Relevant and even prescient commentary on news, politics and the economy.

Trumponomics

Trump’s America First economic strategy looks a lot like the import substitution economic development strategy that was so popular several decades ago—notably in Latin America and South Asia..  But it only had limited success, especially compared to the export led growth strategy followed in East Asia.  Import substitution tended to produce fragmented, inefficient and low productivity industries protected from foreign competition by high tariffs and other trade barriers

Take autos, for example.  It does not take a lot more labor to build a $30,000 or $60,000 car than a $15,000 car.  But no one can profitably manufacture a $15,000 car using expensive American labor.  That is why most auto imports are economy or luxury cars.  But this is exactly what Trump is asking Detroit to do.  SEER suspects that the auto CEOs told Trump what he wanted to hear and went back home and did nothing. If for no other reason, the auto industry is operating at very high capacity utilization and does not have the idle capacity to dedicate to small car and truck production. If questioned, they can say it is more difficult than they thought and they are still working on it. That is probably preferable to  actually building some white elephant. Most manufactured imports are not profitable to make in the US at current prices.

 

The Border Adjustment Tax ( BAT) appears to be dead, but who knows.  SEER does not accept the idea being pushed that the dollar will automatically rise to offset the tariffs. It is an interesting theory, but SEER has not been able to find a single historic example of it ever actually happening.  The trade deficit is driven by the domestic savings-investment gap – including the federal deficit as negative savings.  BAT will be a major source of federal revenues and will dampen the savings- investment gap as well as the trade balance.  The impact of BAT on the dollar appears indeterminate as far as SEER can tell. But the bottom line is that the Republicans have long worked to shift taxes from income to consumption and BAT is just another example of that.

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Larry Summers: genius economist, failure at Psychology 101

by New Deal democrat

Larry Summers: genius economist, failure at Psychology 101

One of my recurring themes is how macroeconomic theory, no matter how elegant mathematically, consistently errs because it fails to take into account basic psychology — i.e., how the human animal actually works.

A big component of this failure is that humans, like other primates and apparently like just about every other social species, are hard-wired to inflict punishment on “winners” from inequitable distributions, even at cost to themselves. For a hilarious example of this, see what happens when an experimenter rewards one monkey with a cucumber while feeding another a delicious grape.
One such failure to take into account elementary psychology was on display in an article a few days ago, wherein Larry Summers, in the course of lambasting the rubes for trying to undermine global trade, concluded:

A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges.

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Fool me once again?

From the Roosevelt Institute comes this graphic on the overall reality of macro policies:

The Republicans’ underlying assumption—that corporations invest more and create more jobs only when they are relieved of burdensome tax rates—is false. American businesses already enjoy a historically low cost of capital, and they have more than enough cash on hand to invest, raise wages, and create jobs. Corporations are choosing to make dividend payments and stock buybacks instead of investing because they face a lack of competitive pressure—itself the result of power and wealth shifting toward rich shareholders. Another tax cut for the rich will only make the problem worse.

FoolMeOnce_MythvsFact

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Saint Janet Yellen: The Best Fed Chair Ever?

by Barkley Rosser  (originally published at Econospeak)

Saint Janet Yellen: The Best Fed Chair Ever?

OK, so the immediate reaction of many to this title might be to laugh, but I challenge anybody reading this to name another Fed Chair who was clearly better than she is.  I do not think you can.  However, one reason why one may not think much about her is that things have been so inconsequential since she has been Chair.  Nothing much has happened.  She continued the Quantitative Easing for awhile started by Bernanke and then stopped it.  Inflation has remained below 2% mostly.  Growth has not been dramatic, but it has been steady and higher than in most other advanced market capitalist economies.  There has not been a recession since 2009.  There have been no bubbles and no crashes.  Nothing dramatic has happened and certainly nothing bad, even if lots of deep problems of the US economy such as inequality remain.  But that one is not the Fed’s responsibility anyway.  So, bottom line, she has been doing a great job even if everybody is quite certain Trump will replace her, with all kinds of candidate names being thrown around.  But none of these will be better than she has been.

So, going backwards her most serious rival might be her immediate predecessor, who  looks to have played a substantial role in the save of September, 2008 that involved buying a lot of eurojunk from the ECB, only to roll it off over the next six months or so.  Of course some of the more innovative things done then were coming out of the NY Fed, but Bernanke did an excellent job when the crisis hit.  At the same time, Janet was around during that period, initially as San Fran Fed president, and then later as Vice Chair.  But where Bernanke looks not so good is the runup to that crisis, where he seems really not to have seen it coming.  Who saw it coming and as far back as 2005 sounding the alarm about the housing bubble?  Oh, right. Janet Yellen.

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Trump And The Fed

by Barkley Rosser originally published at Econospeak, “Trump and the Fed”

It may be way too soon to say anything sensible about what Trump thinks about the Fed or will do  about it, but as the first person to have publicly called for appointing Janet Yellen as Chair (back in 2009), I figure I am more situated to stick my neck out to say something, especially when it looks like what is coming is a big contradictory mess.For the moment the Fed seems to be laying low, having made almost no change in policy or projections as reported by the diligent …Tim Duy.  They remain open to maybe tightening after March if the employment report improves notably, but otherwise seem to be on a “steady as you goes” path for the moment, doing almost nothing.  This on top of a letter from Congressman McHenry demanding they stop cooperating with any international banking entities until Trump  makes appropriate appointments.  And Tim adds a comment on a recent column by former Fed gov Kevin Warsh, who indulged in criticizing the Fed by demanding that it follow policies it is already following.  In this latest post Duy suggests that perhaps Warsh is running for Fed Chair, which means one has to appear to criticize Fed policy, even if one is not really.  Which raises the question of what Trump will do.

Let us start with something that hardly anybody has noticed, but is just taken for granted: that Trump almost certainly will not reappoint Janet Yellen as Chair.  This just seems to follow from his general attitude that all incumbents are no good, and especially anybody appointed by Obama, except for FBI Director Comey.  Why she is no good is not immediately obvious, and in fact several times over the last two years he praised  her “low interest rate policies” noting that as an old real estate developer he has always been a fan of such policies.  However, in June of this past year when the Fed did not raise the fed funds target rate, he denounced her personally and the Fed more generally for not doing so, charging that their failure to do so was part of a plot to goose the economy in an effort to help elect Hillary Clinton. Given that rhetoric it seems unlikely that he would reappoint her, although it could still come to pass that if when her term comes up next year markets seem to like her as well as GOP commentators, he could change his mind.

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A thought for Sunday: of heartlessness, confidence and conviction

by New Deal democrat
A thought for Sunday: of heartlessness, confidence and conviction

First of all, let me join in full in the following from Calculated Risk:

These are not normal times, and I can’t just post economic data and remain silent on other issues.
Mr. Trump’s executive order is un-American, not Christian, and hopefully unconstitutional. This is a shameful act and no good person can remain silent.

I believe that the sheer heartlessness of Trump’s Order is a feature, not a bug.  It is designed for maximum media coverage in order to show his supporters that he is delivering on his promises.

It is likely that in a longer timeframe this will backfire, as the cruelty of separating families, turning away children, and refusing entry to people who already had legal permission to live here via visas and even green cards, turns people against Trump and his enablers.

Once upon a time, for academic reasons I read the same book that Trump was rumored to have by his bedside in NYC: the english translation of the full text of Adolf Hitler’s speeches. Hitler’s argument for getting ordinary Germans to go along with his extreme anti-Semitic agenda was masterful. It went in essence like this: “I know that there are a very few good Jews, and you may know a few of them.  But the vast majority of Jews, who you don’t know, are evil.  In order to get rid of the vast majority of evil Jews, we have to sweep up a few of the good ones. So don’t worry, we will take care of it.”  By getting people to overlook their own experience with Jews they knew, he prevailed.

In contrast – for example – gay rights triumphed when enough people knew gays in their ordinary lives, and realized that they were no different from anybody else. So they were unable to see any valid reason to discriminate against them.

This ban is much more like the second situation than the first. Hitler argued that he might have to inflict hardship on a few good people in order (allegedly) to get to the mass of bad apples.  Trump is inflicting a lot of harm on a mass of good people in order (allegedly) to get to a few bad apples

And we haven’t even gotten to the point yet when the same heartlessness is going to be inflicted on DREAMers.

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Trump’s Cabinet Picks Are A Sorry Lot

Lifted from ataxingmatter from Jan 18:

by Linda Beale

Trump’s Cabinet Picks Are A Sorry Lot

As the Friday inauguration date draws near, most ordinary Americans who read, stay informed, pay attention to history and events, and engage in critical thinking are, understandably, aghast at the poor job Mr. Trump has done so far in putting together a workable Cabinet of high-level appointees with the expertise, experience and values that can lead the country.

We Americans share many values.  Among them has always been a view that those who are better off should help those who are less well off. We’ve done that in many ways, beginning with private charity (supported by our tax code) but going much beyond the soup kitchens and church support for a sick parishioner to include a progressive income tax, taxation of the estates of the wealthiest among us upon their deaths (since they were generally almost tax free in life), and the provision of many necessary services through public institutions.  The latter includes things that are important to the everyday life of all of us as well as the opportunities for better lives for those of us not born with a silver (or, in Trump’s case, golden) spoon:

  • a public right to decent health care, made real by the expectation that hospitals (whether for profit or nonprofit) will care for those who enter their emergency rooms in medical emergencies, even if the patients cannot afford to pay the going price for the service needed, and made more substantive by the passage of the Affordable Care Act which provided coverage for pre-existing conditions, allowed young people to remain on their parent’s insurance, and made market exchanges available to provide better to understand choices while providing a federal subsidy for those who otherwise couldn’t afford insurance;
  • public education from kindergarten through college, supported by federal and state funding, with reasonable rules that protect our children, such as not allowing private carrying of guns within protective zones around schools, and –in many states–rules that ensure that public support reaches poor districts as well as wealthy ones;
  • protection of the environment, from national monuments and parks to restrictions on dangerous fracking and oil drilling in sensitive areas (consider the Arctic National Wildlife Refuge), from ensuring that communities have clean water to drink through regulation of corporate waste to ensuring that children have safe homes through regulation of lead paint, from protecting the nation’s waterways so that individual owners and polluters cannot hoard or harm nationally important resources to protecting creatures large and small that represent the genetic diversity of this Earth
  • regulation of commercial enterprises, to ensure that they do not exploit their workers, through fair labor laws and hiring laws and workplace rules that prevent employers from being able to force individuals to work in dangerous conditions or without appropriate rest and meal breaks
  • regulation of financial enterprises, to ensure that those sophisticated ‘quants’ don’t take advantage of less sophisticated customers, to prevent discriminatory practices that disadvantage people of color, to ensure open and fair reporting of financial positions
  • regulation of the foods and drugs that enter our marketplace, to protect Americans, our children and our pets from the kind of pollution of food products that occurred when China’s unregulated marketplace allowed melamine (plastic) to be substituted for protein in pet foods that were exported abroad or the indiscriminate use of toxic pesticides without informing consumers so that we can make good decisions about products that we buy; and on and on

Trump’s appointees for many of the important Cabinet positions seem to be primarily wealthy crony capitalists with radical ideologies that are in direct conflict with the agency missions. Consider just the following three:

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Paul Ryan Can Not Take the Truth So He Hides It with Legislation

Paul Ryan and other House Republicans voted along party lines “Adopting rules for the One Hundred Fifteenth Congress.” The vote was 234 Yeas to 193 Nays. Three Republicans voted with Democrats to block the new rules for the 115th Congress. No big deal, right? and the New Rules passed.

As many of you probably know, I have been writing about the PPACA/ACA/Obamacare since 2008; answering questions, presenting information, and rebutting the stories, outright lies, and silly remarks. I did a lot of Maggie Mahar’s editing to get her columns up on Angry Bear and subsequently became familiar with the healthcare law. Now before you attempt to get into this with me, I will say this; “it was not perfect; but, it was all we had for the time being.” Now we are going backwards. We will be worse off under the new healthcare law.

Typically, this is not big deal except Randian Paul Ryan stuck a couple of sentences into the new House Rules. Before I get there, I want to take this a step backwards and explain. I was angry enough after reading the Rules Change to write my Congressman Mike Bishop. This is unusual for me as it typically is a waste of time. They represent upwards of 700,000 people in high density states. It was never supposed to be that way until Congress decided to freeze the number of Reps in the House. If the number of constituents represented had stayed at 60,000; my vote and opinion would have counted for more when drop kicking him across the room. There is a reason they did this and if they did not do this, the number of Reps would have been much higher.

I wrote Congress Person Mike and started explaining how Senator Sessions with the help of Rep Upton also from Michigan wrote the GAO asking why the HHS could appropriate funds. The GAO said they could not; but, the GAO left an opening for the HHS and the Administration by stating they could transfer funds from other programs into the Risk Corridor program. The Risk Corridor program for the PPACA is a 3-year program. Since there was a lot of risk for insurance companies and Co-ops, it was established along the same lines as the one for Part D Medicare which the Republicans created. An insurance company was limited to 3% profit,. If you made more than that, you kicked into the program a ratio of those profits. The higher the profit, the more you kicked in. If you lost money as the new Co-ops did, the program gave them money if the loss was greater than 3%. The CBO estimated the Risk Corridor program would generate $16 billion over its 3 year life time. Companies were taking on people who were denied insurance before due to pre-existing conditions. It was a higher risk and no one could be sure how many high risk insured they would get. They could not deny insuring them or increase premiums. This worked well for Part D.

Session and Upton were able to make the Risk Corridor program budget revenue neutral so the HHS and administration could not appropriate funds for it. They enlisted the aid of Rep Jack Kingston Appropriations Panel Chairman who stuck a sentence in Section 227 of the 2015 Appropriations Act (dated December 16, 2014). The sentence said; no

“funds made available by this Act from the Federal Hospital Insurance Trust Fund or the Federal Supplemental Medical Insurance Trust Fund, or transferred from other accounts funded by this Act to the “Centers for Medicare and Medicaid Services–Program Management” account, may be used for payments under section 1342(b)(1) of Public Law 111-148 (relating to risk corridors).”

If you are wondering why Co-ops went bankrupt, healthcare premiums started to go up, insurance companies withdrew, and insurances companies lost millions; here is the reason why. So I laid this treachery on Congressman Mike Bishop.

I then proceeded to tell him that under reconciliation, you can not create a budget deficit. This would happen with the repeal of the PPACA. In Summer of 2016, the CBO estimated it would be ~$350 billion.

Now, back to my Roll Call on New House Rules. Randian Paul Ryan stuck a few sentence into the House Rules for the 115th Congress. Here is what they said:

“This subsection shall not apply to any bill or joint resolution, or amendment thereto or conference report thereon –

(A) repealing the Patient Protection and Affordable Care Act and title I and subtitle B of title II of the Health Care and Education Affordability Reconciliation Act of 2010;

(B) reforming the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010.”

In simple English here is what it meant; the CBO could not review the Repeal of the PPACA and the costs associated with it. My question to Congressperson Mike Bishop was; “Why did you vote yes to this knowing you were covering up the truth and creating a budget defict?”

Not that I will get one; but, I asked for a return reply.

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Equality in Retirement

Sarah Anderson and Scott Klinger of the Institute of Policy Studies released “Tale of Two Retirements”, a study discussing how well CEOs will retire in comparison to the low and middle income citizens who only have 401ks and Social Security to retire on in the US and what President-Elect Trump’s actions will do to CEO retirement.

invisible hand

One hundred CEOs have company retirement funds worth approximately $4.7 billion or a sum equal to the entire retirement savings of 41 percent of U.S. families with the smallest nest eggs.

The $4.7 billion total is equal to the entire retirement savings of:

59 percent of African-American families
75 percent of Latino families
55 percent of female-headed households
44 percent of white working class households

The average of the top 100 executives is enough to generate an ~$253,000/month life time check.

In comparison:

• Ordinary workers have ~$18,000 of 401K savings or enough for ~$100 in a monthly payout.
• 39% of workers 51 to 61 years of age have no employer sponsored retirement plan and will be mostly dependent upon an ~$1200/month Social Security check.

Many CEOs have tax-deferred accounts totally with ~$3 billion in deferred payout. If President-Elect Trump cuts the marginal tax rate, they will also gain in retirement funding.

• Cutting the top marginal tax rate to 33 percent, Fortune 500 CEOs would save $196 million on their income taxes.
• These deferred payout accounts are also exempt from 401k contribution limitations

.

Mirroring the same racial and gender gap exiting today in business, white male CEOs have done better than their minority male and their female counterparts.

• The top 10 white male CEOs have a combined $1.4 billion in the tax deferred compensation accounts
• Eight times more than the top ten minority male counterparts and five times more than the top ten female counterparts.

Top 10 White Male CEOs

I want to take a moment and dwell on this topic a bit more. While some readers are distracted by immigration and its impact on the economy, they ignore the crop-picking, laboring, and housekeeping jobs where many of these immigrants end up. We are losing sight of some real issues plaguing the middle income bracket making less than $100,000 annually which comprises most of the population.

“Just” 50% of the American Labor Force are offered a 401K in which to set aside money in for retirement. The maximum contribution to date for most who have a 401k is $18,000 annually with an exception for older workers who get bumps up to $24,000 annually, if . . . if you are making enough to be able to set aside the initial amount and more if older. It is a tease from the beginning and worse now with stagnant incomes. If I do not set a minimum aside, I am in deeper trouble when I am older. If I do set this aside now and I have a college loan, can I have a life, married life, and a family? Which would you choose if the potential was there to set this aside now? The choices are not easy and we are seeing the results as more people go on SS with college loans still outstanding and have their SS garnished to pay them off.

Top Ten CEO (Clink on the chart to make it larger and for clarity.)

As the report details, CEOs have few if any limits to set aside taxable retirement income and more have the income to set aside. As a perk, many CEOs are given tax deferred accounts in which companies do not pay taxes until the funds are withdrawn. In the mean time the executives benefit from tax free compounding investment returns. As proposed if President Trump decides to do so, a reduction in the maximum income tax bracket from 39% to 33% because it might (laughing) create jobs, the very same executives stand to make an unearned jump in income. “At a 39.6 percent income tax rate, they would owe $1.2 billion to the IRS and at a 33 percent rate, they would owe $979 million, for a combined savings of $196 million.”

Whether $1.2 billion or 979 million, $millions in taxes are lost yearly to states and the federal government due to Tax-Deferred accounts.

• In 2007, the Senate passed a minimum wage bill that would have limited annual executive pay deferrals to $1 million, but the provision was dropped in the conference committee. According to the Joint Tax Committee, the measure would’ve saved taxpayers $806 million over 10 years.

• In 2015 alone, 215 Fortune 500 CEOs invested a combined $227 million more of their pre-tax income in these plans than they would have been able to invest if they’d been subject to the maximum $24,000 cap that applies to ordinary workers. If they had been subject to this limit, they would’ve owed the U.S. Treasury $90 million more in income taxes last year.

What is surprising is how many are willing to defend this type of compensation calling it theft if taxed. Yet this type of compensation is limited to 1% of the population and numbering less than 1 million people. At the same time, the same people defending huge salaries will decry the loss of jobs in the US going overseas or automated which many executives are handsomely compensated for in the name of cutting cost and increased profits. We also have a president today who is promoting a populist agenda and telling people he will bring back the jobs whether automated out of existence or resourced out of the country by the executives of companies. While there may be a few jobs saved over the next 4 years, most will still be quietly moved or automated.

I am sure you have noticed the all star team for promoting the well being of the nation beyond what Sarah Anderson and Scott Klinger of the Institute of Policy Studies has reported on is being assembled in Washington DC by President D. Trump. Beyond the scapegoating and misdirection promulgated by President Trump in his inaugural speech, this team is just another example of chutzpah beyond Trump’s absolutely, awesome, and amazing (it will be great) standards expressed during the runup to a momentous inaugural day. As identified, there is a group of people who have been sucking up the economic gains that should be going to the middle class and President Trump has surrounded himself with them . . . the billionaires and multi-millionaires in his cabinet. No other populist administration has gone to this extreme in selecting a group so dedicated to their own well being.

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Wealth Inequality and Sentimental Credit

By Noni Mausa

Wealth Inequality and Sentimental Credit

I go to the store and buy a loaf of bread. But I haven’t actually harvested a loaf of bread (unless I am a shoplifter.) I have, instead, used a tiny scrap of credit to mobilize a farmer, a baker, a truck driver, and probably a score of others to exert their skill and energy to have a loaf of bread there when I arrive.

Though my credit is sliced very thin and passed around to these dozens of people, and though it travels backwards in time, so to speak, to reward them, it is merely a placeholder for an exchange of human effort.

My “credit” is not necessarily cash or even money. It is simply whatever leverage I can wield to direct human effort to my benefit. Sometimes, of course, it takes the form of cash, but just as often it can manifest as pity, fear, misdirection, beauty, hope, hatred, fun, or family feeling.

One way to increase one’s own power is to increase your ability to work one or another of these levers. Currently, people focus on only one of these – the possession of money, in the forms of cash, investments, steady incomes, etc.

When the possession or control of cash increases in a small group, we call this wealth inequality. But another way to increase inequality lies in reducing people’s access to non-cash credit, what you might call sentimental credit.

Sentimental credit is the credit the poor depend on when all else is stripped from them. This is the reason why people in the poorest countries are often described as generous, welcoming, lovely, cheerful, honourable, charitable, and keenly alive to community and family connections. It’s why these people create intricate art and music and wonderful food out of the unlikeliest poor materials, and tell long and fascinating stories. It’s why their land, however poor, is seen as their home, with loyalty, respect and family-feeling.

In deeply poor communities, sentimental credit circulate available resources, earns respect and trust, cultivates family feeling, builds pride, and basically keeps things together. People in these societies who aren’t generous, who are miserable to be around, who take but never give, who take no pride in skills, who know no stories, and yet are not actually crippled and thus deserving of assistance — these people don’t have anything to trade. They have little or no sentimental credit. Such people can get along fine if they have a good supply of cash and can live in a relatively anonymous society. Otherwise, they are, ahem, evolutionally impaired.

How does this apply to the descent of America into an unequal society?

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