Cromwell

The market crash that I (and others) predicted after the election has not yet come to pass, mostly because investors are seeing with their hearts and not their heads. The recession will arrive sooner or later;  it is just a matter of time.  How severe the “Trump Slump” will be will depend on which of his campaign promises are jettisoned after he takes office.

I can imagine three different scenarios:

1.  Funhouse Reaganism:   The Reagan tax cut was approved in a recession largely caused by large interest rate increases engineered by the Fed in order to break the back of inflation.  While the tax cut caused the deficit to balloon, it in some respects mitigated the impact of the interest rate increase, and when the Fed relented, it was Morning in America.

There is no doubt that there will be a huge, and hugely regressive, Trump tax cut in 2017.  Unlike the Reagan legislation, it will be approved at a time when the Fed is already worried about the economy overheating.  In this scenario, I also assume large spending increases on defense and infrastructure, and minimal spending cuts.  As a result, interest rates will unquestionably go up substantially, the dollar will rise, emerging countries will struggle, and exports and real estate will slump.  Most of the tax cut will increase the size of the pre-existing cash mountains instead of being spent. Before long, the economy will heave into a recession, and Trump will no longer spout the current GOP line that interest rate increases are a good thing.

2.  Reverse Robin Hood:  In this scenario, the size of the regressive tax cut is largely offset by cuts to anti-poverty and entitlement programs, so the deficit does not balloon as much, and interest rates peak at a lower level.  The reduction in demand caused by the federal spending cuts still causes a recession, but its impacts are more chronic than dramatic.

3.  Trade Warrior:  Unlike the other two scenarios, in this one I assume that the regressive tax cut is accompanied by the promised trade wars with China and Mexico.  Prices rise; supply chains are disrupted; and businesses relying heavily on exports are crushed by retaliatory tariffs.  The Fed, faced with stagflation, jacks up interest rates to deal with the price increases.  This recession is by far the worst of the three.

So which will it be?  We’ll have to wait and see.

 

Though we enjoyed our trip to Florence,

Bad news seemed to fall in torrents.

The state shut my wife’s office down;

The President’s an evil clown.

 

Bowie, Prince, and then Glenn Frey:

Why must all our heroes die?

Tim’s retired, and Arnie’s gone.

The Demon Deacs will soldier on.

 

Our politics have gone insane.

At least there was no hurricane.

We don’t have time to bitch and moan;

We’re spending Christmas in Cologne.

 

We send our love to all our friends.

The bad times, like the good ones, end.

It’s just four years until he goes,

So keep the faith and hold your nose.

The American welfare state is financed primarily by exactions on employers and employees.  This has the following results:  first, it artificially drives up the cost of labor, and thus encourages offshoring and automation; and second, it imposes costs that should logically be borne by all of society on a relatively small group of people.

The biggest problem with changing the system is breaking the relationship between payments and benefits on an individual basis.  For that reason, some form of the payroll tax is bound to endure.  It could be cut and replaced in large part by a VAT or a carbon tax, however.

After the Brexit vote, the new government of the UK repudiated the neo-Thatcherism of George Osborne and moved to the center in order to win votes from whatever remains of the Labour Party.  As a result, it is a virtual certainty that the Conservatives will win a huge majority at the next general election.

 Faced with a reasonably analogous situation, the French Republicans, on the other hand, have embraced a hard right candidate.  Will French workers vote for him over Le Pen and the possibility of Frexit?  I have a lot of doubts.

If you were returning to Earth after spending the last 20 years on Mars, you could be forgiven if you thought that using block grants for anti-poverty programs was a good idea.  After all, who could object to providing flexibility for state governments to deal with unique conditions on the ground?  It just makes sense.

Except, in the real world, many state governments are perpetually controlled by people who view the poor (in their eyes, undeserving panhandling minorities) as the enemy, and who are more than happy to make them miserable.  My own state, which turned down federal money for infrastructure improvements and Medicaid expansion, is a good example of that. You can bet that some states will find a way to use block grants to move money around in order to finance tax cuts for wealthy people.  So, when you add the absence of good faith implementation to the cuts that inevitably will follow block grants, you have the ingredients for a war on the poor.

It’s going to happen.  I don’t see any way to stop it.  The questions then become:

1.  How do Trump’s white working class and elderly supporters respond when the scapegoats are duly punished, but their lives don’t improve at all?
2.  How does Trump react to the likely avalanche of stories about how his war on the poor isn’t exactly making America great again?

Once again, be careful what you ask for, because you just might get it, and then, who knows?

 

Bannon and Flynn are scary, to be sure, but they won’t run departments, so no one knows how much influence they will actually have.  Sessions is scary, too, but he will be constrained by the law.  No, the new Cabinet member who frightens me the most at this point is Price, because he can be relied upon to push hard, not just for Obamacare replacement, but for Medicaid cuts and Medicare privatization, and he will have the force of a department behind him.

By any reasonable metric, Obamacare has been a success;  the percentage of uninsured has hit a record low, and the cost curve has been bent significantly. You would think that the program, which is, after all, the spawn of Romneycare, would have the support of the GOP, but you would be wrong.  Obamacare is viewed as an entitlement program for the undeserving poor, so go it must.

What will replace it, if anything?  There are plenty of options, but all of them more or less reflect the GOP’s attitude towards health care and the market, which can be described in the following principles:

1.  Health care is primarily an individual, not a collective, concern.   While there are certain elements of health care that are driven by factors outside of each individual’s control (i.e., genetics, age, and bad luck), in general, bad health is caused by bad choices.  If you live an unhealthy lifestyle, why should I have to subsidize it?

2.  The best way to control costs is to reduce demand.  I have read countless articles that make it clear that Americans do not consume more health care services than anyone else in the world;  we simply pay much more for each one of those services.  Nevertheless, the GOP thinks that rising costs can be addressed by requiring everyone to have more “skin in the game.”

3.  The market for health care products and services is fundamentally similar to the markets for other goods and services, so there is no justification for regulating it differently.  For a variety of reasons that I have discussed in previous posts (local hospital monopolies; unequal bargaining power; lack of transparent pricing), that simply isn’t true.

4.  The private sector is inherently more efficient than the government, and competition is a better way to control costs than the use of a public monopoly.  Again, if you compare Medicare costs to the cost of private insurance, or the American system to any European system, you will conclude otherwise.

5.  The redistribution of wealth through government taxing and spending is immoral.  Hence, tax cuts are good, because they return wealth to its proper owners, but spending is bad, because it benefits the undeserving poor.

With these concepts in mind, what can you expect from the Obamacare replacement plan?  Here’s my prediction:

1.  The individual and employer mandates will, of course, be gone.

2.  Community rating will be watered down dramatically, but will have to continue to exist in a much weaker form for the system to work at all.

3.  The cost of insurance for young and healthy people will go down, but the quality of that insurance will decline, as well.  The cost of insurance for older and sicker people will go up significantly.

4.  There will be no “Cadillac tax.”

5.  The Medicaid expansion will be repealed.

6.  As a result of the foregoing, millions of people will lose their insurance, and millions more will have substantially higher deductibles and co-pays. The transition to the new system will be chaotic, which will hurt producers as well as consumers.  The GOP owns this issue in 2020.

 

 

Cruz fancies himself a steadfast opponent of crony capitalism, so this would be the time for him to take a position on Trump’s conflicts of interest, his pseudo-negotiations with Carrier, and his bogus infrastructure plan.

What’s that I hear?  Silence?  What a surprise!

At least Rand Paul is speaking his mind about potential Cabinet appointees.  The way things are going, he may have to be the conscience of the country.

 

I actually wrote this before the election, but it seems more pertinent now.  It is consistent with the spirit of the original.

                             Blue People

Blue people got no reason

Blue people got no reason

Blue people got no reason to live.

 

They live in cities.

They think they’re smart.

They claim to know about the latest art.

No time for NASCAR;

No use for guns.

Skiing and yachting are what they do for fun.

 

Well, I don’t want no blue people

Don’t want no blue people

Don’t want no blue people ’round here.

 

Blue people are just the same as you and I (A fool such as I).

All men are brothers until the day they die. (It’s a wonderful world).

 

Blue people got nobody

Blue people got nobody

Blue people got nobody to love.

 

We hate their culture.

They hate ours, too.

We want what’s old;

They prefer what’s new.

Rampant abortions.

Sex on demand.

I really think it’s gotten out of hand.

 

No, I don’t want no blue people

Don’t want no blue people

Don’t want no blue people ’round here.

 

Parody of “Short People” by Randy Newman.

 

The irony of the Ryan plan for “premium support” is, of course, that it resembles Obamacare with the public option.  Some people would say “hypocrisy” rather than “irony,” but Ryan is just being practical here;  he can’t get rid of Medicare altogether, so this is the best he thinks he can do.

The intellectual basis for “premium support” is the Republican belief, completely unsupported by the facts, both in this country and elsewhere, that the private sector is always more efficient than the government, and that competition is a better way of holding down costs than the use of a consumer cartel.  In my view, the most important questions about the plan in practice are as follows:

1.  Will the amount of the voucher increase over time based on population growth and medical inflation, or just the CPI?  If the former, privatization would not really result in any cuts;  if the latter, which is much more likely, the legislation would shift substantial costs from the government to individual beneficiaries.

2.  Will the private plans be required to provide all of the same benefits as traditional Medicare?  Private insurance companies make money by screening out customers who represent large and open-ended financial commitments.  It is inevitable that even under a GOP plan, there will be some elements of community rating, which will present a problem for the companies when they consider making bids.  If the private plans are required to provide all of the same end-of-life care that Medicare does, I can’t imagine the companies really wanting to participate in what looks like a huge potential money pit.  If not, if I were an insurance company executive, I would pitch a plan to the younger and healthier seniors that would include low co-pays and perks like gym memberships, while limiting liability for end-of-life care.  Under that scenario, large numbers of seniors would start out with one of these private plans and then move into traditional Medicare when they get older and sicker.  Medicare (already more expensive than in the past due to the loss of its effective monopoly power) will then go into a death spiral due to increased costs, and will either collapse or be forced to eliminate its payments for end-of-life care.

The bottom line is that in Scenario #2, the market will ultimately serve as a “death panel” for old, sick seniors.  You can make a case for that, but I don’t think many of Trump’s supporters knowingly voted for it.

My prediction:  Trump, who hates making choices that will cost him popularity, particularly among the members of his base, will keep quiet and watch what happens.  The Ryan plan will pass the House, but run into strong opposition in the Senate.  The public will react strongly and negatively to the plan.  Knowing a vote loser when he sees one, Trump will pull the plug, and the issue will die.

 

The Frenchman known as Francois Fillon.

For the right he will carry the baton.

The left’s bound to rise.

It won’t be a surprise

If the war on the streets is back on.

Fillon was initially portrayed by the press as a French version of Mrs. Thatcher, but it appears to me that his brand of conservatism really has much deeper roots that go all the way back to the opposition to the French Revolution. Selecting him will have the following results:

1.  The French left will rise again.  The Socialists were demoralized by Hollande’s vacillations, but Fillon’s antipathy to organized labor and to the welfare state gives them a compelling reason to go out and vote.  I doubt that it will be enough to get their candidate into the second round, but it means they should have at least a respectable showing.

2.  Le Pen will be running as the left-wing candidate in the runoff.   She makes the case that the welfare state is a French traditional value.  There is no obvious reason why a French worker would prefer Fillon to her.

3.  There is an American analogy to a Fillon/Le Pen race.  Imagine if the entire American electorate ultimately had to choose between Trump and Ted Cruz. Ugh!

The bottom line is that politics in France are about to get really interesting, and really ugly.  Expect lots of action out on the street in 2017 regardless of who wins.

It isn’t easy to find a single word to define Social Security.  It isn’t exactly “insurance,” because the recipients don’t have property rights in the assets in the trust fund, but it isn’t completely “welfare,” either, because there is a correlation between the funds each recipient pays in and takes out of the system.  I guess you could call it a hybrid, which sounds a lot better than “Ponzi scheme,” Trump’s description of it in years past.

The following facts about Social Security cannot be disputed:

1.  The system is popular.  There is no groundswell of support for privatization, or for massive cuts, even among GOP voters.

2.  Social Security makes up a large proportion of the incomes of the elderly; that proportion is likely to rise in the future.  This is due to inadequate savings, which in turn was largely caused by stagnating wages.

3.  While the system has chronic funding problems, it is in no danger of “going broke.”  The Reagan era modifications to the system were designed to address future deficits caused by demographic problems by creating a large surplus in the Social Security Trust Fund.  The system is now running deficits, which will get worse as the baby boomers retire.  As a result, the assets in the Trust Fund will be exhausted sometime after 2030, and taxes will fund only about 80 percent of projected benefits.  If no action is taken to address the deficit by that time, beneficiaries will be looking at a 20 percent cut.

4.  Previous efforts to guarantee the solvency of the system had bipartisan support in Congress.  That is unlikely to be true today.

The partial privatization of the system was suggested by the Bush Administration, partly due to its ideological affinity for solutions involving the private sector, and partly in the hope that higher returns from the market would fill in the funding gap.  Leaving aside the serious possibility that beneficiaries could lose, rather than gain, by making more speculative investments, the problem with privatization is that it blows an even bigger fiscal hole in the system, because it results in less money being available to pay the current beneficiaries.  In light of that, and the previous Bush political debacle, I don’t think privatization will be pushed seriously in the next administration.

There are a number of ways available to address the funding gap.  These include:

1.  Raise the earnings cap.  As it stands today, people with incomes above the cap pay a lower marginal tax rate than people below it, which makes no sense. The down side to this approach is that, unless you also increase the payouts to rich people, it diminishes the “insurance” part of the hybrid scheme.

2.  Increase the retirement age.  Business interests prefer this approach, because it increases the size of their worker pool and thus keeps wages down. For demographic reasons, increasing the retirement age makes some sense, but it is unfair to blue collar workers, who are frequently in no physical condition to work longer.

3.  Change the cost-of-living formula.  Obama was open to this as part of a “grand bargain,” but it never happened.

4.  Raise the tax rate.  Do we really want to make labor even more expensive than it is today?

5.  Let the default cuts kick in.  Seniors rely on Social Security for their retirement income.  Doing nothing will tear huge holes in their financial plans.

Realistically, the most politically palatable way of dealing with the funding gap would be to employ several of these tools in moderation.  That would require the cooperation of both parties, however.

My prognosis:  Trump campaigned against Social Security cuts, and the GOP has shown less interest in the subject since the failure of the Bush plan.  There will be some talk about Social Security reform, but the GOP will look to the Democrats for political cover, and will not get it.  The issue will be kicked to 2020.

Bernie Sanders argued throughout his campaign that the system was “rigged” because rich people and institutions enjoyed undue influence by making disproportionately large campaign contributions.  Donald Trump proved him wrong by winning in spite of being substantially outspent, first in the primaries, and later in the general election.

As it turns out, however, there is a better argument that the system is “rigged;” that is the product of the geographic distribution of Democratic voters and the Electoral College.  And so, for the second time in 16 years, the Democratic candidate was won the popular vote and lost the election.

It is an article of faith among many Republicans that the Democratic Party supports increased spending on social programs in a cynical effort to ensnare hapless voters in a web of dependency.  If that is, in fact, the case, the tactic has been a miserable failure;  the elderly, who rely heavily on transfer payments, are among the most reliable GOP voters, and the poorest states in the country are among the deepest red.

How do we account for this apparent paradox?  It all comes down to the illusion of entitlement;  there is widespread public support for spending on “entitlement” programs that appear to be tied to work.  Tariffs and minimum wages are effectively government redistribution programs, just like, say, food stamps, but the average voter does not perceive them in the same way, because the benefits have to be “earned” through labor.  In the same vein, Social Security and Medicare are essential parts of the welfare state, not private insurance programs, but because the elderly have paid into the system for years, they feel entitled to payments that are typically in excess of what they would have earned from an insurance program even though, from a legal perspective, they have no property rights to any of the funds in the system.

So the key to creating a politically successful welfare state program is to hide its true nature.  That is where Obamacare failed;  the public correctly viewed it as an attempt to redistribute wealth.