Month: January 2019

Sanders has proposed a dramatic increase in the estate tax. It doesn’t raise constitutional issues and it wouldn’t create administrative problems that the IRS hasn’t seen before. It would, over the long run, help to eliminate plutocrat dynasties, and thus reduce inequality, without doing much damage to work incentives. It would also raise money for the expensive new social programs that are being tabled by a variety of candidates.

The Sanders legislation is more reasonable and moderate than the Warren wealth tax. Who would have imagined it?

It’s fair to say that the American economy is hooked on low interest rates. If you need evidence, look at what the stock market and the bond market do when the Fed raises rates.

Rates have been extremely low since 2008. Some Democrats clearly view this as an immutable new normal and argue that blowing up the deficit with expensive new programs won’t damage the economy. Are they right? Not really.

Interest rates are the product of a number of factors, including the following:

1. CONFIDENCE IN THE FUTURE: This cuts different ways. If you assume that the American government will always be predictable and competent (i.e., it will not create catastrophes or default on its bills) and that growth will remain slow but steady, you will bet on low rates. If you don’t believe in both of those things, you will demand higher returns on your money.
2. INFLATION: The little-publicized up side to automation and globalization is low inflation. Given the state of American politics, can you safely assume that inexpensive Chinese products will continue to flood our markets and keep prices down?
3. THE FED: The Fed wants additional ammunition to deal with future recessions. That, to a large extent, has driven the most recent interest rate increases. It also wants to maintain its credibility as an inflation-fighter with the markets, even in the face of criticism from Trump. Those motivations aren’t going away.
4. FOREIGN INVESTMENT: Japan has a very high debt relative to GDP, but it also has high levels of domestic saving, so the debt is held by Japanese citizens. That is not true here. Foreigners could raise interest rates by refusing, for either economic or political reasons, to buy American debt.

The fact is that the investor class is likely to freak out if the 2020 election is won by a Democrat who promises lots of new expensive programs and doesn’t have a plausible way to pay for them. Investors prefer incompetent right-wing bozos who speak their language to left-wingers. That may be unfair, but it’s a fact of life. And so, while there is certainly some room to expand the deficit for overriding public purposes, I cannot agree that it does not matter; the possibility of significant increases in interest rates still exists.

As we all know, Donald Trump ran as a populist, but chose to govern as a traditional Republican–at least on economic issues. Warren clearly intends to run as a genuine populist, not a faux one. What does that mean for the Fox News crowd? You have to wonder what they think when they hear Sean Hannity attack her tax and defend the GOP by talking about how vital the yachting industry is to our economy.

Warren is effectively making a bet with her wealth tax plan, as well as other parts of her program, that the additional white working votes she wins will more than offset the potential votes and contributions she loses from socially liberal millionaires. The bet presumes that, for a large number of the white workers who voted for Trump in 2016, economic interests prevail over cultural concerns. Personally, I think she’s wrong about that, and the bet will fail, but I could be wrong. We’ll see next year.

Warren has made it clear that the motivation behind her tax is not primarily economic; she thinks that the levels of inequality in this country are now damaging democracy. Is she right?

On its face, she definitely has a case. Today, as a result of two unenlightened Supreme Court decisions equating campaign funds with free speech and some ongoing sabotage of the electoral regulation system by the GOP, you have a flood of unaccountable money in the process and the phenomenon of self-financing campaigns. In addition, you have national campaigns that are kept alive solely by sugar daddies like Sheldon Adelson and Foster Friess. It is not unreasonable to view this as a threat to the system.

On the other hand, billionaires don’t have a very good record of actually winning elections. Donald Trump was outspent in 2016 by Hillary Clinton. Santorum and Gingrich didn’t win, in spite of the best efforts of their patrons, in 2012. Rick Scott would appear to be an exception, but his margin of victory last year was the same as DeSantis’, which suggests that his spending didn’t really make much of a difference in the long run.

My conclusions are as follows:

1. There are plenty of billionaires in America, and some of them are liberals. The likelihood that one of them, or a very small number, can dominate politics is consequently pretty minimal. Madison’s view of the role of factions in large countries is relevant here.
2. You could argue that one of the positive elements of our intense partisan divide is that campaign money doesn’t matter much in national elections, because most of the voters simply can’t be reached by commercials.
3. I think money really comes into play in two situations, neither of which can be touched by the Warren tax. First, large corporations can afford to pay lobbyists to tweak legislation and regulations to get what they want; second, politicians of both parties are more sympathetic to the concerns of people of their own class than to the poor. There really isn’t an obvious way to address these concerns; certainly, the Warren tax won’t.

And so, like the economic case against the tax, I consider the political case for it to be unproven.

A brief history of the Brexit negotiations:

1. May tells the world that no deal is better than a bad deal.
2. May predictably negotiates a bad deal with the EU, which has most of the leverage. The deal mitigates some of the damage from Brexit at the cost of turning the UK into a vassal state. Everyone is appalled.
3. Notwithstanding #1, May tells the Commons that her bad deal is better than no deal. She also tells the Brexiteers that the EU won’t negotiate a better deal.
4. Parliament overwhelmingly rejects her deal.
5. Notwithstanding #3 and numerous statements from the EU, May tells Parliament that the EU is willing to concede a better deal on the Irish backstop if they know it will be approved by the Commons. Parliament sends her back out to make the promised better deal with the clock ticking.
6. What do you think happens next? This is theater of the absurd.

The right, of course, is screaming that the Warren wealth tax is the first step to Venezuela. Are they right? Here is my analysis:

1. REDUCED INCENTIVES: The tax only applies to a very small number of people. You would have to assume that the average person could somehow calibrate his willingness to work to a very high income threshold. That doesn’t seem very plausible–or significant.
2. REDUCED INVESTMENT: The very wealthy can’t possibly consume all of their income, so the rest is obviously invested. Is their investment exceptionally productive? Sure, some of them made their money as entrepreneurs, but is it likely that the majority of them continue to put their fortunes at risk? I haven’t made a study of this, but I doubt that the average plutocrat takes many chances with his money. On the other hand, the tax proceeds might, or might not, be used for productive investments in infrastructure, education, and the like. The bottom line here is that the relative value of plutocrat and public expenditures depends on how each party spends the money; you can’t say categorically that one approach is better than the other.
3. REDUCED PHILANTHROPY: There is no doubt that the Warren tax would reduce philanthropy. Would that matter much to the average American? As far as I can tell, a disproportionate amount of plutocrat philanthropy either goes to high culture vanity projects or to improve the lot of suffering people in Africa. The latter is admirable, but you can understand why American working people are not overly impressed.

The better arguments against the wealth tax are the legal and administrative concerns that I discussed in my last post. The economic case against the tax is unproven.

In 2000, it was Ralph Nader, who bears (in spite of his denials) some responsibility for hundreds of thousands of deaths in Iraq. In 2016, it was Jill Stein, who insisted against all appearances that there was no real difference between Hillary Clinton and Donald Trump. In 2020, it seems, it may be Howard Schultz, who has the brilliant idea that what we really need now is a successful outsider businessman to clean things up in Washington. Where have I heard that before?

tI assume that Schultz takes his inspiration from Macron’s success as an independent centrist. Unfortunately for him, the American political system differs from that of France, as follows:

1. The left in France was dispirited and exhausted at the time of the election. That will emphatically not be the case with the Democrats in 2020.
2. The French system has a runoff. Ours doesn’t. In France, he could hope to win the support of the left if he could get into a runoff against Trump. Here, that can’t happen; he would have to win outright in November.

The fact is that the red and blue bases constitute about 70 to 80 percent of the electorate. Schultz could only hope to compete for the remaining 20 to 30 percent. That’s not enough, realistically speaking, to get elected.

And so, if he decides to go where Michael Bloomberg wisely chose not to, he can only be a spoiler in 2020.

Mark Knopfler is the exception to the rule: a songwriter who has improved with age. He has a great sense of history, an eye for detail, and clear sympathy for the struggles of outsiders and working people. And, of course, he has always been a wonderful musician.

His new record, “Down the Road Wherever,” is consistent with its predecessors, with two notable exceptions. First of all, it is more musically adventurous; it has about as many horns as guitars, and features, among other things, piano jazz and a song that sounds like something Steely Dan recorded in the seventies. (It’s true–I’m not kidding.) Not all of these experiments are successful, largely due to his vocal limitations, but he’s entitled to credit for trying. Second, some of the lyrics aren’t as sharp as usual; two of the verses on “One Song at a Time” don’t work for me, and the irascible old guy in “Bacon Roll” sounds like the character in “Mighty Man,” but without the pathos that made the latter song so effective.

Still, it’s well worth a listen. The highlight is “Back on the Dance Floor,” which would have been a big hit 30 years ago. Unfortunately, the music world has moved on, and hardly anyone will notice today.

Leaving the policy merits of the proposal aside, the Warren wealth tax is a brilliant tactical decision that could help her win the nomination. Why? Because it destroys any plausible rationale for a Bernie Sanders candidacy. Sanders already had issues with his age and his past associations; now he has been outflanked on the left by the wealth tax, which is a simpler, bolder measure than anything he has ever proposed. He can’t compete with it; he would be wise not to try.

Warren should have the fundi/class quadrant locked up at this point. She could still be defeated by a more charismatic candidate who emphasizes identity over class (probably Harris or Booker) or a realo candidate who calls for national unity against Trump and presents a more moderate, realistic agenda (Biden). Will that happen? At this point, I have no idea.

Elizabeth Warren isn’t a Marxist, but she has certainly read her Piketty. Her wealth tax is completely consistent with the Piketty book, and her two principal advisers on the subject are, as I understand it, collaborators of his.

The wealth tax proposal has far-reaching consequences that I will address in three separate posts in the future. The first will focus on the tax as a campaign tactic; the second will talk about the political premises of the proposal; and the third will discuss its economic impacts, if implemented.

For today, however, I will limit myself to the legal and administrative problems with the tax, which are as follows:

1. IT WOULD PROBABLY BE FOUND TO BE UNCONSTITUTIONAL: There is a fairly lively debate among the commentators as to whether a wealth tax would survive legal scrutiny. I am more persuaded by the no side, but the merits of the arguments really don’t matter much, because the decision would ultimately be made by the Roberts Court, and how do you think that would turn out?
2. IT WOULD BE AN ADMINISTRATIVE NIGHTMARE: Warren is no fool, and she knows that the people who are potentially subject to the tax will do everything possible to avoid it, so part of her proposal is money for increased enforcement. The principal issues would be valuations, the movement of money overseas, and more or less fraudulent conveyances. It would take a small army of lawyers and accountants assigned to each taxpayer to make the tax work. Basically, the country would be treating every person who is potentially subject to the tax as a quasi-criminal, or a dangerous animal at a zoo. Does that sound fair to you?

I would agree with Warren that the extremely wealthy should pay more taxes, as they have benefited disproportionately from globalization and automation, and that inequality has reached levels that are making our economy unnecessarily unstable. The best way of dealing with these problems, however, is not a wealth tax, but higher marginal rates of income tax at the top levels and a beefed-up estate tax without stepped-up basis. These measures would address 80 percent of the issue at close to zero percent of the cost and risk.

Don’t think the Chinese didn’t notice. It bodes well for a face-saving end to the trade war–for a fundamental change in the Chinese system, not so much.

There should be no partisan division on one point: Nicolas Maduro is a singularly inept tyrant. He has trashed his country’s constitution and driven its economy into the ground. The exodus that inevitably followed is causing great hardship for Venezuela’s neighbors. Everyone except the Russians, Chinese, and Cubans would be better off if he left, and who cares about them?

But still, he clings to power, and he clearly has the public support of the higher levels of the military. So what happens now? Here are my thoughts:

1. The Trump administration has limited itself to public statements of support for the opposition up until now, which was wise.
2. Now, however, we have taken concrete action by recognizing the head of the opposition as the legitimate Venezuelan head of state.
3. That, in effect, is a red line. We can’t let Maduro stay in power without embarrassing ourselves at this point.
4. Brazil and Colombia have ideological issues with Maduro and have been impacted by the influx of refugees. If they aren’t willing to take military action to displace him, we should not have created the red line.
5. We could refuse to buy Venezuelan oil. That would have a very significant impact on the government (and American consumers) in the short run. Trump has no obvious legal right to take that step, however, and in a matter of weeks, the world oil markets would adjust, and supply chains would be changed. If the embargo didn’t cause the government to collapse immediately, therefore, it probably wouldn’t work at all.
6. We could impose a blockade on oil tankers leaving Venezuela. That would probably work, but it would be an act of war without congressional approval.
7. We can provide moral and material support to an invading force from Brazil or Colombia. If those countries aren’t willing to take military action, however, that obviously won’t work.
8. Given our checkered history in South America and the obvious analogy to Putin in Ukraine, direct military involvement on our part would be a disaster.

What does Trump have in mind? Honestly, I have no idea. Let’s just hope his plan is better than the one for the shutdown.

So much winning! Are you tired of it yet?

So the government shutdown goes on.

All those federal workers are pawns.

So how does it end?

It’s when Trump and his friends

See their hopes of a win are now gone.

We already know what it will take to decarbonize our utilities: cheaper and more efficient sources of renewable energy; better batteries; and a smarter grid. We also know how to get there: technology-forcing regulation and subsidies.

When you are relying on innovation, however, there are no guarantees. The real policy question on this issue, therefore, is whether nuclear power will be part of the equation.

On the plus side, nuclear plants don’t emit greenhouse gases, they create energy very efficiently, and they use technology that is already available today. On the down side, of course, are concerns about accidents, fuel storage, and terrorism.

It’s a balancing act. To me, the negatives of nukes outweigh the positives, but reasonable people can disagree on this point. If you don’t accept nukes as part of the solution, you have to be prepared to water down your decarbonization objectives to some degree. I believe that is what will happen.

Jonathan Chait reminds us in today’s New York Magazine that Trump didn’t invent hostage taking as a legislative tactic; the GOP used the threat of shutdowns and debt ceiling crises to force spending cuts during the slow recovery from the Great Recession. He’s right, of course.

While the wall crisis is largely about the symbolism of the wall, it is also about the legitimacy of hostage taking; the Democrats know Trump will do it again if they concede any kind of a “win” over the wall. The question for today is, would he try it over the debt ceiling? Would he really risk the credit of the United States for something stupid that would please his base? And if he did, would the GOP congressional leadership step in to save the interests of the donor class?

The answer to the first and second questions is almost certainly yes; for Trump, anyone and anything can be a hostage if it serves his purpose. Nothing is sacred to him except his own self-image. As to the third question, McConnell would have to choose either to buck his president or his donors. Since he typically takes a long view, I’m guessing that he would support the donors, but that remains to be seen.