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Earlier this year, I identified Trump’s “worst ever tweet.”

I was wrong. That tweet, which displayed an astounding level of economic ignorance, is now old news.

Trump issued a tweet yesterday that is far worse because it combines bad economic theory with horrifying support for massive economic intervention. Pay special attention to the part circled in red.

Huh?!?

Since when does the President get to dictate where companies can do business?

Unfortunately, whenever he wants to.

Congress has delegated to the President massive “emergency” powers over the economy. Specifically, the International Emergency Economic Powers Act (IEEPA) is a blank check.

Here are some excerpts from a report by the Congressional Research Service.

By the twentieth century, …Congress created statutory bases permitting the President to declare a state of emergency and make use of extraordinary delegated powers. …The International Emergency Economic Powers Act (IEEPA) is one such example of a twentieth-century delegation of emergency authority. …IEEPA grants the President extensive power to regulate a variety of economic transactions during a state of emergency. …Since 1977, Presidents have invoked IEEPA in 54 declarations of national emergency. On average, these emergencies last nearly a decade. Most emergencies have been geographically specific, targeting a specific country or government. …No President has used IEEPA to place tariffs on imported products from a specific country or on products imported to the United States in general. However, …such an action could happen. In addition, no President has used IEEPA to enact a policy that was primarily domestic in effect. Some scholars argue, however, that the interconnectedness of the global economy means it would probably be permissible to use IEEPA to take an action that was primarily domestic in effect. …Neither the NEA nor IEEPA define what constitutes a “national emergency.” …While IEEPA nominally applies only to foreign transactions, the breadth of the phrase, “any interest of any foreign country or a national thereof” has left a great deal of room for executive discretion.

You can click here for the actual legislative language of IEEPA.

You’ll see that the President has the power, for all intents and purposes, to severely disrupt or even block financial transactions between people and/or companies in the United States and people and/or companies in a designated foreign country.

And there’s no limit on the definition of “emergency.”

One could argue that an emergency declaration and a ban on the movement of money wouldn’t necessarily prohibit a company from doing business in a particular jurisdiction, but it surely would have that effect.

The economic consequences would be profound. In a negative way.

By the way, the White House Bureau Chief for the Washington Post responded to Trump’s tweet with one of his own.

He says the President, who criticizes socialism, is acting like a socialist.

He’s actually wrong, at least technically.

Socialism is government ownership and control of the means of production.

What Trump is seeking is private ownership and government control. And there’s a different word for that economic policy.

P.S. It’s a good idea for the U.S. government to have powers to respond to a genuine emergency. But it shouldn’t be the decision of one person in our separation-of-powers system. It was a bad idea when Obama was in the White House, and it’s a bad idea with Trump in the White House.

In peacetime, an emergency should require the approval of Congress. In wartime, it should require approval of the House and Senate leadership from both parties.

P.P.S. Trade laws are another example of Congress delegating too much power to the executive branch.

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I wrote two days ago about how the White House is contemplating ideas to boost the economy.

This is somewhat worrisome since “stimulus” plans oftentimes are based on Keynesian economics, which has a terrible track record. But there are policies that could help growth and I comment on some of them in this interview.

The discussion jumped from one idea to the next, so let’s makes sense of the various proposals by ranking them from best to worst.

And I’m including a few ideas that are part of the discussion in Washington, but weren’t mentioned in the interview.

  1. Eliminate Trade Taxes – Trump’s various trade taxes have made America’s economy less efficient and less productive. And, as I explained in the interview, the president has unilateral power to undo his destructive protectionist policies.
  2. Index Capital Gains – The moral argument for using regulatory authority to index capital gains for inflation is just as strong as the economic argument, as far as I’m concerned. Potential legal challenges could create uncertainly and thus mute the beneficial impact.
  3. Lower Payroll Tax Rates – While it’s always a good idea to lower the marginal tax rate on work, politicians are only considering a temporary reduction, which would greatly reduce any potential benefits.
  4. Do Nothing – As of today, based on Trump’s statements, this may be the most likely option. And since “doing something” in Washington often means more power for government, there’s a strong argument for “doing nothing.”
  5. Infrastructure – This wasn’t mentioned in the interview, but I worry that Trump will join with Democrats (and some pork-oriented Republicans) to enact a boondoggle package of transportation spending.
  6. Easy Money from the Fed – Trump is browbeating the Federal Reserve in hopes that the central bank will use its powers to artificially reduce interest rates. The president apparently thinks Keynesian monetary policy will goose the economy. In reality, intervention by the Fed usually is the cause of economic instability.

In my ideal world, I would have included spending cuts. But I limited myself to ideas that with a greater-than-zero chance of getting implemented.

I’ll close with some observations on the state of the economy.

Economists have a terrible track record of predicting twists and turns in the economy. This is why I don’t make predictions and instead focus on analyzing how various policies will affect potential long-run growth.

That being said, it’s generally safe to assume that downturns are caused by bad economic policy, especially the Federal Reserve’s boom-bust monetary policy.

Ironically, some people then blame capitalism for the damage caused by government intervention (the Great Depression, the Financial Crisis, etc).

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When I talked to CNBC on Wednesday, I was very critical of Trump and other Republicans for promoting protectionism, Keynesian monetary policy, and wasteful spending.

Yes, I give Trump and the GOP credit for improvements in regulatory policy and tax policy. And I used to think that the pro-growth effect of those reforms was enough to balance out the anti-growth effects of the bad policies.

But I now think the net effect of the Trump presidency is to expand the overall burden of government.

In early July, my report card on Trump’s economic policy (based on the five key indices in Economic Freedom of the World) had him slightly above a C average.

Now, as you can see, he’s slightly below. And since Republicans in Congress are largely going along with Trump’s policies, they also deserve blame.

I realize that people also care about other matters, such as social issues, the judiciary, and foreign policy, so it’s not my goal to influence how anyone votes.

But I do want people to understand that economic policy matters. And for readers who like Trump (or at least think he’s a less-worse alternative than Sanders, Harris, Warren, etc), be forewarned that Trump’s big-government policies are increasing the probability of having Democrats win in 2020.

The lesson Republicans should have learned from Ronald Reagan is that good policy is good politics (my Fourth Theorem of Government).

George H.W. Bush didn’t learn that lesson. George W. Bush didn’t learn that lesson. And now Trump is demonstrating that he didn’t learn that lesson.

P.S. Some of us knew ahead of time to expect bad policy from Trump.

P.P.S. Since my 2016 election prediction was wrong, feel free to ignore my political prognosticating.

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In this interview with Fox Business, I make my usual points (trade barriers are misguided, China is protectionist, Trump’s not responding wisely, etc).

For today’s column, though, I want to discuss who actually bears the burden of Trump’s trade taxes.

All of us (including the host) pointed out that consumers will pay more. To be sure, the tax technically is paid by importers as goods enter the country, but there’s near-universal agreement that the cost is largely passed along.

But keep in mind that American consumers are not the only victims. As I pointed out last year, as well as earlier this year, there’s lots of secondary damage. Taxpayers, workers, retailers, exporters, manufacturers, and investors in the United States also suffer.

And in other nations as well.

From an economic perspective, the key thing to understand is that there are direct costs and indirect costs. The importer bears the direct costs of the trade tax (i.e., they’re the folks who actually send money to the government).

The rest of us bear the indirect costs because the economy is less efficient and productive.

  • As consumers, we pay more.
  • As workers, we get paid less.
  • As investors, we earn lower returns.

There also are added costs on specific trade-dependent sectors (agriculture, for instance), as well as future victims since protectionism by the U.S. triggers protectionism by other nations.

And this doesn’t even consider the potential harm of currency devaluations. Geesh, no wonder financial markets are spooked.

The bottom line is that Trump is playing with fire. I’ve been happy to give him credit for his good policies (tax plan, regulatory easing), but what he’s doing on trade is definitely doing a lot of damage (exacerbated by the reckless spending).

To be sure, China also is suffering. But hurting ourselves to hurt China is not a smart strategy.

P.S. Taxes on trade are like taxes on business. In the former case, politicians say they’re imposing taxes on other countries, but people (consumers, workers, investors) are the victims. In the latter case, politicians say they’re imposing taxes on corporations, but people (consumers, workers, investors) are the victims.

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I point out in this interview that the 2011 Budget Control Act (BCA) was the only big victory for taxpayers this century. It imposed spending caps on discretionary spending and led to a sequester in early 2013, which was Barack Obama’s biggest defeat.

The bad news is that the BCA is merely legislation. That means politicians can conspire to bust the spending caps – which is what they did at the end of 2013, as well as in 2015, 2018, and again this year.

This most recent deal may be the worst of the worst. The Committee for a Responsible Federal Budget (CRFB) shows that it brings discretionary spending almost up to the level we reached during Obama’s pork-filled stimulus.

By the way, the chart also shows that Bush was a big spender and that we actually had a bit of spending restraint after the Tea Party-themed 2010 mid-term elections.

But let’s focus on today.

Here’s one more chart from CRFB. It shows that Trump is doing a good job of impersonating Obama with huge, across-the-board spending increases.

These charts show why I’m so depressed. And let’s not forget that they are only measures of discretionary spending. The outlook for entitlement spending is even worse!

In other words, we’re on the path to fiscal crisis. Is there a solution?

Yes, we could adopt constitutional restraints on the growth of government. I mentioned Colorado’s Taxpayer Bill of Rights in the interview, as well as the “debt brake” in Switzerland.

But there’s zero chance that today’s crop of politicians will enact this kind of sensible reform. We’ll probably have to wait until a crisis occurs. At which point it may be too late.

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As I explained last year, Trump is right and wrong about China and trade. He’s correct that China doesn’t play fair, but he mistakenly fixates on the trade deficit rather than going after China’s subsidies and cronyism.

And, as I note in this brief interview from yesterday, he’s making a mistake by not using the World Trade Organization to curtail China’s anti-market policies.

For further information, I wrote a column about the five things everyone should understand about the US-China trade squabble.

But I also think there are two points from the interview that deserve elaboration.

  • First, I should not have said the WTO was a “threat” to China. Yes, the Geneva-based organization almost surely would rule against many of China’s policies, but getting rid of subsidies and cronyism would be very beneficial for the Chinese economy. In other words, China would enjoy more growth and prosperity if it had to fix its bad policies in response to adverse WTO rulings. And, of course, the United States and other countries also would benefit as well.
  • Second, I want to explain what I meant in my closing point about whether China could “trick Trump.” The best outcome of negotiations is genuine free trade between the US and China, with no subsidies and cronyism to tilt the playing field. But since Trump wrongly fixates on trade balances, I worry that China might seek to preserve its bad policies and instead mollify the president by agreeing to something gimmicky (like purchasing X tons of soybeans or importing Y number of cars).

I’ll close by addressing a common complaint that the WTO would not be an effective vehicle for liberalization.

Given how trade taxes have dropped since the WTO was created, I think this is a very bizarre assertion.

Unlike other international organizations, which have dismal track records, the WTO has actually helped increase economic freedom around the world.

And that’s good news for America. And the rest of the world as well.

The WTO also is willing to stand up to China when it’s wrong. Here are some excerpts from a recent report by Reuters.

China has halted a dispute at the World Trade Organization over its claim to be a market economy, a panel of three WTO adjudicators said on Monday… One trade official close to the case said so much of the ruling had gone against Beijing that it had opted to pull the plug before the result became official. “They lost so much that they didn’t even want the world to see the panel’s reasoning,” the official said. …China had insisted that they treat it as a “market economy”, countering their view that the price of Chinese exports could not be taken at face value due to state interference in the economy. …the United States and the EU…said Chinese goods — especially commodities such as steel and aluminum — were still heavily underpriced because of subsidies and state-backed oversupply.

Last but not least, here’s a chart from the Peterson Institute showing how the United States has been the most active participant in the WTO’s process for dispute resolution.

The bottom line is that both China and the United States will benefit if there’s more economic freedom and less government intervention.

But Trump doesn’t understand trade and China’s leaders don’t want to give up their grip on the allocation of capital. So I’m not holding my breath waiting for a good outcome.

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Way back in early 2016, I asked whether Donald Trump believed in smaller government.

A few months later, I concluded that the answer was no. Trump – like Bush and Nixon – was a big-government Republican.

I wish that I was wrong.

But if you look at the budget deal he approved last year, there’s no alternative explanation. Especially since there was an approach that would have guaranteed a victory for taxpayers.

Now it appears that he is on the verge of meekly surrendering to another big expansion of the federal budget.

The Washington Post has a story on the new deal to increase spending.

…the final details of a sweeping budget and debt deal are unlikely to include many — if any — actual spending cuts… The agreement appeared likely to mark a retreat for White House officials who had demanded major spending cuts in exchange for a new budget deal. …instead of the $150 billion in new spending cuts recently demanded by White House acting budget director Russell Vought, the agreement would include a significantly lower amount of reductions. And those reductions aren’t expected to represent actual spending cuts, in part because most would take place in future years and likely be reversed by Congress at a later date. …In practical terms, the budget agreement would increase spending by tens of billions of dollars in the next two years, a stark reversal from the White House’s budget request several months ago… Agreeing on new spending levels also avoids onerous budget caps that would otherwise snap into place automatically under an Obama-era deal, and indiscriminately slash $126 billion from domestic and Pentagon budgets.

The establishment-oriented Committee for a Responsible Federal Budget (CRFB) is aghast at the grotesque profligacy of the purported agreement.

…this agreement is a total abdication of fiscal responsibility by Congress and the President. It may end up being the worst budget agreement in our nation’s history, proposed at a time when our fiscal conditions are already precarious. If this deal passes, President Trump will have increased discretionary spending by as much as 22 percent over his first term… There was a time when Republicans insisted on a dollar of spending cuts for every dollar increase in the debt limit. It’s hard to believe they are now considering the opposite – attaching $2 trillion of spending increases to a similar-sized debt limit hike.

I sometimes differ with the folks at the CRFB because they’re too fixated on debt rather than the size of government.

But in this case, we both find this rumored deal to be utterly irresponsible.

From a liberty-minded perspective, the Wall Street Journal opines about the spendthrift agreement.

House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin are negotiating another spending blowout as part of a two-year budget deal, and let’s hope the talks break down. The price could be another $2 trillion in deficit spending… The Budget Control Act of 2011 puts caps on spending that both parties have to agree to lift. In 2018 Congress passed a two-year budget deal that blew out domestic spending by more than $130 billion in exchange for a buildup in defense. The bipartisan spending party is hoping to repeat the exercise for fiscal 2020 and 2021… After the last two-year deal Mr. Trump vowed never to sign another one, but here he is again. …The GOP may…underestimate the political cost of campaigning on another spending deal that increases the size of government. It will be harder to run against the spending plans of Elizabeth Warren or Kamala Harris with Mr. Trump’s first-term spending record.

I’ll close with a chart I prepared based on the numbers for domestic discretionary spending from the Mid-Session Review, as well as Table 8.1 from the Historical Tables, both from the Office of Management and Budget.

The numbers show that we had more fiscal restraint under Obama (blue line) than Trump (orange line). And Trump’s numbers will now be even worse with the new deal.

I added the Excel-generated trendline to show what would have happened if Obama-era policies were maintained.

But since that produced an unrealistic assessment, I also showed (green line) what spending would have looked like if politicians had obeyed commitments from the 2011 Budget Control Act (BCA).

Some of these numbers are back-of-the-envelope calculations, but the bottom line is clear. Trump is worse than Obama on spending.

And that means big tax increases inevitably will be the result.

P.S. When I recently issued a report card for Trump’s economic policy, I gave him a “B-” because I decided his good tax policy outweighed his bad spending policy. If this deal gets finalized, he drops to a “C-” because of the big expansion in the burden of spending.

P.P.S. Trump also is weak on entitlement spending, which is the biggest part of the federal spending burden.

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