The Fiscal Times Newsletter - August 28, 2017

Quick Hits

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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#Harvey in perspective. So much rain has fallen, we've had to update the color charts on our graphics in order to effectively map it.
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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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How to Defuse Exploding Consumer Credit Debt

By Beth Braverman
June 8, 2015

The average household had a credit card balance of $7,177 in the first quarter, the highest level in six years, according to a new report by CardHub.

Total consumer credit card debt in the U.S. amounted to more than $57 billion for the quarter, despite paying off $34.7 billion in the quarter.

There was some good news in the report: Credit card defaults for the quarter declined more than $350 million to the lowest rate since 1995, and first quarter debt reduction was 7 percent large than those of the past two years.

About a third of households with credit card debt carries a balance from month to month claims a separate study by the National Foundation for Credit Counseling.

Meanwhile, the number of credit card accounts is increasing. In the first quarter, TransUnion says there were 359.64 million credit card accounts, up 4 percent from the first quarter of 2014.

CardHub estimates that net credit card debt for the year will be $55.8 billion, roughly the same level as last year.

Consumers with high levels of credit card debt could benefit from taking advantage of some of credit card transfers, which are among the sweetest they’ve been in years, with many issuers offering zero-percent transfers for a year or more.

Look for a deal that includes no transfer fees or annual fees. Rolling over debt only makes sense if you can pay it off before or immediately after the introductory rate expires. 

The Biggest Apple Hit You've Never Heard Of

By Millie Dent
June 5, 2015

Even some of the most diehard Apple fanatics missed one of the company’s biggest rollouts. About a year ago, Apple launched a new computer language, Swift, that is rapidly becoming one of the most popular software languages among programmers, according to Bloomberg.

In rankings of programming languages by developer industry analysts at a firm called RedMonk, Swift placed 22nd early this year, up from 68th in the third quarter of last year.

Apple’s new language now finds itself just one spot behind Coffeescript and one spot ahead of Lua, which might not mean much to you but apparently has developers quite excited.

“The growth that Swift experienced is essentially unprecedented in the history of these rankings,” the RedMonk analysis explains.

Previously, Apple developers could only use Objective C, a language built in the 1980s. Responding to complaints that the language was old fashioned and slow, Apple unveiled Swift, which it had been working on since 2010. Developers have responded to Swift’s safety, modernity and "expressiveness," meaning fewer lines of code are required to get the computer to do specific things. 

The ride-hailing service Lyft reportedly rewrote its entire app about six months ago using Swift after finding that updates to the code took much less time. Another early user of the code is SlideShare, a document-sharing service owned by LinkedIn. 

Still, as Swift is still undergoing rapid evolution, most developers are choosing to wait before adopting it. As of now, Objective C is still Apple developer’s number one choice, but a fully developed Swift could swiftly change that.

Home Buying Gets Easier as Down Payments Dip

FILE PHOTO: A real estate sign advertising a new home for sale is pictured in Vienna, Virginia, U.S. October 20, 2014. REUTERS/Larry Downing/File Photo
Larry Downing
By Beth Braverman
June 5, 2015

One hurdle to first-time homebuyers is starting to get a little lower: The average down payment for a home fell to less than 15 percent in the first quarter of 2015 to its lowest level since early 2012. The average down payment for the quarter was $57,710, according to RealtyTrac.

The lower down payments reflect new loan programs recently introduced by Fannie Mae and Freddie Mac, and lower insurance premiums for Federal Housing Authority Loans. The market is also adjusting as large, institutional investors who had been buying starter homes as rental investments dial back.

Related: U.S. Homeownership Dips, But Household Formation Rises

“Down payment trends in the first quarter indicate that first-time homebuyers are finally starting to come out of the woodwork, albeit gradually,” RealtyTrac vice president Daren Blomquist said in a statement.

Broken down by type of loan, the average down payment for conventional loans was 18.4 percent ($72,590), and the average down payment for FHA loans was just 2.9 percent ($7,609). FHA loans as a share of all mortgages increased from 21 percent in January to 25 percent in March.

Among the country’s largest counties, Wayne County in Detroit, Mich., had the lowest average down payment (12 percent), and New York had the highest (37 percent).

While lower down payments are good news for first-time homebuyers, they also are a reminder of practices that led to the housing bubble that began to burst in late 2006 and contributed to the financial crisis. During the height of the boom, buyers were able to purchase homes that they couldn’t really afford by putting little or no money down on the property.

House Democrat Calls Congress ‘The Poster Child for Cowardice” on ISIS

Fighters of the Islamic State of Iraq and the Levant (ISIL) celebrate on vehicles taken from Iraqi security forces, at a street in city of Mosul
© STRINGER Iraq / Reuters
By Eric Pianin
June 4, 2015

Amid growing signs that the U.S. faces nothing but bad choices in its war against ISIS, Rep. Jim McGovern, a liberal Democrat from Massachusetts, today denounced Congress as “the poster child for cowardice” for refusing to debate a new war powers resolution to set parameters for the Obama administration’s efforts to “degrade and defeat” the jihadist terrorists in Iraq and Syria.

At the behest of Republican and Democratic leaders, Obama sent a proposed war powers resolution to Congress in February outlining his core objectives of systematically destroying the jihadist terror group through a sustained campaign of airstrikes, supporting and training allied forces on the ground and humanitarian assistance – but without committing a large number of U.S. combat troops to the effort.

Related: U.S. Shoots Itself in the Foot By Accidentally Arming ISIS 

The administration proposal would give the military “flexibility” to confront unforeseen circumstances, potentially by deploying Special Forces in the region. But it would limit the mission to three years and would not authorize “enduring offensive ground combat operations.” 

But rather than roll up their sleeves and debate and vote on the president’s request for new military authorization, Republican leaders have effectively shelved the issue and moved on to other things, such as rewriting the rules for NSA spying on Americans’ phone calls and providing Obama with fast track authority to negotiate a new trade pact with Asian countries.

With many conservative Republicans including Sens. John McCain of Arizona and Lindsey Graham of South Carolina complaining that the president’s strategy for defeating ISIS woefully inadequate and some Democrats worried that it goes too far in committing U.S. troops and resources to a no-win situation in the Middle East, Senate Foreign Relations Committee Chair Bob Corker (R-TN) said recently he had no incentive to take up the issue in his committee.

Related: Why Congress Should Simply Bag the War Powers Debate

Frankly speaking, this is unacceptable,” McGovern, a member of the House Rules Committee,  said on the House floor today, adding that if the Congress “doesn’t have the stomach” to authorize the war it should vote to bring U.S. forces home, according to Politico. McGovern introduced a bipartisan resolution that would require full debate within 15 days on whether U.S. troops should withdraw from Iraq and Syria. His bipartisan resolution is co-sponsored by Reps. Walter Jones (R-NC) and Barbara Lee (D-CA).

“This House appears to have no problem sending our uniformed men and women into harm’s way,” McGovern said in prepared remarks. “It appears to have no problem spending billions of dollars for the arms, equipment and airpower to carry out these wars. But it just can’t bring itself to step up to the plate and take responsibility for these wars.”

The Phantom Billionaire Who’s Richer Than Warren Buffett

Getty Images
By Millie Dent
June 4, 2015

A practically unheard-of billionaire, Amancio Ortega, just blew past household name Warren Buffett to be the second-richest man in the world, according to Bloomberg. Microsoft founder Bill Gates, who is worth $85.5 billion, remains first.

Oretega, who has amassed a net worth of $71.5 billion, is the founding chairman of the Inditex fashion group, the world’s largest apparel retailer. Inditex is best known for its chain of Zara clothing and accessories shops, which had sales of $19.7 billion in fiscal 2014.

Related: Bill Gates Is the World’s Richest Man Again. Or Is He?

Worth noting is that Warren Buffett, whose net worth of $70.2 billion puts him at third place, would be in second-place if not for his philanthropic giving.

A native of Spain, Ortega refuses almost all interview requests and until 1999, no photograph of him had ever been published. However, Zara is not so low-profile. The world’s biggest fashion retailer operates over 6,600 stores in more than 88 countries.

Inditex has shown strong growth year over year. In March, it reported net profit up 5 percent from the previous fiscal year. In addition, the company said it planned to open up 480 more stores this year.

Related: America’s Highest Paid CEO Is Not Who You Think

Key to Ortega’s success has been keeping Zara’s manufacturing close to its home base in the ancient port city of La Coruña, rather than outsourcing production to China to cut costs. This allows Zara to act quickly on new trends and put new products into stories right away. Zara shops receive new shipments of clothing twice a week, virtually unheard of among retail stores.

If Inditex brands continue to grow and Zara’s popularity extends to millennials and beyond, the mysterious billionaire’s wealth could eventually push him to number one on the list.