fiscal policy

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Is There a “Policy”?

I read this morning that the Federal Reserve had bought, at the peak of the recent crisis, about 40% of all US government bonds being issued.

This may, to some of you, be something of no concern.

Think again

The illusion that there are separate spaces for monetary and fiscal policy is belied by this fact.  Which one was it?  Was it the Fed flooding the economy with money?  Or was it the government issuing debt to finance economic activity? I suppose it was both.  But it wasn’t fiscal policy.  The effect of all that money was simply to support asset prices.  Whether that was the intention is irrelevant.  The flood found its way into the financial system and relatively little found its way into the economy in the form of an expansion of productive activity.  We could go further: a great deal of what expansion of capacity actually occurred went abroad to build fragile supply chains and take advantage of low wages in distant parts.

What also happened was that households sat on the portion of the flood that they received as a hedge against further economic mayhem.  And when, as now, they began to feel more confident they started to spend the money on goods rather than services.  Remember that the economy is heavily skewed towards consumption, and within that, towards services.  The problem with services is that they tend to be in-person.  And being in-person is something a lot of people are avoiding right now.  So they decided to switch and buy goods instead.

This, being the twenty-first century, those goods usually contain some sort of a computer chip.  Quite why we need our refrigerators to talk to each other is beyond me, but someone decided it has great value to us.  So everything nowadays is packed with the ability to communicate.  Which puts pressure on the chip manufacturers.

It also, coincidentally, puts enormous pressure on the people who move the chips around the globe because, this also being the twenty-first century, chip production is concentrated in far corners of the globe rather than near to where they might be incorporated into the final product.  This is the way of efficient supply chains.  Which, as we now know, is something of an oxymoron.

With the supply side of the economy so battered by both unexpected money-induced demand and the corporate delusion of efficient supply chains, we are now being bombarded by price increases.  This has given rise to the specter of inflation.

I hope you have noticed that inflation is always a specter.  It is a ghost that haunts the minds of serious people who, once they see workers demanding more wages, seek to damp such demands as being insidious.

But insidious to whom?

Asset holders of course!

The long term value of assets is eroded by inflation.  Those pesky workers demanding higher wages works to undermine that value by inducing a cycle of “inflationary expectations”.  That wages have been suppressed for eons in order to boost the profits earned by asset holders is left out of the discussion.  We must, at all costs, preserve those asset values.

So, in the face of a collapsed economy in, say, 2008, we pump in trillions of dollars of money.  This has the primary effect of ensuring asset holders don’t get taken completely to the cleaners.  Job well done.  The problem then becomes how to wean ourselves off the flood of money.  That’s easy: we wait for the economy to return to its long term trajectory and then ease off.  The presumed recovery in earnings prospects will offset any downside implied by removing the monetary life support.  Rising interest rates will prevent the specter of inflation undermining asset prices.  Wages will be contained within sensible bounds.  Profits will recover.  Asset values will flourish.

Phew.

Except.

What happens if the economy doesn’t return to its long term trajectory?  What happens if it wallows along sub-optimally, starved of investment, with low productivity and perpetually on the brink of a renewed downturn?

Well, in that case you keep flooding it with money.  Just like we did between the Great Crash and the Pandemic Crisis which provide bookends for a period of pretty awful economic policy.  Too little reliance of fiscal policy at one end and relentless floods of money throughout.  It was called quantitative easing.  In fact it was an addiction.

In the absence of an economic policy that put government expenditure of real activity at its heart, think of the bridges that could have been built with all that money, we monetized the debt instead.  We flooded the financial system with cheap money.  Indeed we ended up making money so cheap it has become incredibly difficult to increase its price.  It has made credit so widely available that even the most perverse investment opportunity is grasped as a possibility worth thinking about.  The search for returns has overwhelmed any sense of risk aversion.  Everything goes.  And like all addictions this will end badly.

We have produced an economy awash with debt and with asset prices higher than the underlying cash flows justify.  This is what happens when you ignore history and imagine that you don’t need proper fiscal policy.  Or, at the very least, that you distinguish between monetary and fiscal policies.

So now the central banks are stuck.  Having created an addiction they need to offset the inevitable withdrawal symptoms.  If they raise interest rates they might deflate asset values from their addiction riddled levels.  If they don’t raise interest rates they might abet the onset of an inflationary cycle that might deflate asset values from their addiction riddled values.

Whoops.

Meanwhile the bond market, in its current addicted state, prefers to believe that the central banks will continue to drip feed it sufficiently to prevent a decline in values.  How else can we interpret the contradiction between the constant refrain of the inflation specter being raised by bankers and their concurrent willingness not to bid up long term interest rates?

Interesting times.

So the Fed’s avowed intention to taper its asset purchases down to zero by mid 2022 looks like an exercise in hope and belief that something will turn up.  Which doesn’t sound much like “policy” to me.

But it will have to do.

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Modern monetary theorists will chortle at the above.  The constraint they prefer to rely on with respect to the flood of money is inflation.  Great.  Question: is the exchange of Fed-created money for Treasury-issued debt not a form of MMT?  After all it ends up as money.  And the debt becomes an issue only for those who talk about debt ceilings and “affordability”.  We talk flippantly about low interest environments being comfortable for the issuance of debt to finance government spending.  So we ought not concern ourselves about etc debt per se, only the cost of carrying it?  But who made interest rates so low?  Did we not manufacture the exact conditions within which debt is so cheap?  It sounds so circular.  Meanwhile why don’t we simply dispense with the illusion of debt to begin with?  Why don’t we recognize it as money at the source?  Why don’t we simply fund government with money?  If Fed-created money and Treasury-issued debt are so fungible why bother with the distinction?  In whose interest is it to maintain the difference?  Asset holders.  Now we know who policy is maintained for.  Surprise.

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Ryan, Deficits and Hypocrisy

Paul Ryan is leaving Congress. Before he had finished announcing his upcoming retirement the airwaves were awash with commentary about his legacy.

Count me as one of those who have a particularly strong perspective on this. Paul Ryan was, and presumably still is, a supremely hypocritical human being.

Recall how he sprang into public consciousness. He quickly established himself as a severe right winger, but one with the smarts to back it all up. He promoted himself as a thoughtful conservative. He quoted all the thinkers one has to refer to if one is to be such a person. Ayn Rand was his go-to intellectual foundational source.

He spoke eloquently about the damage that Federal deficits would do. He berated Democrats, and Obama especially, for their wanton reliance on debt to pay for rescuing the economy in the aftermath of the Great Recession. His mantra was that if we would only set taxpayers free, if we would only slash social spending, and if we would only see the sense in balancing our budget then America would enter a new golden age.

Well, a golden age for the wealthy at any rate.

He was, and presumably still is, one of those far right conservatives who honestly believe that cutting away the social safety net from underneath our fellow citizens will somehow lead to their discovery of endless vitality, determination, and virtue sufficient to lift them free of poverty, sickness, or age whichever of which is the cause of their reliance on that safety net.

There is nothing new, of course, in this right wing narrative, it has been the core of conservative opposition to social spending for over a century. In a perverse twist of history the notion that a person ensnared in the net of big government is a soul lost to the march of freedom has moved from being a liberal rallying cry — as it was in the heyday of pure liberalism in the late 1800’s — to that of the far right. Ryan personifies this antediluvian approach today.

I am not going to litigate the pro and cons of safety nets here, besides you can tell what I think in that regard: I want to keep the focus on Ryan.

Nothing more personifies his hypocrisy than his meager legislative record.

His biggest accomplishment, one of which he spoke at length, is the recent tax cut passed late last year. The problem that Ryan has is that this so-called accomplishment will blow a massive hole in the budget. Prima facie it is a negation of his entire political career.

Let’s set aside the discussion over budget deficits and their relevance, let’s just take Ryan at his word.

He believes, so he has said repeatedly, that the federal government needs to avoid deficits. He has spoken about deficits in the darkest and most severe terms. He has lashed out at any politician who he can accuse of “running up the deficit”. His entire career was built around this core message.

And yet here we are with Ryan proclaiming that his personal triumph is the tax cut that will, according to the Congressional Budget Office,  run up that self-same deficit with historic speed and severity.

The starkness of Ryan’s hypocrisy is so sharp and so startling that it almost shocks us into disbelief. Perhaps we misunderstood him all those years. Perhaps all that supposed wonkish posturing was so convoluted that we missed Ryan’s message. Maybe were were wrong. We must have been because no one could possibly be this brazen about their hypocrisy.

Surely not.

No. We undertook him perfectly well. What we misunderstood was his honesty. He simply lied. He lied constantly. His presentations and protestations were a sham. He never once meant what he said.

His goal was, to use a phrase he wore out in his criticism of others, to bankrupt America. He was a true son and heir of the far right’s intention to “starve the beast”.

That refrain, as we all remember, was the battle song of the far right’s rise throughout the 1990’s. It formed the core rationale for Bush’s tax cuts of 2001 and 2003. It formed the basis for the opposition to anything Obama tried to do. It damn near undid the efforts to revitalize the economy in the aftermath of the last recession. Create a budgetary crisis by cutting taxes to the bone and then, in view of that crisis and using it as  justification for action, slash social spending. That was the plan. It was never based on budgetary conservatism. It was based on virulently anti-social opposition to government.

Ryan, and the far right he led to victory, took Lenin’s dictum one step further. It was not a case of “burning the village to save the village”, it was  case of burning the village to justify its destruction. As in: “see we can’t afford villages”.

And, in case you think I am being harsh, let me present exhibit “A”:

Today, in the House of Representatives, a motion to enforce balanced budgets on the Federal government is being brought up for a vote.

Think about that in the context of what I just said.

The Republicans, fresh from undermining the fiscal stability of the budget, are now arguing we need to restore stability through balancing it.

And guess how they propose doing this?

By slashing social spending of course.

Thus is Ryan revealed. And along with him the entire Republican domestic agenda. Anti-social to its core. All in the name of liberty.

Those of us who believe in democracy have a more extensive view of liberty. Freedom from poverty and sickness are within our purview. So is freedom from the consequences of untrammeled capital.

But that’s for another day. Right now let’s be happy Ryan is on his way out.

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Tax Fog

Whenever we are told about a Trump plan we have to use the word “plan” very carefully. Thus far Trump’s various plans have been more vague suggestions, hints, clues to what’s inside his head, or varieties of “what a plan were to look like were Trump to have an actual plan, but he doesn’t”.

This week’s ballyhooed tax plan is no exception.

It has been introduced as a framework. A skeleton. A coat hanger upon which Congress will need to hang actual policy in order to legislate. It isn’t a plan, that’s for sure.

So what is it?

Much like Trump’s other initiatives — I use the word lightly — the tax plan is a series of items that now need to be stitched together. In other words the really hard part lies ahead. More importantly it lies ahead in waters teeming with lobbyist sharks waiting to pounce and defend privileges that sundry clients want preserved.

The American tax code needs thorough overhaul. It is riddled with special interest privileges, it is incomprehensible, bloated, and really bad at the one thing it needs to do which is to raise taxes to fund government activity. Let’s not forget why the tax code exists: the government needs cash. And that cash comes from you and me.

Now I don’t want to get into discussions about the interesting idea that the government can fund itself simply by printing money. That’s for another day. Let’s stay focused on the here and now by looking at the latest Trump tax “plan”.

First: it looks more like a tax cut that a thorough tax reform. More to the point it is a tax cut for the wealthy. What a shock. Trump wants the current seven tax rates to be collapsed into three. Guess what? the biggest change comes at the top where the current top rate would drop from 39.6% to 35%. At the other end of the scale the lowest rate would rise from 10% to 12%. The optics of this are hard to sell as a tax cut for the poor: the lowest rate is actually going up, while the highest rate is going down. Initial guesses by tax experts suggest that about 80% of all the tax cuts in the plan will benefit the rich. Some lower income families might even see their taxes rise.

Second: Trump moves on by changing the way in which people can deduct various items from their gross income to arrive at their taxable income. The current code is riven through with dodges and wheezes that allow higher income people to lower their taxable income aggressively, whereas it offers much less to lower income people. Trump says he wants simplify the code and the morass of deductions would be good place to start. Why not get rid of them all? But, no, Trump gets stuck in the middle.

His simplification appears to reduce to doubling the standard deduction which all families can claim. Unfortunately he also gets rid of the personal deduction. So a family of four would get the new deduction of $24,000, but lose their current standard deduction of $12,700 and the four individual deductions of $4,050 they can currently claim. Do the math: that is a reduction from $28,900 to $24,000. There are plenty of middle class families who will be hurt, not helped, by this little piece Trump inspired simplification. Meanwhile another old limitation on the way in which rich people can limit their taxes — the so-called Alternative Minimum Tax [AMT] will be eliminated. AMT cost Trump $31 million in the one and only year we know about his taxes. But, he assures us, he won’t benefit personally at all from his plan. Really?

Perhaps most notable in this decluttering of deductions is the elimination of the deduction people can claim on the Federal tax forms for any State and Local taxes they pay. It has long been a goal of Republicans to eliminate this deduction because the people who benefit most from it live in the higher tax/higher service states that typically vote for Democrats. Taxes may well go up for some upper middle income families in the blue states.

Other favorite deductions, such as that for interest on mortgages, are staying put in the Trump plan. So at least he won’t have to hear cries from the real estate lobby.

Third: the corporate tax is targeted for major changes. The notional rate is reduced: Trump wants it down to 20%, whether it gets there is another matter. And many of the current deductions corporations use to limit their taxes are done away with. One that caught my eye is the deduction for interest on debt. Were this to be part of the final legislation it would dramatically reduce corporate appetite for debt-based investment.

Fourth: we get to a sticky one. Trump wants to reduce change the tax rate charged to people who use what is known as the “pass-through” business structure. In brief this structure allows a taxpayer to pass corporate income through and pay tax at the personal level. It is usually a technique for small businesses. The idea being that income is taxed only once: if income of a business is taxed within the business and then dividends paid to business owners are then taxed again as their personal income this is equivalent to double taxation on the same income. In the context of small business this has long been regarded as unfair.  However, some of the richest people in the country have set themselves up as pass-through businesses too. They would get a windfall were the tax rate on pass-throughs be reduced significantly below the various tax rates applied to straightforward income. And guess what? Trump’s businesses are pass-through corporations. He would benefit from such a windfall. Surprise.

Fifth: Trump finally fulfills another long term goal of the Republicans: he wants to eliminate the estate tax. Taxes on inheritances have irked the GOP for decades. They have managed to whip up a public fury over what they demean as a “death tax”. Getting rid of it is a key promise to their loyal voters. Not that it has any impact on the vast majority of people: the level at which estate tax kicks in reduces its impact only to the wealthy. This aspect of the plan will inevitably exacerbate inequality and entrench the plutocratic class even more than ever.

Sixth: there seems to be no doubt that the Trump plan would vastly increase the deficit. There is no word on what, if anything, Trump proposes doing about that. Business taxes would be reduced sharply which will benefit upper income households who hold a disproportionate amount of corporate shares, and thus far no one has offered any countervailing budget cuts and/or alternative tax increases.

All those deficit hawks who shrilled about Obama and his deficits have, up until now, been remarkably quiet with respect to Trump’s proposed budget busting. Presumably we are back to the old days of Dick Cheney pronouncing that depicts don’t matter.

Oh: one old saw is back.

Many Republicans are rallying behind the idea that all these tax cuts for business and the rich will induce enormous amounts of growth which will, so the story goes, raise income sufficiently that the extra tax on that extra income will offset the deficit created by the tax cuts.

We’ve heard that one before. It didn’t work then. It won’t work now. But the Republicans need a legislative win else they will face the wrath of their more fanatical supporters. So they are now keen to throw the Federal budget to the wolves.

So, in summary:

Trump’s tax plan isn’t really a plan. It is a set of suggestions. It isn’t a reform. It is a tax cut. It doesn’t leave the wealthy untouched. It will benefit the wealthy enormously. It won’t stimulate the economy and/or job creation. It will inflate the deficit and that’s about it.

No it’s not a plan. It’s mainly fog.

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Budget Fog and Budget Clarity

On a clear day we can dream of being free from the farce and incompetence that is Trump. Meanhwile back in reality …

The Trump budget released this week is both indescribably foggy and clear as a bright spring day. It is a perfect statement of ‘Trumpism’ from its devastation of the poor, through its privilege for the rich, and its arrogance towards and ignorance of process. Let’s not get carried away though: this budget, like all presidential budgets is symbolic. It has no meaning other than as an indication of Trump’s personal priorities, which, apparently, are entirely plutocratic in tenor. The American budgetary process is convoluted and ultimate authority resides in Congress. So while a future Federal budget might ultimately embody many of Trump’s ideas, the document released this week is simply a starting point.

Further, given the arcane bureaucracy that is Congress, the budget will be subject to obscure procedural rules, particularly in the Senate where the much discussed reconciliation process will come into play. The Republicans are in a rush to slash taxes for the rich, and they want to destroy health care for the poor, both of which efforts are using up slots in the reconciliation calendar. This means that Congress will be very slow to take up a budget debate and will have to wait for the Congressional Budget Office to score those other efforts before it can start in earnest on budget matters.

With that all said, let’s take a look at Trump’s wish list.

First the clarity.

He wants to slash spending on the poor. And I mean slash. His budget aims at eliminating the deficit in ten years. To do that he takes sharp aim at Medicaid, which he wants to halve; he hammers the Supplemental Nutrition Assistance Program (aka Food Stamps); and, contrary to his campaign promises, he reduces parts of Medicare. These programs combine to be the backbone of support for tens of millions of low income Americans. Attacking them in this way will heighten poverty, increase insecurity, and cost the lives of many who no longer will receive health care of any kind. This part of his program is pure right wing callousness unadorned and direct.

He also wants to slash government. He proposes cuts in the departmental budgets of most, if not all, government departments. Some, like the Environmental Protection Agency, will be cut by upwards of 30%. The State Department, too, gets gutted. Neither of these is a surprise. Two of Trump’s major supporters have been lobbying hard for the cuts. The big oil and coal producers want to gut environmental laws, and Russia simply hates the State Department and all that ‘soft power’ money it slops around the world to entice nations into falling for the allure of democracy. At least Trump is being honest about how much in thrall to Putin he is.

Then, this being a pretty straightforward Republican budget, comes the obligatory increase in offense spending and in national security generally. This includes a big dollop of money for Trump’s wall along the Mexican border. There is no indication as yet about how he intends to get Mexico to pay for this. I guess we will have to wait on that.

That’s the clarity: you will notice that the goal for a balanced budget has no reference to the part the rich will play. Presumably they will benefit but not have to sacrifice. As I said: pure plutocracy.

Next comes the fog:

Given that the Republicans want to cut taxes for the rich, even theses draconian cuts in social programs don’t balance the budget in the desired timeframe. So Trump’s budget assumes a 3% annual growth rate in the economy. This is absurd. In an era of slowing population growth, weak productivity growth, and demographic shifts such as the massive wave of baby-boomer retirement, annual growth of 3% is a pipe dream. It is a fantasy. To add to the stupidity of the assumption is the realization that the Trump team began with it as a foundation for their budget process. It wasn’t an outcome of their budget priorities, it was an input from the very beginning. So the minions putting the budget together had to take the fantasy into account no matter how ridiculous it is.

Now for the good bit: the budget includes the impact of the tax reform Trump has already announced. In the budget those tax cuts, which cut a swathe out of Federal revenues, are treated as revenue neutral. In other words whilst they cut revenues because they are tax cuts, they are assumed to ‘pay for themselves’ by stimulating growth sufficiently for the government to earn extra tax revenues. The government, Trump argues, will make the loss up in volume. This is laughable, but is accepted amongst Republican policy makers who all want to deny blowing the deficit wide open.

Wait for it …

Then, when these tax cuts are included in the budget they are assumed to work this miracle all over again. Yes, you read that correctly. The tax cuts not only ‘pay for themselves’ as tax cuts, but they then repeat the process and stimulate growth to allow the budget to arrive at a balance ten years out.

I have never seen anything so brazenly stupid. Nor as plain dumb. This isn’t the sort of double entry bookkeeping I was taught way back in my accounting days. This is way more imaginativetive. It is a triple entry at a minimum, with more entries to come as the Trump administration flounders about in a mess of its own making.

Trump is inventing growth to cover the brutal insanity of his budget. Even the Republicans are repulsed at his plans. Not that they are much better.

Just as a brief indicator of how the Republican’s various policy goals are contradictory, think about the impact of population growth on the budget. Trump is virulently anti-immigrant. By slowing down the influx of immigrants he is, coincidentally, reducing the increase in the working age population. That acts as a significant drag on growth. Yet this is ignored by the Republican hierarchy. Where is the workforce needed to get growth up to 3% to come from? Are they building a time machine to go back to the 1990’s and boost the birthrate?

As I said fog!

One last thing: normal presidents have decent enough relationships with Congress that their budget proposals conform closely with Congressional political possibilities. This is especially true when the president is lucky enough to have a Congress dominated by his (or her?) own party. In Trump’s case he seems not to care. He has simply dumped this budget without any fanfare in the lap of Congress and walked away. Doubtless he will brag about it when he returns from abroad, but his total disregard for the niceties of political relationship building could not be on more public display. He simply doesn’t give a damn about Congress. Like most want-to-be autocrats he has nothing but disdain for the democratic process. But democracy is a pain. It bites back.

Which is why Trump’s budget will go nowhere.

Fortunately. Because it’s horrendous.

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Tax Reform, Relief, Whatever

Moving on, White House style, we are now confronting the prospect of tax reform. I suppose that those of us who cringe whenever we hear a Republican use the phrase “tax reform” ought take some comfort from the obvious disarray in right wing policy circles. Tax reform is already looking like a re-run of health care reform. We all know that Republicans never actually mean “reform” they always mean “cut”, but there are hopeful signs this time through the process. Perhaps reform is a possibility.

Maybe not.

The problem with being an utter incompetent when it comes to sophisticated governance is that complicated stuff is, well, complicated. You can’t just go and bully a few people and get what you want. Tax reform is a complicated problem, especially so in America’s antiquated legislative milieu. There are so many opportunities for well-healed interest groups to twist legislation into the kind of contorted, incomprehensible, and special interest pandering mess that is our current tax system. Untwisting the tax pretzel will require deft, well informed, and strategically driven legislative leadership. Which is not, I think, a key asset of Trump. He is more of an ill informed, inept, elephant of a negotiator whose primary skill is to threaten or cajole, and who then quits abruptly if he can’t get his own way quickly.

Such was his approach on health care. And so far such is his approach on tax reform.

What do we know about the great Trump tax cut?

Not much.

As usual is seems to be a made-for-headlines artifact rather than an actual policy. We don’t know who is working on it, although this weekend our Treasury Secretary appeared to know something about the plan because he told an IMF conference that the plan would involve some short term budget busting. That’s alright though because he assured everyone that in the long term the tax cuts would pay for themselves.

What’s the correct way to react to this absurdity?

OMG!?

Apparently there are no grown ups in the modern Republican party. They keep trotting out the drivel that tax cuts “pay for themselves”. Which they do only in right wing fantasy land. Here on earth: not so much. This is not even controversial. Look at the Reagan and Bush tax cuts and then take a look at the [modest] Clinton tax increase. Investment failed to budge after the tax decreases, economic growth didn’t get a jolt, and the tax cuts simply piled up Federal deficits. Conversely, or perversely depending on your point of view, everything perked up nicely after the tax increases. So we have actual, real-life evidence: tax cuts do not pay for themselves. The fact that we have to to say this is depressing. Facts matter.

But it does give us insight into Trump world.

He, and his key advisors, seem to live in a fact fchallenged time warp where current or contemporary is defined as anything in vogue in Reagan era Republican thinking. Subsequent history and evidence is simply either ignored or never taken on board to begin with.

Its all very old fashioned and increasingly irrelevant in our new economy.

Trump is fighting a modern policy war with the equivalent, not of the old Maginot line, but with something much earlier. He seems to live in a different era and is remarkably ill-informed about the modern economy. His tax plan, what we know of it, reflects his obsolescence.

Do we need to worry?

Of course. Trump is a Clouseau clown bumbling about but with a difference: he might actually break something important. Worse: he doesn’t know enough to know if he’s breaking something.

Then again, maybe we don’t need to worry: Trump hasn’t — still — filled any of the key tax policy positions in the Treasury Department. Presumably this is because he thinks it isn’t complicated and so he doesn’t need thoughtful advice or analysis.

Or maybe he simply doesn’t know those positions exist.

Or something.

You can get quite a headache trying to explain Trump. It’s probably safer not to try.

 

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