Are Deficit Hawks Dead or Just Playing Possum?

Plus, Larry Kudlow is at it again By Yuval Rosenberg and Michael Rainey Are Deficit Hawks Dead or Just Playing Possum? “The deficits hawks are dead,” declared Paul Kane, The Washington Post’s senior congressional correspondent and columnist, in [a piece]( over the weekend. It’s easy to see why Kane says that, and there’s plenty of reason to beat up on our politicians for their poor policy choices, hypocrisy and lack of leadership. But while Kane has a point, he’s probably wrong in declaring deficit hawks dead. Here’s his case in a nutshell: The death knell, he argues, was the ringing silence that greeted last week’s Congressional Budget Office report that estimated the federal deficit over the first 11 months of fiscal 2018 totaled [$895 billion]( up 33 percent from the previous year — “a stunning gap that was met with a collective shrug on Capitol Hill.” But if the shrug was a clear signal of just how little weight deficit concerns carry in this Congress, Kane notes that “the real death of the deficit hawks” happened late last year when Republicans like House Speaker Paul Ryan, who had decried deficits under President Obama, accepted a massive increase in borrowing in order to get the tax cuts they wanted. Democrats criticized the tax cuts and the added borrowing, but they haven’t made the rising deficit much of an issue since then, instead pushing for spending increases and choosing to focus their election messaging on issues like health care that polls show resonate more with voters. “Given possible high ground on the issue, Democrats have largely fielded a crop of candidates across the nation who have ignored, played down or outright rejected the significance of the still-growing deficits,” Kane notes. Rep. Joe Courtney (D-CT) explains why: “That economic fragility that people felt in the wake of the Great Recession has kind of overtaken the fiscal-hawk sort of priorities,” he tells Kane. Plus, some Democrats argue that Republicans pulled back the curtain on their deficit hypocrisy in pursuit of their agenda so why not do the same? Playing Possum? The problem with Kane’s argument is that death, with some notable [exceptions]( is permanent and it’s too soon to say that congressional deficit hawks are gone for good. They might just be playing possum for political purposes. What would it take to bring back the deficit hawks? The return of trillion-dollar deficits as soon as next year might do it, providing a big round number that could rattle the entire political system. An exogenous shock could do it, too, suddenly forcing the markets’ attention to the issue. Or it could be the elections that bring the hawks back from the brink of extinction. Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a non-partisan nonprofit that warns about the dangers of rising U.S. debt, suggests that’s what it would take: “Getting there would likely require a presidential election in which this issue is front and center, with candidates actually running on a platform to fix the problem. And you need to see change in how our two parties function. If we’re going to address this issue, we have to find a way for our politicians to work together to make hard choices,” she said in a recent interview published as part of a Goldman Sachs [research report](. If that all sounds laughable — or simply out of touch with our political moment — Bruce Bartlett, a veteran economic policy expert, brings up another possibility popular with analysts on the left: Republicans will be blasting deficits again as they look to slash government spending and push back on Democrats’ agenda: “Deficits hawks will reemerge more powerful than ever the second Democrats regain control of Congress,” he [tweeted]( in response to Kane’s piece. “GOP will assert that deficit reduction is the Number 1 issue and the mainstream media will agree.” (See Larry Kudlow’s comments below.) Either way, we’ll find out soon whether the deficit hawks are ready to swoop back to life. Kudlow: ‘I Don’t Buy’ That Tax Cuts Boosted Deficit Larry Kudlow is at it again. Speaking at the Economic Club of New York, the top economic adviser to President Trump said that, while the administration is looking to cut federal spending — including on entitlement programs — he believes that the GOP tax cuts passed late last year are not to blame for the rising budget deficit. Here’s some of what Kudlow said, followed by a crucial fact check. On entitlement cuts: “We’ve already tackled a big part of the newest entitlement, namely Obamacare. … And we’re still chipping away on a regulatory basis to reduce the burdens and the inefficiencies of that. … As far as the larger entitlements, I think everybody’s going to look at that, probably next year. I don’t want to be specific. I don’t want to get ahead of our own budgeting, but we’ll get there.” On tax cuts and deficits: “We have to be tougher on spending. People are quick to blame deficits on tax cuts. Well, but I don’t buy that. Tax cuts promote growth and wages. Revenues come in – federal, state and local revenues come in. We’re going to run deficits of about 4 to 5 percent of GDP the next year or two. I’d rather it were lower, but it’s not a catastrophe. It’s not the biggest thing in the world. Going down the road, of course we’d like to slim that down as much as possible and we will work at it. … The single biggest factor affecting the budget in general and these macro numbers on deficits and debt is the rate of economic growth. If you grow slowly for long periods of time you’re going to have greater deficits. If you grow rapidly, you’re going to have lesser deficits. … Growth solves a lot of problems.” The fact check: Growth may solve a lot of problems, but budget experts don’t expect it will eliminate the deficit or come close to paying for the tax cuts. The Congressional Budget Office has projected that the tax cuts passed in 2017 will add about $1.9 trillion to the deficit over 10 years, even factoring in economic growth effects. And most economists outside the White House still expect that the economic growth over the next decade will be far slower than the [unprecedented boom]( required to balance the budget, or even to stabilize the debt as a percent of GDP. Watch Kudlow’s comments [here](. Quote of the Day “Donald Trump wants to rebuild America’s infrastructure the same way he built his buildings: debt, debt and more debt.” [– Axios’ Jonathan Swan]( who reports that the president “wanted the federal government to borrow tons of money for infrastructure projects” — and that Trump might still be willing to defy Republicans and agree to a $1 trillion infrastructure package financed with public debt. Map of the Day The Great Recession hit state budgets hard, but nearly half are now prepared to weather the next modest downturn. Moody’s Analytics says that 23 states have enough reserves to meet budget shortfalls in a moderate economic contraction, up from just 16 last year, [Bloomberg]( reports. Another 10 states are close. The map below shows which states are within 1 percent of their funding needs for their rainy day funds (in green) and which states are falling short. Why Trillions in Offshore Profits May Stay Offshore The tax law that went into effect this year imposed a one-time, reduced tax on profits held overseas by U.S. companies. The tax holiday was designed to encourage corporations to bring money home, to be made available for payments to shareholders and for investments that could boost domestic economic growth. The Federal Reserve [said]( earlier this month that companies were indeed picking up the pace of repatriations at the beginning of 2018, with roughly $300 billion in foreign profits being returned in the first three months of the year, a big jump compared to a baseline of about $35 billion per quarter in years past. However, The Wall Street Journal’s Richard Rubin and Theo Francis [reported]( Monday that the size of the repatriation could fall well short of the claims made by the tax law’s supporters — like President Trump’s eye-popping claim that more than $4 trillion, or close to $5 trillion, would be “brought back very shortly.” Rubin and Francis found that the 108 large public companies that account for the lion’s share of the profits currently held overseas have disclosed only about $143 billion in repatriations so far this year. While the Journal’s method of analysis, which relied on companies divulging private information, may have undercounted the money flowing back to the U.S., the report highlights “the frictions, the caution and the opacity” involved in the repatriation process, all of which could result in a far lower tally than many expect. “In all, while repatriations have soared past pre-2018 levels, independent analysts don’t expect anywhere near the $4 trillion Mr. Trump has touted,” Rubin and Francis concluded. The Journal piece provides some interesting details about repatriations that are worth highlighting: - Estimates of the profits held overseas vary significantly. Putting aside the president’s possibly exaggerated claims, frequently-cited estimates peg the number at between $2.5 trillion and $3 trillion. But only half of that is in cash, reducing the size of the pool of profits that are likely to return home. The Federal Reserve [estimates]( that U.S. multinationals were holding about $1 trillion in cash overseas at the end of 2017. - About 100 companies account for 90 percent of the foreign profits held offshore. - About two-thirds of the $143 billion in repatriated profits reported by the Journal came from just two companies, Cisco Systems and Gilead Sciences. - Some large multinationals, including General Electric and Boston Scientific, say they don’t need additional cash for their U.S. operations have no plans to bring any foreign profits home. - Some multinationals, such as Chevron and Archer Daniels Midland, have long used their foreign profits to invest in facilities overseas, and are unlikely to change that pattern even with the tax holiday. - Much of the repatriated cash is being used for stock buybacks, and the Federal Reserve has detected few signs of an upswing in investment. “We’re going to be giving back to the shareholders through a healthy buyback,” said Cisco CFO Kelly Kramer said in February. The bottom line: Total repatriated cash from the tax holiday on overseas profits could fall far short of the GOP talking points. At the same time, the tax is having a real effect and the dollar figures involved are quite significant. Daniel Clifton, an analyst with Strategas, an institutional research firm in Washington, said his firm expects to see about [$700 billion]( repatriated this year, the equivalent of roughly 3.4 percent of GDP. 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