“Kee” Points with Jim Kee, Ph.D.

  • Revenue Projections
  • Stocks and Government Shutdowns
  • China GDP Calculations
  • Country Debt Levels

Markets are still fairly bullish on the prospect of tax reform, which is currently in the reconciliation process between the House and Senate bills (Republicans that is, as zero Democrats are expected to vote “for”). There are not really huge differences between the two, with the exception of the timing of the corporate tax rate reduction (2018 versus 2019). Also meaningful is the fact that the Senate bill has seven individual tax brackets versus four with the House bill, and there are some differences in the expirations of various line items.

Revenue Projections

The Congressional Budget Office (CBO) has not had time to score the bill, but the House version was expected to generate about $1.4 trillion in deficit increases over the next 10 years, which is often deemed “the cost” of the tax cut. These estimates depend upon estimates of future economic growth rates, and there is never agreement between parties over the impact of tax or spending changes. Several organizations put out their own estimates, like the Tax Policy Center, the Tax Foundation, and the Penn/Wharton Budget Model. The non-partisan Joint Committee on Taxation (JCT) puts that number at $1 trillion, which is as probably as good an estimate as any (both the CBO and the JCT are notoriously bad at forecasting). Economist John Cochrane describes the predictable Republican/Democrat wrangling over tax cuts, growth, and revenue as like “a very old marriage” with both sides yelling at each other and accomplishing little. I don’t really think the scoring matters, as any differences in 10-year deficit estimates are dwarfed by future unfunded government liabilities, particularly Medicare, which will have to be reformed. We’ll save that for another Kee Points!

Stocks and Government Shutdowns

On the topic of budgets, the government’s funding expires at 12:01 am on December 9th (Wall Street Journal), which has led to an unpassed bill to fund the government through December 22nd. There are dozens of twists, extensions, etc., to this sort of thing, and I don’t really relish the media coverage that usually accompanies funding expiration and extension proposals. I’ll just reiterate to Kee Points readers that during the last 18 government shutdowns, the market (S&P 500) declined on average about -0.6% or 60 basis points. The median was zero percent, meaning if you ranked them from largest decline to the largest gain, the middle measure was zero. Forty-four percent of the time the market was positive during a government shutdown.

China GDP Calculations

China: A couple of interesting recent articles in the Financial Times are worth a mention. The first, “China’s Growth Miracle Has Run Out of Steam,” hints at the difficulties of computing GDP numbers in countries like China, where governments often allocate capital in uneconomic ways. I have discussed this before in Kee Points, the fact the GDP is meant to measure “market valued output,” a concept that isn’t always descriptive of government-directed economies. This was an issue in the old Cold War days, where economists often talked of how comparing output in the former Soviet Union with that of capitalist economies like the US wasn’t really comparing apples to apples. I am glad to see some recognition of this in the press in discussions of Chinese growth.

Country Debt Levels

The second article, “Stop Worrying About Chinese Debt, a Crisis is Not Brewing,” points out that total outstanding debt levels should be compared to total asset values, while annual income (GDP) should be compared with annual debt servicing costs. I’ve talked about this before as well, the point being that looking at debt-to-GDP ratios, common in the press, isn’t very meaningful. Here’s how the Financial Times article put it:

"The fundamental problem with this ratio is that it only provides a narrow snapshot of an economy’s debt picture. Debt is a stock concept, while GDP is a flow. The ratio tells you more about how much of an economy’s accumulated savings have been allocated via the debt channel. It does not tell us anything about a country’s net asset position. Nor does it provide any information on debt-servicing costs or the mix of local versus foreign currency-denominated debt. As such, the debt-to-GDP ratio gives us almost no information on a nation’s ability to sustain its debt.”

That last point, perhaps overstated a bit, is what I’ve found in my career when researching country debt levels, and I am glad to see some recognition of that in the press as well.