Trump’s Record-Shattering Trade Deficit

Plus, can the Netflix model work for prescription drugs? By Yuval Rosenberg and Michael Rainey Trump’s Tax Cuts Are Driving Up the Trade Deficit He Wants to Bring Down President Trump’s efforts to reduce the trade deficit don’t seem to be working — and his fiscal policies are almost certainly making it bigger. The U.S. trade deficit in goods hit its highest level ever last year, rising to $891 billion, the Bureau of Economic Analysis [said]( Wednesday. The trade deficit with China also rose to a record level, hitting $419 billion. The overall trade deficit, which includes a substantial surplus in services, rose to $621 billion — short of the record $838 billion seen in 2006, but more than $100 billion larger than when Trump first took office. What’s driving the trade deficit: While the dynamics of trade are complex, economists say the widening trade deficit is driven by factors such as a global economic slowdown and a strong U.S. dollar, which amplify long-term trends such as foreign investment flows coming into the United States and a relatively low domestic savings rate. The $1.5 trillion tax cut signed by Trump in 2017 exacerbated existing imbalances. “The immediate drivers of the surge in the trade deficit under Trump have been the fiscal expansion resulting from the tax cuts he pushed through Congress and the stronger dollar that resulted, partly from the juiced economy that expansion helped create,” Bloomberg’s Shawn Donnan [wrote](. Trump’s trade war with China also played a role, reducing American farm exports as tariffs kicked in last year. Kyle Pomerleau of the conservative Tax Foundation [summed up]( the growing trade deficit in simple terms: It should come as no surprise: Almost all economists agree that Trump’s trade war is misguided at best, and when combined with massive tax cuts, the overall policy will produce the opposite of what the president says he wants. An [analysis]( of then-candidate Trump’s trade proposals by Leonard Burman of the Tax Policy Center back in 2016 sums up the dominant view: “Republican presidential contender Donald Trump often expresses dismay about the US trade deficit, which he ties to the loss of good paying middle class jobs. The issue is more nuanced than Mr. Trump suggests, and his plan to impose giant tariffs on China and other countries won’t create jobs or even necessarily reduce the trade deficit. Even more damaging, his tax proposals could double our trade deficit from $500 billion to as much as $1 trillion at current income levels.” What could reverse the trend? A trade deal with China, which the White House says could be announced at any moment, won’t have much of an effect on the trade deficit, economists say. William Reinsch of the Center for Strategic and International Studies [told]( The Washington Post that an economic downturn may be the most reliable way to reduce the deficit: “If you want to lower the trade deficit, have a recession,” he said. Short of a recession, though, the trend is likely to continue. Andrew Hunter of Capital Economics said he expects imports to increase in 2019 even as a global slowdown weighs on exports. The bottom line: Contrary to President Trump’s insistence that trade balances provide a scorecard of some sort in the battle between nations, most economists say the focus on the trade deficit is unwarranted. Nevertheless, the president is failing to deliver on one of his key economic promises, and his own fiscal policies bear much of the blame. Did the GOP Tax Cuts Really Boost the Economy? The Republican tax cuts have been cited as an important factor in the jump in economic growth in 2018, but a new analysis by Bloomberg Economics suggests they played a much smaller role than their supporters say they did. Here are some highlights of the analysis by [Bloomberg’s Tim Mahedy]( - “The Tax Cuts and Jobs Act of 2017 was as close as the real world gets to a laboratory experiment on whether supply-side theory works in practice. More than one year on, we have an answer. It’s ‘meh.’” - The analysis finds that, while investment spending rose in 2018, the tax cuts didn’t play much of a role: “[W]ithout the corporate side of the TCJA, growth last year would have been 3 percent instead of 3.1 percent. That’s a much smaller boost than what White House officials had promised.” - On the other hand, the tax cuts definitely did play a large role in raising the federal deficit, as corporate tax receipts dropped almost 31 percent for the calendar year. “While the TCJA hasn’t quite lived up to the supply-side sales pitch from a growth perspective,” Mahedy says, “its effects on government finances have been broadly in line with what its detractors anticipated.” Chart of the Day: The Decline of Corporate Taxes Since roughly the end of World War II, individual income taxes in the U.S. have equaled about 8 percent of GDP. By contrast, the Tax Policy Center [says]( “corporate income tax revenues declined from 6% of GDP in 1950s to under 2% in the 1980s through the Great Recession, and have averaged 1.4% of GDP since then.” Number of the Day: $1.25 Trillion U.S. companies delivered shareholders more than $1.25 trillion in buybacks and dividends in the fourth quarter of 2018, according to preliminary data from S&P Dow Jones Indices. Buybacks totaled nearly $215 billion, a fourth consecutive quarterly record. For the full year, the total spent on buybacks is just shy of $800 billion, up from $519 billion in 2017. The record-shattering totals for 2018 bring the “post-crisis bonanza” of cash returned to shareholders since 2009 to nearly $8 trillion, Robin Wigglesworth of the [Financial Times]( says. “That would, at current prices, be more than enough to buy all the major listed companies of the UK, France, Germany, Spain, Italy and Sweden. It is nearly five times the size of Russia’s annual economic output, and almost equal to the current value of all gold ever mined through history, according to the World Gold Council.” Why it matters: “Buybacks in particular have become controversial,” Wigglesworth writes, “with some politicians arguing that companies are starving the economy of investment and eschewing wage increases even as they funnel tax cut-enhanced profits back to shareholders.” Like Netflix, but for Prescription Drugs The New York Times’ Tina Rosenberg lays out an idea for getting Big Pharma to make important new medicines affordable: Treat the drugs like Netflix treats its shows. You pay a flat fee and then can use its product as much as you want. Rosenberg explains using an example from Australia and costly drugs for hepatitis C: “In 2015, Australia signed agreements with Gilead, AbbVie, Bristol Myers Squibb and Merck, producers of the new hep C cures. For 1 billion Australian dollars — $766 million U.S. — Australia gets, for five years, all the hep C medicine it can use. “The size and certainty of the payment guarantees that the drug companies will get large profits. And they can look like good guys. “A study [just published]( in The New England Journal of Medicine found that on average, Australia pays $7,352 (U.S.) per course of treatment. It has been able to treat seven times as many patients as it would without the agreements.” Rosenberg reports that Louisiana and Washington State are following Australia’s example and looking to sign contracts with manufacturers of hep C drugs. In January, Louisiana asked drugmakers to bid on a plan to supply unlimited amounts of hep C drugs for $35 million — the amount the state spent last year to treat about 1,000 of the estimated 90,000 people infected. Bidding closed Thursday, Rosenberg says, and the state hopes to start getting medicines on July 1. [Read the full piece at The New York Times]( for more on why the “Netflix model” makes sense for hep C drugs, and to see where else it might apply. It's the fiscally responsible thing to do. Share this email, or tell your friends they can [sign up here]( to get their own copy of this newsletter every weekday. Send your tips and feedback to yrosenberg@thefiscaltimes.com. Or connect with us on Twitter: [@yuvalrosenberg]( [@mdrainey]( and [@TheFiscalTimes](. Now You Know: Office Snacks and Taxes At [The New York Times]( Jamie Lauren Keiles offers an in-depth look at “the scrappy new cuisine” being created by white-collar workers making the most of the various free snacks their offices now offer. (We enjoyed some yogurt, pretzels and Babybel cheeses today.) But there’s a tax angle to this free lunch story, too: “Up until last year, an employer could actually deduct the full cost of employee snacks, which might help to explain how they became a workplace fixture,” Keiles writes. “In 2018, this tax break was halved, following the [Tax Cuts and Jobs Act of 2017.]( It is too early to predict how the new set of rules might affect the future of the start-up smorgasbord.” News - [White House Turns Up Heat on GOP Senators Considering Bucking Trump on National Emergency]( – Washington Post - [GOP Could Face Emergency Vote Every 6 Months]( – Politico - [On Trump's Emergency, Toomey Eyes a Third Way]( – York Dispatch - [From $22 an Hour to $11: GM Job Cuts in Ohio Show a Hot Economy Is Still Leaving Parts of America Behind]( – Washington Post - [Mike Bloomberg Says Green New Deal ‘Stands No Chance’ in the Senate — So He’s Offering an Alternative]( – CNBC - [Democrats Have United Around a Plan to Dramatically Cut Child Poverty]( – Vox - [Gottlieb: Drug Rebates Not Benefiting Sicker Patients]( – The Hill - [Dem Campaign Chief: Medicare for All Price Rag 'a Little Scary']( – The Hill - [How Federal Disaster Money Favors the Rich]( – NPR - [Some Key Ideas Behind MMT, the Theory Everyone's Talking About]( – Bloomberg - [Standalone Emergency Rooms Are Crazy Expensive]( – Axios - [Good News: Opioid Prescribing Fell. The Bad? Pain Patients Suffer, Doctors Say.]( – New York Times - [More Seniors Should Be Getting Brain Health Screenings, Experts Say]( – Time - [N.J.’s Governor Pushes ‘Millionaire’s Tax’ as His Party Tilts Left]( – New York Times - [California Is at War With the Trump White House]( – The Atlantic - [Taylor Swift Says She Wants to Get More Involved in Politics]( – The Hill Views and Analysis - [Fiscal Discipline Is Not Passé]( – Bloomberg Editorial Board - [Trump’s Economic Hoaxes Just Collided with Reality]( – Dana Milbank, Washington Post - [Trump’s Trade Illiteracy Comes Back to Haunt Him]( – Jennifer Rubin, Washington Post - [7 Republican Holdouts on National Emergency Resolution, Ranked]( – Colby Itkowitz, Washington Post - [Trump Says 'Senate Republicans Are Not Voting on Constitutionality' of Emergency Declaration]( – Joe Setyon, Reason - [Fix America’s National Emergencies Law. And Not Just Because of Trump.]( – New York Times Editorial Board - [Wealth Taxes Will Not Save Democracy from Inequality]( – Will Wilkinson, Bulwark - [Why Fans of the Green New Deal Are Underestimating the Potential of Carbon Taxes]( – Monica Prasad, Politico - [Do Parents Want Subsidies for Child Care Providers? Or Cash for Themselves?]( – Renu Zaretsky, Tax Policy Center - [The Influence of Centrist Democrats Is Fading Fast. What Does That Mean for Liberal Technocrats?]( – Jared Bernstein, Washington Post - [How Much Does Nancy Pelosi Have to Worry About a Left-Center Split?]( – Thomas B. Edsall, New York Times - [The Green New Deal Isn't Outlandish — It's a Necessity]( – Jeffrey Sachs, The Hill - [Full Employment Looks as If It’s Finally Here]( – Noah Smith, Bloomberg - [Why American Capital Will Vote R in 2020]( – Daniel W. Drezner, Washington Post - [Unchecked Federal Spending Is Leading Us to Fiscal Calamity]( – Alison Acosta Winters, The Fiscal Times Copyright © 2019 The Fiscal Times, All rights reserved. You are receiving this newsletter because you subscribed at our website, thefiscaltimes.com, or through Facebook. Our mailing address is: The Fiscal Times 399 Park AvenueNew York, NY 10022 [Add us to your address book]( If someone has forwarded this email to you, consider signing up for The Fiscal Times emails on our [website](. Want to change how you receive these emails? [Update your preferences]( or [unsubscribe](.