The Trade Wars Are a War on Trade

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The impending trade war with China has already generated the drumbeat of preparations for a real war:  “cheating”, “usurping”, “impoverishing”, “existential threat”, …  Of course with Trump you never know what’s just posturing, given how quickly the North Korean “rocket man” became “very honorable”. So there’s hope that the Chinese trade war will somehow wind down.

But even if it does, we have to recognize there is now a real, ongoing threat to international prosperity.  Trump is attacking the system of fair trade that underlies the world’s rise in prosperity since the second world war.  His notion of sovereignty means he refuses to acknowledge any limits (international or constitutional) on his ability to use trade as a weapon.  That is new, and if it wins we all lose.

 

We start by quoting a position from the Business Roundtable of corporate CEO’s on the trade negotiations with China.

“During negotiations with China, the Administration’s objective should be to secure lasting economic reforms that will curtail China’s unfair trade practices and allow U.S. businesses to compete on a level playing field. Negotiations that focus on temporarily reducing the trade deficit would make this a wasted effort. Working in coordination with our allies, the U.S. should set deadlines on those economic reforms and outline the consequences China would face if reforms aren’t made. This approach will provide an opportunity for the Chinese to produce results and for the Administration to protect the interests of U.S. businesses and workers effectively.”

The important thing about the quote is that it sees the problems with China within the context of internationally-defined fair trade.  And it emphasizes the importance of working with our allies to make the system successful.   That’s as opposed to “reducing the trade deficit”—which seems to be at the top of the administration’s list both for China and for Mexico, Canada, and others.  (This is despite the fact that our balance of payments deficit with China has decreased greatly from peak, is not a financial problem, and is not the reason for the stresses on the American middle class.)

It is important to recognize that regulating deficits is worse than “wasted effort”; it actually subverts the real objectives of fair trade.  Not only does it make China responsible for something it doesn’t completely control (we’re the ones pumping up the federal deficit), it is a rule we would never accept for ourselves.  The whole idea of fair trade is that it should be a system of known rules by which everyone can play; here we’re just imposing whatever we think we can get away with.

The quote is of course coming from businessmen, but the issue is one for everyone.  The downsides of international trade exist, but most cases the problems are of our own doing.  Further the most effective way to impose standards for labor and environmental issues is to work through the definition of fair trade.

We have already sinned against WTO fair trade once, by invoking “national security” as a blanket excuse for unilateral tariffs.   We are going beyond that here by setting rules for others we have no intention ever to obey.

 

The second example is the administration’s other major issue in the Chinese negotiations: “Made in China 2025”.

For high-tech, China today is primarily building products for western companies.  Generally most of the intellectual content and profit goes to the parent company (e.g. Apple) as the top of the heap.  Unsurprisingly, China would like to move up the value chain to get more of the benefit.  Also, China today sources most of the IC chips in the products it builds from other countries—a fact that China views as a risk to its success.  Made in China is the plan to move up.

Made in China 2025 covers just about any technical field you can think of (except AI, with its own plan), and the government expects to spend money to make progress happen.  As an idea, this isn’t terribly different from what is going on in many other countries (see here for a summary of national spending on AI).  But the Trump administration has decided that the whole idea of Chinese government involvement in technological advancement is suspect.

While Mnuchin and others use the language of fair trade to attack the Chinese plan, those attacks have lacked much specificity.  And in fact if the administration is worried about abuse, they could take the whole affair to the WTO.  What makes the case even weirder is that, as we know, the Trump administration has proposed severe cuts in US government funding for research in essentially all fields, claiming the private sector does it better.

So one has to conclude that what is going on is trade warfare pure and simple.  The Trump people (with their zero-sum view of the world) are afraid the Chinese might catch up, and their goals is to throw as many nails on the road as possible to slow them down.  That’s what passes for economic policy.

This is arrogant foolhardiness of the sort the world hasn’t seen since the geniuses of the Iraq war.  As many have pointed out, the companies most hurt will be American.  And the message for the rest of the world is clear.  The US, with quite a lot to gain, has decided it doesn’t need free trade.

The end here, as in our last piece on trade, is constitutional.  It becomes more urgent each time.

Normally, without the seldom-used national security ploy, tariffs are a matter for Congress.  When Trump got away with it on the aluminum and steel tariffs it was a scary first step.  We’re now fighting a whole trade war with China, and no one is questioning that it can be done purely by fiat.

So we no longer need to argue about whether Trump will or won’t try to make himself a dictator.  Unless something happens, he is already in position to wreck our economy all by himself.

Tesla and Ice

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This is a short note on a couple of issues related only in that they say something relevant about the future we should be planning for.

The first relates to Tesla and its production difficulties with the new, lower-priced model 3.  The highly-automated production of the model 3 is well-behind schedule, to the point where it is a big hit to the cash flow of the company.  We mention it here, though, because the delay is an indication that mass production of electric cars is something fundamentally new.

An electric car is a much simpler machine than an ordinary, gas-powered vehicle.  In principle the construction should be both cheaper and easier to automate.  Current production of Teslas is intrinsically a low-volume operation.  The model 3 will be the first indication of what newly-imagined electric car production is like.

I don’t know if we’re in for a shock or not (this is after all a first go at it), but this could be another big change to conventional middle-class employment.  And there will be follow-on effects for gas stations, and especially maintenance and repair.  This is another of many indications that broad, technology-based disruption of jobs is going to happen.

 

The other story is about the commissioning of a new class of Russian icebreaker—targeted at clearing northern ship lanes freed up by the retreat of polar ice with global warming.  The phenomenon is already clear, although the amount of traffic is still small.  The Russians are preparing for the opportunity with multiple classes of new machines planned for release up to 2025.  The Chinese have announced cooperation with the objective of reducing shipping times to Europe by a third.

The US is of course uninterested in consequences of climate change.  The only Coast Guard ice breaker is 40 years old, and they have a hard time getting authorization to get a new one.  The Bering strait, however, could be a shipping lane.

This is a very small example, but climate change affects many things, and as a country we’re trying to avoid finding out about them.

 

The current federal budget is put together for a world where the private sector will take care of everything.  That has always been a fantasy—the efficiency of the private sector comes in large part from its ability to ignore everything not relevant to immediate financial success.  It is particularly false for a world undergoing fundamental change.  We either recognize it and help people through it, or we fall behind and revert to the nightmares of the nineteenth century.

The Great Trump Korean Trade Deal

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As usual we need to put two and two together for these announcements.

  1. The biggest, highest profile provision of the deal is the raised limit on the number of cars each American manufacturer can sell in Korea. However, no American manufacturer has come close to the current limit.
  2. American auto manufacturers have recently made clear how interested they are in foreign markets. The industry’s lobbying group—the  Alliance of Automobile Manufacturers—recently released a report full of fabricated challenges to the idea of climate change in support of a regulatory request for relief from new auto emissions and fuel economy standards.

In other words they’d rather come up with the next SUV—a product niche initially unique to the US—than fight it out in the more competitive international market where such standards hold sway.  (Even the Korean deal actually had to include an exemption from such rules, or we couldn’t sell anything!)

So we have theater instead of economic policy.  Too bad we can’t just export media events.

Political Correctness, False News, and the Attack on Education

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This is a tough time for colleges and universities.  Many of them—particularly the public ones—are being squeezed for money, and they’ve all got to deal with conflicting standards for sexual harassment, trigger warnings, and political polarization of the student body.

And then there’s “political correctness”.  It’s a difficult issue, with arguments on multiple sides, and with something quite sinister lurking in the background.

On one hand there is the classic liberal argument for universal openness.  Constraints on the intellectual environment are bad, because truth can be unpopular.   Furthermore, once you allow constraints you never know who is going to do the deciding.

It’s hard to argue with that position in an ideal world, but the real world makes the situation less clear.

First there is the question of safety or feelings of safety for the student body.   You can’t allow some people to attack others they don’t like, and the only question is how far that prohibition goes.  In the real world, the university must guarantee that every student is safe and valued.  That has to apply to all groups, religious beliefs, and sexual attitudes (liberal, Christian, or anything else).  That’s not a simple criterion to enforce, but universities cannot be faulted for setting such rules.

A second problem is harder.  Today we’re dealing with an environment where not all ideas have an equal chance, as more and more intellectual discourse is bought.  The prime example is the Koch organization, that has plowed hundreds of millions of dollars into institutes that promote their ideas.  Everyday examples are the American Enterprise Institute, the Cato Institute, and the Mercatus Center at George Mason.  People working for these institutes (e.g. Charles Murray) can do legitimate research, but they are paid for reaching correct conclusions, and their ideas are heavily promoted to serve their masters.  This isn’t exactly false news, but any implication of unbiased research is certainly false.

In such cases it is understandable that some students feel that their ideas are being squashed by the power of money—a feeling that is particularly acute in a time of Citizens United and Trump.  But it’s also true that the student intellectual environments are prey to their own fads, with self-righteous acts directed at others. (I personally remember unbridled enthusiasm for Chinese communism and Mao’s little red book.  I also remember reading Simon Leys’ Chinese Shadows, with the comment that Western fascination with Mao was proof of how little anyone really cared about China!)

So there is some justice in decrying political correctness, but that doesn’t mean that student concerns about speakers are wrong.   Any opinions can be expressed (subject to valuing all students), but it also seems that sponsors of a speaker should be required to enforce standards for on-campus speech and also to make clear the nature of the institutions represented.  And it should be part of everyone’s education to understand how intellectual discourse is bought.  With the profusion of institutes and representatives, it’s not simple to keep track of all the Koch tentacles!  Even when the subject is government, people aren’t reminded frequently enough that Pence, Pruitt, and Pompeo are all Koch creations.

However, we have not yet reached the crux of the issue.  Thus far we have treated political correctness as a real issue where there can be legitimate areas of disagreement.   That’s true for some of the discussion, but certainly not all.  You have to go back to the core Koch motivations:  shrink government, shrink controls, and above all shrink taxes.  Colleges are expensive and turn out liberals.  The Koch’s attack on political correctness is actually just a pretext for a full-bore attack on college education overall.  The whole system has to go.

A recent best-seller on Amazon could not be more explicit—“The Case against Education: Why the Education System Is a Waste of Time and Money”.  College education teaches nothing useful, it’s just a game to certify the capabilities of students to potential employers.  It teaches people things they don’t want to learn and will just forget anyway.  In particular nobody needs to know history, because no one is going to get a job as a historian.  Scrap the whole thing, save a fortune, and give people some useful vocational education to get a job!

The author is an academic from a reputable institution, nominally talking about what he as a teacher really thinks needs to be done.   Almost all reviews on Amazon take that at face value.  You have to know that he comes from the Mercatus Institute at George Mason, where Charles Koch sits on the board!

The argument is of course self-serving.  There’s no question about the value of education—both financial and personal—to those who complete it, and also no question about what kind of education people with money will chose for their own children.   The “just a game” story ignores the value of intellectual activity—the real goal of education—and focuses on memorized facts.  In the end the proposal comes down to a two-tiered educational model, where the world is wide open to children whose parents can afford the real thing, but not to the rest.   The Kochs are willing to pay for the basics needed to produce employees and nothing more.  Just like the good old days.

Nonetheless the argument has a scary amount of currency.  Mainstream Republicans are hostile to education in general and college education in particular (but richer ones send their kids to college anyway).  Identity politics and vilification of liberals have convinced some people against their interests to keep their kids from being corrupted by education.   Some state governments (Wisconsin, North Carolina) have deliberately attacked their state universities.  Trump’s State of the Union speech pointedly talked about “vocational education” only.  (A more recent NY Times college education overview is perhaps scariest of all in the amount of Republican rhetoric it swallows whole in its effort to be even-handed.)

We can’t claim all colleges have always paid enough attention to getting their students jobs, but the value of education has been undeniable and increasing.  Further, broad-based college education has always been one of the major strengths of this country, and the rest of the world has learned its value as well.  College at its best prepares students for a world where they will have to adapt continually to changes and opportunities, whatever those might be.  A two-tiered system would be a nightmarish step backward both for students and for the country.

Education is one of the most important battlegrounds where our collective future will be won or lost.

The Budget and the Real World

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It’s worth asking the question—what exactly does all of our military spending do for us with North Korea?  They devote more of their GNP to weapons than we do, but we’re spending on more on military equipment and technology than the next 8 countries combined.  Is it solving the problem?  Would a few more aircraft carriers put us over the top?

How about the other obvious hot spots:   Syria, Afghanistan, even Iran.  Try to find one where aircraft carriers would fix it.

Since that didn’t seem to work let’s try a more general question:  what are the most obvious and successful military threats to America today?

Unfortunately the answer to that one is cyberwarfare:  both direct government action—such as disrupting elections, and private attacks (with government connections)—such as computer virus attacks.  The intelligence community has been explicit about that, since they’ve had to go public to get the administration’s attention.  Won’t get much out of aircraft carriers there either.

What is the major item in Trump’s budget?—traditional military equipment and people, including more aircraft carriers.  That not only dominates the thinking about the military, it dominates the thinking about all international relations, and it wipes out most other priorities in the budget.

As such it is emblematic of an even bigger problem.  We are refusing to understand the actual problems we face, so we end up wasting our resources instead of moving forward.  That’s no small problem; it’s the way nations die.

 

Let’s look at the economy.  Here’s some reality:

– American corporations are doing quite well, with record profits worldwide—driven primarily by America technological pre-eminence.  Newest companies, however, are not labor-intensive.

– The labor market is split.   People with the right skills are doing well, people without such skills find fewer jobs at lower wages.  With growing automation, globalization, and de-unionization, workers are weaker than ever in dealing with management.   The minimum wage has gone down in real terms, so that it is no longer a living wage.

– Education is in crisis.  Most of it is state-funded and the states are still trying to recover from the 2008 crash.  Underfunding has resulted in the student debt crisis and in debasing teaching as a profession.

 

Here’s what are we doing:

– A huge tax cut for corporations, because they supposedly can’t compete worldwide—a conclusion contrary to fact and relying on known deceptive statistics.  And anyone who thinks those new profits will be handed out as gifts to workers should look at history or the rise of the stock market!

– Reduced benefits for anyone who loses a job.  No interest in raising the minimum wage.  Appointment of anti-union judges to the Courts.

– An all-out attack on education.   We can’t waste money on anything but vocational education—the welders (382,730 jobs nationwide) and coal miners (50,000 jobs) from Trump’s State of the Union speech.  This at a time when people need both more specific knowledge and more breadth of knowledge for good jobs with ever-changing technology.   And of course vouchers will privatize education and help break the teachers’ unions—so we can save money there too!

– All-out attack on science, both in influencing government policy and as an independent enterprise.  Scientists removed from consultation roles in the EPA and elsewhere, cuts in government-sponsored research, and new taxes on major research institutions (as compared with tax cuts for businesses).  Climate change cannot be mentioned.

In other words we’re solving a non-existent problem for businesses (with a big present to investors) and at the same time abandoning the population (for both education and support) and denying the importance of the science and technology that have been our success.

 

The rest of the world has learned from us the value of an educated population and of moving forward wherever opportunity lies—but we’ve lost interest in that approach.  Instead we have a new religion of the unencumbered private sector as the solution to all problems!  As noted before, even Adam Smith himself wouldn’t sign up for that one.

This administration likes to talk about putting government on a business footing.  That’s just talk.  Businesses are hungry for facts and solve real problems.  Denying reality is the quickest way to go broke.

That can happen to countries too.

What the New Tax Law Means

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This note is about the effect of the new tax law on the middle class.  While much has been written on this subject, the focus has generally been too narrow to give the full picture.  It is important to get this right.

This note deals with three topics:

  1. Who really wins and loses with the tax cuts.
  2. How the tax cuts affect the economy.
  3. What about the corresponding budget cuts?

Most discussions of the tax law stop with item 1.  That is to put it mildly deceptive—as if the tax cuts were free money we just printed, and we’re only deciding how to divide up the proceeds.   That’s understandable from Republicans, but others shouldn’t let them get away with it.  Items 2 and 3 talk about consequences.  Item 2 affects everyone; item 3 needs to be analyzed to see how it hits the middle class.  However even the discussions of item 1 have understated the situation, so we start there.

  1. Who really wins and loses with the tax cuts.

Most discussions of this topic focus on the new rules for personal tax filing.  This is of course complicated because winners and losers are different in different states and with different levels of income or expenses.   For our purposes we assume that job has been done.  The NY Times has a handy calculator.  In the first year about 75% of payers get a tax cut, 25% pay more.  The median result over the entire population is a tax cut of $380.  By 2027 some cuts expire and virtually everyone pays more.

The first caveat is that this forgets that the federal tax isn’t the only tax paid. The new tax law has two conflicting effects on state taxes.   On one hand the limited deductability of state taxes has made taxation more expensive to the payers in high-tax states.  On the other hand the corresponding federal budget cuts will throw additional social welfare expenses back on the states.  States will have to choose between increased misery and tax increases.  Given the modest size of middle-class tax cuts, it takes little at the state level to negate them.

However the bigger part of the story is that we have left out two major pieces of the tax law.  One is the frequently-discussed new 25% rate on pass-through income.  We know it’s free money if your personal tax rate is higher, but it’s hard to quantify since we don’t know exactly who will use it.  With the armies of accountants hard at work on it, let’s just say that since the 32% tax rate starts at $315,000, you have to be at least borderline rich to cash in.

The remaining piece of the tax law is the huge corporate rate cut—the biggest part of the package.   The issue here is that the effects of corporate cuts have not been put in proper context.  On one hand we have Trump and Mnuchin talking about how the cuts will be worth $4000 for all workers (a number that very few regard as true).  But on the other hand the huge rise in the stock market (even after the recent retreat) is somehow taken out of scope—a benefit to everyone from the Trump presidency.  In fact the stock market rise is the primary rich-taxpayer payoff from the tax plan—and it has been a great deal!

There are several points to be made:

– The corporate tax cuts are a direct tax benefit to rich tax payers.

This is just arithmetic:  cutting corporate taxes increases profits and hence the financial value of what the investors own.   From the beginning, the expectation of tax cuts has been the primary driver of the stock market boom.  Since stock ownership increases dramatically with income (see the chart below), this means that the value of the corporate tax cut is hugely tilted toward the rich.

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It’s worth emphasizing just how skewed this is.  The chart shows 84% of stock is owned by the top 10% of taxpayers, but the top 1% own 40%.

– What about the bonuses to workers?

We’ve had a few public relationship announcements of benefits, but there’s no reason to expect this will represent a significant part of the tax cut effects.  At a qualitative level, one has to believe the stock market—which clearly thinks there will be no substantial loss of profits to wages.  In fact the recent stock decline was caused by the fear of inflation based on statistics showing a 2.9% annual increase in wages.  Shows how likely the business community is to put tax cut benefits into wages!  Even Mnuchin’s improbable $4000 was actually a long-term benefit (i.e. years out) based on estimates of productivity increases from projected new investments.

The link between the corporate tax cuts and investors benefits is immediate and direct.   The link to worker benefits is indirect and historically shaky.   The following unedited statement from a Cisco financial report is an excellent introduction to the real world:

“Because of the law’s corporate tax cut, Cisco plans to repatriate in the current quarter $67 billion parked in foreign banks. The company plans to spend the money on dividends paid to shareholders, stock buybacks and acquisitions.”  (With experience, we can now be even more explicit—thus far in 2018 corporations have spent $171B of tax savings on stock buybacks and $6B on employee bonuses.)

– What about jobs?

In 2004 the Bush administration granted a tax holiday for businesses to return overseas earnings.   Many businesses took advantage of the gift, but none of the promised increase in jobs materialized.  That was actually not surprising, because job increases go with new ventures—and the extra cash doesn’t create those opportunities.

The picture is even more tilted that way today.  The cost of capital has been so low, that it has been simply no impediment to investment.  Any reasonable project is fundable.  The corporate tax decrease, large as it is, doesn’t change that picture.  And even a little bit of inflation counteracts it entirely.

– Will the tax cuts bring international operations of businesses home to the US?

The corporate tax cuts mean that businesses will pay less tax than they used to for their operations in the US, so in that sense there is less disincentive for operations here.  However, the new tax rules mean that going forward businesses will pay NO tax on their operations overseas.  End of subject!

– What about foreign companies putting operations here?

That amounts to subsidizing their operations by our policies here.  Good for them, not so good for us.

– What about the corporate announcements of expansions in the US?

Corporate announcements are a little suspect, because it’s tempting to jump on the bandwagon for public relations reasons.  One obvious example is Apple who announced a $350 billion investment in America over a period of 5 years.  As it turns out Apple’s current annual domestic investment amounts to $275 billion over five years, so we’re down to $75 billion new.  In addition, with the new tax law Apple returned $252 billion from overseas to take advantage of the tax holiday rate of 15%.  That means 38 billion of the $350 went to taxes for a total new investment over 5 years of $37 billion.  Not such a big change and probably still somewhat inflated.

It’s also worth thinking a bit about that $252 billion in overseas saving.  That huge number for overseas assets is a tribute not just to Apple’s overseas business but also to modern accounting practices by which companies attribute profits to subsidiaries in convenient places.  The new tax law—with no tax on overseas operations—creates an even greater incentive for such creative profit shifting.  The new approach was sold as putting US taxes on the same footing as for the Europeans, who also don’t tax foreign profits.   However the Europeans have complex rules to avoid profit shifting, and those rules go far beyond anything in our new law.  So this is another really great deal for the investors!

Conclusion:  The direct financial effects of the new tax law are vastly to the benefit of the rich, and the greatest beneficiaries are the very richest.  In particular, it is incorrect to think of the huge corporate tax cuts as a general stimulus that rains benefits on everyone.  It is a tax present to investors who have shown via the markets that they expect to make out like bandits.  (Since this tax plan was pushed through by ultra-rich investors for their own benefit, the analogy is exact.)

 

  1. How the tax cuts affect the economy.

From the beginning this has been the most obvious concern with the Trump administration’s policies.  As we’ve noted before, the new tax plan is doing a massive, deficit-funded stimulation of an economy at essentially full employment while eliminating all oversight of speculation and other bad behavior.  That is a demonstrated recipe for disaster.  We’re only ten years from the crash of 2008, and we seem to have forgotten that such things really can happen.

The Trump administration is so intent on delivering its gifts to corporations and the ultra-rich that it cannot begin to think about matters of timing.  There is a confluence of evils.  For the Trump people, ignorance of economics and history makes them unaware they are playing with fire.   For the Koch-financed Republican Congress, enthusiasm for the unregulated greed of the nineteenth century makes them blind to the crashes and panics of capitalism in the wild.  From one economist recently: I think we should be very worried.  As a macroeconomic matter, I’m not aware of another example of this—of a country that’s basically at full employment embarking on massive fiscal stimulus.”  And he hasn’t even gotten to the demise of financial oversight!

It is worth thinking a little about other ways the administration’s stated goals could have been achieved.  The average effective corporate rate for the US is not the statutory 35% but more like 24%, which is not so far from the developed-country average estimated at 21%.   Real tax reform would bring the effective and nominal rates in closer line with each other–with the advantage of removing artificial lobbyist-created inequities in the tax plan.   That, with adjustments to assure parity with other countries, would not have broken the bank.

Such a plan would have been in line with the revenue-neutral tax reform achieved with bipartisan support under Reagan in 1986.  It would have allowed the country to address its real and pressing problems (see the next section), it would have minimized inflation and growth of the deficit, and it would have avoided the catastrophic risk just described.

Conclusion:  We need to stop some part of this train wreck waiting to happen.

The tax plan actually shows Trump’s dedication to fighting climate change.  Thus far the only year when carbon dioxide production actually fell was when the world economy collapsed in 2008.   Trump is out to beat that one!

 

  1. What about the corresponding budget cuts?

One way to think about this subject actually comes from Trump’s State of the Union speech.  Towards the end of the economic discussion Trump turned dreamy (“we’re all dreamers!”), stared into the air, and talked about how the new America is the place for young people to start off building their lives.

Like much of Trump’s rhetoric this was a call for people to think back to the good old days of the (idealized) 1950’s and 60’s, the days that Trump wants us to think he is recreating.  We should talk about those good old days, the reality for young people starting off in Trump’s America, and what really ought to be done about it.

First about those good old days:

Employment:  This was an era of strong unions, with corresponding good wages and working conditions.  Companies offered lifetime employment.  Employment was a clear path to a middle-class lifestyle.

Medical care:  Affordable without worrying too much about it.  Coverage built around employment.

Education:   The GI bill had sent people of all kinds to college for the first time.   The state university system in full expansion made college affordable.  Everyone’s kids get a newly-won chance to do anything.

Retirement:  Companies offer full pensions, based on years of lifetime employment.

Infrastructure:  New and enhanced through public spending.  The interstate highway system is a key new achievement.

Environment:  Getting better as we begin to pay attention to it via the newly-formed ecology movement with bipartisan support.

International:  The world had learned that war was a bad idea.  International institutions formed to diffuse it and to prevent another depression.

Overall this was a time of confidence—as long as you weren’t black!  People could feel sure that they knew how to create a life trajectory for personal success and for their children.

 

Let’s revisit those topics now in light of Republican policies in general and the tax cuts in particular.

Employment:  Unions have lost power in most industries.  Globalization and (even more) automation have changed and are continually changing the nature and number of good jobs.  Lifetime employment is rare.  The “Gig economy” has few benefits.  Compensation has a very large range with the minimum wage unchanged for 15 years.  There is a current threat of a new round of job losses from artificial intelligence.  Overall—employment is uncertain and not a guarantee of a middle-class lifestyle.  And if you lose your job you lose everything.

Republican policy>> The administration is actively hostile to unions and to regulation of working conditions.  For other issues Trump has pegged everything to his stimulus of the economy and his renegotiating of the trade agreements.  That resolves few of the problems just mentioned.  In the State of the Union speech Trump talked about retraining, but thus far has announced only cuts to existing training programs.  There’s no room in the budget for government-funded jobs programs, including especially infrastructure (discussed later).  Hostility toward government-funded research is a bad sign for the future.

Medical care:   Medical care has become a huge part of national spending and a major worry to most people.   Prior to Obamacare there were 500,000 medical bankruptcies per year in the US, most for people who thought they had insurance.   Obamacare was a first step to move beyond an expensive, dishonest, inequitable, and incomplete non-system.  Obamacare was of course financed with a surtax on higher incomes that has been a primary Republican target.   Obamacare isn’t dead, but Trump has tried to kill it through a number of measures to raise its cost and create uncertainty about its operation.

>> Republicans have tried for years to get out of the healthcare business.  Trump’s healthcare promises made them create proposals, but none were serious.   The first two killed the surtax directly, and the third pushed responsibilities to the states with diminishing federal funding.    The recent Medicaid waiver action allows states to cut medical services, since that improves the recipients’ lives by making them more self-reliant!

The tax bill removes the Obamacare healthcare mandate, which undermines the insurance pools and increases costs for those remaining.  Further Paul Ryan has announced that the tax bill deficit means going after Medicare.  Trump recently acknowledged the opioid crisis, but provided no funding to do anything about it.

Education:  State financing of education has never recovered from the 2008 recession.  One consequence is the college student debt crisis, and state funding of K-12 education is also down.

>> In a reasonable world the federal government would act to support the financially-strapped, state-based education system.  Instead, with the rising state social service burden, the tax plan puts the states under even more stress.

The Republican party has turned alarmingly anti-education—for the public system.  Trump’s State of the Union speech mentioned only “vocational education” as an issue, and there have been calls not to waste taxpayer money on anything else.  There’s nothing wrong with vocational education, but it’s not the whole picture, and there’s no indication that public officials are choosing exclusively that for their own children.  Further, Trump’s budget proposal takes money away from public schools to kick-start the DeVos voucher system—with educational quality sold to the highest bidder.

The tax bill has no money to fix the student debt crisis, but it goes out of its way to provide a new tax deduction for private school tuition payments!  We are in danger of losing the legacy of the GI bill to a new notion of “good enough” for the public system. This is bad both for individuals and for the country overall.   Other countries have now long recognized what we used to know—broad-based educational success drives prosperity.  Our once-best upward mobility made us what we are.

Retirement:  Companies don’t do it anymore.  Most soon-to-be retirees have little savings.

>> The tax bill deficit means Social Security is under siege from House Republicans.

It should be noted that Social Security is not actually bankrupt—it has enough current income to pay ¾ of benefits from income.   Its big problem is that with growing inequality, less and less of income is taxed to support it.  No one is fixing that problem.

Infrastructure:  Problems have been well-documented and were acknowledged by both candidates in the election.

>> From the State of the Union speech, Trump expects the states and the private sector to foot most of the bill for infrastructure.   States have no money, as noted earlier.  Private sector financing is historically limited and only goes where there’s money. Infrastructure work has the potential to help with both employment and competitiveness, but there is nothing left in the budget to make it happen.

Environment:  Technological change and lobbyist spending means that it is always tough to be one step ahead of industry.

>> The administration views all environmental regulation as the enemy.  The withdrawal from the Paris Climate Accords is part of that picture.  The EPA is a prime target of budget cuts.

International:  This is a period of growing interdependence but with increasing sources of instability.  The US used to lead in establishing order, and it profited from that role.   We have now abandoned that and are increasingly threatening unilateral military action.

>> The tax plan budget has extreme cuts to the State Department together with a large increase in spending for traditional military hardware.  The change of emphasis is unnerving, and the military part eats up a large part of the budget after tax cuts.   One also can’t discount the real risk of conflict.

Conclusion:  The result of all this is how insecure life has become for many American families.  Employment has become riskier, government support has not evolved to help, and fundamental services such as education, healthcare, and infrastructure can no longer be counted on.  The new tax law makes all of that worse, because of specific policies (education, healthcare) and because there’s just no money left (infrastructure).   The government has been put out of the running to address the problems we actually have.

 

In final conclusion, we can sum it all up by saying this is a tax plan for a two-tiered American society, where the very rich are secure in their status and their ability to pass it on to their children—and the rest of us are performing without a net.  Middle class opportunities are there but shrinking, and it’s easy to fall out.  It’s hard not to think about the symbolism in the State of the Union address pagentry, where a crowd of overwhelmingly rich and overwhelmingly white people cheered wildly for the few others who were brought in to do the job of making them richer.

The State of Our Future

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After the many other commentaries on Trump’s State of the Union speech, there are two reasons for this one:

  1. Trump seems to have gotten away with more than he should have.
  2. We seem to understate the magnitude of the danger.

On the first point it seems that Trump has pulled a truly remarkable sleight of hand.  The whole first part of the speech was about economic success.  He cited record low unemployment numbers as proof that his program was working and that the tax cuts would bring success.  To some extent this was the kind of distortion of reality we’ve come to expect, since Trump’s own job creation numbers were actually below all of Obama’s last five years.  What’s really shocking though is that he seems to have succeeded in using the ongoing mainstream world-wide recovery as a validation for the radically different and dangerous economics embodied in his tax plan!

Presidents generally can’t do much to change the economic situation in a first year, just because the ship is too big to turn around.   The numbers in the following job creation chart show just that for Trump.

job_creation

You can give the Republicans points for creative packaging of the results, but nothing more. (Today’s January statistics show more of the same.) That’s not surprising, since on economic policy Trump’s fights with Congress left him unable to enact much of anything before the tax cuts.  And the stock market had its own reasons for upswing—it has been overhanging the tax cuts all year, and that money will be going straight into profits.

By contrast, one cannot overstate the dangers posed by Trump’s economic plan.   We are doing a massive, deficit-funded stimulation of an economy at essentially full employment while eliminating all oversight of speculation and other bad behavior.  Economists expect that cannot end well.  It is at the least inflationary and likely worse.  The giddiness is beyond the level that gave us the 2008 crash, and this time there’s no guarantee that the people managing the crisis will remember the lessons of the 1930’s.  This is not a natural disaster or other unforeseeable event.  We are choosing to do this.

One revealing point: in his speech Trump boasted of the current strength of the American economy and talked about the urgent need to cut business taxes in order to make American companies competitive.  Say what you will, that doesn’t add up.  There’s a good reason why American companies are doing ok—in the aggregate they aren’t paying those high tax rates because of all the loopholes and other special provisions engineered by decades of lobbyists.  Real tax reform would have eliminated the loopholes, made the tax code more equitable, and paid for much of the rate reduction.   We didn’t do that; instead we just delivered a gift to companies and investors.  And we’re so excited about the gift that we can’t be bothered to look at consequences.

At this point in the business cycle we should be using our resources to make the country stronger.  Trump himself mentioned some of the problem areas that need focus:  the opioid crisis, infrastructure, job training (his first acknowledgement that business profits won’t help everyone).  All of those take money, and Trump’s speech said very little about that part.  The current Trump opioid plan is an unfunded joke.

This country and the rest of the world have come back from the 2008 crash to the point where we now have money to invest in infrastructure and people—including Trump supporters—and instead we’re giving it away and borrowing more to solve a problem that we don’t currently have.  That stimulus would have been handy five years ago; now it is a lost opportunity as well as an invitation to inflation (which certainly costs jobs) and another crash.

 

The economy, however, is only one of the danger areas mentioned at the beginning.  In an earlier note on policy risks we listed four areas of concern:  the economy, war, Russia, and climate change.  Trump’s State of the Union speech was worrisome in the other three areas as well.

War:  Trump spent a considerable portion of the last half-hour talking about North Korea.  This included two different sets of invited guests (the parents of murdered Otto Warmbier and the injured Christian defector Ji Seong-ho) to underscore his message of evil.  He blamed his predecessors for the North Korean problem, but presented nothing at all to show what he intended to do about it.  That omission made the episode eerie, particularly when we learned just before the speech that the administration ended the nomination process of a proposed ambassador to South Korea when the person expressed uneasiness about plans for “bloody nose” limited military actions.  Some commentators worried about preparation for war.

Russia:  Here the problem was not what was said but what wasn’t.   Russia was simply absent as a major concern.   In all the repeated military chest-beating there was no acknowledgement of past Russian behavior as a current threat.  The Russian regime has demonstrated its ability and willingness to penetrate public and private data networks including the NSA.  And Russians (inside and outside the state) are a major source of viruses as a kind of private cyberwarfare.  As a threat Russian cyberwarfare ranks with North Korea, but somehow it gets a pass.  (This recent article finally shows some concern in the press.)

Climate change:  Trump’s speech was a frontal attack on the whole idea of climate change.  He began with a list of natural disasters the country had overcome—including hurricane Harvey and the wildfires in California.  All his examples were cases that had been linked to climate change, and his mentioning them without comment showed how politically confident he felt in his climate denial.  He then went on to gloat about his (questionable) successes in pushing the energy sector and “clean coal” in particular.   For climate change there are many valiant efforts to work around Trump, but we should not believe that US behavior doesn’t matter.  International unanimity on climate change is crucial to stop cheating, and we—with probably the most to gain from the process—are the cheaters in chief.

 

Many people, including TV commentators, tend to discount State of the Union speeches as political hullabaloo without real consequences.   This one was more than that.   Not because Trump announced anything really new, but because it confirmed the crazy and dangerous path where he the “genius” is taking us.

As we’ve said before—people easily forget what happened with the last set of geniuses under George W. Bush.   We barely avoided catastrophe that time.   This time we have ample evidence that it will be worse.

As a country we have had many years of stability, so we tend to think somehow things will just work out.  In practice that means we try to normalize the craziness around us.  But we are abandoning peace and prosperity to follow lies and fantasy.  And once again, unless we change course, there will be hell to pay.

Finding Reality

pew-studyThis item grows out of a recent study noting that in the US today few people have friends on the other side of the ideological fence.

It’s easy to imagine how that happens—there are just too many subjects to avoid!   That raises the question of why all those topics are taboo.   There are many reasons, but we deal here with one specific problem:  distinguishing real issues from pretexts.

The problem is that while there are plenty of real policy issues where debate should be possible, they tend to be mixed-in with taboo topics where the policy positions are actually donor’s self-interested pretexts (“climate change is a discredited hoax”).  Public debates can be (and often are) staged to discuss issues in the taboo category, but they never get very far.  There’s not much to be discussed when the stated policy is not the point.

It’s not necessarily easy to figure out what’s real, and undoubtedly many people will disagree with the examples here.   However the idea is to focus on a few issue areas where we as a country ought to be able to make progress if we can keep track of what is real and what isn’t.

We put issues in two categories:  non-issues and real issues.  Non-issues are issues only if donors (or other political considerations) force them to be.    We owe it to the country to get past them.  Real issues are the significant questions we need to solve.

 

  1. Climate change

As just noted, climate change is a poster child for pretexts.  There is of course one primary reason this whole subject is partisan, and his name is Charles Koch.  In addition to the false hoax claim, there is a continually-morphing litany of other misrepresentations.  It used to be easier to be a skeptic.  By now more than enough is known, so that ordinary risk analysis says the time has come to get serious.

Non-issues

Climate change is real.

Burning of fossil fuels is causing it.

The people working on it are not political hacks, but dedicated scientists faced with a hard problem.

Real issues

Risk assessment and what needs to happen now.  Steps and timing.

Roles of government and the private sector, e.g. supporting the power companies.

How research, particularly energy research, can best support the private sector.

What infrastructure changes will be needed and when?  Where will the jobs go?

Coordinating the whole effort.

It is worth pointing out that there are plenty of good, multi-year working-class jobs involved in dealing with climate change.

 

  1. Environmental policy and the EPA

What is frustrating about this topic is the extent to which the whole discussion of environmental regulation has gone on without specifics.   Is it really possible to believe that all environmental regulation is bad?  Even after the Flint disaster?  It is not viable to have environmental regulation whipsawed back and forth between administrations.

Non-issues

Not all environmental regulation is bad.

Not all environmental regulation is bad for business.

Real issues

Agreed-upon standards for regulation.  Work from the current list of Trump administration actions and responses.   Criteria to avoid overreach by all sides.

What is an appropriate process to assure that both the public interest and businesses have a say?

Should there be compensation for consequences of new rules?

 

  1. Healthcare

Now that all the repeal and replace nightmares are out of our system, we really ought to be able to do something good about healthcare.   This isn’t rocket science.   Every other prosperous country has come up with something that works.

Non-issues

Obamacare works well enough to be a starting point.  Sabotaging it helps no one.

The country needs a nationwide solution.  Uniform treatment for all people is good.

Single-payer systems are used by most of the world and may have a role to play.

Real issues

Availability of plans

Cost of plans

Assuring participation and coverage

Addressing needs of businesses

Getting religion out of the debate

Controlling costs of the program

 

  1. Jobs

Thus far the whole treatment of jobs has been based on campaign slogans.  The current tax cut plan is a case in point.   The millions of affected people deserve better.

Non-issues

Decline of good, low-skill working class jobs.

Decline in workforce participation.

Decline of upward mobility in the US.

No silver bullet.

Real issues

What is and isn’t cured by growth.

Workable options for tariffs, subsidies, or other government actions on trade.

Long-standing issues with wage growth and inequality.

Role of education.

Role of government as an employer (e.g. infrastructure, climate projects).

Budget impact and tax plans.

Geographic coverage.

Protecting the next generation.

 

It would be nice to believe that the country is now ready to get down to work.   On real issues some level of bipartisan cooperation could even be the norm.