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Voodoo Economics at the Treasury — CEO Daily, Tuesday 12th December

Good morning,

Regular readers of this newsletter know I am sympathetic to the GOP tax bill, because it makes needed fixes to the corporate tax system. But there is little good to say about the long-awaited “analysis” of that plan issued yesterday by the Treasury Department.

The analysis said the tax cuts would more than pay for themselves. Sort of. Actually, it said that if annual GDP growth increased to 2.9% a year, up from current projections of 2.2%, that would bring in enough revenue to cover the cost of the tax bill. And while the tax plan alone might not create that much growth, an additional boost “from a combination of regulatory reform, infrastructure development and welfare reform as proposed in the administration’s fiscal year 2018 budget” would make up the difference.

The full report was less than 500 words—the equivalent of, say, four tweets. Having spent a portion of my earlier career reading papers from the Office of Tax Policy (see: Showdown at Gucci Gulch), I can say I’ve never seen one quite as flimsy as this. The once-credible Treasury economics shop seems to have adopted President Trump’s flexible approach to reality. No need to be troubled with numbers or facts. Just create your own.

There are other clouds on the horizon for this tax proposal too. The finance ministers of Europe’s five largest economies warned yesterday that some of its provisions may violate existing international tax treaties (the city of London is particularly concerned about the treatment of intra-bank transfers between the U.S. and Europe). China is also planning possible retaliatory measures, according to the WSJ.

Estimating the effects of tax bills on the economy, of course, is an uncertain art. But it’s a necessary one. The congressional Joint Committee on Taxation made a good faith effort, and concluded the bill would add $1 trillion to the deficit, even after an expected boost to the economy. I’d take that as more realistic. If you care about the nation’s future, it’s probably also an argument for Congress to compromise on a corporate tax rate closer to 25%.

News below.

Alan Murray

Top News

Workplace Harassment With a Difference

United Airlines CEO Oscar Munoz endorsed the Association of Flight Attendants’ campaign for a “zero tolerance” policy towards sexual harassment. Munoz’s letter to staff followed an op-ed in the Washington Post by the AFA’s president Sara Nelson, who argued that harassment by passengers is still routine. Munoz’s initiative takes what has been in recent weeks a discussion about essentially internal dynamics in workplace culture and turns it outwards to include customer-staff relations. That makes it a much more complicated issue. How far an industry hyper-sensitized to customer service issues is prepared to back staff complaints about passengers will be interesting to see. Fortune

Mattel’s Christmas Is Junked

Mattel warned that sales would fall by up to 10% on the year this holiday season, and warned it would have to take a write-down on inventory. The bankruptcy of Toys’R’Us, which rival Hasbro blamed explicitly for a similar profit warning, may have affected its planning, but Mattel cited a sector-wide move toward tighter inventory management. Adding insult to injury, the three big credit ratings agencies downgraded its debt to junk status as it announced plans to borrow $1 billion to buy time for Margo Georgiadis’ turnaround plan. Fortune

ExxonMobil Gives Ground on Climate Risks Audit

ExxonMobil gave into shareholder pressure and said it would publish new details about how climate change could hit its business. It’s hoping to appeasing critics and forestall another proxy fight over the issue next year, but shareholders’ response suggests that they’re not yet satisfied with the company’s commitment. Elsewhere, French President Emmanuel Macron made a splashy award of government grants to fund climate research, overwhelmingly to U.S. scientists. The Paris establishment is more upset than most at the U.S. withdrawing from the Paris Climate Accord, a recent high point of French diplomacy. Fortune

Westfield Bows Out as Mall Sector Consolidates

Consolidation in the global shopping mall sector stepped up a gear as French-based Unibail-Rodamco agreed to buy Westfield for $15 billion plus another $10 billion in debt. Australia-based Westfield is well represented in the mature and challenged markets of the U.S. and U.K. Its portfolio includes the Century City mall in Los Angeles and a string of prime properties in London. The market reckoned Unibail had overpaid and pushed its share price down 3% on the Euronext exchange. Fortune

Around the Water Cooler

Comcast Leaves Disney a Free Run at Fox (and Hulu)

Comcast said it had dropped out of the running to buy movie and international TV assets from 21st Century Fox. That leaves Walt Disney poised to wrap up a deal as soon as this week, according to The Wall Street Journal. Comcast said it had “never got the level of engagement needed to make a definitive offer.” As such, it looks like Disney will end up with a controlling interest in streaming service Hulu, an important building block in a new video product designed to hit back at Netflix. Currently Hulu is owned 30% each by Disney, Fox and Comcast, with Time Warner holding the remaining 10%.  Fortune

HNA Sued for Lying About Its Owners

HNA, the Chinese conglomerate that was on an overseas buying spree until Beijing cracked down on its use of debt financing, has been sued by one of its former targets in the U.S. Software group Ness Technologies claims HNA and its outsourcing unit Pactera lied to U.S. authorities about who its true owners were. The proposed acquisition, for a relatively modest $325 million, was ultimately vetoed by the Committee on Foreign Investment in the U.S. after HNA “poisoned and prejudiced the review process,” according to Ness. HNA is also under scrutiny from the European Central Bank for its fitness to be the largest shareholder of Deutsche Bank. FT, metered access

Gemalto Deal Highlights Payment Sector Flux

Atos, the French IT services company led by Jacques Chirac’s former Finance Minister Thierry Breton, has offered just over $5 billion to buy Dutch smart-card maker Gemalto. The deal could create an industry heavyweight in the payment security space, and lifted Atos’ and Gemalto’s share prices by 5% and 33% respectively. Gemalto’s core business of making SIM cards and chips for payment cards is under pressure from newer payment technologies and its stock had fallen 36% this year before Atos’ announcement. Gemalto said it’s ‘studying’ the deal. WSJ, subscription required

“You Don’t Realize It, But You Are Being Programmed”

Another early member of the Facebook management team confessed to remorse about the impact of their invention on its users (now 2 billion and counting). Charmath Palihapitiya, former VP for user growth, told an audience at Stanford that “The short-term, dopamine-driven feedback loops we’ve created are destroying how society works…No civil discourse, no cooperation; misinformation, mistruth.” He took pains to point out that is a global problem rather than anything as specific as the furore over election manipulation. Palihapitiya said he’s stopped using social media and had banned his children from using it. Facebook’s first president Sean Parker had voiced similar concerns only last month.  Fortune

Summaries by Geoffrey Smith;