Archive for the ‘Economy’ Category

The Perils of Trump

Monday, February 13th, 2017

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Trump has become one of the most unpopular President’s in history in the shortest time on record.

Because he lost the popular vote by such a wide margin, he didn’t enter office with much support outside his party. That support is now gone.

Whether Trump’s approval rating will drop further depends largely on independents and Republicans — he has almost no support to lose among Democrats. If those voters do sour on him, that could pose a threat to Republicans in the midterm election in 2018. The incumbent president’s approval rating historically serves as a good predictor of how many seats his party will lose at midterm.

Based on recent studies, we can make some predictions of where future erosion could occur.

His core support represents about 22% of the population. These folks are going to support Trump no matter what.

The next group are going to support him based on what he delivers. These represent another 22% of the population. These first two groups, the “believers” and the “conditionals” make up the 44% of the population (more or less) that approve of Trump’s performance so far.

The “conditionals” are interested in an improved economy, cleaning up Washington corruption, defeating ISIS, and building the wall in that order. If he fails to do any of those things, he will lose their support.

Let’s look at the challenges that Trump has with this group of “conditionals”.

Trump’s economic plan has a big problem. There aren’t enough workers to support the growth that he has promised. Worse than that, Trump is also expected by this group to put a tough immigration plan in place. Immigration is the easiest place to find the workers that Trump’s economic plan REQUIRES.

Here’s the math. We currently employ 152M people. Trump wants to add 25M more jobs. He needs that job growth in order to deliver the 4% a year GDP growth that he has promised. He’ll get 8M from population growth. If we are able to return to historical highs in workforce participation, he’ll get another 8M. That still leaves him 9M short.

There are only two places he can find those extra jobs. Either immigrants are going to fill them or he’s going to have to figure out how to convince baby boomers to come out of retirement.

The problem is that he can’t fill them with immigrants because one of the other things that the conditionals are going to hold him accountable for is keeping immigrants out and deporting those who are here illegally. That leave seniors. 19% of those 65 and over, work today. In order to hit his numbers, that percentage has to increase to 32%. Even that won’t get the job done, because 7M jobs are filled today by undocumented workers. If you deport all of those workers in addition to keeping new workers out, Trump’s plan adds only 9M new jobs. That’s not nearly enough to hit his GDP numbers. It barely keeps up with the jobs that population growth will require.

Trump is left between a rock and a hard place. Investments to grow the economy without increases in both productivity and workforce are going to spike inflation as demand exceeds supply. That’s going to lose him the support of the conditionals who will have a harder time buying a house, paying their adjustable mortgage, buying a car, and paying their bills. If he reneges on his immigration plan, he will lose the support of the conditionals even if it does help him keep his economic promise.

Trump has already lost the last two groups (curious and resister). He won’t get them back because their views are diametrically opposed to his base and the conditionals. They don’t want a wall.  They want to keep Obamacare. etc.

The only logical result is a continued erosion of the “conditionals” as Trump fails to deliver on his promises.

Most presidents lose ground during their first two years. The average decline since World War II is just short of eight points, according to a compilation by Marquette University political scientist Charles Franklin. If Trump follows that pattern, he could end up with an approval rating in the high 30s — perilous territory for congressional candidates running in swing districts.

If he survives all of the other challenges that currently seem to surround his administration, the historic patterns leave him in very dangerous territory. Bush II lost control of both the house and the Senate in 2006 because the country was tired of the Iraq War. His approval ratings were in the 30’s.

House members are already dealing with tea-party-like disruptions at their local town halls. Republicans are already backing away rapidly from any immediate action on Obamacare replacement because of fears of the impact that might have on the 2018 elections. Trump hasn’t even started to try to get his agenda through Congress, and the news cycles are dominated by stories of disarray, conflict, and foreign intrigue.  By way of comparison, by the third week of the Obama administration stimulus legislation was already being debated.

The closer that we get to the 2018 elections, the less likely it will be that at least House Republicans are going to be willing to take controversial votes. If healthcare reform remains undone, some voters are going to hold him accountable for NOT making the healthcare changes he promised. Other voters are going to vote for Democrats to PREVENT him from making the changes that he promised.

There is no clear path for Trump to improve his situation.

There are only many opportunities for it to get worse.

What Happened?

Tuesday, December 20th, 2016

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We elected Trump president.

He is by all objective accounts the least qualified person ever elected to this office.  Yes he is a businessman and by all appearances a very wealthy person.  We have elected business people to this office in the past, but never one with absolutely no government experience.  We have also elected wealthy people to this office in the past, but never one who claims to be as wealthy as this guy.  As a result, we have no idea how he will perform because we have no previous history to use as comparison.  The closest we can come is Herbert Hoover, and that didn’t work out so well.

In as a dispassionate way as possible, I’d like to figure out why and then perhaps lay out just a few of the challenges that he and we will face.

Change

Republicans began this race with a significant advantage.  US voters simply don’t like to give any particular party more than 8 years in the White House.

The Clinton campaign understood this challenge.  As it became clear that Trump would be the Republican nominee, they crafted a strategy to highlight the risks of electing someone with so little government experience.  They framed this election as a choice between change and risk.

Here’s an example of how Clinton discussed this choice.

Donald Trump’s ideas aren’t just different – they are dangerously incoherent. They’re not even really ideas – just a series of bizarre rants, personal feuds and outright lies.

He is not just unprepared – he is temperamentally unfit to hold an office that requires knowledge, stability and immense responsibility.

As proof of how effective her message was, Clinton won these points.

  • Just 38 percent of voters said that Trump was “qualified” to be president (52 percent said the same of Clinton).
  • Just 35 percent said Trump had the “temperament to serve effectively as president” (55 percent said Clinton had the right temperament to be president).
  • One in three voters said Trump was honest and trustworthy (36 percent said the same of Clinton).

But she still lost the popular vote in the key states of Wisconsin, Michigan, Pennsylvania, Ohio, and Florida.  That’s because the desire for change was stronger than the perceived risks associated with that change.  Four in 10 voters said the most important character trait in deciding their vote was a candidate who “can bring needed change” to Washington. Of that group, Trump won 83 percent to Clinton’s 14 percent.  In effect, all that Trump had to do is demonstrate that he was NOT part of the establishment in order to win this election.  For the change voters, particularly in the key battleground states that I listed, all of his objective weaknesses were strengths.

Demographics

I had thought that the Obama victories spelled the end of white angry male politics.

I was wrong.

Clinton still did well with emerging demographics.  The white male voter segment is getting smaller in every election including this one.  That vote increased 2% from 2012-2016.  In comparison the black vote increased 6%.  The Asian vote increased 16% and the Hispanic vote increased 17%.  The problem for Clinton was that most of those votes were in states like California rather than the battleground states where Trump was able to eke out narrow victories.

Clinton won 55% of the young vote, but they weren’t as large a percentage of the total vote in 2016 as they were in 2008 or 2012.  Clinton also improved as a percentage of 65+ voters over those who voted for Obama in 2012, though Trump won that demographic by roughly 10%.

Issues

The country continues to become more liberal as demographics change.

The vote on immigration this election was almost evenly split.  That is a dramatic improvement over the negative view of immigration a decade ago.  74% of Americans now believe that there should be a path to citizenship for undocumented workers.  61% oppose building a wall.

Large majorities of all voters support more aggressive actions on gun control including expanded background checks, keeps guns out of the hands of those with mental health issues, barring those on no-fly lists from purchasing guns, tracking gun purchases in a national database, banning the sale of high capacity ammunition clips, and even restricting the sale of assault-type weapons.

65% of voters are concerned about climate change and believe it is a real issue.

60% support same sex marriage and LGBT rights.  A majority also oppose “Freedom of Religion” laws.

Where We Go From Here

There are a number of issues that could easily derail a Trump presidency.  The basic challenges remain that he is deeply inexperienced AND that he has chosen to surround himself with others who can only be generously classified as outsiders.

He was certainly elected to “shake up” Washington.  But Washington isn’t going to welcome change.  The same is true with the rest of the world.

So here’s my list of the challenges that Trump is going to have to navigate to survive his first term and get re-elected in 2020.

China, Russia, Iran, Israel, and ISIS

The One China policy has allowed Taiwan and China to peacefully coexist for decades.  Trump upset that policy with one phone call.  China’s response was to grab some of our stuff.  Escalation is not a good formula here.  Trump is already talking about killing the TPP.  That agreement was crafted to provide the other Pacific Rim countries an alternative to accepting China’s trading rules.  If China controls the rules of trade in the Pacific, they will also have tremendous economic leverage over those countries.  That will make it more difficult for the US to oppose Chinese aggression in the region.  What will Trump do if China threatens Taiwan?

It would be great to have better relations with Russia.  But Russia has been aggressively expanding its sphere of influence in border countries by intervening in their elections and annexing territory.  What is Trump going to be willing to give (or take away from) Russia that will cause them to change their behavior?  Trump is in dangerous territory if it turns out that there were contacts between his campaign and Russian hacking during the election.  Trump is also in dangerous territory if ongoing Russian hacking expose the inner workings of the Trump administration in the same ways that it exposed the inner workings of the Clinton campaign.  What leverage does this give Russia?  Russian reactions to the assassination in Turkey could lead to a military escalation early in Trump’s administration.  Turkey is our NATO ally.  How will the Trump administration respond?  Trump also has real estate holdings in Turkey.  How will Trump respond to actions that threaten some of his properties?

Trump has said that he will move the US embassy to Jerusalem.  That move would signal the end of any two-state solution.  It will also give Israel free reign to continue their economic and military persecution of Palestinians.  How will the Trump administration respond to an Israeli crack down on a Palestinian uprising that resulted in a large number of Palestinians being killed?  How will a Trump administration respond to an increase in military actions by Israel’s neighbors in reaction to a brutal military crackdown of a Palestinian uprising?

That leads naturally to Iran.  Israel has every right to fear Iran, and Iran has every right to fear both Israel and the US.  Iraq used to be the balance to Iran, but our invasion of Iraq upset that balance and caused Iran to start their nuclear weapons program.  They’ve stopped that development because of their interest in joining the global economy.  But if Trump figures he can get a better deal and is also seen as a close ally of Israel, this whole deal could come apart.  What will Trump do to prevent Iran from getting a nuclear weapon?  What will Russia, Iran’s close ally, do if the US or Israel take some aggressive action against Iran because of their resumed nuclear program?

ISIS will continue to attack around the world.  He has been curiously silent, for example, after the Berlin attack.  After Trump’s inauguration, I predict that his named properties will become targets.  This isn’t planned, but random.  How is Trump going to respond?  The reality is that there is little he can do.  He can attempt to bomb them, but if anything that will only increase the domestic terrorism that is now the bulk of ISIS action.  He will fail to be effective and ultimately voters will hold him responsible.

Conflict of Interest, Deal Making, Obamacare, Infrastructure, Tax Reform, and Republicans

Trump has a serious conflict of interest problem.  There are no indications that he is going to take steps to effectively insulate his business and his family from the potential benefits that would accrue to those businesses from his office.  Even worse, he also needs to insulate himself from the APPEARANCE of conflict regarding foreign contributions.  Just one example is the fact that he owns hotels.  Every time someone employed by a foreign government stays in one of his hotels, he is in potential violation of the constitution.  Congress and the American people will let him slide for a while, but he is taking grave risks against some future event that will paint him as corrupt.  I’m not sure how many of those events he is going to be able to survive, since he was elected to clean up the corruption.

Deal making is also going to be very difficult for him because that’s not how government business is done.  Deals are done politically, not financially.  It is ok to trade influence.  It is not ok to trade money.  There are a large body of regulations which prohibit favoritism in government contracting.  Trump could easily run afoul of these laws in his attempts to personally negotiate the country’s business.  The difference here is that, rather than a political backlash, he will get sued by whatever corporations felt that they were disadvantaged by one of Trump’s deals.  How many of those suits will have to occur before Congress decides that they have had enough?

It is going to be very difficult to replace Obamacare.  Collin Powell famously said of Iraq, “if you break it, you own it.”  The same is true of Obamacare.  If Republicans repeal it without a plan to replace it, even if that repeal is delayed until after the 2018 elections, the exchange structure could easily collapse.  If that happens, millions of people will either lose their insurance, or see their premiums rise dramatically.  This could easily turn into a daily drip-drip-drip of bad news, much like the financial collapse of 2008.  That bad news and the inability of the Trump administration to do anything about it, will result in a big 2018 backlash and the beginning of the end for Trump.  He will say that he did what the voters elected him to do, but voters are going to blame him because he promised to make it better.

Trump hired a budget hawk for his OMB director.  This budget hawk is going to have to figure out how to fund the massive infrastructure bill that is the foundation for Trump’s jobs program.  It is going to be very interesting to see how this plays out.  The infrastructure bank idea is an invitation to crony capitalism and will only work in big urban areas where investors have an opportunity to monetize their projects.  It isn’t going to help those vast under served rural areas where many Trump voters live.  The cuts to other federal spending that would be required to pay for this, if it isn’t financed through debt, will result in MORE job loss and hardship for those rural voters rather than less.  Their life will get harder, unemployment will go up, and they will vote for a different change in 2018 and 2020.

Tax Reform will be another give away to the rich.  This may turn out to be the least controversial of the programs that Trump takes on.  But it is also fraught with danger for Trump.  If Trump voters weren’t already sensitive to a cabinet filled with billionaires all getting big tax cuts, they will be.  If Trump hasn’t divested himself from his businesses, you can bet that the benefits that his family gets from Tax reform will be front page news and Trump’s hypocrisies will dominate social media.

Republicans are the most interesting piece of this puzzle.  Just as they rallied around Trump as it became obvious that he was going to win, they will abandon him if he appears to falter.  They will determine if they can mold him in their image.  When that fails, they will see if they can maneuver him politically to carry out their agenda.  When that fails, they will see if they can trip him up and get him out of the way, so that they can replace his agenda with theirs.

Summary

I will be surprised to see Trump complete his term.  I think that foreign intrigue will reveal his fundamental weaknesses and terrify voters.  Hopefully, we will avoid a conflict.  If not, it will go badly.  If he avoids foreign conflict, he will fumble Obamacare and the repercussions will cost him at least his senate majority in 2018.  The house will eventually impeach him for conflicts of interest and the post 2018 senate will confirm that impeachment making him the third president to go through an impeachment trial, and only the second one to lose.

I would prefer that this not be the script for the next four years, but Trump is sowing the seeds of his own destruction as we speak.  He is not taking the steps to insulate himself from potential conflicts of interest.  He is secretive and combative rather than transparent.  He trusts in his own ability to communicate with the public directly, but the public will soon be able to see for themselves whether the results match his promises.  He is picking fights with his intelligence agencies which makes him even more vulnerable to bad information.  His cabinet of outsiders will likely agree with him rather than oppose him.

We will face a challenge as a country too.  That’s because Trump will try to blame his failures on others.  We have to be vigilant to prevent Trump and his followers from using domestic turmoil to distract us from his administration’s failures.  He should have every opportunity to prove me wrong, but if he fails, he alone should be held responsible for the consequences of his failures.

 

Trump’s Swamp Fever

Sunday, November 13th, 2016

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One of Trump’s closing arguments was his promise to “drain the swamp”.

Less than a week after winning the election in dramatic fashion and preparing to move into the White House, he appears to have caught a serious case of swamp fever.

He may have been infected from the whole set of Washington insiders that he has invited to help him plan the transition.

He may have caught it from President Obama himself. After what he described as very cordial meeting for which he appeared genuinely grateful, he described Obama as a very good man.

That wall that he promised to build on day one? Newt Gingrich admitted that Trump probably can’t get Mexico to pay for the wall, but that it was a “great campaign device”.

Instead of appointing a special prosecutor to investigate Hillary Clinton and Barak Obama, in an exclusive interview with the WSJ, Trump said, “It’s not something I’ve given a lot of thought, because I want to solve health care, jobs, border control, tax reform.”

Instead of making the repeal of Obamacare his first priority, instead he is talking about a series of amendments to improve it.

Oh and that Iran nuclear deal, one of the worst deals in the history of the world? He kinda likes it. He’s going to talk with the Iranians about a couple of his concerns, but he isn’t going to tear it up.

Moving or embassy to Jerusalem (a big issue for Sheldon Adelson)? Trump’s campaign said that any move would come only after there was a consensus by all parties. The Palestinians have been and are seriously opposed to the move.

That waterboarding stuff? Mike Rodgers representing the Trump campaign said it was just “campaign talk”.

Instead of supporting Paul Ryan’s call to privatize Medicare and Social Security, Trump has been curiously quiet.

Those mass deportations? They are history too. Instead Trump has said he is only going to deport those illegal immigrants who commit violent crimes. This is pretty much what the Obama administration has been doing for the past 8 years.

Those nasty late night tweets? Even they appear to have moderated. After sharply criticizing the #notmypresident demonstrations, he quickly released another tweet celebrating their passion and their right to express their opinion.

What happened to this guy?

Who kidnapped Donald Trump and replaced him with a thoughtful moderate?

Here’s my take.

We already know that he is not an ideologue and his main principle appears to be his own self-interest.

What we may be discovering is that he is more of a narcissistic Zelig chameleon than anyone thought.

We also may be discovering that he understands that he has to start working now to win the midterm elections in two years. Those who didn’t vote for him are just waiting for his first misstep to turn the next two years into an Occupy Washington protest.

We are now 7 years into this economic expansion cycle. We are starting to see some inflation and finally a little wage growth. We are well overdue for a recession.

The best thing that Trump could do to protect his Congressional majorities in 2018 is pump a lot of money into the economy as quickly as possible in the form of infrastructure improvements. We know from Obama’s attempts to do the same thing on a MUCH smaller scale that it takes a while to get this going. Obama may have warned Trump about how long it will take to get anything done in Washington. We also know that big spending bills provide plenty of opportunities for back seat driving and second guessing. The last thing Trump needs is a fight over this. The best way to get spending bill passed quickly is to make sure that the Democrats are on board too. He may need their help to overcome the fiscal conservatives and small government ideologues that still dominate his party.

By narrowing his focus to jobs, securing the boarder, amending Obamacare, and passing his tax plan; he can gain enough good will with the public to gain a little momentum. If he can find a way to work with the Democrats rather than poking them in the eye, he can continue to keep the Republican establishment off balance. Perhaps Obama also warned him that the Republicans in Washington are not his friends.

Since he doesn’t have the votes to over override a Senate veto, he would be wise to take small steps that will make it through the Senate. Otherwise, he runs the risk of the Democrats running out the clock on his first two years in much the same way that Republicans tied up Obama.

If he can find a way to get government working again by pivoting to the center, while still retaining the support of his base, he may prove to be a better politician than anyone imagined. If so, it may turn out that swamp fever isn’t so bad after all. If, however, this is really honeymoon fever, and the old combative Trump returns, it could be a bumpy two years.

 

You Can’t Just Wing It

Monday, August 8th, 2016

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It wasn’t all that long ago that Trump was riding high.

He got the bump that he was looking for from his convention and many around the country were starting to talk about what a Trump presidency would look like.

But as quickly as he rose, he fell.

He couldn’t allow the spotlight to shine on anyone else.

Even after Clinton stumbled in an interview about her dealings with the FBI, Trump produced a virtual waterfall of “news” that turned the spotlight back on himself.  In more or less chronological order he:

  1. Attacked a Gold Star Muslim family who spoke out against his immigration policies.
  2. Said that the NFL sent him a letter complaining about the debate dates (NFL said it sent no such letter).
  3. Claimed that Russia would not invade Ukraine only to have to backtrack when informed that they already did in 2014
  4. Criticized a fire marshal in Columbus because the occupancy code was enforced.
  5. Praised Paul Ryan’s primary opponent.
  6. Told a woman with a crying baby to leave his rally.
  7. Accepted a Purple Heart from a vet with the statement, “I always wanted to get the Purple Heart, this was much easier.” Less than a day earlier, the NYT published a piece on his Viet Nam draft dodging.
  8. Refused to endorse Ryan, McCain, and Ayotte (he backtracked on this too later in the week)
  9. Claimed that the November elections would be rigged against him
  10. Claimed to have seen a top secret Iranian video of money being unloaded from a plane in Iran.  What he actually saw was publicly available video shot in Switzerland that had nothing to do with delivery of money to Iran. His campaign then corrected him. Then he repeated the lie again.

He has played right into Clinton’s hands with this strategy.  Her campaign has portrayed Trump as a dangerous choice and then patiently waited for Trump to prove it.  Just one indication of how big an issue this has become is when Charles Krauthammer, that champion hater of everything liberal, feels he has to comment on Trump’s fitness for the office.

As Trump’s poll numbers dropped, a parade of Republican incumbents have abandoned him.

Now 50 leading Republican security experts have released an open letter warning that a Trump presidency would put the nation’s security at risk. 

Mr. Trump “lacks the character, values and experience” to be president and “would put at risk our country’s national security and well-being.”

Mr. Trump, the officials warn, “would be the most reckless president in American history.”

Mr. Trump responded by laying the blame for the world “mess” at their feet.  He blamed them not only for the Iraq war, but also for the deaths in Benghazi and the rise of ISIS.  The latter two are curious since they occurred during the Obama administration when all of these officials were out of power.  But that’s about par for the course for the Trump campaign.

Here’s the basic problem.

The strategy that Trump used to monopolize the news cycle during the primaries is backfiring.  During the primaries the gaggle of other candidates were spending all of their time responding to Trump’s endless streams of insults and bravado.

In this general election cycle, the press is trying to inform the voters about who Trump is.  They hold him accountable for every gaffe.  They document the responses of experts when he says something dangerous.  But the sheer volume of this information simply reinforces Clinton’s claim that she is the more mature and experienced choice.  At this point, she doesn’t have to do a lot more other than to remind people that she isn’t Trump.

If Trump were able to stay on message for more than a day, he would have a real chance in this election because Clinton IS well known and has high negatives with many voters.

At this point, however, it may be too late.

His latest attempt to demonstrate some gravitas in a speech at the Detroit Economic Club drew mixed reviews.  His economic plan is a mishmash of old Republican ideas, old Democratic ideas, and new populist stuff.  There was a little something for everyone, which will likely confuse rather than satisfy undecided voters.  Just a couple of examples include making child care deductible.  Most working people don’t file the more complicated form required to claim this deduction.  Poor people don’t pay enough in taxes to take advantage of it.  As a result, it mostly benefits those that are well off.  That doesn’t square with his core demographic.  He also pledged to halt new regulations including those that would affect Wall Street.  This is seems to be at odds with his claim that he was going to crack down on Wall Street.

Trump is his own worst enemy because under the pressure of this campaign his true nature is on display for the whole country.  That nature is an unstable narcissist with an insatiable appetite for the spot light.  But like many who have also suffered from that obsession, the public is beginning to realize that he isn’t the winner that he claims to be.  He doesn’t really have wings, just wax and feathers.  Those are not enough to carry him to victory in the November.

 

 

 

Honesty

Sunday, June 12th, 2016


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One of the big issues in this campaign appears to be honesty.

Just looking at the facts, the answer is obvious.

As tracked by Politifact, Trump tells the complete truth only 3% of the time.  Clinton tells the complete truth 23% of the time.  It isn’t even that Trump is telling a nuanced truth.  60% of the things he says don’t have a shred of truth.  These aren’t just little lies either.  19% are pants on fire whoppers.

Here’s just a sampling.

Crime is rising.  It’s not.

“I watched in Jersey City, N.J., where thousands and thousands of people were cheering” as the World Trade Center collapsed.    Trump appears to be the only person who saw this.

“Frankly, (Hillary Clinton) doesn’t do very well with women.”  She leads Trump with women by the largest margin in history.

The question has to be why some polls give Trump higher marks than Clinton on honesty when the facts simply don’t support it?

Some of it might be the fact that Clinton only recently clinched her party’s nomination.  Since that time her overall polling numbers have been going up.

But something else is going on here.

When we dig into the responses regarding Trump, what emerges is that some of those supporting Trump feel that he is more genuine that Clinton.  His willingness to speak in an unfiltered way causes them to assume that he is speaking from the heart.  Clinton on the other hand is a professional politician.  She is schooled in the sort of cautious speech that some people associate with fear of “telling it like it is”.

This is also reflected in the Trump’s assault on what he and his followers call Political Correctness.  His willingness to offend virtually every special interest group in the country for the entertainment of his white male audience wins him points for authenticity.

Perhaps this is how he actually feels.  It is also possible that he is sincerely expressing his unfiltered opinion, though that opinion appears to change based on the reaction that it generates.

IMHO nothing could be further from the truth.  His “authenticity” is an act.  It is the result of his talent as con man.  He built a following pointing out that the conservative working man has been duped by the Republican Establishment.  Trump, however, is also playing them for suckers by channeling Triumph the Insult Dog and letting them fill in the blanks based on their own fears and biases.

Those who support him, however, have such deep animus for Clinton, that they have latched onto to this difference to justify their support.  They say that he is just “Donald being Donald”.  That he doesn’t really mean all of the things that he says.  He will ultimately make “deals” that are in the best interests of the country.

Let’s look at some of those deals from the perspective of what is best for the country.

The most obvious is the Supreme Court.  Whomever is the next President will have at least two and perhaps three vacancies to fill.

Clinton will nominate liberal judges.  The result of that will likely be reversing the narrow Citizen’s United decision.  That will allow new limits to be placed on private money in elections.  Trump supposedly shares this interest.  He claims that his own personal fortune means he can’t be bought.  But the judges he has proposed nominating support the view that corporate money is free speech.

Instead Trump has promised that he will appoint judges who will overturn Roe v. Wade.  Whether or not this is even possible, packing the court based on an abortion litmus test sets a very dangerous precedent.

Clinton has put forward solid policies to both reduce the debt and improve the job prospects for the very people who are supporting Trump.  Trump has only said that he will be the best job’s president the country has ever seen.  It also came out recently that he routinely fails to pay his own workers and contractors. 

None of this information will likely alter the minds of those who already have cast their lot with Trump.  They are so deep in their denial that there is little that Trump can do between now and the election to lose their support.  The rest of the country, however, who approach their job of picking the next President more analytically will discover that the Trump campaign is a sham.  They will reject the violence, xenophobia, and cult of personality that Trump has created and select Clinton because of her policies.

Slip Sliding Away

Sunday, May 22nd, 2016

facism

Many of those who are supporting Trump are doing so because they have lost all faith in the existing institutions, parties, and leaders to make a positive change in their lives.

What’s interesting is that, while they appear to have lost faith in existing leaders, they haven’t lost faith in the democratic process.  Otherwise, why attempt to use it to bring about change?  So in terms of a revolution, this one is still well within the bounds of our constitution and our tradition of democracy which in some ways makes it even more dangerous.

In that context then, what appears to be happening is that those working folks who have been supporting conservative causes over the past fifty years or so (stretching back to Goldwater) are finally waking up to the fact that much of what the Republican Party promised, was never delivered.  Economic reform based on tax reductions never generated the promised job or wage growth.  In fact just the opposite has occurred.  The wealthy have grown even more wealthy and powerful, while everyone else has seen their wages stagnate, their jobs become less secure, and their political power erode.  Social reform never generated the changes in abortion laws or prevented the expansion of rights for the LGBT community.  Government has not been able to slow the growth in minority and immigrant populations or their new found political power.  The government still spends a lot of money.  The debt has grown larger, on average, when Republicans controlled the White House than Democrats.  There are still structural problems with Social Security and Medicare.  The world remains an unstable place.  ISIS has replaced al Qaeda as the “great evil”.

What the Republican Party did accomplish is to erode trust in the institutions of both government, the free press, and academia.  That created an information bubble where many of those who support the conservative wing of the Republican Party live.  Being a conservative Republican became much more an exercise in faith rather than fact.

Their faith in Trump is that he is strong enough to make the changes that they so desperately want to see happen.  They are so deep in their delusion that any individual can in fact affect this sort of change, they ignore what the man is saying.   Instead they project their own individual agenda on their candidate.  This is the best example of motivated reasoning that I have ever seen, but it is also the most dangerous.  That’s because Trump only obligation is to his own agenda.

Here’s just one example of that sort of motivated reasoning.  It is an attempt to logically support an emotional decision which is at the core of motivated reasoning.  These lists generally begin – I’m voting for Trump because …..  I’ve added my comments after each assertion.

Isn’t a career politician
This is the first office he has even run for.  Minnesota voters elected Jesse Ventura as governor for many of the same reasons.  There are very few examples of successful Presidents who had no previous political experience.

Isn’t funded by Goldman (besides Bernie)
Big assumption here.  Trump has already said that he wants to raise $1B to run in the fall.  More specifically, Trump owns stock in Goldman.  Goldman has issued Trump a line of credit.  So technically Trump IS funded by Goldman.

Will take a stand against China before it’s too late
Obviously this begs the question of “too late for what”? But Trump’s promise to start a trade war with China and renegotiate our existing trade agreements has been rejected by most experts as naive and dangerous.

Is running on his own dime, not Super-PAC
See above.  Trump is not going to be running on his own dime.  He was able to run a low budget primary campaign because of all the free media coverage he received.  He perfected the art of dominating the media with outrageous statements.  It is unclear whether he will be able to get away with that in a two person race.  That’s because every time he says something outrageous, the press will also print a response from the campaign of the Democratic nominee.  As a result, he hired a former hedge fund manager to help him raise $1B for the fall campaign.

Has grown a business ten-fold into a third generation which is very hard
Business success does not necessarily translate in political success.  Until Trump releases more tax returns, the scale of his business success will be hard to measure.  The last successful business man to occupy the White House without previously holding an elected office was Herbert Hoover.  That didn’t turn out very well.

Admits we are in a bubble in this country that isn’t far from popping
If that were true, you would expect Trump would be shorting a bunch of stocks and investing in gold.  Trump’s investments don’t reflect that strategy.  But even if they did, the real question is what he would do to either prevent the bubble from popping or mitigate the damage from that pop.  He has demonstrated a reasonable understanding of monetary policy but clearly doesn’t understand how national debt works in a global economy.

Doesn’t drink, do drugs or smoke
He doesn’t appear to have any problems selling alcohol.  As far as drugs, he and his brother were patients of Dr. Greenberg in the 80’s who prescribed amphetamines for weight loss.  This was also documented in a controversial Trump biography by Harry Hunt.

Has a history of promoting women to high positions in his businesses
That’s true.  He also has had a reputation as a playboy.  He has been married three times.  He has admitted having extramarital affairs, and has a long history of describing women in objectified ways.

Is friendly to the LGBT community
Not sure what “friendly” means.  Confused might be a better term.  On the campaign trail, he has said he opposes marriage equality.  He did also say that he was opposed to the NC law prohibiting transgender bathroom accommodations.

Has great support from Orthodox Jewish community
This is true because the Orthodox Jewish community does not want to see the sort of two state settlement between Isreal and the Palestinians that the Democrats and most of the rest of the world support.  Sheldon Adelson has also promised Trump $100M if Trump supports Adelson’s call for moving the US embassy to Jerusalem, which would clearly put the two state solution in jeopardy.

It isn’t clear what Trump’s agenda is, other than to bolster his own over-inflated ego.

He divides the world between winners and losers.  He is the classic school yard bully who will seek to ingratiate himself to those he views as more powerful and denigrate those that he feels are weak.

The problem is that everyone eventually proves themselves to be weak.  Everyone will eventually be a loser.  What will happen to those losers if this deeply unstable man suddenly becomes the most powerful man in the world?

And what happens to his followers if he doesn’t win?  They have already demonstrated their willingness to respond violently to those who disagree with them.  We are also witness to increased unprovoked attacks against immigrants who are the scapegoats in the Trump narrative.

This is how the United States slipped into facism.  Not with a shout, but with a whimper.

Who is John Galt?

Tuesday, March 22nd, 2016

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The Republican Party is struggling to come to grips with the fact that their “base” is no longer loyal to their “principles”. Even worse, the one leading these people astray is a businessman who should be poster boy of what the party principles say all should aspire to.

The party clearly has two choices. They can either reflect more deeply on how their “principles” apply to those they seek to lead, or they can blame this wayward band and their leader as apostates.

It probably doesn’t surprise you that the conservative Republican establishment response is that the working class who are the core of Trump’s support can only blame themselves for their situation and their leader is not a true conservative.

At the core of this dilemma is the Randian Objectivism that has become the bedrock philosophy of mainstream conservatism. It was reflected in Romney’s claim that 47% of 2012 voters would never support him because they were dependent on the government. Paul Ryan famously described the social safety net as “a hammock the lulls able-bodied people to lives of dependency and complacency”.

Rand’s prototypical hero is the businessman, John Galt. He criticized any state intervention in society because it allowed poor people to leech the hard-earned wealth of the rich (sound familiar?). Conservative Establishment Republicans use this philosophy to absolve themselves from any responsibility for their own actions by claiming a sort of social Darwinism. They claim that the outcome of any individual’s life is purely a function of their willingness to overcome any adverse circumstance they encounter with ability and intelligence. Helping those that are in need only prolongs their struggle. They point to their own success as evidence of their piety to this principle without acknowledging that in most cases it was the result of an advantageous birth.

Paul Krugman does a wonderful job of summarizing this attitude.

Stripped down to its essence, the G.O.P. elite view is that working-class America faces a crisis, not of opportunity, but of values. That is, for some mysterious reason why many of our citizens have, as Mr. Ryan puts it, lost “their will and their incentive to make the most of their lives.” And this crisis of values, they suggest, has been aided and abetted by social programs that make life too easy on slackers.

What science tells us, however, is markedly different. The basic cause for the social dysfunction in the black community in this country is not some genetic inability to form strong family bonds. It is the result of systematic elimination of economic opportunity. To paraphrase a Baltimore resident, it is unreasonable to expect people to demonstrate middle class values in the absence of middle class jobs.

What we are now seeing are the same social ills that have been associated with the black community, showing up in the white working class community — addiction, violence, crime, single parent families, chronic disease, increased suicide, and shorter life expectancy.

That in and of itself should not be surprising.

It also should not be surprising that those who are suffering from decreasing economic opportunity and collapsing social stability are both angry and afraid.

What is surprising, however, is that though this phenomena is present throughout the industrialized west, only the US is suffering a rise in mortality among middle-aged whites. Everywhere else mortality continues to trend downward.

Why are things different here?

Paul Ryan and the self-serving conservative Republican elites have successfully used Randian Objectivism to dismantle much of our social safety net. Every other western industrialized country has robust systems to help workers manage the transitions during these sorts of economic disruptions. The result of our purposefully frayed social safety net is not a robust new generation of John Galt’s freed from the shackles of dependency, but a surly terrified generation of workers who have finally realized that they are being exploited and are no longer willing to take the blame.

The delicious irony is that the man leading this populist revolution bent on overthrowing the Republican Objectivists is the epitome of Randian self-responsibility. He is supposed to suggest that those who are struggling just need to be more responsible and work a little harder. Instead his whole career has been built on a false promise that Trump’s success was contagious. It would rub off on you if you just purchased one of his products, visited one of his properties, or watched one of his reality shows. Rather than lecture the disgruntled white working class, he agrees that they have received a raw deal. Rather than suggest that they are responsible for their own success, he blames the current political establishment (Republican and Democratic) for making bad deals that have disadvantaged workers. He promises his followers that he will be able to relieve their pain by replacing those bad deals with good ones that he will negotiate on their behalf.

FDR recognized the same thing. The Great Depression decimated the economy because unregulated capitalism ran amok. FDR made a new deal with workers. Rather than replace capitalism, he proposed a new mixed economy — strong business constrained by a strong government. Government will also construct a social safety net. That safety net would allow workers to retire with some dignity when they grew too old for physical labor. It would also mitigate the pain of individual job loss when economies contract or individual companies fail.

After the biggest economic constriction since the Great Depression, workers are again stressed and angry about the abuses of big business and the failure of the government to live up to its promises.

Donald Trump claims he can deliver a better deal. His ability to convince workers that this is possible is testimony to the level of their desperation as well as his talent as a con man.

But it is also fascinating that when faced with the choice between channeling John Galt or FDR, he chose FDR.

More Thoughts on Income Inequality

Saturday, January 16th, 2016

Paul Krugman recently published a good summary of the historical discussions regarding income inequality.

Before diving into climate change, I thought it would represent a reasonable addendum to what has already been posted.

It does venture in a little bit into the territory of why we should reduce income inequality and how we should go about doing that.

First let’s explore the three generally accepted reasons for the current huge income inequality.

Productivity
People get paid based on the value of their work. The reason some people get paid hundreds or thousands of time more than other people is because they are uniquely capable, skilled, and experienced. It is the old plumber joke. A man calls a plumber because he is having a problem. The plumber walks in, looks around for a minute, and hits a pipe with his hammer. The problem is fixed. The plumber hands the homeowner a bill for $100. The homeowner objects complaining that the plumber was only in the house for 10 minutes. The plumber takes the invoice back, adds these itemizations, and hands it back to the homeowner. Labor – $20. Knowing which pipe to hit and where to hit it – $80.

For the record, I have no problem with those with unique skills getting paid what the market will bear for those skills. Those include athletes, entertainers, and actors as well as brilliant developers and visionary entrepreneurs.

Luck
People get rich because they are in the right place at the right time. No better example of that than the recent Powerball lottery. That event produced roughly 5 people each worth $200M or so after taxes. Their chances of winning were ridiculously thin, but they won none the less because there are always winners. Not many who participated in one of our gold rushes struck it rich either, but the number of people who did participate spoke to the belief in this country that we all have an opportunity to strike it rich. But this sort of windfall has nothing to do with character, talent, or persistence. Just luck. That same luck is evidenced in the fact that parentage directly or indirectly accounts for a significant percentage of those who are wealthy today. This whole concept of “wealthy” luck was explored deeply in Malcom Gladwell’s Outliers book.

I have no problem with those who end up being wealthy because they were lucky. I don’t think that they have any standing to suggest that a higher tax rate will somehow reduce the small percentage of people who figuratively or literally win the lottery. But I agree that we have always been a “gold rush” country where we celebrate the good fortune of those who overcame enormous odds through blind dumb luck.

Power
Executives at large corporations who get to set their own compensation programs. Financial speculators who benefit from information that the rest of the market doesn’t have. Fraudsters who get rich off schemes that fleece the naïve or greedy. Power brokers who are able to exchange political power for financial gain.

These are the segment of wealthy that I think are the most troublesome. That’s because they use their wealth to acquire political influence. They use that political influence to gain an unfair advantage. That process is corrosive in a democratic society.

So What
There is the claim that “it has ever been thus”. We’ve always had income inequality, the claim goes. What is so different now?

The difference is that the income inequality is now larger than it has been since the robber baron gilded age. The public’s disgust about the influence of wealth at that time elected reformers like Teddy Roosevelt and William Howard Taft. These wealthy civic-minded leaders realized that our democracy couldn’t survive if so much wealth was concentrated in the hands of so few people. That’s because our political system then, and our political system now, allows money to purchase political influence. Those that are driven to dominate industries through economic power see political power as just another opportunity to acquire an unfair advantage over their competitors. Reformers passed legislation to break up the trusts and monopolies built by folks like Morgan, Carnegie, Rockefeller, and Schwab.

I’ve documented how the same thing is going on in markets today. It is clearly more sophisticated, but it is no less insidious.

There are certainly those, like Mark Zuckerberg, who built his fortune on the strength of a great idea that created a whole new category of software. We can talk about his luck of being in the right place at the right time, combined with being born into a wealthy family that could afford to send him to the best schools, to getting accepted at Harvard at a time when the college-based social networks were just taking off. But for every Mark Zuckerberg, there are roughly 30 corporate execs just making a salary.

70% of the top .1% of fabulously wealthy wage earners are corporate execs, financial professionals, real estate speculators, and lawyers. It is this dramatic growth in executive salaries that has been the dominant force in creating a new gilded age.

What Should Government’s Role Be?
That leaves the fundamental question of the purpose of progressive taxation, government oversight in market rules making, and money in politics.

The extraordinary gap between the rich and poor, driven by power rather than luck or skill, demonstrates that money is already providing the “Power” wealthy inordinate influence in politics. The powerful have already reduced the impact of taxation on their annual income as well as increased their ability to preserve their wealth for their heirs. They have manipulated the rules of the marketplace to provide their companies an unfair advantage against both competitors and the public. Finally they have achieved this by becoming the primary funders for political campaigns of those politicians who are willing to do their bidding. Four hundred families have provided half the funding for the current presidential campaign. That is unprecedented.

Progressive taxation is not punishment for success. Instead it is a tool that a democratic society can use to balance the political power that naturally accrues to the wealthy. The purpose of that balance is not to discourage success, but rather to lower the barriers that the “Power” wealthy can put in place to make it more difficult for others to succeed.

Revenues generated from higher taxes on those that I characterize as “powerful”, can be used to build a stronger social safety net and provide access for all citizens to the tools (education, investment, and government subsidies) needed to participate in the start-up economy. The 50’s and 60’s were the period of our most rapid growth and technological progress. We also had much higher top tax rates and much lower income inequality. Sweden is a good example of a high-tax, low-inequality state today. They have high marginal tax rates on their top earners and a very healthy start-up economy. They use the revenue generated from these high taxes on top earners to build a strong social safety net. They claim that this strong safety net encourages more risk taking because it reduces the personal costs of failure.

Creating markets that operate more fairly than today’s markets protect investors and reward innovation in ways that our current markets don’t. Most start-ups get acquired today because big companies continue to have significant market advantages over small ones. Freeing up small companies from issues of tortuous patent infringement, contractual barriers to competition, and de-facto monopolies will benefit consumers and the economy in general.

Breaking the connection between money and political influence will deliver on the promise of our democracy. One person. One vote.

Summary
The issue is not wealth.

The issue is not talent.

The issue is not luck.

The issue is how we want our economy to function.

We currently have a wealth-based economy. Wealth-based economies are inherently less stable than consumer-based economies. Our wealth-based economy was not the natural outgrowth of the disruptive events of automation. It was the unnatural influence of money on government policies. Those government policies encouraged a dramatic increase in corporate executive compensation that was not justified by company performance, allowed insider trading and stock manipulation, and increased corporate power and protection which weakening the bargaining power of workers.

I submit that a wealth-based economy is also not sustainable in a democracy. That’s because the natural tendency of those who have wealth is to protect it. That “protection” inevitably becomes influence on government policies from taxation, to market rules, to executive compensation.

At some point, those who are not part of the wealthy class will begin to realize that they are playing a game that is rigged against them. Rewards don’t go to those who are willing to work hard and play by the rules. Rewards go those who make the rules.

In a democracy the rules should be made by and for the largest number of voters. Right now many of our rules benefit only a small minority – an oligarchy.

One of those rules will be a rejection of the myth that high taxes discourage investment innovation. There is no data to support that claim. Innovation suffers when markets are dominated by large companies and rules/monopolies prevent the emergence of disruptive technologies.

If we want to encourage innovation, subsidize education, promote new business formation, expand the social safety net, and invest in emerging technologies. That would increase the number of “Productivity” billionaires even with high marginal tax rates. We would return to the meritocracy of the 60’s where talent and determination opened the doors to opportunity. Today, parentage is the primary determination of success.

We would not reduce the number of “lucky” wealthy because taxes have no impact on luck. Those who are lucky will continue to be lucky and should in some ways be willing to give back to a society that afforded them an opportunity that they didn’t themselves deserve.

We WILL reduce the number of those who achieve their wealth through warping the marketplace to their own benefit. The savings will diversify our economy, reduce those companies that became “too big to fail”, and close all of the loopholes and shortcuts to prosperity that only the “smart” money could take advantage of. In other words, those who in the past depended on Power to secure their wealth will now have to work for it just like everyone else.

That may result in some of the fabulously wealthy becoming just wealthy. It may also reduce inequality, but inequality will always be with us. It will expand opportunity which has always been the basic promise of this country.

Conservative Myth – Income Inequality is Fine

Thursday, December 10th, 2015

We’ve already gone through the question of whether or not an unregulated free market really exists in this country (it doesn’t) and whether that market is a fair distributor of wealth (it isn’t).

Just as a reminder. I’m not attempting to suggest any solution to the problem, but just addressing the conservative myths. I want to separate those two discussions, because so often the defense of a myth is the suggestion that there is nothing reasonable you can do to prevent it. We can get into solutions in future posts. Let’s focus these discussions on existence rather than remediation.

So now let’s dig a little deeper into the related conservative myth regarding their tolerance of income inequality. That myth has three parts.

The first, like many conservative myths, ignores the facts and suggests that income inequality isn’t really that bad for the individual. Everyone has a higher standard of living after all and so those who are concerned about income inequality are really just engaged in class warfare.

The second, is that a concentration of wealth in the hands of a few is good for the economy. It is the ultimate expression of a free market at work and it is the wealthy who create jobs, so any attempt to limit their ability to maximize their income is going to hurt the economy.

The third, is related to the second, but more philosophical. Wealth is the natural outcome of a free market. So progressive taxes and other methods which require the wealthy to pay more than everyone else is unfair. These methods punish success and by implication discourage others from making the same sacrifices that these special individual are willing to make.

Let’s take these in order.

Income Inequality is Harmless

Hopefully we all can agree that income inequality is great if you are part of the small group whose share of the income pie has been growing. We’ll talk about that group in more detail in the next two parts of this myth.

For the purposes of this portion of the discussion let’s focus on the rest of those who are primarily wage earners and whose incomes have been basically flat since roughly 1970.

Here’s how life has changed for this group.
1. Mom’s went to work. They did this to allow their families to remain in the middle class, or as an effort to get into the middle class. One wage earner used to be sufficient for a comfortable middle class life, but it isn’t anymore. The nature of middle class jobs changed for a number of reasons. One of those reasons is that executives began taking a bigger piece of the compensation pie. Up until the 1970’s, workers’ wages kept pace with productivity. After the 1970’s only executives benefited from increased corporate productivity.
2. Families got smaller. Middle class families could no longer afford four kids. The costs to raise kids went up in part because mom’s were no longer at home to help. Smaller families mean smaller schools, slower growth in the consumer economy, and long term fewer workers paying taxes and supporting Social Security and Medicare.
3. Commutes got longer. Middle class work weeks got longer. Middle class workers took less vacation. The United States in some ways turned into Japan in terms of the 24-7 nature of middle class jobs. As a result, the health of middle class workers declined as their stress levels went up.
4. The bargaining power of middle class workers decreased. Several factors at work here. One was an aggressive union-busting strategy championed by Ronald Reagan. Another was an aggressive outsourcing of manufacturing to right-to-work southern states and offshore low cost of labor centers. The third was decimation of the white collar workforce as a result of automation. Many middle management jobs simply disappeared as factory work contracted, clerical work disappeared, and software replaced paper and the workforce that managed that paper.
5. The cost of college skyrocketed as Republicans purposefully cut funding to higher education as part of the larger supply side economic fantasy. The middle class did get a tax break, but that modest increase in income fell far short of the cost to send their kids to college. So those families pulled money out of the only other asset they had, their homes. That asset was dramatically devalued in the financial crisis of 2008. The result is that those families are no longer able to pay for a college education. That burden has now shifted to students who leave college with huge debt burdens that previous generations did not have to deal with. The result of those burdens are being felt across the economy as college graduates spent a decade or more paying off debts rather than buying houses, starting families, or starting new businesses.
6. College education used to be the huge social melting pot where smart kids from modest means could make the jump to high paying jobs based on their willingness to work hard. Now college, particularly the elite colleges that are the gateway to the executive level jobs in this country, are only available to the children of those executives. The meritocracy of the 1950’s has been replaced by an oligarchy.

The Concentration of Wealth is Good for the Economy

I’ve dealt with this in previous posts. But here is a quick summary.
1. There is no trickle down economy. Wealthy people only buy from other wealthy people.
2. The wealthy get a substantial amount of their income from the stock market. As a result, their spending habits fluctuate based on the market. This makes for a far more volatile economy than one based on a large set of middle class consumers.
3. The wealthy are NOT job creators. Most jobs in this country are generated by medium size high growth companies. Most of these companies are privately owned. Those owners are not taking big salaries. They may have high net worth because of the value of their business, but all of their assets are tied up in their business. So they aren’t generally reporting high incomes. Too many small businesses fail or get acquired, so the gains of small business are pretty much offset by the loses. Big companies that can afford high priced CEO’s are the ones doing the acquiring. As a result, they lay off more people than they hire. So they also are not a long term significant contributor to job growth.

Wealth is the Natural Outcome of a Free Market

While it is true that in a free market income distribution is going to produce some wealthy people, we have already proven that in this country, markets aren’t free. Worse yet, markets have become warped by the political influence of wealth. Because we’ve allowed markets to become biased to benefit the wealthy at the expense of everyone else, we shouldn’t be concerned that an effort to remove some of this bias is “unnatural”.

While it is true that wealth is an incentive, there is no evidence that progressive taxes are a disincentive, or that a multi-millionaire is any less driven than a billionaire. If higher marginal tax rates were a disincentive to wealth, we would see it reflected in slower economic growth during times of high marginal tax rates and higher growth during times of low marginal tax rates.

During the period 1951-63, when marginal rates were at their peak—91 percent or 92 percent—the American economy boomed, growing at an average annual rate of 3.71 percent. The fact that the marginal rates were what would today be viewed as essentially confiscatory did not cause economic cataclysm—just the opposite. And during the past seven years, during which we reduced the top marginal rate to 35 percent, average growth was a more meager 1.71 percent.

Finally there is the myth that a progressive tax system removes the incentive for those who aspire to wealth to make the same sacrifices that those who achieved it where willing to make. The reality as we covered in the previous post is that great wealth in this country is much more an accident of birth than the product of hard work. Less than 20% of the billionaires in this country earned all of that income themselves. The other 80% inherited a substantial amount of money, in some cases more than a billion dollars.

That is not to say that those who achieve great wealth weren’t willing to work hard and make sacrifices. They were. But it wasn’t their hard work and willingness to sacrifice that distinguished them from those who didn’t achieve great wealth. The difference is that they were lucky. They stood at the table of life and rolled a 7. They were born into the right family at the right time with the right skill set to take advantage of a disruptive moment in our economy. There is nothing wrong with being lucky, but there is something wrong when we suggest that taxing the lucky will somehow diminish their ability or desire to take advantage of their good fortune.

But that still leaves one question unanswered. What sort of incentive does wealth provide for those who are already wealthy? Turns out that the major incentive is preservation of their family’s wealth through investments to minimize their taxes and secure the future for their children. Over the past 50 years or so, those investments have include political contributions to influence favorable rule making.

Again I’m not trying to make value judgments here, though obviously I do have an opinion. I’m just stating facts. For example, it is entirely natural for parents to try to make a better life for their children. By not paying closer attention to the influence that wealth has in this country, however, we are witness to the meritocracy of the 60’s becoming an aristocracy. That’s because those who benefited from the ability to make the jump from the middle class to wealth have had the means to change the system so that it benefits the children of the wealthy rather than all talented, gifted, and hard working children. There are still the same number of opportunities for Ivy League grads now that existed in the 60’s, but a much higher percentage of those grads are coming from wealthy families.

So it raises the inevitable question of which is more beneficial to our society, one billionaire or 20,000 middle class wage earners. In other words, what kind of a society to we want ?

Here are our choices. The society we have today concentrates wealth in the hands of a few who control the rules of the game for their own benefit. Those rule changes have greatly impacted the middle class which is in steep decline. The society we had during the most prosperous years in our history concentrated economic and political power is in the hands of a middle class. They received a fair share of the productivity gains that they delivered because of strong unions. That fair share was sufficient to allow them to provide their children all of the advantages and support required to also be part of the middle class. The result was a growing middle class that sustained economic growth through the 1970’s when the rules began to change.

Economic prosperity doesn’t trickle down, and neither does civic prosperity. Both are middle-out phenomena. When workers earn enough from one job to live on, they are far more likely to be contributors to civic prosperity — in your community. Parents who need only one job, not two or three to get by, can be available to help their kids with homework and keep them out of trouble — in your school. They can look out for you and your neighbors, volunteer, and contribute — in your school and church. Our prosperity does not all come home in our paycheck. Living in a community of people who are paid enough to contribute to your community, rather than require its help, may be more important than your salary. Prosperity and poverty are like viruses. They infect us all — for good or ill.

Inclusive economies always outperform and outlast plutocracies. That’s why investments in the middle class work, and tax breaks for the rich don’t.

Conservative Myths – Free Market

Saturday, November 14th, 2015

One of the basic claims of conservatives and libertarians is that government intervention in capitalism distorts and ultimately inhibits the free market. More importantly, the implication is that the free market would somehow operate more efficiently if it were unfettered. Republicans have claimed among other things that an unfettered free market will cure poverty, solve global warming, reign in the growth of healthcare spending, and give everyone the opportunity to become wealthy.

So let’s dig into this myth as a precursor to a discussion about income inequality.

Markets, free or otherwise, are places where goods and services are bought and sold.

Markets require rules in order to operate. Sellers want to be assured that they are going to get paid. Buyers what to be assured that they get what they paid for.

eBay is a great example. They created their own market free from government regulation. It had anonymous buyers and sellers. Everything, at least in the beginning was priced based on competitive bidding. As long as there was more than one bidder, prices would always settle on what the real value of that product or service was at that particular point in time. Basic supply and demand. But even eBay had to have rules. They had to have a way to escrow payments to make sure that sellers got paid and buyers actually received what they paid for. They have to have a way to resolve disputes if products turned out to be misrepresented. They also had to protect sellers from unethical buyers who might want to blackmail sellers using bad reviews. eBay is as close to free market as you are going to get in this day and age, and they did it through consistent enforcement of a set of rules that were fair to both buyer and seller.

Government provides the rules that allow markets to operate in efficient and predictable ways. Those rules include contracts, bankruptcy, and fraud just to name a few. The notion that markets are somehow fettered by these rules is folly. In fact, it is very much the opposite as we will soon see.

This brings us to the next step in the myth of the free market. That is the notion that the marketplace is the fairest judge of the worth of both goods and labor. That might be the case if the markets were themselves fair, but if people cheat to gain an advantage it raises the real question of how fair that market is going to be.

Here are a few examples.

Insider Trading
Insider trading is taking unfair advantage of information that you may have that is not available to the rest of the market. The expectation of most people familiar with the term is that insider trading is illegal. The fact is, however, that CEO’s trading with their own stock are exempt from insider trading rules. Even worse, companies no longer have to disclose when they are trading in their own shares, whether that is buying back their own stock or when their senior executives exercise their options and then sell the stock. Rules put in place during the Clinton administration treat executive compensation that is performance-based (e.g. stock options) as tax exempt for the company. These rules have created a perfectly legal situation where a CEO can direct his company to buy back a sufficient number of their own shares to artificially drive up the price, and then sell off shares acquired through their executive compensation package before the stock has had a chance to fall back to the normal trading ranges. This is one of the ways that CEO’s of companies underperforming the stock market can still secure windfall profits for themselves. It is not illegal. But it is certainly cheating on the principle that compensation has anything to do with performance. What’s worse, it is not only cheating those who are investing in this company or its competitors. We tax payers are subsidizing these windfall profits that CEO’s enjoy because we make up the difference that their taxes would otherwise supply.

This is just one example of how large companies since roughly the 70’s have tilted their markets in their favor through manipulation of the rules governing the market. It is also an example of how tax rules put taxpayers in the position of redistributing pre-tax subsidies UPWARD in our economy.

Another example was the subject of a three part story in the NYT.

Contracts
That covers contracts. Companies large and small now include terms of use contracts in all of their online and many of their hard goods packaging. The same language is in many supply contracts as well. Those terms of use preclude the user from participating in a class action suit. Instead the consumer or trading partner agrees to arbitration. The problem is that the arbiters who hear these cases have a built in bias to find in favor of the company. That’s because those who find in favor of the customer quickly find that they fall off the list of arbiters acceptable to the corporations. The result has been that third party arbitrations end up being resolved in favor of the company most of the time. This gives companies wide leeway to behave in predatory ways without fear of consequences.

Here’s another.

Generic Drugs
It is perfectly legal in this country for large pharmaceutical companies to pay producers of low cost generic alternatives to delay producing those drugs. The result is that healthcare costs in this country are artificially inflated because only the higher priced proprietary drug is available. Worse yet, we are the only country in the world that allows this practice. So our drug prices are also the highest in the world. The annual additional cost that the insured and the government bear is estimated to be $3.5B/year. This is another direct subsidy to big pharma.

Cable Monopolies
We also pay more for Internet service that any other country in the world because we have given the cable companies, who dominate the market, a monopoly in most areas. 80% of cable subscribers in this country only have one choice. As a result cable costs 3x more in the US than Europe where consumers have up to 7 providers to choose from.

Big Banks
Too big to fail banks now control 44% of the loans in this country. They are able to offer lower interest rates on those loans than smaller competitors precisely BECAUSE the financial markets know our government will not allow these big banks to fail.

Bankruptcy Law
Similarly the rules for bankruptcy favor corporations and banks over individuals. Corporations can use bankruptcy to walk away from pension obligations or union contracts. Individuals cannot use bankruptcy to walk away from student loan debt.

Ivy League Schools
Because wealthy people get big tax breaks to contribute to private institutions of higher learning like the Ivy League Schools. They also secure the guarantee of enrollment at those institutions for their children through “legacy” preference. The problem is that those tax deductions constitute a government subsidy provided by the rest of us tax payers that is estimated at almost $60K a year per Ivy League student. The tax payer subsidies to state schools generated primarily through direct payments rather than tax deductions is about $6K per student. So we are not only contributing to the wealth of the 1% through the tax avoidance strategies of their companies, we are also paying to educate their kids who will learn how to expand this strategy for their benefit when they follow in their parents footsteps.

Summary
I could go on for quite a while, but I think that you are getting the point.

There is no such thing as a free market because those who control the market would prefer that it operate in ways that benefit big corporations and disadvantage competition and customers.

The result is a massive subsidy that consumers, small companies, and the government provide in the form of anti-competitive rules and regulations. This upward pre-tax distribution of money is why many corporations spend more money on lobbying than they do on R&D.

Our markets are rigged to benefit the powerful and wealthy. The powerful and wealthy are perfectly happy to perpetuate the myth that they earned their wealth because they were smarter and willing to work harder than everyone else. The data, however, suggest otherwise. It shows that corporations with highly paid executives generally underperformed the market and their competitors.

The real story is that a high percentage of the wealthy and powerful got there because they started out on the inside through the accident of birth, learned the game at the same schools their parents attended and supported, and figured out how to expand their unfair advantages when they had their turn at the wheel.

The reality is that if we were able to stem the tide of this massive upward redistribution of wealth, we wouldn’t need nearly the amount of post-tax redistribution to the working poor through transfer payments. We would be able to pay our bills because the existing tax system would be generating a lot more money. We would be able to fix our roads, educate our kids, and feed our hungry.

Instead we are supporting an oligarchy who claims that they deserve what they stole because the “free market” decided that they should have it. While they are promoting the myth of the free market, they are using their wealth to buy political influence. They use that political influence to warp market and tax rules in their favor.

They say publicly that “government is the problem”, but behind the scenes this government is working just fine for them. That’s because they are getting what they paid for.