http://crookedtimber.org/2016/11/26/castro-is-dead/
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Dean Baker
Truthout, November 21, 2016
Remember all those times the Republicans in Congress shut down the government and threatened to default on the debt? The ostensible cause was the out of control deficit. Back in the day when President Obama was drafting the budget, these Republicans were arguing that the national debt threatened the well-being of our children and grandchildren. They claimed to view deficit reduction as a sacred cause.
Well, we're about to see a religious conversion of world historic size as the Republican Party, and its congressional leader Paul Ryan, convert from deficit hawks to big spenders. With Donald Trump in the White House, we're going to discover that they think large deficits are just fine.
The basic story is straightforward. Trump has promised both an infrastructure program and large tax cuts which will primarily benefit the rich. On some days he has also promised big increases in military spending, but it's not clear where this commitment stands.
In any case, he is talking about substantial increases in spending and a large cut in revenue. According to the analysis of the Tax Policy Center at the Brookings Institution and the Urban Institute, his tax plan will reduce revenue by more than $9 trillion (close to 4 percent of GDP) over the course of the next decade. This tax cut plan would effectively add close to $800 billion to the annual deficit when it first takes effect, with the amount increasing over time.
While the plan that gets submitted to Congress may look somewhat different than what Trump proposed in his campaign, there is no doubt that it will lead to a large increase in the size of the budget deficit. Under their former faith in balanced budgets, Speaker Ryan and his Republican caucus would be expected to strongly oppose this massive increase in budget deficits.
But there is an important difference between the origins of the Trump deficit and the deficits the Republicans fought under President Obama. While the cuts sought by the Republicans targeted programs that benefited large segments of the US population, according to the Tax Policy Center, more than half of Trump's tax cuts will go to the richest 1 percent of the population. The richest 0.1 percent will get tax cuts that average almost $1.5 million annually.
The Trump tax cut is consistent with the fundamental principle of the Republican Party, and unfortunately many Democrats, of putting as much money as possible in the pockets of the rich. In this context, a budget deficit of any size is no big deal. We saw that under President Reagan, the second President Bush and now under Donald Trump.
We can be sure that the Republicans will deny that their tax cuts will lead to large deficits, claiming that they will be offset by faster growth. In economics, this is called "lying." There is a massive amount of research on this point. There is no reason to believe that the incentives created by lower tax rates will have a substantial impact on savings, investment or work.
When he was head of the Congressional Budget Office, Douglas Holtz-Eakin, a conservative economist who has advised many Republican candidates, did a study of the possible effects of tax cuts on growth. Analyzing a wide range of models he found that additional growth could at best reclaim a small fraction of the revenue lost to the tax cuts. In many of the models the tax cuts actually reduced growth, adding further to the deficit.
In addition to this sort of modeling exercise, we actually did this experiment, twice. In 1981, President Reagan cut income taxes sharply and the deficit soared. In 2001 the second President Bush sharply reduced taxes and the deficit soared.
In short, there is zero reason to think that additional growth from tax cuts will offset the lost revenue to any noticeably effect. We know this based on both careful economic research and two real world experiments. This means when our Republican deficit hawks claim that their tax cuts for the rich won't add to the deficit because of the additional growth they will produce, they know they are not telling the truth.
As I've written many times, the additional stimulus to the economy provided by Trump's tax and spending plans may actually be a good thing, even if the composition of the spending and the targeting of the tax cuts is really bad. We need larger deficits to allow the economy to reach its potential and to get closer to full employment. This is what I've argued for years.
But the Republican deficit hawks have been saying the exact opposite. When it comes to giving tax dollars to the rich, they no longer care about deficits. It would be nice if the media called attention to the incredible hypocrisy of Speaker Ryan and the Republican caucus. Maybe they could take away a little time from covering Hillary Clinton's emails.
Tim Duy:
On Krugman And The Working Class, by Tim Duy: Paul Krugman on the election:
The only way to make sense of what happened is to see the vote as an expression of, well, identity politics — some combination of white resentment at what voters see as favoritism toward nonwhites (even though it isn't) and anger on the part of the less educated at liberal elites whom they imagine look down on them.
To be honest, I don't fully understand this resentment.
To not understand this resentment is to pretend this never happened:
"You know, to just be grossly generalistic, you could put half of Trump's supporters into what I call the basket of deplorables. Right?" she said to applause and laughter. "The racist, sexist, homophobic, xenophobic, Islamaphobic — you name it. And unfortunately there are people like that. And he has lifted them up."
Clinton effectively wrote off nearly half the country at that point. Where was the liberal outrage at this gross generalization? Nowhere – because Clinton's supporters believed this to be largely true. The white working class had already been written off. Hence the applause and laughter.
In hindsight, I wonder if the election was probably over right then and there.
Krugman continues:
In particular, I don't know why imagined liberal disdain inspires so much more anger than the very real disdain of conservatives who see the poverty of places like eastern Kentucky as a sign of the personal and moral inadequacy of their residents.
But they do know the disdain of conservatives. Clinton followed right along the path of former Presidential candidate Mitt Romney:
It was the characterization of "half of Trump's supporters" on Friday that struck some Republicans as similar to the damning "47 percent" remark made by their own nominee, Mitt Romney, in his 2012 campaign against President Obama. At a private fund-raiser Mr. Romney, who Democrats had already sought to portray as a cold corporate titan, said 47 percent of voters were "dependent upon government, who believe that they are victims" and who "pay no income tax."
There was, of course, liberal outrage at Romney.
Krugman forgets that Trump was not the choice of mainstream Republicans. Trump's base overthrew the mainstream – they felt the disdain of mainstream Republicans just as they felt the disdain of the Democrats, and returned the favor.
I doubt very much that these voters are looking for the left's paternalistic attitude:
One thing is clear, however: Democrats have to figure out why the white working class just voted overwhelmingly against its own economic interests, not pretend that a bit more populism would solve the problem.
That Krugman can wonder at the source of the disdain felt toward the liberal elite while lecturing Trump's voters on their own self-interest is really quite remarkable.
I don't know that the white working class voted against their economic interest. I don't pretend that I can define their preferences with such accuracy. Maybe they did. But the working class may reasonably believe that neither party offers them an economic solution. The Republicans are the party of the rich; the Democrats are the party of the rich and poor. Those in between have no place.
That sense of hopelessness would be justifiably acute in rural areas. Economic development is hard work in the best of circumstances; across the sparsely populated vastness of rural America, it is virtually impossible. The victories are – and will continue to be – few and far between.
The tough reality of economic development is that it will always be easier to move people to jobs than the jobs to people. Which is akin to telling many, many voters the only way possible way they can live an even modest lifestyle is to abandon their roots for the uniformity of urban life. They must sacrifice their identities to survive. You will be assimilated. Resistance is futile. Follow the Brooklyn hipsters to the Promised Land.
This is a bitter pill for many to swallow. To just sit back and accept the collapse of your communities. And I suspect the white working class resents being told to swallow that pill when the Democrats eagerly celebrate the identities of everyone else.
And it is an especially difficult pill given that the decline was forced upon the white working class; it was not a choice of their own making. The tsunami of globalization washed over them with nary a concern on the part of the political class. To be sure, in many ways it was inevitable, just as was the march of technology that had been eating away at manufacturing jobs for decades. But the damage was intensified by trade deals that lacked sufficient redistributive policies. And to add insult to injury, the speed of decline was hastened further by the refusal of the US Treasury to express concern about currency manipulation twenty years ago. Then came the housing crash and the ensuing humiliation of the foreclosure crisis.
The subsequent impact on the white working class – the poverty, the opioid epidemic, the rising death rates – are well documented. An environment that serves as fertile breeding ground for resentment, hatred and racism, a desire to strike back at someone, anyone, simply to feel some control, to be recognized. Hence Trump.
Is there a way forward for Democrats? One strategy is to do nothing and hope that the fast growing Sunbelt shifts the electoral map in their favor. Not entirely unreasonable. Maybe even the white working class turns on Trump when it becomes evident that he has no better plan for the white working class than anyone else (then again maybe he skates by with a few small but high profile wins). But who do they turn to next?
And how long will a "hold the course" strategy take? One more election cycle? Or ten? How much damage to our institutions will occur as a result? Can the Democrats afford the time? Or should they find a new standard bearer that can win the Sunbelt states and bridge the divide with the white working class? I tend to think the latter strategy has the higher likelihood of success. But to pursue such a strategy, the liberal elite might find it necessary to learn some humility. Lecturing the white working class on their own self-interest hasn't worked in the past, and I don't see how it will work in the future.
President-elect Donald Trump has indicated that one of his first priorities will be a plan to boost infrastructure investment. Normally, this would be welcome news for those of us who have been arguing for years that increased public investment—including but not limited to infrastructure investments—should be a top-tier economic priority. Further, it also seems like a rare opportunity for bipartisanship—after all, Hillary Clinton made infrastructure investment a priority of her campaign's policy platform, as well.
The still-sketchy details of Trump's plan, however, are a cause for concern. What we know is that the plan is to provide a tax credit equal to 82 percent of the equity amount that investors commit to financing infrastructure. In the coming days, this will invariably be described as creating public-private partnerships (P3s). P3s are a standard model for financing infrastructure that can in theory be used with little downside compared to direct public provision. However, this description of the Trump plan is both not that comforting and incorrect. It's not comforting because the real-world record of P3s is much spottierthan textbook models would suggest. And it's not accurate because Trump's plan isn't as simple as encouraging new P3s. It is instead (at least in its embryonic form), simply a way to transfer money to developers with no guarantee at all that net new investments are made.
Let's start with describing what a textbook P3 would look like and what the rationale for using it would be. P3s are long-term contracts between the state and private companies to build and maintain infrastructure. They can be thought of as sitting somewhere between standard public provision and full privatization of infrastructure. Say that a state or local government wants to build a new road, but is constrained for some reason (usually simpleminded anti-tax politics) from raising the money to publicly finance it. It's important the democratically-elected and accountable government ensure the project is in the public interest. Having done this, the government can then negotiate with private financiers and developers to get the project built. To reduce costs and provide incentives for development, tax breaks are sometimes provided to holders of bonds issued by the private entities, and the private entities also receive a revenue stream of some kind in exchange for their investment. Often this is an explicit user fee, like a toll for using a road.
Here's ex-Treasury Secretary Robert Rubin–one of the chief architects of the global financial crisis–articulating the position of his proteges at 1600 Pennsylvania Ave.Robert Rubin: "Putting another major stimulus on top of already huge deficits and rising debt-to-GDP ratios would have risks. And further expansion of the Federal Reserve Board's balance sheet could create significant problems…. Today's economic conditions would ordinarily be met with expansionary policy, but our fiscal and monetary conditions are a serious constraint, and waiting too long to address them could cause a new crisis….
According to the independent committee that officially determines such things, the so-called Great Recession ended in June 2009, around the same time that the acute phase of the financial crisis ended. Most Americans, however, disagree. In a March 2014 poll, for example, 57 percent of respondents declared that the nation was still in recession.
[T]he American Recovery and Reinvestment Act, aka the Obama stimulus … surely helped end the economy's free fall. But the stimulus was too small and too short-lived given the depth of the slump: stimulus spending peaked at 1.6 percent of GDP in early 2010 and dropped rapidly thereafter, giving way to a regime of destructive fiscal austerity. And the administration's efforts to help homeowners were so ineffectual as to be risible.
The White HouseOffice of the Press SecretaryFor Immediate ReleaseJanuary 27, 2010Remarks by the President in State of the Union AddressNow — just stating the facts. Now, if we had taken office in ordinary times, I would have liked nothing more than to start bringing down the deficit. But we took office amid a crisis. And our efforts to prevent a second depression have added another $1 trillion to our national debt. That, too, is a fact.
I'm absolutely convinced that was the right thing to do. But families across the country are tightening their belts and making tough decisions. The federal government should do the same. (Applause.) So tonight, I'm proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year.
Starting in 2011, we are prepared to freeze government spending for three years. (Applause.) Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don't. And if I have to enforce this discipline by veto, I will. (Applause.)
We will continue to go through the budget, line by line, page by page, to eliminate programs that we can't afford and don't work. We've already identified $20 billion in savings for next year. To help working families, we'll extend our middle-class tax cuts. But at a time of record deficits, we will not continue tax cuts for oil companies, for investment fund managers, and for those making over $250,000 a year. We just can't afford it. (Applause.)Now, even after paying for what we spent on my watch, we'll still face the massive deficit we had when I took office. More importantly, the cost of Medicare, Medicaid, and Social Security will continue to skyrocket. That's why I've called for a bipartisan fiscal commission, modeled on a proposal by Republican Judd Gregg and Democrat Kent Conrad. (Applause.) This can't be one of those Washington gimmicks that lets us pretend we solved a problem. The commission will have to provide a specific set of solutions by a certain deadline.
Now, yesterday, the Senate blocked a bill that would have created this commission. So I'll issue an executive order that will allow us to go forward, because I refuse to pass this problem on to another generation of Americans. (Applause.) And when the vote comes tomorrow, the Senate should restore the pay-as-you-go law that was a big reason for why we had record surpluses in the 1990s. (Applause.)
Now, I know that some in my own party will argue that we can't address the deficit or freeze government spending when so many are still hurting. And I agree — which is why this freeze won't take effect until next year — (laughter) — when the economy is stronger. That's how budgeting works. (Laughter and applause.) But understand –- understand if we don't take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery -– all of which would have an even worse effect on our job growth and family incomes.
From some on the right, I expect we'll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away. The problem is that's what we did for eight years. (Applause.) That's what helped us into this crisis. It's what helped lead to these deficits. We can't do it again.Rather than fight the same tired battles that have dominated Washington for decades, it's time to try something new. Let's invest in our people without leaving them a mountain of debt. Let's meet our responsibility to the citizens who sent us here. Let's try common sense. (Laughter.) A novel concept.
During his campaign, President-elect Donald Trump promised that he would take the side of American workers against economic elites when evaluating policy. Yet, the policy proposals he put forth during the campaign had nothing in them that would actually help working- and middle-class Americans. Now that more plans and potential cabinet appointments are coming into focus, it looks worse than many of us thought even before the election. Across a broad range of crucial issues, the incoming Trump administration appears likely to betray the promises he made to the American middle class. Here's a rough sketch of how.
Trump's tax policy proposals are crystal clear about who will benefit the most—and it's not working- or middle-class families. Despite crowing during the campaign about raising taxes on "hedge fund guys," the tax plan Trump released raises one small tax on hedge fund guys (eliminating the so-called carried interest loophole), and then gives them a hundred times more back in the form of lower taxes everywhere else. The top 1 percent will get 47 percent of the total benefits in the Trump tax plan, while the bottom 60 percent will get just 10 percent. Worse, large numbers of working-class taxpayers will see tax increases under Trump. Yes, increases. Because that money is needed to make sure that private equity managers can see their top tax rates moved down to 15 percent.
House Speaker Paul Ryan—who many (not least Speaker Ryan himself) think will end up crafting most of the actual policy to come out of the Trump administration—has a competing tax proposal. Apparently, he thinks it's important to give an even higher share of tax cuts to the top. The Ryan plan lavishes 76 percent of its total tax benefits onto the top 1 percent of households (the top 0.1 percent, or the top 1/1000th of households, gets more than 47 percent). In the Ryan plan, the bottom 60 percent get less than 5 percent of the total benefits.
A very large tax cut that delivers an enormous share of the benefits to the richest Americans—with an average cut of at least $1,100,000 to the richest 0.1 percent—will be one of the top priorities of both Trump and the incoming Congress. This should raise a clear red flag about just how much Trump actually cares about the bottom 90 percent.
People really can't claim they didn't see this coming. In the town hall debate with Hillary Clinton, an audience member asked how the candidates would ensure that the richest Americans paid their fair share. Trump's response? He said he would cut the corporate income tax rate from 35 to 15 percent. Given that the corporate income tax is one of the most progressive parts of our tax code, cutting it absolutely does not hurt rich households.
Trump has also promised to end crony capitalism and "drain the swamp," which might sound to most Americans like he wants to take on Wall Street. If by "take on" you mean "give them everything they want," then this sounds about right. He has been forthright about repealing Dodd-Frank, which as passed in the wake of the 2008 financial crisis to rein in the risk of big banks and prevent the need for future bailouts. There are criticisms to be made of Dodd-Frank, but the Trump criticism is that it's just too tough on banks.
This view is shared by the men mentioned as potential Treasury secretaries in the Trump administration. One name is Jamie Dimon, whose investment bank JPMorgan Chase received a 2008 bailout. In recent years JPMorgan traders have been found guilty of rigging foreign exchange markets. And yet Dimon claims that "banks are under assault" by regulators and that such oversight is essentially un-American.
Another name that's been floated for Treasury secretary is Anthony Scaramucci, who thinks that there has been an "irrational demonization of Wall Street over the past 8 years," and that Wall Street is "filled with integrity." As for the financial crash of 2008, Scaramucci is clear who is to blame—mostly not Wall Street. The culprit who needs more blame cast upon them, he says, is "frankly, Main Street. Many people overreached in their homes because there was easy money and easy credit." He hopes the "nonsense" that Wall Street bears primary responsibility for the 2008 financial crash ends with the Trump administration. And he makes it clear that his personal opinion is that Dodd-Frank restricts banking risk excessively (making banking "too, too safe") and should be repealed.
Finally, the frontrunner for Treasury seems to be Steve Mnuchin, a Goldman Sachs alum who distinguished himself during the financial crash by buying up the crashed California bank IndyMac, renaming it, and then being found by regulators to have run "unsafe" and "unsound" foreclosure practices as he seized people's homes.
If you want an administration where apologists for Wall Street behavior are in charge of regulating banks, then the next four years looks great. If you were hoping for an administration that would be on your side against the banks, then less so. And if you doubt my analysis of how Wall Street-friendly a Trump administration is likely to be, just check out the reaction of banks' stock prices following the Trump win.
Americans value Medicare and Medicaid very highly, and rightly so. Millions rely on these programs for health care during tough times (Medicaid) and in retirement (Medicare), and about 40 percent of long-term care in the country is provided by Medicaid. During the campaign, Trump made clear promises to protect these programs from budget cuts. The question going forward, however, is did we elect President Donald Trump or President Paul Ryan?
Ryan has wanted to voucherize Medicare and radically cut Medicaid for years. He tries to dress up his plans in technocratic language and frame them as "reforms," but, they're cuts, period. One would think that the more than 60 times the House has voted to repeal the Medicaid expansions that are part of the Affordable Care Act would provide sufficient proof of this.
It may be that Trump really does not want to cut these programs. But the question is whether or not he's attentive and shrewd enough to stop congressional Republicans from doing so.
The president-elect recently claimed (through a tweet, of course) that he personally convinced Ford to keep one of its production facilities in the United States. This boast has been debunked. But compared to the rest of his trade policy, the efficacy of picking up the phone and calling his CEO friends actually doesn't look so bad.
We at EPI have been consistent for years in opposing corporate-driven trade agreements. But Trump's agenda on trade agreements is nothing more than a vague claim he'll be able to negotiate "better" trade agreements. His other proposals indicate strongly that he won't, because he doesn't know how.
He might slap large, arbitrary tariffs on imports from countries he doesn't seem to much like, but this will do little to improve American competitiveness. In fact, if such tariffs encourage foreign producers to set up facilities in the United States to avoid tariffs, create economic weakness in our trading partners, and/or encourage retaliatory tariffs, they will increase America's trade deficit. A prediction: presuming the economy does not enter recession in the next four years (and there's no reason it should, absent a huge fumble by the Trump policymaking team), the American trade deficit will be larger, not smaller by 2020.
Finally, I should note that Trump is once again in his life inheriting an extraordinarily valuable gift. This time it's a stable economy that has been sailing steadily towards full employment for years. The unemployment rate has been halved since its post-Great Recession peak. The labor force participation rate stopped falling and has actually nudged up in the past year even as natural demographic changes (retiring Baby Boomers) have been pulling it down. The last year has also seen some evidence of an uptick in wage growth.
No, we're not at full employment today—largely because Republicans in Congress and in statehouses around the country have starved the economy of normal levels of spending during the recovery. Without this austerity, we would have reached full employment years ago. But even with no help at all from tax cuts or spending increases, the economy is projected to reach 4.6 percent unemployment or lower by the end of 2017.
And now that Republicans are in charge, the austerity they forced on the American people will undoubtedly stop. A huge tax cut will add to purchasing power and demand growth in the economy. It will do so incredibly inefficiently, creating about one job for every four that could be created if this money was spent more intelligently. But job creation has to take a back seat as a goal to maximizing the take of the top 1 percent, so, tax cuts for rich households it is. Inefficient stimulus, but lots of it.
A possible infrastructure plan would also boost growth, so long as its effectiveness was not compromised by the crony capitalism and poor targeting that would result from the Trump proposal's very odd structure of giving tax credits to private investors, rather than just having state and local governments direct and finance projects. For those hoping that the Trump infrastructure plan would be aimed at helping struggling areas, it is worth noting that a key source of efficiency gains hoped for by the plan's authors is that private investors are much more willing to cut off necessary services to households in economic distress. They approvingly note that privately-owned water and electrical utilities are much quicker and more willing to turn off services when households cannot pay bills than publicly-owned utilities.
All in all, the hopes that a Trump administration will stand up to elites on behalf of the broad middle class look well on their way to being dashed. Republicans first priority is cutting $1.1 million tax rebate checks to the top 0.1 percent. A secondary priority is giving away tax credits to private developers while hoping that they might build something useful without the whole endeavor becoming a nest of corruption. A key question is whether or not Trump will be willing to devote the energy and effort needed to stand behind his own words about defending Medicare and Medicaid in the face of the Republican Congress. Their trade plans are pure bluster and as likely to raise as lower the trade deficit. And every single potential appointment floated to run the regulation of banks and Wall Street is on record as arguing that the big problem today is that people and governments are too mean to virtuous financial professionals.
Maybe I'm wrong (I sure hope so), but the wedge between implied promises and delivered reality to working-class households already looks awfully large, and will likely just grow over time.