Macro Roundup

just an FYI, WSJ reports on the Harvard study we looked at yesterday (attached)

"...A study from two Harvard University economists, Nathaniel Hendren and Ben Sprung-Keyser, examines 133 U.S. policy changes over the past half-century, including the creation of Medicare, Medicaid expansions, the introduction of food stamps, as well as dozens of state and local programs. Their paper, released Monday, identifies which policies ultimately made the government money, generally in the form of beneficiaries who needed less assistance over time or who became more productive and paid more taxes. Say you have $1 to give to a social policy. You could strengthen the safety net for adults—say, boosting health insurance, unemployment benefits and disability insurance. Or you could give it to programs for low-income children. Adults use benefits that end up costing additional money—an extra 60 cents or so on top of the $1 you spent.But health care and education for kids often reduces dependence on aid and lifts earnings. Over time, you get back your $1—plus about 47 cents...."

Soo Oh and Janet Adamy, "When the Safety Net Pays for Itself,"Wall Street Journal, July 22, 2019, https://www.wsj.com/articles/when-the-safety-net-pays-for-itself-11563800405

though this might be fun rainy day reading out there. terrific new paper suggest that the labor share hasn't fallen, as high skilled persons income is increasingly taking the form of equity. some great factoids.

"....The widespread and growing practice of equity-based compensation has transformed high-skilled labor from a pure labor input into a class of “human capitalists”. We show that high-skilled labor income in the form of equity claims to firms’ future dividends and capital gains has dramatically increased since the 1980s. Indeed, in recent years, equity based compensation represents almost 45% of total compensation to high-skilled labor. Ignoring such income results in incorrect measurement of the returns to high-skilled labor, with important implications for macroeconomics. Including equity-based compensation to high-skilled labor cuts the total decline in the labor share since the 1980’s by over 60%, and completely reverses the decline in the high skilled labor share to an increase of almost 1%.Correctly measuring the return to high-skilled labor can thus resolve the puzzling lack of a skill premium in recent data, as well as the corresponding lack of evidence of complementarity between high-skilled labor and new-economy physical capital. Moreover, tackling the capital structure question of who owns firms’ profits is necessary to provide a link between changing factor shares and changing income and wealth shares. We use an estimated model to understand the rise of human capitalists in an economy with declining capital goods prices. Finally, we present corroborating cross section and time series evidence for complementarity between high-skilled labor and physical capital using our corrected measure of the total return to human capitalists..... In our sample, human capitalists’ ownership share of public companies is 7%.....implies that, in recent years, human capitalists earn over $85 Billion annually in equity-based compensation from publicly traded firms...."

Andrea Eisfeldt, Antonio Falato and Mindy Z. Xiaolan, "Human Capitalists," Stanford University, July 2019, https://economics.stanford.edu/sites/g/files/sbiybj9386/f/abstract_5.pdf

“…an internal Freddie Mac business strategy presentation, presented at a two-day board of directors meeting held in March 2007, tells an entirely different story. It lays out in detail how Freddie Mac in 2007 was having tremendous difficulty coping with, much less overcoming, the intense competitive threat posed by Fannie Mae. It is worth noting that in 2007 Freddie Mac was one of the largest financial institutions in the world….”

Edward Pinto, “The facts demonstrate that Fannie and Freddie were not “lazy competitors” before seizure,” American Enterprise Institute, July 22, 2019, https://www.aei.org/articles/facts-fannie-freddie-not-lazy-competitors/

Patrick Asked“Who Is The Party Of More?”

CNN, "The day the tea party died," CNN, July 23, 2019, https://www.kxlf.com/cnn-us-politics/2019/07/23/the-day-the-tea-party-died/

The day the tea party died

The tea party was born February 19, 2009. It died, officially, July 22, 2019.

The first date was when CNBC analyst Rick Santelli went on a rant — from the floor of the Chicago Mercantile Exchange — about government spending and the dangerous resultant debt it was creating for the country.

The second date was, well, Monday, when the Trump White House and key Democratic and Republican leaders in Congress agreed to a two-year budget deal that further unraveled the spending strictures put in place by tea party Republicans in 2011 and suspended the debt ceiling through July 2021 — and, in practical terms, well into 2022.

In a terrific piece for the National Review, Brian Riedl writes of Monday’s deal:

“This represents a fitting conclusion of the Budget Control Act — the crown jewel of the 2011 ‘tea-party Congress.’ The decade-long shredding of these hard-fought budget constraints mirrors the shredding of Republican credibility on fiscal responsibility.”

Correct. The deal, which still needs to be approved by both House of Congress and then signed into law by President Donald Trump (so, you just never know!), is a sort of final death throe of a movement that has been limping along — mortally wounded but still, somehow, breathing — ever since Trump emerged on the political scene.

Unlike many of his rivals for the 2016 presidential nomination — Jeb(!) Bush, Ted Cruz — Trump never expressed any real concern about the rising deficits (and debt) in the country, nor did he seem terribly concerned about its potential impacts on the economy either now or in the future.

That was in keeping with how Trump had conducted his own personal business prior to running for office — the self-proclaimed “King of Debt,” Trump regularly borrowed heavily to finance his various projects. As Trump told CBS News’ Norah O’Donnell during the 2016 campaign: “I’ve made a fortune by using debt, and if things don’t work out, I renegotiate the debt. I mean, that’s a smart thing, not a stupid thing.”

Given that history, no one could, really, be surprised by the lack of interest or concern Trump has shown about adding to yearly deficits since being elected president. His much-hyped tax cuts are set to add $1.85 trillion to the national debt over an 11-year period, according to projections from the Congressional Budget Office. (The national debt has already grown to $22 trillion — up more than $2 trillion since Trump came into office.) The federal deficit for this budgetary year, which has two more months left in it, is almost $750 billion — an increase of nearly 25% from the previous year.

The new compromise budget deal — again, assuming it passes — would raise spending limits by $321 billion over the next two years. As The New York Times’ Jim Tankersley noted on Twitter Monday night, discretionary spending (meaning government-authorized spending outside of entitlements like Medicare and Social Security) is now projected to grow at 4% for Trump’s first term. In then-President Barack Obama’s first term, which saw the rise of the tea party in opposition to out-of-control government spending partly in response to the economic recession of 2008, discretionary spending rose at 3%. (In Obama’s second term, discretionary spending dropped by 2%.)

CNN’s Manu Raju caught up with Cruz, a leading voice in tea party circles and a strong opponent of raising the debt ceiling in the Obama years, on Tuesday morning — asking him for his thoughts on the latest compromise. “Just call our press office,” Cruz told Raju. So, yeah.

The truth is that the tea party was on its way out before Trump emerged on the scene. Almost since the moment the tea party movement pushed through the Budget Control Act in 2011, politicians — on both sides — have been trying to claw back some of the spending they gave up in that deal.

But the emergence of Trump — and congressional Republicans’ complete capitulation to, well, Trumpism, has clearly sped up the death of the movement. He doesn’t care about debt and deficit and so now neither do they.

Looking back over the last 10 years, it’s a remarkable arc. The tea party was the dominant movement in American politics at the start of the decade — seizing control of the Republican Party and pushing out Speaker John Boehner (Ohio) in the process. But then the tea party forces watched as Trump grabbed the GOP by the throat and (still) hasn’t let go.

The tea party has been left dead by the side of the road, one of the many casualties of the presidency of Donald Trump.

“…Given that history, no one could, really, be surprised by the lack of interest or concern Trump has shown about adding to yearly deficits since being elected president. His much-hyped tax cuts are set to add $1.85 trillion to the national debt over an 11-year period, according to projections from the Congressional Budget Office. (The national debt has already grown to $22 trillion — up more than $2 trillion since Trump came into office.) The federal deficit for this budgetary year, which has two more months left in it, is almost $750 billion — an increase of nearly 25% from the previous year. The new compromise budget deal — again, assuming it passes — would raise spending limits by $321 billion over the next two years. As The New York Times’ Jim Tankersley noted on Twitter Monday night, discretionary spending (meaning government-authorized spending outside of entitlements like Medicare and Social Security) is now projected to grow at 4% for Trump’s first term. In then-President Barack Obama’s first term, which saw the rise of the tea party in opposition to out-of-control government spending partly in response to the economic recession of 2008, discretionary spending rose at 3%. (In Obama’s second term, discretionary spending dropped by 2%.)…”

Rick Berger, "Winners and losers of the bipartisan budget agreement," American Enterprise Institute, July 23, 2019, https://www.aei.org/foreign-and-defense-policy/defense/winners-and-losers-of-the-bipartisan-budget-agreement/

Winners and losers of the bipartisan budget agreement

Yesterday, President Trump and congressional leaders announced a deal to extend the debt ceiling for two years and raise the Budget Control Act spending caps for two years, avoiding $126 billion in automatic across-the-board cuts set to take effect in January of 2020. This $320 billion deal builds on the last pact, which raised spending by $296 billion. While this agreement represents a surprising breakthrough, this was the easy part, and much work remains to actually pass 12 appropriations bills. Most importantly, the president has yet to announce his explicit support of the accord, and he will gauge public reaction before doing so. Congressional leaders must now figure out how to thread the needle of packaging appropriations bills.

Winners

Speaker Pelosi: The leader of the Democratic House played a bad hand into a good deal; in one conservative’s take, she “played like a fiddle.” Beyond avoiding sequestration and a debt ceiling showdown, the speaker desired a significant increase in non-defense discretionary spending — and she delivered in spades. With the addition of $22 billion in unpaid VA bills, Pelosi and Democratic leadership can now credibly claim to have broken the longstanding principle of “parity” in budget deals in which each dollar for defense is matched on the non-defense side.

Mitch McConnell: With the prospect of chaos looming, the Senate majority leader always wanted stability above all else. This arrangement buys him that stability, avoiding a sequester, a shutdown, or a one-year continuing resolution and further budget games, as Acting White House Chief of Staff Mick Mulvaney and OMB Director Russ Vought wanted. McConnell also shields his caucus from a brutal standalone debt ceiling vote and retains the option to disavow the handshake agreement, calling it the “Administration-Pelosi” deal. In addition, by extending the debt ceiling for two years rather than a short-term extension or an elimination, McConnell plays the long game. The new July 2021 debt ceiling deadline sets up either a chance for a newly re-elected Trump to work with Senate Republicans on a true debt reduction pact or to force a Democratic president to squander the most valuable first-term political capital.

Losers

Fiscal hawks: The reaction from fiscal hawks can be summed up by Rep. Mark Walker’s tweet featuring the Joker standing next to a pile of money on fire. Many House Republicans and Senate GOP deficit hawks said voting for the massive increases in non-defense discretionary spending in the last budget agreement clocked in as the worst vote of their tenures in Congress. This deal is simultaneously larger than the last one and possesses fewer offsets, leading the deficit-battling Committee on a Responsible Federal Budget to brand it “the worst budget agreement in our nation’s history.”

Progressives: Left-leaning Democrats in Congress aren’t thrilled about this agreement because it includes a verbal agreement from Speaker Pelosi to eschew using poison-pill policy riders in appropriations bills to restrict the president’s latitude on border wall issues. Progressive Dems in the House are still smarting after a betrayal by Senate Minority Leader Schumer on the humanitarian aid package for the border, which included no restrictions on the administration. After helping to pass the National Defense Authorization Act on party lines — a bill most progressive never vote for — they’re unlikely to go quietly into that good night.

Meh

Defense hawks: Without a confirmed defense secretary to provide a strong voice in the room, defense spending was not a priority for White House negotiators. Leading defense hawks, such as Sen. Jim Inhofe and Rep. Mac Thornberry, had called $750 billion the bare minimum to carry out the president’s National Defense Strategy. This budget deal provides $738 billion in 2020, only $5 billion more than the House Democrats’ preferred level and about 1% real growth. In 2021, the $741 billion defense budget will actually represent a decrease in buying power, given inflation. However, defense hawks notched a win in avoiding a one-year continuing resolution or across-the-board cuts to the military twice the size of the 2013 sequester, which devastated readiness. Sen. Inhofe and Rep. Thornberry have already announced their reluctant support of the deal to maintain momentum on readiness recovery, but this deal was a pyrrhic victory for defense hawks.

The President: Facing advisers split on a negotiating strategy, the president tentatively agreed to a compromise, which he could ditch at any moment. The Mnuchin wing avoids a potential default and sequestration, while the Mulvaney/Vought wing sets up a premier fiscal fight early on in a second term, should the president win next November. The president also retains his freedom on his number-one issue — the border wall — with transfer authority intact and a promise from Pelosi to ban immigration-related policy riders on appropriations bills.