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Articles by Alan & Akemi

Deficit Prompts Attack on Health Programs

Just over a year ago, President Trump gave corporations a "tax holiday", a levy of only 6% on $620 billion of tax-free profits sheltered overseas. Then, he granted corporations a massive, permanent tax cut from 35% down to 21%. It was unprecedented, because this sort of government largesse is only doled out during times of recession, when the economy badly needs a stimulus to recover. This time, it was granted when corporations were already making record profits. It created an unnecessary burden on the federal deficit.

Trump campaigned on the promise to wipe out the government's $19 trillion in total debt. Since the tax cuts, corporate revenue to the government plummeted 21%, from $76 billion to $60 billion. Consequently, this sharply accelerated the federal deficit.

The Congressional Budget Office said that, compared to 2017, the interest expense on U.S. debt increased by nearly 50%, and is scheduled to hit $390 billion next year. Within ten years, the annual interest expense is projected to be $900 billion. This would represent 13% of the federal budget, more than the expenditure on the military, on Medicaid, or on programs for children. 1

The increased expenditure would also draw resources away from infrastructure projects to repair or replace America's aging roads, electrical grid, clean water systems and public buildings. Although Trump vowed to put $1 trillion into improving infrastructure, he couldn't get his own party to agree to it, while the deficit hung over their heads.

Who does Trump blame for this runaway debt?  -- the Federal Reserve Bank. The two basic goals of the Fed are to maximize employment, and to keep inflation at bay. To accomplish that, Fed chair Jerome Powell raised interest rates gradually, a quarter-percent at a time, last year. As of March 2019, inflation hit the lowest rate in nearly 2 ½ years, and unemployment is at a record low. Yet, Trump attacked the Fed, an independent body, leading to rumors that he would fire Powell for the rate increases. Trump demanded that the Fed, instead, use its power to support his trade plans and goals, and ignore its own mandate. ²

Since last year, Trump has waged a tariff war against China, imposing tariffs on over $250 billion worth of Chinese products. It started with a 25% tax on $50 billion of Chinese imports last June. Then in September 2018, there was another 10% tax on an additional $200 billion of Chinese products. China responded by imposing duties on about $110 billion of U.S. exports. This has ended up hurting Trump's own supporters in the farming and manufacturing sectors. Trump said the trade deficit was crushing the U.S. economy. The tariffs, he said, would reduce the U.S. reliance on imported goods and materials.

However, despite the tariffs, the Commerce Department reported this week that the trade deficit with China hit a record $419 billion last year, up from the previous record of $375.5 billion in 2017. The overall trade deficit was $621 billion, the highest since 2008. ³

The other result was that customs duties nearly doubled, from $12.6 billion to $24.5 billion due to the Administration's tariffs. These additional duties were in actuality paid by American consumers at the cash register. The tariffs were really a hidden tax on the economy.

When Marketplace interviewed former Fed Reserve chair, Janet Yellen, last month, they asked, "Do you think the president has a grasp of macroeconomic policy?" "No, I do not," she replied, adding that she doubted if he understood how the Fed worked. ²

Now, Medicare and Medicaid are in the crosshairs as a way to reduce the deficit. During the 2016 presidential campaign, Trump declared he would protect Medicare and Social Security. However, his budget last year proposed a $550 billion cut to the programs. The budget also endorsed the Medicaid block grant idea.

Medicaid is a federal assistance program that began in the 1960s as part of the War on Poverty. It guarantees states a federal share of funding for anyone who is eligible for the program (those who have low income, low assets, or are blind or disabled).

Trump's budget proposal calls for a spending cut of nearly $1.5 trillion to Medicaid over the next 10 years. It also eliminates funding for Medicaid expansion under the Affordable Care Act. 

Under the newly proposed budget, the federal commitment to fund Medicaid would end. Instead, states would receive small fixed grants and would have to bear the healthcare burden themselves by 2021. The growth of the grants would be limited to the Consumer Price Index, even though the actual cost of healthcare inflates at about double that amount, at 5.3% per year. This means that states would be saddled with escalating healthcare costs. ⁴

Charles Kahn, president of the Federation of American Hospitals warned that the budget "imposes arbitrary and blunt Medicare cuts. The impact on seniors and low-income Americans will be devastating." ⁴

1 New York Times, 9/25/2018

² Time, 2/25/2019

³ Politico 3/6/2019

⁴ Washington Post, 3/11/2019

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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