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:

Trickling Down With Trump

On Monday, Donald Trump unveiled his economic plan. It contained no actual numbers, so it wasn’t so much a plan as a theory. He sprinkled his comments with jabs at Hillary Clinton which could be, and were, fact checked, and Trump was shown to be dishonest once again. But the big lie in his speech was the theory he was touting, and that went unchallenged. The theory was the one that has been the mantra of establishment Republicans since Ronald Reagan: that massive tax cuts for wealthy individuals and corporations create jobs. In fact, the experiment has been tried, and it failed miserably. We don’t have to refute this with more theory when we have actual evidence. With just a little thought, we can find the fatal flaw in this theory. And it is also fair to talk about unintended consequences.

The United States had eight years of huge tax cuts of the sort Trump wants when George W Bush was president, and they gave us the weakest economic recovery in American history. The stimulus that was supposed to follow from this never happened, so we also saw a vast increase in the federal deficit. Pundits on the right will sometimes point out that we can’t know what the deficit might have looked like if we had not also been at war, but Trump gives me no confidence in that regard. Job growth was anemic, which made the 2007-2008 collapse far more painful than it needed to be. To understand why, you need to realize that trickle economics assumes that companies do not hire because they can not afford to. Why else would tax cuts stimulate the economy? But this assumption makes no sense. We have seen companies post record profits and sit on hordes of cash, but where are the jobs? And what happens to the money, if it does not prod hiring? One thing that happens is an increase in mergers and corporate takeovers. These actually cost the economy jobs.

Another is an increase in speculative investing. This is what wealthy individuals do with their tax cuts when they are supposed to be creating jobs. The Bush cuts created a new, lower tax rate for capital gains. Before, capital gains were taxed at the same rate as regular income, but Bush created a new rate that was about half the rate for earned income. A capital gain is the profit you make when you sell an investment for more than you bought it for. So now, when you calculated the risk of an investment, you could figure in the reduced tax rate. The new capital gains rate meant that it now made more sense than before to buy oil and gas futures as investments. This has meant that everyone pays a price at the pump that is inflated by the purchases of speculators. But the capital gains tax cut also made junk mortgage investments more attractive, thereby making the 2008 financial crisis worse. Trump, in his speech, also targeted what he called excessive regulations, so he would restore the conditions that made the 2008 crisis so serious. In particular, he made his billions in real estate, so he can be expected to work hard to remove any and all regulations on the real estate industry. Liar loans and other abuses in the mortgage industry that led to the financial crisis are all good for Trump’s business.

It is only fair to ask what does create jobs. Before Ronald Reagan sold the nation trickle down religion, it was widely understood that the real reason companies hire is that they expect to sell more stuff. That means good marketing and good new products, but it also requires a large number of consumers with spendable cash. This is why, in actual case histories, minimum wage increases generally lead to increases in hiring. So do boosts to programs like Food Stamps and Social Security. In theory, Universal Health Care in the United States would cost jobs in the insurance industry, but those losses would be more than offset by increases in consumer spending. Companies would also see a sharp reduction in their labor costs, since they would no longer have to provide medical benefits. Donald Trump wants to take this country in the opposite direction, and we have seen before where that would take us.