We're Uncertain Just How Much Economic Uncertainty Trump Has Added

"There are known unknowns and unknown unknowns," Rumsfeld famously said. With the incoming Trump administration we might now say, "There are certain uncertainties and uncertain uncertainties."

The stock market has rallied since Trump's election. Presumably, the reasons for this include expectations of tax cuts, stimulus spending, and deregulation. All of these add to uncertainty, though.

If Trump gets a stimulus package in the form of infrastructure spending, it will boost GDP more than if the stimulus comes in the form of tax cuts. (The tax cuts will overwhelmingly go to the rich. A guy making $500,000 a year is less likely to change his spending in response to a tax cut that puts $1,000 more in his pocket than will a guy who makes only $5,000 a year.) 

Will the stimulus - the assumed rise in deficit spending - boost the economy by 1% or by something negligible? It's uncertain because we don't really know what form the stimulus will come in.

Further complicating this, Trump has appointed Mick Mulvaney to head his Office of Management and Budget (OMB). He'll be responsible for crafting the budgets proposed to Congress. Mulvaney is a fiscal hawk who has voted against raising the debt ceiling and seems committed enough to a balanced budget that he'd shut down government for this. By contrast, Trump has promised tax cuts and boosts to defense spending and infrastructure, which will drive a big increase in the deficit.

Paul Ryan and Mick Mulvaney's desire for balanced budgets will be at odds with Donald Trump's "deficit be damned" policies. Will Trump's proposed budget deficit shrink or even become a budget surplus? It's uncertain.

Deregulation adds the most uncertainty of all. Before the Great Recession, banks were leveraged about 30 to 1. For every dollar they had in deposits, they had loaned out about $30. That gives you great returns but it makes you vulnerable to a credit crunch. Since Dodd Frank,that ratio has dropped to about 10 to 1, which makes for a much safer banking system. Now, the expectation is that a Trump administration will lower regulatory requirements and allow banks to raise that ratio again. Will the ratio go up to just, say, 12 or 15 to 1? That ratio might still be reasonably safe but raise profits nicely. Or will the ratio be allowed to rise all the way to 20 to 1 or even 30 to 1 again? That ratio will greatly raise profits .... and risk. Financial stocks could look really healthy even as the financial system gets sick. 

Will Trump deregulation give finance a little nudge or a dangerous shove? That's uncertain.

Add to this the uncertainty inherent in Trump's trade policies. Will he actually put 35% and 45% tariffs in place against Mexico and China? If he does, WTO will probably slap on retaliatory fines and this could set off a trade war. That path would cost us millions of jobs. If he only talks about trade wars but doesn't actually impose tariffs, it could "just" result in a slowdown in trade. It's uncertain.

And then there is the policy with undocumented workers. Will he actually deport 11 million people? If so, that will crush growth in aggregate demand here in the US and crash house prices. It's uncertain.

Economics is always uncertain but the Trump Administration has added more uncertainty to that than any that I can remember. And perhaps inherent in that uncertainty is an uncertainty about what Trump's victory will mean for the future identity of the Republican Party.

Republicans Raise Taxes

Republican's new balanced budget amendment proposal requires government spending and tax revenues to be equal (hence the balanced) and set to 18% of GDP.

Curiously, this is roughly what taxes have averaged over the last few decades. It is also about 3 percentage points higher than it is now, at roughly 15% of GDP.

So, the Republicans have finally agreed to raise taxes.

The amendment will never pass, and there are so many good reasons it shouldn't. But one overlooked fact in all this is that this amendment is the Republican's first admission that with taxes the lowest they have been in Obama's lifetime, we might have to swallow the bitter pill of tax hikes.

Read this Post or I Shoot the Puppy

National Lampoon had a magazine cover years ago with the picture of a dog with a gun to his head. The magazine cover was, "Buy this magazine or we'll shoot this dog."

Eric Cantor (from the Latin meaning, can't do, referring to someone who obstructs progress), has essentially become a financial terrorist, holding the state hostage to his tax cutting demands.

Not raising the debt limit means insisting that the budget be instantaneously balanced. Cantor refuses to raise taxes a penny, so he's essentially demanding that the federal budget be cut by about 1/3 or more. The implications of this are many, but here are the highlights:

1. The deficit is about $1.5 trillion a year. The American economy is about $15 trillion. So, Cantor is threatening to eliminate about 10% of the total number of jobs in the US economy, more than doubling unemployment in a time of already high unemployment. This means that folks at the EPA will be let go, as will military personnel, government contractors, research scientists (some on government grants and some actually employed as government scientists), etc. Unemployment would, overnight, jump from about 9% to nearly 20%.

2. The implications of the above is a ripple effect into the private sector and into local governments. Dry cleaners by the air force base, sandwich shops by the Pentagon, and car rental staffs around the country are just a few of the thousands of businesses that will layoff in response to a severe drop in demand from former government employees and contractors. This, alone, would raise unemployment another 2% to 10%.

3. It is hard to imagine that the government would be able to quickly respond as described in the first bullet. This means that the budget will also be "balanced" by stopping payment on government debt. The implications of this include (paradoxically) a huge surge in interest payments as agencies lower the rating on government debt. A default would ripple through credit markets, raise interest rates on most every kind of loan (most are tied to government rates), and trigger a fresh round of mortgage defaults, and further contraction in hiring and expansion from a private sector that has just begun to (slowly) expand in this year. This, alone, would raise unemployment by another 2% to 10%.

4. Worse, this would ripple out from the US to the rest of the globe. The 2008 financial crisis destroyed trillions in wealth and millions of jobs. This Cantor-induced default on debt payments would screw up credit markets around the world, particularly the already shaky euro market.

In short, what Cantor would do is plunge us into a depression just as we're (barely) recovering from a recession

One thing that Cantor does make clear, though, is that this determination to reduce the size of government does not come from a vision of economic prosperity, an actual belief that the economy will thrive in response to smaller government. This is, instead, an ideology that has to do with a belief in little or no government rather than a commitment to a healthy and growing economy. Like the Taliban, Cantor is committed to an ideology that has nothing to do with normal measures like poverty reduction, rises in income, or low unemployment.

Cantor has the world economy hostage. One can only hope that voters will realize what a calamitous mistake this is when he next comes up re-election. Then maybe he can go in to real estate and see how much success he has selling houses only to families who can afford down payments that are 100% of the purchase price, avoiding debt and living within their means.

iBudget: The Per Person National Budget, Allocated by You

I think it is time that federal budgets be translated into per person amounts so that we all can have some sense of perspective.

The idea of a $14 trillion economy or a $3.5 trillion federal budget is mind numbing. I propose that all talk about budgets and taxes be adjusted to per person totals. Our roughly $14 trillion economy, for instance, translates into about $46,000 per person. The first number makes no sense to me; the second does.

So, even if - like me - you haven't a clue what $663 billion for defense looks like, you can understand what it means to have each person pay $2,200 a year for defense, or about 5 cents of each dollar they make. A National Science Foundation budget to finance all basic research is about $7 billion. Sounds like a lot, but that means each American chips in about $23 a year. In other words, if you go to a nice, but by no means extravagant, restaurant, you'll spend as much on that one meal as you spend to help fund basic research.

It wouldn't be hard for the federal government to have a website that allowed people to enter their income to see how much they were funding in each category. And I think that if we can calculate taxes we owe each year, we should also have the ability to allocate those taxes. I'd be fascinated to see what gaps showed up between current government outlays and what the average person thought we ought to allocate to. If we were really brave, we could let each tax payer allocate - the total budget distribution a weighted average of every taxpayers' allocation.

These steps would make the budget process more personal and maybe even make it feel a little more like it was our government.

A Nation in Denial

Here's a curious little fact.

In Obama's 2010 budget, he's showing mandatory expenses at $2.184 trillion. (Mandatory includes things like social security, medicare, and interest on the national debt.) He's projecting revenues of $2.381 trillion. So, $197 billion is left for all discretionary spending. Unless, of course, we want a 1.2 trillion deficit.

Let's say that we balance the budget without adding taxes. We'd have to cut all discretionary spending by more than 85%. This would mean, for instance, that defense spending would drop from $664 billion to $95 billion, a level we haven't been at since before World War 2. The National Science Foundation - the investment our $13 trillion economy makes into basic research - would be a mere $1 billion, or about what Exxon makes in an hour.

People like to talk about the good old days before the time of so many taxes. Of course, they forget that in those good old days life expectancy was about 47 years, income was a fraction of what it is now, and people had yellow teeth. Assuming they had teeth.

George Bush took us to war and gave us a tax cut. We bought it.

Barack Obama got elected by promising universal health care and a tax cut. We bought it.

We're the ones in denial here, not the politicians. They know that they have to give us our programs and tax cuts or we boot them out.

If a politician promised to raise taxes and cut programs by enough to balance the budget he or she would lose the election. (And anyone who thinks you could balance the budget with just raising taxes or cutting programs is obviously a beneficiary of the new medical marijuana laws.) It's that simple.

Obama has appointed a commission tasked with creating recommendations for moving towards a balanced budget. Elected officials can't talk honestly about what needs to be done, so the bitter truth is left for appointed officials to say. Because you can't stay in office and talk honestly about the deficit. Not if you want to be elected by a polity in denial.

Sacred Cow Sausage

Hopefully we won't take our deficit problem too seriously this year but once the recession is clearly behind us, it will be important to address. Very important.

Right now, the problem seems intractable. When a problem can't be solved, it is time to look in new places for solutions.

Currently, there are three places that are considered sacred for budget cuts, three places we don't even consider as sources for potential savings.

1. Defense. We still spend money as if preparing for a large-scale conventional war. We fund weapon systems long past their "not feasible" expiration date. We don't know the difference between war and occupation. But if you want to lose an election, simply mention the possibility that we might want to decrease - rather than increase - defense spending. We will not get to a balanced budget without changing the assumption that defense spending is sacred. We don't have to spend more on defense than the rest of the world combined and it makes up about a trillion of our three trillion budget. I don't know how you ignore this if you are serious about balancing a budget that is off by about a trillion.

2. Social security. Technically off-budget and its own category, but still leaves a large carbon, I mean fiscal, footprint. When it was introduced, social security kicked in around the time that the average person died: life expectancy and retirement age weren't so very different. Today? Very different. This is simple. For my generation, we have got to raise retirement age by 1 to 5 years. This will make a huge difference in the money collected by and paid out from social security. We can't pretend that the rules for when people retire remain unchanged as life expectancies increase.

3. Medicare and all health care. People are bankrupt by medical costs and this is wrong. Millions are not covered and this, too, is wrong. What else is wrong? Covering expenses that are, say, under $1,000 or even $2,500. This creates overhead for billing, adding costs to health care. It makes us less price sensitive (imagine that filling up your gas tank had a set co-pay of $5 whether you were buying it at $2.50 a gallon or $5.20 a gallon) for services whose price would be lower if subject to price competition. And it makes us feel entitled rather than careful about casually using health care. If we did not cover services under some threshold, we could greatly reduce the cost of administration and coverage. Health care - like defense and security - should be a right. That ought not to be construed to mean that every piddling service we need is something we should pay for through the roundabout means of taxation and government reimbursement.

Right now, we can't seem to reduce the deficit, much less balance the budget. When your current set of assumptions preclude your goal, it is time to challenge the assumptions.

Oh, and one other thing. Even challenging spending on these sacred cows will not be enough. We will have to raise taxes. We may as well make the slaughter wholesale.

A Megaphone for the Mega-Deficits

By 2014, the world's biggest economies are likely to have public debt equal to their GDP. This is not necessarily debilitating: many households owe more on their mortgage than they make in a year. But it is not something we should be happy about.

Critics are right to wring their hands about the deficit that Obama's building up. But the commentary on the right is annoying on two points. One, while Bush was stacking up IOUs like leaves in fall, they were silent on the issue of deficit spending. Two, they gloss over the fact that Obama is going to have outrageous deficits because he started with outrageous deficits. $1 trillion of the deficit from this year is inherited from Bush.

We've had worse deficits (as a percentage of GDP) than Bush's, but not during an expansion. And not so quickly after we were running a surplus.

The Republican Party used to be well populated by fiscal conservatives. That is, people who liked to avoid deficit spending. The GOP was hijacked (a story well told by Jonathan Chait in his book, The Big Con) and all the fiscal conservatives were muzzled. At least until now.

I don't even mind that the fiscal conservatives have been given a voice again. I think it is healthy. But until they start their critique with a expose of the massive spending increase and deficits run up by their own party for the 6 years it owned Congress and the White House, their words lack credibility. Bush's budgets became the new baseline from which any stimulus package had to start.

By definition, a stimulus package will increase the deficit. If Obama had - like Bush - inherited a surplus, his stimulus package would not have required huge deficits. It might not have even required deficits.

It's important not to be quiet about the deficit. It is just as important to be honest about its cause.

Replace the Capitol Dome with a Pyramid to Sharpen Thinking?

I have seen the future and it doesn't work.
- Robert Fulford

After Obama got his stimulus package passed, he budgeted another $634 billion for health care. (And before his stimulus package passed, he budgeted $33 billion to cover children's health care.)

Now it used to be that $634 billion was a lot of money. Nowadays, it goes without notice. I hate to say this, but Obama is beginning to remind me of a teenager with his first credit card, more impressed with how easy it is to buy than mindful of how hard it is to pay.

One of my many, "he must be smoking crack" moments of the Bush administration was when he launched two invasions while cutting taxes. This had never been done before - tax cuts during war. It was stupidity on steroids.

But the two things that most excite conservatives are wars and tax cuts. Combining the two was like promising a diet of pastries and ice cream. It was simply irresistible for a party whose domination was so complete that they didn't need to even let Democrats onto the floor of Congress to pass their legislation.

Now, the liberals have seized the reins of government. What are two things that most excite them? Stimulus packages (read, spending bills) and health care reform (read, more money for more coverage for more people).

You can't remain a good liberal and suggest that perhaps health care reform should wait. This is like telling a conservative that tax cuts aren't always the best thing. It is blasphemy, no matter how accurate the assessment.

So, we're stuck with the consequences of who we have in office and these people seem unable to change who they are. The result seems to be that certain truths are simply verboten - impossible to utter because true believers would never be so craven as to actually take into consideration something as unprincipled as budgets or economic conditions.

Maybe it is true that considering conditions would lead to inaction. I doubt it, though. I think that a party that actually considered reality before trying to change reality would end up adapting policies that would be so effective as to actually sustain their time in power.

Yet, this seems to be the catch-22 of politics. You can't get elected without the support of some group of true believers. If you deny them their diet of pastries and ice cream when they finally have their day in office, they will hate you. And this is one of the ways that what makes for good politics seems to make for poor policy.

I remain an optimist, though, about the possibility of policy that works and, specifically, the possibility that this Obama administration will formulate and enact such policy. All the data, though, seems to support the most cynical pronouncements of my good buddies Davos, Allen, and Bill who regularly express the opinion that there is something about working inside the Capitol dome that distorts good thinking.

Hmm. Maybe they need to replace the dome with a pyramid. If a different group of true believers is right, this could sharpen thinking.

How Cutting Government Spending Can Boost the Economy

My wife teaches 3rd grade at San Diego City Schools. Her kids get P.E. once a week. Why do I mention it? Because this is a warning of how cuts in government spending can stimulate the economy - but not in necessarily positive ways.

Layoff 80% of your PE teachers and now schedule PE for your kids only once a week instead of once a day. So, how does this stimulate the economy? Stay with me to watch the dominoes fall.

Kids who are less active gain weight. Some even become obese. This has health consequences, triggering demand for weight-loss products, treatment for childhood diabetes, new wardrobe, and joint pains and injuries associated with the stress of being overweight. Dealing with all these problems involves cost - what politicians call economic activity.

Measures for economic growth are both less objective and less obviously a positive thing than many would have you believe. Economic growth that comes about as the result of increased spending on security equipment, health complications, or thrash metal concert tickets is evidence that economic growth needn't acttually correlate with improvements in quality of life.

Virtual Budgets - A Proposal for 2008 Presidential Candidates

This is the second in a series of proposals I'd like to hear from presidential candidates.

Today, George W. sent Congress his latest budget proposal, nearly $3 trillion for federal spending.

One subset of his budget is the defense spending - a tidy $717 billion. According to The World Bank listing of 183 counties, ranked by GDP, http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP.pdf
a country with a GDP of $717 billion would have ranked 15th globally - just between Russia and Australia. $717 billion is twice the size of Sweden or Saudi Arabia's entire GDP! Put another way, it is nearly 3X the total GDP of the Axis of Evil combined. (That's Iraq, Iran, and North Korea. We could lease those countries for one third of what it takes to defend ourselves from them.)

So, with that bit of rant behind me, let me propose this. When Americans file their taxes each year, they indicate where they would like to see their money spent. What percentage to housing, to basic research, to health insurance, to defense, to education, etc.? We have the technology to make this feasible. At a minimum, it could be the starting point for DC's plans about how to spend our money.