Fantasyland

The Republicans got their fantasy last week. The tax bill that nobody read passed the Senate, and now it only has to go through reconciliation with the House version to become law. There is no question that Donald Trump will sign it, also without reading it. All along we have heard how this will spur job creation. This is pure fantasy. What this bill will do is damage the insurance marketplace created by Obamacare, thereby raising premiums for everyone, and causing a drop in consumer spending as a result. Before that happens, companies who are already more than able to afford to hire new workers or give raises to existing ones will instead ramp up their efforts to acquire other companies, costing the economy jobs rather than creating them. Wealthy individuals will now have more money to invest in the stock market and more speculative items, and the stock market will also benefit from a rise in stock buybacks by corporations. This will fuel a rise in stock prices, but without a corresponding rise in value that would come from an increase in consumer demand. For a while, top executives will love the rise in the value of their portfolios of company stock, but something will have to give in the end. The prospects for consumer spending get even worse if the Republicans are able to use the sharp increase in the national debt that this bill will cause to justify cuts in social spending.

But let’s focus on that speculative investing I mentioned before. In the wake of the Bush tax cuts, a lot of that money went into mortgage backed securities, and we know how that ended up. As I discussed in a previous post, some will fuel speculation on the price of oil, which will mean that we will pay more at the pump. That will also cut into consumer spending. But it is the possibility of a speculative bubble that concerns me the most. On the one hand, Barack Obama was never able to completely undo the Bush tax cuts. Politically, the only way you can get tax increases through Congress is if you have a total economic collapse. I can make the case that George W Bush was an evil president, but faced with the prospect of a total financial collapse on a scale that would have rivalled the Great Depression, Bush was smart and sane enough to push for emergency measures to prevent that. Today, we are not so lucky. Even if Treasury Secretary Steve Mnuchin told Donald Trump that a new Depression loomed, Trump might simply refuse to believe it until even his real estate empire lay in ruins.

So where could the next financial collapse come from? It won’t be mortgages this time. In the wake of any collapse, measures are put in place to prevent a repeat. That’s why the last collapse wasn’t about internet stocks or savings and loans, to use two recent examples. The most famous collapse in financial history was the brutal end of the Dutch tulip mania, as shown in the chart at the top of this article. Today, the price of a tulip bulb reflects its value as an addition to your garden. There is a premium that allows tulip growers to make a reasonable profit. But during the Dutch mania, tulip prices rose astronomically, as everyone feared missing out on the enormous profits being made by others. People traded away their estates in order to possess a single bulb. By 1637, sanity returned and the prices plummeted, ruining many people financially in the process. But a tulip bulb is a tangible object. You can hold it in your hand. So it is clearly worth something.

We would all like to believe that we are smarter today. After all, the tax cuts for the extremely wealthy are going to those who are rich enough to invest in hedge funds. Hedge funds are lightly regulated because our law considers these wealthy investors “sophisticated.” Mutual funds are available for far lower prices, and are therefore regulated to protect the consumer. Of course, a lot of “sophisticated” investors fell for the Bernie Madoff scam, so you have to wonder. Where then might the next financial collapse come from? Something else might happen first, but let’s talk about bitcoins.

The chart of bitcoin prices above bears an eerie resemblance to the first part of the tulip chart. A bitcoin is different from a tulip bulb, however, because you can not hold a bitcoin in your hand. That means that, unlike a tulip bulb, the value of a bitcoin can drop to zero. If you are just hearing of bitcoins for the first time, they are the most popular of what are called cryptocurrencies. Basically, someone invented them out of thin air, and created an admittedly brilliant software package to monitor and control their exchange. This software is referred to as blockchain technology, and it has practical applications for transactions conducted with traditional currencies. But the bitcoin itself is a fabrication. The key selling point is that bitcoins are not controlled by any government. They are a pirate currency, and sure enough, many early adopters were engaged in illegal activities. But this is also libertarian money. You can conduct business in bitcoins, and pay no taxes because it is difficult to track the profits. Officially, only a limited amount of bitcoins will ever be issued, so prices reflect planned scarcity as well. But already billions of dollars have gone into bitcoins. Now, the CTFC has approved the selling of bitcoin futures, which makes it possible to speculate on the price of a bitcoin without even owning one. That means that the amount of money involved in the bitcoin market is about to explode. But who controls the bitcoin? No one knows. The trading is controlled by a company in the Philippines called Satoshi Citadel. The company has three co-founders and two additional officers, but nothing else is known of these men. They have no history before their involvement with this company. Miguel Cuneta is one of the co-founders, and the chief mouthpiece for the company. He talks a good line, but we have no way of knowing if he might have intentions that are not discussed in his official utterances.

Both the CTFC action and the tax cut bill mean that more money will go into bitcoin speculation. They will become further enmeshed in the global financial system, just as mortgage backed securities did. And then, one day, something will happen, and people will start to demand answers to uncomfortable questions. I hope I am wrong about this. I hope bitcoins really are the next great innovation after the internet itself, as Miguel Cuneta would have us believe. But I am chilled by having seen this show before. And if all of this results in a crisis, I have no faith in Donald Trump to get us through it. The only positive I can see is that it might create the political climate that would make possible the removal of both the Trump and Bush tax cuts. But it would come at a very high price.

If there is a song about the Dutch tulip mania, I do not know of it. However, this one describes a crash pretty well:

A Plan for the Democrats

The Republicans who now control the White House and both houses of Congress have a problem, and it is the job of progressives in particular, and the Democratic Party as well, if they will only accept the challenge, to make that problem worse for them. The Republican Party as now constituted is dedicated to the proposition that government can only do harm, and never do anything good. The Affordable Care Act, or Obamacare, flies in the face of that proposition, which is why from the beginning the Republicans set out to sabotage the ACA once they understood that they could not stop it. It was also necessary to amplify every problem that occurred during the rollout of the ACA, to promote the idea that the ACA overall was bad. One defense the Democrats pursued was to challenge the Republicans by asking what their alternative was. Now we know: it is the monstrosity known as the American Health Care Act, which I prefer to call Ryancare. At this point, it is not Trumpcare, because Trump had no apparent hand in shaping it, but he has said that he will try to sell it.

In trying to “repeal and replace” the ACA, Republicans ran into sharp opposition from their own constituents at emotional town halls. It turns out that people are discovering, when faced with the prospect of losing the ACA, that they really like and need it. Oddly, Ryancare is also opposed by the most extreme members of the Republican Party, who object to the fact that it fails to completely repeal the ACA. So it would seem that progressives would have nothing to worry about, because the Republicans will not be able to find the votes to pass Ryancare. This assumption, however, fails to take into account the extraordinary sales skills of Donald Trump. This is a man who could sell sand in the Sahara Desert. The last time we underestimated him, he became president. The Democratic Party is being too complacent at the moment, and not listening to their own advice. It is not enough to defend the status quo, to insist that the ACA must remain in place. Despite the exaggerations and outright lies of the right wing, there are real problems with the ACA that created the opening for Trump’s victory in the first place. For many, lack of insurance has been replaced by insurance that people can not afford to use. So, in order to make sure that Ryancare fails, The Democrats need to offer up their own plan, just as they insisted the Republicans do. Let me offer my idea of what that plan should be, and how to sell it.

The purpose here is to offer up a plan that highlights the inadequacies of Ryancare and the harm it will do. We also need to undercut Trump’s efforts to get it passed. So we need a plan that really does deliver on a promise that Donald Trump made, that he would deliver a plan that would save money and deliver better care than the ACA. That plan is universal health care. I have talked before about how and why Democrats have failed to sell it to the American people, but I want to go into more detail now about how to win this battle. Hillary Clinton tried to get universal healthcare in 1993, but her instincts are always to find a consensus solution to any problem. There is no consensus solution here, because there is no way around the fact that you are destroying a vital part of the insurance industry, taking them out of the very lucrative health care business entirely. Done properly, universal health care also hurts the pharmaceutical industry, because you should insist that the government has the right to negotiate for the best prices. So you need to stand up to some powerful lobbies to pass universal health care. That is why the best time to do it is during a severe economic crisis. Barack Obama had that opportunity in 2009, but he too was intent on government by consensus, so we got the ACA instead. Last year, Bernie Sanders tried a different approach, insisting that universal health care was a right, a moral imperative. It is, but Hillary Clinton was able to get him bogged down in the details of how to pay for it. She made him lose the same battle she had lost thirteen years earlier, and also managed to make him look unprepared to govern while she was at it. I believe this was a major reason why Sanders lost the primaries. Ironically, the answer to how to sell universal healthcare was at Sanders’ fingertips the whole time, but he never effectively put the whole package together for the voters.

Universal health care would give the American people cash to spend on other things, so it would provide a major boost to consumer spending. Money that now gets deducted from paychecks for premiums, or spent on copays and deductibles, would instead go directly into the economy, leading to a major boost in job creation. It would also make American companies more competitive, by reducing the cost of hiring, and freeing companies from the expense of providing retiree health benefits. To pay for it, we must first recognize that the current cost of the ACA and other government health programs would no longer be needed, so those funds would go here instead. On top of that, companies currently deduct $260 billion for employee health benefits. Add in increased revenue from all of those new jobs I mentioned. And then there is the kicker. Pair universal healthcare with a measure that costs the government nothing, and you suddenly need very little in the way of new taxes to pay for it all. That measure is an immediate increase in the minimum wage to $15, indexed to inflation. Right wingers like to make the disputed claim that increasing the minimum wage is a job killer, but pair it with the job creating aspects of universal healthcare and that problem disappears. Over time, the minimum wage increase promotes consumer spending, which also means more jobs, and more revenue to pay for healthcare. Bernie Sanders erred in failing to realize the powerful synergy between his two proposals. It even gets better. All those new jobs, plus increased pay for existing jobs, means a sharp reduction in the number of the working poor, meaning funds that had been spent on public assistance programs such as food stamps can be used to pay for universal healthcare instead. I am not an economist, but I think it is possible that this proposal could be sold as being revenue neutral. At the worst, it should be possible to claim convincingly that the only new taxes needed would be on the wealthy.

I am a realist. I understand that there is no chance that a Republican-controlled Congress would ever pass this. Even if they did, you can be sure that Donald Trump would veto the measure. But that is not the point. By offering up this proposal and selling it properly, the Democrats would guarantee the failure of Ryancare, and expose the callousness of the Republican Party for all to see. If anything, the fact that this proposal would not pass should help reluctant Democrats to rally around it, knowing that they would have to answer to their constituents in redder states only for an idea, but not a law that would be vilified in the right wing media. The minimum wage increase is a popular idea, and so is universal healthcare if the public can be made to accept that their taxes do not need to rise to pay for it. The Democrats need to show that they are better than the Republicans who could not come up with an alternative to the ACA for eight years, and this is how to do it.

OK, I admit the song this time is a stretch, but I couldn’t resist: