NC Budget and Tax Center

Trump Administration admits economic damage of shutdown more than twice what originally claimed

Image: Adobe Stock

Kevin Hassett is the chairman of the White House Council of Economic Advisors, a group that is supposed to inject reason and rigor into the administration’s economic worldview. On Tuesday, he admitted that the shutdown is inflicting more than twice the damage on the economy than the President’s economic advisors had previously claimed, and even Hassett’s new estimate still fails to face the true economic bill that Trump’s shutdown is running up.

“We’ve been watching the actual effects, and noticing that the impact we see on government contractors is bigger than the sort of staff rule-of-thumb anticipated.”

This simple quote is revealing in a number of ways.

Hassett and his team weren’t just a little off — they weren’t even in the neighborhood of the right ballpark. The Council of Economic Advisors now admits that the economic damage is likely to be worse every week than what they had originally claimed would take two weeks to occur. We all make mistakes, but for a group whose core mission is to generate reliable economic estimates, that’s a big error.

Hassett’s language also reveals a lack of planning and forethought within the Administration. The choice to close government appears to have considered little more than “staff rule-of-thumb”, rather than a serious attempt to predict the economic consequences that would come from it. Partially shutting down a big chunk of our government is not rule-of-thumb stuff — it’s a major decision that should never be taken lightly.

The same lack of serious thought was also on display a few days ago, when Hassett opined that federal employees should be delighted that they’re getting a free vacation (quote begins around the 4:30 mark in this video), and that “in some sense they’re better off”.

Even now, the Trump administration still hasn’t fully grappled with the economic injury it is inflicting on our country. With the Federal Government partially incapacitated, key vertebra in America’s economic backbone are suddenly missing. Beyond federal contractors and employees not getting paid, a host of vital economic services are going undelivered. As we have covered before, home loans are not being underwritten, businesses can’t get advice in preparing their taxes, farmers are missing out on crop reimbursements, environmental permitting is not happening, and even breweries can’t get their spring drafts approved. The President’s economic advisors have not released any rigorous analysis of how the failure to discharge these critical functions could undermine our economy, so even the new estimates that Hassett revealed this week are likely to prove an inadequate assessment.

Concerns about undermining growth are particularly pressing given the range of risks currently facing the global economy. We’ve had a long run of steady economic growth, but the list of risk factors that could derail that record are growing. Against that backdrop, it is all the more incumbent on the Administration to consider all of the ramifications of their policy choices.

Trump’s advisors may not have adequately foretold what would come from shuttering the people’s government, but the real-world consequences of the President’s decision become clearer by the day.

NC Budget and Tax Center

The creeping damage of Trump’s shutdown

President Trump looked America in the eye last night and made it clear that he was the person who decided to shut the government down, that a wall along the southern border matters more to him than whether hundreds of thousands of federal employees can make ends meet. More important than families’ ability to put food on the table. More important than whether farmers get reimbursed for crop losses. More important than keeping federal parks safe. More important than a host of other vital government services.

This isn’t how our system of government was designed to function. Funding the government is always about compromises and trade-offs made throughout a process that should be oriented toward the good of our country as a whole, but a responsible President would never shut the entire government down over one line item in a $3.8 trillion dollar budget. That’s why the Senate unanimously passed a measure in December that would have avoided the shutdown, and why a similar extension of funding quickly passed when Democrats took control of the House last week.

Let’s look at a partial list of what the President is willing to sacrifice, and the people he’s willing to harm, in his quest to build a symbol along the southern border.

Part or all of the following departments are currently shut down:

  • Homeland Security
  • Justice
  • Agriculture
  • Treasury
  • State
  • Interior
  • Transportation
  • Housing and Urban Development

As a result, the following government functions have either stopped already, or will grind to a halt as the shutdown persists.

(We will continue to provide updates as additional impacts become clear.)

Impacts Already

  • Federal workers not getting paid: Federal employees in unfunded agencies are not getting paid, both those who are furloughed and employees like airport security officers who are still required to report for work. In North Carolina, roughly 7,800 Federal employees are missing paychecks, a count that does not include contract workers and state employees whose salaries are paid with Federal funds. The agencies with the most employees going without pay in North Carolina are the Department of Agriculture (1,900 employees), Environmental Protection Agency (1,200 employees), and Homeland Security (1,100 employees). Read more
NC Budget and Tax Center

Party like its 1929. Income inequality rivals era before the Great Depression

Before you dig out your flapper dresses and suspenders, odds are this is a party you can’t afford to attend. A new report from the Economic Policy Institute shows that the level of income inequality in the United States and North Carolina has increased over the past several years to a point where we are now at or above the economic divide that helped to propel the world in the worst economic collapse in modern history.

“There has been vast and widespread growth in income inequality in every corner of the country. Overall, the growth in incomes of the bottom 99 percent has improved since our last report, in step with a strengthening economy, but the gap between the top 1 percent and everyone else still grew in the majority of states we examine here.”

In North Carolina, the average income for someone in the top one percent is 20.6 times larger than everyone else, a figure that has increased substantially during the Great Recession and is much higher than it was in the 1960s through early 1980s. The top one percent took home over 17 percent of all income in North Carolina in 2015, and the top 0.1 percent commanded 7.4 of all income. In 1974, when the level of income inequality in North Carolina was the lowest in modern history, the top one percent only consumed 7.8 percent of all North Carolina income.

We’re not doomed to repeat the Great Depression, but it is clear that state and federal policy in the last several years has failed to address the single most pressing economic challenge of our time. Instead of hoping that more tax cuts for wealthy people and profitable corporations will magically fix our problems, it’s time for leaders in Raleigh and Washington, D.C., to admit that we are reaching levels of inequality that threaten the social and economic fabric of our country. Read more

Commentary, NC Budget and Tax Center

Income tax cap seeks to lock in a failed economic experiment

The current push to reduce North Carolina’s Constitutional income tax cap (SB75) is not rooted in sober analysis of hard economic data.

From the moment that legislative leaders proposed slashing income taxes in 2013, we were promised that it would radically transform North Carolina’s economy. Now, several years into this experiment, evidence abounds that tax cuts failed to change our economic trajectory. Employment growth in North Carolina has moved in virtual lockstep with our immediate neighbors through the recession and recovery, both before and after the recent wave of tax cuts started taking effect. In fact, several of our neighbor states have added jobs faster than North Carolina since the start of 2014, and none of our neighbors embarked on a similar set of income tax reductions.

The economic benefits of recent tax cuts may be undetectable, but the harm is plain to see. Tax cuts have reduced state revenue by $2.6 billion each year, seriously undermining our collective commitment to strong schools, healthy communities, and a competitive economy. For example, we have an estimated $8 billion backlog in school construction and repairs statewide, we’re not aggressively building 21st-Century broadband infrastructure, and we have dramatically reduced our efforts to protect the public from harmful toxins and contaminants.

Locking in recent tax cuts would become even more damaging in the next few years. The non-partisan Fiscal Research Division of the General Assembly projects that the current tax system won’t raise the revenue needed to continue current services, falling billions of dollars short in the next few years. If the income tax cap passes, it would then force legislators to cut vital public services even more, or to increase sales taxes, fees, and other levies to fill the hole.

The unfortunate fact is that we have fundamental economic challenges that tax cuts simply cannot address.  Poverty remains far too prevalent, wage growth remain tepid, and many communities still face barriers to opportunity. To make matters even worse, roughly  one-third of North Carolina’s counties actually lost jobs over the past year, deepening longstanding racial and regional economic divides. This week, researchers revealed that North Carolina’s rural economy would expand by $5.3 billion if we ensured that everyone who wants a job can find one.  We can’t realize that potential through tax cuts—we need investments in rural regions, systems that deliver the training and business supports to grow a competitive rural workforce, and 21st-Century infrastructure that connects communities from the mountains to the coast.

An income tax cap won’t make North Carolina any more prosperous, or any better prepared for an uncertain future. It will simply make it harder for us to respond to the real challenges facing our state.

Patrick McHugh is an Economic Analyst for the Budget & Tax Center, a project of the North Carolina Justice Center.

NC Budget and Tax Center

Lowering the income tax cap would come back to haunt N.C. when the next recession occurs

Among the proposed ballot initiatives hanging in the air as the 2018 legislative session draws near its end is a move to change the North Carolina Constitution to lower the income tax rate cap . While this proposal has not received a great deal of attention, it could have profound and long-lasting impacts on the fiscal health of state and local governments. The proposal would dramatically reduce our ability to respond to changing economic circumstances, a problem that will likely be felt most acutely whenever the next economic downturn occurs.

It is not clear when the next downturn will happen, but current risks and historical precedent indicate that the run of growth will not last forever. The current economic expansion is already one of the longest on record and, if there is one thing we know about economic conditions, it is that they are bound to change.

Prolonged periods of growth tend to create what economists call “irrational exuberance”, a collective forgetfulness that long-term decisions should be calibrated to deal with bad times as well as good. “It’s just the time when it feels like all is going fabulously that we make mistakes,” says Mark Zandi, chief economist of Moody’s Analytics.

Dramatically lowering the maximum income tax rate permitted under the North Carolina Constitution is a good example of irrational exuberance, because it is likely to come back to haunt us whenever this run of growth comes to an end. Lowering the income tax cap would tie our state’s fiscal hands when the next recession occurs, effectively forcing the state government to increase sales taxes, franchise taxes, fees, and other levies when the next recession creates a hole in public finances. Local governments could also be forced to increase property taxes if state funding dries up during the next recession. Read more