The Fiscal Times Newsletter - August 28, 2017

By The Fiscal Times Staff

August 29, 2017

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How Hurricane Harvey Could Transform the Budget Battle in Washington

The costs of Hurricane Harvey could climb as high as $100 billion, according to at least one estimate. While it will still take weeks for the full extent of the damage to become clear, the catastrophic flooding — and a recovery effort that is likely to take years — will almost certainly have an impact on some critical upcoming deadlines for lawmakers in D.C.

White House and congressional GOP officials told The Washington Post on Sunday that they expected to begin discussing emergency funding for disaster relief soon. Those discussions could present challenges for other items on President Trump’s agenda, from tax reform to a border wall with Mexico.

President Trump had threatened to shutdown the government if any funding bill failed to include money for the border wall with Mexico. But the need for disaster relief funding — and the political risk of failing to deliver such funding — could force the president and Congress to act more quickly to fund the government and avoid a partial federal shutdown. “That is because a government shutdown could sideline agencies involved in a rescue and relief effort that officials are predicting will last years,” Mike DeBonis and Damian Paletta of The Washington Post report.

The balance of the Federal Emergency Management Agency’s disaster relief fund stood at just $3.8 billion at the end of July — with $1.6 billion of that money set to be spent elsewhere. The funds needed for Harvey recovery alone may well exceed the total disaster relief budget for the current and upcoming fiscal years, The Post noted. Also, Congress must reauthorize the National Flood Insurance Program, which is more than $24 billion in debt, by the end of September and ensure that its legal borrowing limit, now around $30 billion, is sufficient to cover expected claims from Harvey victims.

William Hoagland of the Bipartisan Policy Center, who served as a former GOP staff director for the Senate Budget Committee, said the hurricane could also lead to the debt ceiling being raised faster than it otherwise might have been so as to ensure that the Treasury can provide emergency cash to storm-hit areas.

That’s not to say the disaster relief funding won’t devolve into a congressional fight. Both Hurricane Katrina in 2005 and Superstorm Sandy in 2012 led to budget fights in Congress in which Republicans resisted disaster funding that wasn’t offset by other spending cuts.

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Top Budget Expert Thinks We’re Headed for a Government Shutdown

Noted budget expert Stan Collender – who is sometimes referred to as “Mr. Budget” and who tweets under the name, @TheBudgetGuy – says that odds are better than even that the federal government will shut down this fall. Disputes over raising the debt ceiling are also in the cards, though with slightly less probability of a chaotic ending.

Collender says in Forbes that the problem lies with the current internal dynamics of the Republicans in Congress. In any other year, single-party control would mean less chaos in budget matters, not more. But the GOP is unusually divided right now. Collender argues there are seven contentious factions that are making it hard to get things done. In the House, there’s the conservative Freedom Caucus and the more moderate Tuesday Group. The Senate is similarly divided, but there is no real alignment between the Senate and House versions of each group. Then there’s the leadership of each chamber, which have their own interests and responsibilities that sometimes clash with the others. Last but not least, there’s President Trump, who is becoming something of a party unto himself.

These seven factions could make it very difficult to solve the two pressing fiscal problems – raising the debt ceiling to avoid a potential default on U.S. debt and funding the government to avoid a shutdown – that loom before October 1.

On the debt ceiling, the Trump administration has called for a “clean” debt ceiling hike, unencumbered by any other policy changes. But the Freedom Caucus has sent mixed signals on the subject, and there’s a good chance that the hardline conservatives won’t play along with the moderates to raise the ceiling, forcing House Speaker Paul Ryan (R-WI) to turn to Democrats for help – in which case, the Freedom Caucus could push for Ryan’s ouster, as they did with former speaker John Boehner in 2015.

On funding the government, a short-term spending bill, called a continuing resolution, seems like a relatively easy solution, even if it only puts off the budget fight temporarily. But President Trump, the ultimate wild card, has altered the game by threatening to veto any such funding if it fails to include money for a border wall. It’s all too easy to imagine that showdown ending with a shutdown.

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The High Cost of Debt Ceiling Brinksmanship

Every time Congress dithers on raising the debt ceiling, the Treasury Department is forced to take “extraordinary measures” to make sure it has enough cash to pay the country’s bills in full and on time without hitting the ceiling. Kellie Mejdrich at Roll Call reminds us that these measures come with a considerable cost, even without a default on the debt.

The Treasury began employing extraordinary measures last March, when the suspension of the debt limit brokered in a budget deal in November 2016 expired. With the debt ceiling back in force, the Treasury had to look for ways to avoid hitting the limit, currently $19.8 trillion. Treasury has several options — it defines four of them here — which involve not spending all of the money is it legally authorized to spend. For example, the Treasury may avoid making full investments in pension and savings accounts of government employees, delaying payments until a later date.

These measures tend to make the financial markets nervous, especially over time as the threat of default grows, which can move interest rates higher than they otherwise would be. The Bipartisan Policy Center points out that the current debt ceiling impasse sent short-term Treasury bill rates higher in July, raising the costs of issuing debt for the U.S. government.

Looking back at the debt ceiling brinksmanship of 2011-2012, the Government Accountability Office concluded that delaying the increase in the debt limit cost the Treasury at least $1.3 billion:

“Delays in raising the debt limit can create uncertainty in the Treasury market and lead to higher Treasury borrowing costs. GAO estimated that delays in raising the debt limit in 2011 led to an increase in Treasury’s borrowing costs of about $1.3 billion in fiscal year 2011. However, this does not account for the multiyear effects on increased costs for Treasury securities that will remain outstanding after fiscal year 2011. Further, according to Treasury officials, the increased focus on debt limit-related operations as such delays occurred required more time and Treasury resources and diverted Treasury’s staff away from other important cash and debt management responsibilities.”

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Robert Samuelson: Why Trump’s Tax Reform Won’t Work

It’s hard to imagine that tax reform is No. 1 on the Republicans’ to-do list when they still don’t have a 2018 budget. Worse, they still haven’t agreed to raise the debt ceiling, as the federal government continues to draw down what was $350 billion in cash reserves in January to $50.6 billion as of last Thursday, according to The Washington Post.

Maybe that’s why the Post’s economics columnist, Robert J. Samuelson, was inspired to challenge the GOP’s idea that cutting taxes is “tax reform,” which implies an improvement over the old system.

Samuelson is clearly disturbed about Trump’s tax plan, which primarily benefits the rich at the expense of the poor and adds an additional $3.5 trillion in deficits over a decade, according to the Tax Policy Center. It’s not clear how that’s an improvement.

Samuelson says, “If tax cuts were initially financed by more deficit spending, the costs of today’s lower taxes would be transferred to future generations.” That now includes the largest generation in America — the Millennials — as Baby Boomers die off.

The key argument against tax cuts, Samuelson says, is that contrary to Republican claims, they don’t stimulate significantly faster growth. “Tax cuts may cushion a recession and improve the business climate, but they don’t automatically raise long-term growth. A 2014 study by the Congressional Research Service put it this way: ‘A review of statistical evidence suggests that both labor supply and savings and investment are relatively insensitive to tax rates.’”

For Samuelson, the facts point in a different direction: “The truth is that we need higher, not lower, taxes. … We are undertaxed. Government spending, led by the cost of retirees, regularly exceeds our tax intake.”

But will Republicans raise taxes? That’s not a likely outcome given the current budget debate, which would need a dose of honesty that is sorely missing.

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US Companies Push Back on One Idea for Taxing Their Foreign Profits

The corporate lobbying push on tax reform is on in full force. If you watch cable news, you’ve likely seen ads from the Business Roundtable and other groups that are already spending millions of dollars to promote tax reform on television and radio. But not all the efforts are so public.

In a piece in Sunday’s Wall Street Journal, Richard Rubin offers details on one behind-the-scenes campaign by corporations to shape tax reform. Rubin reports that a group of large U.S. companies called the Alliance for Competitive Taxation issued a policy paper earlier this month warning against the “unintended and adverse consequences” of introducing a minimum tax for foreign earnings.

Such a minimum tax is reportedly one option under consideration as part of a shift to a territorial tax system, with a lower corporate rate for domestic profits, intended to incentivize companies to bring back some of the profits they have stashed in foreign countries to avoid paying a high tax rate on those earnings at home.

The minimum rate would be below the new statutory corporate rate and act to reduce the incentive to keep foreign profits in other countries.

But the companies in the alliance, including Eli Lilly, United Technologies and UPS, warned that a minimum tax would put American corporations at a disadvantage to their global competitors.

Kyle Pomerleau of the conservative-leaning Tax Foundation wrote recently that a broad minimum tax on foreign earnings would still give companies incentive to move their headquarters out of the U.S. to avoid the tax.

But Chye-Ching Huang, deputy director of federal tax policy at the left-leaning Center on Budget and Policy Priorities, tweeted Monday that multinational corporations want a “cartoon” version of the territorial tax system — one that would bring “0% US tax on their foreign profits. Giant incentive to shift profits offshore. Weak guardrails to stop it.”

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More from Around the Web

Trump’s Pivot to Taxes Is Fraught With ‘Pitfalls Everywhere’ – Bloomberg
Hurricane Harvey Should Be a Wake-Up Call to Trump’s Disaster Relief Budget – HuffPost
What Could Happen Next on ACA Taxes – Axios
Friendly Talk on Tax Cuts Makes a Democrat the Star of a Republican Ad – Washington Post
Will Republican Tax Bill Be Aimed at the Past, or the Future? – New York Times
Stephen Moore: The Key to Passing Tax Reform, ‘Keep It Simple, Stupid’ – Washington Times
Trump’s Wall Is a 2,000-Mile Fraud – Chicago Tribune
The Fed's Effect on Deficits and Debt – CRFB
Seattle's Boom Is a Boon for the Tax Man – BloombergView
Why Retiring in America Has Become Less Attractive – MarketWatch
Bernie Sanders: Single-Payer Isn’t a Litmus Test for Dems – The Hill
Flood Insurance Splits GOP, Spurs Bipartisan Dealmaking as Deadline Looms – Politico
What You Can Do to Help People Hit by Hurricane Harvey -- Quartz

Watch Out, YouTube! Facebook Wants Your Video Action

DADO RUVIC

By Suelain Moy

July 2, 2015

It was only a matter of time before Facebook figured out a way to make money from the videos that are played on their platform. As Fortune points out, before now, video creators didn’t have a way to make money on the Facebook platform. That all changes today, with Facebook’s new plan to monetize videos and share the revenue with creators. The revenue arrangement is the same as YouTube’s: 55 percent of the money earned from ads goes to the creator, and 45 percent goes to Facebook. So far, the program has a couple of dozen partners who have signed up, including the NBA, Fox Sports, Hearst, and Funny or Die.

Prior to the new plan, Feed videos would only play mutely until the user clicked on them. Now, when users play a video on mobile, they will get a feed of “Suggested Videos.” It’s not until a few of these videos play, that the user will see an actual ad. And these ads, unlike Facebook’s autoplay videos, will play with the sound turned on.

In the past few weeks, the social media giant has tested the “Suggested Videos” product with a small number of iOS users. Today the test goes wider, and will eventually expand to include Android and desktop users.

Unlike YouTube, which gives content creators 55 percent of the revenue from the ads it plays before videos, Facebook will divvy up the 55 percent in revenue among multiple creators or partners. For example, if you watched a three-minute video from the NBA, and a two-minute video from Funny or Die, the 55 percent in ad revenue would be split proportionately between the NBA and Funny or Die.

Industry experts fully expect video—especially mobile video—to be a major source of revenue for Facebook in the future since users already deliver four billion videos views daily. The company made $3.3 billion in ad revenue in the first quarter of 2015, 73 percent of it from mobile ads alone. For now, Facebook says it is focused on shorter video formats, not long-form video formats like TV shows and movies.

To date, YouTube has been the only major player in user-posted video, but Facebook is stepping up its game. It just announced to advertisers the option to pay for video ads only after a video has played for 10 seconds. It’s a response to announcements that Snapchat and Twitter are rolling out video divisions too. In May, Spotify added video-streaming to its music-streaming app. And Hulu, Yahoo, and AOL are also pushing their video strategies.

For content providers, it’s a new way to play—and pay.

Did Airlines Collude to Keep Air Fares High?

REUTERS/Lisi Niesner

By Suelain Moy

July 2, 2015

For months now, oil and gas prices have been dropping—and that includes jet fuel. So why haven’t airline ticket prices dropped as well? That’s one of the questions the Justice Department wants answered as it investigates the possibility of collusion among carriers to keep airfares high.

The DOJ also wants to know if companies conspired to limit the number of available seats in order to drive prices up. Yesterday, the Associated Press broke the news that major U.S. carriers had received a letter demanding copies of all communications the airlines had with each other, Wall Street analysts, and major shareholders about their plans for passenger-carrying capacity, going back to January 2010. The civil antitrust investigation is focusing on whether airlines illegally indicated to each other how quickly they would add new flights, routes, and extra seats in an effort to prop up ticket prices.

Just minutes after the news broke, stocks of the major U.S. airlines fell four to five percent, with the S&P 500 airlines index off more than four percent. Until now, the U.S. airline industry had been enjoying record profits, due to increasing numbers of Americans flying and a huge drop in the price of jet fuel. In April, the price of jet fuel was $1.94 per gallon, a decrease of 34 percent from the previous year.

The investigation marks a notable shift for the Justice Department, which approved the merger of American Airlines and US Airways back in November 2013, despite previously blocking it over concerns that the airlines would collude on fares. The probe could signal a more aggressive approach on antitrust enforcement, under the strong leadership of Loretta Lynch, who was confirmed in April.

Justice Department spokesperson Emily Pierce confirmed that the department was investigating potential “unlawful coordination” among some airlines.

Just two weeks ago, U.S. Senator Richard Blumenthal (D-CT) urged the Justice Department to investigate what he called “anti-competitive, anti-consumer conduct and misuse of market power in the airline industry.”

Since 2008, various mergers have resulted in four major airlines (down from nine)—American, Delta, Southwest, and United—controlling about 80 percent of all domestic air travel. All four airlines have confirmed that they received the letter and that they were cooperating with the investigation.

According to Bureau of Transportation Statistics, the average domestic airfare rose 13 percent from 2009 to 2014 (adjusted for inflation). The average domestic flight last year cost $391. In the past year alone, airlines received an additional $3.6 billion from bag fees and another $3 billion from reservation-change fees. All of the major airlines—American Airlines, United Continental Holdings, Delta Air Lines, Southwest Airlines, JetBlue Airways, and Alaska Air Group—posted record profits with a consolidated net income of over $3 billion during the first quarter of 2015.

Here’s Why Whole Foods Is Apologizing to Customers

Flickr/Elvert Barnes

By Beth Braverman

July 2, 2015

Stocking up at Whole Foods for a Fourth of July Bar-B-Q this weekend? Better double check the prices you’re paying.

Most customers expect to pay high prices at Whole Foods. The gourmet supermarket is often jokingly referred to as “Whole Paycheck.” But in its New York stores, the grocer may have gone too far.

The company’s co-CEOs admitted in a video shared online yesterday that workers in the stores had been mislabeling the weights of its prepared foods. “Straight up, we made some mistakes,” co-CEO Walter Robb said in the video.

The executives never said the word “sorry,” but said that they would retrain their workers, implement a third-party auditing system, and give items for free to customers who found a mistake not in their favor.

The New York City Department of Consumer Affairs announced last week that an investigation had tested 80 types of prepackaged foods and found that all of them had mislabeled weights.

“It is unacceptable that New Yorkers shopping for a summer BBQ or who grab something to eat from the self-service aisles at New York City’s Whole Foods stores have a good chance of being overcharged,” DCA Commissioner Julie Menin said in a statement announcing the investigation last week. “Our inspectors tell me this is the worst case of mislabeling they have seen in their careers.”

Want to Boost the Value of Your House? Get High-Speed Internet

Kacper Pempel

By Suelain Moy

July 2, 2015

Having trouble selling your house? A slow Internet connection may be to blame.

Recently, The Wall Street Journal reported that “the availability of speedy Internet service is starting to affect Americans’ biggest purchase: their homes.”

In a study released earlier this week, researchers at the University of Colorado and Carnegie Mellon found that fiber-optic connections can add $5,437 to the price of a $175,000 home. A 2014 study by the University of Wisconsin at Whitewater showed similar results. It found that high-speed access could add $11,815 to the value of a $439,000 vacation house in Door County, Wisconsin.

Some real estate agents are going so far as to tout high-speed Internet service in listings, along with the number of bathrooms and other desirable features.

For most Americans, adding a high-speed Internet line is relatively cheap and easy. And it sure beats renovating the kitchen.

The $2.6 Billion Gay Wedding Boom

REUTERS/Enrique Castro-Mendivil

By Beth Braverman

July 1, 2015

States in the Southeast that had banned gay marriage prior to last week’s Supreme Court decision legalizing it stand to gain the most from the ruling financially, according to a report compiled at the end of last year by the Williams Institute at UCLA and Credit Suisse.

The study found that states in the Southeast could see a total economic benefit of $733 million in the first three years after legalization of gay marriage, thanks to pent up demand and increased spending on weddings and tourism.

Researchers estimated that gay marriage spending nationwide could reach $2.6 billion over the next three years. Gay couples tend to have smaller weddings, with an average of less than 80 guests, according to TheKnot.

Men spend an average of $15,992 on their wedding, while women spend an average of $13,055. More than 20 percent of gay couples spend more than $20,000 on their nuptials. The average opposite-sex marriage costs more than $31,000.

In addition to boosting consumer spending, which helps GDP, the ruling may also be a boon to federal coffers. While married couples now benefit from the financial protections of marriage, they also now have to pay the tax penalty.

The legalization of gay marriage in New York in 2011 led to an estimated $259 million in spending and $16 million in revenues for New York City, according to the mayor’s office.

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Quick Hits

How Hurricane Harvey Could Transform the Budget Battle in Washington

Tweet of the Day

Top Budget Expert Thinks We’re Headed for a Government Shutdown

The High Cost of Debt Ceiling Brinksmanship

Robert Samuelson: Why Trump’s Tax Reform Won’t Work

US Companies Push Back on One Idea for Taxing Their Foreign Profits

More from Around the Web