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.

Open for Business at Davos

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Welcome to the United States.   We’re a great place to do business.

In America you come first!  Just look at what we’ve got:

  • Powerless unions.
  • No stupid rules for working conditions.
  • Do what you want to the environment.
  • Hire and fire as you please.
  • Healthcare plans optional.
  • Employers win all legal challenges.
  • Play states against each other for gifts.
  • Lowest taxes anywhere—the “locals” are not your problem!

You may have lost your colonies, but now there is the new America:

The land where you don’t have to care!

Why Isn’t the Tax Cut Bipartisan?

In previous posts we’ve talked about possibilities for bipartisan cooperation on the federal budget and the tax plan.   There were obvious possibilities for that to happen.   The biggest cuts after all are to the corporate income tax, and Obama already discussed his interest in that in the 2015 State of the Union.  Other Democrats talked to Trump about bipartisan options prior to the announcement of the tax plan.

Why didn’t that happen?  Let’s look at the primary provisions.

  1. The Corporate Tax Cut

First of all, as many have mentioned, the average effective corporate rate in the US is not 35% but more like 24%, which is not so far from the international average.   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 break the bank.  It would help the country and could have bipartisan support.

We have instead chosen to close few loopholes, insist on a nominal 20% corporate tax rate, and incur a massive revenue shortfall.  That choice gives us the deficit as well as the middle-class tax increases.  The connection to jobs is weak at best, so most of this additional corporate saving going to investors.   Since it isn’t a matter of competitive parity—why are we doing it?

  1. The Pass-Through tax cut

The stated target of this tax cut was small business, but in fact few small businesses would be helped.   Further, as was recognized early, this tax cut opens opportunities for wealthy people to avoid personal tax rates.   The current form of the tax cut has rules that attempt to limit that.  However many loopholes remain, and the rules are strangely targeted.   Manufacturing and real estate can benefit, but not services.

Since most of this money is going to people who can exploit the loopholes—not to the stated targets—why are we doing it?

  1. The Estate Tax cut

This is of course the most problematical of all.   Only rich people with estates over $10 million are involved, and the benefit increases with wealth.  It is worth emphasizing that we don’t just raise the tax-free limit, we completely abolish it and with no unpaid capital gains taxes on the heirs!

As to why we’re doing it, the explanation is the most transparent of self-serving nonsense—“making rich people richer is good for everyone”.

 

These tax cuts are not bipartisan, because their logic has nothing to do with the welfare of the country.   Donors are complaining they haven’t gotten what they paid for, so it’s time to get the job done.  Bipartisanship is not on the agenda.   These tax cuts are delivered as ordered.

It is important to recognize that there is nothing mysterious about the small, ultra-rich donor community (with the Koch organization as primary mover channeling money from others) and also nothing ambiguous about their demands—both money and power.  You might even argue—though it’s a stretch—that perhaps the stock market is rising not on business prospects, but on all that extra money the ultra-rich donors will have to invest somewhere!

And there’s another twist to this too.   Trump and the Koch brothers have much the same motives, but Trump is the President after all.  How can he get away with a tax program that has been precisely engineered for his own benefit?

Trump was born for this job.   He actually believes that whatever is good for him personally is by definition the best possible thing for the country.

So we are left with a philosophical quandary.   Is a crook who uses his office to pocket more than a billion dollars from the country excused if he is too self-intoxicated to realize what he’s doing?

 

 

This is it!

This is it!  Finally it’s here.

After six years of holding the country hostage (no question now about the meaning of “party of no”)—

After thousands of Fox News stories full of arrogant and nasty liberals—

After untold campaign contributions—

We finally have what we’ve waited for.   The dearly-bought gift—the tax cut, our tax cut has arrived in Congress!

 

Think about what we’ve done to get here.  First some of the ground work:

– Republican Supreme Court justices Roberts, Thomas, Alito, Gorsuch.

– Citizen’s United—liberating our money as protected free speech.

– The unprecedented Koch organization—funded by billionaires and with a staff of 1600 and billion-dollar budgets to control state and federal legislatures.

– A full complement of Koch people (e.g. Pence, Pruitt) in Trump’s government.

 

Then our messaging with Fox News and Rupert Murdoch leading the way:

– First one fabulous job of divide and conquer.  We’ve made “liberals” even more detestable than “welfare queens”.   What a line we’ve got: “They’re laughing at us and think we’re stupid.   They’re stealing our jobs and our money.  Can’t believe a word they say.  Our team will bash their heads in when we win!”  We’ve even got real liberals apologizing for our stereotypes!  And then there’s racism…

– Next the subtler part—governments can do nothing, everything they offer is either worthless or for someone else.  There’s quite a list of things governments can’t do:  education, social services, medical care, even police (we just need “good people with guns”).  Funny thing about all those wastes of taxpayer money—they’re things we’re already doing for ourselves.

– Finally a bit of warm and fuzzy nonsense.  Jobs are gifts from corporations and rich people.   Make us rich and we’ll take care of you!

Sounds like a tax plan.

 

And look now at what we’ve got.  Let’s count the tax cuts:

– Estate tax.  Only helps families with at least $10 M to pass on.  Worth $1 B for Trump himself.   Just for us.

– Tax rates.  The top bracket is down to 35%, but that’s just the beginning.  We’ll really get 25% with the new passthrough loophole (our lawyers will certainly take care of any fine print).

– Corporate tax rates.   We’ve got the clout to get most of this as dividends or stock repurchases.

– Deficits.   That’s a particularly good one.   Those nonsensical growth predictions are just one more piece of the pie.  The deficits will mean cuts in services and correspondingly lower taxes going forward!

It’s actually marvelous how this has worked out.   We’ve got a tax cut before there’s even a real budget!  Exactly the way the world should be.

 

Where is all this going?  Funny you should ask.   There’s an article in today’s NY Times talking about it.   It seems Mexico is actually doing something right.   They’re not wasting money on parasites.   People like us live in walled communities with their own security and service.  Some of it they pay for, and the state does the rest. And they pay practically no taxes!  The world as God created it!

 

The tax cut has come.   We are saved.

Living with the Dark Side

There has been a lot of talk recently about possible Democratic cooperation with Trump.   There is of course little basis to that yet, but it is interesting how quickly we’ve gone from hoping the Republican Party would save us from Trump to the other way around!  With that as motivation it is worth thinking a little more about the players and issues in this game.

First about the choice of evils:

On one hand we have the Republican Party:

– This has become largely a Koch brothers organization.  Low taxes for the very rich is the only real objective.

– Opposed to all social programs (no accident they couldn’t do healthcare).

– Pro-business, but perhaps not completely nuts on economic issues.

– Can find individuals to work with.

On the other hand we have Trump, with two sometimes contradictory impulses:

  1.  Sees everything as though he were still managing his own businesses

– Cut taxes on businesses and rich people

– No interest in unemployed people or other “losers”

– All regulations are bad; anything of value happens in the private sector

  1.  Sold himself as a “populist” and wants to believe he is delivering on it

– Primary focus is jobs via tax cuts and tariffs.  Not much has actually happened.

– Support for coal miners, abandonment of Paris Agreement, killing DACA

– Not much else yet; AHCA would not have been a winner

The business side of Trump is only subtly different from the Koch brothers agenda, and separating Trump’s two sides is tricky.  His speech on exiting the Paris Agreements was all about the populist side, but everything behind it was driven by Koch brothers people (Pruitt, Pence).  Similarly, AHCA was nominally populist, but really an excuse to cut taxes for rich people.

Thus far Trump hasn’t done much for the populist side, but he keeps talking about it.   That’s actually what has thus far stopped healthcare.  Republicans spent six years repealing ACA with no worries about who would lose coverage–but that became an obvious issue now.  Even though Trump supports AHCA, it’s not so easy for Congress just to laugh off the coverage.

Ideally that is an opening to find Democratic proposals of obvious benefit to Trump’s core constituency that are somehow salable to Trump.  We have to accept these will only get mileage if they are presented as Trump’s initiatives.  If it all fails, that will at least point out the hypocrisy of the populism.

There are some obvious possibilities:

  1. Healthcare

Anything here is conditional on Republicans really giving up on the AHCA nightmare. If that happens Trump will need something.  That could conceivably be whatever comes out of the bipartisan work on ACA, but Trump may want something really different to put his name on.

It should be pointed that this is not just an issue for the Trump core.  Business needs it too, even more than the tax cut if you if you believe Warren Buffett.  A good solution here could incorporate elements of a single payer system into a public option based on Medicare.  For that it is important to realize that the existing Medicare infrastructure is actually administrated by the private sector.

This is a low probability, but you never know–he might bite if it really does save money for business.

  1. Infrastructure

Trump has said he wants to do this, but a pure private sector approach won’t work for poor areas.  Appalachia is not going to benefit without some kind of compromise approach.

  1. Transitional job assistance (retraining and support)

Thus far Trump has put all his eggs in the “growth = jobs” basket.  His target budget killed any assistance programs, including a successful one in Appalachia.   However, it is now clear things are going to take longer than he expected.  If this is viewed as transitional, we may actually be able to help people.

  1. Early childhood education; cost of college

All polls I’ve seen of Trump’s base say that they want something better for their children.  Paul Ryan Republicans have been disastrous for such programs.  These would be clear benefits for the working class.

  1. Tax reform

Trump likes to talk about reducing the current 35% corporate income tax.   However, the average effective rate is more like 24 %, in large part because of special provisions delivered by lobbyists for particular corporations.  A lot of Trump support is from small businesses who aren’t so lucky.   A fair system may not appeal to Paul Ryan, but there is more reason for it to appeal to Trump.   No one is supporting 15%, but 25% with real tax reform would not break the bank and would recall an achievement under Reagan.

  1. Promoting American jobs

Trump has made high tariffs the miracle solution to all problems for everyone.   That’s not true, but it doesn’t mean there is nothing sensible to do.   Trump probably doesn’t know anything else.   We may be able to help.  This is not the Republicans’ area of expertise.

  1. Climate Change

This is so crazy it’s hard to give up, even if it means fighting the Koch brothers directly. There’s both a carrot and a stick involved here, with recent developments for both:

– Harvey is the most recent example of what worsening weather can mean.  As noted in the previous post, no reasonable business faced with such a large potential risk would choose just to ignore it.

– The reality of climate change will create enormous business opportunities—wholesale migration to electric cars is just one.  With current policies we could very well cede all that to the Chinese.  This would not be the only time that a first mover like Tesla would lose out in the end.

In all these areas, in contrast to the Republican healthcare fiasco, Democrats should be able to offer real proposals.  So you never know….

Minding the Store

It has been a long time since there was someone interested in governing the United States of America.  For now we are specializing in promotional stunts (essentially all of foreign policy) or deliveries to electoral constituencies (climate change, ACA repeal, white supremacist racism).

Now that we can have no delusions about what Trump represents (pardoning Arpaio was a last straw), the country is in dire need of a way to get through the next 3 ½ years.

So it is worth remembering that there is actually a group in government trying to do something positive for the country.  That is the bipartisan group of senators working to fix problems with Obamacare (e.g. number of plans offered).  Not only is that a laudable activity for itself (whether or not the results get quashed), but it makes you think about other things a bipartisan group could do.   Here is one short list.

– Supreme Court nominees

At this point you don’t have to be a Democrat to recognize that democracy in this country is under threat.  We need to decide that a next Supreme Court justice cannot use the war powers clause or anything else to promote legal tyranny.  That applies to the role of Congress, to delaying or otherwise manipulating elections, and to Presidential pardons.

– Jobs program subsidies

During the election both candidates spoke about a government role in promoting employment in under-served areas (Appalachia, inner cities, etc.).  More recently, Republicans have promoted a deal with Foxcomm that was very heavily subsidized by the state of Wisconsin.

This needs to be a federal program because not all states can do it themselves, because it needs to be planned at a national level, and because a federal program could reduce the leverage employers have in playing off states against each other.

– Infrastructure

This is another area promoted by both candidates in the election.  There are of course significant differences in approach.  But it seems that issues such as selection of projects, rules and roles for private investment, and protection against corruption can be solved if there is a will to do it.

– Taxes

This a controversial area, and Trump’s so-called tax reform is not helpful.   But there is agreement on at least a couple of points:

  1. Real tax reform means eliminating the current maze of special gifts to create a more equitable system and a correspondingly lower basic tax rate. That kind of reform was achieved as a bipartisan effort under Reagan.   It has little to do with proposals currently on the table, but that doesn’t mean it can’t be done.
  2. As part of that effort, there is agreement that the basic corporate tax rate is too high. So that seems a good place to start–when accompanied by item #1.

– Education

Education is one of the most important services provided by government.  Even if De Vos vouchers turn out to be off-limits, there are at least two areas where bipartisan work is possible:

  1. The student loan crisis is a huge burden on a whole generation. This is not because students have suddenly become wasteful in their habits, but because costs of college have risen rapidly even in state institutions.  Government needs to help out.
  2. Government needs to help students and states to navigate the costs and benefits of educational programs. This is not just a matter of fraudulent institutions and sweetheart deals to vendors (although there is plenty of that).   Students need the information to choose for their futures.  And we as a country need to decide what equality of opportunity means for the cost of college.

– Foreign Policy

The only foreign policy we currently have is a disdain for employees of the State Department and a desire to exploit foreign issues for chest-beating electoral gestures.  It is tough to do foreign policy by committee, but we don’t really have a choice.

 

This is by no means a complete list, but we have to recognize that government is in crisis and needs a bipartisan effort even to mind the store.

Limits of Charlottesville

However depressing Trump’s Charlottesville comments may be, we should not delude ourselves into believing that Trump will be defeated by any matter of principle.

The current situation recalls the uproar over the video with Trump’s lewd comments on women—an uproar that dissipated to nothing.  It remains to be seen how long the new level of outrage will last.  We can’t dismiss Nazism, but we won’t win on outrage either.  We will get nothing but backlash if perceived bread-and-butter issues are left unaddressed.

The main issue has to be the economy–jobs and prosperity–where many myths are still widely-believed.

Too many people believe that giving businesses everything they want is the path to prosperity.  That is historically false and will come back to haunt us:

– The prosperity of this country cannot possibly be based on protected industries making stuff others make cheaper.   Tariffs are no silver bullet to bring back the days of good, union jobs.

– Education and research are primary engines of prosperity.   They are what supports our standard of living and cannot be treated as money stolen from the private sector.

– We are living in a period of extraordinary technology change.   That is altering the nature of work and affects increasingly many people.  It creates twin problems—preparing our population for success and helping people left behind.   Neither will be magically provided by the private sector alone.

Trump’s policies will defeat us as a country and impoverish us as individuals.  One entry got it right in the NY Times’ list of write-in slogans for the Democratic Party:

“Justice, Compassion and Jobs!”

It speaks to the core values and, in the end, it’s the economy, stupid!

(Wynn Schwartz, Boston)

Sacrifices to the Gods of Jobs

Since the election there has been a continuing focus on the “Trump core voters”–people whose standard of living plummeted after the loss of good unionized industrial jobs.

During the campaign Trump’s story was that the jobs were lost to unfair trade practices, and that the cures were tariffs, deportations of immigrants, and abandoning NAFTA.  In the months since Trump assumed office, his emphasis has shifted.  China is our friend, the NAFTA discussion is on hold, and all the stress is on prosperity to be created through a huge tax cut for the rich.

Few economists believed the first story (most put the emphasis on technology change), and even fewer believe the second.  All of that, however, makes it even more important to understand what is actually going on.

The message here is that the problems of the “Trump core” are not isolated, but emblematic of fundamental trends in American society.   And Trump’s currently-proposed cure is more a problem than a solution.

 

We begin by referencing a recent article which points out how the problems of the Trump core voters fit squarely within the context of the decline of the middle class.

There is in fact no mystery about what is going on.  US society has been changing in fundamental ways, and those changes include a number of separate trends:

– The Trump core voter issues

– Underfunding of education, including a huge rise in the cost of college

– Infrastructure decay

– Decline of the middle class

– Vast increase in wealth inequality by any measure

– The Tea Party and Donald Trump

Briefly stated, the country is losing the public infrastructure necessary to maintain the middle class.  That trend is fundamentally tied up with wealth inequality, and in fact there is feedback that is accelerating both the inequality and the middle class decline.  Part of the problem is familiar “trickle-down economics”—the historically false idea that giveaways to the rich produce jobs—but the current version of it has reached a stage where it threatens the country as we know it.

To see that we go through the items one-by-one:

  1. Trump core voter issues

In any analysis of the problems of Trump core voters, the interrelated factors of globalization, technological change, and deunionization all play a role.  Industry world-wide (even in China) has moved up the technology curve, and good jobs demand more education and skills.  Workers without such skills are at the bottom of the heap:  competing for scarce jobs with no leverage and without union support.

This is not the first time that the US has experienced such transitions—think of textiles in New England.   Such dislocations are hard and can take time.  It is the role of government to provide support, retraining, and incentives to reestablish the economic base.  Education in particular is critical, both for the job-seekers and perhaps even more for their children.  In the current environment there has been little money or appetite for any of that.

The Trump budget in fact cuts essentially all such support in favor of nothing but more “tickle-down”—cut taxes on the rich and everything will be great.

  1. Education

The problems with education, however, go beyond the Trump core voters.   In the current economy (as just discussed), education is the key for most people to join the middle class, and we are making that harder than ever.   Many states have cut back on education budgets across the board.

The most obvious example, though, is the huge rise in college debt coming from rising tuition even at public colleges.  Even though college is for most people a prerequisite to a good job, we are making that a tough gate to get through.  As a society we have effectively abandoned our commitment to free public education.  And if there is any single thing that is important in “making our country great” it is education.

  1. Infrastructure decay

Like education, this is an example of refusal to fund the public good.  In the Presidential campaign both Trump and Clinton raised infrastructure repairs as an issue.  Further, since infrastructure work is personnel intensive, it can be a means of dealing with the transition issues discussed for Trump voters.  However, really doing something means significant money must be spent.

Despite Trump’s pronouncements on the role of the private sector, there is no way to make this happen without government spending, and it remains to be seen if there is a will to do it.   (Trump’s budget has seed money for privatizing bridges and airports, but the program is far from clear.  There’s no guaranteeing what will get done, and the opportunities for corruption are very large.)

Moreover for the middle class, infrastructure isn’t limited to just roads and airports.   There are many factors, including such basics as healthcare and childcare, which have a role in the viability of the middle class.  There is currently little support for any of it.

  1. Decline of the middle class

The previous points described some of what has been lost for the middle class.   And statistics show the result.   It has become harder to get in (and even those that do can have crushing debt), and harder to stay in if anything goes wrong.  Far fewer people now think their children will make out better than they did.

We also have examples of pending Trump administration programs that will make matters worse.  Healthcare, judging from the House bill, will become more uncertain and expensive, particularly if you are elderly or have pre-existing conditions.   For education, DeVos has already made things worse for student debt, and her voucher program will deliver for a payoff for people who already have kids in private schools, but has no commitment to delivering quality education for all.

All told pretty grim.

  1. The role of inequality

To start with, it is important to recognize how drastically things have changed in this country—for example from 1980 to 2014 incomes of the top 1% have tripled in real dollars, but incomes of the bottom 50% were unchanged.  And the effect actually was more pronounced the higher up the ladder you go–the increases for the top .01% were significantly greater than for the top 1 %.

As usual more money buys more power, and we’ve now reached the stage where even individuals (super-rich ones like the Koch brothers, Robert Mercer, Betsy DeVos) can dictate public policy.   That effect was enhanced by the Citizen’s United decision, since they now have unlimited ability to affect elections.   Overall–more money drives legislation favorable to the elites, which in turn makes them ever richer and more powerful.

There have been two primary parts to their message:

– Opposition to government social welfare programs of any kind (“governments can do nothing”).

– Pressure for tax cuts for the wealthy (“we are the job creators”).

The first attacks low and middle class programs (even education)—which they don’t want to pay for.  (Robert Mercer, one of Trump’s primary backers, famously said that people on welfare are worth less than cats.)  The second drives increasing inequality—more and more wealth and power for the elites (i.e. Trump and his cabinet).

  1. The Tea Party and Donald Trump

Ordinary “trickle-down” economics has always offered a historically false promise—cut taxes on the rich, and things will get better.

With the Tea Party and Trump we seem to have gone one step further.  Great sums of money have gone into promoting the idea that since jobs come from the private sector, the only way to have jobs is to let the private sector do everything it wants.  Jobs are gifts from the “job creators.”  Getting more jobs means doing everything possible to keep the job creators happy.  Government can only get in the way.  The recipe for more jobs is tax cuts for the job creators (corporate and personal) and elimination of programs that might disturb them (or take money they might otherwise get).  We must keep up the sacrifices to the jealous gods of jobs.

That message runs counter to both logic and history.  Corporations don’t hire people because they are happy or grateful; that would be incompetent and bad business.   They hire based on growth opportunities and in locations that suit their purposes.  And government has a lot to say about conditions for growth and how people will actually benefit.  It is precisely the elements of the public good—education, infrastructure, research—that create the environment that makes for our success, both as a country and as individuals.  The economic successes of Silicon Valley and the current centers of biotech didn’t come from their being the cheapest and most docile places to do business. Historically, overall economic performance under Democratic administrations has actually been significantly better than for Republican ones by essentially all measures.

Nonetheless, the simplicity of the message has led to its overwhelming success.   It has become so powerful, that when it fails we only get more of the same.   We have now been through several cycles of:

Tax cuts for the rich and reduced funding for social programs =>

Reduced support for middle class people to succeed =>

Fewer people in good jobs =>

Even more tax cuts for the rich and cuts to programs

That is basically how we got from the Tea Party to Trump.  The Republican Congress tried desperately to repeal the Obamacare surtax and blocked all attempts at social welfare legislation—including initiatives for early childhood education and community college support.  That paid off with Trump elected on a spurious jobs platform that has translated in the budget to extreme tax cuts for the rich and even more drastic cuts to all services.

The “jobs are gifts” fiction has now reached the level of religious fervor:  we must be ready to sacrifice all (environment, education, minimum wage) to the corporate “job creators” so that they will grant us jobs.  Trump’s budget effectively does just that.

“jobs are gifts” is like quicksand—you can’t get out.  We can’t stop the decline of the middle class, because if we stop giving to the rich they’ll take our jobs away.  So we continue to spiral down to a two-tiered society with a growing gap and little in between.

As always with “trickle-down” economics, the sacrifices are real but the promises are not.  There is no cornucopia of good jobs coming to the “Trump voters” or others looking for middle class income without education or skills.  Nothing in Trump’s budget will fix mismatches of jobs and skills, but the tax cuts are real money.

In fact with the specifics of Trump’s tax plan, things look decidedly bleak.  With huge deficit spending at this stage of the business cycle we are inviting another crash on the order of 2008 or worse.  We survived 2008, because the people in charge knew enough to act countercyclically.   We won’t have that luxury this time, which is exactly what happened in 1929.

 

On the other hand if we can overcome the “jobs are gifts” fiction, the world suddenly looks brighter.  That’s not to say all the problems will go away, but at least we can systematically make things better.

First of all, it isn’t that hard to fix things.  The country is prosperous, but the prosperity has been accompanied by dramatic inequality.  We need to broaden prosperity by broadening opportunity, similar to what happened in the fifties and sixties.  History has shown that contrary to the “gift” fiction, broadened prosperity actually helps rather than hinders growth.  Education, research, and even (with global warming) the maligned EPA are keys to growth.

Second, despite all the penny-pinching gloom, we do have the resources to make it happen.  The straitjacket we’re in now is of our own doing.   There are many examples.

Republicans like to talk about the impending entitlements disaster:  Social Security and Medicare.  In fact neither is unmanageable.

Social Security is self-funded, but it is currently paying a portion of benefits out of past savings, and in 2034 that pot of past savings will be exhausted.   However what happens in 2034 has been much exaggerated–current funding would continue to pay 3/4 of benefits for the foreseeable future.   (“Social Security is bankrupt” is another trick of language, falsely implying there will be nothing after 2034.)  For the remaining 1/4, one first notes that the Social Security payroll tax has become increasingly regressive–the tax is paid only on the first $118,00 of income, and with the growing wage inequality a higher and higher percentage of earnings is outside the cap.  Doing away with the earnings cap is estimated to cover benefits for an additional 30 years—at which point no one knows what the demographics will look like.  That isn’t necessarily the best solution, but it shows that solving the problem is only a matter of will.

As for Medicare, the issue–rising medical costs–is the same problem faced by every developed country and every insurance company in the world.  There’s no way that problem isn’t solvable.

In fact with growing income inequality, the tax system has become more regressive overall, and it takes surprisingly little adjustment to save the middle class.

Current personal income tax tiering is simply out of whack with the magnitude of the incomes built up by growing inequality.  Also, despite the dire predictions of the “jobs as gifts” fiction, there is no evidence that taxing high end personal incomes costs jobs.  Obviously there are many things worth fixing in the tax code, but it doesn’t take high risk or rocket science to generate money to save the middle class.

As to getting there, you might (or might not) say:  the only thing we have to fear is fearmongering itself!  Unfortunately there is a lot of it:

– Citizen’s United—lets individuals put limitless money into politics (“Jobs are gifts!”, “Governments can do nothing!”)

– Limitations of the press—entertainment seems to win out over substance

– Demagogues and politics of identity—unfortunately always a danger in democracy

One can only hope that people will come to realize that “jobs are gifts” is just a trick, and that divisiveness and scapegoating are conscious techniques of some members of the .01% to divide and conquer the broader population.

We have to be very clear this is not anti-business.  Historically what works is to have government and business as countervailing forces that keep each other honest.   That’s what gave us prosperity in the past, and what is clearly (explicitly) out of kilter in the present.

The one good thing you can say about the present state of affairs is that perhaps it is the cathartic moment that lets people realize that the grim worldview is false, that they don’t have to be fighting with each other for shrinking crumbs from the elite, and that broader prosperity is not only possible, but actually doable.