Category Archives: Economics

Our Post Industrial Economy

Economics professors have always agreed about what comes after an industrial economy: a knowledge-based economy. Service industries would rise up to push around the money we made, inventing and utilizing new technologies. Workers would be data crunchers. They would be accountants, economists, health care workers and computer scientists. Great – no problem we all said. Just stay ahead of the (education) curve and don’t expect to get rich as a steel or car plant worker.

There is, however, another path. What if our remaining industrial base becomes so denuded that it (virtually) no longer produces goods. We won’t need as many engineers to improve productivity or to build robots to replace workers. We won’t need accountants or investment professionals to manage the wealth created by these industries. We won’t need scientists to do R&D since that always takes place near the production facility. (Why do R&D anyway in a world of rampant global IP theft?)

China has replaced us as the new industrial behemoth. They need raw materials for their factories and food for their army of peasant labor. Yes, they need services too but those markets are completely closed to foreign providers. (Just ask Google and Microsoft). Who shall feed the beast?

The Future: Our industrial capacity is shrinking towards irrelevance and our service sector is stalled out. We are the global consumer and without any trade barriers, everyone is just chewing on our flesh. We can still buy their goods but it’s all paid for with borrowed money. So now we are to go back to what we used to do – before the 2nd industrial revolution. We will produce food, minerals, and fuel and sell them to China and Japan just like Africa, Australia, and the Middle East. There are no import barriers on oil or wheat. This is economic development in reverse. It is, of course, a path to poverty and massive income inequality. The whole idea behind trade barriers was to protect young industries (and countries) until they have improved efficiency and become innovative. We have been doing the opposite for 20 years and it’s killing us.

Am I  being too cynical? Let’s look at the data. In 2017 6/10 of the top exports (by category) to China were commodity goods. Only three of the top ten were commodity sectors in 2007. ” In 2007, the U.S. manufacturing trade deficit … accounted for 76.99 percent of the overall merchandise deficit on a Census basis. The 2017 figure? 116.50 percent.”

The race to the bottom that began when China got MFN status is in its final stages. To sustain 2.5% growth we are bankrupting the state.  We have manufactured the illusion of increased wealth by virtue of massive debt increases. The robotics wave will have a greater effect on Chinese and German productivity since that is where global manufacturing now resides. We must get it back. Mercantilism can save us just like it made us in the 19th century but we’ll need a new mindset and new leadership.

Let’s dig up Alexander Hamilton.

 

Why do you hate the idea of a wall?

Let me guess your answer – “… because I can’t stand Donald Trump so I want to deny him anything he asks for.” If he wants something, it must be for some malevolent reason – right?. There is some merit to the argument but it frequently goes along with an effort to justify the anti-Trump position with a legitimate reason. That has lead us back to identity politics. Suddenly a wall is bad because all illegal aliens coming from Mexico and Central America are flawless perfect immigrants who just happen to be “undocumented“. In fact, it’s better for us to get these people (“who do all those horrible jobs we won’t do”) than it is to get migrants from anywhere else – even educated ones that speak English.

This leads directly to an open borders position. If you can’t articulate how you’re going to keep out some people then you must be in favor of letting everyone in.

Let the deluge begin.

This would be fairer to those unfortunates born in s(*&hole countries but then we must set a new rule. You are never allowed to whine about lousy income distribution. Your open borders policy will guarantee the suffering of our ever increasing underclass. You can never lament the poor economic position of the African American community or those less educated souls who failed to get a CS degree. There is pure Darwinian hell at the very bottom of the labor force and open borders guarantee its survival. (Let’s say it together class – Opioid Crisis)

Maybe you prefer feudalism…

I am not a heartless person – really. I do understand the luck of being born in the west and (in my case) getting entry to America legally. I don’t want to break up families or condemn teenagers to gang warfare in Central America. For that matter, I’m sure we could find an infinite number of Senegalese, Syrians, and Ivory Coasters who just want safety and justice. The problem is a simple one of supply and demand. A limitless number of destitute workers will (is) suppress wages for the unskilled. There’s a reason “no one will do those jobs” – the pay is terrible. What do you call a country with no borders?

So get on with it Chuck – get protection for DACA people and let’s build a southern border wall. Do the deal. And please, NPR and all the writers at the NewYorker,  stop interviewing members of the huddled masses who are either here illegally or sitting offshore waiting for plane-fare. You must tell me how you would stop the deluge before you make an argument in favor of letting in every person you profile.

Personalizing policy is the worst way to make it.

The Union Gets a Win.

The American confederacy was an agrarian economy trying to survive during the industrial revolution.  The only way for it to compete with the north and raise living standards was to enhance productivity by the use of free labor. Agrarian economies tend to be more traditional culturally since their lifestyle is the same as it was generations ago. Cows are cows and wheat is wheat. Eventually that culture gets out off sync with industrial competitors and neighbors. A rift grows and such rifts are not easily repaired.

To some extent the animus produced by cultural difference is exacerbated by  inferior economic performance. A hundred and fifty years after the war the rift still exists for the same reasons it did in 1858. The  animosity tends to expand into other spheres such as science and religiosity.

This national bifurcation has been around a long time and the party of the south (and the rural west) has always had to strike a balance or a tolerance between its two factions. FDR had to look the other way  in the face of the KKK and southern lynching because he needed southern Democrats to vote for his new deal programs. Truman and Kennedy  made similar compromises. Johnson blew up the party and handed the south to the the Republicans when he pushed through new civil rights laws. Now the balancing act must be done in that party.

The Repubs used to have a hard core group of free market driven Northeastern intellectuals led by William F. Buckley who had nothing in common with southern racist (James Birk Society)  southerners. Each side served to offset the other so they delivered compromise candidates who could still win a national plurality.

Coastal intellectuals have uniformly rejected Trump’s malevolent narcissism so he must now cow to the southern racist wing of the party. A narcissist must find adoration. Of course he/they favor no estate taxes just like English land barons of the 19th century). Social services for the poor (healthcare) are absurd if you rule over a plantation. Don’t tread on Jesus and Robert E. Lee.

Congress is now ruled by southern Senators with southern Confederate agendas. There is no balance of northeastern or Californian senators who believe in evolution, climate change or balanced budgets. In fact there is little populism in their policies since the south has always been ruled by plutocrats just as it was in medieval times in Europe. Tax cuts for corporate donors – of course!

The structure of the US Senate and the Electoral College were supposed to ensure regional balance and fairness. All they do now is sustain the Confederacy’s malevolent influence. We are condemned to a life or death struggle against the likes of Roy Moore and Mike Pence – living anachronisms, ascendant in the era of Elon Musk.

Today we can celebrate our win and next week Congress will pass a new tax plan that will destroy the federal budget.

Are all these policy changes targeted at me?

That’s how it feels. It’s not just Trump who is after me,  it’s the entire Republican party. I have a few basic issues that excite me and it seems that someone in Congress is singularly devoted to doing the exact opposite of what I believe in:

  1. All steps closer to universal coverage and subsidies for the poor are being undone – as though Republicans want the working poor and the nearly old – to die, literally.
  2. Net Neutrality is being revoked. I have (like most people) no choice regarding my internet provider. Now, if they want to jack up my rates because I use Netflix then they can and will.
  3. At every turn, the government seems devoted to anti-science. I seem to waste my time learning about such things as climate change as though my advocacy for clean energy production matters.
  4. Corporate taxation ranks right at the bottom of my priorities. Why? .. because profits as a share of GDP have never been higher! How does anyone defend lower corporate taxes in this context? Are many head offices moving to Switzerland? Have all those profits produced fabulous wage increases for workers?
  5. I seem to be the only person left in this country who cares about the US budget deficit. Why? I have to accept that neither party cares and the the Republicans are unfazed about jacking the deficit to $1 trillion/year. If there’s a new recession then maybe we’ll see $1.5 trn!
  6. Eliminating the estate tax moves us precisely to where the founding fathers said they didn’t want us to be. An up and coming business will be moat construction.
  7. The elimination of state and local tax deductiblity, is a perfect way for the Republican Party to hurt Democrats including yours truly. Let’s say it together -Double Taxation for all!

We have finally arrived at irrefutable proof that this is not a democracy. Gerrymandering had already pretty much accomplished this. A  new tax bill that raises personal taxes on non-millionaires in order to pay for a reduction of corporate taxes tells us that voters are irrelevant. This is precisely the kind of policy you would expect to see in a corrupt third world autocracy.

What surprises me is how this all contrasts wits other western democracies. They’re not taking the same anti-science anti-democratic bus to  insolvency town. They all have universal heath care – our House speaker wants to cancel Medicare!

I emigrated to the USA 31 years ago – I never felt as foreign as I do today.

Is this Tax Reform or a Tax Cut?

Maybe it’s both so let’s look at five (Republican) axioms for their veracity:

  1. Flattening, simplifying and reducing the corporate tax rate will help business which will stimulate the economy. Why? Corporate taxes are too high so corporations are not locating here anymore. Really, name some. Last I checked Silicon Valley wasn’t having a problem with new business formation (and they’re in a high tax state too). So how much higher are our rates?The countries with meaningful lower rates are ones where infrastructure and talent are severely lacking. They have lower rates to make up for these (and other geographical) shortcomings. Please note – the effective rate is nowhere near the “statutory” rate.
  2. Corporations have a ton of money locked up offshore. Give them a tax holiday and it will come home and be spent on new plant and equipment -jobs!! (Yes I have already written about this.) US corporations are awash with cash and rather than spend it on new capacity (or higher wages) they are buying back stock with it. Is this just a plan to increase stock buybacks?
  3. We are in year 8 of an economic expansion – that’s when we should be raising taxes to balance the budget, not cutting them. Has no one read Keynes?
  4. If I pay taxes to the state and town, is that money still taxable by the Feds? Let’s say I earn $100,000 and pay $80,000 (total) to the state and my municipality (easy for someone with a big house in Westchester NY). Can the Federal government still come along and ask me for $30,000 more? They have been prevented from doing this ever since the inception of income tax in 1918 so as to protect state revenue from the evil Feds and to prevent income tax rates from exceeding 100%. I feel a supreme court challenge coming.
  5. Can we please stop saying that tax cuts pay for themselves. Until they come up with one perfectly clean example of this, it must stop. In fact, they don’t really have the right to say that tax cuts are good at all unless they find a case where interest rates rose, taxes were cut, and GDP rose without some corresponding budget deficit nightmare. That leaves the 80’s out. How about the EGTRRA of 2001?  Yes – the one that took the budget from a surplus of $600bn/yr to a $200bn/yr deficit. Does anyone want to talk about the Kansas tax cutting disaster? Does anyone remember that Clinton raised rates (in 1993) and economic growth accelerated? In economics, like all social sciences, nothing is cut and dried.
  6. All LLC’s must have low tax rates to compete with corporations or else they’ll all just incorporate. If the LLC rate falls way below the maximum tax rate then everyone will quit working for wages and become an LLC. Wait, have I seen this ridiculous idea before – Yes, Kansas did it!

If you hear an expert espouse the magic of tax cutting like a religious zealot – change the station.

Nukes versus iPhones

President Trump proposed the idea that in order to stop North Korea we should stop enabling it by trading with any country that trades with it. This is necessary because US sanctions are worthless since we don’t trade with Nort Korea. The biggest impact would be on China since they are N. Korea’s biggest (only) trading partner and a large part of the Chinese economy depends on western (US) buyers so we have leverage.

We can argue about the efficacy of such a policy. If Europe doesn’t go along then China could just reroute exports to other countries which are not being sanctioned. We can worry about the time it would take to replace critical imports with locally produced substitutes. There are some goods that would become more expensive since you can’t really replace a billion peasant laborers. Inflation would rise as would wages. Finally, we could discuss the impact on raw material suppliers (to China) that would lose business by virtue of a big decline in Chinese economic activity.

What I hear instead is a lot of contempt and outrage over the idea simply because it would affect our supply of cheap stuff. The idea that we would use a powerful stick like trade as an incentive to get countries to behave appalls people. Is it not reasonable to ask: Why do we trade with Russia (or Turkey or Azerbaijan or…) at all? These are totalitarian states engaged in global crime, sometimes devoted to wrecking our elections. How many more reasons do you need to cut them off?

China keeps North Korea functioning and North Korea is considering nuking Los Angeles!

We have seemed to reach the ultimate victory of consumerism over sovereignty and safety. How many tainted elections can you accept to keep Russian oil flowing? How many lives are you willing to spend in LA to keep your iPhone below $35/month? The one weapon we wield is the power of the US consumer to buy foreign stuff. Every country in the world sets policy and obsesses over us. Yet when we need something, they are utterly indifferent. Their nerve makes me crazy.  When our own press and corporate lobby facilitate it, we become our own worst enemy.

The artificiality of social media tells us that such real, bad things, can’t actually occur – not at least while we’re taking a selfie with our beautiful dinner salad. What’s real is Facebook updates, Twitter attacks, and Instagram bikinis. In that world, a real nuclear attack is only something you might see on an old youtube video. Politicians don’t want to disturb those people from their virtual world…

It would be bad for business.

The Populist Vote is Up For Grabs Again

It is pretty clear that Donald Trump has abandoned all his promises, including those he made about keeping jobs in America. He has eaten chocolate cake with the President of China, now they’re in love. The Prime Minister of Japan was the first to get a deal after he supplicated himself. Is Trump canceling NAFTA?  – not as far as I can tell. He has even come out against a border tax in the next budget – something that Paul Ryan was going to put in.

His one touchstone (promised) policy that resonated with (almost) everyone (especially me) has been abandoned completely. That means the Democrats can grab it and grab it, they must. Forget all this identity politics and globalism nonsense. They desperately need an economic program that will resonate with laborers even if they’re white. They can dump the elitist nauseating position of the Clinton’s and get back to where they are supposed to be – right next to Bernie Sanders. Sorry, Joe, speeches about your love for the LGBT community won’t win elections.

This needs to happen immediately as it is becoming clear that time is running out. About five years ago I wrote about how China wasn’t looking to just steal low wage jobs, it wants everything. The two biggest value added industries we have are cars and airplanes. We need to protect those with our lives. The New York times recently wrote about how Ford is going to produce their next flagship compact car in China.  My nightmare is coming true.

If the Dems stand up, their losses could be limited to the 2016 election and they would grab back their brand. They let it be stolen by a fake billionaire with no conviction about anything. Al Franken – are you listening? You should put this issue right next to Medicare-for-all and hit the road.

This is your time.

Trying to understand the revocation of Obamacare

I’m going to make a solid effort here to understand the reasoning behind the repeal of Obamacare. I’ll try my best to withhold my shock and depression over this issue, at least for a few minutes. Let’s make a list of all the reasons why repeal makes sense to those voters who will continue to support their congressmen (or senator) after he votes for the AHCA:

  1. It was President Obama’s signature piece of legislation and Obama is the devil. He is a black, Muslim, Kenyan, socialist who nearly destroyed the country. We must destroy his legacy. By definition, if he was in favor of such a program, it must have been profoundly damaging to the American economy.
  1. As a libertarian, I detest any Government interference in the economy. I believe in free markets and the ability of price to effectively allocate resources. Everything will be better if the government gets out of the way. I’d be in favor of getting rid of Social Security and Medicare as well.
  1. The obesity epidemic in this country has shown us that people must be responsible for their own health. If they are sick then it’s their fault. Why should I have to pay any taxes towards their healthcare? Why should my premiums be higher to average out an insurance pool. I have no pre-existing conditions.
  1. I am fabulously rich and perfectly able to buy as much health coverage as I want. If you have failed to make a lot of money like me then you must accept the consequences.
  1. I am on Medicare or have fabulous coverage through my employer so this is not really important to me. If people die from this repeal then that’s not my problem. I’d just like to see my taxes go down, and Roe vs Wade revoked.
  1. How did the government raise taxes on capital gains or force me to buy healthcare insurance when I don’t want to. That’s an infringement on my liberty!

Obamacare is just made up of two things: a restriction on charging people more for their pre-existing conditions, and a series of subsidies for poor people [Medicaid, high risk, and older people). That’s it. So if you hate it you have only a few things to get angry about. You must hate sick people, poor people or you must make a ton of money from capital gains. You must not know anybody who is between the ages of 50 and 65 who have been sick or might get sick. (Is that possible?)

The other option, of course, is that you think that Obamacare is a much more intrusive system which tells doctors how to do their jobs. It doesn’t. Ask the AMA what they think. Maybe you believe that subsidies are the same as socialism. If everyone gets healthcare they’ll become lazy economic leeches.

In this debate, there is sort of a sweet spot – around the age of 45. When you’re that age your parents are old enough for Medicare so they are not affected by any of this. You’ve been healthy all your life and your insurance rates before Obamacare were reasonable, or you got your insurance through your employer. You’re too old to have more children so prenatal care or child delivery coverage is irrelevant. Such a person may not realize that cancer can hit somebody younger than 65. They are on the edge of a cliff, premium wise. Simply being 55 is a preexisting condition in and of itself. Ageism makes it very hard to get a new corporate job if you get laid off. These “nearly old” are unemployable and uninsurable. 45 year-olds don’t realize how close they are.

In the end, it comes down to compassion versus a tax cut. It’s a matter of recognizing that the state has a logical role when it comes to establishing insurance pools. Every actuary and every other country in the world understand this. As with climate change we are unique in that we have a significant (vocal) minority who prefer not to have a plan when it comes to long-term complicated issues. They simply hope that supply and demand will take care of things since they (and their donors) can’t or won’t. Consequently, CO2 emissions are not taxed to pay for negative externalities [secondary spinoff effects]. Similarly, prices do not allocate healthcare resources effectively. There there is no “elasticity”. Simply put, demand does not decline if price rises. That’s why the United States free market version of healthcare is so spectacularly less efficient than every other socialized system in the world. We pay more but receive the same services as any Dutchman or German. There is no state monopsony.

It’s hard to admit when free markets, don’t work. When you read Ayn Rand at the age of 16 you completely bought into her depiction of government as evil. How can you recant or explain to other true believers that there seem to be a few holes in the storyline? Will someone call Milton Friedman? You decide it’s better to ignore these glaring exceptions so you can reduce regulation and government corruption. Voters don’t want to hear about complexity anyway. So in the name of your God – Free Markets you declare:

If 24 million uninsured people must die in the gutter or go bankrupt to pay for hospital care then – so be it!

 

 

What will drive the Trump agenda?

I think we are actually progressing faster than we ever have to the universal conclusion that a (this) president is a profoundly stupid man. I almost never hear anyone defending his acumen or foresight. No one defends his “policies” because he clearly has none. Every campaign promise has been broken and his opinion on any subject is driven by the last conversation he had or what he saw on Fox News. Republicans of various stripes – libertarians, Christian fundamentalists, big defense interventionists, and fanatical tax cutters are all hoping the Trump wheel stops spinning at their number. None of them can (honestly) say he shares their ideology – they all know he has no ideology other than self-enrichment.
The last place the wheel stopped was on government contract bidding. He proclaimed that contracts should only go to American companies. What could make better sense? I argued that the Obama Stimulus plan of ’09 should have a buy-America requirement built in. Isn’t at least part of the point of government spending to stimulate the US economy.  Trump seems to get this “buy America” thing but when it angers certain interest groups like Ryan’s Border Tax would, then he runs away – just like a man devoid of ideology would do. He wants to do some of those things he promised but only if certain people don’t get mad. Why? He was supposed to be the rich guy who could ignore special interests.

The only logical reason is that it’s bad for business – the Trump Hotel business.

Forcing China or Japan to relent from their mercantalist policies would hurt his chances to open new hotels there. Raising taxes on retailers who source their goods overseas would aggravate many rich hotel patrons and investors. Conversely, policies that only benefit the working poor do the company no good. In fact, association with racist yahoos may hurt the brand.  Such people don’t buy $10mm condo’s in New York. They don’t have low handicaps. If there is no impact on Trump Hotels then his opinion gets blown around by the wind. Let’s filter policies for whether they are OK for his business:

  1. A border wall – poor illegal immigrants don’t stay at the Trump International Hotel. He has no properties in Mexico (he did have a failed one in Baja) or for that matter any part of Central America.
  2. Cancel all health care for the middle class and the very sick. Health care insurance company executives may join Maralago.
  3. Bomb only places where there are no Trump hotels. That takes North Korea off the list since Kim Jong Un would destroy Seoul and Trump has real estate there. Iran is OK.
  4. Tax cuts must only be for the rich – prospective hotel patrons.

In the end the very thing – money, that was supposed to make him able to drain the swamp actually makes him aligned with all the same wealthy vested interests that already control Washington. All of this would have been prevented if he had chosen to completely liquidate his assets before being sworn in. As it is we have just stepped closer to a classic third world construct.

Trump voters have been left hoping that his proven stupidity will shake things up for the better. As long as they are on the side of Trump hotels they won’t be disappointed.

The Populist Scam

We have had populists rise to the top of the American political system in the past. In each case, we saw a relationship between the man and the message. Take a look at the style and wealth of Eugene Debs, William Jennings Bryan, Henry Wallace, and Bernie Sanders. Their message was clear and no one doubted their sincerity.

It became hard to understand the commitment of a real estate millionaire to populist policies such as trade tariffs, more healthcare for the lower and middle classes, lower levels of immigration and less international engagement. Trump’s believers bought into the inconsistency because the man seemed so different from the standard polished lawyers who competed against him. They couldn’t be trusted/believed. Trump spoke his mind and had no history of flip-flopping on policy because he had never been a policy maker.  The fact that his promises were altered to suit his audience never shook their faith.

Trump has abandoned all his populist positions in record time:

  • Repeal and replace became – dump coverage for all those middle-class voters.
  • China (and India and Mexico) were not declared to be currency manipulators as promised, and his talks with the leaders of Japan and China seem to be warm and fuzzy. Wasn’t China our economic archenemy?
  • The tax bill that was to include a Border Tax Adjustment seems to be dying as the retail industry gets its way.
  • No NATO countries are being asked to contribute more or raise their level of defense spending.
  • NAFTA cancellation has become NAFTA renegotiation – light.
  • Where’s the wall?

He seems to need love from whoever is in the room more than the satisfaction of actually doing anything he promised. There are always far more people in the room who favor corporate interests over those of the people. That was supposed to be the problem he was going to change. As we watch the demise of Steve Bannon and the rise of Xi Jinping and Jared Kushner we are watching the logical failure of a millionaire who never believed in the cause.

You can tell by how Bernie Sanders combs his hair, that he is a true believer. No one can doubt that when confronted by Wall Street lobbyists he would be deaf to their remonstrations. Trump says he wants to make deals. Did it occur to anyone that blowing up a trading relationship is the opposite of a deal? China will always offer us a “good” deal. After all, they just want to sell us cheap stuff. It will be far easier for Trump to take the easy path.

Inertia is powerful.

The question then becomes – when do his supporters realize they have been had? Do they maintain hope because of his unconventional (moronic) approach/appearance? How will he defend his failure to deliver on anything other than a bombing raid in Syria which is exactly the sort of thing his voters really don’t care about?

The conventional forces of the Washington political quagmire are taking hold – they have sucked this neophyte into their black hole of dysfunction and failure.