Thursday, March 15, 2018

When meddling is strategic doctrine.

On Morning Joe last week, a journalist who has covered the Russia story commented that it was hard to take Steele's Russia dossier seriously early on. "He was saying, the Russians are coming, the Russians are coming, and, contrary to the conspiracy theories, no one was so hard to believe there was a Russian conspiracy or that this story could be true..."

Skepticism around the notion of a "Russian conspiracy," and the idea that the Russians might be coming, influenced how Steele's material was received by much of the media. A Russian conspiracy? The very idea of it is so 1950s. We imagine that the Cold War years are deep in our past, and we are way beyond that now.

Despite the conviction of U.S. intelligence agencies that Vladimir Putin personally directed the information operation against the U.S. election, Putin denied everything in a recent interview with Megan Kelly on NBC. He insisted he knew nothing about it and was dismissive of the significance of allegations by Robert Mueller that Russian citizens were involved. "So what if they're Russians?" Putin protested. "There are 146 million Russians. So what?... Maybe they're not even Russians. Maybe they're Ukrainians, Tatars, Jews, just with Russian citizenship." 

The remarkable thing is not that he denied it, but that anyone would give any weight to Putin's answer. It is an oddity of our media culture that we presume that people have an obligation to tell the truth. Putin is the head of the Russian state, and whether you like him or not, there is simply no reason to believe that he has some kind of moral obligation to divulge his nation's intelligence strategies on U.S. television. Yet, somehow, we do, and, by the manner of her questioning, Megan Kelly did too.

Russia's history with "information warfare" is long and deep. In 1954, my grandfather, a conservative intellectual, wrote a book called The Fifth Weapon. It opened with a quote from Stalin's Premier Vyacheslav Molotov, who asserted that the Soviet Union would never fight America militarily, but instead would weaken America internally through other means, ultimately allowing the Soviet Union to "settle our accounts with America" on its own terms. The "fifth weapon" referred to the collection of non-military Soviet tactics designed to disrupt American democracy through the manipulation of language and dissemination of fake news, with the objective of steering public opinion and weakening America and other western societies from within.

Those tactics had a long history in Russia. Perhaps the most effective information warfare campaign in history – the publication of The Protocols of the Elders of Zion – had been launched a half-century earlier, just after the turn of the century. Attributed to the Okrana – the secret police of Tsar Nicholas II and forerunner to the KGB – The Protocols were disseminated during a period rife with anti-Jewish massacres across Russia. The Protocols were subsequently embraced and promoted by individuals ranging from Adolph Hitler to Henry Ford, and its central premise of a Jewish cabal that runs the world continues to reverberate in radical rhetoric on the right and the left across the globe.

When Barack Obama told Vadimir Putin to "cut it out," he seemed to be suggesting that the information warfare tactics launched by Putin surrounding the 2016 election was a prank of some kind, rather than central to Russian strategic doctrine. Just three years earlier, in an article in 2013, General Valery Gerasimov, the Chief of the General Staff of the Armed Forces of Russia – Putin's top general – described the critical role of information warfare: "The very ‘rules of war’ have changed," Gerasimov observed. "The role of nonmilitary means of achieving political and strategic goals has grown, and, in many cases, they have exceeded the power of force of weapons in their effectiveness."

The "Gerasimov Doctrine" mirrored Molotov's view that non-military tactics constitute an essential path to achieving victory. In the opening comments of is 2013 article, Gerasimov suggested that "In the 21st century, there is a tendency to erase the differences between the state of war and peace. Wars are no longer declared, and when they begin, they do not follow the pattern that we are accustomed to... A completely prosperous state in a matter of months or even days can turn into an arena of fierce armed struggle, fall prey to foreign intervention, plunge into the abyss of chaos, humanitarian catastrophe and civil war." Given this new frame of reference, Gerasimov continued, "The emphasis of the methods of confrontation used is shifting towards broad application of political, economic, information, humanitarian and other non-military measures implemented with the use of the protest potential of the population." 

As much as we view Russia today as distinct from its Soviet forebears, Gerasimov's doctrine reflects a Russian view of its relationship with the world that dates back to the Tsars: fear of encirclement, vulnerability to invasion, a desire to build a perimeter of friendly or neutral regimes around its periphery, a resistance to political and cultural pressures from the West, and an awareness that it is militarily overmatched. Gerasimov's perspective mirrors Soviet doctrine, where anything from fifth columns to agitprop to proxy wars were tools, preferred to actual engagement of Russian soldiers on the ground.

A more challenging question than whether Vladimir Putin directed Russian efforts to meddle in our democracy is: Why wouldn't is. Most Americans fell asleep after we declared victory in the Cold War. Separated by oceans and our belief in the inevitable triumph of liberal democracy, we laughed when Mitt Romney suggested that Russia remained our greatest geo-political adversary. We had moved on.

Russia, on the other hand, never moved on. Putin has made no secret of his ambition to resist the influence of the West and roll back the decline of Russian global power and regional hegemony. We should not view the notion that Russia might harness the power of social media and use it as a tool against us as a conspiracy – or surprising. Military confrontation is not – and has never been – an option upon which Russia could rely. In contrast, the rise of information technology and social networking offered Russia with a new theatre for information warfare that has been central to its strategic world view for more than a century.

A woman who worked in one of the St. Petersburg 'troll factories' referenced in Mueller's indictment, "that turned lying, telling untruths, into an industrial assembly line," observed that Russia's tactics could never work against Russians. "Who really reads the comments under news articles, anyway? Especially when they were so obviously fake... But for Americans, it appears it did work. They aren’t used to this kind of trickery. They live in a society in which it’s accepted to answer for your words." 

The burden is not on Vladimir Putin to cut it out. This is our problem. Putin is simply doing what he views as in his and his country's best interest, using tools and strategies that they have refined over the generations. Whatever response people might have in mind – expelling diplomats or adding some new sanctions – will not fix things. We have made ourselves vulnerable to Russia's efforts by our own behavior; our penchant for conspiracy theories, our increasing insistence on assuming the worst of those on the other side in our political wars, and, as the woman from St. Petersburg suggested, our guilelessness.

That was the Russian objective all along: deepening the political rifts that divide us and exacerbating our dysfunction; anything more than that was just an added bonus. We have become so obsessed with partisan games that it has become difficult for us to see simple truths and dangers that are right in front of us, and to grasp how much we have at stake if we continue down the path we are on.

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 and Alex Dworetzky. Check out Jay's political cartooning at Follow him on Twitter @jayduret or Instagram at @joefaces.

Friday, March 09, 2018

Peace in our time.

After weeks of resignations, scandal and a deepening legal turmoil, Donald Trump had a good week – or at least a good couple of days. Between tariffs and North Korea, Trump was on his game.

Say what you will about whether he announced tariffs to change the story from hush money paid to Stormy Daniels, it worked. Tariffs knocked Daniels off the front pages of the newspapers, and replaced that story with the image of a the strong, deeply caring President greeting steelworkers in the White House, hearing their stories, and basking in their appreciation for defending them, their families and their communities against the onslaught of the world. It is exactly what he promised.

When he is running the show, Trump is a master of imagery and narrative. Surrounded by beefy steelworkers, hearing their stories, offering them praise. The working man's hero making America great again.

Scott Sauritich, a local union leader from a Pennsylvania steel town told his story. "My father, during the '80s, he lost his job due to imports coming into this country. And I just want to tell you what that does to a man with six kids is devastating. So I never forgot that looking into his eyes in my household what that does to a family. You hear about it, but when you're actually involved and it impacts you, it's - it'll never leave you." 

Your father must be very proud of you, the President offers. He is center stage with the cameras rolling. It is his show. He is relaxed, affable, and shows an easy sense of humor.

But the breadth of the tariffs is already beginning to fade. Just days ago, the White House insisted there would be no exemptions to the American action, but Canada and Mexico, the largest and fourth largest sources of imported steel, have already been excluded. Exemptions are also expected for other allies. Certainly South Korea, the third largest source of imports, which just delivered Trump a possibly earthshaking meeting with Kim Jong-un, will not be punished for its efforts. Together, those three represent 35% of steel imports into the country.

That leaves Brazil and Russia as the last of the top five largest importers, which together deliver a further 20+% of imports into the U.S. Then there are Japan, Taiwan and Germany, three staunch allies, who make up another 12%. Time will tell whether, as attention turns elsewhere, pressure from allies, Congress, and the ever-curious Russia story, will further erode the impact of tariffs celebrated by the steelworkers that Trump gathered around himself. Suffice it to say, if Trump gives in to the pressures he is already facing, as much as 75% of imports may turn out to be reduced or waived altogether. But Trump lives for the attention and adulation in the moment, and seems oblivious to whether anything of enduring value survives.

Trump's reality show chops have been on display of late, and he is very good at it. His new favorite platform – the White House meetings with bi-partisan groups of Senators to knock heads and make deals – have all the appearance of what one might have hoped for from a President Trump, based on how he sold himself on the campaign trail. At the meeting on guns, Trump sat California Democrat Diane Feinstein – the architect of the automatic weapons ban that has long since lapsed – to his left. He orchestrated a back and forth between the Democrats and Republicans, suggesting what could and couldn't work, shocking Republicans in the room as he deferred to the Democrats. Feinstein became visibly giddy with excitement as the President put the real issues on the table and swatted aside the legitimacy of the National Riffle Association as a player in the legislative deal making.

We had seen this performance before, when Trump put himself front and center in a similar meeting on DACA and immigrations. There, he presaged the staged nature of the proceedings as he literally welcomed the Senators into his "studio." He was the master of ceremonies, and set a strong tone laying out the issues, leaving Republicans dumbstruck as the man who rode visceral partisan anger over immigration to the presidency positioned himself as a neutral arbiter; a dealmaker serving the nation's interest. Then, as with guns, he assured the group that, like Prometheus stealing fire from the gods, he would take the heat; he would bear the political risk of passing an immigration bill over what was certain to be angry objections from the Republican base.

The Republican base, of course, is the Trump base, and each time, once the cameras were off and the Senators had retreated to their chambers, Trump reverted to his political safe space. No deals made in his studio survived the light of day. Stephen Miller, Trump's 32 year old senior advisor who presides as the Prefect of the Doctrine of the Faith, is now responsible in Steve Bannon's absence for pulling Trump back from the brink when he makes commitments that violate his oath to the MAGA faithful; and so he did. The deal on DACA died a swift death as Miller added new conditions that quickly scuttled the purported deal. Progress toward action on guns was put to bed by an announcement by the NRA that they had met with Trump a few hours after the meeting. Whatever Trump might have suggested in that room was mistaken; his position on guns was not really what he said it was.

On Thursday, Trump blindsided his own foreign policy team by agreeing to meet face-to-face with North Korea's supreme leader Kim Jong-un. It has all the makings of more great television. Saudi Arabia and China laid out the script for the rest of the world, that the President can be seduced by a hero's welcome with high production values. The South Koreans – who lie in the path of Kim's artillery and are most vulnerable to nuclear annihilation should the cascade of insults between Kim and Trump lead one of them to actually start something – stroked Trump's ego furiously as they announced the pending meeting.

If it comes to something, the solution to the North Korea problem that South Korea's National Security Advisor suggested was at hand would cement Trump's legacy. But we are a long way from that. A meeting in and of itself – regardless of what it leads to down the road – looms to give each of the two leaders what they value most. Kim Jong-un will get to stand side-to-side on equal terms with the most powerful man on the planet. For his part, Donald Trump will stand before the assembled cameras of the world, as Clinton, Bush and Obama had each failed to do, and declare peace in our time.

Commenting after the White House ceremony, Scott Sauritch did not see the cynical side, the risk that he was just a prop in one more episode of a reality show presidency. "I think this all needs action right now," he emphasized. "Let me tell you something...this change in the steel industry, this attention to what's going on right now had to happen... For the infrastructure and the safety and security it needed to happen." 

Sauritch, like many of Trump's supporters, may take him at his word, but, as with all of the President's striking performances, it is the next day that matters; and the day after that. In DACA and guns and infrastructure week, and now with tariffs, once the show ends and the cameras stop rolling, Trump's attention fades and his commitment withers, and, at the end of the day, little of substance is actually achieved.

If there is a deal to be reached with North Korea – or even for real negotiations to begin – members of the foreign policy establishment have observed that the President will need a diplomatic infrastructure that he currently does not have. Right now, we have no ambassador on the Korean peninsula. Nor, apparently, does Rex Tillerson have a staffed East Asia desk. In an earlier time, one would have assumed that the President would task Jared Kushner to put together the North Korea peace deal. But his star has faded of late, and, in any event, his plate is probably full with Mexico, the Middle East and China, to say nothing of his own personal legal defense and lack of security clearance.

Getting to an actual deal will be the difficult part, not arranging one face-to-face meeting. A meeting, after all, does not required Kim to relinquish his nukes or Trump his rhetoric. But should a deal be struck and a written agreement actually drafted, getting it signed – which is the point of greatest political risk – could present a challenge all of its own. If you don't believe that, just ask Stormy Daniels.

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.

Wednesday, March 07, 2018

Our politics, turned upside down.

If there was any doubt that Donald Trump has turned our politics upside down, that question has been settled. According to the Quinnipiac University Poll released this week, American voters oppose Trump's proposed tariffs on steel and aluminum by a 50% to 31% margin, and nearly two-thirds disagree with his assessment that a trade war would be good for the country. But it is the partisan breakdown of those numbers that show that our politics have truly disappeared down the rabbit hole. According to the poll, 58% of Republicans support Trump's tariffs, while 73% of Democrats oppose them, and 67% of Republicans agree with the President that a trade war would be good for the country and could be easily won, while 90% of Democrats disagree. These results are literally the opposite of what, in the world before Trump, one would have expected.

Dating back to the post-World War II years, free trade was a defining principle of the Republican Party. Democrats have long been split between free traders and protectionists, but not so the GOP. When Richard Nixon and Ronald Reagan broadened the GOP coalition to bring white southern and working class Democrats into the fold – former members of Franklin Roosevelt's New Deal coalition who had been weaned on big government and protectionist sentiments – the party acquiesced to the interests of those voters and tacked hard to the right on social issues, but the Wall Street and Main Street business Republicans who had long represented the core of the GOP gave no ground on their core economic principles, including their commitment to free trade and free markets.

GOP support of free trade was historically coupled with its pull-up-the-bootstraps stance with respect to individuals in the job market. In his famous 47% comments to a group of hedge fund managers during the 2012 presidential campaign, Republican nominee Mitt Romney denigrated Americans "who believe that they are victims" and lean on the government to solve their problems rather than packing their bags when times were tough and moving to where the jobs are. Four years after Romney's defeat, however, working class Americans hunkered down in dying rural communities – former Democrats who had morphed into the activist base of the GOP – eagerly embraced Donald Trump, as he rejected Romney's traditional GOP message and told those voters instead that they should sit tight and he would bring their jobs back.

Now that Donald Trump is proposing to deliver on his promises – showing himself as more Huey Long than Mitt Romney – business Republicans who fell in lockstep with him in return for massive tax cuts are protesting what in their view is Trump's abandoning of a core principle of Republicanism. But there is no reason they should be surprised; Donald Trump ran against the Republican Party as much as he ran as part of it, and the peasants with pitchforks who carried him to the White House are surely as deserving of their payday as those GOP elites who cashed their checks last Christmas. But if the Quinnipiac numbers are correct, we may be seeing more than just payback for delivering votes on election day. Donald Trump may have completely flipped the script as he competes his overhaul of the GOP, leaving old guard, free trade, free market Republicans on the outside looking in. 

Donald Trump is correct. The world has taken advantage of American foreign and trade policies in the decades since World War II and the Cold War. But that was the point. The global economic order that America championed in the wake of the Second World War was built around opening up our own markets to international competition to allow nations across the world to lift much of their citizenry out of extreme poverty. It was not a charitable undertaking on our part. After the world had suffered through two world wars, after the treaty ending the First World War pushed the German people into a degree of privation that led to the rise of Hitler, and after the Second World War left much of Europe and Japan in ruins, it was clear that a different path was going to be necessary if we were going to avoid a third world war.

Coming of age in the 1960s and 70s, when 50% or more of the people across the globe lived in extreme poverty, it was hard to imagine – as illustrated here – that in our lifetime that the percent of the world population living in extreme poverty would decline to below 10%, as it did by 2015. As it turned out, a billion or more prisoners of starvation across the globe were lifted out of extreme poverty – with hundreds of millions entering the middle class in countries where none existed before – as much as anything by an economic vision championed by the GOP and resisted by protectionists within the Democratic Party. In the decades following the Second World War, first Europe and Japan, then India and East Asia and China, and ultimately Africa have seen improvements in standards of living across a variety of metrics to an extent that once was unimaginable. 

Donald Trump's most loyal supporters – former steelworkers and others who were forced along the way to compete with low cost workers and government subsidized industries across the world – see Trump as their champion. Many old school Democrats, such as Ohio Senator Sherrod Brown, similarly celebrated Trump's proposed tariffs. “This welcome welcome action," Brown exclaimed "is long overdue for shuttered steel plants across Ohio and steelworkers who live in fear that their jobs will be the next victims of Chinese cheating.” 

It turns out, however, reports of the death of the steel industry have been greatly exaggerated, as the data paints a more ambiguous picture than simply one about an American industry suffering at the hands of the perfidious Chinese. As the graph here illustrates, the tonnage of steel produced in the United States has remained roughly unchanged over the past three decades, even as employment in the steel industry has declined by roughly two-thirds. This suggests that it is the jobs that have disappeared, not the industry, and that investment in advanced technologies has been the primary culprit leading to the loss of jobs rather than competition from China. 

While Trump – and more notably Steve Bannon, before he disappeared from the administration – has consistently pointed the finger of blame at China, Chinese imports are barely a factor with respect to domestic steel consumption and import competition. Canada and Mexico, our partners in the increasingly integrated North American market, are two of the five largest sources of steel imported into the United States, along with Brazil, South Korea and – interestingly – Russia. Of the top ten, China is 11th, with less than a 2% share of imports. This is not to say that China has not been the primary culprit in the evisceration of U.S. manufacturing; it has been. Our trade deficit with China eclipses our trade imbalances with literally all of our other trading partners combined. But even if China is the problem, it is not apparent how Trump's proposed steel tariffs are a solution.

The picture that the data paints with respect to the impact of technology on steel production and employment is illustrative of the entire manufacturing sector. As this graph from the St. Louis Federal Reserve Bank illustrates, industrial production – shown in the blue line – has risen steadily since the 1970s, with periodic dips during economic recessions, even as manufacturing employment – the red line – has declined from a peak of over 19 million workers, to below 13 million currently. The simple truth is that the world of manufacturing has changed, and all of the MAGA hats and #MAGA tweets are not going to restore the bygone era of people's imagination. Trump's tariffs may give American steel a competitive advantage in the domestic market, but trends in automation and robotics suggest that employment impacts will be far less than economic nationalists imagine. As was the case with his tax cuts, Trump may sell the proposed tariffs on the basis of restoring lost jobs for his working class supporters, but the economic benefits will likely flow to the company CEOs, directors and investors.

Donald Trump conceded as much last July, during a visit a county in upstate New York that he had won with nearly 57% of the vote eight months earlier. Straying off message in the face of the harsh realities on the ground in an economically ravaged community, Trump told workers there the truth: Sitting tight and waiting for the jobs to return was an fool's errand. Companies in other regions of the country were grappling with chronic labor shortages, he said, and people should pack up their belongings and move to where the jobs are. "It's OK," he said. "Don't worry about your house." Trump knows that he has been peddling false hopes with his promises to return the nation to its manufacturing heyday, but so far, it has worked for him.

Free trade and the elevation of a billion people out of extreme poverty in the decades since World War II is as much a defining Republican victory as the fall of the Iron Curtain. But the days when the GOP was a party with a global vision of security through economic cooperation is swiftly disappearing into the fog of memory. Long-time Republicans swallowed hard over the years as one GOP President after another walked back the party's traditional embrace of civil rights, and its moderation on social issues, as the price of building a winning electoral coalition. Now, the final old time pillar of Republicanism is crumbling.

Over the course of the primary campaign, and now as President, Donald Trump pushed the Party of Lincoln into uncharted territory, first with his demonizing of immigrants, then his coddling of neo-Nazis, and now with his full-throated embrace of a trade war. Economic nationalism may not sit well with traditional Wall Street and business Republicans as the new mantra of the GOP – and indeed it offers no solutions to the working class voters that have fallen under Trump's spell – but according to the Quinnipiac Poll, the rest of the party is getting on board. Those traditional Republicans – bought off for thirty pieces of silver – looked away time and again as Donald Trump exploited the worst angels of our nature. It is a little late for them to start complaining now.

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.

Saturday, March 03, 2018

The hidden price of presidential hubris.

As a class, investors have enjoyed the fruits of the Trump presidency. From the day of his election through this past January, the Dow Jones rose 48%, from 17,888 to 26,616. That is a rally of unheard of proportions for a large cap market index. After it hit that high in late January, the market corrected by 10%. Despite those who feared the worst, the pullback was a healthy – and needed – correction for a market that has been careening upward. Over the past week, the economic momentum encapsulated in the stock market's advance has been shaken by Donald Trump's apparent eager embrace of a trade war, and his willingness to threaten the myriad advantages that the United States has enjoyed as the architect of the post-World War II international order.

If you talk to investment advisors these days, they are an optimistic bunch. The world, they will tell you, is in a uniquely aligned period of economic expansion. Even Japan, which has been mired in economic stagnation and deflation for several decades now, is finally showing signs of growth. At home, the U.S. has rebounded from the 2007-08 global financial collapse more robustly than most areas of the industrialized world. Unemployment has continued a long, steady decline, domestic manufacturing is growing, and, as illustrated in the graph here, consumer confidence has steadily improved, to its highest level in nearly two decades.

Just as the stock markets had bounced back from the correction that began in late January, Trump threw a wrench in the works, announcing that he planned to institute a 25% tariff on steel imports. One might have thought that by now the world would have learned not to over-react to Trump's words, and instead waited a few days to see if there was any substance to his announcement or if it was just one more tactical diversion to draw attention away from what has been one of the most tumultuous weeks of his presidency, but markets are easily spooked by threats of tariffs and trade wars. However glowing the global economic context might look, these threats are a reminder of the risks that politics can pose, and harken back specifically to the Smoot-Hawley Tariff Act of 1930. That Act put in place protectionist tariffs and trade policies in the wake of the 1929 stock market crash. The retaliatory tariffs and trade war that ensued are widely credited with deepening the Great Depression. Trump's words proved to be hard to gloss over, and within the first hours following his announcement, $400 billion in market value evaporated. Within two days, the Dow dropped 1,000 points.

The threat posed by Trump's continuing flirtations with economic nationalism goes well beyond the tit-for-tat consequences that we might face should he go forward with imposing tariffs on one industry or another. It is easy to forget how dependent upon the rest of the world we have become, not just with respect to confronting global issues like the terrorism or climate change, but in the more mundane issue of how we pay our bills from one month to the next.

Talking about debt and deficits has gone out of fashion, and for good reason: after a decade of zero and near-zero interest rate policies by central bankers around the world, the annual interest cost on the federal debt has remained artificially low, assuring that the financial cost of federal deficits has been far lower than the political cost of doing anything about them (i.e. raising taxes or cutting spending). While total outstanding federal debt held by the public has grown ten-fold since Ronald Reagan was president – from $1.2 trillion in 1984 to $11.7 trillion in 2016 – the net interest cost in the federal budget has barely doubled, rising from $111 billion to $240 billion, as the average interest rate paid on the national debt plummeted from over 8% to under 2%. 

In a world where borrowed money costs so little, Congress finally decided that yelling and screaming about deficits isn't worth it; a new consensus emerged: deficits don't matter. The moment of capitulation came when Republicans – including members of the formerly anti-debt Freedom Caucus – embraced tax cuts estimated to cost $2.2 trillion. After that, the budget deal costing $300 billion was a cakewalk. 

The result of that capitulation is projected to be trillion-dollar deficits for years to come. That, in turn, means that the United States will be depending on the good will of the international community for years to come – a consideration that does not appear to factor into Trump's view of the international landscape. 

Our ability to fund massive budget deficits year after year without feeling much pain has not been just because of zero interest rate policies that have been in effect since the 2008 collapse, but also because for the past half-century the U.S. dollar has been the reserve currency of the world. Both of these circumstances are now at risk, and both suggest that the future may not be as accommodating as the past. 

As the global reserve currency, foreign countries have a number of reasons to invest their currency reserves in dollars. It is an advantage that French President Valéry Giscard d'Estaing famously described as an "exorbitant privilege" granted to the United States as the overseer of the post-World War II international order. As illustrated in this graph from the St. Louis Federal Reserve Bank, foreign investment in federal debt – shown here in blue –has increased substantially as the amount of U.S. federal debt has grown. The other areas illustrated in the graph are domestic private investors in green, and holdings by the Federal Reserve Bank in red. As of 2016, foreign investors held 53% of the $11.7 trillion of publicly-held federal debt, with China and Japan together holding $3.3 trillion, or one-third of the total.

Interest rates are already heading upward as the world economy is picking up steam, just as the Congress and the President have committed to a path of massive increases in annual borrowing. We are now dependent on the international community to assure adequate demand for our bonds, and minimize the interest costs we are forced to pay. Should rates rise to where they were in 2007 just before the global financial collapse – around 4.5% – the net interest costs in the federal budget would nearly triple from the current $220 billion to $650 billion per year. Should rates rise to where they were when Bill Clinton was president – 6.5% – interest costs would rise nearly four-fold to $850 billion. That would represent a cost increase of $630 billion, or more than the entire cost of the budget for the Department of Defense last year. And those numbers are based on the debt outstanding as of 2016, and therefore understate the risk posed by rising rates.

Donald Trump has carefully honed his disdain for the international order constructed by the United States over the past half century and is more than willing to lash out at the world in whatever manner he chooses when it serves his domestic political interests. We saw that this week, as he stirred up a hornet's nest by announcing import tariffs and endorsing the idea of a trade war. Casting aside the international order may be good domestic politics for the President, but there is a very real price to be paid if it goes too far. China has long-bristled at the exorbitant privileges the United States enjoys and has demonstrated that it is more than eager to step into any void created by the United States walking away from its historic leadership role – or by any actions of the American President that alienate the good will of the rest of the world. Already, China is pushing to shift the pricing of oil contracts from dollars to the Chinese renminbi, a critical step in unwinding a half-century of dollar hegemony in the global energy markets, and scaling back the privileges that we enjoy, including the incentives that foreign central banks have to purchase our debt. 

In these circumstances, the last thing we need is the President antagonizing the rest of the world for his own momentary political advantage. Right now, those same countries he is antagonizing are the ones that he is assuming will buy the trillions of dollars of bonds that will fund his tax cuts. They don't have to do that if they don't want to. If they decide to turn their backs on him, we are going to learn very quickly that federal deficits do matter after all.

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.

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.

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, 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.

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, 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.

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, 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.