Archive for the ‘Finance’ Category

Should I Stay or Should I Go?

Monday, June 5th, 2017

Why is Trump so unpopular?

His supporters claim that a biased media and the “sore loser” Democratic Party are to blame.  While Trump supporters may draw some comfort from those excuses, the real cause is much more obvious.

Trump has lost a third of his support since taking office based on his actions.

  1.  He passed a bill that broke his promise to replace the ACA with something which provides better coverage to more people for less money.  His bill covers 23M fewer people, raises costs for the sick and elderly, removes pre-existing conditions protections, gives a huge tax break to the wealthy, and saves no more money than the ACA.  73% of voters oppose it.
  2. His admitted Muslim travel ban was poorly implemented and struck down by the courts.  Most polls show that the public supports the courts and opposes the ban.
  3. 78% of Americans support an independent investigation of the claims of Russian involvement in the election and Trump’s potential obstruction of justice.
  4. 62% of voters want to stay in the Paris Accords.  Trump announced the US was leaving based on an economic argument that was widely criticized by the fact checkers.
  5.  A majority of Americans (53%) want Trump to release his tax returns.
  6. Finally a majority (54%) of Americans believe President Trump is abusing his powers.

Trump’s historically low approval ratings are his own fault.  Neither the media nor the Democrats forced him to take these actions.  Hopefully his current supporters will also eventually hold him accountable.

For those Trump supporters who aren’t there yet, allow me to share the thoughts of Ray Dalio.  He is a billionaire hedge-fund manager who has been a vocal Trump supporter until recently.

His concern is that he hasn’t seen the pivot that he was expecting from Trump.  That was a pivot from seeking confrontation to implementing policy.  Trump won.  He has an historically unique moment for the conservative movement – Congressional and Judicial majorities.

Instead Trump has spent his time in office seeking out conflict.  Instead of making the fundamental changes in the way that government operates that he promised, Trump continues to drive the world to the brink of disaster environmentally, militarily, and financially.

Here’s how Dalio is evaluating his choice.

It seems to me people who are trying to figure out whether or not to support him are faced with three big questions: 1) what exactly is the part he’s trying to optimize for (e.g., American manufacturing workers) and at the expense of whom, 2) am I more aligned with that part he is trying to protect (e.g., American manufacturing workers) or more aligned with those who will lose out (e.g., immigrants, those who will lose benefits from his budget changes), and 3) will his path of conflict rather than cooperation be effective or harmful?

The rest of us are looking forward to 2018 when we plan to use the ballot box to vote out those who supported his plans.

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 – a Joker, a Welsher, and a Crook

Tuesday, September 20th, 2016

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Donald Trump nearly went personally bankrupt in the early 90’s as his casino empire collapsed.  Bankers forced him to give up his majority holdings in four properties, sell his yacht, and his airline.

He rebuilt his casino/real estate empire only to see it collapse again in 2004 and 2009.  As part of the 2004 bankruptcy, Deutsche Bank revealed that they had loaned Trump’s company $40M backed by his personal guarantee that included his own estimate that he was worth $3.5B.  The bank and the court discovered that he was only worth $788M.  He later defaulted on that loan and sued the bank. They settled in 2010 with Trump getting a 5 year extension to pay back the loan.  It is unclear whether than obligation was satisfied, but the bank has provided Trump other loans since.

What’s important about these timelines is that Trump’s business model changed in 2004 when he started a new business as a celebrity on the long running Apprentice series.  Trump reported that NBC paid him more than $200M over 14 seasons to appear on the show.  NBC said multiple times that those figures were “grossly inaccurate and … significantly overstated”.  But this was only one of the whole host of celebrity endorsements that Trump was making.  The problem is that celebrity endorsements simply don’t bring in the same cash that real estate does, but they also don’t require nearly the same amount of upfront cash.  So it appears that Trump began to suffer from a cash flow short fall between the costs of his lifestyle (needed to support his endorsement business) and the income that lifestyle was generating.

He did the same thing most every other family in the country does when that happens.  He took some money out of the piggy bank.  In this case the piggy bank was his personal foundation.

The Washington Post recently documented that he withdrew roughly $258M from his charitable foundation to pay his own personal bills.

Now you might say that this was his own money, after all, and he should be able to do whatever he wants with it, but that’s not how charitable foundations work.  Trump got a tax deduction for the money that he donated to this charity.  Taking money back out to pay his own expenses constitutes fraud and violates federal rules against “self-dealing”.

To make matters worse, he wasn’t even taking out his own money.  He had pretty much run his foundation dry of his own money by 2006, leaving it with just $4,238 at year’s end, according to tax records.  He made small donations in 2007 and 2008.  Everything after that was other people’s money.  Other people who were making donations to his charity in order to ingratiate themselves to him.

Hillary Clinton has been accused of selling access to the State Department in return for large donations to her family’s charity.  The difference is that the Clinton foundation used those donations to fight AIDs.  The Trump foundation used access to Trump to secure large donations, but then used some of that money to pay Trump’s bills.

Here’s how he used that money.

In 2007, he settled a dispute with Palm Beach over the size of a flagpole at his Mar-a-Lago Club.  The original unpaid fines for the zoning violation totaled $120,000.  Trump settled with the city by offering to make a $100,000 donation to a veteran’s charity.  Rather than write the check, the donation came from his charity.

In another case in 2010, Trump was offering a $1M prize during a charity golf outing at a Trump golf course for anyone who had a hole in one.  Martin Greenberg won the prize.  The small print on the rules said that the golf ball had to travel at least 150 yards.  The hole where this challenge was set up was deliberately less than that.  Greenberg sued Trump’s club, the charity of former NBA star Alonzo Mourning, which was also hosting the tournament, as well as the insurance company that had underwritten the prize.

Eventually, Trump’s club and Greenberg settled the case, with the course agreeing to donate $158,000 to a charity chosen by Greenberg.  Trump paid that bill using foundation money.

In 2013, the foundation purchased $5,000 advertising for his hotels in programs for three events organized by a D.C. preservation group.  In 2014, Trump paid for a portrait of himself purchased at a charity auction with $10,000 of foundation money.  This is reminiscent of a similar $20,000 purchase of a portrait in 2007 that he also made with foundation money.

The bottom line is that this is all illegal.

“I represent 700 nonprofits a year, and I’ve never encountered anything so brazen,” said Jeffrey Tenenbaum, who advises charities at the Venable law firm in Washington. After The Post described the details of these Trump Foundation gifts, Tenenbaum described them as “really shocking.”

“If he’s using other people’s money — run through his foundation — to satisfy his personal obligations, then that’s about as blatant an example of self-dealing [as] I’ve seen in a while,” Tenenbaum said.

 

The real question is if this guy is as wealthy as he said he was and as generous as he said he was, why didn’t he just pay these bills out of his own pocket?  Why would he take the risk of breaking IRS rules for what to him should have been pocket change?

You can ask the same question regarding the $25,000 donation that the foundation made to the Bondi campaign just before the Florida AG dropped her plans to bring legal action against Trump University.  That donation was also illegal.  It should also have been easy from Trump to write the check himself.  He didn’t.

There are only two answers.

  1. He is pathological and this was an obsession that he simply couldn’t control.
  2. He didn’t have the money and this was the only way that he could cover those expenses.

In either case, it is just another example of why this person is uniquely deceptive and wholly unsuited for the office that he is seeking.

 

 

 

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.

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.

The Empire Strikes Back

Tuesday, September 15th, 2015

There are plenty of frightening things about Trump’s campaign.

What is most frightening is his xenophobic appeal to nativism. It has given voice to an ugly white bigoted segment of society that has always been there, but was not discussed in polite company. These are the neo-nazi white supremacist racists who have enjoyed resurgence over the past eight years because a black man was in the White House. They were able to scream their bigotry in the public square because conservative Republicans claimed it was all politics. The worst stuff imaginable was suddenly fashionable among those who opposed the President because of his politics AND his race.

While they weren’t looking, however, conservatives have discovered that Trump is not just a racist, which they understand. He is also a populist. Worse yet, he is a rich populist, which seems an oxymoron, but doesn’t seem to disturb his followers. Even more terrifying to the conservative Republican establishment, his populism hasn’t just targeting illegal immigrants. It has also targeted bloated corporations who have had their way for too long and CEO’s who have been packing it in at the expense of their workers.

This is a very interesting turn of events. Ever since Reagan coopted the evangelical political movement awakened by Carter, Republican candidates have run on a whole platform of social issues. Once elected, however, they only delivered on the fiscal issues that were most important to their big money backers. Over the years everyone assumed that social conservatives actually cared about all of these fiscal issues too. Turns out that those supporting Trump don’t really care about the reducing taxes, expanding federal programs, and state’s rights. They understand the impact that big money has had on politics and are just as unhappy about large corporations and high income CEO’s as they are about illegal immigrants. Trump, running as a conservative Republican, hates free trade deals, loves Medicare and Social Security, wants to punish big companies that ship their jobs overseas, wants to tax CEO’s with cushy comp packages, and pledges to hold boards more accountable for their crony capitalism. In that regard Trump is MUCH closer to Bernie Sanders than he is any other candidate on the Republican ticket.

As Paul Krugman points out

The influence of big-money donors meant that nobody could make a serious play for the G.O.P. nomination without pledging allegiance to supply-side doctrine, and this allowed the establishment to imagine that ordinary voters shared its antipopulist creed.

But Mr. Trump, who is self-financing, didn’t need to genuflect to the big money, and it turns out that the base doesn’t mind his heresies. This is a real revelation, which may have a lasting impact on our politics.

The empire has inevitably begun to strike back.

The Club for Growth, that mainline supply side shill for political big money, is raising money to start running ads against Trump because of his tax policy.

Their hope is that they are going to be able to convince enough conservative Republicans that Trump is not their friend. This is going to be really interesting because the moment those ads begin to run I predict his poll numbers will improve. Rather than vilify Trump, these attacks from the conservative Republican establishment will validate what Trump has been saying all along. Those that have been sitting on the sidelines not sure that Trump is the real deal will realize that the Republican establishment, whom they also don’t trust, DOES take him seriously. They believe that he is dangerous. They recognize that he isn’t going to succumb to their influence. And finally, the establishment is terrified of what will happen to them if Trump is elected. This attack will be the sort of endorsement some of those on the sidelines have been waiting for. Trump will use these attacks to double down on his message of change. He will say, “If you really want to see changes, rather than the same old three card Monty that the Republican Party has been running, vote for me”.

If Trump is able to prove that these sorts of attacks will backfire and that organizations like the Club for Growth no longer have the weapon they claimed, the Republican Party will enter a brave new world. They will be required to really debate fiscal policy on the basis of what is best for the voters rather than what is best for their big money interests. If that occurs, we could really see a Presidential election where Bernie Sanders and Donald Trump both agree that the wealthy should pay more taxes, corporations should be penalized when they ship jobs offshore, trade pacts should benefit US workers, the social safety net should be strengthened because it benefits those that depend on it, and healthcare should be available to all at a cost that all can afford.

Compare this to the tax plans of the rest of the clowns on the Republican candidate bus.

Cruz, Paul, and Carson all favor a flat tax. Easy math says that the flat tax has to be somewhere around 25% in order to fund the government at current spending levels. Paul is at 14.5%. Carson at is 10%. Cruz hasn’t said. Beyond that, the flat tax is a huge give away to the wealthy who are paying significantly more in taxes today.

Huckabee is proposing a consumption tax. This federal sales tax would add $.23 to ever $1 spent on anything or an effective rate of 30%. The problem is that economic think tanks across the political spectrum say that it wouldn’t even come close to funding the government at its current level of spending.

Bush’s tax plan is the most interesting just because it is so weird. He has already promised that supply side economics will produce 4% growth for as far as the eye can see. But the details of the plan make that naïve prediction seem rational. Here are some quotes from a good article on the subject from fivethirtyeight.com

Bush’s plan offers an unlikely combination of solutions to the problem of slow growth.

He wants to cut the income tax rate and eliminate the estate tax and the alternative minimum tax — all policies that would benefit mostly the wealthiest Americans. At other times, he sounds like a populist, calling for the closing of loopholes that benefit corporations and hedge fund managers. And at others, he sounds like a policy wonk, arguing to shift tax policy in a way that encourages companies to build rather than borrow.

There’s no way to calculate yet what impact Bush’s proposals would have on the federal deficit, for example, or exactly how much more or less specific groups would pay in taxes. He hasn’t identified the corporate loopholes he would close or said whether closing them would fully offset his proposed cut to the headline corporate income tax rate.

The summary is that this is a politically motivated plan that borrows something from every other candidate including Clinton and Sanders, bundles it all up in a big confusing bag, and then wraps it in a bow of promised 4% growth. The reality once you strip everything away is that it is the same old voodoo economics that Reagan was forced to abandon, Bush I rescinded, and Bush II used to turn a surplus into a deficit.

The reality, at least for the moment, is that there are a lot of angry white voters out there who are unhappy with the Republican establishment. There are also a lot of frustrated progressive voters out there who are eager for a candidate willing to mount a full throated defense of progressive principles. Trump and Sanders are riding these respective waves. It is unclear whether those waves will propel both candidates to their party’s nomination, but the political establishment is becoming very uneasy with this populist uprising.

Trump and the Crazy Train

Friday, August 14th, 2015

There is certainly one thing that you can say about Trump – he is entertaining.

What people aren’t talking about is the fact that ALL of the Republican presidential candidates are in one way or another just as crazy as Trump.

Trump represents an interesting populist anti-establishment uprising that has surprised the party establishment, the media, and Trump. He is also the natural evolution of the “money votes” economy. Rand Paul was on the right track when he said that Trump is “used to buying politicians”. He has simply taken the next step of by passing the middle man and representing his own interests. Whether he is able to translate this into a nomination is yet to be seen.

He gained momentum by demonizing undocumented workers. He fanned the flames of xenophobia by claiming that Mexico was deliberately sending their most dangerous citizens to us to deal with.

All of the rest of the candidates were dragged along to support Trump’s claim that there is a crisis at the border. Rubio tried to distance himself from his previous support of a path to citizenship. Walker also changed his tune. Christie called his previous support a “garbage idea”. Even Trump had flipped from his earlier support of path to citizenship. Only Kasich, Hackabee, Carson, and Paul have resisted the urge to jump on the “we’re being overwhelmed with criminals” bandwagon.

The problem is that fact checkers call this claim false. Illegal immigration peaked in 2007 and has actually declined since. Deportations hit an all time high in 2013 of 400K. Most of those were convicted of crimes in this country. More robust border enforcement has not only dramatically reduced illegal immigration, but it has also discouraged undocumented workers from leaving this country for fear that they won’t be able to get back in. The result is a fairly stable population of undocumented workers in this country of 11M. Their children, at least those born here, will automatically be citizens. If these trends continue, within thirty years the number of undocumented workers will drop by 50% without any other actions on our part.

So the only value in building a bigger wall is that it will likely provide some jobs for those that the wall is intended to keep out.

How about abortion?

Trump flipped from his previous support of abortion.

Rubio lied about never supporting exceptions to abortion.

Bush questioned whether, “we need half a billion dollars for women’s health issues.”

Huckabee said he would ignore the Supreme Court and declare that a “baby inside the mother’s womb is a person at the moment of conception.”

Santorum, who has built his political career on his opposition to abortion, took the opportunity to question Carson’s character because Carson used fetal tissue in his medical research. “When you start to see some of these cracks, I think it may show whether the person is really someone who’s going to take on an issue and be strong on it when they get into the very difficult position of being President of the United States.” An interesting attack from the guy who recently failed a significant test of character when he had to choose between politics and his religious faith on the topic of climate change.

How about healthcare?

Trump flip flopped in his previous support for single payor.

All promise to repeal Obamacare and replace it with something better. NONE have said what that something better would be other than some discussion that health savings accounts would be nice.

How about the use of our military in the Middle East?

Rand Paul is the only one who would not put “boots on the ground”.

Fiorina lied when she claimed that the US wasn’t arming the Kurds. We are doing it through the Iraqi government.

How about the economy?

Jeb promises that he can deliver 4% growth off into the future based on his experience in Florida and his belief in supply side economics. The reality is that he presided over a huge real estate bubble in Florida. When it burst, shortly after he left office, 900K of the 1.3M jobs he claimed to create vanished. Funny the same thing happened to his brother’s supply-side experiment.

Many economists think that 4% is just out of our reach because of the demographic headwinds of the baby boomer retirement. You really have to believe in the fairy dust of supply side economics to project that we would touch 3% as a result of government policies.

Christie claimed some big job numbers, but his state ranked 44 out of 50 in job growth.

Walker did not elaborate on his failure to deliver the 215K jobs he promised would appear as a result of the massive tax cuts he gave business. Instead he talked about job growth and job participation numbers. What he didn’t say is that these were the same numbers that existed prior to his election.

Huckabee solves everything with a consumption tax. One of the advantages of that tax is that even “illegals, prostitutes, pimps, and drug dealers” would be paying this tax. He claims that tax will generate 6% growth. I have to admit that 6 is better than 4 which is certainly better than 2, but just changing the tax policy won’t do it. You have to get more workers which just isn’t going to happen unless there is also a radical change in immigration policy which is not part of Huckabee’s plan. Even if you got more workers, you would also have to have a significant change in productivity because wages would have to track this growth in order to get more money into the economy. Huckabee hasn’t even thought of this because his consumption tax shifts most of the tax burden to the poor. All he has thought about is that 6 is better than 4.

Then there is Doc Carson, who suggest that we should all tithe 10% of income instead of pay taxes. When asked whether or not it would work, he said that if it worked for God, it will work for us.

Summary

In this context it isn’t surprising that Trump is having the success that he has been having. The reality is that the only half-way serious candidate in this train full of clowns is Kasich. Not surprisingly he is the most moderate of the bunch and as a result, the least likely to get the nomination.

This speaks volumes about what the Republican Party has become. This is no longer the party of George HW Bush or even Ronald Reagan. It has become the party of paranoia and extremism as the old white angry men, who have been the party’s backbone, struggle with the reality that they are no longer in control. They failed to defend marriage from the onslaught of gay rights. They failed to prevent the rollout of what they see as another big entitlement program in Obamacare. Black people are demanding justice. Hispanics have discovered the power of the ballot box. Even the Pope disagrees with their abortion obsession. And women are no longer content with staying home and raising children. They not only demand a career, but also equal pay for equal work.

These guys are growing tired of the effort required to hold back the flood of scientific evidence supporting human-caused climate change. Their dam has sprung so many leaks that they are running out of fingers to plug them. Coal-based electrical generation is not only polluting, it is expensive. The most economical and highest performance car is all electric, made in this country, and sold direct over the internet. The world is changing under their feet and there appears to be little they can do to prevent it except perhaps support someone who is willing to give voice to their fears and frustrations – Donald Trump.

Money Corrupts

Friday, June 19th, 2015

One example of modern day corruption is the estate tax repeal that the republican house recently passed.

I’m working on another post that digs into the whole topic of corruption in more detail, but here’s a quick overview to provide some historical context to this discussion.

The framers of the constitution felt that corruption was the single largest threat to democracy.

If you remember your history, the United States was not the first democracy. That was Athens. But democracy was still a novel idea when the colonies decided that they had to be independent of the King. One of the arguments against democracy was the natural instinct of self-interest. The other argument was that the rich and powerful in Europe had been able to undermine democracy. The livelihoods of so many people depended on the good graces of royalty, for example, that few opposed their rule.

The framers, however, believed that individuals would value liberty so highly that civic virtue would trump self-interest. They were not so naïve, however, as to assume that this willingness to sacrifice for the greater good would continue once those who experienced the revolution passed on. So they regarded anything that would subvert civic virtue, or even have the appearance of self-interest, as corruption.

It’s through that lens that I’d like to look at the repeal of the estate tax. This isn’t to suggest that this is the only example of modern corruption. It’s just an obvious one.

The estate tax charges the wealthiest .2% of American households when they pass on amounts in excess of $5.4M in the case of individuals and $10.9M in the case of couples to their heirs.

This estate tax has been part of the US infrastructure since 1797. Its explicit purpose is to prevent the sort of corruption that the founders associated with a permanent aristocracy. By making it difficult for one generation to share their wealth with another, it discourages the formation of families with enough money to damage civic virtue. Specifically the concern was that our representative democracy could erode to an oligarchy if the government didn’t specifically take steps to prevent the concentration of wealth in the hands of a few. James Madison warned that inequality in property ownership would subvert liberty, either through opposition to wealth (a war of labor against capital) or “by an oligarchy founded on corruption” through which the wealthy dominate political decision-making (a war of capital against labor).

Here are some of the justifications leading Republicans have used for eliminating the estate tax.

House Ways and Means Committee Chairman Paul Ryan, R-Wis. claimed that the estate tax is “absolutely devastating” to family farms, and further he claimed the repeal would remove “an additional layer of taxation” from assets that had already been taxed.

“It sounds to me like there’s a lot of wealth envy in this country,” Rep. Virginia Foxx, R-N.C. The bill abolishing the estate tax, she said, “will draw a line in the sand.”

The facts are that only 120 small businesses and farms (100 of them large farms) were hit by the estate tax in 2013. And for that tiny number affected, there are all sorts of provisions already in place to soften the blow: low valuation rules, delayed tax payments and other breaks and discounts. In fact some have characterized the estate tax and a fine for those who failed to pay their accountant, since careful planning can generally avoid this tax.

Also 55% of the value of estates worth more than $100M, according to Americans for Tax Fairness, are unrealized capital gains that have never been taxed. If the issue were double taxation, there is a much better way of addressing the issue than simply eliminating the estate tax.

Besides the obvious risks of increased concentration of wealth in the hands of a few, there are real budget implications of repealing this tax. The tax will bring in $269B over the next ten years. Republicans are going to say that putting this money back into the hands of the wealthy will increase other tax revenue by causing economic growth, but there are no facts to support this claim. What the data shows is that tax cuts to the rich only reduce the middle class, increase the ranks of the poor, weaken our economy, and increase our debt.

To put this gift to the wealthy in perspective, here are some of the other things that could be done with that amount of money.

  • Making community college free for everyone for ten years cost $60B
  • Making four year college free for all that qualify would cost an additional $15B
  • Plugging the current highway trust fund deficit which would support infrastructure improvement costs $164B over the same time period

If at this point you are asking what does all of this have to do with corruption, the house members who voted for this bill received a combined $56M in campaign contributions during the last election cycle from special interest groups specifically advocating the repeal of this tax.

This may not meet the narrow standard of corruption that the Supreme Court used to justify the Citizen’s United case, but it does justify the fears that our framers had regarding the corrupting influence that money has on our democracy.