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Yahoo
28-05-2025
- Business
- Yahoo
Opinion - The bond market is missing the real ‘big, beautiful' story
After touching 4 percent on Apr. 2, the yield on the 10-year Treasury has climbed more than 50 basis points. Pundits and portfolio managers alike insist the bond market vigilantes are delivering a decisive and unmistakable rebuke of President Trump's One Big Beautiful Bill Act and its tax cuts — just passed in the House and now pending in the Senate. On the surface, they appear to have a case. The Congressional Budget Office projects that the Big Beautiful Bill Act will add almost $4 trillion to the national debt over the next ten years. To the CBO, tax cuts mean less revenue. Less revenue in the absence of equal spending cuts means more borrowing. More borrowing means higher bond yields, a bigger interest payment burden on future generations, and a fiscal drag on GDP growth. Go a bit deeper, however, and it is clear that financial markets do not have complete information about either the historical inaccuracy of CBO forecasts or the substantial positive revenue impact of the new Trump tariffs. For years, a feckless CBO, saddled by archaic Keynesian and static assumptions, has routinely underestimated the dynamic revenue effects of pro-growth tax policies, deregulatory momentum, lower energy prices, and trade deficit-reducing fair-trade policies. Exhibit A is the Trump 2017 Tax Cuts and Jobs Act. When Congress enacted this historic legislation, the CBO projected only modest improvements in GDP growth, estimating a return to trend growth around 1.8 percent to 2.0 percent. Yet actual growth in 2018 jumped to 2.9 percent, exceeding CBO forecasts by nearly a full percentage point. What the CBO forecast missed was a surge in business investment, the repatriation of overseas earnings, and a sharp increase in consumer and small business confidence that followed both the tax cuts and sweeping regulatory reforms. This miscalculation led to persistent underestimates of tax revenue, employment gains, and productivity improvements during the early Trump years. This demonstrates a systemic blind spot in CBO modeling whenever policies deviate from the Keynesian static status quo norm. The CBO's latest score of Trump's One Big Beautiful Bill Act is even worse. It pessimistically assumes a long-term, low-ball GDP growth rate of a mere 1.7 percent. This falls well short of what America's economy is capable of under Trump policies that promote a lower tax and regulatory burden, strategic energy dominance, and trade deficit-reducing trade policies. The result of the CBO's low-ball GDP growth forecast is a projected increase in the federal debt over the next ten years of a whopping $3.8 trillion. If, however, we more realistically add a half or full point more to the projected growth rate, these more dynamic growth rates of 2.2 percent to 2.7 percent add between $1.2 trillion and $2.5 trillion in new tax revenues. In this scenario, the CBO's projected revenue shortfall drops from $3.8 trillion to $2.6 trillion under the 2.2 percent growth rate assumption and $1.3 trillion under the 2.7 percent growth rate assumption. That's still real money of course, but here's the buried lead. In making its projections, the CBO has refused to account for — or 'score' as they say in CBO lingo — any of the new revenues from the Trump reciprocal tariffs. Remember here a key goal of Trump's fair-trade policies is to shift the U.S. tax base from one primarily reliant on income taxes to one that, with the vision of the new External Revenue Service, is also supported by tariff revenues. Consider, then, the impacts on the CBO's projected revenue shortfall of just the modest 10 percent global baseline tariff Trump recently put into effect. Such a tariff, depending on consumer responses (as measured by demand elasticities) and enforcement efficacy (i.e., how much cheating occurs), should generate between $2.3 trillion and $3.3 trillion in additional revenue over the ten-year forecast period. When this revenue is layered onto the enhanced dynamic growth scenario, the projected budget impact from the One Big Beautiful Bill Act ranges from a modest $300 billion increase in the debt under the 2.2 percent growth assumption to as much as a $2 trillion surplus under the 2.7 percent growth assumption. As this forecast recognizes, as tariffs take hold and U.S. companies shift away from foreign suppliers, the volume of dutiable imports will decline — and with it tariff revenues. But this is not a flaw in the strategy or forecast; it is its greatest strength. Every dollar that no longer flows overseas will instead fuel domestic production, payrolls, and investment. That shift expands the tax base far beyond the narrow confines of tariff collections. As American factories hum, workers earn paychecks and spend them, generating higher income, payroll, and sales tax revenues. Domestic firms post profits and pay corporate taxes, while reinvesting in equipment, technology, and job creation. In this way, the new Trump tariffs catalyze a multiplier effect that produces not only self-financing fiscal policy, but also a broader industrial renaissance. It is a virtuous cycle that the Congressional Budget Office simply refuses to score — but one that any business owner, worker, or supply chain strategist can see plain as day. Which brings us back to the bond market. The current rise in yields reflects fear — not facts. Bond traders are pricing in a future where the government borrows trillions more with no offsetting revenues. They believe the tax cuts are not paid for. To the contrary, Trumpnomics and the Trump tariffs will put America on a sounder fiscal footing than any policy proposal in decades. That's the complete information our financial markets should be working from – and bond investors should yield to that wisdom. Peter Navarro is the White House Senior Counselor for Trade and Manufacturing. Copyright 2025 Nexstar Media, Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
The Hill
28-05-2025
- Business
- The Hill
The bond market is missing the real ‘big, beautiful' story
After touching 4 percent on Apr. 2, the yield on the 10-year Treasury has climbed more than 50 basis points. Pundits and portfolio managers alike insist the bond market vigilantes are delivering a decisive and unmistakable rebuke of President Trump's One Big Beautiful Bill Act and its tax cuts — just passed in the House and now pending in the Senate. On the surface, they appear to have a case. The Congressional Budget Office projects that the Big Beautiful Bill Act will add almost $4 trillion to the national debt over the next ten years. To the CBO, tax cuts mean less revenue. Less revenue in the absence of equal spending cuts means more borrowing. More borrowing means higher bond yields, a bigger interest payment burden on future generations, and a fiscal drag on GDP growth. Go a bit deeper, however, and it is clear that financial markets do not have complete information about either the historical inaccuracy of CBO forecasts or the substantial positive revenue impact of the new Trump tariffs. For years, a feckless CBO, saddled by archaic Keynesian and static assumptions, has routinely underestimated the dynamic revenue effects of pro-growth tax policies, deregulatory momentum, lower energy prices, and trade deficit-reducing fair-trade policies. Exhibit A is the Trump 2017 Tax Cuts and Jobs Act. When Congress enacted this historic legislation, the CBO projected only modest improvements in GDP growth, estimating a return to trend growth around 1.8 percent to 2.0 percent. Yet actual growth in 2018 jumped to 2.9 percent, exceeding CBO forecasts by nearly a full percentage point. What the CBO forecast missed was a surge in business investment, the repatriation of overseas earnings, and a sharp increase in consumer and small business confidence that followed both the tax cuts and sweeping regulatory reforms. This miscalculation led to persistent underestimates of tax revenue, employment gains, and productivity improvements during the early Trump years. This demonstrates a systemic blind spot in CBO modeling whenever policies deviate from the Keynesian static status quo norm. The CBO's latest score of Trump's One Big Beautiful Bill Act is even worse. It pessimistically assumes a long-term, low-ball GDP growth rate of a mere 1.7 percent. This falls well short of what America's economy is capable of under Trump policies that promote a lower tax and regulatory burden, strategic energy dominance, and trade deficit-reducing trade policies. The result of the CBO's low-ball GDP growth forecast is a projected increase in the federal debt over the next ten years of a whopping $3.8 trillion. If, however, we more realistically add a half or full point more to the projected growth rate, these more dynamic growth rates of 2.2 percent to 2.7 percent add between $1.2 trillion and $2.5 trillion in new tax revenues. In this scenario, the CBO's projected revenue shortfall drops from $3.8 trillion to $2.6 trillion under the 2.2 percent growth rate assumption and $1.3 trillion under the 2.7 percent growth rate assumption. That's still real money of course, but here's the buried lead. In making its projections, the CBO has refused to account for — or 'score' as they say in CBO lingo — any of the new revenues from the Trump reciprocal tariffs. Remember here a key goal of Trump's fair-trade policies is to shift the U.S. tax base from one primarily reliant on income taxes to one that, with the vision of the new External Revenue Service, is also supported by tariff revenues. Consider, then, the impacts on the CBO's projected revenue shortfall of just the modest 10 percent global baseline tariff Trump recently put into effect. Such a tariff, depending on consumer responses (as measured by demand elasticities) and enforcement efficacy (i.e., how much cheating occurs), should generate between $2.3 trillion and $3.3 trillion in additional revenue over the ten-year forecast period. When this revenue is layered onto the enhanced dynamic growth scenario, the projected budget impact from the One Big Beautiful Bill Act ranges from a modest $300 billion increase in the debt under the 2.2 percent growth assumption to as much as a $2 trillion surplus under the 2.7 percent growth assumption. As this forecast recognizes, as tariffs take hold and U.S. companies shift away from foreign suppliers, the volume of dutiable imports will decline — and with it tariff revenues. But this is not a flaw in the strategy or forecast; it is its greatest strength. Every dollar that no longer flows overseas will instead fuel domestic production, payrolls, and investment. That shift expands the tax base far beyond the narrow confines of tariff collections. As American factories hum, workers earn paychecks and spend them, generating higher income, payroll, and sales tax revenues. Domestic firms post profits and pay corporate taxes, while reinvesting in equipment, technology, and job creation. In this way, the new Trump tariffs catalyze a multiplier effect that produces not only self-financing fiscal policy, but also a broader industrial renaissance. It is a virtuous cycle that the Congressional Budget Office simply refuses to score — but one that any business owner, worker, or supply chain strategist can see plain as day. Which brings us back to the bond market. The current rise in yields reflects fear — not facts. Bond traders are pricing in a future where the government borrows trillions more with no offsetting revenues. They believe the tax cuts are not paid for. To the contrary, Trumpnomics and the Trump tariffs will put America on a sounder fiscal footing than any policy proposal in decades. That's the complete information our financial markets should be working from – and bond investors should yield to that wisdom. Peter Navarro is the White House Senior Counselor for Trade and Manufacturing.
Yahoo
28-05-2025
- Business
- Yahoo
How the government makes a $3.8 trillion educated guess
A version of this story appeared in CNN's What Matters newsletter. To get it in your inbox, sign up for free here. Rather than justify sticker shock at the trillions of dollars President Donald Trump's tax bill would add to deficits and the national debt, some Republican lawmakers and conservative economists are trying out some mind tricks. This isn't REALLY $3.8 trillion in deficit spending. 'Dramatically overestimated,' House Speaker Mike Johnson told CNN's Jake Tapper on 'State of the Union' Sunday, days after the proposal squeaked through the House. Johnson hopes budget-conscious senators don't tinker with the legislation too much. Any changes will lead to new projections. 'A Ouija board could turn out more accurate prognostications,' wrote Stephen Moore, a Trump ally at the Heritage Foundation, in an op-ed for the Wall Street Journal: 'Save us from the CBO.' He was talking about the budget scoring process, which involves both the Congressional Budget Office and the Joint Committee on Taxation. These types of complaints about CBO and JCT appear whenever there is a big bill likely to add to the national debt. Former House Speaker Newt Gingrich has long criticized the CBO. He called for it to be abolished back in 2019, arguing in a Fox News op-ed that its math does not appropriately assume tax cuts will spur economic growth. 'The CBO consistently underestimates the positive impact from supply-side, market-oriented reforms while giving Keynesian, big government policies the benefit of the doubt,' Gingrich wrote. The CBO, however, is definitely nonpartisan. Both Republicans and Democrats on Capitol Hill have a say in who leads the organization. The CBO has also evolved its calculations in recent years to account for economic activity, something known as 'dynamic scoring.' Importantly, there are plenty of lawmakers on both sides of the aisle who agree to accept CBO's scores. The fiscal hawk Sen. Ron Johnson, a Wisconsin Republican, told Tapper he opposes the House bill because it adds so much deficit spending. 'You have these independent analysts saying it's $3.3 trillion to $4 trillion. I agree with that,' Johnson said. 'We have to reduce the deficit. And so we need to focus on spending, spending, spending.' Complaining about the CBO and its scoring may be part of the political argument. If you don't like the numbers, attack the numbers. But it's interesting to consider how CBO runs the numbers to predict how a trillion-dollar tax cut might affect the deficit. I went to Douglas Holtz-Eakin, a former CBO director who also worked on the Council of Economic Advisers during both Bush presidencies. Today he's president of the American Action Forum, an independent organization that classifies itself as center-right on economic policy. Our conversation, conducted by phone and edited for length, is below. Holtz-Eakin: CBO's primary job is to score pieces of legislation. Scoring is calculating the change in the amount of money flowing into the Treasury, the amount of money flowing out of the Treasury in response to a piece of legislation. The Joint Committee on Taxation does the tax piece of it. CBO does the rest. They both operate the same way to do that. To do that — and this is sort of nerdy, but very important — the first thing CBO does — and the Joint Committee shares it — is CBO calculates a projection for the economy in January, and then layers on top of that the current tax and spending laws to show what would happen to the federal budget if left on autopilot. And that's known as the baseline. Then it starts scoring various bills by looking at how they would change the money coming in and going out versus that baseline. It's important they use the same baseline for all the scores so that you can compare them. Importantly, CBO is still scoring against the outlook for the economy they saw when they put out the January baseline. Nobody thinks the economy looks the same now as it did in January. If you were just interested in predicting the right number, then you would update your jumping-off point. But CBO doesn't get to do that. They have to provide Congress with consistent scores, and they will do that throughout the year, regardless of what happens to the economy. It's trying to give Congress good information about the decisions it's making. Holtz-Eakin: It is nonpartisan by law and, more importantly, by DNA. I was the first, and to this day, the only CBO director to come directly from the White House, which most people think was a fairly partisan organization. Many Democrats were extraordinarily skeptical of my ability to lead CBO in a nonpartisan fashion, and I was able to do so successfully because the organization is nonpartisan. I just had to give a good direction and it took care of itself. People don't like CBO because they don't get the answer they want, and they blame it on partisan grounds, but that's not what's going on. They're just disappointed. The other thing that's worth mentioning here, because it's really, really wrong, and (Moore) has said it now for 20 years: CBO regularly updates its models. It is not using the same models it used back in 1978. It builds its estimates off the consensus of the research literature. There's a lot of economic research every year. A lot of empirical evidence gives you guidance on tax and spending programs, on environmental programs, health programs, all of that. CBO is a regular participant in research conferences. It is using the latest estimates from the literature. So the models aren't the same, because the research keeps progressing. Holtz-Eakin: The difference between a dynamic score and a traditional score is that in a dynamic score, you allow the size of the economy to change. And for some policies, that's appropriate, like certainly the 2017 (Tax Cuts and Jobs Act) … a whole point was to make the economy grow better, so the size of the economy would change from the baseline. CBO regularly incorporates behavioral responses to tax incentives. If you put a draconian tax on stock buybacks, you're going to see changes in firms' financial behavior. CBO will capture that. In (the case of this bill), if you don't tax tips, you're going to see more tipped income. It might not be dramatic, but they'll take all those things into account. Holtz-Eakin: CBO usually gets it wrong because of two things. You can't predict the future, and the economy is always different than one would have been able to forecast. They can't change their forecast every month, so the jumping-off points are often not what they would prefer. There's going to be changes in the environment around them. And more importantly, administrations do executive actions, Congress passes laws — they change everything in the budget around CBO, and they turn out to be off. The right question is, had those things not changed, how close would they have been? And that's a much harder question to answer. You'd have to rerun history with a counterfactual where the executive didn't take actions, Congress sat on its hands, and the economy progressed as we thought. Then you'd have a real answer. Holtz-Eakin: The roots of the CBO are in a fight between then-President Richard Nixon and the Congress on Nixon impounding funds. There was a lawsuit that went to the Supreme Court. But Congress came to the realization that they could not rely on the budgetary information that was solely available from the Bureau of the Budget, now the Office of Management and Budget, the executive branch. Congress wanted their own. So with the 1974 Budget Act, they created the Congressional Budget Office and also the entire apparatus for budgeting — House Budget Committee, Senate Budget Committee, budget resolutions — all of that came out of the '74 act. CBO's role in that was twofold. To do the scoring that I described, and To do special studies, as Congress asked them to, on particular topics that they might have future legislation on. You see a lot of CBO studies at the request of members of Congress, but their bread and butter is using what they've learned from those studies to do the scoring. Holtz-Eakin: It's important in two ways. There's going to be more, not less, debt. They're unquestionably right about that. The magnitude. It's single digits, below $5 trillion. It's not double digits. It's not triple digits, God forbid. You get the magnitude of the legislation. This is measured in the trillions. That's important. It's big and relative to already having $37 trillion in debt, it's going to be something that looks like 10% more over 10 years. That's the ballpark. Holtz-Eakin: I think CBO still could write more clearly about the key parts of important scores. When I was director, we did a score of the Medicare Modernization Act, which created the Part D program. I had them write up the score as a separate CBO study — a complete, finished book, almost: How did we do it? How did we think about it? What judgments had to be made? Models inform that judgment. Models can be very useful. But when you're doing something that involves judgment, you should explain how you made your judgments, and they're often not clear enough about that.
Yahoo
15-05-2025
- Business
- Yahoo
Liz Truss crisis is still damaging Britain, claims Goldman Sachs
Liz Truss's mini-Budget is still damaging Britain's economy nearly four years later, Goldman Sachs has claimed. A toxic combination of high inflation and low growth has plagued the UK more than other advanced economies, and the Wall Street bank said the fallout from Ms Truss's fiscal statement was to blame. Ms Truss's announced £45bn in unfunded and unaudited tax cuts in September 2022, triggering a crisis in the bond markets as investors panicked over the sustainability of UK government debt and whether inflation could be kept under control. Yields on government bonds rocketed as a result, nearly pushing some pension funds to the brink of collapse and forcing an intervention from the Bank of England. Gilts, as UK government bonds are known, have underperformed compared to other G10 nations in the years since then. Goldman Sachs said this was because investors were still wary of a repeat of the 2022 episode. The result is higher government borrowing costs and massive extra costs for the public purse. Higher gilt yields usually lead to a rise in the value of the pound but this link has been broken since the mini-Budget, Goldman Sachs said, worsening the investment case for foreign investors in Britain. 'The gilt turmoil has certainly been the main catalyst,' analysts wrote. Jitters about tax changes in Britain have also increased. A Goldman Sachs index shows gilt yield sensitivity to changes in fiscal policy has 'increased substantially' since the mini-Budget crisis. A source close to Ms Truss hit back at the suggestion the former prime minister was to blame for the crisis that followed her mini-Budget. They said: 'Even though the Bank of England has itself admitted two thirds of the market spike in 2022 was down to its failures, the economic establishment keep trying to scapegoat Liz Truss. 'They don't want to admit that their globalist policies like net zero, mass migration and Keynesian economics have completely failed in the UK and Europe. The same people spend huge amounts of their time and energy attacking President Trump and anyone else who seeks to take on the status quo. 'The fact is that any continuing impact from what occurred in 2022 is more likely to emanate from a lack of confidence in the very same Bank and Treasury establishment who remain in place to this day.' The Liz Truss mini-Budget episode should be a warning for Donald Trump, Goldman Sachs said. The US president's tariff policies have triggered huge swings in US Treasury markets and the dollar, while investors are growing increasingly concerned about his budget. Yields on American bonds have jumped as the Republicans prepare to push through Mr Trump's 'big, beautiful bill', which includes a fleet of tax cuts that will widen the US deficit. Rates on 30-year US Treasuries rose to nearly 5pc on Wednesday, a level last seen in early April when Mr Trump's 'liberation day' tariffs sent markets into turmoil. Soaring government borrowing costs ultimately forced the US president to an about-turn a week later by announcing a 90-day pause on his 'reciprocal' tariffs. Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month with unlimited access to our award-winning website, exclusive app, money-saving offers and more. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
15-05-2025
- Business
- Yahoo
Liz Truss crisis is still damaging Britain, claims Goldman Sachs
Liz Truss's mini-Budget is still damaging Britain's economy nearly four years later, Goldman Sachs has claimed. A toxic combination of high inflation and low growth has plagued the UK more than other advanced economies, and the Wall Street bank said the fallout from Ms Truss's fiscal statement was to blame. Ms Truss's announced £45bn in unfunded and unaudited tax cuts in September 2022, triggering a crisis in the bond markets as investors panicked over the sustainability of UK government debt and whether inflation could be kept under control. Yields on government bonds rocketed as a result, nearly pushing some pension funds to the brink of collapse and forcing an intervention from the Bank of England. Gilts, as UK government bonds are known, have underperformed compared to other G10 nations in the years since then. Goldman Sachs said this was because investors were still wary of a repeat of the 2022 episode. The result is higher government borrowing costs and massive extra costs for the public purse. Higher gilt yields usually lead to a rise in the value of the pound but this link has been broken since the mini-Budget, Goldman Sachs said, worsening the investment case for foreign investors in Britain. 'The gilt turmoil has certainly been the main catalyst,' analysts wrote. Jitters about tax changes in Britain have also increased. A Goldman Sachs index shows gilt yield sensitivity to changes in fiscal policy has 'increased substantially' since the mini-Budget crisis. A source close to Ms Truss hit back at the suggestion the former prime minister was to blame for the crisis that followed her mini-Budget. They said: 'Even though the Bank of England has itself admitted two thirds of the market spike in 2022 was down to its failures, the economic establishment keep trying to scapegoat Liz Truss. 'They don't want to admit that their globalist policies like net zero, mass migration and Keynesian economics have completely failed in the UK and Europe. The same people spend huge amounts of their time and energy attacking President Trump and anyone else who seeks to take on the status quo. 'The fact is that any continuing impact from what occurred in 2022 is more likely to emanate from a lack of confidence in the very same Bank and Treasury establishment who remain in place to this day.' The Liz Truss mini-Budget episode should be a warning for Donald Trump, Goldman Sachs said. The US president's tariff policies have triggered huge swings in US Treasury markets and the dollar, while investors are growing increasingly concerned about his budget. Yields on American bonds have jumped as the Republicans prepare to push through Mr Trump's 'big, beautiful bill', which includes a fleet of tax cuts that will widen the US deficit. Rates on 30-year US Treasuries rose to nearly 5pc on Wednesday, a level last seen in early April when Mr Trump's 'liberation day' tariffs sent markets into turmoil. Soaring government borrowing costs ultimately forced the US president to an about-turn a week later by announcing a 90-day pause on his 'reciprocal' tariffs. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
