SHUTDOWN | Cost Estimate Doubled by the White House

White House Doubles Its Estimate of the Cost to
GDP of the Shutdown, January 15, 2019.

The following is posted, with his permission, from an email by Dana Chasin. 

WASHINGTON, D.C., January 15, 2019 – Per a report by S&P Global Ratings, the US economy has lost $3.6 billion since the beginning of the shutdown on December 22. Original estimates by President Trump’s chief economist, Kevin Hassett, put the damage to the economy at $1.2 billion each week the shutdown continues. The Trump administration has since doubled its damage estimate to the economy, estimating today that the shutdown results in a GDP loss of $2.4 billion — 0.1 percent off the annual holiday growth rate — each week of the shutdown.

The loss in GDP growth results partly from the loss of government work hours and partly from the decline in spending by unpaid federal employees. To the extent they depend on federal contracts, private contractors are also without work during the shutdown, amplifying the effects for the wider economy. Ironically, if the shutdown continues for another two weeks, the amount shaved off US GDP would be equivalent to the amount requested by the president for the border wall.

The shutdown comes as doubts are raised about the strength of the US economy. A protracted shutdown is occurring at a time when there are ongoing trade negotiations with China, concerning indicators in the housing and leveraged loans markets, slowing global growth, and concerns over Fed rate hikes and quantitative tightening.

While the 800,000 furloughed federal employees are expected to get back pay [the President on January 16 signed a commitment to that effect – https://federalnewsnetwork.com/government-shutdown/2019/01/trump-signs-bill-ensuring-federal-employees-get-paid-after-government-shutdown/ –JTM], many contractors, like janitors and cafeteria staff, typically get no such protection. There is no official source tracking the number of current federal contractors, but Paul Light, a professor at New York University, estimates there are over 4 million contractors and grant recipients affected by the shutdown. In a letter on Thursday, January 10, 34 Democratic Senators implored OMB to grant back pay for low- and middle-income contractor employees.

Federal Furlough

The Senate Appropriations Committee estimates that in addition to the 420,000 federal employees that have to work without pay, 380,000 are furloughed — meaning they are sent home without pay. According to the American Federation of Government Employees, a labor union that represents about 700,000 workers, while some government employees make six-figure salaries, the average weekly salary of a government employee is only about $500.

Low- and middle-income workers and families directly affected by the shutdown, some of whom will not end up receiving back-pay, compensate for the lack of paychecks by collecting unemployment, dipping into or draining savings accounts, turning off the heat in their homes, borrowing money from friends or family, or taking out small commercial loans. Some areas of the country are harder hit than others; over the past three weeks, Washington, D.C. saw the highest level of jobless claims in six years.

If the shutdown continues much longer, mounting late fees, defaults, evictions, and foreclosures are significant, dangerous, and very real prospects for many federal workers and contractors. The knock-on effects of individuals not participating in the wider economy will also soon become noticeable.

Skeleton Crews Struggling

The direct economic impact on furloughed federal workers is obvious, but the shutdown is also creating headaches for workers and businesses in a number of indirect ways, as various federal agencies are working with limited capacity:

• Capital markets feeling the strain
  
  Severely limited capacities at the Federal Trade Commission (FTC), Department of Justice (DoJ), and the Securities and Exchange Commission (SEC) are putting initial public offerings (IPOs) and M&As in jeopardy. The SEC is not reviewing IPO filings during the shutdown, threatening prolific upcoming filings such as the ride sharing apps, Lyft and Uber, which were initially slated for early Q1. Once agency employees return to work, they will still face a large backlog that may have ripple effects throughout the year in the capital markets.
• Lack of economic database
  
  The US Department of Commerce has not been able to publish a number of regular reports that look at the health of the US economy, including new home sales, factory orders and inventories, construction spending, and trade balances. The US Department of Agriculture has also been unable to publish its monthly World Agricultural Supply and Demand Estimate (WASDE), a vital source of demand, supply, and inventory data for farmers and crop traders.
• Low-income households left in limbo
  
  According to HUD, around 1,150 federal rental assistance contracts have expired since the shutdown began and have not been not renewed. Around 150,000 people, mostly seniors and those with disabilities, are covered under this program and without government assistance, may face the risk of eviction. Also at risk is the Supplemental Nutrition Assistance Program (SNAP), run by the USDA.  While SNAP is able to operate through February, millions of recipients could have their basic food assistance cut back in March and even removed altogether in April, if the shutdown persists.
• Small business loans stalled
  
  The SBA has stopped approving new loans on day-one of the shutdown, affecting many small businesses who are looking to expand their operations or get their business off the ground. Small businesses employ 53 percent of the domestic workforce and a protracted shutdown could cause a domino effect as loan growth in this sector stalls.
• Federally-funded highway and transit programs in jeopardy
  
  The well of federal money for highway projects has been dry since the shutdown began on Dec. 22. State officials relying on federal funding assistance for their highway and transit initiatives are reluctant to authorize planned projects for 2019. Though states could tweak their financing to operate at near-normal levels in the short-term, a protracted shutdown will affect much-needed highway and transit maintenance and improvements across the country for the rest of the fiscal year.

Light at the End of the Tunnel?

With Democrats standing united in opposition to wall funding, President Trump has few options on the table. The most obvious (but perhaps least likely) solution to the shutdown would be compromise. Democratic leadership has put forward a two-bill proposal to address the situation. The first bill, H.R. 21, would fund all agencies outside of the Department of Homeland Security (DHS) through the fiscal year, while the second, H.J. Res.1, would extend current DHS funding through February 8. The additional month provides a window for ongoing border wall negotiations, allowing the rest of the government to reopen. Both passed the House by a near party-line vote last week.

Trump has repeatedly shot down this proposal, claiming he will accept nothing short of the requested $5.7 billion in wall funding upfront.

Who Blinks First?

As the partial shutdown drags through the winter, Trump seems as committed to brinkmanship as ever. A protracted shutdown bears out the dysfunctional government proponents’ self-fulfilling prophecy. Many voters ascribe to the view that a shutdown is a pox on both Democratic and Republican houses. Although polling suggests most voters blame the president for the shutdown, the president’s support among his base appears to remain strong and gaining marginally. Pressure on some Senate Republicans is mounting — let’s see when it becomes enough for them to break rank and try to persuade the president to end the longest shutdown in US history. In the meantime, as the president puts it, federal employees “on the receiving end will make adjustments.”

Other recent stories about the impact of the shutdown:

Gregory Daco estimates 0.2 percentage-point cut in 1Q19 GDP growth from shutdown 

https://www.marketwatch.com/story/why-stock-market-investors-are-starting-to-worry-about-the-government-shutdown-2019-01-16

New York Magazine Intelligencer: http://nymag.com/intelligencer/2019/01/the-longer-the-shutdown-lasts-the-more-it-hurts-the-economy.html This story calls all of the unpaid workers "furloughed", not the definition used by GovExec.. 

It's Official: Furloughed Feds Will Receive Back Pay Once the Shutdown Ends // GovExec Staff. President Trump on Wednesday signed into law a bill that guarantees about 350,000 furloughed federal employees back pay once the partial shutdown ends. This source restricts the term "furloughed" to workers who are told not to come into work, as opposed to those working without pay, who are called "excepted" or "exempted".

Letter from Federation of American Scientists on the cost of the shutdown to science: https://mailchi.mp/fas/2019-government-shutdown. Same message as story in NY Times on the impact of the shutdown on scientific research on January 16. 

TAX BILL | Latest on House-Senate Conference

The following is from Dana Chasin in Washington, reposted by permission. (I am in Washington this week as well.) This is his Update 235 on Washington legislation.

This afternoon at the White House, President Trump made one last pitch for the Tax Cuts and Jobs Act.  

Up on the Hill, conferees met to continue trying resolve differences between the House and Senate bills.  

Even as the process is well underway, the conferees know that Americans have picked up on the fact that their promised tax cuts are turning out to be rebates that dwindle over ten years through a series of sunsets. 

When will the initial tax cuts sunset?  Who then gets the tax hikes that follow?  How much does the middle class get in relief, averaged annually over the life of the law?  How many middle class taxpayers are looking a tax hike?

Rebate and Switch

This afternoon, Republican tax negotiators from the House and Senate met to hash out differences in the GOP effort at sweeping reformation of the nation’s tax code.  Unsurprisingly, the meeting was conducted behind closed doors. Republicans point to an ambitious timetable for keeping negotiations out of the public eye, but just as important is the tax bill’s overwhelming unpopularity.

Republicans made grand promises in their sales pitch to the middle class. Americans were told the average middle class family of four earning $59,000 per year would see a tax cut of $1,182 – more than $11,000 over ten years. Even today, President Trump repeated the claim that corporate rate reductions will generate $4,000 in new annual income per household. Simply put, the public is not buying it. As negotiations have worn on and details of the bill have emerged, public support for the bill has plummeted.

The bill would send trillions of dollars to the country’s largest corporations and wealthiest income earners. As of now, the nation’s top income earners would see their individual tax rate fall from 39.6 percent to 37 percent. Corporate taxes are slashed more severely, falling from 35 to 21 percent. Those in the middle and working classes would see their taxes increase. 

As a result, the Republican tax plan is now less popular than the tax hikes passed under Presidents Clinton and H.W. Bush. That the GOP has managed to make tax cuts less popular than tax hikes is signal.  The majority of Americans sees this Republican chicanery as a massive reverse transfer payment financed on the back of the middle class and generations to follow. 

What the Middle Class Actually Gets: Sunsets

Republicans included a number of short-term provisions in order to improve their bill’s distributional optics, but most of these concessions are written in disappearing ink.  While GOP lawmakers were sure to make corporate handouts permanent, many of the individual rate cuts and tax credits disappear by 2025. 

The increased medical expense deduction disappears after 2018. The expanded Child Tax Credit, which Sens. Rubio and Lee loudly pushed for, expires after 2024.  One of President Trump’s favorite provisions, the doubling of the standard deduction, also expires after 2024.

Bottom line: the average family will receive nowhere close to $11,820 in tax relief over the decade ($1,182 times ten).  What starts out as a $1,182 cut in year one transforms into a tax hike as deductions expire and individual rates reset.  By 2027, the wealthiest one percent of Americans will receive an average tax cut in excess of $27,000. That year, the bottom 60 percent of wage earners will face an average tax hike of $160.

In the end, an estimated 87 million families -- almost 40 percent of taxpayers -- will see their tax liability increase.  Per the Institute on Taxation and Economic Policy, 19 states would pay more overall in taxes. In 14 states, over 1 million taxpayers will face a tax hike.  

Indirect Hikes and Paygo Pain

To make matters worse, millions of Americans will see rising costs indirectly due to provisions in the tax bill unrelated to tax rates:

• The individual mandate penalty repeal alone is expected to increase premiums by 10 percent. This provision would also increase healthcare costs for the 13 million Americans who will lose health coverage as a result of mandate repeal.
• A new Chained-CPI measurement of inflation that would push filers into higher brackets more quickly.

And still worse; the deficit increase of $1.4 trillion has already initiated talks in GOP circles of automatic cuts to critical social programs -- including $25 billion in Medicare cuts in 2018 alone.  At first Republican leaders promised their cut bill would not trigger Paygo cuts, but they have recently changed their tune.  Sen. Rubio, Ways and Means Chairman Kevin Brady, and Speaker Paul Ryan have all linked tax cuts with welfare reform in recent weeks. 

Where provisions that help the middle class (the child tax credit, the doubled standard deduction, the rate cuts) are made temporary, provisions that hurt the middle class are made permanent.

Source: Tax Policy Center

Permanence for Corporations

The sunsetting of individual rate cuts and other middle class credits and deductions pave the way for permanent business tax cuts. The long-term winners are corporations were the long-term losers are the bottom 60 percent.  Wealthy Republican donors will appreciate the long-term 21 percent corporate rate, while middle and low-income Americans will see a little to no difference in disposable income and maybe substantial cuts to the government programs they count on.  

Next Steps 

Look for the Conference Committee to conclude its work blending the House and Senate versions of the bill by Friday.  The bill will then move to the Senate first for passage most likely on Monday in order to ensure compliance with Byrd Rule budgetary restrictions. The House is scheduled to take up the legislation the day after it passes the Senate. The GOP’s ultimate goal is to have the final bill on President Trump’s desk as early as December 20.

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Good Job News - U-6 Down Nearly 2 Percentage Points

The U-6 Unemployment Rate Since 1994. FRED Chart by FR Bank of St.
Louis. The rate fell in December to 11.1 percent, not seasonally adjusted.

The year 2014 is the best for U.S. job growth in 15 years. The BLS announced today growth of 252,000 U.S. jobs in December plus a total of 50,000 jobs added as adjustments to prior two months. Continuing the November pattern, job growth in December was strong in professional and business services, construction, food services and drinking places, health care, and manufacturing.

The unemployment rate in December was the lowest in six years, down to 5.6 percent from 5.8 percent. A rate that falls below 6 percent is ordinarily a warning of inflationary pressures, and like a Greek statue the Federal Reserve remains poised to reduce its efforts to stimulate the economy through low interest rates. However, wages remain depressed, economic problems in Europe are a drag on future growth, and the bond-market rooms of the global financial casino - where the smartest players are rumored to hang out - don't seem to worry about a rise in long-term interest rates.

Alternative measures of unemployment and labor utilization show improvement, especially U-6, which fell 1.9 percentage points between December 2013 and December 2014. (Jason Furman, Chairman of the President's Council of Economic Advisers, this morning, in his comments on the data from The White House, shows a 1.8 percent drop, presumably because the White House is working with more precise data.) This suggests a significant drop in those employed involuntarily part-time, for economic reasons, another sign of a cyclical recovery.

Alternative Measures of Unemployment and Labor Utilization

Measure	Not seasonally adjusted			Seasonally adjusted
	Dec. 2013	Nov. 2014	Dec. 2014	Dec. 2013	Aug. 2014	Sept. 2014	Oct. 2014	Nov. 2014	Dec. 2014
U-1 Persons unemployed 15 weeks or longer,  % of the civilian labor force	3.5	2.7	2.5	3.6	2.9	2.8	2.8	2.7	2.6
U-2 Job losers and persons who completed temporary jobs, % of the civilian labor force	3.5	2.7	2.8	3.5	3.1	2.9	2.8	2.9	2.8
U-3 Total unemployed, % of the civilian labor force (official unemployment rate)	6.5	5.5	5.4	6.7	6.1	5.9	5.7	5.8	5.6
U-4 Total unemployed plus discouraged workers, % of the civilian labor force plus discouraged workers	7.0	5.9	5.8	7.2	6.6	6.3	6.2	6.2	6.0
U-5 Total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, % of the civilian labor force plus all persons marginally attached to the labor force	7.9	6.8	6.7	8.1	7.4	7.3	7.1	7.1	6.9
U-6 Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, % of the civilian labor force plus all persons marginally attached to the labor force	13.0	11.0	11.1	13.1	12.0	11.7	11.5	11.4	11.2
NOTE: Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for work. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. Updated population controls are introduced annually with the release of January data. Source: BLS.