Thursday, August 1, 2019

When This is All Over Trump is Going to MABA

By David Stockman

You couldn't have timed that better. The Donald managed to hold on to a "2" in Friday's GDP report, but it was entirely due to a boom in government spending.

We'd call it a kind of stick save that came, ironically, the very day Trump is planning to sign a $1.7 trillion budget abomination. The deal negotiated with Pelosi and Chuckles Schumer, and voted against by a large majority of House Republicans, shit-cans the decade-old discretionary spending caps and permits unlimited Federal borrowing through June 2021.

So who needs Hillary? Or even Barry!

As it happened, the 2.035% seasonally adjusted annualized growth rate for Q2 made it over the hump by a smidgeon on the strength of an aberrant 0.85% contribution to GDP growth from the government sector (federal, state and local).

The latter figure compares to a 0.24% average contribution from the government sector during the Donald's first nine quarters in office. So if you merely adjust for the excess contribution (0.61%) from government, you would have had an even more punkish 1.43% headline GDP growth rate this AM.

Then again, it is only through the miracle of Keynesian GDP accounting that economic waste on defense and domestic pork barrels or extractions from taxpayers to fund bureaucrats' wages and other purchases count as "growth". Self-evidently, when the state becomes corpulent like at present, it undermines prosperity and the rudiments of real wealth gains.

And that gets us to where the Donald is really leading the nation---and it surely is not MAGA. Better to just recycle those red baseball caps and slap on the letters for MABA. Today's GDP report is just one more reminder that Make America Broke Again is the actual path ahead.

The truth is, the Donald, who is fiscally and economically ignorant, and his advisors who are stupid (Mnuchin) or charlatans (Kudlow and Hassett), are perpetuating a cruel hoax. Namely, that "growth" at this late stage of the business cycle can forestall fiscal disaster.

But when you are in debt to the tune of $22 trillion nominally, and actually $42 trillion when you consider what is already hard-wired into the budget over the next decade, even 1960s style growth (4% + real GDP gains) couldn't move the needle much.

Needless to say, the Q2 GDP report put the kibosh on even that delusion. If you look at real final sales in order to remove the short-run inventory noise (destocking actually reduced headline growth this quarter), it is damn evident that the sugar high is over.

The 1.8% gain over the 12 months ending in June, in fact, is the lowest rate of gain since Q2 2014. And as the chart makes clear, there's simply no basis for the claim that the Trump-O-Nomics has caused a sustained acceleration of growth.

Indeed, at this late stage of the business cycle (a record 121 months), the decelerating trend shown above is all the warning you need.

Here is what happened to real final sales during the last few quarters before the Great Recession incepted in 2008. The annualized rate of gain dropped from 3-4% thru early 2006 to 1.6% by Q2 2008 before finally rolling over at the recession bottom.

Then again, the public and private debt burdens were far lower on the eve of the Great Recession than they are today---meaning that the headwinds to expansion have become commensurately greater. Public debt stood at $9.2 trillion in Q4 2007 versus $22 trillion today, while total public and private debt of $52.6 trillion back then has subsequently ballooned to $72.1 trillion.

So the last thing the US economy needs is more debt, but that's exactly what was behind even this morning's modest growth and is what the Donald reckless fiscal policies are piling on in spades.
As to the latter, here is what the Committee for a Responsible Federal Budget reckons has been the future year impact of the major fiscal enactments to date. If the current deal becomes law as expected, legislation signed by Donald Trump — including tax cuts and increased spending — will add $4.1 trillion to the national debt between 2017 and 2029.

Moreover, well more than half of that is due to spending increases and interest, not the Donald's ballyhooed tax cut, which, as we demonstrate below, is not working anyway. The pending spending deal (BBA 2019) will add $1.7 trillion, and that comes on top of the $445 billion added by last year's deal.

What is especially egregious about the current deal is that it constitutes the final mockery of the 2011 Budget Control Act. The latter came during the August 2011 debt ceiling crisis and involved a mega deal between the "big spending" Obama Administration and the Republican Congress. Supposedly it saved the nation from a catastrophic default.

As enacted, Obama got a $2.1 trillion increase in the debt ceiling in return for $2.1 trillion in cuts through 2021---most of which was to be achieved by firm annual spending caps on about $1.1 trillion of annual defense and nondefense discretionary spending.

At the time, the hypocritical GOP majority argued that it couldn't do anything about the massive growth of entitlements and other mandatory spending, which accounts for more than 70% of the budget, because Obama's veto stood in the way. But it could at least place stringent caps on annual appropriated outlays---with of view to significantly shrinking the inflation-adjusted level of spending for these purposes over the coming decade.

Here's what happened, however. On four different occasions the GOP congressional leadership (and much of the rank and file, especially in the US Senate) has been complicit in suspending the 2011 budget caps and the sequester enforcement mechanism in favor of two-year bipartisan "deals".
Obama agreed to two overrides, which raised the caps by about $145 billion for the four years impacted..

But with the now House-approved BBA 2019 (Senate approval is only a formality) to bust the caps for FY 2020-2021, Trump's two budget deals will have blown the caps by about $600 billion over the four years directly impacted.

More crucially, that's all she wrote with respect to the Fake Caps on discretionary spending, which have only been observed in the breach. Now, however, even the last vestige of the 2011 deal has been vaporized---so that after FY 2021 there will not even be a pretense of spending limits.

The chart below tells the real story. During FY 2010 Obama's "shovel-ready" stimulus boondoggle had bloated discretionary spending in real terms (2018 $) to $1.25 trillion, which represented a 50% increased in inflation-adjusted dollars from the level of Bill Clinton's last budget (FY 2000).
So the whole point of the August 2011 deal was to let the one-time counter-recession spending roll-off and then press real spending lower in the years to follow. In very modest degree (and far less than targeted at the time) that's what did happen---with real discretionary spending flat-lining at about $1.1 trillion per during Obama's second term.

No more. The Donald and his GOP confederates have rekindled "guns and butter" in a way that would make even LBJ blush. In both of Trump's two-year budget deals, domestic appropriations have been raised sharply in return for what will be nearly a $150 billion annual increase in defense spending by FY 2021.

Accordingly, even in real terms the FY 2020 budget for defense and nondefense discretionary programs (red bar) will virtually reach the out-0f-control Obama level (green bar), which occurred during the depths of the Great Recession.

Meanwhile, entitlements and mandatory spending will have grow from $1.915 trillion in FY 2010 to an estimated $3.320 trillion in FY2020, representing a gain of 74%.

At the same time, there is apparently no corner of the budget too obscure not to get a Trumpian style booster shot if political circumstances warrant it. That is, there is no more slimy area of the Swamp than the farm commodity subsidies, but owing to the havoc being wrecked upon the farm states by the Donald's Trade Wars, the largess is now flowing there likely rarely before.

According to the USDA, the tariffs slashed Chinese purchases of U.S. soybeans by 75% over the 12 months ended May 31, thereby also reducing the price per-bushel for sales that were actually made. Similarly, U.S. hog producers and meatpackers have watched China ramp up meat purchases from countries like Spain, Brazil and Australia to replenish supplies after a pig disease decimated Chinese hog farms.

So last week the U.S. Department of Agriculture announced it is preparing to deploy $16 billion in fresh government funds (on top of the $12 billion already distributed) to aid farmers hurt by the trade battle with China---and also the wet weather that kept many from planting a full crop this spring.
There is never a payback when mother nature conspires to generate a bumper crop, of course, because the Swamp only flows one way----from taxpayers to tax consumers.

In any event, the USDA will divide the $16 billion among soybean fields, hog barns, dairy farms, cranberry bogs and manifold other agricultural operations. Payment rates will range between $15 and $150 an acre based on a farm’s location and this year’s expected production; and Uncle Sam will also purchase more than $1.3 billion worth of commodities such as pork and prunes affected by China's retaliatory tariffs for distribution to food banks, schools etc.

We dwell on the manner in which entitlements have been left to drift higher, future discretionary budget caps have been eliminated, ad hoc spending programs like the new farm bailout put in place and phony outyear savings measures cancelled just before they reach their effective dates (like the House repeal of the Cadillac tax on health care plans valued at more than $3,000/family last week, even though it would not become effective until 2023) because these are the mechanisms which give lie to the standard 10-year budget projections.

Even though CBO's current outlook is for more than $11 trillion of added debt over the coming decade, that assumes (under Congressionally mandated scoring rules) that a lot of Fake Savings are actually realized in the years ahead.

They won't be. That's why the real baseline deficits total more than $17 trillion over he coming decade, and will reach $2.4 trillion per year by the end of the 2020s---even if there is no recession through October 2028.

That is to say, the current business expansion never ends and reaches 232 months of age!

The truth is, that is not going to happen. Accordingly, there is not a snowballs' chance in the hot place that the America can grow its way out of the massive baseline deficits shown in the non- recession forecast above.

That was more than evident in the trends in today's GDP report. On the one hand, investment in both the business sector and residential housing sector is now clearly rolling over. If last year's $200 billion business tax cut didn't do the trick, however, pray tell what will?

On an annualized run rate basis, real business investment actually went south in Q2, dropping by 0.6%. The sugar high stemming from the tax cut has entirely vanished.

At the end of the day, government spending and household consumption contributed 3.70% to the 2.05% change in real GDP during the second quarter. That is, it was all driven by debt, debt and more debt.

In fact, absent the acceleration in consumer borrowing during the last 12 months shown below, even household consumption would have flattened during Q2.

And that ain't MAGA. It's MABA.

David Stockman was Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.

The above originally appeared at David Stockman's Contra Corner.

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