Never-Never Land

You can’t turn around today without someone talking about how great the economy is.  Low unemployment and low inflation.  What could be better?

In fact you don’t have to look far to know something’s wrong.  For once this is less a matter of lies than of myopia.   We’re living in an artificially-created bubble, and while we don’t know exactly when it will end, this is never-never land.   We’ll go through it step-by-step:

– The bubble

We incurred $985 B of deficit this fiscal year as short-term stimulus to an economy already at full employment.  That’s a monumental $300 B over last year—in good times. As in every other such case, the tax cuts are NOT paying for themselves.  During the year we had a small reduction in unemployment from 4. 1% to 3.7%, but at no faster rate than last year and with no increase in inflation-adjusted wages (one-time bonuses from the tax cuts were negligible in the statistics).  You might ask why we would do such a thing—$1 T is a lot of money—but one thing the deficit certainly delivers is that much more economic activity in an election year.  The same people who starved recovery from the 2008 crisis to sow discontent for the 2016 election gave themselves a big boost for this one.

You might also ask how long we can continue doing it, and the following budget chart makes that unmistakably clear:


We’re running up unimaginable deficits in good times, with consequences we’ll talk about in a minute.  And the chart actually understates the situation.  The underlying figures come from a CBO report written in April, when their estimate of the 2018 deficit was $805 B. With a final 2018 deficit of $985 B, the situation now looks considerably worse. The CBO report said that we would reach deficit = $1T by 2020 and then reach the sinister milestone of debt = total GDP by 2028.  With the current deficit, we have reached the $1 T value in 1/3 the time, so we can also expect the second milestone looms sooner too.

The stock market is a similar case.  The corporate tax cuts went directly to company bottom lines, raising price/earning ratios and stock values. What’s more corporations turned around and used all that money for stock buybacks, increasing demand for stocks and further enhancing stock prices.  None of this is sustainable.

– The deficit

Much discussion of deficits seems theoretical, but the consequences of our current deficits are real.  Republicans are already talking about cuts to Medicare and Social Security as counterpart to last year’s tax cuts.  Just imagine now we’ve reached a downturn in the economy—not even necessarily as bad as 2008.  We’ll have the massive deficit-induced debts shown in the prior chart, and now—on top of that—tax receipts that have just collapsed with the economy.  In that case we’re not talking about changes around the edges of Medicare and Social Security, we’re talking about no money for it and “taking the hard choices we just have to do.”   That means dramatic change in what it means to be living in this country.

Further (as noted in the CBO report) the deficit is a time bomb.  As interest rates rise in good times, the yearly cost of financing the deficit rises accordingly.  We’re already talking about deficit finance costs higher than the defense budget.  And it will just continue up, eating into available money for healthcare, education, opioid crisis even before a downturn.  There are good reasons not to incur deficits in good times!

– Our economy

With all Trump’s talk about the private sector and relief from regulation you might think that the country has been liberated from misguided government meddling with private enterprise.  But you’d be wrong.  The current executive-imposed tariffs and trade wars constitute the most extreme government intervention in the economy within memory.

The steel tariffs hit anyone building anything out of steel—basically forcing export-directed activities off shore.   The new USMCA regulations have already caused layoffs at Ford (and the touted benefits to labor are so far from clear that the unions can only wait and see).  The trade war with China disrupts values chains of any corporations not sufficiently well-connected to get exemptions.  The government is choosing winners and losers in the economy based on impulse (coal and steel sound good) or lobbying (the Apple watch).  And established companies have been winning out over newer, innovative ones (net neutrality) any time the issue comes up.

All of that, together with xenophobia and lack of support for education, augurs poorly for the state of our economy going forward.  And we’re even waging economic war with the largest, most rapidly growing economy in the world—in the name of protectionism!

– Our population

Since the subject is the economy, we’re talking here about the related topics of personal and national economic success.  It is of course a truism that the world economy is changing.  Good jobs, and the jobs that maintain our national standard of living, are changing.  Very many of them require more and different training.  (One list of the top ten growing job categories is given here.)  Economists going back to Adam Smith have recognized the responsibility of government to educate the population.

However with the tax cuts we took a very different tack, essentially trusting private sector prosperity to raise all boats.  There is no evidence that works.  The tax cuts went primarily to stock buybacks (see the mind-boggling level of buybacks below), leaving issues such as education (including the student loans crisis), infrastructure, and healthcare up for grabs.  For now, protectionism is the solution to job retraining, and consequences of automation are unaddressed.  Given the current level of inequality, low unemployment without wage increases just makes people with good jobs feel safe.

stock buyback2c

We are not preparing the population for today’s world, because we’re too busy trying to get back to the “great” old days of the 1950’s and 60’s.

– Climate Change

Climate change belongs on this list, because if we continue to ignore it the economic effects could well rival the defense budget.  Climate change may have morphed into a partisan issue, but nature isn’t fooled.

Consequences will be in many forms—severe weather, changes of temperature and rainfall, sea-level rise.   Turning around today’s carbon-based economies takes time, so if we don’t start acting now, we’re talking many trillions of dollars of expenses for repair and to forestall truly disastrous consequences.  The recent IPCC report found more serious effects than previously recognized by 2040.   As the following chart shows, the US currently generates twice the per-capita CO2 of any other major player, so we have a long way to go.


For now we are doing worse than nothing.  Climate change is an issue where international unity of purpose is extremely important, because cheaters—with cheap coal—can prosper.   We have not only endorsed coal for ourselves but actively encouraged cheating.  Further our departure from the Paris Agreement process—and in particular our disavowal of the whole idea of rich countries helping poorer ones act in our common interest—leads directly to dangers such as Brazil abandoning protection for the Amazon.

Ignoring climate change means more damaging effects of warming, and more drastic (and expensive) action in the end.   Furthermore, as a purely economic issue, by denying the issue we are sidelining our own companies’ participation in this necessary multi-trillion-dollar enterprise.  The day will soon come (we’re now talking just 20 years to get off coal, oil, and gas) when this moves to page 1 of the news, and stays there.


Our never-never land economy is good only so long as we keep our eyes closed.  But if we don’t open them soon, we won’t recognize what we’ll find later.

Kavanaugh Nightmares


This subject is too painful to talk about but too painful to leave alone.  A few points:

– The fundamental danger of the Kavanaugh appointment was of course clear from the start—it was clear from the moment that Kennedy announced his retirement.  One way or another we were going to get a Supreme Court majority for authoritarian control of the country.   Since the Supreme Court enforces the Constitution, this is the fox in the hen house.

– The Kavanaugh hearing made matters worse in two ways.  The idea that law-giving on abortion and contraception might be determined by a perpetrator of sexual assault was bad enough, but additionally we were given the spectacle of Kavanaugh’s unhinged rant about liberal conspiracies with the implied threat (now soon to be realized) of revenge.  The final act, with Collins presenting the Party’s carefully-crafted whitewash of the whole affair, was an apotheosis of hypocrisy.

– The press has thus far, as usual, attempted to normalize the situation.  The word “conservative” is a handy tool in this effort.  As if these people represented an ordinary, conservative political wing rather than a takeover of the country to subvert democracy for the foreseeable future!  Even the focus on Roe v Wade has this effect, by making it sound like the problem is limited to a few specific issues.

Instead this takeover of the court will pervade all aspects of society.  Here are a few more examples of what may be in store:

  1. Essentially all regulatory agencies risk shutdown. The new “conservative” mantra is that delegation to regulatory agencies is unconstitutional, i.e. any regulation has to be a law passed by Congress.  Since that is as a practical matter unworkable, none of it can happen.
  2. The 14th Amendment can be weakened out of existence (the Constitution only exists as interpreted by the Court), limiting the ability to address racism or LGBT issues.  This is a stated “conservative” objective.
  3. Selected portions of Medicare, Social Security, and other aid programs can be eliminated as unconstitutional. This works directly to the Koch organization’s goal of drastically cutting government to reduce their taxes.
  4. Basic problems of the society can become unaddressable. Education, student loans, healthcare, opioid crisis, etc. can be made untouchable by any future Congressional effort.
  5. Fundamental free speech rules can become unenforceable. Trump could be able to shut down the NY Times or Washington Post on whatever pretext he chooses.
  6. Rule by Presidential fiat can become the norm, as only the Court can challenge it. With the example of the current trade wars, arbitrary control of the US economy will erode its strengths for all of us.

That’s what’s looming for the not-so-distant future.  It doesn’t change our immediate goals, as the mid-term elections are now more important than ever.  But it will be a tough battle, and the unprincipled savagery of today’s Republican Party has been vividly on display.

Losses of War


The current trade war with China is so ill-conceived and damaging to the US that one hardly knows where to start.

As one point of departure, it’s worth pointing out that the rhetoric around the trade war sounds like the kind of propaganda campaign used to pump up public support for a real war.  It’s all about “winning” and vilification of the Chinese, as if we’re going to knock them down, so that they’ll never threaten our dominance again.

Given that rhetoric it’s worth pointing out a few basic facts:

– China has been overall good for the American economy.   Much of Chinese manufacture is done for American supply chains.  Low prices and high quality of Chinese exports have helped American companies to sell value-add products worldwide, and has also benefited American consumers.  American businesses, with few exceptions, are not pushing for the tariffs.

– There is of course no question about the decline in good, well-paying jobs for people without specific skills.  The Chinese have contributed to that by making good, cheap stuff, in part through undervaluing their currency.   They perfected outsourcing from spec to such a degree that they have made themselves suppliers of choice, leading to declines in manufacturing jobs in the US. While all of that is true, it is also true that they are scapegoats as much as perpetrators for the consequences.   The Chinese are not the source of inequality in the US—we did it to ourselves.  And that, as least as much as the Chinese, is the source of the pain frequently blamed on globalization.

– The rhetoric around the trade war is remarkably vague over exactly who or what is being defended.  When the subject is the deficit, that makes it sound like the Chinese are stealing from our economy.  But businesses are not tariff supporters, and the deficit is just plain not measuring the right things.  The iPhone is a good example.  It is a fantastically profitable product for Apple—sold at 300% markup over the imported hardware–but it counts as a big loss for the deficit, because the profits are declared in Ireland and Luxemburg for tax purposes.

So maybe we’re doing it for employment.  But the same people who are pushing this are fighting unions, so it pays to look closer.  There’s no guarantee that the tariff-protection will be positive for jobs, particularly good jobs.  Tariffs are a tax, and a very expensive and unsure way to protect a few jobs while putting many more at risk.  To emphasize this point, it should be noted that the new tariffs on China are much like the previous steel tariffs in that they are assessed on basic commodities rather than finished goods—which means that they put all businesses that make the finished goods at risk.   This is obvious in the case of steel, but many of the new tariffs affect hardware which American companies use as platforms for their software—as in the iPhone example.  So the result is the same as for steel.

– Finally the specific evils attributed to the Chinese—theft of intellectual property, currency manipulation, unfair competition in China and elsewhere—are resolvable issues, as we will discuss shortly.  The trade wars guarantee that those resolvable issues will now be sacrificed to the raw emotions of war.

To understand where we stand with China, it helps to think a little bit about history.  Over the past twenty years the Chinese economy has come from nowhere to now surpass the US in total volume.  (However, the Chinese population is so large that per capita income is still well-below Mexico.)

The result is that China has transitioned from a country with no capacity to absorb imports and an economy 100% based on export-driven growth—to a country with a middle-class market comparable to the US.  One indication of the transition is the sudden appearance of Chinese tourists everywhere in the West.

That change has many consequences.  For growth, it means that the Chinese are acutely dependent on prosperity in the West for continuing growth of such a huge economy.  For intellectual property, it means that the Chinese have as much to defend as we do.  For imports, it means that the Chinese middle-class has as much interest in western goods as it does in western travel.  And the Chinese are now supporting their currency rather than undervaluing it.

All of that means that—though negotiation with China will certainly not be easy—there is a common interest recognized by all parties.  This is already happening in particular domains, such as financial services.  The world is ready for a historic step—international trade agreements opening China as a major economy and preparing for an era of worldwide growth to the benefit of all parties.  That’s what we are torpedoing with the trade wars, undermining the necessary trust between participants.

Regardless of what we think we’re negotiating, the trade wars mean we’re giving up on access to the biggest economy in the world, growing at 6%, in favor of protected industries at home.  Trade wars are not like real wars in one important respect—we have limited control of the results from the agreement we reach.  People will still have to buy the stuff, and industries have many ways of avoiding a result that no one wants.   An agreement reached (as the Chinese have said) with a knife at the throat is unlikely to bear fruit.  “Winning” in Trump’s sense has little to do with this situation.  And the “it’s no fun winning unless everyone else loses” attitude is a proven recipe for disaster—for us.

If we look toward the future, we are not going to make China go away as a world power—and it’s not to our advantage to do so.  And it’s certainly delusional to think they are just a bunch of cheats whose only talent is in stealing from us.  If we want to be successful, we need to build upon our strengths.  China is a legitimate challenger technologically, and we will fall behind if we don’t recognize what those strengths actually are.  There was one such list of strengths in the NYTimes today;  here we’ve also given a more technology-oriented list.  Many of those items are at-risk in the current anti-science and xenophobic environment.

We should recognize that if we play our cards right, the value of our openness and democratic structures cannot be overestimated, compared with China’s authoritarian regime.   (One can even argue that China’s enormous growth was largely in spite of, rather than because of, its central authority, and that Xi is tightening the screws.)  I’m old enough to remember when we worried about Japan overtaking us, through their disciplined, top-down economy.  There was even a moment where they too had a central technology plan that was going to leave us far behind.   That never happened, and the dynamism of what we represent continued to reinvent itself in the many decades that followed.

And the whole world got richer.  That should be our future also.

A Logical Trap

This note is occasioned by Elizabeth Warren’s recent proposal on corporate governance—to add labor representation on corporate boards and expand the scope of corporate responsibility.  Regardless of what happens to her bill, she has done an important service by calling attention to a fundamental problem.

In recent decades American business has been taken over by the so-called Milton Friedman view of corporations.   That view has a simple prescription for how companies should operate: the world is best-served when businesses focus exclusively on business.  I.e. the role of a corporation should be to generate the maximum possible return to its investors.  Any other concerns (the workforce, community responsibility, etc.) are a perversion of the engine that makes capitalism great.

There are lots of reasons why that is suspect.  Clearly in this world labor has little to say, and in fact even a business’ own interests are not necessarily well-served—investors can walk away if the business gets pillaged for their benefit.  The percentage of business profits returned to investors has gone up dramatically with this philosophy, to the disadvantage of both labor and capital investment in the companies themselves.

The point we want to emphasize here is how damaging the Milton Friedman view is in the environment of today.   We have just passed a massive tax cut that has taken so much out of the federal budget that there is (particularly with the deficits) essentially nothing left for the other problems of the society.  As justification we’re told that private enterprise is the engine that makes everything great.

That is of course a logical trap.   Businesses in this world have no responsibility for the well-being of the country—and the government doesn’t either, because the private sector is always the answer!  Just give it money and let it go.

As a consequence we’re not investing in our people, we don’t have to think about their welfare, and we’re not preparing for the future, because there is no one on the hook to do it.  Even Adam Smith had no illusions about the private sector’s ability to police itself or prepare the population for personal and national success.

Everyone should recognize the true symbolism of the following chart:

stock buyback2b

The one significant result of the tax cuts is the huge surge in stock buybacks, essentially returning taxpayer money to corporate investors.  We set a record in Q1, and then almost doubled it in Q2!

Capital investment, by contrast, was relatively flat—little touched by all that money:


In other words the tax cuts have siphoned off the resources of the country, so that there is nothing left for issues like education, infrastructure, the opioid crisis, climate change—and has delivered that money to corporations who have in turn just passed it through to their wealthy investors via buybacks.

So we’ve become like one big predatory private equity investment, being sucked dry for the benefit of the happy few who are running the show.

Tesla as Example


However distasteful Elon Musk seems to be, the nuttiness of Tesla’s treatment nonetheless deserves comment.

Tesla was the first (as far as I know) to figure out that current battery technology is practical to power a car.  They have also been the best thus far at figuring out how such a car can be made uniquely attractive.

This is an intensely competitive business, and they have been trying to maintain first-mover advantages in features, battery technology, and the manufacturing process.  That is a very tall order, and it involves enough risk-taking that there is no surprise that it is tough to keep commitments.  Until they reach some sort of stable state vis-à-vis their auto competitors, Tesla has to be regarded as still in a kind of startup phase.  That applies both to risks and rewards.  No one expected iPhone penetration to grow as fast as it did (I can still remember articles talking about mobile phones as a mature, saturated market), and the same kind of thing could happen with electric cars.

Unless you’re a deliberate non-believer in climate change (and these days you have to try hard), the role of electric cars can hardly be overestimated.    Transportation accounts for 28% of carbon dioxide production, and there is no one proposing to put carbon dioxide scrubbers in every car.  Tesla is trying to become the Apple of transportation, with perhaps an even bigger impact on the US economy.

How are we helping Tesla in that undertaking?  Well, we haven’t cut out the electric vehicle subsidy entirely (as the House Republicans proposed to do), but there’s no evidence we’re trying very hard either. The administration is just not interested in anything that raises even the suspicion of climate change.  A carbon tax for example.  We are minimizing Tesla’s value in its home market, while the rest of the world catches up.

As for the business community, everyone seems eager to predict the Tesla’s demise.  Certainly the traditional auto companies would like that, and Musk’s antics make it exciting for the press to think about a deserved fall of arrogance.

However as an indication of what that might mean, people should recognize that all of the core technology in the Chevy Bolt comes from South Korea.  And that story can hold for the rest of the multi-trillion-dollar investment that will be needed to combat climate change.

Thinking Back to the 2008 Crash


There have been many articles recently reviewing what happened in 2008 and how things have evolved since then.  It’s a good thing we’re thinking about it, but there seems to be a tinge of inevitability to our memories, as if it was all a fact of nature and we need to understand the science of how things turned out as they did.

That’s wrong.  Blithe confidence in deregulation caused the crash.  The Koch-controlled Republican Party chose—with unconscionable cruelty—to prolong the pain of the downturn, so as to get a new President who would deliver massive tax cuts for the ultra-rich.  (Remember the “balanced budget amendment” and compare with the current deficits.)  And they have placed in power and continue to support a person who in their own words “continues to act in a manner that is detrimental to the health of our republic.”  It’s a good idea to think about the crash.

Despite the much-discussed topics of globalization and automation, we are not living with unsolvable acts of God.  And there are no secret demons running around hidden in the depths of the administrative state.  Dramatically rising inequality—and the decline of the middle class—is not an accident, but a chosen result.  The deep divisions that exist in our society are not an accident, but a chosen result.  Follow the money.  Divide and conquer is nothing new.

This country has dealt successfully in the past with industrialization and massive immigration.  And was stronger for both.  And we were able to share that prosperity more broadly than it had even been done before.  We can do it again.  The current, hard-won worldwide prosperity should be good for everyone if it weren’t being sacrificed to greed.

This isn’t going to be easy.  The current inhumane, anti-democratic Supreme Court will be around for a long time.  The much-encouraged divisions in the society will not heal easily.  But we can start by heeding the recent advice of John McCain and vote out this cult that can’t even be called conservatives.  Democrats have a great variety of people running in this critical election.  Breadth of opinions is a good thing.  Belief in democracy is a requirement.

This needs to be done.  What we do matters everywhere.  We are the leaders of the free world, and that leadership is dearly missed.

Small Bits of Reality

Two obvious bits of economic reality worth emphasizing:

  1. Trump and the stock market

Stock prices are directly related to earnings.  Cuts to corporate taxes translate directly to earnings.  Stock prices rose with the expectation of Trump’s corporate tax cuts, and he delivered.

At this point nothing else has happened (other than the uncertainty of the trade wars).  The recent rise in corporate earnings is not a reflection of new business activity, it’s just the reality of the money we’ve all given them.  That’s a matter of profits and the next item to be mentioned ….

  1. How those tax cuts have been spent

Imagine you’re a corporate CEO who has just put together a new business plan.  The cost of capital is extremely low, so money alone cannot be viewed as a serious brake on new opportunities.  You have submitted your business plan to your board, and it has been approved.  Somebody now gives you a bunch of money.  Does that invalidate your business plan?  Were you wrong about the opportunities?

Next you’re an investor in that business.  You’ve watched the tax cuts coming from the beginning, so you know there’s a bunch of new money that just came in.  The CEO has already told you that his business plan is taking advantage of the opportunities worth pursuing.  Whose money is that—it’s mine!

Unsurprisingly, that’s exactly what happened.  “Stock buybacks to boost investor share value.”

In other words, the best thing companies have found to do with taxpayer money is to pass it straight through to their investors!



NY Times: Inviting the Next Financial Crisis

This NY Times Editorial Board piece is the best summary I’ve seen of where we are and how we got there.

Our comment:

Maybe I missed it, but one thing that isn’t explicitly noted is how much worse this could be than 2008. The major stimulus then came from the US and China, both of whom are far less able today. Also the IMF issued a warning a few months ago about an enormous increase in the global level of debt. What’s particularly galling about the current situation is that the current, hard-won worldwide prosperity IS sustainable if it weren’t being sacrificed to greed.

I was glad to see the article point out the unconscionable cruelty of the Republican party in deliberately prolonging the effects of the downturn so as to sow discontent for the election. We should call things for what they were: the Republicans held the country hostage for six years, so they could deliver massive tax cuts for their ultra-rich donors.