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Category: Economics

2020: Trump’s America

Originally published April 4, 2016


Donald J. Trump’s first presidential term had started with such promise. He had ascended to the highest office in the land based upon his business acumen and as a man of the people. A billionaire populist, he would use his negotiating skill on behalf of the general citizenry. The American public, as he had convinced it during the campaign, was tired losing and being governed by “stupid people.”

Trump took office in January 2017, following 83 consecutive months of job growth and an increase of over 13 million private sector jobs under the outgoing Obama Administration. He inherited a growing economy and shrinking budget deficits.

So what happened?

Don’t tax but spend

Trump made good on his promise to maintain popular middle class entitlements (Social Security, Medicare, etc.), but also on his promise to cut taxes for everyone. This translated into a miniscule tax cut for lower income earners, but huge one for those in the upper income brackets. As accurately predicted by the Tax Policy Center, the highest-income 0.1 percent of taxpayers got an average tax cut of more than $1.3 million while middle-income households only received an average tax cut of $2,700. Although he campaigned like a would-be traitor to his class, the Donald’s tax plan oddly benefited himself and his children the most. And without any offsetting spending cuts, deficits have spiraled – taking the deficit that was down to 2.4% of GPD in President Obama’s last year in office back to the almost double digits not seen since the recession that Obama inherited.

Tariffs and trade

The incoming Trump Administration also made good on the candidate’s campaign promise to hike tariffs on our trading partners by 45%. The resulting trade war caught the new president off guard. He was also surprised to find that Americans were none too pleased by what amounted to a huge tax on their consumer goods – and by the resulting return of high inflation to a country where millennials had grown up expecting no inflation and close to zero interest rates. But Fed Chairman Carl Icahn had no choice but to hike the federal funds rate to tamp down on runaway inflation.

Income inequality

After depleting government revenue and ballooning the deficit, Trump had no money left for government spending on investments that actually pay dividends in economic development, like public infrastructure, public education and research and development. He, of course, worked with Speaker Paul Ryan and Senate Majority Leader Mitch McConnell to repeal the Affordable Care Act and Dodd-Frank regulations of Wall Street. The predicable results: pre-ObamaCare levels of uninsured returned, as did banks that were too big to fail. Wall Street was unleashed, and income inequality soared.

Banning abortion

The Donald has always said that he cherishes women and has lived up to his election promise to protect them from their right to choose. Instead, he gave that choice to the Supreme Court justice he selected to fill the seat of the late Antonin Scalia.

During a 24 hour period in the campaign, Trump had gotten a little tripped by taking wildly inconsistent positions on abortion – from punishing a woman for having an abortion, to calling Roe v. Wade settled law that should not be changed, to finally saying he would appoint judges to overturn it.

But by sub-contracting out to the Heritage Foundation the job of vetting judges for the high court, Trump was able to recreate the 5-4 conservative majority that had reigned since the Reagan years. With the retirement of Anthony Kennedy and his replacement by Andrew Napolitano of Fox News, abortion is now technically legal but practically inaccessible for most women. Separate is once again equal. And all gays who married have received a government-mandated divorce when the franchise was recently withdrawn by court decree. Trump explained that he was merely swapping one individual mandate for another.

Making America great again

In his first week in office, President Trump decided to renegotiate that “disastrous” nuclear deal with Iran. The Iranians responded by kicking out the IAEA inspectors and restarting their nuclear program that had been mothballed under Obama’s international agreement. War is imminent. But with the demise of NATO, at least the United States can count on the now nuclear-armed Saudis, South Koreans and Japanese to maintain the peace in the east.

The big, beautiful wall

Trump finally built that dang wall on the Mexican border, and one on the Canadian border for good measure. Combined they block both undocumented immigrants returning to the South and emigrants fleeing to the North. His glowing historical references to Eisenhower’s “Operation Wetback,” FDR’s Japanese internment and East Germany’s Berlin Wall now make prefect sense.

Four more years

After defying odds in capturing the White House in 2016, Donald Trump reaches the end of his first term facing a more diverse, unemployed and angry electorate. Four years ago, he loved the “poorly uneducated” and they returned the favor. Will those with a functioning brain now take their country back?


Do Americans agree on the cause of economic inequality?

Originally published May 4, 2014


According to last week’s Pew Research Center poll on income inequality, the number one cause that both Democrats and Republicans identified for why the gap between the rich and everyone else has increased as of late is, surprisingly, the same: taxes. Among Democrats and left-leaners, 26% volunteered the tax system or tax loopholes as the main culprit for income inequality. The number shrunk to 14% among Republicans and right-learners – but was still the top vote getter. It is fortuitous then that Pew released its poll the same week that the French academic economist, Thomas Piketty, was here in the United States on a speaking tour to promote his new book, “Capital in the Twenty-First Century.”

5689f24d4a28d7dd014f74db31c64e47Piketty does not exactly argue that tax policy is the “cause” of income inequity. Rather, he attributes such inequality to the ability of the rich to save and invest, thus earning a return on capital greater than the growth in the economy, But taxes are certainly part of Piketty’s solution to the problem. He prescribes higher taxes on income and a new global tax on capital, the latter of which no one sees as political viable.

As summarized by the New York Times’ David Leonhardt,

“Piketty’s First Law of Inequality [… is based upon t]he fact that the rich earn enough money to save money allows them to make investments that other people simply cannot afford. And investments — whether stones, land, corporate stock or education — tend to bring a positive return. Piketty describes the relationship formally as r > g: the rate of return on capital usually exceeds economic growth.”

In speaking about the rate of return on capital, it occurs to me Piketty is espousing a theory akin to the liberal mirror image in reverse of Supply Side Economics – in other words, that the supply of capital is the most important factor determining wealth. And his necessary corollary is to see increased taxation as the main remedy to the ever-increasing concentration of capital at the top – to which I would introduce Professor Piketty to that other Thomas: Thomas Friedman.

In his 2011 book, “That Used To Be Us,” Friedman argues that’s it not just about raising taxes. It’s about what you do with the proceeds of those taxes. He recommends that America “invest in education, infrastructure, and research and development, as well as open our society more widely to talented immigrants and fix the regulations that govern our economy.”

Friedman is focused on the Demand Side – government spending that will spur economic growth through adding to the gross domestic product. When this spending is designed at its best, these include investments in human capital that will pay dividends as educated people from all classes of society enter the workforce and earn (and spend) a decent living (which hopefully also allows them to also save and get in on that higher return on capital!).

Friedman’s spending is reliant on Piketty’s revenues, so their economic policies support each other. The problem, of course, is that both Thomases, Piketty and Friedman, require more sound fiscal policies than has been politically achievable with the U.S. House of Representatives, which is still under the fever of Tea Party minority control.

That fever was evident in the Pew Research Center poll, where 9% of Republicans and right-learners cited “the work ethic of the poor and government assistance programs” as the main cause of inequality. Almost none of the Democrats and left-learners cited this “blame the victim” cause. The Pew Research Center poll found that both parties pointed to Congress and undefined “government policies” as the second most popular cause of income inequality. But presumably in classic Supply Side fashion, conservatives likely favored less government and fewer taxes, which both Piketty and Friedman agree would only increase that inequality.

So yes, Americans agree on the main cause of income inequality, but draw opposite conclusions as to what should be done to address it – to which our introduction to the French professor may prove helpful.

Any bargain for the middle class would be nice – let alone a grand one

Originally published June 30, 2013

Today the president proposed a “grand bargain for middle-class jobs” – offering Republicans to swap a lower corporate tax rate for a jobs program that would invest in education, training and public works projects. The corporate tax rate would be cut from 35% to 25%, and paid for by closing those infamous loopholes that allow some big companies to pay nothing in taxes . In exchange, Congress would authorize $50 billion in new infrastructure and education spending. If successful, Obama’s initiative would be the first new injection of fiscal stimulus since December 2010 right after the mid-term elections returned control of the House to the Republicans.

President Obama Makes Economic Policy Speech At An Amazon Fulfillment CenterIn past negotiations with the Republicans, Obama’s only leverage has come from the threat of higher taxes. In the New Year’s Eve 2011 fiscal deal, Obama obtained a payroll tax holiday and extension of unemployment benefits (good fiscal stimulus), but only because he agreed to extend the Bush Tax Cuts for another year. His original “Grand Bargain” talks with John Boehner over the summer of 2011 collapsed because the Republicans couldn’t accept any tax hikes on the wealthy. And the New Year’s Day 2013 tax deal essentially traded the expiration of the Bush Tax Cuts for the upper 2% for making those cuts permanent for everyone else.

The problem is that since late 2010, the president has been unable to gain any new fiscal stimulus programs. Instead, he has been saddled with Sequestration won by the Republicans as their prize for not allowing us to breach the Debt Ceiling – leaving it up to the Fed Chairman Bernanke to keep the recovery rolling with his monetary expansionary policy. But sequestration has resulted in slower economic growth and only proven, as if it were needed, that austerity in difficult economic times is bad policy.

So will the lure of corporate tax reform be sufficient to entice Republicans to do something positive for working class Americans? Probably not, at least initially since Tea Partiers only want the government to move in one direction: downward. But the Tea Party’s prime issue, the deficit, seems to be waning as the nation’s balance sheet improves along with the economy. And it’s an election year, so members of Congress may actually want something they can brag about to the folks back home. Remember of Paul Ryan and others in his caucus were decrying the American Jobs Recovery Act — the original stimulus – but at the same time asking for stimulus spending and bragging about it back in their home districts?

We could use some more pump-priming in the form of infrastructure, education and training spending, and there is certainly the need for those programs in the country. The middle class could use just a good bargain. It need not be grand.

Obama’s tax deal is stimulus 2.0 in the new era of divided government

Originally published December 8, 2010


I am shocked, shocked that some liberal commentators would rather debate the politics of President Obama’s tax deal with Republicans this week than the economics of it. Yes, Obama campaigned on ending the Bush tax cuts on those earning greater than $250,000. Yes, he has argued that the upper 2% didn’t ask for and don’t need a continued cut. And yes, there are far better uses for the money being allocated to tax cuts for the rich.

But Obama needed a fiscal deal with the Republicans that injected more money into the economy and started producing jobs. And the $900 billion tax deal that he reached with Republicans this week is one way, probably the most politically feasible way, to do so. Look at it as a jobs bill. It’s Stimulus 2.0 for the new reality of divided government.

For every dollar spent (yes, needlessly) on the rich ($133 billion for extending the Bush tax cuts and the estate tax reduction for the top earners), it has 3.6 dollars for the poor and middle class. These come in the form of a 13-month extension of unemployment insurance ($56 billion), a 2% cut of the payroll tax ($120 billion), earned income tax credit ($40 billion) and extension of the Bush tax rates for those making under $250,000 ($300 billion). And much of the new bargaining points put on the table by Obama are, in fact, stimulative, including advanced-depreciation for businesses ($30 billion to $180 billion).

The first stimulus bill passed in early 2009 is now running out of steam. It, along with TARP and the Fed, saved the economy from dropping off a cliff after the collapse of the financial sector. Absent the first stimulus and related programs, unemployment would be probably in the range of 13 to 15% — and getting worse. Now, growth has returned. But not at a high enough rate to bring down the unemployment rate.

Obama will only be reelected if the unemployment rate is around 7% and going down by Fall of 2012. Recall, Reagan had an over 10% unemployment rate in 1982 when he suffered significant setbacks during his first mid-term election. But by 1984, with the unemployment rate at 7.2%, it was “Morning in America,” and Reagan was off to a second term.

If Obama had allowed the Bush tax rates to expire in their entirety on New Year’s Eve, the economy would not continue recovering in 2011. The bottom marginal tax rate would have increased 50% (from 10% to 15%) on New Year’s Day. Even if Obama had somehow held out and gotten the lower rate only for the middle class, that would not have been stimulus enough to prime the pump. Recall that the first stimulus package was 50% too small ($800 billion when Christina Romer calculated that it should have been $1.2 trillion). And also recall that even in the first stimulus, in order to get just a few moderate Republican votes, about a quarter went to tax cuts that did not have the same multiplier effect in the economy as spending programs. The fact is that the only mechanism at the disposal of elected government officials to spur growth in a recession is deficit spending (either in the form of spending or tax cuts). The first stimulus was mostly the former, the second is almost all the latter.

Obama looks bipartisan and presidential in striking a deal to move the country forward, and he has preserved the issue of tax fairness as a campaign issue for 2012. Indeed, once he deals with short-term stimulus (which requires, in fact demands, short-term debt), he can pivot to long-term deficit reduction and income inequality, for which his presidential commission just fired the opening salvo.

John Maynard Keynes would be proud. Now we need to work on Keith and Rachel.