Wednesday, February 14, 2018

Don't blame Donald Trump.

Republicans of the old school variety have been all over the media these days, alternately shaking their heads and their fists in frustration as they watch Donald Trump trampling the political landscape in their name. But the simple truth is that Trump has followed the GOP playbook to a T. He has pandered to evangelicals and the gun lobby. He has appointed judges that are off the charts – in some cases literally – at the conservative end of the spectrum. He is rolling back the regulatory state. And he has cut taxes. Hugely. 

When the New York Times editorial board declared last Sunday that Republicans Have Become the Party of Debt, it was as though they had been out of the country – or perhaps on another planet – for the last thirty-five years. It is a tribute to the power of the Republican brand that a fair share of Republicans – along, apparently, with the Times editorial board – continue to believe that the GOP is the party of balanced budgets, small government and individual liberty. For decades, that brand has been an illusion. 

The Times editorial pointed wistfully to Kentucky Senator Rand Paul, who lashed out at his Republican colleagues during his brief filibuster of last week's budget deal: “If you were against President Obama’s deficits, and now you’re for the Republican deficits, isn’t that the very definition of hypocrisy?” Of course it is, but so was Paul's own vote in favor of tax cuts that are projected to add $539 billion to the federal deficit over the next two years, nearly double the spending hike in the two-year spending bill that he decried. It is an article of faith with math-challenged conservatives that a deficit produced by reducing revenues is different from one created by increasing spending. To resolve that quandary – and in the eyes of the New York Times, burying once and for all the GOP reputation for fiscal prudence – they have chosen to do both, Paul's flailing hypocrisy notwithstanding. 

On the eve of the financial collapse in 2008, I published this graph of the change in the public debt by presidential administration. I was trying to make the same point back then that the members of the New York Times Editorial Board still find hard to grasp: This is not their parents' Republican Party. As illustrated here, the public debt declined as a percent of GDP under Presidents Nixon, Carter and Clinton, while rising under Ronald Reagan and both Presidents Bush. The Republican Party's principled commitment to balanced budgets began to crack with Ronald Reagan's embrace of supply side economics. As was evident in Republican rhetoric as they passed last year's tax cuts, under the tutelage of a cabal of charlatans and cranks, the GOP cast aside its long-standing belief that making difficult fiscal choices was an essential responsibility of governing, in favor of the myth of self-funding tax cuts.

It was the electoral self-interest of Richard Nixon and Ronald Reagan, that led the Republican Party to turn its back on its defining principles and embark on the journey that led it into the arms of Donald Trump. Having suffered a razor thin loss in his first presidential bid in 1960, before winning the White House eight years later with a narrow margin in the popular vote, Richard Nixon swore that he would never suffer a near miss again. And thus was born the Southern Strategy. 

Looking across the electoral landscape of the 1960s, Nixon determined to reshape the Republican coalition by bringing Southern Democrats into the Republican Party. In the wake of the civil rights and anti-war movements, and the cultural turmoil of the 1960s, Nixon's strategy targeted the Southern and culturally conservative working-class voters who were estranged from the Democratic Party and had given Alabama Governor George Wallace 13.5% of the vote in the 1968 Presidential Election. Nixon – who had won nearly a third of the black vote in 1960 – anticipated that the GOP could gain a significant advantage in the Electoral College if it essentially traded its historical support among blacks and Northeastern liberals for the Southern white vote that had long constituted the Solid South of the Democratic Party. After winning the White House by barely half a percent in 1968, he was swept to a second term four years later with a 23% edge in the popular vote, and the largest Electoral College landslide by any Republican in history.

When Ronald Reagan ran against a weak Jimmy Carter in the 1980 presidential race, he might have chosen to return to the GOP roots, but instead doubled down on Nixon's strategy. In his famous states' rights speech at the Nashoba County Fair in Mississippi in the summer of 1980, Reagan adapted George Wallace's famous words, segregation now, segregation tomorrow, segregation forever, into a pattern of coded racial rhetoric that would become the GOP standard for decades to come. Just a few years after Congressional Republicans voted overwhelmingly to support the Civil Rights Act of 1964 and the Voting Rights Act of 1965 – in contrast with a sharply divided Democratic Party – Reagan committed the Republican Party to rolling back the U.S. Department of Justice commitment to civil rights by his promise to "restore to states and local governments the power that properly belongs to them."

Reagan associate Grover Norquist emerged as the architect of the political strategy that would bind historically Democrat Southern and socially conservative working class whites to the GOP for decades to come. The coalition strategy that he laid out in the late 1980s focused on a half dozen single issue voting groups – anti-tax, pro-gun, pro-life, pro-faith, anti-gay marriage, pro-property rights. Norquist's purpose was not to define the principles of the Republican Party, but rather to provide GOP candidates with an electoral roadmap: swear fealty to each of these groups and he guaranteed victory on Election Day. Norquist "center right" strategy did not dictate where any given candidate should stand on other issues – free trade, immigration, death penalty, and the like – it was simply an electoral strategy to build an enduring Republican majority. 

The commitment of the Republican Party to balanced budgets died with George Herbert Walker Bush's support for the 1990 tax increases. When Bush violated his no-tax pledge – in favor of what he imagined to be the higher Republican principle of fiscal rectitude – he doomed both his own re-election and put the final nail in the coffin of that long-standing GOP article of faith. Norquist's Taxpayer Protection Pledge, combined with the ascendency within the party of – in the words of long-time Republican insider Pete Peterson – "an unholy alliance of tax cutting Republicans and big spending Republicans" doomed the fiscal principles that the GOP once stood for. As Grover Norquist observed a few years ago, explaining why a commitment to balanced budgets had no roll in his electoral roadmap, 'the simple the truth is that no one cares about budget deficits except a few old men sipping scotch at the New York Metropolitan Club.' 

For all the hew and cry from disgruntled Never Trump Republicans – and the New York Times editorial board – it is not Donald Trump who undermined the commitment of the Republican Party to what had long been its core principles; it was Richard Nixon and Ronald Reagan who set the course to where the GOP finds itself today. A half-century ago, Nixon and Reagan lured disgruntled Southern and culturally conservative Democrats into the Republican Party. Over the ensuing decades, as those voters became the base of the GOP, abortion, guns, faith and the myth of self-funding tax cuts – along with coded racial rhetoric that has increasingly seeped into public policy – have become the core commitments of the GOP, effectively replacing the principles that the party once stood for.

It should be no surprise, then, that Donald Trump has succeeded by aping the style and substance of a Southern populist. Far from trampling on what some view as Republican traditions, he has diligently embraced the Norquist electoral playbook that Nixon and Reagan first put in place. If he chose to deepen his appeal by being more Huey Long than Jeb Bush – giving no regard to Republican pieties about balanced budgets, small government or individual self-reliance that have long since been rendered quaint – it is because he understands that the GOP did not take over the Southern Democratic Party, as Richard Nixon imagined, instead, the Southern Democratic Party took over the GOP.

Thursday, February 08, 2018

The cunning of Vladimir Putin.

Everyone is piling on Christopher Steele these days. The twenty-two year veteran of the British MI-6 intelligence service is the author of the 'Russia dossier' that has become the target of Republican ire. Over the past few weeks, House Intelligence Committee Chairman Devin Nunes, Senators Chuck Grassley and Lindsay Graham, and the Wall Street Journal editorial board have each targeted Steele, dismissing the long-time Russia expert as just one more partisan hack in our roiling politics.

At issue are the FISA surveillance warrants issued by the Foreign Intelligence Surveillance Court that allowed the FBI and Department of Justice to wiretap Trump campaign associate Carter Page. Four different FISA judges approved the electronic surveillance of Page, an investment banker with ties to the Kremlin. Nunes and the rest are challenging the validity of those warrants on the basis that the applications for the warrants relied heavily on material derived from Steele's dossier, which, they contend, was tainted by the former British spy's partisan bias. As illustrated in this graphic from Fox News, Trump loyalists argue that the approval of the Page wiretaps by the FISA court was part of the critical path of events that led to the appointment of Robert Mueller as Special Counsel to investigate the whole Russia matter. Like one of those crafty defense attorneys on Law and Order that Republicans despise, Nunes, Grassley, Graham – and the President himself – are essentially arguing that the Russia investigation, in its entirety, should be thrown out on a technicality – on a defective warrant.

It is hard to write anything about 'Russia dossier' without feeling like you are descending into the world of conspiracy theories and political mud wrestling. The dossier – for those who have been living in a cave for the past year or two – is a collection of 13 intelligence memos prepared by Christopher Steele from June 20 to December 13, 2016. The memos reflect material provided from a range of sources, including current and former Russian foreign ministry, finance and intelligence officials within Vladimir Putin's orbit.

The dossier is rarely mentioned in the media without the adjective "salacious" attached to it. Its reputation for salacious content is a reference to just one paragraph in the entire 35-page file. That paragraph, which appears on page two of the memo dated June 20, 2016, describes Donald Trump cavorting with a number of women in the presidential suite at the Moscow Ritz Carlton in 2013, an incident that is referred to in later memos as part of the kompromat (compromising information) that the Russians hold for potential blackmail purposes.

While that event has not been confirmed, it is worth noting that Trump's long-time bodyguard Keith Schiller did confirm in his testimony to Congress last year that he and Trump were at the hotel at the time, and that a Russian associate did offer to "send five women" up to Trump's room. But Schiller recalls that he (Schiller) declined the offer, saying "We don't do that type of stuff." Schiller subsequently went to bed and could not confirm what, if anything, might have happened later.

For all the attention the Russia dossier has garnered, few people seem to have actually read it. Ironically, the labeling of the dossier as "salacious" has limited the amount of attention that has actually been paid to its contents. The importance of Steele's work is not in what it says about Carter Page – or even what it says about Donald Trump – it is what it says about Vladimir Putin. The memos describe the strategy supported and directed by Putin to, in the words of a senior foreign ministry official, "sow discord and disunity both within the US itself, but more especially within the Transatlantic alliance which was viewed as inimical to Russia's interests." The dossier in its totality describes an "information operation" designed to use psychological, cyber and propaganda tactics to achieve long-standing Russian and Soviet goals of undermining liberal western democracies, which they had been unable to achieve through diplomatic initiatives or military intimidation.

No one should be surprised that Vladimir Putin wants to restore Russia's power and dominion to what it was at the height of the Soviet empire; he has suggested as much many times. And, certainly, none of our long-time allies in Europe have any doubt about the very real threat that Putin's ambitions represent. The importance of the dossier is that it focuses on Putin's view that neutering the power and prestige of the United States is a critical path step in achieving his ambitions, and that it describes the strategy Putin has orchestrated to accomplish that objective.

The fact that Putin has put in place an ongoing effort to disrupt our democracy is no longer in dispute – at least outside of the Oval Office. Each week, it seems, there is new evidence of Russia's tactics, from the use of bots to stir up controversy and conflict on social media, to direct attacks on the integrity of our election apparatus. An example of this latter effort was confirmed this week by the Department of Homeland Security report that Russia was successful – to a limited extent – in hacking state voting systems in advance of the 2016 election. If Putin's objective was to sow discord and disunity in our society, it is safe to say that he has succeeded beyond his wildest dreams.

The arguments made over the past few weeks by Devin Nunes, Senators Grassley and Graham, and the Wall Street Journal editorial board illustrate the point. While it was released with much fanfare, the memo that Nunes prepared in his capacity as chairman of the House Intelligence Committee barely takes issue with the substance of Steele's dossier. Instead, it simply asserts that Christopher Steele was a partisan, and therefore his work product should not be relied upon to secure a FISA surveillance warrant.

Nunes memo can be summed up in a single sentence in the second to last paragraph: "While the FISA application relied on Steele’s past record of credible reporting on other unrelated matters, it ignored or concealed his anti-Trump financial and ideological motivations." The sentence is striking because, despite all the partisan uproar, Nunes does not attack the substance of the information presented in the dossier. He does not suggest that Steele is a crackpot or conspiracy theorist. He does not argue, as some have suggested, that the entire dossier was made up out of whole cloth as part of a Russian disinformation campaign. Indeed, he affirms Steele's past record of credible reporting. Instead, like Grassley, Graham and the WSJ editorial board, the Nunes memo simply insists that the information in the dossier should be disregarded because Steele was a partisan. And the proof that Steele is a partisan is a statement he made in September 2016 – cited earlier in the memo – confessing that he “was desperate that Donald Trump not get elected and was passionate about him not being president.” 

But confessing that he was desperate that Donald Trump not get elected does not mean that Steele's motivations were ideological. As a British MI-6 officer, he watched first-hand the collapse of the Soviet Union and the rise of the new Russian state led by the KGB-trained Vladimir Putin. If one reads the first seven or eight memos in the dossier – those written in the months before Steele expressed his concerns about Trump – one can imagine his growing concern with what he was hearing. Those memos describe nothing less than a strategy to undermine Russia's most powerful geopolitical adversary – and Great Britain's closest ally – to reestablish Russian dominance over its historical spheres of influence, and ultimately to overturn the post-World War II international order.

And in Donald Trump – those memos suggest – Putin appeared to have found his perfect, if unwitting, counterpart. Trump's America First foreign policy would easily comport with Putin's desire – as described by a senior Russian finance official in the dossier – "to return to Nineteenth Century 'Great Power' politics anchored upon countries' interests rather than the ideals-based international order." Over the course of the presidential campaign, Trump consistently pandered to Putin; Trump's team removed support for Ukrainian independence from the Republican Party platform; and Trump's pro-Putin rhetoric was leading to a significant softening in American attitudes toward Russia and Vladimir Putin, particularly among Republicans. In Steele's July 30th memo, a Russian émigré source within the Trump campaign sums it all up, when he reported that the "Kremlin had given its word" that the comprising material that the Russians had gathered would not be deployed against Trump, "given how helpful and cooperative his team had been over several years, and particularly of late." 

There was a reason Christopher Steele's hair was on fire, but it was most likely not the bias that Nunes and the rest contend. It was because – in Steele's mind's eye – he was watching the rise of a real world Manchurian Candidate, in real time. In the pre-Trumpian world, Steele's reporting would not brand him an ideologue in the manner Nunes suggests, but rather a loyal friend to the United States – concerned with the survival of American leadership in the world and its role as the bulwark against everything that Vladimir Putin stands for.

Even if Nunes believed Steele to be a partisan producing opposition research for a Democrat, that should not be a reason to ignore the contents of the dossier. After all, it is a truism of politics that opposition research is only valuable if it is factual. The fact that Nunes appears to have been unable – as the chairman of the House Intelligence Committee – to look past his own bias against the author of the dossier and consider the implications of its contents for the security of our nation represents an institutional failure of the first order.

The fact that Chuck Grassley and Lindsay Graham similarly chose to pile on in a purely partisan manner illustrates the most peculiar and distressing aspect of our politics today: how the Republican Party, en masse, has succumbed so completely to Donald Trump's particular mix of cultural and political power. The willingness of each of these parties to ignore the substance of the dossier – which is not about Carter Page or Donald Trump, but the credible portrait it provides of Vladimir Putin and the threat he represents – demonstrates the depth of our dysfunction, and the extent to which the leadership of the GOP has defaulted to the new political maxim of our era: one is either pro-Trump or part of the treasonous cabal that opposes him.

There are three possibilities with respect to Trump himself. First, that he is everything that Putin could have ever hoped for, because much of what Christopher Steele has written is true, and the collusion and corruption was deep and enduring. Second, that Trump is everything that Putin could have ever hoped for, because his pathological narcissism and defensiveness about the election blind him to any concern about how Putin is seeking to neuter America as an adversary and impose his will on the west. Or third, that Trump is everything that Putin could have ever hoped for, because he is content to have America cede its post-World War II leadership role in the world.

When Mitt Romney was the Republican Party nominee for President, he observed that Russia is our greatest geopolitical threat. Five years later, it appears we have come full circle. Today, we are led by a President – with the Republican Party in his wake – who, whatever his reasons might be, simply does not care. 

Tuesday, January 30, 2018

Lingering ripples from the financial collapse.

Last week, determined to defend her father-in-law against the anti-Trump tenor of the Women's March, Lara Trump berated those who participated for ignoring his achievements. "This president has done so much for women," she complained. "Women’s unemployment is at a 17-year low right now. And, yet, these women out there are so anti-Trump." 

Unemployment Rates by Gender
Both of Lara Trump's statements are true. First, that the gathering for this Women's March, as with the first one held the weekend of Trump's inauguration, was expressly anti-Trump; and, second, that women's unemployment is at historically low levels. As the first graph here illustrates, the unemployment rate among women peaked at 9% in November of 2010, more than two years after the financial crash in September of 2008, and has steadily declined since, to just 4% today.

While many Democrats immediately protested that the downward trend in the unemployment well preceded Donald Trump's arrival on the scene, it is totally natural that those within TrumpWorld should claim credit for the new lows in unemployment rates. Every politician seeks to claim credit for good news that transpires on their watch, it is the nature of the beast. This President, of course, as is his wont, is claiming credit for more than just good news on the unemployment front, he claims to have achieved nothing less than a complete transformation of the U.S. economy. One year ago, he described the U.S. economy in terms of "American carnage," where the real unemployment rate was "28, 29, as high as 35 [or] 42 percent." Today, "our economy is better than it has been in many decades." What a difference a year makes.

Unemployment Rates by Race
This is the new administration talking point, and it has crept into any number of unrelated discussions. Don't like Trump's stance on immigration? Well, look at what he has done for Latino unemployment. Think the White House is in chaos? Yeah, but you gotta love that the rate of Black unemployment is at historic lows. As illustrated in the second graph here, the unemployment rate for Black workers peaked at 16.8% in March of 2010, and since then the unemployment rates for both Black and Latinx workers – which continue to lag White workers – has declined steadily, to current historically low levels. In December, Black unemployment hit 6.8% and Latinx unemployment hit 4.9%, compared to 3.7% among Whites.

However effective Donald Trump's agenda of deregulation and tax cuts may prove to be in promoting business and investor confidence, one would hope that honest observers would recognize the long, downward trend in unemployment rates illustrated in these charts, and acknowledge the historical context. It was ten years ago that the U.S. and world economies were shaken by the most severe financial crisis since the Great Depression. To a certain extent, the financial collapse and the significant events that led up to it have faded into memory. However, the financial insecurities that the 2008 collapse unleashed in people's lives continue to reverberate through our politics .

In October of 2009, when the nation was reeling – politically and economically – from the impact of the collapse of the banks and housing markets, Harvard economists Carmen Reinhart and Ken Rogoff published This Time Is Different: Eight Centuries of Financial Folly. Their book provided extensive data on the economic impacts of financial crises over the centuries, including those that were characterized by bank failures and financial system illiquidity, similar to the 2008 collapse.

The book provided a foreshadowing of what lay ahead for the U.S. economy. The Reinhart/Rogoff analysis suggested that in the wake of comparable financial crises, unemployment rates continued to rise, on average, for five years; housing values declined by a third or more; and national debt nearly doubled in the first three years following the point of collapse. Perhaps most significant, in terms of the interplay between the devastating economic fallout of a systemic financial collapse and democratic politics, the data suggested that restoration of employment and economic growth to pre-crisis levels could take seven to ten years.

This Time is Different garnered significant attention at the time it was published. But while it presented a trove of data that suggested that the fallout from the 2008 financial collapse was going to be with us for a long time, little heed was paid to the suggestion that a full recovery could take up to a decade to play out. Ideally, one might have imagined that an understanding of the duration of comparable crises over the course of history might have led the political parties to pull together. But seven to ten years is an eternity in our politics, and the notion that politicians – much less their constituents – could accept a seven to ten year time horizon before normalcy might return, without massive social and political upheaval, was unimaginable.

There was, of course, no coming together to brace the public for the long and difficult ride that lay ahead. Instead, the 2008 crisis only galvanized our politics further. Democrats blamed capitalism and Wall Street and the banks; Republicans blamed Keynesian socialism and over-regulation; and each party blamed the other. Twelve months after the publication of the book came the anti-debt, Tea Party wave election of 2010, rife as it was with conspiratorial calls to disband the Federal Reserve Bank, which, ironically, probably deserved the greatest share of the credit for pulling the nation – and much of the world – through the crisis.

This Time is Different turned out to provide a fairly accurate forecast of how things would play out. As illustrated in the graphs above, unemployment rates peaked two years after the September 2008 collapse, a less prolonged rise than in other crises. On the other hand, as illustrated in the Case-Shiller housing data presented here, median home prices fell 50% from their peak in April of 2006. They did not begin to recover until six years later, and are only now reaching pre-collapse levels. National debt, finally, grew less in percentage terms than in other comparable crises. National debt grew 51% over the course of Barack Obama's first four years in office, and 78% over his eight year presidency – a rate of growth that turned out to be comparable to other recent two-term presidencies – slightly below George W. Bush (93%), higher than Clinton (37%), and lower than Reagan (184%).

But the prediction suggested by the historical data that is worth noting was the suggestion back in late 2009, when unemployment was continuing to rise and home prices were continuing to fall, that a reasonably full recovery from the 2008 global financial collapse would not take hold until some time between 2015 and 2018. And that is exactly how things transpired. While Lara Trump and others – including Donald Trump in his own tweet shown here – credit the President for the historic decline in unemployment rates, his greatest accomplishment may have been timing. In Donald Trump's election one year ago, we saw the lingering ripples of the 2008 financial crisis in the form of the anger arising out of continuing individual and family economic insecurity that animated his base. And we can see it again in the final recovery of unemployment rates and home prices to pre-collapse levels: Ten years after the collapse, and right on schedule.

Friday, January 26, 2018

Democrat myopia.

During the Republican National Convention last summer, House Speaker Paul Ryan and Deputy Majority Whip Tom Cole spoke confidently about their ability to work with Donald Trump as President. Despite all Trump's rhetoric, they insisted that at the end of the day, they would drive the legislative agenda, and he would sign whatever they put in front of him.

And so he has. If you strip away all the turmoil and rhetoric, Donald Trump has been everything Republican leaders could have hoped for. He has delivered not only Neil Gorsuch, but a consistent slate of conservative judges. He is implementing a deregulation agenda for the ages on behalf of GOP business constituencies. And then there are the tax cuts. Anyone who scoffs at Trump's performance in his first year in office is scoring by a different set of metrics than Republican leaders in Congress.

Democrats, on the other hand, see the world differently, and are drooling at the prospect of a wave election in 2018, and sending Trump home in 2020. For many Democrats – and no small subset of moderate Republicans – the turmoil and rhetoric matter. However, counting on Donald Trump's negatives to drive independent voters and a share of Republicans to her corner did not turn out to be quite enough for Hillary Clinton, and it may not be enough in 2018 – to say nothing of 2020. When Nancy Pelosi railed against Republican tax cuts the other day, and derided the $1,000 tax cut bonuses that corporate America is throwing around to their workers, she betrayed the Achilles Heal of Democratic Party strategy looking forward.

Pelosi's comment was not unreasonable from a certain vantage point. If five million U.S. workers receive $1,000 bonuses – the announced number is in the range of two to three million so far – that represents $5 billion into the pockets of working men and women. In contrast, in the wake of the tax cuts, Bank of America economists project that $450 billion of repatriated corporate profits – roughly half of the trillion dollars, after tax, that companies are expected to bring home – will be used to buy back stock.

From the standpoint of the politics of envy – which has now morphed into the politics of rage – Pelosi has a reasonable case to make. While the President referred to the tax cut bonuses as a “a big, beautiful waterfall,” allocating a half a trillion dollars to investors vs. five billion to workers would seem to confirm that the benefits of the tax cuts are tilted somewhat to the wealthy, just as GOP donors intended. On the other hand, for families earning $35,000 or 50,000 a year, $1,000 is real money, to say nothing of the doubling of the standard deduction. More to the point, Democratic Party leaders, like Nancy Pelosi, who begrudge that reality only highlight how long it has been since they lived paycheck to paycheck.

Railing away about how the Republican tax cuts will go away in 2027, or the trillion dollars of new deficits, will be hollow argument for Democrats in 2018. A trillion dollars over ten years is a hundred billion a year, which remains barely significant in a four trillion dollar budget. To paraphrase Illinois Senator Everett Dirksen from many years ago, a hundred billion here, a hundred billion there, no one really pays attention anymore. Sure, there will be a reckoning some day. If interest rates ever return to historical norms prior to the 2008 collapse, the annual interest cost of the federal debt will rise from $200 million a year towards one trillion. But no one (except for me, of course) seems worried that it will happen in their lifetime.

But there is more to it than that. Much has been made by Trump and his advocates of the fact that unemployment rates have hit historically low levels across the economy in recent months. And it's true. The recovery from the 2008 collapse has been a long slog, but unemployment rates across demographic groups – notably Women, Blacks and Hispanics – have finally declined to pre-collapse levels. Democrats can argue that Trump's policies had little to do with finally reaching that milestone; and by and large that is true, the downward trend was part of a long, cyclical recovery and ten years of massive monetary stimulus. But the fact remains that business and investor anticipation of tax cuts and regulatory relief that Donald Trump promised did have an impact – business confidence is up, along with the stock market – and now that they have been passed into law, the tax cuts are going to add significant new fiscal stimulus to an economy that was already picking up steam. By the time election day rolls around in 2018, and certainly by 2020, it is likely that the U.S. economy will be in high gear.

As much as the turmoil and rhetoric that flows from TrumpWorld on a daily basis has become all-consuming, it is steadily becoming normalized as background noise. If that continues to be the case, a booming economy may well loom as a major obstacle to Democrat chances to realize the wave of their dreams, and a strong counter-narrative that will make the election about more than Donald Trump is an dangerous sociopath who is undermining American democracy.

Of course, Donald Trump is a sociopath who is undermining American democracy. That is not a partisan assertion, rather, it is the stance that Ted Cruz articulately put forth during the Republican primaries, and it provided the backdrop against which Paul Ryan and Tom Cole felt the need to assure other Republicans that having Trump lead their party could be managed.

Republicans, of course, have come to terms with their sociopathic leader, in large measure because Donald Trump has delivered on the Republican agenda far more effectively than Democrats want to acknowledge. The other factor that Democrats are loath to acknowledge is that even as the turmoil and rhetoric have damaged the Republican brand, Democrats have suffered as well. George Bernard Shaw summed it up well: the problem with wrestling with a pig is that you get dirty, while the pig likes it.

After a year of unrelenting political warfare, neither party is faring particularly well with the electorate. Based on Gallup tracking data, the share of the electorate that identifies with the two major political parties has continued to decline. Since Election Day 2016, the share of the electorate identifying as Republican has declined by 2%, while the share identifying as Democrat has declined 4%. Meanwhile, the share identifying as independent has jumped 10%. As of last month, only 27% of Americans identify as Democrats and 25% as Republicans, while 46% now identify as independents.

When the upcoming elections roll around, as much as Democrats are enamored of their message of Trump narcissism and Republican greed, that may not be enough to win over independent voters and anti-Trump Republicans. Democrats need to understand that they exist in a bubble – as Nancy Pelosi's comments confirmed – and if they are to build a winning coalition, they need a message that goes beyond pointing out how bad the other side is. Failing that, they may wake up after election day to find that in the midst of an economy that is steaming along, independents had become weary of the yelling and screaming, and just decided to vote their pocketbooks.

Follow David Paul on Twitter @dpaul. He is working on a book, with a working title of "FedExit: Why Federalism is Not Just For Racists Anymore."

Artwork by Jay Duret. Check out his political cartooning at Follow him on Twitter @jayduret or Instagram at @joefaces.

Tuesday, November 28, 2017

The quid pro quo moment has arrived.

New York Republican Congressman Chris Collins summed it all up the other day, when he cited the pressure he and his GOP colleagues are facing to pass tax cut. "My donors are basically saying, 'Get it done or don't ever call me again.'" 

GOP donors have long dreamed for such a moment; a unique alignment of venality and shamelessness that is putting all of their most deeply held dreams within their grasp. Elimination of the estate tax. Slashing the corporate tax rate. Creating a tax rate on pass-through income that will have the effect of extending the hitherto reviled carried interest loophole to a new universe of beneficiaries. And they understand that the moment may be fleeting, that it may not survive the new year, much less the Alabama special election just two weeks away. This is not a moment--to paraphrase Charles Colson--to let go for a better grip.

Three years and what feels like eons ago, in his majority opinion in McCutcheon v. FEC--in which the Supreme Court removed limits on aggregate individual contributions to federal campaigns--Chief Justice John Roberts was dismissive of the corrupting influence of political contributions. Should a recipient of donations act in his or her donors interests, Roberts suggested that was a reasonable expression of "the general gratitude a candidate may feel toward those who support him." Any regulation of political contributions, Roberts went on, "must instead target what we have called 'quid pro quo' corruption or its appearance." 

Almost a half-century earlier, in a moment of honesty that eluded the Chief Justice, Louisiana Senator Russell Long observed that “the distinction between a campaign contribution and a bribe is almost a hairline's difference." Now, after decades of watching the dance of contributions and favors in the nation's capital--and this is not a partisan observation, as it was Bill Clinton who delivered financial services deregulation as his expression of gratitude for the contributions and support of the titans of Wall Street--a moment of quid pro quo corruption or its appearance as the Chief Justice suggested would appear to be upon us. Hundreds of billions, if not trillions of dollars of tax benefits are about to be bestowed on mega-donors who have showered hundreds of millions of dollars of political contributions on the GOP in anticipation of just this moment.

To give the GOP the benefit of the doubt, much of what is in the tax bill represents long-standing Republican priorities, including lowering the corporate tax rate, migration to a territorial tax system, simplification of the tax code, and the elimination of the estate tax. And perhaps if the legislators and donors alike--Collins being case in point on the subject--kept their mouths shut, the case for gratitude vs. bribery might be more credible. But they haven't, and their reliance on abject lies about the merits of the legislation only makes their case worse. It is Donald Trump, after all--along with this tone-deaf factotum, Steve Mnuchin--who continues to sell the bill as one that will deliver HUGE benefits for the middle class and little or nothing for the rich, while House Speaker Paul Ryan continues to claim that the legislation will more than pay for its $1.5 to $2.2 trillion cost, despite the lack of any evidence beyond the prattle of a few, long-debunked charlatans and cranks of the economics world.

To the naked eye, the looming tax legislation has elevated the art of gratitudinous conduct--what even John Roberts should recognize as a quid pro quo relationship--to new heights. The desperation emanating from members of Congress reflects what those donors have seized upon: that this is a moment when all their dreams can come true. The quid has been delivered; this is the moment to collect on the pro quo.

And there sits Chris Collins, a man reelected by 30 and 40 point margins in his last two races, shuddering as he is being shaken down by his donors. “Don’t tax you, don’t tax me, let’s tax the guy behind the tree,” is the aphorism of tax policy famously attributed to Senator Long, and is appropriate for Congressman Collins to consider. After all, as a member from a suburban district in a high tax state, his constituents are the people behind the tree when it comes to this legislation. With the elimination of the state and local tax deduction, only the wealthiest of his constituents--those in the highest tax brackets and with large estates--loom to be material beneficiaries of the proposed legislation.

Proponents of the tax cut legislation--particularly those from low-tax red states--love to point to the elimination of the state and local tax deduction as an issue of simplification and fairness, yet its blatant political calculus should be evident to all. The tax bill is projected to cost the U.S. Treasury trillions of dollars in lost revenue. As they searched for how to pay for it, the first place they looked--suppressing their conservative principles--was borrowing, as they redefined "balanced budget" to include $1.5 trillion in new deficit funding over the next ten years. The second place they looked was to the pockets of taxpayers in high tax, blue states.

Far from increasing fairness in the tax system, the elimination of that deduction will simply exacerbate the current situation, wherein residents of high tax states contribute far more to the federal government than their low tax state counterparts. Residents of New York--like those in Chris Collins' district--pay on average $11,594 in federal taxes, an amount exceeded only by their well-taxed compatriots in New Jersey, Connecticut, Massachusetts, Minnesota and Delaware. Eliminating the state and local tax deduction is estimated to generate $1 trillion to offset tax cuts--an amount that will be taken directly from the pockets of taxpayers in those states. Yet it will cost the GOP little as they round up votes for the tax cuts, as none of those states have a Republican senator.

In aggregate, New York taxpayers paid $55 billion more in income taxes to the federal government in 2016 than they would have if they paid the national average contribution of $8,800 per capita. New Yorkers contribute more--as they have for the past century--because the state's workforce is more economically productive. The workforce is more productive because New Yorkers are, on average, better educated. And New Yorkers are better educated because New York State spends more on K-12 and higher education--requiring higher taxes--than the average state. It is all connected.

By his own words, Chris Collins is not motivated by his general gratitude toward those who have supported him, as John Roberts suggested in McCutcheon v. FEC; instead, Collins has described a world of quid pro quo. Taxpayers in New York's 27th Congressional District should take a hard look at the tax bill and realize that they are getting the short end of the stick. Then, they should ask why their member of Congress--to say nothing of their President--is out there fighting for those donors, rather than fighting for them.

Read it at the HuffPost.

Follow David Paul on Twitter @dpaul. He is working on a book, with a working title of "FedExit: Why Federalism is Not Just For Racists Anymore."

Artwork by Jay Duret. Check out his political cartooning at Follow him on Twitter @jayduret or Instagram at @joefaces.

Friday, November 17, 2017

Sweet home, Alabama.

It is appropriate that what may be a defining moment in the Republican Party civil war revolves around a senate race in Alabama. Alabama is where it all began. It is where, fifty years ago, the GOP embarked on a path that transformed the political landscape of the country and brought the party to its current straits. To a person, the leadership of the GOP in Congress find the GOP Senate candidate Roy Moore to be deplorable, but it remains to be seen if the party base in Alabama--once devoted Democrats, now bound heart and soul to the GOP--share their view.

Fifty years ago this coming February, Alabama Governor George Wallace broke from the Democratic Party and launched his independent bid for the Presidency. The tension between southern Democrats and the national Democratic Party had been building for decades. The Democratic Party had been the party of the agrarian south dating back to its founding by Thomas Jefferson. It was the party of southern slaveholders leading up the Civil War, of the Jim Crow south after Reconstruction, and it continued to dominate southern politics through the New Deal. By the middle of the 20th century, things began to change, however, as growing Democrat support for civil rights increased disaffection with the national Democratic Party among southern Democrats.

Richard Nixon won the presidency in 1968, with 43% of the vote--edging out Democrat Hubert Humphrey by 500,000 votes, or 1/2 of 1%--while George Wallace won 9.9 million votes, representing 14% of the vote. In the wake of a second close presidential contest, Nixon--who had lost the 1960 presidential race by 110,000 votes to John F. Kennedy--was determined not to face a third close election in 1972, and seized on the disaffection of the Wallace voters.

As documented by Nixon strategist Kevin Phillips in his 1969 book, The Emerging Republican Majority, Nixon's ensuing Southern Strategy was implemented with the intention of 'trading' the traditional GOP support among black voters and New England and Midwestern liberal Republicans for the traditionally Democrat southern and working class white voters who had supported the Wallace candidacy. Despite the tendency to view the Southern Strategy in starkly racial terms, Phillips observed that Nixon did not need to make major shifts in traditional GOP rhetoric to win a larger share of southern and rural voters, as the turmoil of the 1960s and the Democratic Party shift to the left on cultural issues provided the GOP with a natural opening. Nixon ran on a law and order platform, and he and his running mate, Spiro Agnew, shared a natural affinity with Wallace voters in their disdain for the cultural turmoil of the 1960s, and the role and power of the national media.

The strategy worked. In the 1960 presidential race, Nixon won 50% of the popular vote, including 51% of the white vote and 32% of the black vote. Twelve years later, in the 1972 contest, Nixon and the GOP took 68% of the white vote and 13% of the black vote. Eight years later, in the 1980 Presidential campaign, Ronald Reagan sharpened the GOP racial appeal with his embrace of state's rights on the eve of his nomination, and his embrace of what his campaign strategist Lee Atwater would later describe as barely disguised racial code.

A half a century later, the political landscape has been transformed. Historically part of the "solid south" of the Democratic Party, Alabama is now seen as forbidding territory for Democrats. Once the most powerful force in the Democratic Caucus, the last white Democrat in Congress from the old south finally succumbed in 2014. On the other side of the aisle, Susan Collins of Maine is the last remaining Republican Senator from the Northeast, which was once a stronghold of the national Republican Party,

Alabama's long history in the Democrat camp is barely remembered by Alabama voters today, as they grapple with the Roy Moore controversy. Voters there who suggest that voting for a Democrat is unimaginable seem unaware that when Jeff Sessions was elected to replace Democrat Howell Heflin twenty-one years ago, he was only the second Republican elected to the Senate from Alabama since Reconstruction; or that current Republican Senator Richard Shelby was originally elected as a Democrat, but switched parties in the mid-1990s.

Against that history and backdrop of strident partisanship, Roy Moore is loath to step aside. Faced with charges of sexual misconduct, he is largely ignoring his Democrat challenger. Instead, he has chosen to strike a stance of defiance against the national media and political elites that resonates deeply with Alabama's history. By choosing to define his political opponent in the race as the Washington Post and Mitch McConnell--while framing himself as standing up for Christian and traditional southern values--he is appealing to Alabama's history of resentment toward federal dictates, and to animosities between the agrarian south and northern power that dates back to the formation of the republic.

Those in the GOP who are looking to Donald Trump to bail the party out and demand that Roy Moore step aside seem to miss the fact that Donald Trump is Roy Moore. Not, as many have suggested, with respect to his sexual deeds or misdeeds, but as a politician who stood against the Republican Party and triumphed by channeling the resentments of voters against the powers that be. Trump put his credibility on the line against Roy Moore once before--against his own instincts--when he deferred to Mitch McConnell and endorsed current Senator Luther Strange, who lost to Moore in the primary. One has to imagine he will be loath to make that mistake again.

The chasm between the Alabama Republican Party and national Republicans is only growing wider. As Roy Moore has stood his ground, GOP leaders in Congress--who thought they had taken an ethical stance in choosing to believe Moore's accusers and demanding that Moore step aside--have found themselves being excoriated by Moore and his allies as political elites allied with the national media. Like déjà vu all over again, we are watching Roy Moore channel George Wallace, and Moore's allies rally Alabamans to his cause.

A half-century after Wallace left the Democratic Party, it is like nothing has changed. Except this time, Roy Moore's man is sitting in the White House. Meanwhile, those in the GOP who thought they were taking the high road are left to wonder: Did the Republican Party absorb the southern Democratic Party, or was it the other way around all along?

Read it at the HuffPost.

Follow David Paul on Twitter @dpaul. He is working on a book, with a working title of "FedExit: Why Federalism is Not Just For Racists Anymore."

Artwork by Jay Duret. Check out his political cartooning at Follow him on Twitter @jayduret or Instagram at @joefaces.

Friday, November 10, 2017

Our lost $18.4 trillion, and the lessons for tax reform.

“The government is promoting bad behavior.” These were Rick Santelli's words on the floor of the Chicago Mercantile Exchange in the opening moments of a rant that would launch the Tea Party movement. Santelli then turned to his audience of commodity traders and railed against public policies that promoted over-leveraging and led to the 2008 financial collapse, for which the public was forced to pick up the estimated $12.8 trillion tab. Add in the $5.6 trillion cost of U.S. wars over the past decade and a half and you have a tidy sum exceeding $18.4 trillion. An amount equivalent to a full year of the U.S. GDP down the drain. Then there are the lives lost, the bodies mangled, the personal bankruptcies, the family futures destroyed, and the dreams that died in the face of lost opportunities and pervasive cynicism. And, of course, the deep damage to our national psyche, the comity of our politics, and public faith in our institutions.

These things are not Donald Trump's fault. The wars and the financial crisis are the context of our disorder, and to take our eyes off them and focus instead on Trumpism and Resistance is to miss the point and fail to seize the moment. The promise of massive federal income tax cuts for the middle class is a palliative for the real suffering that working families have borne. And, as has become evident, those tax cuts are an illusion. Instead, Trump's promise of massive tax cuts to his loyal and trusting supporters has become the stalking horse for massive tax cuts for the wealthiest Americans.

In its desperation to pass some form of tax legislation, the normally deliberative process has given way to cutting individual and corporate rates, and then looking for ways to offset the cost by eliminating deductions. Gone is any notion of tax reform as a process for thinking through what we tax, and why.  If real tax reform were under consideration--rather than simply tax cuts to the donor class--there are steps that could be taken that would make America a better and safer place for the working class and middle class families that live paycheck to paycheck and send their children off to fight our wars. These are reforms that reflect, if nothing else, the lessons learned from the $18.4 trillion price tag of the past decade and a half of our misfortune.

First, tax reform should end subsidies for and incentives to over-leveraging at the corporate and household level. 

As has been well documented, the 2008 economic collapse followed a period of massive over-leveraging--the taking on of excessive debt--at the corporate and household levels. At the corporate level, debt has been used for decades as a tool for increasing economic value, by companies, private equity funds and others. This over-leveraging in the corporate sector increases financial returns to corporations and stockholders during good times, but increases risk and vulnerability to all of us who end up paying the price when the house of cards collapses, as we learned in 2008. Corporate over-leveraging does not occur by happenstance, however. Rather, it is a specific response to incentives in the tax code, which makes debt far more attractive for funding new investments than raising equity. Simply stated, interest paid on debt is deductible from income on a pre-tax basis--which means that the federal government provides a subsidy to any company that raises funds through borrowing--while dividends are paid on an after tax basis.

At the household level, the inducements to borrowing are similarly grounded in the tax-deductibility of mortgage payments vs. the payment of rent from after tax dollars, and the stimulation of consumer credit through home equity loans. Home ownership has long been touted as the cornerstone of national social policy, but in the years since the 2008 financial collapse years, the disadvantages of home ownership have become apparent. In a world where no job is forever, labor mobility--the ability to pack up and move--has increasingly become critical to families seeking economic opportunity. As housing values collapsed in the wake of the financial crisis, families in many communities found themselves immobilized by having whatever wealth they thought they had saved over the years bound up in homes that they could not sell.

Second, a tax on imported petroleum products should fund a portion of our military expenditures.

Since the creation of CENTCOM in the 1970s, the U.S. has affirmed its policy priority of protecting access to Middle East oil for the advanced industrial world. While we have become a petroleum exporting nation in recent years, the domestic price of oil continues to be set by international market forces. Therefore, even if we are energy independent with respect to access to oil, we remain dependent on world events with respect to oil prices. If a continuing U.S. military presence in the Middle East and other energy producing regions of the world is part of the price of assuring stability in global energy markets, then it would be appropriate for some portion of our $600 billion defense budget to be internalized into the price of petroleum products. Failing to do so has the dual impact of encouraging spending on oil by allowing consumers to pay only a portion of the true cost of delivering gasoline to the pump on a reliable basis, as well as undercutting the development of alternative energy sources by keeping petroleum prices artificially low.

Third, tax reform should reverse incentives to the financialization of the U.S. economy, including the brain drain from productive sectors to the financial services sector.

Over the past half century, the financial services sector of the economy has grown as a share of national income. In the wake of Clinton-era deregulation of the financial services sector, this growth exploded, with the development of an endless array of new financial products and loosely regulated hedge funds. Along the way, the carried interest exemption in the federal tax code--which allows many in the financial serviced industry to pay the far lower capital gains tax rate on their ordinary income--attracted many of the brightest minds into finance. This combination of deregulation and tax code incentives has magnified financial returns within the financial sector, even as it has increased the financial risk exposure to the economy, and undermined innovation and invention in other, more productive areas.

Donald Trump promised massive tax cuts for his disaffected working class voters and to end the carried interest exemption that buttresses the fortunes of hedge fund billionaires, but now that a tax bill is actually under consideration, those promises have fallen by the wayside. Treasury Secretary Steve Mnuchin continues to complain that it is hard to not cut taxes for the wealthy in any tax cut plan for the simple reason that they pay most of the taxes. But, in fact, it is not difficult at all. If you don't want to cut taxes for the wealthy, all you have to do is not cut taxes for the wealthy.

As Rick Santelli pointed out, the government supports bad behavior. Donald Trump won the presidency in large measure because of anger over some of that bad behavior, and the price that working families bore--and continue to bear--for the past decades of war and economic dislocation. Tax reform can't change the past, but if we learn from that past, it can be part of creating a better future. Reduce the risks to the economy by reducing the incentives to over-leveraging that are built into our tax code. Reduce the risks of war revolving around global oil dependence by internalizing the cost of defending energy supply lines into the price of oil, and allow the markets for energy alternatives to benefit along the way. And stop the special treatment of the finance sector that serves no one's interests except for a very small, very privileged few. These are tax reforms that would benefit working families, and the rest of us as well.

Read it at the HuffPost.

Follow David Paul on Twitter @dpaul. He is working on a book, with a working title of "FedExit: Why Federalism is Not Just For Racists Anymore."

Artwork by Jay Duret. Check out his political cartooning at Follow him on Twitter @jayduret or Instagram at @joefaces.

Monday, November 06, 2017

Killing blue state tax deductions is a bad idea.... for red states.

The success of proposed tax reform legislation is a life or death issue in the minds of many Republicans, and the success of that legislation may well hinge on the votes of Republican members of Congress from high tax, blue states. At issue is the ability of taxpayers in those states to deduct state and local taxes on their federal income tax returns. Eliminating that tax deduction is worth an estimated $1 trillion as a revenue offset to cuts in tax rates. That trillion dollars comes from the pockets of taxpayers in high tax states, for whom losing that deduction well turn the proposed nominal cuts in income tax rates into a tax increase. Republicans members in those states are being asked to fall on their sword for the broader interests of their party and their President, even if their constituents must pay a price.

Last month, the Senate went on record on a party line vote supporting the repeal of the state and local tax deduction. In language that is more Bernie Sanders than Mitt Romney, West Virginia Republican Senator Shelley Moore Capito argued that the state and local tax deduction disproportionately benefits the wealthy and would be better spent on tax relief for the working class. It was a framing of the issue that should have caused GOP traditionalists to cringe. Only in the nation's capital, after all, would taxing less of people's hard earned money be considered spending. That money, Republicans used to insist, does not belong to the government. Congressman Peter King--a Republican from high tax New York--tried to strike a middle ground, suggesting that the deduction for state and local taxes should be means-tested--available to middle class taxpayers but not to the wealthy. King might have mastered the new world rhetoric of the GOP as the party of the working class, but he is going to have to bone up on his math. The typical middle class taxpayer cited over the past week as the Tax Cuts and Jobs Act was introduced is a household earning $59,000 or thereabouts. A quick glance at the IRS tax tables suggests that those households pay an average federal income tax rate of 2.6%. According to Empire Center data, the middle quintile of taxpayers living in New York City--the area of the state with the highest taxes--pay around 5.5% in combined state and local taxes. That would translate into around $3,245 on their $59,000 of income. A deduction of those taxes against a federal return at a 2.6% federal income tax rate would generate a whopping $84 in tax savings, or $7.03 per month.

Capito and King are missing the larger point that should be part of this discussion. Describing the state and local tax deduction as a subsidy or giveaway to wealthy people in blue states ignores both what it is that those high-tax states do with those tax revenues, and how their proclivity to tax and spend directly benefits low tax states like West Virginia. As a representative of one of the poorest states in the country, Shelly Moore Capito, in particular, might consider paying more attention to why people in those blue states tend to be wealthier, despite paying higher taxes, while those in her state continue to struggle.

If the repeal of the state and local tax deduction goes into effect, public finance analysts fully expect that it will place greater pressure on higher tax states to reduce taxes and roll back spending, as taxpayers in those states will effectively see a tax cut for the rest of the country translated into a tax increase for them. While this is exactly the impact that many Republicans in Congress would like to see, there are potentially significant consequences for both the low tax states as well as the high tax states as the impacts reverberate through the economy.

As things stand--and as the low federal income tax rate paid by a New York middle income household illustrates--the progressive federal income tax system raises the lion's share of federal revenues from wealthier taxpayers, as the top 20% of taxpayers pay approximately 90% of the federal income tax. Looking at the same data on a state-by-state basis, one sees that the wealthier states pay a similarly disproportionate share of federal income taxes relative to the less wealthy states. To be specific, the ten states that contributed the most on a per capita basis (DE, MN, MA, CT, NJ, NY, OH, IL, MD, RI) contributed a combined $236 billion more in federal income taxes than the average, while the lowest contributors (WV, MI, NM, SC, AL, AZ, ME, MO, HA, OK) contributed an aggregate $126 billion less than the average.

More important than who contributed what is why these disparities are so stark. The ten highest contributing states have a gross domestic product per person that is 46% higher on average than the lower contributing states. Higher GDP equates to higher personal incomes, which puts people in a higher tax bracket under a progressive tax system. Shelly Moore Capito, a senator from the lowest contributing state, might want to explore why these differentials are so significant--and based on historical data so enduring--and what the lessons might be for West Virginia beyond seeking greater "tax relief" for her constituents. Her constituents, after all, pay next to nothing federal income taxes--$3,600 on average (most of which is the payroll tax) compared to $14,970 for their counterparts a couple of hundred miles to the east in Delaware--and one has to imagine that a few dollars more a month from the federal government would have less impact on their lives and futures than figuring out how it is that their brethren in Delaware have been doing so much better than them, decade after decade.

While it is easy to confuse correlation with causation, the scatterplot above illustrates the correlation over time between state education rankings--which reflect investment in K-12 and higher education over time--and household incomes. The cohort of economically successful states noted above spend on average 27% more per capita on education, and--as illustrated in the graphic below--have achieved higher levels of educational attainment across their populations, which is critical to both state economic development and the sustainability of family incomes over time.

Data Source: US Census Bureau
Among the most damaging trends within today's Republican Party is the decline in support for higher education. Over the past two years, support for higher education has declined sharply among Republicans from the 60% range to the mid-30s. This decline is arguably less about the value of higher education itself than it is about the knee-jerk shifts in attitudes within the GOP across a number of issues--the decline in support for free trade, the decline in support for Bob Corker and increased affection for Vladimir Putin, to name a few. It reflects a herd mentality that is as destructive as it is disturbing. Just keep staring at the graph below that tracks the relationship between educational attainment to unemployment: education, not tax cuts, is the key to the economic future and resiliency of the middle class.

Unemployment Rate by Educational Attainment 
Source: Macrotrends.
There may be great satisfaction for many in the GOP in eliminating the state and local tax deduction, and in particular in seeing the cutbacks that will ensue in both higher education and K-12 funding. For Republicans in Congress, it is both a way to offset the costs of tax cuts that they have promised to deliver, and at the same time snub their noses at the profligate ways of high tax liberalism--to say nothing of sticking it to the liberal professoriate who have emerged as a pet peeve of the GOP. But in a world of progressive income taxation, red state Republicans have been free riders on the backs of those profligate blue states, who now do the heavy lifting when it comes to the funding of the federal government. Over the near term, the impact of eliminating the state and local tax deduction may be to increase revenues from high tax, blue state America, but if the longer-term consequence is to undermine education funding and economic growth in those states, it would be a pyrrhic victory. After all, the only thing worse for taxpayers who resent rich people--and rich states--is a world without them, when everyone else is forced to pay the bills.

Read it at the HuffPost.

Follow David Paul on Twitter @dpaul. He is working on a book, with a working title of "FedExit: Why Federalism is Not Just For Racists Anymore."

Artwork by Jay Duret. Check out his political cartooning at Follow him on Twitter @jayduret or Instagram at @joefaces.

Thursday, November 02, 2017

The Republican Re-election Act.

Paul Ryan can call it tax reform all he wants, but Donald Trump is not fooled. Asked by Ryan and House Ways and Means chairman Kevin Brady to come up with a name for the bill, the branding wizard-turned President replied with “The Cut Cut Cut Act.”

Donald Trump may be a long-time New York City Democrat, but once he decided to run for President, he picked up the Republican playbook and took it to heart. For the past several decades, the GOP election strategy has focused on a small number of high-impact issues--notably pro-gun, pro-life, religious liberty, and the like--but none came to define the Republican brand as much as tax cuts. From the outset of his campaign, Trump promised "the biggest tax cuts ever." Forget tax reform, that is for policy wonks who were on debate teams in college, tax cuts are an easy pitch to the Republican base in 140 characters or less.

According to Brady and Ryan, the legislation introduced this week is about delivering an estimated $1,200 in income tax relief to lower and middle class American families who are weary of the complexities and burdens of the tax code. It is notable, however, that the income tax rate for the "average" household with an income of $59,000 is approximately 2.6%. If the proposed increases in the standard deduction and tax credits go into effect, those families should end up with a negative tax rate--meaning that after tax credits they will get back more than they paid in. Lower middle class households already take out more than they pay in, as, before the proposed changes, the average income tax rate for the second quintile of households is negative 1.2%. The problem all along for GOP tax cutters promising middle class income tax relief is that the middle class--much less the lower middle class--barely pays the federal income tax.

Nonetheless, marketing the GOP plan as a tax cut for lower and middle class families is critical, even if it can be more accurately described as a welfare system that funnels cash to those households. There is nothing inherently wrong with this--cashflow relief is cashflow relief, after all--but in a country where disdain for the government and those who benefit from government programs has been carefully cultivated as a GOP Election Day strategy, some frank discussion might be in order. Some of the current anger in our politics toward people seen as takers and leeches on the system--central to the rise of Trump--might be lessened if many of those who are angry come to recognize that they too are getting help in getting by.

For weeks now, Paul Ryan has been defending the $1.5 trillion cost of the proposed tax cuts, insisting that there would be no negative deficit impact of the tax cuts. This, too, is central to the marketing of the plan. "We are convinced," Ryan argued, "and the models are really clear, people will change their behavior, businesses will change their behavior if taxes change. That $1.5 trillion number is in the mid-range of the growth we expect. We believe that we will get faster economic growth that will exceed this $1.5 trillion. So we don't anticipate a big deficit affect from this tax reform."

The notion that there are models suggesting the deficit-neutrality of tax-cut legislation is widely derided among professional economists--Republicans and Democrats alike--with the notable exception of the usual collection of charlatans and cranks. Bruce Bartlett--one of the architects of Ronald Reagan's original tax cuts--has for years railed against Republican revisionist history that those tax cuts--or any similar income tax cuts--pay for themselves. If Ryan has models that suggest otherwise, it is just a product of someone tinkering with the algorithm to get the desired result. However, given the anti-elite, anti-academe tenor of the moment, criticism from professional economists of legislation endorsed by this President will only add intensity to the support for the legislation among the Republican base.

No doubt, Ryan is looking to provide political cover for his members with his specious tax-cuts-pay-for-themselves rhetoric, but one has to wonder why. It seems unlikely that he will get much pushback in the Republican Caucus regarding the deficit impacts of tax cuts, for the simple reason that there is likely to be little pushback from the Republican base. An Economist/YouGov poll published last month suggested that 58% of Republicans now support tax cuts regardless of deficit impacts, as compared to 39% of Democrats, and one cannot imagine that Ryan intends to relay on support from across the aisle. Members of his caucus understand that passing tax cuts--and preferably massive tax cuts as the President is demanding--has become a political imperative, however the economics shake out.

Nonetheless, it is worth reflecting for a moment on the circumstances underlying the economic promises that are being made. First and foremost, all of the usual rhetoric about cutting spending to pay for tax cuts has gone by the wayside. In the current era of mob rule, few GOP members of Congress--including members of the Freedom Caucus who long claimed that their single reason for being in Washington was to end deficit spending--are likely to be swayed against the tax cut plan on account of another trillion dollars or two of borrowing. They have seen the price paid by those who go against the President and they want no part of it. Furthermore, as the graph here illustrates, for the past half-century, federal outlays have hovered around 20% of GDP, regardless of spending caps and sequesters, tax policies and rates. Spending moderated slightly during the Reagan and Clinton years, while rising a bit during both Bush presidencies. It spiked upward when GDP dropped in the wake of the 2008 financial crisis, before trending back down to 20% as the economy recovered. If anything, spending is likely to trend upward over the course of the current administration, given the President's interest in growing both military and infrastructure spending, and his lack of interest in entitlement reform. Faced with those facts--and the overriding political imperative of producing a tax cut bill--Ryan is choosing the only path forward available to him if he is to give a nod to fiscal prudence: a "model" that shows that cutting taxes will not reduce revenues.

Second, the national unemployment rate of 4.1% is currently near the lowest level in a half-century. This begs the rationale for massive tax cuts, which are traditionally seen as an economic tool for stimulating growth at times of high unemployment. Donald Trump and House Republicans have been particularly vocal about the urgency of boosting economic growth above the current 3% range. The simple fact is that the United States economy is outperforming much of the advanced industrial world in its recovery from the 2008 global financial collapse, though in the current climate of anger and complaining few are inclined to stand their ground on how well things are going.

U-6 Unemployment Rate:
Many people have argued--as the President did when he was a candidate--that the official "U-3" unemployment rate understates the employment challenges facing the economy. Those people often point to the higher "U-6" rate that includes underemployed and "marginally attached" workers. The U-6 rate spiked at around 17% in the aftermath of the 2008 collapse, and now hovers around 8%. This is not unusual, however, as the graphic here illustrates. The U-6 rate has always floated somewhat above the official rate, with a spread to the U-3 rate that widens as economic conditions worsen and narrows as things improve; with a steadily improving economy, the spread between the U-3 rate and the U-6 rate is now narrowing exactly as one would expect. The truth is that companies across the country already cannot find workers. These tight labor market conditions beg a simple question: where are all the excess workers supposed to come from if tax cuts pass and the economy heats up further. Trump boasts about the lowest unemployment rate in nearly a half century and seems oblivious to the implications of that statement for his tax cut promises of new jobs.

Unemployment Rate by Education:
Third, the most significant factors affecting individual employment prospects and family income sustainability remain largely within the domain of individual choices made over the course of a lifetime. Educational attainment and the willingness to relocate for economic opportunity have long been the primary determinants of economic well-being, and have been central to long-standing GOP principles of self-reliance and personal responsibility. One of the tragedies of the rise of Trump as the avatar of the new Republican Party has been his willingness to undermine the importance of that message, both encouraging workers to stay where they are and rely on him to bring their jobs back, and contributing the growing Republican disdain for higher education. As the graph above illustrates, the linkage between educational attainment and family incomes and economic resiliency is clear. In his book Hillbilly Elegy--which became a bible of sorts for Republican understanding of the plight of its rural white working class base voters--J.D. Vance observed that his family members who went back to school or moved to regions of the country with better job prospects both fared well, while those who stayed put in eastern Kentucky and blamed others for their fate did not. When considering their plight, he suggested that they only needed to look in the mirror to find the source of their problems.

Finally, there is the "jobs" element of the Tax Cuts and Jobs Act: the corporate income tax cuts. This element of the tax cut plan can perhaps best be described as a solution in search of a problem. The prospect of corporate tax cuts--along with a relaxing regulatory environment--have sparked a dramatic rally in the stock markets and galvanized support across the business community for the Trump administration. But unlike flagging household incomes, corporate profits are already at historically high levels in both absolute dollars and as a share of national income, as illustrated here. The prospect of a reduction in the statutory corporate tax rate from 35% to 20%, as well as a tax holiday on overseas profits and full expensing of capital investment, only looms to bolster further profit growth.

The jobs argument for the proposed tax cuts centers on the administration's contention that corporate tax cuts will translate into increased worker wages. Specifically, they are arguing that the proposed $200 billion corporate tax cut will produce a $4,000 to $6,000 hike in average worker take-home pay. Looking at the low end of the projection, $4,000 per worker pencils out to $400 to $600 billion annually, or two or three times the value of the proposed tax cut. The presumption is that with a new, lower statutory tax rate, global capital will pour into the United States, manufacturing will be reborn, and, ultimately, employee wages will be bid upward. After decades of seeing wages decline as a share of national income--as illustrated here--America will be made great again.

That analysis has sparked a raging debate among economists, both as to the basic premise that corporate tax rate cuts lead to meaningful wage increases--which is largely based on experiences of small economies--and historical evidence that suggests that the primary beneficiaries of past corporate tax cuts tend to be shareholders and corporate CEOs and board members. As The Economist magazine pointed out, the administration analysis also seems to ignore the interaction among various provisions in the proposed legislation. Allowing the full expensing of capital equipment--combined with continued, historically low interest rates--may be the real game changer, rather than the cut in the statutory tax rate. Companies faced with tight labor markets will have every incentive to invest in robotics and artificial intelligence to reduce their overall need for workers, rather than boosting their pay, producing an effect at odds with what the administration is promising.

But this is all conjecture, and should not be an obstacle if the GOP keeps its eye on the prize. Even if the economics have not always played out as predicted, tax cuts have always worked as a political strategy. That is where the real algorithm lies, in the politics.

Read it at the HuffPost.

Follow David Paul on Twitter @dpaul. He is working on a book, with a working title of "FedExit: Why Federalism is Not Just For Racists Anymore."

Artwork by Jay Duret. Check out his political cartooning at Follow him on Twitter @jayduret or Instagram at @joefaces.