Politics

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Tax Reform – Maybe Not

I have a friend here who is an ardent Republican, It has been fun watching as he adapts to the reality of Trump, and is now a partisan cheerleader for someone who, a few months back, was anathema to him. Such is the power of tribal politics.

In any case, not to depress him, I ought to note quickly that the much vaunted tax reform proposed by Paul Ryan is almost certainly dead. This is not to argue that tax reform won’t happen. I think it might. It just won’t bear much resemblance to what Paul Ryan was looking for.

This failure, coming so soon after his abject defeat over health care might be the death knell of Ryan’s short leadership of the House Republican caucus.

Yes, I know that the media is full of hushed talk about the re-vitalization of health care reform. But that looks more aspirational than fact. The essential problem that scuppered the Ryan/Trump plan still remains: there are a large number of Republicans in the House that object to all and every government involvement in health care insurance. They see it as a massive invasion of individual freedoms — how Friedman-like of them — and would prefer to rely on the magic of private markets to do the dirty work. In other words they see health care as just another commodity up for sale and not anything deserving of special status. If you aren’t covered by health care insurance then that’s your choice. If you can’t afford coverage, they argue, then stop buying other stuff, like food for instance. In this stance they are fully supported by mainstream economics in which everything is a commodity and consumers always optimize their purchases. According to economic theory if you aren’t covered by insurance its because you chose not to be. Don’t forget this is the same crowd that tells you that if you are unemployed its because you want to be. Employment is, after all, a choice like everything else.

The problem for the House freedom fighters is that they represent only a small part of the overall Republican party. The rest have, begrudgingly, taken on board the reality that Obamacare has re-shaped the discussion on health care. Getting rid of it would be an enormous political risk. So the party is deeply divided and can only legislate on health care with Democratic cooperation. Since that would come at a price — as in keeping Obamacare and fixing it rather than abolishing it and starting over — Ryan led reform is dead.

Now: about tax reform.

The Republicans are deeply divided over this too. Who could have guessed it? And, once again, Ryan seems to be out on a limb.

The core of his much talked about plan is the adoption of a Destination Based Cash Flow Tax [DBCFT]. Such a tax is designed to turn the US into a massive tax shelter. Companies based in the US could export products and deduct the value of the cost of those products for tax purposes. Conversely, companies importing goods would be unable to deduct the cost of those goods for tax purposes. The whole idea being to protect and encourage exports and penalize imports.

The issue is that an enormous amount of American end-sales are sourced from abroad. Most retailers are huge importers and would face extraordinary increases in their tax bills. They would be forced to pass that increase in cost on to customers causing a huge rise in retail prices. Unsurprisingly, companies like Walmart and Target have come out strongly against such a tax.

The fun fact here is that the tax is a liberal idea developed by academic economists who argue that the radical rise in retail prices would be precisely offset by a change in the value of the dollar. This is because of the shift in the US trade balance brought about, presumably, by the tax. So Ryan is pushing something that has its origins in a leftish academic setting.

Funnier still is that plenty of Republican opposition to the tax centers on the entirely academic idea that the exchange rate will, indeed, adjust enough to offset the enormous profit hit taken by the likes of Walmart, which is, lest we forget, the largest employer in the country. The academics, naturally, think this cleverness based on their theories is nothing to worry about.

What’s not to like?

Well, a lot.

It seems as if several Republicans have cottoned onto the fact that academic economics is sufficiently disconnected from reality that it cannot be trusted when we are thinking of tampering with hundreds of thousands of jobs. And, yes, I am aware of my pun: some of the loudest opposition is coming from Senator Cotton of Arkansas, a state which, just coincidentally I am sure, is home base for Walmart. Apparently many politicians are as skeptical of academic economics as I am. They ought to be. Who knew I would have something in common with Senator Cotton?

The problem for Ryan is that he was relying on a DBCFT to finance the rest of his tax reform. It was projected to generate about $1 trillion over its first ten years, which was sufficient to allow a major reduction in the corporate tax rate, from 35% to 20%, and since its cost effects were supposed to be offset by that rise in the dollar he had hoped its effects would be invisible to the general public. He had, he thought, found a perfect tax reduction technique for his corporate sponsors. Unfortunately the realities both of politics and the weakness of academic economics unmasked his scheme. Without that $1 trillion his entire tax reform plan unravels and he is left with nothing.

Hence the current inaction and evasion in the House.

Meanwhile Trump has promised us a big and beautiful tax reform of his own and keeps promising that it is being worked on. Any day now we will learn its wonderful details. Any day now.

Having flubbed his opening lines on health care — he had no plan so he relied on Ryan which turned out to be a political disaster — Trump is under pressure to introduce his own policy. Up until now we have no idea of what a Trump plan might look like. Other than, that is, its undoubted wondrousness. He has hinted he likes a Value Added tax [VAT], but traditional Republicans hate VAT because they see it a as stealth method for paying for social programs like health care. Reagan said as much.

Given that he hasn’t staffed up the Treasury Department it seems unlikely that his Treasury Secretary will be of much use. So he is relying on Gary Cohn, his economic advisor, as architect. No one knows what will arrive, or when. The Trump administration is in its infancy and seems chaotic. It is yet to settle into anything resembling governance. So something like tax reform, which needs careful construction and lots of political selling in Congress looks like a long shot. At least for now. Maybe later? Any day now …

The Republican jubilation at their surprise victory last November and their total control of Congress led them to announce a massive and rapid legislative revolution. Health care and tax reform were the centerpieces of this program, along with, if you believe Trump,  an infrastructure plan. So far nothing has turned up, time is going by, and muddle along with defeat is the order of the day.

What this means for Ryan is anyone’s guess, but even his most ardent supporters must be getting tired of him by now. And he must be, surely, getting tired of his extremist freedom fighting colleagues. Maybe he’ll quit?

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Infrastructure? Not So Much

In the aftermath of the health care debacle Trump has been busying himself, so we are told, with other big projects. Tax reform is one. A huge infrastructure effort is another. Well, count me as skeptical. There are reasons to question whether either is going to see the light of day any time soon.

One is that Trump has no grasp of complex issues.

Let that settle in for a moment.

The Trump campaign was saturated with bombast, politically charged nonsense, venality of various sorts, and plenty of extravagant promises. The health care disaster gives us into insight into how to think about those promises. They have no content. It appears that none of those promises had any substance beyond being clever voter catchers. We best treat them as placeholders taking up space on a shelf of potential policy ideas that need bringing to life at a later date. They do not represent a currently existing policy, or even the skeleton of one.

This became obvious during the health care defeat. Trump left a long and very public trail of comments littered throughout the election campaign. He promised all sorts of things, sometimes in such general language that listeners with contradictory interpretations could be equally accurate in their portrayal of what he said. Nonetheless there was a general shape of a “Trump” policy discernible: low cost, universal coverage, more choice and so on. That there was no actual Trump policy became clear when, during the defeat, Trump outsourced the development of a plan to the House Republicans led by Paul Ryan. Then, when the House GOP plan was launched Trump simply advocated it as if it reflected and embodied his election promises even though it manifestly did not. Indeed in some circumstances it was a flat out rejection of those promises.

What do we make of this when we relate it to infrastructure?

First: we can conclude that Trump has no plan or policy to back up his promises. He simply threw out a lot of commentary that could have been easily overheard in any public place where voters were complaining about their commute, the state of the roads, yet another power outage, or the cancellation of their train. He was playing back to his audience well known grievances. He was not providing a solution. And he still isn’t.

Second: we can also conclude that the emergence of an actual infrastructure plan depends not on Trump but on other people. That might be someone within his administration, although who we are not sure. Or it might be someone in the Republican party, although with their longstanding opposition to government involvement in thee economy  it isn’t clear which GOP official would summon up the courage to take the lead on something like infrastructure which is most likely going to need lots of Federal spending to get it done.

Third: we can also expect lots of continued vaporware. Trump specializes in making vacuous comments that exist only to fill spaces. He has no intention of acting on all theses comments, but he fills the space nonetheless in order to reserve it for future use. This, I suspect, is a strategy he has used frequently in business: make a bold announcement about a project, wait to see what blows back, and then, only under propitious circumstances, explore the possibility of action. Action is, in other words, not contingent on his announcement, but on his subsequent analysis of the criticism of the content of that announcement. In Trump’s mind making a slew of announcements during an election is the equivalent of lining up an inventory of possible things to do. It is not a promise to do any of them.

Fourth: we can expect to hear about all the specialists and experts in the private sector Trump will somehow involve in getting infrastructure projects done. He has already mentioned two: Richard Le Frak and Steve Roth, both of whom have similar profiles to Trump. They are both scions of New York real estate development families with experience primarily in the completion of middle class housing projects. People driving into Manhattan from Queens will no doubt recognize ‘Le Frak City’. These two are supposed to be the first of a group of about twenty such developers, drawn from all over the country, who will advise on infrastructure projects. The problem is that there is no evidence at all of any others being added to the group. Nor is there any evidence of any projects being identified for such a group to consider or offer advice about.

Fifth: as elsewhere in the Trump administration, the infrastructure message is decidedly muddled. The Trump budget proposal actually reduced infrastructure spending, it did not include any allocation for spending on new and large projects, and nowhere is there any formal sign of activity of a parallel effort to consider how to fund anything. We have been told that a huge infrastructure plan might be used as an inducement to get Democratic support for a renewed health care plan — because, as we all know and according to Trump, Democrats are big about infrastructure. There has been no outreach to the Democrats to suggest this is anything but a thought. We have also been told that the original idea of involving the private sector — because as we all know developers get stuff done — is being sidelined because Trump has suddenly realized that the Federal government’s borrowing rate is very low. This must make him jealous. Imagine being Trump and seeing that the entire world is willing to lend you money at rates as low as 1% – 2%. Trump’s private businesses are unable to borrow at any rate here in the US due to his repeated use of default as a bargaining tactic. Banks learn eventually. In any case those low borrowing rates make it more attractive for Trump to use the Federal government as the agent in development, so the public/private partnership is now reduced to the private side being advisory and not actively executing development.

Lastly, and possibly most important, is Trump’s inability to process things in parallel. He has a plateful of issues each of which will consume his attention. North Korea, Syria, ISIS, and so on are all more urgent calls on his time. He will be forced to move on.

I have not mentioned that the administration is woefully undermanned, not because of Congressional opposition to proposed candidates, but due to a lack of any candidates being proposed. Only about 10% of all political appointments have been filled. Most positions remain empty. So this is not an administration equipped for any large scale policy making, let alone getting such a policy through a Congress controlled by a fractious and fractured Republican party.

All this speaks to a reality empty of infrastructure policy. At least for now.

Maybe tax reform?

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How’s That?

Well, there we are. It took less than three weeks for us all to realize that neither the Republican party nor Trump are ready to govern. Their health care fiasco was the talk of the weekend, and fingers are being pointed every which way as culprits are sought and blame assigned. Naturally, Trump doesn’t take any of the blame onto himself. That’s just not his way: he hasn’t nurtured that TV persona of perpetual winning and ace deal making for nothing. Even though it is, apparently, patently absurd. Trump’s image as dealmaker in chief now lies in that dust alongside Ryan’s reputation as a wizard policy wonk and Congressional consensus builder.

Reality is a very difficult thing, especially so if, as the Republicans have done for years now, you can ignore it and succeed only in a world of pretense.

Perhaps most baffling is that the Republicans had no thought through policy in their arsenal as they went into the health care battle. A battle that they chose and that they began. They were remarkably unprepared to confront the realities of both legislation and of the details of health care policy making. Instead they trumpeted their alternative to Obamacare as being a lean and mean example of unbureaucratic planning. It weighed in at only sixty-six pages, of which about ten percent were devoted to the precise ways in which lottery winners were to be denied public assistance in their health care. Compared with the six to seven hundred pages of Obamacare the Republican plan was supposed to be a triumph of direct business like language and no nonsense decision making. Instead it was revealed to be a botched together ensemble of unrelated ideas that anyone could have cobbled together over a drink with friends at the local pub. It wasn’t a plan at all, it was a wish list that had no real central purpose, no coherence, and no constituency. It was doomed to fail from the outset as an orphan with no advocate. Amidst its rubble the Republicans are now revealed as a party under-prepared and poorly led. And, more the point deeply divided.

This point will loom large in the next few weeks as the Republicans seek to recover from this self-inflicted defeat. There is an extreme wing in the GOP party caucus that values ideological purity above action. It abhors compromise and believes that it was sent to Congress to lead the nation away from the corrosive effects of the “nanny” state back to some pristine and efficient market-driven world where each citizen genuinely gets the rewards he or she deserves. In such a world poverty is something you bring upon yourself through idleness, indolence, and the like. It is not a consequence of a systemic failure. Nor is it an outcome of upbringing, luck of birth, or lack of opportunity.

This hard line small government rump of politicians burnished its reputation in those opposition years by constantly haranguing Obama and by forcing votes along hard right lines. It never mattered whether those votes led to legislation, what mattered was only that the purity of ideological temperament was demonstrated and preened before radical voters. This is a great way to oppose. It is a shambolic way to govern. As we now know.

Worse for the Republicans, though, is that the ideological schism between that hard right group and a softer right  — I won’t call it centrist — group now casts a long shadow over the governing party. As they move on from last week’s debacle and seek to undertake tax reform that sharp divide looms larger. How can Ryan, himself a member of the hard right at heart, produce a tax plan that caters to the two sides?

Already we have been given a glimpse of a possible rapprochement. One of the hard right leaders, Mike Meadows, has already signaled that he is not as opposed to “budget busting” tax reform as he might have been before. His hard line has hitherto been to enforce budget “neutrality” meaning that any new spending has to be offset by cuts elsewhere to ensure that the Federal deficit is not increased.  Apparently he is now willing to back away from that requirement in the interests of party solidarity. He is thus channeling Dick Cheney from the Reagan years who famously argued that deficits don’t matter. Well, not at least when they are created by Republican tax giveaways to big business and the wealthy.

There are some elements of Ryan’s tax proposal that are already being heavily opposed by loyal Republican outside interest groups. The so-called border adjustment tax is especially reviled by a large and well-funded coalition of businesses all of whom fear a major tax increase because they are so import dependent. This group, plus any wavering deficit hawks, are likely to cause as much of a problem for Ryan as he tries to get his tax bill through Congress, as the hard right did during the health care disaster. So the odds are that whatever tax reform gets passed into law, if it gets that far, will be a hollow shell of an effort. It will most probably simply be a large tax cut for business and well off taxpayers. It will have little to no effect on the economy, despite the probable cheerleading from the White House, and will almost certainly contain nothing for Trump’s loyal voters.

But they ought to be getting used to being ignored by now.

How’s that for leadership and dealmaking?

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Republican Dilemma

We are down to the wire in Congress: will the Republican party be able to live up to its six year old promise to eliminate the Affordable Care Act [aka Obamacare]? As I write this, a few hours before the vote in the House of Representatives, the answer appears to be no.

The reasons for this potential abandonment of what had become a critical element of true Republicanism is that old fashioned Republican ideology has come up against modern social reality. It is impossible to square the two. Either you are a hard old guard Republican who abhors the prospect of any government involvement in the economy, in society, and in particular, in health care. Or you are a realist who accepts that Obamacare changed the rules and infiltrated the government ever more deeply into the social fabric, from which it is now impossible to retreat.

This clash its tearing the Republicans apart.

There may be some of you who cling to the notion that the Republicans have a theory of public or social policy. Allow me to disabuse you: they don’t. In their world there is no “public” or “social”. Those of us old enough to recall Margaret Thatcher will also recall her ludicrous claim that there is no “society” only a whole bunch of individuals. That is the perspective through which to analyze the Republican health care plan.

It isn’t a health care plan. It is an effort to re-assert the notion that individuals are entirely and exclusively responsible for their own health care, including making a choice as too whether to have insurance. In order to achieve this deconstruction of society the Republicans need to avoid any policy that might perpetuate government involvement in that realm of individual choice.

Hence their desire to eliminate the so-called mandate that forced younger healthy people to buy insurance, which in turn allowed the overall pool of insured people to be less risky and less expensive. Through time the mandate was reining in premium price increases by achieving its goal: lower risk means lower premiums. Health care cost inflation in the Obamacare era was lower than in the previous decade in part due to this improvement in the insurance pool.

Another feature of the Republican effort is to eliminate the so-called ten plan requirements. This was a list of ten elements that Obamacare forced all health plans to include. They are all everyday types of things including maternity and emergency room coverage. The Republicans have always opposed this as a restriction on choice. They argue, absurdly and ingenuously, that people ought not be forced to pay for something like maternity coverage. That gets them into the position of arguing that a young man who, obviously, is unlikely to get pregnant, ought not to be forced to buy a plan that is designed to cover the costs of pregnancy. This is the kind of argument that sounds foolish and is actually more foolish than it sounds. The entire premiss of insurance — of any kind — is that some people buying the coverage will never use it. This allows there to be enough funding in the plan to pay for those who will use it. Interestingly, Republicans never use the example of a woman being forced to buy coverage for prostate cancer screening. The Republicans routinely reek of sexism when they try to give examples of their advocacy of choice.

In any case, if we expand the Republican argument beyond their targeted Obamacare list we could, in a sort of reductio ad absurdum arrive at health care plans that covered only one ailment. And the insurance market would collapse because of the rampant adverse selection that such a situation would unleash.

Adverse selection is that circumstance where people only buy insurance when they know they will use it. This means that there is no pool of low risk people to provide the funds to cover the cost of those of higher risk. The Republican effort to increase the choice of plans available in the market is doomed because it runs afoul of adverse selection. Premiums will rise rapidly for those in higher risk categories, for example the elderly, and many insurers will decide that rising risks and payouts make the market so unprofitable that they will exit. The market will then collapse.

These are just examples of the knots the Republicans are tying themselves in as they try to confront social policy. Paul Ryan, their leader in the House, has been explicit: he sees repeal of Obamacare as a step towards undoing the “nanny” state. That phrase belongs in the 1980s and ignores the massive upheaval in our social fabric wrought since Reagan and his attack on the middle class — also in the name of individual responsibility. Health care costs have risen dramatically since then. The average household’s income has stagnated and the workplace is massively less secure. Ryan’s approach is not to improve health care policy, but to re-design it so there is no room for community or social action. The superior logic of social democracy that would drive us towards a single payer health care system is an anathema to Ryan, so he forced to hobble us with an even worse version of our already poor health care system.

Trumpcare, which I suppose is what we ought call the Republican plan even though Trump is sublimely disconnected from it and ignorant of its consequences, is a disaster for American families. But it delivers on two key planks of Republican ideology: it attacks the “nanny” state, and it includes a huge tax cut for the rich.

That’s all we need to know in order to understand the urgency that the Republican leadership is displaying as it tries to corral its troops for a vote.

Except, it appears, that quite a few Republicans in Congress fear for their re-election chances and have suddenly embraced the nanny state because their voters like government help in getting them health care.

Such is the conundrum when an outmoded ideology runs smack into modern social reality. Not to mention modern democracy.

And, somewhere, Trump is playing golf.

 

Addendum:

I alluded to the new social reality that the Republicans are facing with their outmoded ideology. It might be better to refer to it as a new socio-political reality. It has been well documented that profoundly anti-social politicians such as Reagan and Thatcher were unable to undo well-established social programs even though they reviled those programs as debasing their neoliberal core values. Go to this 1996 paper by Paul Pierson to see his explanation of the argument that social progress occludes political reaction in such circumstances. His argument explains the Republican dilemma well.

 

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Budget Topline

We all ought calm down about the Trump budget. Presidential budgets never, ever, get put into practice. They are simply exercises in politics. They simply give us insight into presidential goals.

In Trump’s case there is nothing that we didn’t already know. He wants to slash domestic programs, especially those niggling ones that offend his far right fans, and pile on the offensive weaponry for the Pentagon.

As I said: no big surprise.

Here’s a very short synopsis of the bigger items:

  1. The Environmental Protection Agency takes a really big hit — a 31% cut in spending. Many of its key programs would simply be axed. They range from any and all research into climate change to the very popular Energy Star program that rates energy using products and so gives consumers insight into their probable energy bills. Ironically one program that might survive is the greenhouse emissions monitoring program which is a mandate by Congress so getting rid of it would imply legislation unlikely to pass. So the EPA might still monitor greenhouse gases. It just would n’t be able to do anything about them.
  2. The Energy Department gets hammered too with an almost 18% cut. The biggest target at DOE is its research programs designed to help accelerate the country’s move from a carbon based energy supply to alternative sources. Right wingers have constantly complained about the DOE dabbling in applied rather than pure early stage research. Evidently Trump agrees.
  3. The State Department also gets a beating, especially anything to do with climate change. The cuts don’t indicate that the US is quitting the Paris climate agreement of 2015, but it sure looks as if that is in the cards. The cuts also include anything to do with UN based climate initiatives. Indeed the UN is a heavy target with the US contribution to peace keeping in the cross hairs. State is having its “soft power” capacity severely trimmed. These are the kinds of programs both the hard right and Russia particularly dislike. They are programs that allow the US to project a softer, gentler image to the world and are meant to take the edge off the militaristic image all those wars project. Apparently Trump doesn’t care about the US image. His generals do: they love soft power because it makes their lives easier out in the war zones.
  4. NASA gets its climate watching programs axed or drastically cut.
  5. The National Oceanic and Atmospheric Administration is likewise gutted.

Yes, there’s a pattern here. It’s not for nothing the the Trump cabinet is packed with energy and like minded plutocrats who have a long held contempt for climate science. What better way to get a nuisance out of the way for the energy companies than to gut funding?

The goal of the budget is to shift financing from all these sorts of activities — the list above leaves aside departments like Agriculture which also gets a big hit — and shovel it down the treat of the military-industrial complex in type name of security.

Quite why America needs to ramp up what is already the world’s biggest defense/offense budget — US military spending is more than of the next seven countries added up [including Russia and China] — is not clear. Except, of course, that military spending is an easy sell to a fear riddled country that jumps at the sight of its own shadow.

Oh: and the budget excludes all the severe cuts aimed at Medicaid and Medicare that are part of the great Republican repeal and reform of Obamacare.

If both the budget and the health care plan pass and are signed into law [a very low probability fortunately] America would be a vastly diminished place. Although both big business and the wealthy would be very happy.

And that is all you need to know.

This is a plutocrat’s budget, pure and simple.

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