Kevin Hassett: Energy shocks will "affect profits for the airlines for the next quarter or so"

[0:00] It has been another one of those weeks where some very big news stories now feel [0:05] very much in the rearview mirror. One such story is that Congress finally, by voice vote no less, [0:11] after 76 days, ended the partial shutdown of the Department of Homeland Security. [0:18] So now TSA agents and the Coast Guard are fully funded. Still unfunded though are the two [0:25] immigration agencies, ICE and CBP. But the story that's not going away is the impact the war with [0:32] Iran is having on the global economy. Rising fuel costs were a factor in the shutdown of low-cost [0:38] carrier Spirit Airlines yesterday, and the sudden shutdown left thousands stranded and some 14,000 [0:45] plus employees without jobs, according to the pilots union. We begin this morning with the [0:51] director of the White House Economic Council. Kevin Hassett joins us from Los Angeles. Good [0:57] early morning to you. Oh, yeah. Good morning. Well, Director, President Trump sent a letter [1:03] to Congress on Friday saying a few things. One, that the conflict with Iran, the ceasefire has been [1:11] extended. He also said the hostilities have been terminated. He also said the threat posed by Iran [1:17] remains significant and the force posture will continue to be updated. Then overnight, [1:23] we saw the president said Iran has not yet paid a big enough price for what they've done to humanity. [1:30] What exactly is the message to the market? Right. Well, I think the market has been pretty consistent. [1:39] The fact is that what the president is seeing is that the blockade is working. It's putting an [1:44] enormous amount of pressure on Iran, and Iran's threats to put mines in the straits have even made [1:51] it so that humanitarian aid that, of course, we would let through to Iran, that there are a lot of [1:57] those ship captains that are wary of going to Iranian ports because they're worried about where the [2:01] Iranians have put the mines. And so, you know, I go down to the sit room many times a week and get [2:07] briefed on what's going on in Iran, and they're an economy that's really on the precipice of extreme [2:12] calamity. They are having a hyperinflation. They're starting to have hunger. The bottom line [2:20] is that the pressure on the great American people because of these people who are like really intent [2:26] on American and Israeli destruction with their nuclear weapons are still in power. One last thing, [2:32] Margaret, I don't know if you noticed, but the UN human rights folks came out this week [2:37] condemning Iran because they're killing people who are trying to stand up to this regime that's [2:43] potentially, you know, causing starvation and even famine. [2:46] So you said the blockade is still on. A blockade is an act of war. Are we at war with Iran? [2:53] Iran shut down the straits. Iran shut down the straits. And the only ones they were letting through [3:00] were Iranian ships, and President Trump didn't think that was acceptable. [3:04] So we are still at war with Iran. You know, I don't know what the definition of war is when [3:12] we're not shooting and we're negotiating, and they're under a lot of pressure. There's no reason, [3:17] I think, right now to do anything other than what we're doing. The fact is that that regime [3:22] has destroyed the country. Let me put it in perspective. In 1978, before the Ayatollah came in, [3:28] then the per capita GDP in Iran was about the same as for Japan and Italy. Now it's about the same as for [3:34] Honduras. Right. So they've run that country into the ground and that's before the straits were [3:39] closed. And so it's really, really a country that's on the rocks. Sure. And we're negotiating with them. [3:43] But so we're going into week 10. I'm wondering what economic modeling you have done here because [3:49] the president had originally said the war was going to last four to six weeks. We are now at the [3:55] national average gas price of $4.45 a gallon. Can we end the conflict without taking back the Strait of [4:03] Hormuz? Well, what's going on right now is that we're doing an all of the above approach to get [4:11] energy to Americans and increase energy production around the world. And I think if you look out into [4:17] the future, what people are saying, you know, so as an example, we waived the Jones Act. The price of [4:22] the U.S. is $10 a barrel less than it is on the world. And in the world exchanges at all the West Coast [4:29] was buying a world price of oil, but now they're buying U.S. price of oil. So we've made an enormous [4:34] number of strides to reduce the short-term disruption. Well, the Bank of America came [4:38] out with a report this week that says the gas price spike has cost consumers $19 billion. [4:44] They say gas prices have canceled out nearly half of the increase in expected tax refunds. [4:50] Goldman Sachs concurs, saying the drag will offset the benefits from that tax bill [4:55] the White House had championed. Do you agree with that analysis? [4:58] No, that analysis is incorrect. Like think about it this way. 150 trillion, [5:04] 3 million people have filed taxes already. And the average tax refund is $3,600. 53 million people [5:12] have benefited from no tax on tips, no tax on overtime, no tax on social security. For the [5:18] no tax on tips and social security, that exempts between $7,000 and $8,000 from taxation for those [5:24] people. And for the no tax on overtime, it's like closer to $5,000. And so these are really, [5:30] really big numbers. And if people look at their gas bills, of course, they're higher. And we're [5:35] doing everything we can to make the temporary increase as small as possible. But, you know, [5:39] and then finally, there's the economic growth component. Real incomes are growing and real [5:44] incomes when they adjust for inflation include the price of energy. Real incomes shrunk for almost [5:49] eight years under Obama. They shrunk under Biden, and they're rising now despite the short-term increase [5:54] in gas prices. Well, we did see an increase in the PCE. But just to clarify, the tax law [6:00] that the president signed doesn't eliminate taxes on social security. It gives seniors an enhanced [6:04] standard deduction through the end of 2028. But let me ask you about the news on Spirit Airlines. [6:11] That makes it so most people aren't covered. Yeah, I want to talk about Spirit. I was just [6:14] going to say that makes it so most people don't face the tax on tips. So you're right as a technical [6:19] matter, but it has the effect that we discuss. So Spirit Airlines ceased operations, as we said, [6:24] at the top of the program. I know the White House was trying to craft an 11th hour rescue plan. [6:30] What happened? And do you have a sense of the broader economic impact? [6:34] Oh, sure. You know, it's something that I was very much involved in. We were aware that because [6:42] the merger between JetBlue and Spirit was canceled unwisely by the Biden administration, [6:47] that Spirit sadly was on the ropes. When we looked at their books, that basically the creditors [6:53] were going to liquidate them and, you know, try to sell their assets so that they could get some of [6:58] the money back that they had lent them. And there were some authorities that were explored to see [7:03] if we could help them, you know, get a lifeline. And in the end, the legal guys decided that those [7:09] authorities wouldn't apply in this situation. Meanwhile, while that was being investigated, [7:14] Secretary Duffy and I talked to the other airlines to make sure that they were helping people who are [7:19] stranded by Spirit get home and to get home basically at much lower prices than the normal [7:25] fares that they would charge. So the company... [7:28] In fact, American and United and Southwest have all said that they're going to help [7:33] the passengers of Spirit get home. So you mentioned past financial troubles. [7:37] Unquestionably, Spirit did have them for many years, but they did have that restructuring deal [7:42] with bondholders back in March. In the statement Spirit released explaining why they were shutting [7:47] down, they said, quote, the sudden and sustained rise in fuel prices in recent weeks ultimately has [7:53] left us with no alternative. Are other industries also at risk of collapse or other major companies due to [8:01] this energy shock? Well, don't forget that Spirit Airlines was chapter 11 twice because they basically [8:11] didn't have a business model that was working. I acknowledge that. [8:13] That's right. And the other airlines are still operating. I just flew out here to discuss these [8:18] matters at the Milken Conference in L.A., you know, on United Airlines and, you know, [8:23] the other airlines are operating. What they've done because they have thought ahead way more than the [8:29] management of Spirit is hedge their jet fuel purchases and so on so that energy, short-term [8:36] energy shocks don't have a big effect on their business. Certainly it'll affect profits for the [8:40] airlines for a quarter or so, but they're very, very healthy right now. Kevin Hassett, [8:46] we'll let you get back to work. Thank you for joining us.