Category Archives: US economy

Trickle-down economics and the Trump tax cut: people don’t get the joke

When U.S. Treasury Secretary Steven Mnuchin spoke about the Trump administration’s tax plan at the Institute of International Finance, he said the plan would pay for itself without adding to the national debt. This, he said, would be based on what he called “dynamic scoring”, and their projections would show ‘a $2 trillion increase in revenues over a 10-year period. So the plan will pay for itself with growth.’

But the tax plan that has just passed Congress and the Senate in (unbelievably) two different forms, which are going to have somehow to be merged, shows (without all the dynamic scoring) a $1.5 trillion extra deficit, according to the nonpartisan Joint Committee on Taxation (JCT).

In the past fiscal year, the U.S. deficit was $666 billion. That follows deficits of $585 billion in 2016, $438 billion in 2015, $485 billion in 2014, $679 billion in 2013 and more than $1 trillion in deficits in each year from 2009 through 2012 despite extraordinary efforts to stimulate the economy following the 2008 Wall Street financial collapse.

The JCT study found, on the other hand, would only return  $458 billion of the $1.5 trillion cost over the 10 year period. Meanwhile, as Senator Elizabeth Warren noted in a letter to the Inspector General of the Treasury Department, there is no study AT ALL coming from the Treasury on the subject.

Mnuchin’s “Goldman Sachs bluster”, which is being trumpeted (excuse the pun) all over the media, with its so-called “dynamic scoring”, is intentionally deceptive. As Professor Ha-Joon Chang at Cambridge University tells us, “trickle down” – the theory that making a few rich creates wealth across the board for everybody – is a totally broken theory.  See him also in the short clip below.

Mnuchin’s deception is not limited to the usual rubbish about ‘trickle-down’, however. The bill he has rammed through Congress and the Senate, which Republicans jumped at and turned into law in record time simply because they’re scared of the upcoming 2018 mid-term elections, is actually a massive $6 trillion tax-cut over the coming decade, funded by tax rises which will destroy local economies across the US.

Senate Majority Leader Mitch McConnell, R-Ky., pictured above, said the tax-cut raises $4.5 trillion in taxes on ordinary people, so that the rich can get the $6 trillion, which is the actual full amount of the scam for the corporations and the 1%: a historic figure both Reagan and Bush would have flinched at.

The Tax Policy Center estimated that about 80 percent of the benefit of the tax plan will go to the top 1 percent, with $1.5 trillion going to slash the corporate tax rate, $700bn going to cancel the ‘alternative minimum tax’, paid almost exclusively by the rich, and $150 billion going to repealing the estate tax, which currently exempts the first $11 million of the deceased’s estate, so nobody even remotely middle class pays it.

Furthermore, more than $200 billion in cuts goes to a provision that allows a greater deduction for dividends on foreign earnings, and $600 billion goes to reducing taxes on “pass-throughs” and other businesses not set up as corporations -such as law firms, lobby shops, and doctors’ surgeries.

If some $200bn will be going to allow higher income bands to claim tax credits, whilst individual and family tax rates are cut by about $1 trillion, these are the only elements in the package likely to filter through to the middle classes. As the New York Times noted, by 2027, people making between $40,000 and $50,000 would see a combined increase of $5.3 billion in taxes, whilst, on the other hand, people earning more than $1 million would see their taxes collectively cut by $5.8 billion a year.

The tax rises made to underwrite the $6 trillion giveaway

(1) The tax rises include some $300 billion allowances for companies with offshore profits to repatriate them at a lower rate. Although that cash goes straight to dividends for shareholders and stock buybacks, it gets counted as a tax increase.

(2) Unbelievably $1.6 trillion is raised by repealing the personal exemption everybody gets on their tax returns.

(3) Another $1.3 trillion is raised by going after deductions for state and local taxes, mortgage interest, charitable contributions, interest on student loans, medical expenses, teachers’ out-of-pocket expenses (e.g. for paper and pencils for students). This will devastate local economies.

(4) The new law gradually raises $128 billion in (stealth) taxes by changing the way inflation is calculated, so that your taxes slowly creep up over the years as the brackets come down.

(5) Finally, the law adds about $1.5 trillion to the already eyewatering debt over the next 10 years, and the interest payments that will entail.

What Great Depression comedian Will Rogers meant by “trickle-down”

Appropriately for the round of pre-mid-term election madness in 2017 Will Rogers said back in 1932, commenting on Hoover’s defeat at the hand of Roosevelt:

“The Republicans didn’t start thinking of the old common fellow till just as they started out on the election tour. The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover was an engineer. He knew that water trickles down. Put it uphill and let it go and it will reach the driest little spot. But he didn’t know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But it will at least have passed through the poor fellows hands. They saved the big banks, but the little ones went up the flue.”

Will Rogers was just telling us what Ha-Joon Chang is trying to say.

Will the Trump-Bannon revolution ‘be greater than the Reagan revolution? The devil is in the detail

Looking at what projects will be launched in the Trump infrastructure foray can eventually tell us which companies will benefit. But will Americans in general benefit as Steve Bannon claims they will? For, the “great political movement” he envisages to keep Republicans in power for 50 years, as he wants, does require that the country at large benefits. There are two problems to look out for:

Infrastructure

Instead of just allocating needed resources in a traditional across the board approach, the Trump team seem to be proposing to offer $137 billion in tax breaks to private investors who want to finance toll roads, toll bridges, or other projects that generate their own revenue streams. Since the plan depends on private investors, it can only fund projects that spin off user fees and are profitable. Rural roads, water systems, and public schools don’t fall into that category. Neither does public transit, which fails on the profitable criterion (it depends on public subsidies). Yet investment in all these things is necessary to keep ‘the great political movement’ on the road.

Tax Breaks

Trump’s tax giveaway plan delivers about half of its benefits to the top 1 percent of households. The Republicans in Congress have a plan they want Trump to consider which is even more lopsided: 76 percent of its cuts go to the top 1 percent. So the campaign rhetoric about the “forgotten little guy” stuff was that … campaign rhetoric.

The impact of the Bush tax cuts, which were smaller than the Trump tax cuts, were shown to have had no positive effect on the economy. Fiscal economists Gale and Orszag wrote that “…as a result of these design flaws—from the perspective of providing stimulus—the tax cuts had at best a small positive bang for the buck relative to other options. The most comprehensive studies … imply that the tax cuts reduced GDP and employment in 2001 and had virtually no effect … in 2002.”

As Cambridge economist Ha-Joon Chang has shown in Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism and in 23 Things They Don’t Tell You About Capitalism  tickle-down economics is pure guff.

So will Trump just be a flash in the pan, create waves, make tons of money, and then leave it to a (hopefully reformed and wiser) Democratic Party to come back? Or Will Steve Bannon’s idea be seen through?

Bannon: I’m not a white nationalist… I’m an economic nationalist

Michael Wolff writes up an interview with Steve Bannon

“I’m not a white nationalist, I’m a nationalist”, he tells me. “The globalist gutted the American working class and created a middle class in Asia. The issue is about Americans not getting [done] over. If we [the trump White House] deliver, we get 60 percent of the white vote, and 40 percent of the black and Hispanic vote and we’ll govern for 50 years. That’s what the Democrats missed. They were talking to these people with companies with a $9bn dollar market cap, employing nine people. It’s not reality. They lost sight of what the world is really about.”

“Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement”, he says. “It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement.”

According to Joseph Stigler not all of it will stick though.

What the Trump presidency means for our future

The Trump presidency is extremely important as a reaction to a neoliberal order that has been with us since Bill Clinton eviscerated the Democratic Party to become the party of corporations from 1993 onwards (followed by Tony Blair in the UK from 1997). In other words, even though the neoliberal order was ushered in by Reagan/Thatcher, it was Clinton/Blair who ensured that it had no opposition in the main democracies.

Hillary Clinton lost to Trump purely on electoral college votes, and it did so primarily because the Democratic Party cheated Bernie Sanders’ populist base by rigging the primaries in favour of  Clinton. What made this worse is that this atrocious behaviour was made public with the leaks of all those emails hacked from the Democratic Party server. Steve Bannon may have been the evil genius who engineered the Trump win, but really he was surfing home on the wave of a Democratic Party suicide mission.

The Trump presidency is ‘fascistic’, but this aspect of it will engender so much opposition, encouraged by the fact that Hillary Clinton got 1.5m more of the popular vote than Trump, that it will be mitigated.

The important thing for anybody who wants to survive financially in the coming 8 years is to realise that Trump will turn the US economy around, and this must inform everybody’s financial decisions. Joseph Stiglitz is right that re-importing jobs won’t be that easy, because technology has changed since the 1980s. But it is not necessarily only that aspect that will change the economic picture, as Trump focuses on infrastructural development.

Extraordinarily his presidency starts with the US Geological Survey confirming the Wolfcamp shale oilfield as the largest ever find in US history, on truly Saudi Arabian proportions, which turns the energy clock back to the pre-1970s when the US was a net US oil exporter.

So, in the sense that Trump wants to be re-elected, the US economy soaring will mean that he will be. While Obama was an unlucky (and weak) President, Trump, it looks like at the moment, will be a lucky one. This unfortunately will embolden a ‘fascistic’ style, possibly better described as the ‘feudal’ style common among corporate CEOs, than as Mussolini-type fascism. Ivanka Trump sitting in on her father’s meeting with the Japanese Prime Minister will be a typical event, and one which will rankle with most Americans.

So also, the democratic counter-attack will have its work cut out for it, and this will logically mean that great changes are in store for the future. Given that the Islamic community in America will be at the centre of the storm, this will tie Islam with the future democratic resurgence and change the very nature of the Islamic dialogue itself. It is a sign of things to come that Democratic Party chairman will most likely be a Muslim American, Keith Ellison.

The resurgence of the US economy will mean that the Federal Reserve will be able to come off the floor on interest rates, sucking capital from stock markets across the world into the US, and trashing fixed interest instruments like bonds, and the stocks of highly leveraged firms. China may have caught up with the US, but the US is still absolutely the largest economy in the world.

Saudi Arabian power waning fast, as the US looks like becoming an oil exporter once again

The U.S. Geological Survey just published an assessment of oil reserves for a section of the Permian Basin, revealing the largest estimate of continuous oil that the agency has ever assessed.

The Wolfcamp shale in the Midland Basin, which is part of the Permian Basin, is one of the most prized shale formations in the United States, and for good reason. The USGS estimates that the West Texas shale formation could hold an estimated mean of 20 billion barrels of oil, 16 trillion cubic feet of associated natural gas, and 1.6 billion barrels of natural gas liquids. Those figures are the largest for any single continuous pool of oil the USGS has ever surveyed.

wolfcamp2

If not forward thinking, Trump may make things worse on inequality

Joseph Stiglitz writes that Trump is unlikely to effect a carbon tax, empower trade unions and make tax rates more progressive, all of which are necessary to see a real impact to his increased investment plans for America.

Prof. Stiglitz concludes: “My very cloudy crystal ball shows a rewriting of the rules, but not to correct the grave mistakes of the Reagan revolution, a milestone on the sordid journey that left so many behind. Rather, the new rules will make the situation worse, excluding even more people from the American dream.”

Read full article here

Slouching towards Trump

Robert Skidelsky writes that there will be benefits to Trump’s approach.

Prof. Skidelsky says: “Trump has… promised an $800 billion-$1 trillion program of infrastructure investment, to be financed by bonds, as well as a massive corporate-tax cut, both aimed at creating 25 million new jobs and boosting growth. This, together with a pledge to maintain welfare entitlements, amounts to a modern form of Keynesian fiscal policy (though of course not identified as such). Its merit is its head-on challenge to the neoliberal obsession with deficits and debt reduction, and to reliance on quantitative easing as the sole – and now exhausted – demand-management tool.”

Read full article here

Why Janet Ain’t Yellin’ “Higher Interest” Anymore: Jobs Worse than Expected and Far Worse than Reported

David Haggith writes

The Fed’s plane called Recovery is disintegrating slowly, rather than in one huge blow-up. Six months out from lift off, it is clear that the forces against another rate increase are growing worse month by month.

The Fed’s chances of pulling up any higher are getting rapidly smaller. Globally, there is talk of Brexit and Grexit, and China is looking like a mountainside that could slide any day now. Japan’s one-hundredth attempt at economic recovery through quantitative easing has failed completely. Much of the world had descended into Alice’s Wonderland of negative interest rates for the first time in world history, as a last-ditch attempt to recover from the Great Recession (and to recover from their central banks’ failed recovery attempts). Two major European banks are failing, and Venezuela and Brazil have collapsed into economic chaos. (And those are just a few current headlines.)

Yet, the worst news for the Fed is right at home. The Fed’s plane never made it more than a few feet above the runway, when this week the illusory jobs recovery flew like a goose into the Fed’s left engine just as Captain Yellen was hoping to pull back on the stick for one more attempt to gain some interest altitude….

Why Janet Ain’t Yellin’ “Higher Interest” Anymore: Jobs Worse than Expected and Far Worse than Reported