John and Mary

This week saw the release of the Trump budget plan. I was disappointed by the coverage of its likely outcomes in the media sources I go to for this kind of story. The budget assumes that the economy will grow at a rate of 3% as a result of the changes proposed. It is assumed that the extreme tax cuts in the American Health Care Act and the further tax cuts Trump wants Congress to afford in a separate bill that we do not have yet will bring about this growth, and that the increased tax revenues from this economic growth spurt will pay for the impact of the Trump budget on the deficit, that the deficit will in fact be reduced. Critics in my media sources have ranged from calling this “unlikely” to “overly optimistic”. It is nothing of the sort. Pardon my French, but this assumption is complete bullshit. I explained part of why in my last post. Tax cuts for the wealthy will go not into the economy, but rather into the financial markets. The rise in the markets that will result will not be sustainable without economic improvements to support it. But it’s much worse than that. To understand why, I would like you to meet John and Mary.

John and Mary are my creations. They are not real, in the sense that I am not talking about actual people I know. But I have named them John and Mary, not, say, Zeb and Lu-Ann, because I want you to take them seriously. John and Mary voted for Trump. They live in western Kentucky, because I wanted to put them in a deep red state that had approved Medicaid expansion. They both work, but they can only afford one used car between them, and hope nothing ever happens to it. So Mary works days at Walmart, while John works the night shift. During the week, they see each other during the time John drives Mary to work. Then John sleeps as much as he can while the kids are at school, and then gets up to be there for them when they get home. John and Mary have two boys. John and Mary work hard, but they rely of SNAP to have enough to feed their family. Mary sometimes has to work on Saturday, so Sunday is the only time the whole family can be together. They go to church in the morning, so only the afternoon is truly theirs. Mary gets human contact during the week from her customers, but for John, church provides a vital lifeline to the outside world. Most of the people they know are coal people. Their families and the families of almost everyone they know had someone who used to make a good living working in the mines. Hillary Clinton, they feel, never cared about those jobs, while Donald Trump spoke to the anger they felt over their loss.

Now we have the new budget proposal. John and Mary don’t have time to try to understand all of the details. They do know that it cuts SNAP, so they will have to make up the difference by doing without something else. They already know that they may need more money from somewhere to cover increased out-of-pocket expenses for their healthcare. Sure, they are basically healthy, so their premiums will go down. But they realize they will not only pay less; they will also get less coverage. But they have not considered the impact on people they know, and what that means to them. Everyone they know will have less money to spend, and will cut back wherever they can. This includes members of their congregation who have pre-existing conditions from the time they spent working in the mines. That means they will spend less at Walmart. John’s job also is in retail, so there will be reduced spending there is well. Although John and Mary have not thought about it, it is possible that one or both of them will be laid off because their employer needs less staff to handle the drop in sales.

So there you have it. 3% growth is not simply overly optimistic or unlikely. The budget cuts at least $1.5 trillion from consumer spending over ten years, and that will mean job losses for people like John and Mary. Those job losses in turn mean even further drops in consumer spending, causing more job losses, and so on. People in Congress, and certainly in the White House, have never lived in John and Mary’s world. They do not understand that the Johns and Marys of the world far outnumber them, and gain nothing from the tax cuts that provide more play money for Wall Street. Our lawmakers call that cut of $1.5 trillion “entitlement reform”, and they believe that the people who will suffer those cuts do not matter to the health of the economy. The budget basically says that John and Mary are expendable, and there are all kinds of rationalizations to explain how anyone who needs public assistance isn’t trying hard enough. John and Mary can’t try any harder. They have already had to sacrifice so much.

People like John and Mary used to reliably vote for Democrats. They or their families remembered the Great Depression, and how Roosevelt worked so hard to help the working man. They saw labor unions as a positive force in their lives, especially if you were a miner. But the Republicans seized on the corruption that afflicted unions to begin a campaign of vilifying organized labor. They also promoted a narrative that life was a fierce competition for finite resources, and that every dollar that went to someone with skin darker than yours came out of your pocket. Now they are positioned to blame the economic downturn that would result from the new budget on people who “just want handouts.” John and Mary don’t want handouts, but they will take whatever help they can find if it means their children are fed. It is long past time to find the Johns and Marys of the world, and make sure their stories are being told. For progressives, it could be the beginning of a new narrative, one that Roosevelt knew well, but has since been lost. More importantly, for John and Mary, it would let them know that they are not alone, and that the desperate circumstances they find themselves in are not their fault. The United States is still among the wealthiest nations on Earth. It is time John and Mary got to see some of that wealth in their own lives.

As it happens, I found this week’s song quite a while ago for my music video page on Facebook. But it certainly fits here as well:

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:

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.