Have the Trump Tax Cuts Flopped?

Plus, drug pricing and infrastructure in 2019 By Yuval Rosenberg and Michael Rainey Have the Trump Tax Cuts Flopped? Sunday marks four months since President Trump signed the Republican tax overhaul into law. So it surprised us just a bit to see economist Andrew Hunter of Capital Economics already asking: “Have the tax cuts flopped?” The question arises because of a slowdown in consumer spending growth in the first quarter of 2018. American workers started seeing the effects of the tax cuts in their paychecks over those months, but according to the data available so far, the income boost hasn’t resulted in a significant jump in consumer spending. Consumption fell in January and was flat in February. Preliminary data suggests March saw only a modest rebound, according to Hunter. As a result, Capital Economics has produced a growth estimate of about 1 percent for the first quarter, down from a 4 percent annualized growth rate in the final quarter of 2017. While slower growth in the first quarter is not unusual, Hunter was surprised to see no discernible positive effect on consumption levels from the tax cuts. “The weakness of real consumption growth … suggests that the recent tax cuts have so far failed to provide any meaningful boost to activity,” Hunter wrote. “After many months of anticipation, there are now rising concerns that the Republicans’ tax bill isn’t all it was hyped up to be.” One possible explanations for the lackluster data, Hunter said, is the tax cuts aren’t providing a significant income boost for the workers most likely to spend additional income. The tax cuts provide a [larger benefit]( to high-income workers, who will take in thousands of dollars more over the course of the year but who are more likely to save rather than the spend the money. Low-income workers, who tend to spend a higher proportion of their earnings, will receive at most a few hundred dollars per year, which may not be enough to spark a change in their consumption levels, especially with the net gain spread out over dozens of weekly paychecks. Given this dynamic, Hunter said he expects “the fiscal multiplier for the tax bill to be low.” At the same time, it might still be too early to write off any consumer effects of the tax cuts. The economy has considerable momentum, with a strong labor market, record household wealth and strong consumer sentiment, Hunter said, and the income boost from the tax cuts may show a positive effect on consumption later in the year as the benefits accumulate. Capital Economics’ estimate for first quarter GDP growth is 2.3 percent, roughly midway between Barclay’s recent estimate of [1.5 percent]( and the New York Federal Reserve Bank’s current forecast of [2.9 percent](. Would a Democratic Win in the Midterms Lead to Lower Prescription Drug Prices? We’re 200 days away from November’s midterms, and while we don’t want to get too far ahead of ourselves — 200 days, after all, could also be counted as about [20 Scaramuccis]( in Trumpworld — Goldman Sachs strategists are out with a useful look at what the elections might mean for policy in 2019. The Goldman team assumes that Democrats will take control of the House but not the Senate, which seems the most likely outcome at the moment. Such a divided government could lead to two very different results, the strategists write. In one scenario — let’s call it the optimistic view — “bipartisan cooperation could lead to new legislative actions in rare areas of political agreement,” including drug pricing and infrastructure investment. That would at least be something, although it’s worth noting that we’ve all heard that before and it hasn’t quite worked out as we hoped. In the more pessimistic scenario, any kind of compromise might prove impossible given a divided government and our current political environment. In this case, “the legislative engine could grind to a halt amid partisan conflict, which would create a different set of policy winners and losers.” Here’s more on what divided government might mean for drug prices and infrastructure, based on Goldman’s report: Health care costs: “Drug prices in particular have long been a stated focus of members of both parties, and recent headlines suggest that President Trump will give a speech on prescription drug prices later this month,” the Goldman strategists say. They also note that the bank’s political economist believes that Congress might be more likely to implement some of the [drug pricing proposals]( put forth by the Department of Health and Human Services this year if Democrats win the House. But political clashes might mean nothing gets done. Infrastructure and Government Spending: Both President Trump and Democrats have talked about investing in infrastructure, but the chances of something getting done appear small given the partisan divide and the worsening outlook for the budget deficit after enactment of the Republican tax cuts and a $1.3 trillion spending plan. “From a macro perspective, our political economists have highlighted that a divided government would increase the likelihood of passive fiscal tightening in early 2020,” the report says. Such tightening would occur if lawmakers fail to provide any new fiscal stimulus as the positive economic effects from the tax cuts fade. For now, it seems that the only certainty is more uncertainty and volatility ahead of the elections — and after them as well, if a divided Congress leads to tighter oversight of the Trump administration and a two-year legislative stalemate. Have a great weekend! But please take a minute to send us your feedback, good or bad, by emailing yrosenberg@thefiscaltimes.com. Follow us on Twitter [@yuvalrosenberg]( and [@TheFiscalTimes](. And to Mr. Schell: We hear you. We're working on it! Your Prize for Making It Through the Week The Hubble Telescope is about to turn 28, and NASA is celebrating with the release of [spectacular new photos]( of the Lagoon Nebula, a giant interstellar cloud 4,000 light-years from Earth. NASA astronomer Michelle Thaller told [Gizmodo]( “This thing is huge on the sky, about five times the size of the full moon, but it’s mostly too dim for our eyes to see. It looks like a smudge with a pair of binoculars or a small telescope, but when the Hubble looks at it, it’s an incredibly beautiful, twisting tornado-like structure of dark dust.” NASA has also produced a [“flythrough” video]( of the cloud, which may be of particular interest to our readers celebrating 4/20. News - [Couples in Retirement Face Average Health Care Costs of $280,000, Fidelity Estimates]( – USA Today - [White House Reviewing Drug-Pricing Plan]( – Axios - [IMF’s Lagarde ‘Very Pleased’ with Trump Tax Cuts]( – Yahoo Finance - [10-Year Treasury Yield Hits Its Highest Level Since 2014]( – CNBC - ['Gradual' Pace of Rate Hikes Likely to Hold for Years, Fed's Williams Says]( – CNBC - [Why More Than a Million Teachers Can't Use Social Security]( – NPR - [GOP in Retreat on Obamacare]( – The Hill - [Big Banks Saved $3.6B in Taxes Last Quarter Under New Law]( – Associated Press - [Arizona Teachers to Walk Out in First-Ever Statewide Strike]( – The Hill - [Defense Department Is Pursuing Another Multibillion-Dollar Cloud]( – Nextgov - [Michael Cohen’s Other Woe: Mounting Unpaid Taxes on New York Cabs]( – Bloomberg - [Comedians Have Their Say on IRS Tax Day Glitch]( – USA Today Views - [How Congress Cheats with Our Money — and How We Can Stop It]( – Marc Goldwein and Zach Moller, TFT - [The United States Is Mortgaging Its Future]( – Catherine Rampell, Washington Post - [Paltry Wage Gains, Rising Deficits Two Key Tax Reform Concerns]( – Greg Leiserson, The Hill - [How to Bolster Social Security Without Raising Taxes]( – Ramesh Ponnuru, Bloomberg View - [Abolishing Budget Committee Hits a Symptom, Not the Disease]( – Larry Hart, The Hill - [Tax Cut Bill Will Lead to Trillion Dollar Deficits]( – Alan Cohen, Center for American Progress - [Hey, White House: Trust Me. People Don’t Like to Be Told They’re Doing Better Than They Are]( – Jared Bernstein, Washington Post - [Should the U.S. Extend Individual Tax Breaks Beyond 2025?]( – Kimberly Burham and Alan Auerbach, Knowledge@Wharton - [Trump Stress-Tests the World Economy]( – Bloomberg View Editorial Board - [The Oversight Board’s Latest Fiscal Plan for Puerto Rico Is Still Too Optimistic]( – Brad W. Setser, Council on Foreign Relations - [Billionaire Bezos and the Warehouse Workers]( – Barry Ritholtz, Bloomberg View Copyright © 2018 The Fiscal Times, All rights reserved. You are receiving this newsletter because you subscribed at our website, thefiscaltimes.com. Our mailing address is: The Fiscal Times 712 Fifth AvenueNew York, NY 10019 [Add us to your address book](//thefiscaltimes.us1.list-manage.com/vcard?u=40d2c5373681f5cd830b6d823&id=714147a9cf) If someone has forwarded this email to you, consider signing up for The Fiscal Times emails on our [website](. 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