Economic policy

Disconnects

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One of the biggest problems with politics in this country is assumed connections that simply don’t exist.  DOGE and the closing of USAID and other government programs were money in the bank for the Trump base (instead it went to tax cuts for the rich).  Getting rid of immigrants would leave more of the pot of gold for everyone else (but growing the pot is the big issue and immigrants are contributors).   The reason we can’t have free public college here is that the Europeans didn’t contribute enough to NATO (though the Republican Party has consistently blocked any such public services).  And of course the big one—making rich people richer will trickle down to everyone else (which has never happened anywhere—they just get more power to help them keep it).

You have to be really careful with anyone’s tacitly-assumed connections.  Even if they existed in the past, there’s no guarantee they’re going to continue as before.  The particular case I want to talk about is the assumed link between national power (military and corporate) and population well-being.  For most of the 20th century that link really was true.  That’s Trump’s factory economy with good jobs and the corporate might that won two world wars.  But that’s not the reality today–manufacturing is 8% of GDP, unions cover 10% of workers, and many service sectors are low-wage and dead-end.  It’s even less the reality going forward.  The AI world is simply not going to supply that kind of employment-linked prosperity—there will be good jobs but not so many of them for a good long while. Experts spill ink arguing about the impact of AI, but the desperation of new college graduates (and current students) is the real world.

Many people have compared AI to the industrial revolution of the nineteenth century.  Britain at the time was the most powerful and prosperous country that had ever existed.  It was a world of fabulous wealth and horrendous destitution, both domestically and in its empire.  Eventually the world was able to adapt to the new reality, but that took a whole century of well-documented horrors.  Economies can’t adapt overnight.  The private sector will not miraculously solve the problem.  The only way is for government to create the link that is broken. (Note there is another side of this picture–we all increasingly depend on a relatively limited group who make the difference for rest of us. We NEED to spend money on education and research and to restore our status as the destination for the best and brightest from everywhere.)

Despite all the propaganda to the contrary, government needs a bigger role in employment. This isn’t charity. Government needs to finance work that needs to be done but won’t get done by the private sector alone.  An obvious case is climate change, which will require monumental transformations well beyond the cost of the new equipment.  In this country we have the dubious distinction of currently paying for a huge, debt-financed, fossil-fuel-powered datacenter expansion–that will end up being reworked in short order for a cheaper sustainable successor whether we like it or not! There are also many other parts of the public sector that have been starved for years–for example in healthcare and education.  All of that sounds like a recovery plan from a depression—how to put people to work–but there’s a big difference: we have the money. As with the industrial revolution the problem is not a shortage of work or a shortage of money—it’s making the link.  This time we need to do it.

That isn’t a trivial problem, but it’s worth understanding it as THE economic challenge of our era.  In this we’re not talking about taxing companies in cut-throat price competition with each other–if anything our problem today is too much consolidation and sector monopoly behavior.  Tech companies operate with profit margins that would have been unthinkable in competitive industries. Google’s operating margin runs over 25%. Apple’s over 30%. Microsoft’s over 40%. But we do need to be careful to make taxation work effectively, and we need to avoid an international race to the bottom.  I’m not going to attempt to solve either here. But I will note that stock buybacks are a great indication that companies have more money than they know what to do with, and some kind of equity participation by the government is consistent with the value of the infrastructure provided. For the international side, we’ve done this sort of thing before–with labor standards and environmental regulations.

In fact I’d like to think we could perhaps take the international part a step farther. There are many reasons why the world today needs new forms of cooperation. This issue is everyone’s problem, and (as opposed to many other issues) it is rationally solvable. And it would also be economically stabilizing.  So if we can deal with this one, perhaps it is also a first step toward harder issues–such as nuclear proliferation or a political order to avoid war. We need to do this.

Hanging Over Our Heads

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Suppose the Iran war somehow reaches a conclusion, and we have a good, rational, democratically-elected regime in Tehran.  What would be a first act of such a regime?  In today’s world they’d need to start a nuclear weapons program as an absolute requirement to maintain sovereignty.

And what would happen after that?  The clear answer to that question shows what is really on the table.  Trump would decide. His Board of Peace is no sideshow–Trump wants to run the world. That may sound great to a US audience, but only until the story collapses. We can see what that means now.

Trump is not worried that the world he has called into being is really chaotic and dangerous.  Since he is THE universal genius, he’ll just take care of it. But in the Iran war we see how little grasp he has on reality. The two-day surgical intervention is out of control in all directions. We’re not always going to be in charge and not always even going to know where our actions will lead. Who knows where we’ll be after a Presidential version of Trump’s six bankruptcies.

The only way we know to control major wars is a system for international governance where war is to the greatest extent possible off the table.  Competing spheres of influence don’t work. International governance isn’t easy either, but we’re all lucky to have lived through such a period.  For all the flaws it mostly worked for peace.  We’re now in an era where many players now think they need nuclear weapons, and the restraints on acts of war are weakening.  Thus far no one has used those weapons, but it’s hard to avoid the feeling we’re getting closer to the brink.

There are other factors too. Computer-controlled drones have clearly changed the rules for warfare in ways we are only beginning to understand.  They have already overturned traditional measures of military strength in both Ukraine and Iran.  They’re cheap, readily available, and we can’t even protect our own radar systems from them. AI is another destabilizer at an even earlier stage of understanding.  Uncertainty and volitily in national assessments of strength or weakness risk wars of overconfidence or paranoia–with weapons of horrendous power.  More than ever we need to restore a framework for stability.

There are really only two ways to do that:  stability is either imposed by dictatorial fiat or assembled by common effort.  The first is Trmp’s vision, but it simply doesn’t match reality.  The second is something we have to make work.  For that everyone needs a stake in the game. There is a base of common interest from both climate change and the obvious risks for war, but the common effort takes more than that–a commitment to international well-being. Obama was able to do something of the sort with the unanimity he achieved around climate change, but it was unstable.  There was too much to be gained in the short term by cheating, and once cheating became respectable, it was hard to fight. Now we’ve got Trump’s sabotage instead.

That doesn’t say the effort was wrong or naive, just hard. Reality won’t wait, and the risks are only increasing. It’s worth noting that there are other success stories for cooperation among nations. The US itself is one–individual states had to decide (with some difficulty) to give up sovereignty for the union to succeed. The EU–despite its bad press–is another one, with prosperity after centuries of bitter wars. Shared prosperity can work, but it requires national governments to make sure benefits reach their populations. In addition here in the US people need to realize that an international order isn’t selling out our national self-interest—in fact we’re doing that today as an unreliable partner in any enterprise.

At some point climate change will become too serious to pretend away.  However, as has been noted many times, by then it may well be too late.  Similarly for war.  We don’t have a choice.  We have to recognize what is at stake now.  We can’t let Trump’s ego wreck the one marvelous world we’ve been granted.

Trump’s Tariffs are a Dry Run for the World’s Future

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As the Trump administration ramps up its efforts to sabotage climate action, we have to think about what that means.  There is only one atmosphere, and the consequences of climate change are becoming ever more obvious.  Our policies are not just putting the US at risk, we’re putting everyone at risk.

So it is only a matter of time before the rest of the world will have to react.  The US has become not just a rogue state but a criminally insane one.  The only reasonable action is a global embargo.  The US has to be treated as a matter for quarantine.

Fortunately for the rest of the world, Trump is providing an excellent transitional strategy.  As exports to the US become subject to draconian and unpredictable risks, the world has a chance to live without us. The supposed lifeline we’re throwing to the rest of the world is actually worthless—building factories in the US just increases the exposure to Trump’s whims, and further the fossil-fuel-privileged industries of the US (e.g. cars) will have little future elsewhere.

There is a remarkable consistency in US policy—we are doing everything we can to turn ourselves from a world power into an afterthought.  That’s not just the tariffs, it’s the attacks on education, healthcare, and forward-looking research.  The demonizing of all immigrants. It’s amazing what dreams of past imperial greatness can do.

Maybe it’s in part an Anglo-Saxon thing.  The parallels with Britain are close, although our fall is much greater.  Brexit was Britain’s effort to restore its nineteenth century dominance by withdrawing from cooperation with the EU.  The result was an instantaneous economic downturn that took about five years for the population to understand.  There may well be no way back—with more Farage populism in the offing, the downward spiral could continue.

We voted for Trump to bring back the glories of the post-war fifties.  He has promised to make everyone rich by shaking down the rest of the world.  With tariffs, we are in essence doing our own Brexit with everyone else. Whatever the evangelicals may believe, there is no God protecting us from folly.

We Are Russia In Ukraine

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In case you haven’t noticed we just declared war on our independent neighbor Canada.  We haven’t sent an army yet, but that’s only because we think we can win with financial weapons.  But there’s no mistaking it—it’s war.  And our declaration of war was beyond ludicrous—for few immigrants, just about no fentanyl, and a balance of payments deficit that has nothing to do with protectionism.  The real reason is no better—a vanity project so that Trump can say he personally added the extra territory to the USA.

That’s pretty bad, but it is certainly not the worst of the lying going on.  For that, you can point to all the talk about getting rich. We’re constantly told that everything going on, no matter how painful or immoral is about getting rich.  But no one has any intention of creating a world where the population gets rich. This is government of, by, and for big corporations.

There is no linkage between all the firings and the well-being of the population—the money being saved is to justify the tax cuts for rich people and Wall Street.  The tariffs are a sales tax paid by buyers—a regressive tax.  The deportations will raise prices even on basic foodstuffs and essential services such as elder care.  Finally and most importantly, as even Adam Smith understood and the entire nineteenth century demonstrated, the big corporations are not going to shower golden paychecks.

If you want to understand what’s in store for the population just look at what uncontrolled free enterprise did in the nineteenth century.  The picture was very much like the story Trump tells—the European powers dominated their colonies and brought all the profits home.  Industrialists made fortunes, controlled government, and kept the work force desperate.  Uncontrolled capitalism is good at making money for itself full stop.  Most people are in no position to bargain.

There is no miracle world of uncontrolled free enterprise—the only people who preach that religion are handsomely paid to do so.  Governments can do bad things too, but without the countervailing power of government there is no one to speak for the well-being of the population.  Just look at some problems facing us today: 

– AI (with robotics) is already becoming a hit on employment. Musk’s savaging of government jobs is actually a foretaste of what to expect throughout the private sector.  Someone will have to help.

– Climate change is real—whether Trump likes it or not—and there will be major changes to be managed if the population is to be kept whole.

– Education and healthcare are necessary for personal financial success and stability.  The private sector is not going to fund it.  Punting it to the states is something business interests do to avoid paying for it.  Musk goes a step beyond that—preferentially hiring H1B slaves whose education was paid-for by someone else, and who can’t quit or change jobs.

– The technological environment is changing faster and faster.  No one predicted just how far generative AI would be able to go.  Unless we are prepared to spend real money on pure research we will be left behind.  That means not only missed opportunities in the economy but these days also military weakness.  Regardless of what politicians may say—the private sector does not do basic research.

Trump’s golden world does none of these things. It’s not good for the vast majority of people.  Except in the very near term it’s not even good for the billionaires.

In business I’ve been to plenty of meetings where someone proposes a new idea—different and exciting, thinking outside the box.  Frequently what makes it new, different, and exciting turns out to be that it’s wildly unethical—kind of like invading Canada.  Wildly unethical may be different, but that does not mean good.  In fact most of the time it’s terrible.  And with Trump that’s what we’ve got.

Two Views of Government

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It seems to be taken for granted that everyone knows the objective of government:  it exists for the good of the country.  However it’s not obvious what the “good of the country” means, and that ambiguity leaves plenty of room for confusion.  There are two models.

Model number one is more or less derived from the family.  The good of the family is the well-being of its members.  Government exits for the well-being of the population. Reasonable enough.

Model number two is a business.  The goal of a business is returns to its investors.  The employees are a cost center, and every dollar earned by the workforce is a dollar lost to investors.  The population is at best a necessary evil, with fewer and fewer really required for business operations and with available slave substitutes (who can’t quit or change jobs) as Musk’s beloved H1B’s.

We are currently seeing model two in full operation.  Everything has to be sacrificed to the 4.5 trillion dollar tax cut for rich people and businesses. Despite all the rhetoric about a golden era, all the money from the cuts and firings ends there.  It’s golden for the people with the gold.

And that’s not the end of the story. As even Adam Smith understood perfectly, the private sector is actually not good at providing for its own success. Left to its own devices it rutherlessly sacrifices everything to immediate profit, which leads to longer-term collapse. Think about the cuts to education, research, and climate change. So as far as the two models of government are concerned, we’re running headlong into a worst of both worlds–sacrificing both the population and the economy.

The Only Thing New is That They’re Getting Away with It

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I need to return to Adam Smith’s quote from last time.  It’s so accurate it’s incredible.  First the quote:

“The proposal of any new law or regulation of commerce which comes from this order [merchants and manufacturers], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”  (Wealth of Nations, Book 1, Chapter 3)

All by itself this stands as rebuttal to the Republican Party’s standard argument: “We’re businessmen, so we’re good for the economy.” It seems businessmen are not so benevolent. Let’s look at the record—Adam Smith could hardly have been more to the point.

I’ll start with Obama’s first term.  George W. Bush left a mess so bad that it is only partially acknowledged.  The stock market crashed and the economy was shutting down (basically from what amounted to misguided deregulation of the overall banking system through mortgage-backed securities).  But that wasn’t the whole story.  Hidden behind the smokescreen of “neoliberalism” was the fact that essentially all of the job loss to China occurred either during Bush’s administration or with their crash. Just look:

That’s no accident. The Bush people refused to resist China’s WTO-prohibited trade practices (e.g. currency manipulation), because they were actively promoting off-shoring—since that’s what business wanted (e.g. about 70-80% of Walmart suppliers were in China).  In this case it’s tempting to say “deceived and oppressed” was coupled with pure incompetence, but that actually misrepresents a situation that Adam Smith understood perfectly.  Both the deregulation and the off-shoring were cases of business getting what it wanted without the necessary “suspicious attention”.

Obama’s job was to get us out of that mess, and he was well-underway when Republican decided that he might succeed.  That could not be allowed, since there was an election coming up.  So with the fabricated excuse of the “balanced budget amendment” rhetoric they essentially shut down government including all stimulus to the economy.  That meant jobs and income for many people.  They also blocked any aid to the millions of people who lost jobs from Bush’s off-shoring.  “Deceived and oppressed” is right on.

Now we get to Trump.  The “balanced budget amendment” rhetoric disappears instantly, and was replaced by a tax cut funded by a 2 trillion dollar deficit.  That was going to cure the last part of the recovery they had sabotaged.  However the economy was actually in pretty good shape, and as we noted last time the only stimulus that Obama ever got past the Republicans (in his first term) was on the order of $500 billion.  This needs to be emphasized.  We read articles about governments in Africa where department heads steal millions by handling their budgets as personal slush funds.  We in the US don’t do things like that.  We’re much more civilized.  Using the “balanced budget” ploy the Republican Party took 1.5 trillion dollars of benefits for its owners quite legally from the American people. If you want stumulus you’ve got to pay us first. “Deceived” is the very least you could say.

That money went straight to Wall Street.  It inflated corporate profits, so stocks went up.  But the companies didn’t spend that money on employees or the business, they used it for stock buybacks—a second kick in the pants for the market.  For the people in Adam Smith’s quote all you can say is—what a wonderful world this is!   

And they’re ready to do it again.  They’ve made up the fiction that inflation is all due to spending money for the benefit of the population.  Can’t do that.  Bad idea. Have to give it to us, and it will be Nirvana.

The next deficit is estimated at $4T.  Republicans have signed-on salivating—Will wonders never cease? (And that’s before the sweetheart deals with individual billionaires!) But that’s not the end of it. Trump’s new set of proposals (tariffs, deportations, tax cuts) is wildy inflationary, potential as damaging as what trashed the economy under George W. Bush—again what you get without “suspicious attention”. (It may be a side issue, but we even have a potential repeat of Bush’s banking debacle with all the cryptocurrency money behind Trump.) All of us have to hope it doesn’t happen.

Adam Smith did his job.  Can’t say we weren’t warned.