Monday, April 24, 2017

Play Money

Donald Trump is looking for a big win as he draws close to the end of his first 100 days in office. Healthcare reform has failed, Obamacare is very much still with us, and the smoke and mirrors of the new healthcare proposal doesn’t seem to be fooling anyone. The travel ban is held up in the courts, and looks like it will never happen. Even the stock market has not been cooperating lately. As I write this, Donald Trump’s biggest accomplishment has been putting Neil Gorsuch on the Supreme Court, and even that came with the asterisk known as the nuclear option. So Trump is pretty desperate for a legislative win, and he thinks he can get it with tax reform. “Tax reform”, of course, is a euphemism for a massive tax cut for the rich. George W Bush had relatively little trouble getting Congress to approve his tax cuts, but they were set to expire in ten years, making it relatively easy for Obama to get rid of them when the time came. Now, Trump and his enablers in Congress want to avoid that problem by making the new tax cuts permanent. That, fortunately, is harder to do.

The reason for that is something called the Byrd Rule. Approved in 1985 and amended into its current form five years later, the Rule allows anyone in the Senate to object to any legislation on the grounds that it increases the deficit for a period longer than ten years. The objection can only be overcome by a 60 vote majority, which means at the moment that Trump would need to find six Democrats to join him while keeping all of the Republicans on board. So far, this has proven impossible on any issue. His other choice is to get passed into law measures which would offset the impact of his tax cuts on the budget, and he was hoping to do this with massive cuts to healthcare. Now, however, we are starting to hear noise about something called “dynamic scoring”.

Dynamic scoring is the pretext for tax cuts for the wealthy in the first place. You sell the idea to voters based on the ridiculous idea that the stimulus these tax cuts will provide to the economy will be so powerful that they will actually reduce the deficit. That is, a sharp drop in federal revenues will magically result in the government taking in more funds than it spends. I explained a couple of weeks ago why this idea is doomed to fail. Paul Krugman, when he talks about this, refers to what he calls “the confidence fairy”. But this is not simply an argument about competing theories. Tax cuts like these have been tried before, and we don’t have to guess what will happen when recent history tells us. I mentioned that Bush passed his temporary tax cuts. The deficit exploded. As should have been obvious, when the government took in a lot less money, it wound up owing more. Fans of dynamic scoring will point out that Bush then engaged in two costly wars, and they will try to claim that, without those wars, the Bush tax cuts would have worked as advertised. OK. Suppose we take them at their word. Are they willing to end all US involvement in Iraq and Afghanistan, and pledge to not take any military action anywhere in the world, in the fight against terrorism or for any other reason, to pay for their tax cuts? Do they expect to convince us that they could keep such a pledge with this president in office? Barring such a pledge, we have every reason to expect that paying for Trump tax cuts with dynamic scoring would lead to a repeat of the Bush deficit explosion. Keep in mind as well that we should have expected the jump in military spending from the Bush wars to stimulate the economy, but instead we saw the weakest recovery from any US recession since World War II. So let’s score dynamic scoring, and give it the failing grade it deserves. Let’s recognize that tax cuts are a form of government spending, and insist that they can not be paid for with play money. Let’s force Trump and his friends to explain what cuts they will make to coddle the rich, and see if they can sell them to the voters.

Tonight’s song is one I had not heard before tonight. I stumbled upon it quite by accident, but its tribute to government in dementia seems fitting:

Monday, April 17, 2017

War Shopping

Donald Trump has started shopping for a war. Two weeks ago, his approval ratings were almost impossibly low. This is very important to him. In fact, his personal popularity may be the thing that motivates Trump before anything else. He knows that becoming a wartime president is the quickest way to become more popular. If he had any doubts on this point, he saw it work powerfully for George W Bush. Ultimately, Trump knows that he needs a war that is long enough to establish him as a wartime president. But he also knows that the right war is important. He is old enough to remember how the Vietnam War made Lyndon Johnson hugely unpopular. So Trump has been trying different wars out, to see how they play.

First, there was the missile attack against Syria. This one made Trump a hero, in that he was acting nobly, in response to Assad’s gas attack on his own people. It played well, giving Trump’s approval ratings a nice bounce. But it was a theater piece. Trump had to get permission from Vladimir Putin to launch the strike, which meant Assad knew in advance of the attack. So there was no lasting damage, but Putin played his part publicly, making it look like the attack “proved” that Trump was willing to stand up to Russia. The attack served its immediate purpose, which was to deflect attention from the probe into Russia’s meddling in our election with the Trump campaigns possible cooperation. But Trump clearly owes Putin a debt of gratitude, so a sustained campaign against Assad is not an option.

Next, Trump tried a provocation against North Korea. That nation’s Supreme Leader, Kim Jong-un, is a good choice for an enemy, a man who is almost as unpopular among Americans as Trump himself at his low point. But there are two wild cards here that make a shooting war too frightening to pursue, at least for now. Kim Jong-un is perceived as being crazy enough to actually use nukes, and even the generals around Trump do not want to go there. Even more frightening is the possibility that China could become involved. China would be a potent enemy on the battlefield, and there would be great damage to our economy as well. China is a major provider of cheap labor and goods for us, and is also a major buyer of our goods. Trump may not be capable of seeing that far ahead, but surely someone in his circle has pointed it out. This one, however, is still simmering, and there is the horrifying possibility of having a battle of bluster lead us to a place where Trump feels he must start a shooting war.

And then there was the bombing of the cave complex in Afghanistan, with ISIS as the target. In this one, we dropped the “Mother Of All Bombs”, a gigantic bomb as devastating as possible without going nuclear. For Trump’s shopping, the problem here is there is no possible follow up. A weapon that powerful is supposed to be a closer. We were already fighting against terrorists in Afghanistan, so this attack should have finished the job. There is also the absurd claim that every precaution was taken to avoid civilian casualties. You simply do not use a weapon like this if you are trying to spare civilians.

So none of these situations give Trump the war he wants. For that he needs an enemy foolish enough to attack out shores, or a terrorist attack similar in scale to 9/11. He needs a situation that makes it clear that he is standing up for all of us, responding to a new enemy or threat. He needs, in short, a justification for a sustained campaign against a nation we can all agree is dangerous enough to us to justify the sacrifice of American blood. Anything else will only be good enough for a short term popularity boost, doomed to fade in the absence of any peaceful domestic successes.

All of this is disturbing enough, but we also need to be concerned about Trump’s choice of weapons. Barack Obama seemed almost embarrassed by the need to wage war. He favored weapons which were subtle and precise. These are not very splashy, but they actually do limit civilian casualties as much as possible. Trump, on the other hand, likes big explosions. Even though the Syrian airfield was somehow usable the next day, 59 Tomahawk missiles made quite a show. Like a drug addict needing a bigger fix, Trump topped that by using the “Mother Of All Bombs” in Afghanistan. It’s not even clear why this weapon exists. It is hard to drop, and there are very few situations, if any, where its deployment makes any strategic sense. The man who designed it must have been a bit unbalanced. Now it seems that Trump must find a new weapon to top this for next time, and that scares the hell out of me. I hope he understands that any place we nuke will not be a suitable place to build a Trump-branded property during the rest of Trump’s lifetime, because that may be all that saves us.

I would very have preferred that tonight’s song had become obsolete, but it may be even more relevant now than when Tom Lehrer wrote it:

Monday, April 10, 2017

The Theories of Fear

This week’s news has provided plenty of material for me to write about, from the nuclear option to the Syria strike, but none of that has distracted me from the apology I feel that I owe my readers for my post last week. I wrote about the myth that tax cuts create jobs, and I stand by that. But, in making my case, I vastly simplified matters, and in particular I denigrated the entire profession of economics. The resulting post had a tone of anti-intellectualism that goes against everything I hold dear. Things are more complicated, and economists can be very important to us in making our arguments. So this week’s post is devoted to understanding where supply-side economics came from, and what the political implications of that are.

Our politics these days is in many ways an ongoing war between two schools of economics: Keynesian and supply side. Both theories arose in response to an extreme economic event, and represent a reaction to fear. I caution, as I did last week, that I have not formally studied economics.

Keynesianism began to take hold around 1935, and was a direct response to the Great Depression. In particular, it was and is based on the fear of deflation. In any depression, consumer prices drop in response to a lack of demand, but that in turn suppresses demand, causing further price declines, and so on. John Maynard Keynes described a series of remedies for this that involved powerful government interventions to spur demand. The New Deal represented such an intervention, but so did Lyndon Johnson’s New Society programs, which were enacted at a time when the economy was already on much stronger footing than it had been during the Great Depression.

Conservatives, or what we call conservatives these days, surely object to the Great Society programs and parts of the New Deal for the ugly reason that these programs help minorities through the mechanism of higher taxes on whites. But the economic case they make is based on the fear of inflation, not deflation at all. This fear is the basis of supply side economics. In this formulation, the existing New Deal programs and Johnson’s additions were the direct cause of the hyperinflation and severe recession of the 1970s. The nation experienced periodic depressions until the big one in the 1930s, but the New Deal prevented any further depressions since then. On the other hand, we have not seen a recession as severe as the one in the 1970s since then, but the continued occurrence at all of recessions tells a supply sider that their work is not done. The so called Great Recession that followed the financial crisis of 2008 is a special case that we need to understand in the context of Keynes vs. the supply siders in order to counter their arguments.

The Federal Reserve is supposed to find a balance between the threats of inflation and unemployment by controlling interest rates. That is, they are supposed to raise interest rates when the greater fear is inflation, and lower them when the greater threat is unemployment that can bring on deflation. To a supply sider, higher interest rates are an unacceptable burden on the economy. They make it more expensive for businesses to borrow money, which encourages more price increases and creates a feedback loop. Instead, supply siders favor suppressing inflation by attacking demand. That means redistribution of wealth through regressive tax policies to reduce the buying power of workers. It means attacking labor unions in order further reduce buying power. It means promoting the idea that levels of unemployment that are high by historical standards represent a new normal brought on by demographic changes.

It would be political suicide for any candidate to say that the country needs fewer people working, and lower incomes for those who are working. Yet, that is exactly what supply side economics tells us is needed to combat the terrible threat of inflation. The economic crisis that followed from the financial crisis of 2008 is often referred to as the Great Recession, which would seem to bolster their argument. But this was not anything like a classic recession. We did not face any threat of inflation in this period. Instead, we saw severe un- and underemployment, and we narrowly averted a depression that could have rivalled the one in the 1930s. Just as supply side economics was founded on the idea that Keynesianism went too far in the 1960s, leading directly to the recession of the 1970s, so we must now make the case that the near depression that began in 2009 was the direct result of supply side policies that went too far. Even now, we face a greater threat of deflation than inflation.

To be clear, the supply siders have a valid point that we must find a balance, and understand that we may at some point need aggressive remedies against the threat of inflation. They go wrong, however, in asserting that this is such a point. A shock to the economy now would not cause inflation. Instead, it would put us back on the brink of a depression, as we were in 2009. The Affordable Care Act was the only remedy Obama was able to pass that was anything like permanent, and it hardly puts us where we were economically in 1972.Our energy policies have left us less vulnerable by far to an oil price shock than we were then. Years of increasing income inequality have left a landscape where our workers simply can not support inflation of the sort we saw in the 1970s. Aggressive union busting and the change to a service economy have made these trends harder to reverse.

It is my belief that we need to understand supply side economics and Keynesian economics as well. We need people with the skill to measure the condition of our economy, and give us the foresight to anticipate and prevent crises. But I fear that the continued dominance of supply side thinking in our politics will lead us back to the brink of the crisis we avoided in 2009. This time, Donald Trump will have neither the inclination nor the personnel around him to respond appropriately. I hope I am wrong, and that we do not need to experience an actual depression before we realize that it is the supply siders who have gone too far this time.

The song for a post about fear had to be this one:

Monday, April 3, 2017

The Emperor’s New Tax Cuts

The battle over health care has been won, at least for now, and we can savor that victory. But we must realize that the circumstances of that victory will not always apply to the next fight. Specifically, the next fight is supposed to be over “tax reform”, and this one will play out very differently. In the health care fight, the Freedom Caucus was dedicated to the repeal of the Affordable Care Act, and had no interest in replacing it. Their absolutism, combined with the pressure protestors put on vulnerable Republicans to do no harm, made it impossible to get through the House any plan that could not attract Democratic support. “Tax reform” is of course a euphemism for massive tax cuts for the rich, and this one will play out differently. Here, our greatest help may come from Grover Norquist, but that won’t prevent a harmful bill from passing both houses of Congress.

The Republicans are bound by a rule that says no permanent tax cuts can be enacted unless the measure is revenue neutral. Instead, any measure which raises the deficit must be temporary, lasting only ten years. The Bush tax cuts were enacted this way, which is how Obama was able to get rid of parts of them when they expired. To pass the permanent tax cuts for the rich that Trump wants, the bill must contain offsets that would save the government enough money to pay for them. Shady accounting will only cover so much of this, and the Republicans were hoping to use the savings realized through savage cuts to healthcare to pay for the rest. So now they will attempt to craft a bill which raises taxes through measures like the border tax to offset permanent cuts for the rich and corporations. This is where Grover Norquist comes in. Norquist is the founder and president of Americans for Tax Reform, and he has extracted a pledge from most Republican lawmakers to never raise taxes for any reason. This pledge was the reason why the Bush cuts were temporary, and that is probably what will happen again if we lose this fight. Absolutists among the Republicans will prevent any measure which would increase taxes on anyone to offset cuts for the rich. That will still leave us with a measure that will do great harm. We can and must do better, which means we must change the national conversation on taxes.

I have never taken a single course on economics. Instead, I learned what I know by reading first Paul Krugman in the New York Times, and then later other writers as well. So I don’t have all of the detailed analyses others might be aware of, and I can’t put precise numbers to my statements. But I can apply common sense more easily than some people precisely because I don’t have the formal training. Some economists, it seems to me, come up with hair brained theories, and then devote themselves to “proving“ them. They make adjustments to these theories and “proofs” when facts don’t cooperate, but they are unable to back away and say the initial theory itself was the problem. A layman like me is sometimes to needed to show where they went wrong. I am thinking, of course, of the myth that tax cuts stimulate the economy and create jobs. It is only a myth, but it is also an assumption that dominates the national discussion on taxes, thanks in large part to Ronald Reagan. Reagan was not an economist either, but he was the one who succeeded in convincing American voters that tax cuts for “job creators” were needed to stimulate the economy. Reagan was forced to back pedal and raise taxes before economic growth could take hold, but he had already changed the national conversation before that happened. George W Bush never backed away from his tax cuts, and he presided over the weakest recovery since World War II, followed by the worst economic crisis since the Great Depression, but still the idea that tax cuts provide growth persists.

So what’s wrong with the idea anyway? It is seductive in its simplicity. Corporations are the ones who actually hire workers, so shouldn’t anything that helps them create jobs? Actually, that is the wrong question. The right questions are, what does a corporation do with its tax cuts, and why do companies hire? During the Obama presidency, we had a period where job growth was still sluggish, but companies were recording record profits and sitting on huge hordes of cash. Supply side economics tells us that this is impossible, that the economy should have been awash in jobs. Instead, in a process that is still underway, companies devoted a great deal of energy and imagination to figuring out what to do with all that cash. They mostly decided that it was not profitable to invest in hiring new workers. Instead, they could boost their stock prices by buying back shares of stock, a measure that does not do anything to create jobs. They also went on a binge of mergers and acquisitions, and that actually costs the economy jobs. Trump and the Republicans want to eliminate regulations, including ones that restrict a company’s ability to acquire other companies, so that will actually make things worse.

Why was it not profitable to hire new workers, and why did that change as the Obama administration continued? That relates to my second question, why do companies hire? Supply side economics is based on the idea that companies do not hire because they can’t afford to. Put like that, you can see the absurdity of it. I have already shown that companies do not hire just because they have the money to do so, not when they can make more money in other ways. Common sense should also tell you that it doesn’t make sense to hire workers to provide goods and services that no one can or will buy. And there is your answer. Companies hire because they believe that they can sell more stuff. Once you see that, you realize that companies may do the hiring, but they are not the job creators. We are, all of us. When you or I go to the store and spend $100 more than usual, we create jobs. When you or I use more medical care because Obama has made it more affordable, we create jobs. When you or I are able to take that Disney vacation we always wanted, we create jobs. It follows that the government can best create jobs by putting money in the hands of people who will spend it. That is not the rich. They don’t live from paycheck to paycheck, wishing they could buy more stuff. Instead, they put the money away, in stocks or in something riskier when stocks seem like a bad bet. Give another million dollars to the wealthy, and Goldman Sachs might need to hire one new broker. Give that same million dollars to poor people, by expanding food stamps or improving the Affordable Care Act, and McDonalds and Walmart between them might need ten new workers. Increasing the minimum wage is another way to boost spending, and it costs the government nothing. Universal Healthcare would make hiring new workers more profitable, and also boost spending and the consumption of healthcare.

So there is our assignment. To win the fight over tax cuts, we must change the national discussion. We must help people and lawmakers understand where jobs really come from. We must find personal stories wherever possible to make our points. We must help the American people understand who the real job creators are, and give them back their power.

I’m using the song this week as a tribute to the power of magical thinking. On a personal note, Pippin, which opened this way, was the first show I ever saw on Broadway. The entire show was a masterful display of the magic of the stage and its ability to create powerful illusions.