Normative Narratives

Category Archives: Economic Outlook

Global current events through a political economy lens. Present by Yours truly


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Inflation Reduction Act? How Can Spending Be Disinflationary?!

Well a couple of ways, but first, a quick primer on whats been going on with prices lately

Overall, inflation is a function of aggregate demand (henceforth referred to as “demand”) and aggregate supply (“supply”). Demand is the sum of Personal Consumption (C), Investment (I), Government Spending (G), and Net Int’l Trade (Exports – Imports). Supply is all the goods and service producers can supply, a function of the cost of labor (wages) and various inputs (materials, energy, etc.). Consumption accounts for by far the largest portion of the U.S. economy, roughly 70% of demand. Different markets, both in different areas and for different goods or services, realize different inflation rates (some markedly so). To keep things relatively simple, for now lets just consider overall price levels.

Early in the pandemic, savings increased (for many) due to a combination of stimulus money and restrictions on many things people typically spend disposable income on. Once vaccines came out and the economy reopened, people were flush with cash (demand increased), but supply chain issues, global events (Russia-Ukraine War, China’s Zero-Covid policy), and shortages of workers (as COVID reoriented people’s calculus on what they are willing to do and for how much), caused input shortages and increased costs for producers, some of which were passed on to customers in the form of higher prices.

Hindsight is 20/20 as to whether the government “spent too much” during COVID. In the decades preceding the pandemic, increases in demand had been absorbed by a private sector eager to increase supply in order to reap greater profits, with little impact on inflation; globalization created a seemingly endless supply of “stuff” in wealthy countries like America. It was reasonable, if ultimately wrong, to use the models of recent history to forecast what would happen going forward. Early in the pandemic the primary focus was on shoring up demand and reducing personal hardship, which is why the CARES act and subsequent extensions of enhanced unemployment insurance (UI) benefits passed with bipartisan support–inflation simply wasn’t on most lawmakers’ radars.

If the Democrats made a unilateral mistake, it was parts of their American Rescue Plan (ARP)–stimulus checks and extending enhanced UI benefits–that were no doubt politically popular at the time but may have fueled inflation by increasing demand at a time the economy couldn’t absorb it. Some parts of the ARP, particularly the expanded child tax credit and aid to state and local governments, were needed (the latter likely had little impact on inflation; more on that in a moment when we discuss the “multiplier”.) But it is fair to say that Democrats may have overreached with some aspects of the ARP.

I have focused on fiscal policy (spending) because that is the primary story with respect to inflation right now. Yes, the Fed can also impact prices by increasing interest rates (lowering consumption and business spending.) But raising rates comes at a cost to the labor market, one which the Fed didn’t want to take in 2021 when full employment seemed like the more pressing of its dual mandates (and inflation was seen as being transitory.) Furthermore, real consumption has returned to be more-or-less in line with what it would have been if COVID never happened, meaning right now inflation is primarily due to the supply-side factors noted earlier, which the Fed has little power to affect regardless of how much it chokes off growth by raising interest rates.

Not all fiscal policy is equal, that’s on purpose

Not all government spending is equal in its intended goals (obviously, specific programs are sold to the public to address specific needs.) Less obviously, not all spending is equal in its impact on inflation. The extent to which government spending impacts demand (and therefore inflation) is known as the “multiplier”–how much each dollar of government spending increases economic output.

The exact multiplier for a policy is never truly known, there are too many variables to perfectly tease it out in the short run, let alone over time. Generally speaking the multiplier is a function of how much spending affects personal consumption, which as mentioned before makes up about 70% of U.S. GDP and is the surest route to short-term economic impact.

Fiscal policy can be predominantly “counter-cyclical”, directly targeting short-term consumption and business spending. Examples include COVID era spending policies like stimulus checks, enhanced UI benefits, and the Payroll Protection Program, or tax cuts (like the Bush era tax cuts, and a surprisingly large portion of Obama’s post-Great Recession stimulus package.)

These policies main goal is to have a high multiplier–they leverage government money to try to increase demand at a time when the private sector is pulling back (hence “counter-cyclical”.) Normally, as demand rises, businesses hire more people to meet that demand (increasing supply by adding jobs), starting a virtuous cycle of growth in the economy; it goes without saying that the past two and a half years have not been normal times in any sense, including economically.

Alternatively, fiscal policy can be predominantly structural–aimed at addressing the root causes of poverty or other structural inequalities or deficiencies in society. These policies also increase demand by increasing government spending, but their multiplier is lower than counter-cyclical “stimulus spending” because the money is going to longer-term investments in public goods and human capital, not to putting money in people’s pockets to consume more now.

So when is fiscal policy disinflationary?

Fiscal policies that increase demand typically aren’t disinflationary in the short run, but they can have essentially no impact on inflation depending on their multiplier. In the long run, some types fiscal policy can be quite disinflationary.

The Inflation Reduction Act is disinflationary for a straightforward reason–it actually lowers demand, with more tax revenue being raised than money spent. It will also help bring down the cost of prescription drugs by allowing Medicaid to negotiate directly with pharmaceutical companies.

The infrastructure bill is disinflationary in the long run because it will make us more productive. Investments in concrete infrastructure and ports will help people and products get where they’re going quickly and safely. Replacing lead waterpipes will lead to less stunted cognitive development in our youth. Investing in broadband will help bridge the “digital divide” that cuts many poorer and rural people out of the 21st century economy. The bill had a negligible impact on inflation in the short run (notice no large increase in real GDP from before it was passed in Q3 2021 till now) despite injecting a large amount of government money into the economy ($550 billion in new spending), because the money is being disbursed over a longer period of time and isn’t going directly into people’s pockets.

Even after passing the infrastructure bill, the Inflation Reduction Act, and the China-countering Chips and Science Act, many parts of “Build Back Better” (BBB) still need to be passed. 17 Nobel prize winning economists signed a letter saying that, in addition to its primary benefits, BBB would “ease longer-term inflationary pressures” despite its huge price tag. Specifically, investments in affordable childcare and universal pre-K would bring down the cost of childcare and bring caretakers back into the labor market, increasing the supply of labor and easing pressure on wages. More seats at community colleges and apprenticeships would create alternate paths to gainful employment, increasing productivity, reducing student loan debt, and driving down the cost of a four year degree. Allowing anyone to buy into a Medicaid “public option” would inject competition into the health insurance market, lowering prices. These are exactly the “kitchen table” economic policies that Democrats (and ideally some Republicans) should campaign on in 2022 and ’24.

Lawmakers should also embrace the concept of “supply-side progressivism”, another example of spending that can reduce inflation (note that it complements and synergizes with the more traditional approach of providing financial support to poorer people, it does not replace it.) Supply-side progressivism means the government actually creates the things the private sector does not supply enough of affordably. By taking ownership the government removes the need to make a profit, making the product more affordable (like Medicaid vs. private insurance.) Generally speaking profitability is of course desirable, but some markets supply things that are so important for society and the economy that affordable access is more important than profits. Removing the need to profit, and directly increasing supply, can greatly reduce price pressure in imperfect markets.

Most markets function well in the U.S. and require minimal intervention, but not all of them. Some markets, particularly those for necessities, deviate greatly from the textbook concept of “perfect competition”, and thus are prime candidates for supply-side progressivism. Housing, higher education, healthcare, and childcare–all areas where price increases have far outstripped overall inflation in recent history–are good places to start. Looking at how prices have increased for these things over the past four decades; consider the cost that has imposed on all Americans (particularly the poor), and the strain it has put on the federal budget. Clearly the status quo isn’t working.

(Value = % change since July 1982. For example, tuition, fees, and childcare have increased 926.94% over the last 40 years, compared to a 302.84% increase for all items)

Don’t get me wrong, college is still a good investment for those who graduate from a good school with a degree. But the ability to get into a good school–and then remain in until completion–has increasingly become a function of family wealth. Of course there will always be anecdotal examples of social mobility in a country as large and advanced as America, but on a macro level the “American Dream” is no longer attainable for most.

The Inflation Reduction Act, and any future spending proposed to address structural deficiencies in our society, will be attacked as reckless–“Spending?! With inflation as high as it is!” This is a gross oversimplification. For one, there are reasons to believe inflation has already peaked and will start to come down in the coming months. But more generally speaking, some types of spending–the types America has sorely needed for decades–would have little impact on inflation in the short run, and actually reduce it in the long run (in addition to all of its other primary benefits.)


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Human Rights, “Enabling Rights”, and Biden’s Plans

During my internship with the United Nations Development Program in 2013, I had the pleasure of working on the “post-2015 development agenda”. This was the consultative process which eventually yielded the “Sustainable Development Goals” (SDGs), the successor to the Millennium Development Goals (MDGs) and guiding principles for achieving “sustainable human development” through a “human rights based approach to development“.

The “human” in “sustainable human development” is often left out, but it is an important component. Sustainable human development is not just about basic infrastructure, healthcare, education and environmental protection, it is also about how you get there. To be truly sustainable, development cannot be due to an autocrats benevolence, which can be taken away at a moments notice. It must also make space for civil and political rights so disputes to be resolved peacefully, not brutally suppressed and whitewashed by a propaganda machine.

In the developing world, civil and political rights are considered “participatory” or “enabling” rights, in that they enable people to claim other rights (economic, social, cultural) and peacefully resolve disputes through representative government. The absence of this priority explains why well intended and reasonably well funded development efforts in the past, such as the MDGs, have failed to live up to their promise–simply put, due to poor governance and corruption. SDG #16, promoting “peace, justice and strong [accountable and inclusive] institutions” represents the biggest shift from the MDGs to the SDGs.

American democracy, as flawed as it is, is still democracy; American’s, by and large, already enjoy the civil and political enabling rights missing in much of the developing world. America is the type of place people around the world would, and do, risk their lives to live in. Part of this is due to our relative wealth, yes, but the value of our freedoms (and their supporting institutions, such as an independent media and judicial system) are not lost on those who have experienced the alternative. Sadly, that affliction only seems to affect people blessed to have known nothing else.

In America more people don’t vote due to apathy, misinformation, or being too busy scraping by in our flawed economic system than due to disenfranchisement. This is not to say that our electoral system is not also in need of reform–more on that in a moment–but those issues can be overcome with concerted effort. Indeed they were in 2020; voter turnout increased dramatically, delivering a small window to push through many long needed reforms. Will this increase in turnout be an aberration or trend? Much of that depends on how well Biden and the Democratic Party deliver right now.

Because of our extreme worship of money in America, economic rights have become our enabling rights. I am not saying that this is right or good, but when going into battle it is always good to know the lay of the land. Expanding economic opportunity will naturally lead to more equitable economic outcomes and, by extension, help secure other non-economic justices and freedoms. Wealth buys better treatment in our legal system and better healthcare, it enables people to invest enough in themselves to build fulfilling careers, to take risks, to be entrepreneurial, and to live in good neighborhoods and otherwise invest in their children’s futures.

Biden’s plans, by jump-starting the process of wealth accumulation as the government did for white Americans in the mid 20th century, would act not just as a floor beneath which our most vulnerable could not fall, but also as a trampoline for them and their children to reach even higher. In other words these plans would enable people to claim other rights through our market economy, just as political and civil rights in the developing world do through democratic governance. This is not wishful thinking, it is how America already works for its wealthier residents.

Biden’s proposals operate under the framework of “targeted universalism“. By considering how historic disparities and systemic racism still impact outcomes today, and providing more support to historically marginalized groups to help them catch up as we invest in all Americans, Biden’s plans have the ability to make sure future American growth is broad-based and inclusive, reaching groups who often fail to see politicians’ promises materialize. The most obvious example is closing the racial wealth gap by correcting for historic discrimination in housing policy (as home ownership is the largest source of wealth in America), but there are many other examples in Biden’s proposals, such as investing in HBCUs alongside community colleges.

With the fairer economic system that would result from passing Biden’s proposals, cultural divisions would ultimately take on less importance because they would seem less existential, aiding in the fights for civil rights legislation to empower marginalized communities. By proving democracy can still deliver for the American people, Biden’s plans would help sustain higher voter turnout, helping to offset any regressive electoral laws the GOP may pass. On the global stage, nothing better promotes democratic governance than an American system that works.

Of course voting rights are still an issue, and our electoral system as it currently stands is an impediment to a more sustainably progressive America. Geographic realities have enabled gerrymandering and the structure of the Senate to completely bastardize the central democratic concept of “one person, one vote”. Hopefully the Democrats can carve out a filibuster-proof process for voting rights laws, in which case they would immediately become a top policy priority, but up to this point it has not been able to do so.

I hate to be fatalistic, but we simply will not get to the 60 Senate votes needed right now to meaningfully address priority areas that cannot be addressed through reconciliation (anything that isn’t budgetary or spending related in nature, mainly voting rights, immigration reform, or criminal justice reform.) To the contrary the GOP is doubling down on Trumpism, relying on misinformation to drum up fear about these issues as its economic platform becomes increasingly less popular. While Democrats at the national level should voice their support for such reforms, and put GOP lawmakers on the record for their regressive stances, these are fights that will need to be fought mainly at the state and local level and in the courts for now.

So while Biden tries to work with the GOP, which will assuredly come back with inadequate counter-proposals, he should not scale back his plans in the name of bipartisanship or waste too much of this precious window to act before the 2022 midterm elections. Nowadays infrastructure goes beyond pouring concrete, and creating a system that works for working-class Americans is long overdue. Moderate Democratic Senators like Joe Manchin (WV), Krysten Sinema (AZ) and Jon Tester (MT) should know this–their constituents sure do! As Democratic Senators they should also know that since the Great Recession, the field of economics has moved decidedly to the left on how much can be financed responsibly through deficit spending.

Lawmakers and people making up the progressive, liberal, and the centrist wings of the Democratic party must acknowledge exactly what Biden’s plans would mean for America if passed, and remain united in seeing them through. Splintering the party’s focus to pursue reconciliation-proof “woke” legislation is exactly what the GOP wants; as a general rule, it is a good idea not to do what your opposition wants you to.

Failure to pass Biden’s proposals would not only forgo important enabling economic rights, it would put other noble pursuits further out of reach. Ultimately it risks the further erosion of American Democracy by naturally lowering voter turnout through disillusionment and apathy. Nothing is more important right now than passing Biden’s plans. If, as a progressive, you think something else is, think of them as an attainable means to your more preferred ends.

In a perfect world all human rights–economic, political, civil, social, and cultural–would be promoted at all times. This is not a perfect world, and America is not a perfect democracy. Securing economic rights is foundational and feasible right now through reconciliation, and doing so would change the political and cultural landscape in ways that would help secure other rights going forward.


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“The Beast” Has Been Starved, Long Live The Beast!

Starving the Beast

What is “The Beast”, and How to Starve It

Starve the beast is the long running small government belief of the GOP that if you deprive the government of tax revenue, it will be forced to cut spending. 

This theory has generally been disproven–despite concerns about “socialism”, social programs tend to be popular once enacted. Instead of starving the beast, when taxes are cut the deficit and national debt get larger as “the beast” continues to grow.

So what is a small government ideologue to do? How can one starve the beast in such a world?

Unlike the Federal government (the main “beast”), most state and local governments cannot run deficits. They are designed to have balanced budgets, which can be a problem when projected tax revenues fall short and expenses unexpectedly rise (like, say, during a once in a lifetime pandemic).

Congress must pass some sort of meaningful state and local government aid package. These governments employ about 13% of all payroll workers in the country. Many of the public servants they employ work jobs providing a broad array social services to the least well off, and their budgets fund non-profits that do the same. They pay for first responders, teachers and schooling, not to mention all the extra costs associated with safely getting kids back in the classroom whenever that happens. 

Don’t give me that tired line about “bailing out” mismanaged states. With careful wording Congress can address legitimate needs without bailing out states from any pre-COVID budgetary issues; it is ideology and partisan saber rattling holding back this aid, not any concern for economic justice or moral hazard. The economic recovery will lag, and poverty will be exacerbated, if state and local governments slash their payrolls and services at a time when both are needed more than ever. 

Another way to “starve the beast” is to go after programs that are funded through specific “trust funds”, like Social Security and Medicare. These programs are funded through payroll taxes, so cutting the payroll tax could effectively starve that portion of the beast. Even though it likely wouldn’t lead to cuts to these popular programs, the legislative fight to reallocate money for them would present the GOP with an opportunity to push for cuts to other important programs.   

So where do we find ourselves now? In the middle of a manufactured fiscal crisis on top of a terrible recession and pandemic. The Democrats passed a bill 3 months ago in preparation for this, but the GOP has neither passed a bill nor negotiated from the Democrats starting point.

So what was the GOPs response? First, to wait until the last second to even try to start developing out a solution. Then to balk at providing state and local governments the aid they need, despite decades of empty rhetoric about how state governments are best positioned to meet the needs of their people. From the Trump administration the plan is to suspend the payroll tax that funds Social Security and Medicare (an idea he’s been floating since March that no one in his own party even wants), and further strain state budgets by asking them to foot part of enhanced UI benefits.

Taken together the GOPs plan was to cynically try to blame the Democrats for not having a deal in place, while starving whatever “beasts” they could.  

The COVID Spotlight

The corona virus has brought the structural inequalities of America to the forefront. Poorer people and persons of color were more likely to lose their jobs and be exposed to and die from the disease due to interrelated factors such as occupation, income, wealth, underlying health conditions and access to medical care.

People have rightfully been critical of the Trump administration’s response to the corona virus, but these issues are different in that they all predate the pandemic. In order to address them, two things are needed:

  1. An economic system that does a better job of promoting equality of opportunity by providing or making affordable the bare minimum needed for people to reach their cognitive potential (early childhood development programs, universal pre-K), care for themselves when they are sick, and receive the education and job training needed to live a life of dignity and meaning.

    We also need a plan to address structural racism, as history and current systems have left persons of color at a disadvantage relative to their white counterparts (perhaps most simply visualized by racial wealth inequality, even when controlling for income). Call this the “Thurgood Marshall plan”.

    Despite what Trump says, racism will not fix itself with economic growth. For too long that lie has been told, as people of color have been “last hired, first fired” recession after recession. If only the expansion had lasted just a bit longer, Trump says, we would’ve achieved economic and racial justice. Don’t point to relatively low black unemployment and poverty rates pre-COVID as proof Trump is right, those metrics obscure the inequality of opportunity and often times insurmountable headwinds facing America’s least well off.

    Being employed and not in poverty are bare minimums, not high-water marks to be celebrated when finally achieved for a brief moment at tail end of the longest economic expansion in American history. The idea that we may get back to that point 10 years from now should not excite anyone–structural changes are needed.

  2. A stronger social safety net, for those who need temporary support when they are down on their luck (or when something completely outside their control, like a global pandemic, uproots their life).

    On a macro level such programs temper economic downturns and prevent poverty from spiking during them. The recent expiration of enhanced UI benefits without any plan in place with have a negative impact on both these fronts. 

As the past few months have laid bare, a lot of work remains to be done. As comedian John Oliver put it:

“There is no better argument for a permanent welfare state then watching the government desperately trying to build one when it’s already too late. Because make no mistake, the real test here isn’t whether or not our country will get through this, it will. The question is how we get through this, and what kind of country we want to be on the other side…”

Trying to build an adequate safety net from scratch has led to some truly remarkable inefficiencies in our response, from unemployment claim backlogs to small business and hospital aid flowing to undeserving wealthy interests, to outright fraud. In other words, America paid a premium for slapping things together at the last second.

Creating a more just economic system is a more difficult undertaking, but ultimately even more important. In addition to creating a fairer society, getting that right would lead to more long term economic growth as a larger pool of innovators and entrepreneurs reach their potential. It would also lead to savings in our criminal justice system, poverty reduction efforts, mental healthcare, and other “safety net” programs, as fewer people would be reliant on them. To quote Fredrick Douglass, “it is easier to build strong children than to repair broken men”.

In other words America has long been paying the price for our structural inequalities. These costs have just been unfairly ascribed to the very people weighed down by the systems that have failed them, in the largest scale example of victim blaming you will ever see.

Feeding The Beast

Both of these undertakings–building a more just society and a stronger safety net–require not only political will but also large sums of money. America was already heavily indebted before it devoted almost $3 trillion to “managing” the COVID outbreak (if you want to call what the Trump administration has done “managing”). Then there is the stalled stimulus bill that will ultimately need to be passed in some form or another, which will probably settle around $2 trillion. 

Believe it or not, none of this spending is actually an economic recovery plan (think jobs programs, infrastructure spending), which itself will also likely be in the trillions. All this spending needed to address a bungled COVID-19 response, combined with the GOPs tax reform bill that is projected to reduce tax revenue by over $1 trillion over the next decade and unresolved long-term structural issues funding Social Security and Medicaid, and America’s fiscal outlook is bleak. 

But there is hope. We can pay for the many demands Americans have on their governments. After all our governments are not beasts to be starved, but rather the most important institutions we have in promoting the twin goals of justice and economic dynamism. 

The good news is that the GOPs unpopular tax reforms can be undone, and “tax justice”–raising enough revenue to pay for the programs society needs–can be achieved. But it will take an administration that believes in both the ability of government programs to improve people’s lives and in international coordination on tax dodging (because of how easily money can be moved around the world these days). These are two things the Trump Administration is diametrically opposed to.

Because this is a global pandemic, governments around the world find themselves in the same boat–with the demands of their people far outstripping their current abilities to bring in tax revenue. Debt levels have exploded as spending increases and tax revenues shrink. This presents a unique opportunity to engage in truly meaningful action against “base erosion and tax avoidance” (BEDS), one that must not be wasted. Outliers must be treated like pariahs; the global community needs to sanction them until it is proven that white collar crime doesn’t pay.

It may be odd to hear me say it, but generally speaking now is not the time to be raising taxes. At any given moment appropriate fiscal policy is context sensitive and “counter-cyclical“. This is exactly what all this stimulus spending now is for (to prop up the economy during a deep recession), and another reason why the GOPs tax bill was not only regressive but unnecessary (stimulus mostly for the rich during an economic boom). 

But if we try to raise taxes now, when we are beginning what is likely to be a prolonged global recession, it could choke off any recovery we might otherwise realize. This is less true of tax reforms that target the wealthy, or just funding the IRS enough to effectively audit wealthy dodgers, but generally speaking this is not the time to be raising taxes, particularly on small and medium sized businesses. 

This absolutely does not mean there aren’t meaningful steps to take on taxation. Now is when America must do the heavy lifting of leading the global effort to setup a tax framework that works for the 21st Century by plugging up all the holes. If we can accomplish this difficult task it will be relatively easy to raise not just the statutory tax rate (what the tax code says), but more importantly the effective tax rate (what is actually paid), when the time is right.

 


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The Progressive Case For More Moderate Policies

If President Trump has had any positive effect on American politics, it’s that people are more engaged than ever. Think about it, when was the last time you heard that lazy complaint that “both parties are the same”?

Not only are the parties not the same, there are big differences within at least one of them. The GOP has become the party of Trump, but significant philosophical and policy differences exist within the Democratic Party. There are “progressives” like Warren and Sanders, “moderates” like Buttigeg, Biden and Klobuchar, and even an outsider-entrepreneur-populist in Andrew Yang.

When considering an ideal platform to run on, I am not talking about my personal preferences, or what may play well in politically uncompetitive parts of the country. Rather I am talking about two things:

  1. What best addresses the nation’s needs;
  2. What is most likely to appeal to independents and moderates, whose turnout and swing votes could be the determining factors in the 2020 election (electability).

Admittedly, “what best addresses the nation’s needs”, is opinion. In the next section I will defend my opinion that more moderate policies, and more of them, best addresses the nation’s needs. What is most likely to appeal to swing voters, however, is not opinion–it is moderate policies. This is common sense, strongly backed by a recent New York Times analysis of undecided voters:

“These potentially persuadable voters are divided on major issues like single-payer health care, immigration and taxes. But they are fairly clear about what they would like from a Democrat. They prefer, by 82 percent to 11 percent, one who promises to find common ground over one who promises to fight for a progressive agenda; and they prefer a moderate over a liberal, 75 percent to 19 percent.”

Making America Greater Than It’s Ever Been

After decades of inadequately investing in most Americans, many changes are needed to bring some semblance of equality of opportunity to this country.

Progressive Democrats focus on free college and healthcare, but economic opportunity goes beyond free or affordable versions of these things. It is not just healthcare and higher education reform that are needed, but also: early childhood development initiatives, investments in worker (re)training and apprenticeships, addressing student loan debt, a major infrastructure plan, an ambitious green economy plan, and perhaps the beginnings of a Federal work guarantee program (which is the real solution to automation). In other words, a realistic version of the Green New Deal.

By embracing more middle-of-the-road policies to address healthcare and college tuition costs, there is more fiscal space and political capital to spend on these other priorities. Lets consider the big ticket plans, as well as their more moderate alternatives:

“Medicare for All” vs. the “Public Option”

  • People will argue that Medicare for All is “socialism”, that it is “European”, not “American”. Yes, these are dumb arguments, unfortunately that does not matter when a large portion of the country believes them.
  • The public option–letting anyone who wants to buy into Medicare do so–on the other hand, embraces two core American values–choice and competition. It simply provides, as the name implies, an option.
    • As with the ACA, subsidies would be provided for people depending on their income.
  • One of the main reasons the ACA is less effective than it could be (aside from constantly being undermined by the GOP) is lack of providers in many areas.
  • There is more support for a public option than Medicare for all, and the gap is widening.
  • The public option is, of course, less expensive (by varying amounts, depending on the details of the plan).

Even Senator Warren’s path to “Medicare for All” is essentially just passing a public option at first, and then trying to pass a single payer health insurance law at a later date.

Free College Tuition vs. Free Community College

If someone knows they want to go to college, and is committed to seeing it through to degree completion, they should be encouraged and enabled to do so. The data shows that the higher your education level, the more you earn and the more likely you are to be employed. However, nothing good comes from a recent high school grad taking out a loan for a program they have no intention of completing, because they have been convinced that doing anything else would be a mistake.

  • Most student loan debt is driven by people attending for-profit colleges for a semester or two and then dropping out. Without the earnings bump one realizes from getting a degree, they find themselves stuck in debt.
  • We have all heard horror stories of people graduating with 6 figure debt, but these people are the loud minority of student loan debtors, and will likely be able to pay that debt off in the future.
    • For those who pursued or want to pursue expensive degrees in order to work for the social good, there are programs to help them pay down their debt (programs which can be expanded).
  • After years of conventional wisdom unwisely saying “everyone should get a degree”, the downsides of such thinking have become apparent; the decreased value of a bachelor’s degree (as they become much more common), and the increased cost (as more demand drives up prices).
  • Free Community College allows unsure young adults see if a bachelor’s degree is for them, or whether they want to go another route, without the burden of student loan debt.
    • State’s public higher education systems need to create as seamless a transition as possible from their associate’s to bachelor’s degree programs. By doing so, they would effectively be cutting the cost of a bachelor’s degree in half.
    • Some people do not want or need to pursue a bachelor’s degree, and that’s OK! This is not evidence of some moral or cognitive deficiency, nor is it a sentence to a life of poverty. We as a society need to better promote the alternatives, meaning;
    • High Schools, Community Colleges, and businesses need to provide more vocational training and apprenticeship opportunities, particularly since these jobs are projected to grow and more young Americans are beginning to show interest in them.
  • As with the public option, providing free community college would be significantly cheaper than making all public college tuition free.

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Should any “moderate” plan be fully implemented, America would be immeasurably more progressive than it is today. All the progressives out there, if they truly care about social progress, should be out celebrating in the streets if a public option or free community college ever become the law of the land.

Progressive Taxation

Because bigger ticket plans are so expensive, progressive candidates have had to become innovative on taxation, most notably by proposing a wealth tax. There are also more familiar ideas to increase tax revenues, such as increasing higher end income and corporate tax rates, raising the capital gains tax, and introducing a value added tax. Then there is also adequately funding the IRS, so it can better enforce tax law.

Every other wealthy country in the world generates more tax revenue relative to its GDP than the U.S. Despite what Trump may say, I am not comparing the U.S. to socialist countries with failed states; these are the G7–literally the 6 wealthiest countries in the world after after the U.S.

Source: OECD

Note this chart ends at 2017; the U.S. figure is probably about 1% lower for 2018 after the GOP passed it’s new tax bill. That might not sound like much, but remember 1% of the $20 trillion dollar U.S. economy is about $200 billion dollars.

Doing a very rough back-of-the-napkin calculation, if the U.S. collected at the G7 average, it would easily bring in 1.5 trillion more tax dollars per year. I don’t care if your priority is reducing poverty, environmental protection, building up our military, providing better services to veterans, paying down the debt (so that interest payments don’t become the next big taxpayer expense) or literally anything else, we should all be able to agree as a nation that we are leaving too much tax revenue on the table.

Moderate Democrats must also embrace more progressive taxation. For one, it hits on the widespread belief that the wealthy do not pay their fair share of taxes. Furthermore, if a candidate wants to propose a buffet of policies instead of a few main courses, it will still cost a lot of money. Being a moderate Democrat shouldn’t necessarily mean spending less, but rather spending differently. To do this responsibly still requires embracing much more progressive taxation. 

The Uneven Political Playing Field

Due to a number of factors (Gerrymandering in the House, less populous states being disproportionately represented in the Senate, the Electoral College), Trump’s GOP does not need to win national popular support to stay in power. Instead it will double down on lies, partisan attacks and other scare tactics to try to rile up its base.

The Democratic party cannot play this game. While Democrats have to be tough on Trump, they also have to try to appeal to some conservative voters. If the Democratic Party tries a mirror approach, appealing primarily to extreme progressives while ignoring moderate Democrats, conservatives and independents, all it will accomplish is breaking its own 2016 record of winning the popular vote by the largest margin in history while losing the Presidency.

Think about it, people who support the most progressive policies tend to be clustered in big cities–cities that already vote Democratic. Increasing turnout of this voting block would have less of an effect on the election than one may think.

Thanks to his words and actions, Trump has put previously uncompetitive areas in play–the so called “suburban slide” in the south. The Democratic party must seize on this opportunity and try to appeal to these voters. The party’s progressive wing should not punish it for playing smart politics; as the past three years have shown, the stakes are too high.

A New New Deal

Maybe I am wrong. Maybe absent grand policies like “Medicare for All”, “Free College”, or “$1,000 a month for everyone”, the excitement just isn’t there for any Democratic candidate and Trump wins again. Maybe most voters don’t have the capacity or desire to consider a platform that addresses the issues facing this nation with targeted policies.

Or maybe people do want that type of platform, but don’t think politicians can actually deliver it. This is a much more reasonable argument; the Federal government hasn’t been particularly effective in recent history, and it is easier to pass two bills than five.

To this I say that, in America, fatalism is self-fulfilling. If we say, “we can’t pass those bills”, and don’t even try, then we certainly we won’t pass them. If we say “we can’t tax the rich, they’ll just dodge it”, then that becomes the reality (as it has already begun to be).

Yes, there will be difficulties along the way–there always are when taking on wealthy interests. Globalization has made tax evasion more difficult to police. Today’s hyper-partisan political environment has made it harder to pass legislation that actually reflects the will of the vast majority of Americans across the political spectrum. BUT WE MUST TRY. To quote FDR:

“The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it; if it fails, admit it frankly and try another. But above all, try something. The millions who are in want will not stand by silently forever while the things to satisfy their needs are within easy reach.”

American democracy has driven some truly incredible advances in human progress and social fairness in the past, and there is nothing structurally stopping it from doing so again. The New Deal, which today’s Democratic party seems to want to emulate, was itself a large package of targeted policies addressing specific needs.

More moderate policies, and more of them, has been and continues to be the right approach to addressing the many challenges facing our nation. It also happens to be the more broadly popular–and therefore electable–platform. Whether a candidate with such a platform can make it through the 2020 Democratic presidential primaries, however, remains to be seen.


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America’s Choice: Winner-Take-All or Social Democracy

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The 2018 midterm elections, which saw significant gains for the Democratic Party, were in many ways a rejection of President Trump’s policies and worldview. But while the American people seemingly know what we don’t want, do we know what we do want? Those are the questions to be answered leading up to and by the 2020 elections, campaigning for which is already underway.

Ultimately we cannot have the “economic populism” many Americans across the political spectrum seem to want with our current tax code. Insufficient tax revenue means the government cannot provide what is needed to develop the next generation of Americans while simultaneously addressing more immediate concerns. In order to fulfill these two key responsibilities of governing, it is time to seriously consider ideas that have, for a while, been outside of mainstream political discourse.

One such idea is that taxes can be significantly higher at higher income levels. The vast majority of Americans believe that the wealthy and corporations do not pay their fair share of taxes (and these survey results are from before the new GOP tax code went into effect, which even further reduced taxes for the wealthy and corporations).

Alexandria Ocasio-Cortez has recently brought this idea to the forefront, proposing top income tax rates upwards of 70%. Nobel prize winners have said optimal rates may be as high as 80+%. I do not know what a politically viable top rate is, that’s for the American people to decide. I do know that it should be significantly higher than it is today.

Here are three things to consider regarding taxes in America:

  1. Marginal Income Tax Rates

    Whatever tax brackets we choose to have, they will work within the marginal tax rate system we currently use. What are marginal tax rates you ask? Well, imagine there are 3 tax brackets:

    10% for those making > $10,000
    20% for those making $10,000-$100,000
    30% for those making > $100,000

    If I got a raise from $90,000 to $110,000, only the $10,000 over 100,000 would be taxed at 30%. Dollars 1-9,999 would still be taxed at 10%, and dollars 10,000 – 100,000 would still be taxed at 20%. My income would not all now be taxed at the highest rate, only the amount over that top bracket threshold.

    The idea that people will work less hard because of higher marginal rates is silly–people typically can’t control their earnings that much (without the help of high priced accountants at least). Your average American works as hard as they can in hopes of earning as much as they can–they do not calibrate their level of effort based on what is typically a small tax increase that results from entering a higher bracket.

    Now having high marginal tax rates is admittedly harder in a globalized world than it was in the mid 20th century, because people can move themselves and their money around much more easily today. Having said that, and feel free call me a “homer” if you like, but I think that America is pretty unique and special place. If our leaders prioritized curtailing tax avoidance by coordinating with other countries and international organizations, I believe that people would still choose to live, operate businesses, and park their wealth here even if we had higher tax rates.

    In other words, if the choice was pay your fair share or leave, I believe that most wealthy people would choose to pay their fair share.

  2. Income as a Measure of Hard Work, and Inequality in the Age of Globalization

    Think about entrepreneurs in the 1950s. They brought their products mainly to domestic markets, which relied primarily on domestic infrastructure, court systems, and public goods to function. At the time, the government was able to provide these goods without running huge deficits, in large part by adequately taxing the rich.

    Now think about entrepreneurs in the 2010s. They bring their products to a global market. If it’s a popular product, global capital chases it, expanding operations and profits. Maybe they decide to sell their company to foreign firm for a huge pay day.

    The 1950s millionaire entrepreneur can easily be today’s billionaire. Does today’s billionaire work that much harder? Generally speaking, not really–both work(ed) very hard, and there are only so many hours in a day. The same is true of today’s business executives versus those of decades past. Today’s greater earnings, rather, are largely an effect of the global economy we operate in, not harder work–there are billions of potential customers out there instead of millions.

    The global economic system is expensive to maintain. Today the U.S. government needs to not only finance domestic infrastructure and institutions, it also has to help finance international institutions and (perhaps most importantly and expensively) global defense.

    The U.S., as a global leader, naturally pays a large portion of this global economic infrastructure. While it is impossible to quantify piece-by-piece, overall this is a good deal for Americans–just look at the world as it currently is as proof! America is leading the way in almost all macroeconomic metrics (despite what Trump may say about us getting “taken advantage of”, “losing”, or “not being respected”).

    Where America is lacking is in social cohesion, social mobility, and general optimism and happiness. This is not an accident, but rather a feature of our current winner-take-all economic system. This is not just a liberal “bleeding heart” speaking, just ask Fox News host Tucker Carlson.

    It is not difficult to understand the anger of Americans displaced by globalization. Over the past few decades, middle class workers have seen their incomes stagnate, even as their productivity has risen. Why should the wealthy see gains well beyond their hard work, while the average person doesn’t even see the gains their work should rightfully earn them?

    Wealth did not trickle-down as promised (no surprise there, it never does). People who could not afford the increasingly expensive baseline goods needed take advantage of the global economy (early childhood development, higher education, job [re]training) became disgruntled, believing politicians from neither party cared about them. They then went out and voted for any “outsider” offering simple solutions to complex problems, and we ended up with President Trump.

    The truth is that America’s economy has become unfair. In order to restore that fairness we need to provide certain public goods–like affordable (if not free) higher education and healthcare. In order to provide these things, we need more tax revenue, and that tax revenue has to come from the ever-wealthier wealthiest Americans.

    There are many types of taxes, aside from income tax, that are also in play. Some are currently part of the U.S. tax code, while others are not. Examples include corporate taxes, capital gains taxes, financial transaction taxes, carbon taxes, estate taxes, sales taxes and gasoline taxes. 2020 Democratic Presidential candidate Elizabeth Warren has proposed a first-of-its-kind-in-America wealth tax, which has certainly gotten people’s attention.

    Some of these taxes fall mostly on the rich, while others hit everyone. This is an important consideration when trying to address inequality through the tax code. There are also countless tax loopholes, some of which are useful but many of which should be closed.

    The appropriate top marginal income tax rate is a function of the overall tax code.

  3. Adequately Fund and Reprioritize the IRS

    “The [budget] cuts are depleting the staff members who help ensure that taxpayers pay what they owe. As of last year, the IRS had 9,510 auditors. That’s down a third from 2010. The last time the IRS had fewer than 10,000 revenue agents was 1953, when the economy was a seventh of its current size…the IRS conducted 675,000 fewer audits in 2017 than it did in 2010, a drop in the audit rate of 42 percent. But even those stark numbers don’t tell the whole story, say current and former IRS employees: Auditors are stretched thin, and they’re often forced to limit their investigations and move on to the next audit as quickly as they can.

    Corporations and the wealthy are the biggest beneficiaries of the IRS’ decay. Most Americans’ interaction with the IRS is largely automated. But it takes specialized, well-trained personnel to audit a business or a billionaire or to unravel a tax scheme — and those employees are leaving in droves and taking their expertise with them. For the country’s largest corporations, the danger of being hit with a billion-dollar tax bill has greatly diminished. For the rich, who research shows evade taxes the most, the IRS has become less and less of a force to be feared.

    The story has been different for poor taxpayers. The IRS oversees one of the government’s largest anti-poverty programs, the earned income tax credit, which provides cash to the working poor. Under continued pressure from Republicans, the IRS has long made a priority of auditing people who receive that money, and as the IRS has shrunk, those audits have consumed even more resources, accounting for 36 percent of audits last year. The credit’s recipients — whose annual income is typically less than $20,000 — are now examined at rates similar to those who make $500,000 to $1 million a year. Only people with incomes above $1 million are examined much more frequently.

    [Former IRS Commissioner Koskinen, in testimony about the IRS budget] told the Senate, “I don’t know any organization in my 20 years of experience in the private sector that has said, ‘I think I’ll take my revenue operation and starve it for funds.’”

    The idea that a resource-strapped IRS is auditing EITC recipients instead of millionaires and multinational corporations is as absurd economically as it is cruel morally. No wonder most Americans hate the tax man and think the wealthy don’t pay their fair share–they are right.

Being a “Competitive Economy” Need Not Be a Race to the Bottom

A friend recently shared a Breitbart article about America being “the world’s most competitive economy”. While this is good news, it definitely needs some context.

First, America wasn’t a slouch before Trump; we placed 2nd, 3rd, and 3rd in 2017, 2016, and 2015 respectively. I don’t feel like going further back, but I’m sure we’ve never been low on this list.

Second, look at the countries right after us. “Singapore, Germany, Switzerland, and Japan [make up the rest of the] top five. The top ten includes the Netherlands, Hong Kong, the U.K., Sweden, and Denmark.”

These countries almost all have higher levels of taxation, stronger safety nets, and stronger worker protections than the U.S. Some were the “most competitive” countries in past years. A country does not have to “race to the bottom” in order to be competitive.

Being first on this list, as opposed to being second or third, really doesn’t gain us anything other than a nice headline. Companies do not decide where to build plants or hire employees based on “most competitive” indexes, they do it based on their complex internal calculus (cost of labor, cost of moving goods around their supply chain, level of employee expertise needed, infrastructure needs, tax rates, etc.). In some cases this will be the U.S., in others it will not, regardless of meaningless titles.

Jobs and the “Green New Deal”

I am actually a fan of how Trump uses his bully pulpit to make hiring American workers an important consideration for companies–I like his tough rhetoric here. While I am not a fan of protectionism in general, in some cases the credible threat of tariffs is needed in order to show these are not just empty words. This is particularly true when another country isn’t playing fair on trade, which is certainly the case in some instances.

The problem is that Trump gets headlines for the jobs his policies creates or keeps, but not for the ones they lose. For example, job losses have exceeded gains when it comes to iron and steel tariffs and solar panel manufacturing tariffs. Aside from jobs, there is also the increasing prices of imports to consider, which make up about 15% of U.S. GDP–the American consumer likes options, including ones made abroad.

As I have said before, Trump’s worldview is too zero-sum and short-term. Specifically, he views addressing climate change only as a cost (which he always inflates), and not an opportunity for the U.S. to be a leader in emerging industries. Unfortunately, due to the 2013 sequester budget cuts, the Bureau of Labor Statistics stopped tracking “Green Jobs”, making it much more difficult to quantify the benefits of being a leader in these emerging industries.

Take electric vehicles (EVs) for example. General Motors is begging Trump to support a Nationwide Zero Emissions Vehicle program, to no avail. It’s like private sector lobbyists always have Trump’s ear, unless they are promoting something environmentally friendly.

ev investments by country

Credit: Reuters

Over the next decade car companies will invest over $300 billion in EVs, with the largest chunk going to China due to government incentives (Germany is second, while the U.S. is a distant third). As you can see from the image above, Trump’s stance towards EVs has resulted in us leaving other countries investment dollars on the table. It’s like Trump always wants to be tough on China and promote investing in the U.S., unless it has to do with something “green”.

Meanwhile, over in Germany, the government is paving the way for Volkswagen to position itself as a future leader in EVs. In fact, Ford just announced a partnership with VW on EVs. American automakers now need to look abroad for support because our President won’t help them–sad. Hey, remember when Obama saved the U.S. auto industry just a decade ago? That was pretty cool, but I guess Trump wants to undo that part of Obama’s legacy as well…

Auto companies are starting to reach a 200,000 vehicle sale threshold that triggers a gradual elimination of consumer tax credits for buying electric vehicles. Under normal circumstances, either a Republic or Democratic President would seriously consider extending these credits. Instead, the Trump administration has signaled it wants to eliminate the credits altogether.

The shift to a global economy was done on the backs of the commoner–global wealth soared, but so did wealth inequality. “Yellow Vest” protests in France show that regular people will not let the next major shift–from a fossil fuel based economy to a “green economy”–be solely placed on their backs as again (and rightly so!). Rather, this shift will need to be part of an “all hands on deck” approach, with everyone (rich, poor, and all those in between) contributing their fair share towards a greener, fairer, and more dynamic economy. This is the spirit of the “Green New Deal”.

America’s Choice: Social Democracy vs. Unbridled Capitalism

“Supply-side” GOP economics has always relied on questionable math (“magic asterisks“), Trump is just faster and looser with the rules. To Trump, numbers (and the truth in general) are things to be manipulated to promote his agenda. Lies about the value of the Saudi Arabian arms deal, the costs of addressing climate change, and the costs of illegal immigration are prime examples of this.

It is amazing how a man who casts doubt on so many things he disagrees with can speak with such confidence about things that actually are uncertain, like economic outcomes. But then again, humility and honesty have never been Trump’s forte.

Living in a democracy, the shape of our economic system is a choice we collectively make. In American democracy the means justify the ends, as long as the debate is honest and people can make informed decisions. To date, the debate on the structure of our economic system has been anything but honest. Those supporting wealthy interests pretend that any tax increases would ruin our economy, while simultaneously painting any social program as communism.

A choice does not have to be made between having a competitive economy, an environmentally sustainable economy, and a fair economy that promotes equality of opportunity–that is a false trichotomy. We can have all of those things with the right mix of public policy, hard work, and American ingenuity.


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Bipartisanship and the 2018 Midterm Elections

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Ode to John McCain

I did not always agree with the late Senator John McCain on public policy, the most recent defense spending bill bearing his name being a case in point.

His integrity, however, should never be questioned. His willingness during his 2008 Presidential campaign to stand up to constituents who disrespected his opponent Barack Obama, despite the political ramifications, are prime examples of this integrity. How he bucked his party on certain important issues, such as the disastrous Obamacare “skinny repeal” vote, is further proof of his strength of character.

As a soldier and later as a legislator, John McCain was an American hero in every sense of the word. With the country as politically divided as it has been in decades, and our Congress seemingly populated with spineless representatives, we need him now more than ever. He is sorely missed.

From Partisan Differences to Demonization

Ideally, bipartisanship would be a quality which helped a candidate get elected. Unfortunately America is far from, and has perhaps never been further from, this ideal.

America was founded on compromise between the Federalists and Anti-Federalist. Historically, some of our strongest pieces of legislation have resulted from bipartisan compromise. Today it seems like politicians will tow the party line regardless of a policy’s real-world implications, leaving any negative impacts to their party’s spin-doctors (or, due to the time delay it takes for the full impact of many policies to be felt, to future legislators).

Politicians have always cared about getting re-elected, but the type of behavior that voters reward seems to have changed. What was once a quest to push the frontier of American progress has been replaced with a cynical, no-holds barred attempt to secure governing super-majorities that can ram legislation through without any support from the other side. The other side then uses said legislation as campaign fodder, hoping to increase voter turnout and overturn it.

This results in a never ending loop of legislative gridlock in which the average American–regardless of political affiliation–loses. No wonder Americans don’t trust their government and are so politically divided!

This us-versus-them style of governance is reminiscent of sectarianism in newer, fragile democracies (like Iraq or Kenya)–it should not be a feature of American democracy. Policy differences have always existed, but the fight has seemingly gotten dirtier since Trump took office. Even more disturbing is that this increasing partisan divide is being driven by the President himself.

Trump recently called his Secretary of Defense “sort of a Democrat”. While this is far from true, it is also ridiculous that this is even a dig at all–as if being a Democrat is some sort of inherently bad thing. It is this sort of rhetoric that leads Democratic and Republican voters to talk past one another, instead of to one another, precluding the hard work of finding common ground.

Trump also recently said Democrats are “an angry, left-wing mob…they would turn our country so fast into Venezuela, and Venezuela’s not doing too well, folks.”

Look, it was not right when Hillary called Trump supporters “deplorables” during the 2016 Presidential campaign, and it is not right for Trump to call Democrats “an angry mob” now. When we look at the country’s partisan divide, we have to acknowledge the role that the leaders of our political parties play–when they act like children, there is a trickle down effect to the behavior of the average voter.

Lord of the Lies

It is not just morally “wrong” for Trump to say Democrats would “turn our country into Venezuela”, it is inaccurate and hypocritical. The major economic issues facing Venezuela are massive government debt and resulting hyperinflation. Trump’s tax plan will increase the U.S. debt load by $1.5 trillion dollars over the next decade, and he has been critical of the Feds efforts to combat inflation by raising interest rates. I would not go so far as to say that Trump’s policies will turn us into Venezuela, because it would take decades of economic mismanagement to “turn America into Venezuela”. But if either party’s policies are putting us on the path to “becoming Venezuela”, it is the G.O.P’s, not the Democrats.

Trump is taking advantage of the fact that many people want simple answers to complex problems. Responsible leaders admit there are no simple answers, whereas Trump makes up simple answers that will not solve the problems and in many cases exacerbates them. Anyone who tries to point out the shortcomings of his plans are dismissed as liars or out-of-touch experts, trying to bamboozle the common man.

These falsehoods are part of a larger concerted effort by President Trump to blur the line between fact and fiction; when everything is in question, people can make up their own reality. How often have you heard Trump say something to the effect of “maybe it is, maybe it isn’t, who knows?”–on a regular basis if you’ve been paying attention (twice in his most recent “60 Minutes” interview alone).

We’ve all heard of “fake news”, but don’t forget about “alternate facts“, “alternative data“, the “witch hunt” (Mueller investigation), and unsubstantiated conspiracy theories promoted by the President to cast doubt on the outcomes of the 2018 midterm elections.

If some people do not like “politically correct” politicians or “experts” that’s one thing-I don’t agree, but I get it. This does not mean we needed to elect someone who purposefully tells lies and sows confusion and discord as their primary means of governing–there is a huge middle ground here America.

Trump The False Populist

You can blame social media, poor leadership, or whatever other factor of varying importance you want, but where we are as a country ultimately points to a failure of the American people to elect the right type of representatives. If this is a tough pill to swallow then good, it should be; it is meant to prompt introspection and personal accountability. People of all political stripes are complicit in this collective failure, and it will take a change in thinking across the board to correct it.

I do not have the answers to these problems, except to try to educate and lead by example; I think that is all anyone without a celebrity-sized platform can do, so I carry on. Maybe I should just run for office…

Speaking of running for office, remember that Trump campaigned and was elected as a “populist“. While it was pretty clear to anyone who knew anything about his pre-Presidential endeavors that this was not the case, I wanted to give Trump the benefit of the doubt–after all, if he did well it would be good for the country!

Instead, Trump decided to pursue an agenda based on division, class and racial warfare, shortsighted “America First” foreign policy, blindly slashing regulations regardless of whether they were useful or not, and generally undoing all of President Obama’s achievements. To date, Democrats in Congress have had little success defending what I identified as the party’s red-line issues.

Even more tellingly, none of the many potential areas of compromise I identified after the Presidential election have been pursued. These would have been low-hanging fruits for Trump to pick, restoring the public’s faith in the government’s ability to address the issues facing the average American and healing the partisan divide, but he elected to go a different route.

Let this list of unpursued policies (headlined by the lack of an infrastructure plan or apprenticeship bill) stand as a testimony of Trump’s choice not to govern for all Americans.

—

Update (10/24/18): Things have gone from dirty to downright dangerous in the days leading up to the 2018 midterms. Apparently people have sent pipe bombs to Barack Obama, Hillary Clinton, George Soros, and CNN offices.

Maybe having a GOP leader that promotes and applauds violence has somehow actually incited violence! Who would’ve thunk it?!


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Military Spending and “Moral Hazard”

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The ONE thing I have always agreed with President Trump about is that our NATO allies need to spend more on defense. But while Trump has certainly talked this talk, his actions have actually had the opposite effect by reinforcing a “moral hazard”.

You may be thinking, what is a moral hazard? It is “a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.”

In the case of the U.S. and our NATO allies, the “risky event” is NATO countries underinvesting in defense spending. Our allies are able to do this because they know they are protected by the U.S., who is the other party that will “incur the cost” through our massive defense budget.

I invoke this argument because the GOP often uses moral hazard as a justification when it proposes slashing spending on safety net programs (particularly healthcare programs). While I will not wade into that argument, hopefully framing my argument this way will resonate with some people who otherwise would not agree with my prescription for getting our allies to spend more on defense–by reducing (or at very least not increasing) our own defense spending. 

If anything, defense spending is better positioned for a moral hazard argument than safety net programs are. Moral hazard implies a choice is being made by a rational party based on cost, benefit, and risk. So what happens with the same choices when a person or country’s income rises? Wealthy people typically do not forgo health insurance, but wealthy nations sometimes do forgo adequate military spending, which is the crux of this whole issue. All this is not to say that a moral hazard does exist for military spending but not for safety net programs–I leave the reader to draw their own conclusions on that. The point of this little digression, rather, is to say that if you believe a moral hazard exists for safety net programs, it is hard to argue that one does not also exist for defense spending.

Regardless of your beliefs, this is not the first time that differentials in defense spending between the U.S. and our allies have been identified as a moral hazard. Former U.S. Defense Secretary Robert Gates made a similar claim, as highlighted in an Op-Ed written about his final speech to NATO in 2011:

“Gates’s frustration was no doubt sparked by the realization that his department has become the victim of moral hazard. The United States provides a free security guarantee to Europe. Europeans, meanwhile, have responded in an economically rational way by taking greater risk with their external defense. With the collapse of the Soviet Union removing the last plausible military threat, it was logical for European policymakers to avoid spending on expensive space, communications, and intelligence systems that the United States was largely providing for free. 

Gates concluded his speech by warning Europe’s leaders that the next generation of U.S. leaders lacks nostalgia for the Cold War struggle and could walk away from the NATO alliance. In the future, Europe will undoubtedly have to do more for its external defense. That doesn’t seem like a problem now [2011] since there is no apparent external threat. But should they have to more fully insure themselves, European defense planners should consider how they would rebuild their defenses. They should consider how much time it would take to mobilize political and budgetary authority to prepare for these threats and how long it would take to rebuild the required military forces.”

Since that speech [June 2011] many of the external threats to our NATO allies, which Gates noted were then not present, have since emerged. Absent adequate European military capabilities to deter and/or respond to a threat, the Syrian Civil War metastasized from a seemingly containable conflict to the worst humanitarian crisis since WWII. Refugees from the war and other regional conflicts have shaken the E.U. to its foundations, leading to Brexit and increasing Euroscepticism across the continent. More directly, a European (albeit non NATO) country, Ukraine, was invaded and had territory annexed by Russia.

It is, therefore, past time that European countries started taking greater ownership of their collective military capabilities. As Gates correctly noted, mobilizing sufficient public support–a necessary initial step for policy change in democracies–takes time and political ability. Recognizing this fact, it seems that European politicians are far behind where they should be in terms of reconciling their respective electorates with this reality.

Even that U.S. leader who “lacks nostalgia for the Cold War struggle and could walk away from the NATO alliance” is now in power in President Trump. While Presidents Obama and Bush also pressured NATO countries to spend more on defense, they did so more diplomatically. Perhaps surprisingly, I do not think that was necessarily the right approach when it comes to the issue at hand; sometimes difficult things just have to be said candidly, and proper incentives provided, to get a desired outcome (especially when large sums of money are involved, and speaking diplomatically has continuously failed to produce the desired outcome).

I’m sure Donny would tell you, in his usual egomaniacal hyperbole, that “no one has been tougher on NATO spending than me”. While Trump’s words have been the toughest, just like his predecessors his policies are reinforcing this longstanding moral hazard. To see how, just follow the money; the U.S. continues to increase its defense spending (over $100 billion increase since Trump took office, up to $716 billion dollars in fiscal year 2019), sending the message that we will keep making up for the rest of NATOs shortfall–after all, actions speak louder than words.

In order to end this moral hazard, Trump has to not put taxpayer money where his mouth is by not increasing defense spending. Of course the military-industrial complex (and his bases’ blind support for military spending) won’t allow him to do that, regardless of what moral hazard or–much more importantly–the other needs of our nation demand. 

If we continue on this course we will ultimately be left with more military spending both now and in the future, as we decrease pressure on our NATO allies to build up their military capabilities. 


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Labor, Education, and Apprenticeships

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Long time no see folks. It’s well past time to shed that post-policy depression (tax code) and get back to it. In doing so let’s consider a topic I have discussed often, one that should have bipartisan and Trump administration support, but has unfortunately yet to get its due–apprenticeships.

The Trump administration just concluded it’s “Task Force on Apprenticeship Expansion” in May. Here are some key recommendations from the final report:

  • “The Subcommittee on Attracting Business to Apprenticeship recommended that the Industry Recognized Apprenticeship program should streamline and simplify program funding through various methods, such as updating Federal funding criteria, streamlining State grant access, and exploring sector-led financial options.” (p 10)
  • “According to recent research by the U.S. Government Accountability Office (GAO), there are more than 40 workforce development programs across nine Federal agencies. Data shows that these programs were funded with more than $42 billion, although less than half that amount ($17 billion) went to employment and training activities. Based on this data, there is a clear need to streamline and simplify programs by developing an organized approach that recognizes and preferentially funds apprenticeship.” (p 27,28)

Who can argue against greater efficiency? Nobody. However these efficiency increasing measures were already implemented, according to the Government Accountability Office (the very entity the Task Force cited regarding inefficiency in the first place)–that low hanging fruit has already been picked.

The Trump administration wants the private sector to share in the cost of scaling-up apprenticeship programs–another sentiment that is difficult to argue with. The problem is that it has not offered any incentive for the private sector to do so. Private companies are currently bringing in record profits while under-investing in apprenticeships; why would these companies change their behavior now, when times are good, without a new incentive to do so? Instead of increasing spending or leveraging the recent corporate tax giveaway to provide such an incentive, the Task Force cites measures to increase efficiency that have already been implemented.

The private sector needs to play a role in developing the curricula for apprenticeship programs, but can we stop pretending it will provide meaningful financing for them? Maybe if we cut corporate taxes even further they would, right!? If only we could’ve done away with that pesky corporate income tax completely, surely they would have (well, there is no more corporate alternative minimum tax now)…OK, clearly I’m still salty about tax reform…

It is time to admit that private businesses have largely abandoned the apprenticeship model. Sure there will always be anecdotes about successful training programs, particularly from large corporations that can afford to attract top talent. Unfortunately nothing currently exists on the scale required to meet the needs of the average American worker or business.

The results are obvious: underemployment, stagnant wages (a modest uptick in wage growth recently does not make up for decades of stagnancy), and ballooning tuition rates / student loan debt as everyone feels they must go to college to make a decent living. If the Trump administration’s answers to these societal problems are reaching some unattainable level of efficiency and expecting the private sector to suddenly become more altruistic, nothing will change from today’s unacceptable status-quo. If, on the other hand, apprenticeships were adequately invested in, they could provide an affordable alternative to the four-year college path, and revive America’s dwindling middle class.

The Trump administration just proposed merging the Labor and Education Departments. In talking about it, a friend asked me if I thought the proposal was a good idea. My answer was that it could be a good idea, but under this administration it would not be. If, for example, the merger really reduced redundancies and opened up more resources for programs like apprenticeships, that would be a positive trade-off in my opinion (again, greater efficiency is hard to argue against, in theory).

But lets be realistic, that is not the point of the Trump proposal. Look at Trump’s big Apprenticeship Task Force, which would fall squarely within the proposed agency’s mandate. Where’s the beef? SHOW ME THE MONEY! It’s simply not there…

As a nation we invest in what is important to us. No amount of free-market rhetoric, appeals to “greater efficiency”, or other forms of lip-service are going to shrink Americans’ skills gap or “make America great again”. Only investing adequately in our greatest asset–the American people–can accomplish that feat.

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(Note: When considering what we do spend tax dollars on, don’t forget that the recent spending bill appropriated $61 billion MORE for defense spending–$655 billion total, compared to $42 billion for workforce development programs. Also, don’t forget that the recently passed tax code will reduce tax revenue by over $1 trillion dollars over the next decade)

 


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Starved of New Ideas, the GOP Goes Back to “Starve The Beast”

“Starve the Beast”

The GOPs tax plan was the first part of a two-tiered approach to reduce the size of the government–it was never supposed to “pay for itself“. In order to keep the deficit from growing after cutting taxes, spending cuts–with “welfare” the common whipping boy–are necessary, or so the thinking goes. This method of governance, developed by the Republicans in the late 70s and 80s, is known as “starve the beast“.

History tells us that “starve the beast” does not work–it is a tried and failed policy. It turns out that when you get down to the actual programs involved, “welfare” is quite popular; it aligns with America’s collective moral compass, helps promote the “American Dream” (social mobility), and stimulates short-term economic growth. While there are reforms that could improve our welfare system, doing so responsibly requires complementary policies (more on this later).

There are again signs that the GOP will fail to fully implement its “starve the beast” agenda. The tax code is already the law of the land, yet the GOP does not seem to have the political will to tackle welfare reform. Far from starving the beast, Congress has just agreed on a budget deal that will increase spending by $300 billion dollars over the next two years.

I’m sure the GOP will come back to entitlement reform and overall government downsizing after the 2018 midterm elections. At this point the GOP will no longer have to worry about immediate electoral backslash from enacting unpopular welfare reforms, and probably believes the link between their tax cuts and the fiscal need to enact such reforms will have been severed in the average voters mind. But even when the political will to “starve the beast” resurfaces, I doubt the GOP will have sufficient Congressional support to actually implement the plan. Whether they have sufficient support will largely depend on the outcome of the 2018 elections–after all, “elections have consequences”.

Make no mistake, the likelihood that “starve the beast” will again fail is a good thing. The real crime is that the GOP passed a huge tax cut knowing it would not pay for itself, while also knowing that it would not be able to “starve the beast”. The results are ballooning deficits and insufficient resources to address America’s many needs. Sure, budgets may pass with small increases to existing programs, but new programs will not even be considered in this climate of huge (and increasing) national debt, rising interest rates on said debt, and much lower tax receipts.

Perhaps this is the true purpose of “starve the beast”–to restrict our country’s collective “policy imagination” (i.e. “fiscal space“). Instead of thinking about how to make America better, we will be stuck with the status-quo that people across the political spectrum are unhappy with (only now with even more inequality and debt).

Common Sense Welfare Reform

As mentioned before, there are some worthwhile welfare reforms to consider. Let’s look at a few of them, as well as the complementary policies needed to ensure they actually promote desirable results and don’t just place undue burden on America’s most vulnerable people.

SNAP

Let’s promote a healthy diet and save on our country’s medical spending! Why not go one step further and promote local produce wherever possible. Such a plan would benefit smaller farmers and local economies, promote greater public health, and reduce emissions from shipping food around the world.

Drug Testing for Welfare

I am not completely against drug testing people on welfare programs, or other oversight measures, but let’s be clear–such measures would require more spending to implement. It is entirely possible that the nation would spend more money on enforcement than it would save in rooting out welfare fraud–this has largely been the experience when states have experimented with such programs.

But money isn’t everything; in a democracy public support is the lifeblood of any policy, and clearly many people do not approve of our current welfare system. Surely even the most progressive person can see there is some benefit to addressing the concerns of a large portion of the electorate regarding our current welfare system. Addressing these concerns should ultimately increase public support for welfare programs.

The costs and benefits (monetary and otherwise) of various oversight measures are something we should study, so the American people can make an informed decision about whether such policies are truly worth pursuing.

Responsibly Reforming Welfare Programs

How else can we responsibly reform our welfare system, reduce disincentives to work, and promote gainful employment?

First of all, programs that benefit children, the non-wealthy elderly, persons with disabilities (including serious mental illnesses), and other vulnerable groups do not need more requirements–society’s most vulnerable do not need more hoops to jump through. Admittedly, just coming to an agreement on who should be considered ”able-bodied” is a difficult task itself.

But certain recipients, like healthy, prime working age people, can be reasonably expected to meet certain socially beneficial criteria in exchange for welfare benefits. One such example is a new “community engagement” requirement for Medicaid in Kentucky. Progressives may not like this plan, but as long as sufficient waivers exist for vulnerable groups, why should someone in the prime of their life not be working, looking for work, volunteering, and/or in a job training program for 80 hours a month? Such a change should lead to improved employability and mental health outcomes. This is a completely reasonable requirement, and the type of idea that responsible, bipartisan welfare reform can be built upon—leveraging welfare benefits to drive positive recipient behavior.

Aside from reforming welfare programs, other complementary programs targeting the labor market could help reduce reliance on government assistance. Higher minimum wages would reduce government spending on welfare programs, as we currently subsidize companies that do not pay a living wage. An expanded earned income tax credit (EITC) could help reduce disincentives to work by smoothing high marginal tax rates for people coming off welfare programs. We also need more job training and apprenticeship programs; we can’t just say there are job training requirements for welfare eligibility, but then not make these programs available! Just like with welfare oversight measures, expanding the EITC and sufficiently scaling up job training programs would both require significant government resources.

Simply put, there are upfront costs to responsibly reforming our welfare system. Unilaterally cutting welfare programs and hoping for the best will not work; any savings would ultimately be lost due to increased spending on the criminal justice system and decreased long term economic growth, as even more Americans would fail to reach their full economic potential.

Ideally, reducing the size of the “welfare state” would be an organic process by which we invest enough in our people, particularly early in life, to promote equality of opportunity. The complementary policies outlined above can help at the margins, but the real heavy lifting involves addressing the root developmental causes of poverty (early childhood development, housing, healthcare, education, etc.).

Progress Frozen in Time

This brings me to the main reason why the new tax plan is so regressive in the first place. It is not because it will be bad for the average American consumer or economic growth in the short-run; if anything, it should have positive short-term impacts in those regards. Those are, however, poor criteria for assessing the merits of a tax plan that will likely be in place for a long time and is directly related to our ability to fund programs that drive long term growth and social progress. In other words, what did we give up in exchange for these tax cuts?

Due to lower tax revenue, it will be very difficult to fund the aforementioned complementary programs needed to responsibly reform our welfare system, much less the more costly investments needed to promote equality of opportunity and drive long term economic growth (infrastructure, R&D, healthcare, education, job training and early childhood development).

On the topic of infrastructure, Trump’s “trillion dollar infrastructure plan” (now $1.7 trillion, if you still believe a word he says), will reportedly only use $200 billion in federal funds. The idea that $200 billion can leverage that much funding in mostly state and local tax money (as well as some private investment)–the crux of Trump’s plan–was a dubious claim when he made it while campaigning. With the caps on SALT deductions in the new tax code, and the resulting strain on state and local budgets, it can’t even be called wishful thinking–it is just a flat-out lie.

The results will be obvious in the type of infrastructure that ends up being built. Non-revenue producing infrastructure will fall almost completely to the wayside. There will not be enough funding for expanding broadband internet access and affordability in underserved areas, which would unlock better K-12 schooling and access to online job postings. In a sad irony, these underserved areas are mostly in “Trump country”.

EPA Chief Scott Pruitt has said combating lead poisoning is a top priority of his, but has offered no plan for how he will do it. Instead, he has undermined programs that protect children from lead based paint, and supported an overall downsizing of the EPA. In all likelihood there will not be enough funding for new water pipes to prevent people from getting lead poisoning, which stunts cognitive development in children. Stunted development compromises the future earning potential of those affected, increasing reliance on welfare programs–talk about being short-sighted.

Our country likely needed more tax revenue, not less, to promote equality of opportunity, meritocracy and social mobility–to make America fair again. People–albeit the minority of the electorate–elected Trump as a populist because they felt like they were being left behind. Trump has betrayed his base with his policies, whether they realize it yet or not.

The Same Old Blame Game

Absent the resources to actually address the needs of the average American, you will instead hear the GOP repeat its same old tired lines. Lets consider some of these talking points:

People are lazy

Well sure some are, but no more-so than they used to be…

It is true that labor force participation rates are down overall from highs in the 1990s, but this is less true among prime working-age people; the majority of labor force participation decline is due to an aging population.

Furthermore, many people collecting government assistance already work. As stated before, increasing the minimum wage and expanding the EITC would help promote gainful employment.

Traditional marriages / family structures / “values” are breaking down

This is really a societal shift, and in some ways is a natural consequence of a freer society. For example, a wife who is being beaten can more easily leave her husband now than she could decades ago.

This phenomenon is at the cross-section of many deeply personal, multifaceted, and interrelated choices people make (to get married or not, to have kids or not, to get divorced or not). As such, there is really very little the government can do to steer society back towards more traditional family structures. The common conservative call to block access to family planning services, contraception, and abortion, however, will only exacerbate these issues (and yes, likely lead to increased future welfare spending).

We Can Rely on the Private Sector to Fix Everything

Guess what, the private sector won’t just deliver on infrastructure, but job training too! Trickle-down economics! That sure sounds nice, too bad it has never actually worked out that way.

I listened to an event kicking off “National Apprenticeship Week” at the Department of Labor, and not once was government funding or a public-private partnership (PPP) mentioned. It was all about what the private sector can do; well guess what, the aren’t doing it! Absent some change in incentives, there is little reason to think that the private sector will all of a sudden start to prioritize job training programs. What America needs is drastically scaled-up apprenticeship programs developed and financed by community colleges, universities, and industry leaders.

Instead, “Jobs President” Trump has proposed cutting the DOL budget by 21% (from $12.1 billion to $9.6 billion), and the Department of Education budget by 13.5% (from $69.4 billion to $60 billion). Such a plan effectively rules out more funding for apprenticeships, as these would be the departments to administer such programs.

At the same time, the GOP will increase military spending by $82 billion, to $716 billion, by 2019. Imagine the impact that type of additional funding would have on our drastically underfunded job training programs and community colleges.

Hail the Almighty Job Creators! 

We need to stop treating companies as if they are doing some sort of public service by hiring people. Companies create jobs to maximize profits. Publicly traded companies operate to maximize stock prices. Private companies are not doing a public service by being in business.

A company’s social contributions are the taxes they pay. We should not be subsidizing jobs through direct subsidies to companies and unlivable minimum wages that drive people to welfare programs. We should not have reduced the tax burden of the wealthiest Americans in the hope that some scraps will trickle down to the average person. Absent such policies the American economy would still work, just with less extreme inequality.

Until there is a clear understanding on this across the political spectrum, the greedy will continue to use scare tactics to hold enough of the electorate hostage to perpetuate their position of power. We need politicians that will stand up to these people and call their bluffs, not politicians who will sell the American public out to the highest bidder.

Concluding Thoughts

Investing in human development takes time to manifest itself in positive outcomes, just as it takes time for a child to grow up. Therefore a responsible, holistic approach to welfare reform means there will be an overlap period where we will be paying more for both welfare reform and human development initiatives (which in some cases, like CHIP, are one in the same).

If, as a country, we are OK with $1 trillion more in debt (what Trump’s tax plan will cost us), this is the way to spend it—not another war or military buildup, not another trickle-down Hail Mary, but a real plan to promote economic opportunity and responsibly reform our welfare system. This new “Great Society”, with the benefit of 50+ years of lessons learned, could build upon the successes and avoid the shortcomings of the original, and ultimately make America greater than it ever has been.

Instead we are stuck with half a “starve the beast” strategy. This means more debt while cementing in place the status-quo that has failed too many Americans for too long. Thanks, GOP!


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With Tax Reform, America Must Go “Back to the Future”

Tax reform is not “sexy”, there is no getting around this fact. It is, however, a very important issue, as every government program is funded either by tax dollars or debt. While the specifics of tax policy may be difficult to comprehend, almost everyone has their own beliefs on taxation and the role of government.

Looking at these preferences, the majority of Americans believe the government does not do enough to help poor and middle class people. Relatedly, a full three quarters of Americans feel that the wealthy aren’t paying their fair share of taxes.

Against this backdrop, lets consider Trump’s tax proposal:

  • Fewer tax brackets at lower rates for the wealthiest. The plan sets three tax brackets for individuals — 12 percent, 25 percent and 35 percent — down from the existing seven rates (which top out at 39.6 percent).
  • Lowering the corporate tax rate from 35 to 20%. While our corporate tax rate is too high, due to loopholes the actual rate paid is much lower (particularly for large corporations who can afford the best lobbyists, lawyers, and accountants). Based on actual taxes paid, the U.S. ranks comparatively low among developed countries. The corporate tax rate should only be lowered if the revenue lost if offset by closing the right loopholes. Trump has not specified which loopholes, if any, he plans to close.
  • Cutting the “pass-through” tax rate, which is what individuals who file their corporate earnings as personal income pay, from the current highest income tax rate of 39.6% to 25%. This rate cut would almost exclusively benefit the wealthy, and is one to watch closely-in recent years more and more businesses have begun filing as “pass-throughs” in order to minimize their tax bill.
  • Repeal of the alternative minimum tax, which is essentially in place to ensure wealthy people pay a certain minimum amount as they use their accountants to game the tax code. But it will make the tax code fit on a post card! And thats what matters!
  • A lowering an eventual repeal of the inheritance tax, which is only paid on the largest estates. This is being billed as a move to help family farmers, which is an audacious spin of the issue to be sure.
  • Trump’s plan has been light on details about capital gains taxes. However, there is nothing to suggest his financier-stacked Cabinet (Mnuchin, Cohn) will want to do anything but lower these rates as well.

All these proposed ideas would reduce taxes paid by the wealthy, compromising the government’s ability to further help poor and middle class people. So the question is, if these ideas are so unpopular, how is Trump selling them to the American public?

For some, it is enough to say that lower taxes will promote growth, increase employment, and pay for themselves. People who drink this “supply-side” Cool-Aid are outliers, and notably the vast majority of economists disagree with these claims. But remember, we are talking about many of the same people who disagree with 97% of climate scientists on climate change, so this is actually a consistent (if not irrational) repudiation of “experts”.

Most reasonable people, however, believe what the overwhelming majority of experts in a field conclude. For these people, support for Trump’s plan likely comes from being told they will receive a “massive” tax cut. But when you look at it, the “massive” cuts in Trump’s plan are reserved for those with the highest incomes.

Consider the distribution of income tax cuts, as shown on the table below. 77% of the cuts go to people earning more than $143,100 a year. That is hardly the “middle class”.

It’s more of the same when it comes to corporate tax cuts. According to the nonpartisan Tax Policy Center, “middle-income taxpayers would receive less than 10 percent of the benefit of a corporate rate cut while the top 20 percent would receive about 70 percent. The top 1 percent would see about one-third of the benefits and the top 0.1 percent would get about one-fifth.”

Trump’s plan would increase our national debt by well over a trillion dollars. The IMF has warned the plan will increase inequality and will not lead to higher growth. Wall Street is betting it will lead to greater investments in automation, not workers. The Fed has even waded into the debate to issue a rare warning, saying the proposed plan could lead to high inflation.

For all these negatives, middle class earners will only get a small tax cut, if that. Treasury Secretary Mnuchin admitted some middle class earners may not get any cut at all. This is coming from the man who also said it is “hard to create a system where you’re not going to also cut taxes on the top 10 percent“. Maybe if you are a derisive elitist with zero consideration for societal well-being, who has no business governing, it is difficult to imagine not cutting taxes for the wealthy. For most people, it is extremely easy to imagine.

So Trump’s plan is unpopular, and those who support it are either irrational, have been misled, or are wealthy and likely to benefit personally. Just like with healthcare, the GOP has no tax reform plan that works for the vast majority of Americans; hopefully its tax reform efforts will meet a similar defeat.

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The Case for Higher Top Rates

Remember, Trump’s plan sets three tax brackets for individuals, down from the existing seven. While the U.S. tax code has become overly complicated due to deductions and loopholes, the complicating factor is not the number of income tax brackets. Like any misdiagnosis, reducing the number of tax brackets would not solve any problems, and would likely make the situation worse.

Republicans in Congress plan on including a fourth higher bracket in their proposal, but this is not enough. There should be even higher brackets and rates for people with 7 and 8 digit incomes.

After a certain point, the higher your income, the less it is connected to working harder, and the more it is related to the risks one takes and the carefully constructed, trade-based global economy in which we operate (infrastructure, government R&D, international peace and trade rules, strong judicial systems, educated workforces, relatively prosperous customer bases, etc.). Notably these characteristics are all, to varying degrees, financed by tax revenue. 

I can already hear people moaning at this point and calling me a socialist, so allow me to clarify with an example. Take someone who manufactures clothing. Decades ago, the owner of this company would more or less be constrained to selling his or her goods domestically. Despite working very hard, their overall earnings were capped (at least by today’s standards). Today, the same person, putting in the same amount of work, can sell their goods all over the world through the internet, earning a lot more money. The work these two owners from different eras put in is roughly equivalent, but the modern day entrepreneur can potentially earn a lot more. In fact, this is half of the story of increasing extreme global inequality.

What about my other point, about these systems being financed to varying degrees by tax revenue? Well this is certainly true of the internet (whose origins were in defense research). It is also true of all of the spending that promotes international peace and fair trade practices (defense spending, development aid, contributions to international organizations like the WTO, etc.).

While the risks people take should be rewarded, the context in which wealth is earned should not be ignored. This is not to say “you didn’t build it” or “you didn’t work hard”, it is simply acknowledging that outside factors play a role in how much wealth one can amass. Ignoring this reality does not make it go away, but it does risk underinvesting in making sure it continues into the future.

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A Quick Lesson on Marginal Tax Rates

I think that much of the opposition to higher tax brackets comes from misunderstanding how marginal tax rates work. When you enter a higher bracket, only the amount you earn over the higher threshold gets taxed at the higher rate.

Lets take a look at a hypothetical numerical example. If the rate below $100,000 is 20%, and the rate above is 30%, when a person earns their 100,001st dollar, only the amount over the threshold–the one dollar–is taxed at the higher 30% rate. The rest, the first $100,000, is still taxed at the lower 20% rate. People do not become poorer by moving into a higher tax bracket.

In recent history, before the Reagan era tax cuts, top income tax rates were around 50%. This seems like a reasonable number if not for its roundness and inherent fairness, but the exact optimal number of brackets and rates is not what’s most important. More important is recognition by people across the political spectrum that the wealthy must pay their fare share of taxes. Based on the survey results cited earlier, most people already do share this belief–it is well past time their elected representatives acted on it.

The tax code should be used neither to venerate the wealthy as infallible job creators, nor to vilify wealth so much as to stifle innovation. Simply put, the tax code must allow us to adequately invest in the very systems which enabled America to become the wealthiest nation in the world in the first place. Anything else is a short-sighted failure of governance.

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“Back to the Future” (With Some Help From Our Friends)

Trump’s base often talks about “Making America Great Again”. To a small minority, this is a thinly veiled embrace of our country’s racially charged past. To others, I’d like to think most people, making America “great” is about (re)creating an economy that rewards anyone who is willing to work hard.

So how can we make sure that, as a country, we can afford to make the investments needed to get back to this “Golden Age”? Not surprisingly, some of the answers lie in the past; America has historically had both more income tax brackets, and higher tax rates for top earners. These were the good old days many low-tax advocates are pining for!

There is nothing uniquely American about these higher historic rates either. According to the Organisation for Economic Co-operation and Development (OECD), “top personal income tax rates in rich nations had fallen to 35 percent in 2015 from an average of 62 percent in 1981.” To put a bow on an earlier point, this is the other half of the story of increasing extreme global inequality.

Now admittedly some things have changed in the past few decades. The rise of information technologies has led to irreversible changes in financial markets. When people can move their money around the world instantly with the click of a mouse, it is important to have some level tax coordination between countries in order to fight tax evasion (in its many forms). In today’s globalized world, countries and international institutions such as the OECD must work together to ensure the ultra-wealthy are not getting a free ride.

If America wants to be able to adequately invest in the very systems that made and continue to make it great, and if we want to be able to give working class people a tax cut without greatly increasing our national debt, we must hold the wealthiest Americans economically accountable.

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Update (12/1/17):

Some elements of the tax bill have changed since I originally wrote this blog, but these were marginal changes. At it’s core, this bill is still the regressive piece of legislation it always was.

According to the non-partisan Congressional Joint Committee on Taxation, even accounting for supposed growth this bill will “unleash”, it will still increase the deficit by 1 trillion dollars over the next decade. That shortfall will ultimately be paid for by reducing spending on popular government programs, and forestall the conversation on any new government programs (think education, healthcare, infrastructure). The only hope is that the Senate and House are unable to reconcile their bills and pass a unified one, but this is unlikely–if there is one thing most conservatives Congressmen believe in, it is making the rich richer and the poor poorer.

For all the talk of how damaging Trump has been to this country, taking a longer view he will ultimately be a flash in the pan. This tax bill, should it pass, would have a much larger negative impact on our country, ultimately leading to lower social mobility for decades to come. The last major tax overhaul persisted for over 30 years–this country (literally and figuratively) cannot afford to have this bill become our new tax code.

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Update (12/22):

The House and Senate reconciled their tax bills, with the final version being signed into law by President Trump. The only silver-lining is that this massively unpopular law may lead to a Democratic resurgence. However, Republicans will do their best, via repressive voting laws and gerrymandering, to stop this from happening.

The American people cannot afford this tax law on the books for a prolonged period of time.  It will leave us further in debt, while compromising our ability to further invest in our people and our infrastructure. We now turn to the 2018 and 2020 elections as a barometer for just how fed-up the American people are by the bait-and-switch “populism” of Trump and the GOP.