The Finance 202: Tax cuts for hurricane recovery? Not so fast.

THE TICKER

As Hurricane Irma prepared to ravage Florida on Saturday, President Trump urged Congress to accelerate work on a tax overhaul. 

“I think now with what’s happened with the hurricane, I‘m going to ask for a speedup. I wanted a speedup anyway, but now we need it even more so,” Trump said at the outset of a Cabinet meeting focused on the federal disaster response. 

The president didn’t explain his thinking. Let’s extend him the benefit of the doubt and assume he meant that the economic impact of the disaster, piled on top of destruction wrought by Hurricane Harvey, will require some countervailing stimulus to keep growth on track. 

There is some short-term logic in that. A new report from Goldman Sachs estimates that hurricane-generated disruptions will take up to a full point out of gross domestic product in the third quarter. Harvey alone could mean a short-term drag on September payrolls of up to 100,000 jobs, Goldman economist Jan Hatzius estimates. 

But there are two big flaws in using the hurricanes to argue for tax cuts. For one thing, as Goldman notes, the economic shock that natural disasters bring is usually more than made up by growth from all the spending in the rebuilding period that follows. The firm studied data from the 35 largest hurricanes since World War II and found that the storms take a measurable bite out of economic activity in the next month. However, Hatzius writes, “these indicators often rebound significantly to above-trend growth over the following 2-4 months.” 

The spending that promotes that economic healing points to the second fundamental challenge that the twin disasters pose to Trump’s tax agenda. The budget deficit is straining at the seams. Before Harvey steamrolled Southeast Texas, federal spending for the fiscal year that ends Sept. 30 was set to exceed collections by $693 billion — the highest that number has been since 2009. Trump campaigned on a pledge to eliminate the $20 trillion federal debt by the time he leaves office (though as my colleague Damian Paletta recently noted, his advisers have backed away from the promise). And the deficit picture is only getting grimmer, per Damian: 

The Congressional Budget Office believes the U.S. government is about to enter a period of steadily worsening budget pressures, caused by an aging population and rising health-care costs. This will continue to widen the deficit and — unless Congress changes tax or spending policy — raise the national debt.

The U.S. government has borrowed so much money to offset these annual deficits that it is projected to pay $270 billion in interest on the debt this year. And the CBO projects that the U.S. government will pay close to $540 billion in interest on its debt in 2022.

 

Congressional Republicans who spent the Obama years railing against Democratic profligacy presumably will order some attention to this. And indeed, conservative hard-liners in the House objected to the debt-and-disaster package Trump successfully negotiated with Democrats last week on the grounds that it didn’t include the spending restraints they’ve been demanding. “I don’t think this was a good deal for the American taxpayer,” Rep. Jim Jordan (R-Ohio), a co-founder of the House Freedom Caucus, said in an interview on Fox News Sunday. “We didn’t do anything to address the underlying $20 trillion debt problem.”

The hurricanes ensure that problem will get worse. The bill for Harvey could be as hefty as $100 billion. And it’s impossible to say what Irma will cost.

The unforeseen spending binge the disasters require should ratchet up pressure on deficit hawks in both chambers to turn back the tide of red ink. That in turn will make it significantly tougher for GOP leaders to sell the Freedom Caucus on a “skinny budget” — one that holds spending levels steady and enshrines special rules to fast-track a tax overhaul without Democratic support. And Republicans still have miles to go toward forging agreement on a real spending blueprint, despite some recent signs of progress in the Senate.

Without a budget, Republicans will need to head back to square one on a tax plan to bring Democrats into the process. Notwithstanding Trump’s recent bipartisan freelancing — and some lip service toward engaging the minority — that is not an outcome his GOP colleagues in Congress would welcome. 

TRUMP TRACKER

Bannon: Cohn Should’ve Resigned. In a newsy “60 Minutes” interview last night, his first since leaving the White House, former Trump chief strategist Stephen K. Bannon laid into National Economic Council director Gary Cohn for criticizing President Trump’s Charlottesville response without resigning. “The stuff that was leaked out that week by certain members of the White House, I thought, was unacceptable,” Bannon told Charlie Rose. “I’m obviously talking about Gary Cohn and some other people, that if you don’t like what he’s doing, and you don’t agree with it, you have an obligation to resign.” Rose followed up: “So Gary Cohn should have resigned?” Bannon: “Absolutely.” 

You can see the exchange here, starting at the 2:20 mark: 

 

Trump may agree with his former aide. The New York Times’ Maggie Haberman and Glenn Thrush have this telling anecdote: “Several aides said Mr. Trump is freezing out Mr. Cohn by employing a familiar tactic: refusing to make eye contact with Mr. Cohn when his adviser greets him. At a meeting on Thursday on infrastructure at the White House with Gov. Andrew M. Cuomo of New York and members of Congress from New York and New Jersey, Mr. Kelly told participants that Mr. Cohn would lead the meeting. But Mr. Trump, whose most cutting insult is to pretend someone does not exist or that he barely knows them, virtually ignored him.”

Bannon, meanwhile, is plotting to back primary challenges to a number of incumbent Republican senators, launching “an all-out war against Senate Majority Leader Mitch McConnell and the Republican establishment,” Politico’s Alex Isenstadt reports: “Bannon has begun holding private meetings with insurgent challengers, vowing his support. He’s coordinating with conservative mega-donor Robert Mercer, who is prepared to pour millions of dollars into attacks on GOP incumbents. Bannon has also installed a confidant at an outside group that is expected to target Republican lawmakers and push the Trump agenda.

The activity has alarmed senior Republicans, who worry it will drain millions of dollars from the party’s coffers to take on Democrats in the general election. McConnell has repeatedly expressed concern to the White House about the danger primaries pose to his members, stressing that it could imperil his narrow four-seat majority, according to three people with direct knowledge of the discussions.”

(Bannon is also going back to making a living the old-fashioned way: By traveling to Hong Kong to give a speech at a conference hosted by a state-owned Chinese brokerage firm. Per Bloomberg, “The Sept. 12 talk will focus on ‘American economic nationalism, the populist revolt and Asia.'”) 

Mnuchin gets booed. Cohn isn’t the only administration hand crosswise with hard-liners in the party. Treasury Secretary Steven Mnuchin came in for some brutal reviews for his sales pitch to House Republicans on the debt ceiling and Harvey relief package. Bloomberg’s Erik Wasson: “Conservative House Republicans hissed and groaned at Treasury Secretary Steven Mnuchin as he implored them to vote for a hurricane relief bill that includes a short-term extension of the federal debt limit. Some Republicans, attending a closed-door meeting Friday, were infuriated by the sales pitch for the deal, especially when Mnuchin told them to ‘vote for the debt ceiling for me,’ said Representative Mark Walker of North Carolina.

In an interview after the meeting, Representative Ted Yoho of Florida responded to Mnuchin’s comments by saying: ‘He’s not one of my constituents!’ Representative Dave Brat of Virginia said: ‘The comments from the Treasury secretary today were not helpful. I found them to be intellectually insulting.‘”

The Wall Street Journal’s Trump problem

Dozens have left the paper in the past year and interviews with current and ex-staffers show outrage over pressure from management to normalize Trump

The Guardian

MARKET MOVERS

Hurricanes could cloud economic picture for the Fed. Bloomberg’s Christopher Condon: “Harvey and Irma probably aren’t going to dent U.S. growth in any lasting way, but back-to-back hurricanes could make it tough for Federal Reserve officials to take the economy’s pulse as they ponder the timing of their next interest-rate hike. ‘When we think about the impact of these storms, first of all it’s going to make it very difficult to read the economic data over the next few months because it’s going to be hard to know exactly what the data would have been ex the hurricanes,’ William Dudley, president of the New York Fed, told CNBC in an interview Friday.”

Reinsurers on the hook in Florida. The Wall Street Journal’s Leslie Scism: “Irma’s winds are expected to leave tens of billions of dollars in insured damage. And when the insurance money arrives for many homeowners, much of it will be via reinsurance companies—not the carrier on their contract. Reinsurers play an especially large role in Florida’s home-insurance market.

Andrew, Katrina and other severe hurricanes from 1992 through 2005 devastated the state’s insurance marketplace. Most brand-name national home insurers sharply reduced their presence. Picking up the slack today is a state-run “insurer of last resort,” Citizens Property Insurance Corp., and some 50 small to midsize home insurers.”

Goldman: Market reaction will be small but not nothing. “We see several potential implications for markets, most of which are modest. Our Commodities strategists expect the overall impact of both hurricanes to be net bearish for oil in the short term. Similarly, companies in sectors that are directly exposed to the regional damage will see some impact on short-term earnings, but the magnitude of the current impact should be modest in the longer term.”

— Dollar up on North Korea inaction. No news from North Korea is good news. And the dollar is rallying on the absence of a new missile test there over the weekend. Reuters’ Wayne Cole reports: “The U.S. dollar won a reprieve from risk aversion on Monday after North Korean dictator Kim Jong Un decided to hold a party over the weekend rather than launch another missile, tempering safe havens such as the yen and Treasuries.”

REMEMBERING 9/11. AP’s Jennifer Peltz: “While the U.S. contends with the destruction caused by two ferocious hurricanes in three weeks, Americans also are marking the anniversary of one of the nation’s most scarring days. Thousands of 9/11 victims’ relatives, survivors, rescuers and others are expected to gather Monday at the World Trade Center to remember the deadliest terror attack on American soil. Sixteen years later, the quiet rhythms of commemoration have become customs: a recitation of all the names of the dead, moments of silence and tolling bells, and two powerful light beams that shine through the night.”

The country marking the anniversary stands at a partisan low point. USA Today’s Laura Petrecca: “In USA TODAY Network interviews with more than two dozen Americans across the political spectrum, as well as replies to our network’s social media queries, a clear yearning for more unity emerged. Yet Americans struggle with how to get there in a world of partisan politics, vicious social media interactions, blustering pundits and aggressive media coverage of even such trivial issues as first lady Melania Trump’s shoe choices. ” 

And former George W. Bush spokesman Ari Fleischer recounts that day 16 years ago — as he does every year — on his Twitter account:

POCKET CHANGE

Equifax struggled over the weekend to clean up the mess created by its massive data breach. The Wall Street Journal’s AnnaMaria Andriotis: “Regulators, meanwhile, are urging consumers to freeze their credit reports, a move some lenders fear could ding credit growth even as the finance industry struggles with the question of how to contain the potential for widespread fraud that could affect millions of Americans. Despite Equifax’s statement Friday evening that it had cleaned up many of the problems on its website, consumers said they were still receiving erroneous and confusing responses. Some said they made up fake last names and social security numbers and received responses from the site that suggest it didn’t recognize they were fictitious identities.”

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) announced Friday his panel will hold a hearing on the matter. 

Compass Point’s Isaac Boltansky writes that the pain is just beginning for the company: “In the weeks ahead, we expect hearings in both chambers, regulatory inquiries from the CFPB and FTC, state-level investigations, and a slew of private actions. There will surely be a push for federal legislation, likely focused on breach notification and security standards, but we still see no path to passage for meaningful data breach legislation in this Congress.”

— Wells Fargo should consider running for Congress. It’s already got the approval rating. Morning Consult’s Ryan Rainey reports: “According to Morning Consult Brand Intelligence data, Wells Fargo’s net favorability has not cracked 20 percent since Morning Consult started tracking the company in October 2016, when the scandal was one of the biggest news stories other than the then-upcoming presidential election. The bank’s net favorability as of Sept. 8 was 3 percent, a decline from 16 points on Aug. 25.”

And it’s nowhere near resolving its problems. Politico’s Victoria Guida: “Congress is threatening new hearings, and some Democrats have called on regulators to remove the bank’s board or for breaking up the lender entirely. In fact, consumer abuses there are just as fresh in lawmakers’ minds as they were a year ago, with new revelations that the scope of the scandal was larger than originally thought and that the bank charged hundreds of thousands of customers for auto insurance they didn’t need. Another group of victims: military veterans.”

The California legislature approved a measure last week that would let consumers out of binding arbitration agreements so they can sue the bank, AP reports. 

New iPhone costs about six shares of $AAPL. Apple is set to make a fresh push into luxury territory this week when it unveils the newest generation of iPhone, including a $1,000 model. What you get for that price: Infrared facial recognition to unlock the device and wireless charging. The New York Times’ Vindu Goel: “Investors are betting that Apple’s move up the price ladder will pay off with much higher profits, especially in mature markets like the United States and Western Europe, where many of the buyers will be people upgrading from older iPhones. The company’s stock has risen by nearly 50 percent over the past year as anticipation has built about the 2017 models.”

OPINIONS

— “Man Up, Mr. Meadows,” by the Wall Street Journal Editorial Board: “The Washington Post reports that defrocked White House aide Steve Bannon and Members of the House Freedom Caucus are plotting a coup to depose Paul Ryan as Speaker later this fall. Freedom Caucus Chairman Mark Meadows denied this on Friday on MSNBC, but you can bet something is afoot. And come to think of it, why wait?

If the Freedom Caucus is upset enough to contemplate a mid-session leadership coup, let’s get it on now. Congress is entering a critical few months that will determine whether Republicans will have anything significant to show for their majority. If the fate of this Congress hangs in the balance, then it’s unconscionable to wait and let the House fail. The manly—the patriotic—thing to do is force a debate and vote while there’s still time to save the day.

This has the added advantage of being a stab in the front for a change.”

DAYBOOK

Coming Up

  • The House Financial Services Subcommittees on Financial Institutions and Consumer Credit and Monetary Policy and Trade hold a joint hearing on “Examining the Relationship between Prudential Regulation and Monetary Policy at the Federal Reserve” on Tuesday.
  • The Bipartisan Policy Center holds an event on curbing money laundering and terrorist financing on Tuesday.
  • The Senate Finance Committee holds a hearing on health care cost and coverage on Tuesday.
  • The Senate Finance Committee holds a hearing on individual tax reform on Thursday

THE FUNNIES

From the New Yorker:

BULL SESSION

Fact Check: Will a border wall stop drugs from ‘pouring in?’:

Watch as the House passes a package to provide Harvey disaster aid and raise debt ceiling:

President Trump: ‘We are prepared to the absolute max’ for Irma:

Four takeaways from Bannon’s interview on ’60 Minutes’:

Washington Post Satire: Meet Sarah, the New Siri:

Watch Stephen Colbert take on Stephen K. Bannon’s “60 Minutes” interview: 

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