“I don’t think we’re at a crisis point now,” Kudlow said in a Thursday interview at the Peterson Institute of International Economics. He pointed to the fact that the ratio of debt to GDP stands at about 90 percent. “That by itself is not a catastrophe.” (Watch the whole interview here.)

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The comment is latest piece of evidence tracing the GOP’s rapid transformation from a party that held deficit hawkishness as a first principle into one now unbothered by a tide of red ink it has helped unleash.

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Trump campaigned on a pledge to erase $19 trillion in debt over two terms. But his signature policy achievement, the $1.9 trillion tax cut, has accelerated the divergence between federal collections and outlays.

This week, the congressional author of those cuts, Rep. Kevin Brady (R-Tex.), suggested to my colleague Heather Long what mainstream economists contended when the cuts passed — that they will not fully pay for themselves. “We will know in year 8, 9 or 10 what revenues it brought in to the government over time. So it’s way too early to tell,” Brady said.

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(Kudlow claimed in April that "we have already paid for a good chunk” of the tax cuts; a year ago, against the government’s own evidence, he asserted the deficit was "coming down rapidly.”)

So far, the numbers speak for themselves. “Spending is up $255 billion for the first eight months of the fiscal year, the CBO said, while revenues are up only $49 billion,” Heather writes. “Corporate tax receipts are down after Republicans enacted the largest reduction in business taxes in U.S. history. Individual income taxes are basically flat this year (they are growing less than the rate of inflation). Most of the revenue increase is coming from [Trump’s] tariffs and more payroll taxes, which were not cut in the tax bill.”

And the Treasury Department announced Wednesday that the deficit rose to a record $208 billion in May, a 42 percent jump over the same period last year.

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The response from Republicans has amounted to a collective shrug. The Wall Street Journal’s Kate Davidson and Jon Hilsenrath performed something of a forensic autopsy on Washington’s vanishing interest in taming deficits. They found a fundamental shift leading politicians, investors and academics to reevaluate whether much higher spending levels might be sustainable: “The new bottom line: The U.S., despite a record-long economic expansion, is on course to test just how much it can borrow.”

One reason policymakers are changing their tune: Government debt has defied expectations by remaining relatively cheap:

“In theory, an increased supply of government bonds — sold to raise funds when spending exceeds revenues — should increase government borrowing costs. Theory also says big deficits crowd out business borrowing and increase private borrowing costs, too. The opposite has happened. While government debt soared after the 2007-2009 financial crisis, 10-year Treasury yields have fallen to near 2% from more than 5% in 2006, holding down government interest payments. U.S. business debt rose to $15 trillion in 2018 from $9 trillion in 2006.

Nevertheless, Davidson and Hilsenrath note, the Congressional Budget Office projects the federal government will spend “more on interest in 2020 than on Medicaid and more in 2025 than on national defense.” And a recession could reveal the government has overextended itself and limited its ability to jumpstart a recovery.

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Despite lawmakers from both parties ditching their green eyeshades, a partisan budget showdown looms this fall. Speaker Nancy Pelosi (D-Calif.) said Wednesday she would refuse to lift the debt limit until the administration agrees to a deal to lift spending caps. “The White House has demanded that the statutory caps remain in place while raising defense spending through a budget maneuver,” The Hill’s Niv Ellis reports. “House Democrats, meanwhile, have been passing spending bills that would increase funding levels by $17 billion for defense and $34 billion for nondefense.”

MARKET MOVERS

— Stocks snap two-day slide. CNN Business's Anneken Tappe: "The Dow turned things around on Thursday, finishing higher for the first time in two days. The Dow ended the day more than 100 points higher, or 0.4%. The S&P 500 and the Nasdaq Composite closed up 0.4% and 0.6%, respectively. The gains come after stocks closed in the red on Tuesday and Wednesday, ending a week-long rally even though fundamentals hadn't really changed. Investors are hoping [Trump] and Chinese Premier Xi Jinping will meet at the G-20 summit in Japan later this month and move forward to find a resolution to the China-US trade spat."

JPMorgan: Trade war has cost market $3 trillion; half could come back. Marko Kolanovic, J.P. Morgan’s global head of quantitative and derivatives strategy, calculates that "if one takes that the average annual return of U.S. equities was around 7%, the estimated cost of the trade war so far is about $3 trillion…the market damage is about 100 times the tariffs collected, so it’s clearly not making the country richer.” But, per MarketWatch's Barbara Kollmeyer, he also says the market could recover a chunk of that loss quickly: "He notes the recent threat of Mexico tariffs that came and went fast. He thinks a U.S.-China trade deal — logical going into an election year — could reverse about half of the market damage seen so far."

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TRUMP TRACKER

TRADE FLY-AROUND:

— Kudlow: No plans for Trump-Xi talks at G20 yet. Politico's Doug Palmer: "White House chief economic adviser Larry Kudlow on Thursday defended [Trump's] combative approach to trade negotiations, but acknowledged there aren’t any formal plans yet for a meeting with Chinese President Xi Jinping at the G-20 leaders summit later this month. 'You know how you get from here to there, Fred? You kick some butt,'" Kudlow said during the Peterson Institute interview.

— 600 companies warn on tariffs. CNN Business's Nathaniel Meyersohn: "American retailers, manufacturers and tech companies warned [Trump] on Thursday that tariffs on China will damage the US economy, lead to job losses and harm millions of consumers. More than 600 companies and industry trade associations — including Walmart, Costco, Target, Gap, Levi Strauss and Foot Locker — wrote to the White House urging Trump to remove levies on China and end the ongoing trade war."

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From the letter: "An escalated trade war is not in the country's best interest, and both sides will lose."

Sen. Marco Rubio (R-Fla.) criticized the companies as pushing Trump to "surrender" to China:

— Economists question long-term gain for Trump’s tariffs: “Most economic forecasters are pessimistic that the Trump administration’s trade-tariff policy will reap long-term benefits for the economy, according to The Wall Street Journal’s latest monthly survey of economists,” the WSJ’s Harriet Torry reports.

“Nearly 73% of economists in the latest survey said they don’t expect any long-term gains from the Trump administration’s trade-tariff policy will be enough to offset short-term damage to the U.S. economy. Economists in the Journal’s latest monthly survey put the probability of a recession in the next 12 months at 30.1%, the highest level since late 2011, with nearly two-thirds naming trade or tariffs as the biggest downside risk to their forecasts.”

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… But China attempts a positive spin: “China’s point man on trade talks with the U.S., Vice Premier Liu He, said external pressure serves his nation’s long-term interests, providing rare insight into how he frames the high-stakes tussle between the world’s two biggest economies,” the WSJ's James T. Areddy reports.

“Mr. Liu told a financial forum Thursday that such pressures, which he didn’t specify, are spurring China to create stronger domestic capital markets and more innovative industrial supply chains while making financial risks and domestic consumption high priorities. He described those as welcome trends in China’s transition ‘from being big to being strong’ and said they would make for a ‘steady and balanced economy.’ ”

— Retailer’s outlook shows tariff fears: “The first half of 2019 was expected to be a boon for U.S. retailers, buoyed by solid consumer sentiment at home and expansion in China — the market many of them have targeted for the future,” Reuters’s Aishwarya Venugopal and Nivedita Balu report. “Instead, new tariffs [Trump slapped] on some Chinese imports last month and fears that more could come in the escalating trade conflict between Washington and Beijing, had many investors bailing from the sector.”

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“Best Buy Co Inc and Walmart warned higher duties would put pressure on prices for U.S. consumers, while Macy’s Inc and J.C. Penney Company Inc said their businesses would suffer if tariffs were extended to include apparel and footwear. Kohl’s Corp said trade tensions were one of the reasons for a cut in its profit outlook and called the situation ‘fluid.’ ”

— Canada rejects idea of halting extradition of Huawei executive: “Canadian Foreign Minister Chrystia Freeland on Thursday dismissed a suggestion that Ottawa block the extradition of a top executive from China’s Huawei Technologies Co Ltd to the United States, saying it would set a dangerous precedent,” Reuters’s David Ljunggren reports. “Huawei’s Chief Financial Officer Meng Wanzhou, who was arrested on U.S. fraud charges in Vancouver last December, will challenge Washington’s extradition request at hearings that are set to begin next January.”

“China angrily demanded Canada release Meng and detained two Canadians on spying charges. It has also blocked imports of Canadian canola seed and Prime Minister Justin Trudeau has said he fears further retaliation.”

— Warren probes Freddie-backed loan to Kushner. Politico's Katy O'Donnell: "Sen. Elizabeth Warren is calling on government-owned mortgage financier Freddie Mac to provide details on its reported backing of an $800 million loan to the real estate firm owned by White House adviser Jared Kushner’s family. The loan 'raises serious questions about conflicts of interest and whether Kushner Companies may have received special treatment from Freddie, which is currently in government conservatorship,' Warren (D-Mass.) and Sen. Tom Carper (D-Del.) wrote Thursday to Freddie CEO Donald Layton in a letter obtained by POLITICO."

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POCKET CHANGE

— Surging reserves leave states ready for a recession. “If a recession comes soon, America’s state governments are better prepared than ever,” Bloomberg News’s Elizabeth Campbell reports.

“With most states seeing tax collections rise at a faster-than-expected pace, governments have been setting aside more money to help them avert deep spending cuts the next time the economy contracts. Those so-called rainy-day funds have swelled to about $68.2 billion, with the median state having enough to cover about 7.5% of its annual budget, the most on record, according to a report released Thursday by the National Association of State Budget Officers. Next year, those reserves are expected to grow to $74.7 billion.”

— Health-care stocks not vulnerable to political pressures prove profitable. “U.S. healthcare investors have found success this year buying stocks of companies whose products improve eyesight, treat pets and fix crooked teeth, all viewed as unlikely to fall victim to political and regulatory issues pressuring a wide swath of the sector,” Reuters’ Lewis Krauskopf reports.

“The S&P 500 healthcare sector overall has underperformed the broader stock market this year. But a number of companies have posted standout returns even as healthcare reform and prescription drug pricing loom as hot topics with the 2020 presidential election campaign heating up.”

MONEY ON THE HILL

— Rep. Katie Porter challenges Jamie Dimon on arbitration. Bloomberg's Michelle Davis: "U.S. Representative Katie Porter is butting heads with Jamie Dimon again. The Democrat from California claims the bank’s new policy of making credit-card customers use arbitration instead of the courts to resolve payment disputes violates her state’s laws. 'Consumers and your bank should be able to choose arbitration to resolve a dispute but not be forced into such an arrangement merely by failing to wade through pages of disclosure,' according to a copy of the letter sent Thursday to Dimon, JPMorgan’s chief executive officer."

The bank declined to comment, "but pointed to a 2015 Consumer Financial Protection Bureau study showing that when consumers win in arbitration, they receive higher awards than the typical plaintiff in a class-action suit."

THE FUNNIES