NC Budget and Tax Center

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

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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 (UPDATED)

(This post was updated on January 24th to reflect new details on the impacts of the shutdown. We will continue to provide updates as additional impacts become clear.)

President Trump has made it imminently clear that his administration created this shutdown, 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 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

Federal Workers and Contractors

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). Friday January 25th marks the second missed paycheck for impacted federal employees, and many of these families have already run through their available savings. These effects are all the more burdensome because furloughed federal employees can apply for Unemployment Insurance, but have thus far been prevented from collecting payments. A number of states are exploring ways to provide temporary financial relief to federal employees that are not getting paid, but a clear solution has not been implemented in North Carolina.

Federal contractors. In addition to official federal employees, many North Carolinians who work for companies on federal contract may be laid off or forced to take time off without pay. While there are no reliable estimates of the number of businesses or workers who are losing pay in North Carolina because of the shutdown, the harm is substantial and will only grow with time.

Social Services

Food Aid: The Supplemental Nutrition Assistance Program (SNAP) benefits are still being distributed, but the shutdown is already making it harder for North Carolinians to use them. Because the United States Department of Agriculture is unable to renew contracts with stores that normally accept SNAP benefits, more than 150 retailers in North Carolina have been forced to stop participating in the program, many in parts of the state where access to food is already limited. If the shutdown lasts into March, families and children who receive SNAP could go hungry. The Department of Agriculture, which administers the SNAP program, is still issuing checks for now, but available funds could be exhausted within the next several weeks.

Housing Assistance. Payment of rental housing assistance and other programs serving the elderly and others continue to operate for now, but Department of Housing and Urban development informed landlords that its ability to continue payment depends on how much budget authority the agency has, raising the potential that housing assistance could run out. If the shutdown persists, HUD could be unable to renew contracts with local entities that provide housing. It is estimated that over 115 contracts with low-income housing providers have lapsed, threatening the housing security of nearly 2,000 units across the state. In addition, inspection of existing housing units has largely been suspended which may force low-income families to live longer in unhealthy conditions.

Native American health and social services. Many Native American tribes have seen funds for healthcare and other vital services dry up. The Federal Government is legally obligated to support services like medical clinics, food pantries, and educational programs, but the shutdown has stopped many of these payments. This has forced some services to be reduced or eliminated altogether.

Temporary Assistance for Needy Families (TANF). TANF (Temporary Assistance for Needy Families), a federal block grant, is at risk of a lapse in funding. North Carolina could feel the impacts as early as the first few weeks of February, according the National Governors Association. TANF helps to fund our states child care subsidies, NC PreK, and provides cash assistance to families in need. Both the U.S. House and Senate have passed H.R. 430, a bill that extends funding through June. The bill awaits the president’s signature.

Disaster Recovery

Hurricane Florence rebuilding. North Carolina is unable to use $168 million in Community Development Block Grants until guidelines are issued by the Department of Housing and Urban Development (HUD), which has been delayed by the shutdown. This is preventing the State from deploying these funds to assist communities in rebuilding after Hurricane Florence.

Farming Relief Funds. With the United States Department of Agriculture (USDA) unfunded, funds are not being distributed that are meant to reimburse farmers for income lost to last year’s hurricane and the ongoing trade dispute with China. With an estimated $1 billion in lost crops due to storms alone, and with farmers trying to plan for the upcoming growing season, any gap in processing relief claims will severely impact one of North Carolina’s most important industries. David Smith with the State Department of Agriculture and Consumer Services said, “We’re already hearing from farmers who are pretty desperate for relief money.” While some USDA staff were recalled temporarily this month, it remains unclear how many of these reimbursements will be processed and distributed.

Business and Economic Impacts

Farmers’ Planning: USDA crop reports that play a critical role in farmers’ planning for the upcoming year are not being released. As farmers are trying to make decisions about what crops to plant for the approaching growing season and which livestock to invest in, lacking these government surveys could undermine North Carolina’s vital agricultural economy. Particularly in the modern data-driven agriculture economy, the government shutdown is making it far harder for farmers to make informed decisions.

Small Business Loans: Loans provided by the Small Business Administration (SBA) are not being processed, cutting off Mom and Pop enterprises from a vital source of capital. SBA loans are often used to get businesses off the ground, purchase new equipment, make building upgrades, or buy the raw materials needed to fill orders. Because banks are often hesitant to make loans to small businesses, closing the SBA means that some companies may be unable to expand, or may close entirely because they cannot access this essential source of business capital.

Home loans. Several federal agencies that help people purchase homes are shuttered, preventing some applications from being processed and therefore preventing potential buyers from being able to close on the houses they hope to call home. The Federal Housing Authority has said that it will not make new multi-family commitments during the shutdown, the Department of Agriculture has similarly communicated that new rural housing direct loans will not be issued, and the Federal Housing Authority gave notice that it will not make insurance endorsements under the Home Equity Conversion Mortgage program, which is designed to help senior citizens to convert some of the equity in their homes into cash.

Development permitting. EPA will have little to no capacity to process environmental approvals for real estate projects. In a prolonged shutdown, the inability of EPA to process applications could become a profound drag on the economy, preventing new developments from coming into being.

Federal parks unprotected. While most Federal Parks remain technically open, park staff have been sent home and most visitor centers are shuttered. In spite of valiant efforts by volunteer groups and communities, trash is building up and many park advocates worry about mounting damage to natural and cultural treasures because the parks are not being patrolled as usual.

Portions of the Blue Ridge Parkway are closed. Federal Parks are technically open, but portions of the Blue Ridge Parkway have been closed. With maintenance workers furloughed, no one is available to clear trees brought down by recent winter storms, rendering large portions of the iconic route impassible.

Beer, Wine, and Spirits: The Alcohol and Tobacco Tax and Trade Bureau, which processes applications for new labeling is closed, preventing producers from getting new products approved. While by no means the most important impact, it’s an example of the many Federal services that often go unnoticed until they are no longer being performed.

University and Research Funding: If Trump goes ahead with his threat to keep the government shut down for months, university research funding could dry up, threatening several schools in North Carolina that depend on federal funds to pursue their research and teaching missions.

Tax filing. With tax season just around the corner, a significant portion of the Internal Revenue Service (IRS) staff is furloughed. While the administration has pledged that tax refunds will still be issued if the government shutdown persists, it is unclear how the herculean task of processing tax returns can be completed if the already understaffed agency is working with a fraction of its employees. Beyond refund checks, the outage would surely frustrate taxpayers trying to get their questions answered so they can submit accurate returns.  Given the already real underfunding of the country’s Internal Revenue Service, the disruption of the current government shutdown could compound the challenges of administration. 

Public Safety

Victims of domestic violence. Because the Violence against Women Act and the Victims of Crime Act lapsed in December, many local organizations that provide shelter and support to victims of domestic violence are at risk of closing. Many of these life-saving services in North Carolina are provided by non-profit organizations that are already facing the prospect of closing if their federal contracts are not renewed.

Federal Investigations: Most agents with the Federal Bureau of Investigations are considered essential employees and are working without pay during the shutdown. However, a lack of funding is starting to seriously undermine exiting investigations. A few specific impacts include losing informants because agents lack to funds to pay them, inability to set up sting operations in drug cases, and delays in issuing indictments.

Federal courts: If the shutdown lasts past February 1st, Federal courts may have to start closing their doors. The Federal administrative Office of the Courts estimates that sufficient funding exists to keep Federal courts open through January 31st, but not much after that.

Testing for GenX. The State Department of Environmental Quality (DEQ) continues to sample wells for GenX, but the Federal laboratory that would normally run the tests is closed, so samples are piling up in DEQ’s Fayetteville office.

Immigration Legal Proceedings: Immigration courts have suspended hearings on immigration cases where the people involved are currently in detention. This will result in unknown and potentially lengthy delays in resolving cases. Given the backlog of immigration cases, canceling hearings could leave applicants in legal limbo for months, and possibly even years.

Food inspections. If the shutdown persists, the frequency of food safety inspections could be reduced, potentially exposing the eating public to serious risk.

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