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Posts published in “McKee”

What a mess

mckee

Our government is in dire straits, with an impossibly arrogant president so deep in corruption, incompetence, and ignorance that the foundations of our democracy have been laid bare and are actually beginning to wither. He has managed to circumvent or stymie the intricate network of checks and balances put into place to prevent just this circumstance. The national press has been rendered essentially impotent and fully half the country is either caught up in the machinations spewing forth from the Whitehouse or is just plain oblivious to the happenings.

We are so far adrift in our foreign affairs, and so completely cut off from our allies and trading partners, that we are on the verge of being considered irrelevant by the rest of the world. We have become a selfish bully internationally, tolerated and placated by our friends and manipulated into atrocious mistakes by our more devious enemies. We are no longer respected for the examples we set, admired for the skill of our diplomacy, or trusted in the use of our military power. We are no longer considered a leader in the industrialized world.

Our Congress is in shambles. The Republican members have led the Senate to abandon its principled independence under the Constitution and to become hostage to an autocratic bully who demands personal loyalty and absolute obedience no matter what the cause. The result is a dysfunctional body that has failed to uphold its responsibility of oversight over the executive branch, a necessary element of the checks and balances created by the founders.

The most disturbing development is the complete abrogation of any respect for the truth. From a not-distant time when the worst thing a high-level political leader could be called out for was a deliberate lie, we now accept, acknowledge and report on “alternative facts,” as though truth were merely an option to be decided relatively by the desirability of the position taken. The president’s penchant for distorting the facts is to the point where the press has given up trying to keep up with the truth; instead, they report his words verbatim and then offer non-committal scores on how many lies he has told – with a number that now reaches into the thousands.

The necessity of replacing Trump this November could not be more apparent. The impeachment is behind us, and history will eventually tell whether the Senate trial was just a mistake or an outright debacle. Things are bound to get worse, and if Trump is re-elected, they will get much worse. He is already testing the concepts of “president for life” with his base at rallies and in casual conversations, and the cognoscenti foresee obvious signs of his intentions to seek a way around the 22d Amendment if he is elected to a second term. We are literally facing the possibility of a dictatorship being forced upon us.

Against this background, the Democratic Party gives every appearance of doing its best to screw things up. The party is made up of so many factions that working towards a consensus is proving to be a Sisyphean task – and one that appears out of the grasp of current party leadership. The run-up to the formal campaign has been an unorganized cluster-bleep, with no guidance from the DNC. The Iowa curtain-raiser was a disaster, and the DNC and its chairman are getting soundly roasted for it. Party management continues to maintain that the open and unfettered competition will produce the strongest candidate – which sounds fine in theory. In practice, the number of candidates running against each other present a substantial risk of the predictable infighting chewing up the winner of the primaries so badly that he or she will not recover in time to win the general.

From jaundiced view outside the party, by the undecided, independents, and disenchanted Republicans, being the potential voters who have to be corralled in the general election if Trump is to be beaten, the candidates currently leading in the race to face Trump in the fall look like (1) an over-the-hill avowed socialist, (2) an ultra-liberal technocrat so deep in the weeds that she keeps getting in her own way; (3) a nimble former Navy lieutenant, too soon out of college, who managed to become mayor of Podunk before coming out; (4) a good natured has-been who is telephoning in his third try for the job, and (5) an unknown and untested senator from Wisconsin. Wisconsin!

Inside the party, the youth are behind Sanders, but the older voters are put way off by his avowed socialism. Further, too many women blame him for Hillary’s calamity last time out. The far left are enamored with Warren but the moderates consider her a screwball. The blacks and browns won’t touch Mayor Pete yet, and Biden, who started out as the top dog, is really the second choice of even his closest supporters – he’s OK but they still keep looking around. His campaign is currently taking on water, and unless he’s got a rabbit in a hat somewhere, even a landslide in South Carolina may not be enough. Klobuchar did well in Iowa and got a huge bump in New Hampshire, but it is not known yet whether she can maintain and continue to grow on her recent successes.

In the second tier, Yang and Bennett finally tossed in theirs towels, but there are still the two billionaires, both late arrivals, who have been pouring their own money into the melee. If it were not for the money, they would be considered jokes. As it is, no one really knows yet what to make of them. The rest appear too far behind to have any chance.

Most Democrats will say that they can support any of the candidates up there, top tier or not, but that alone will not win the general. It has to be assumed that the Democrats will turn their own voters out in numbers to beat, or at least match, the turnout from the declared Republicans. The winner, then, is going to be determined by the key votes in the battleground states from the independents and disenchanted Republicans. That is going to take something more that party resolve.

This means the ideal candidate probably has to come from the middle. Best would be a moderate, acceptable to the progressives who will not drive off the youth, or a progressive, satisfactory to the moderates who will not drive off the elders. He or she will keep the non-white vote energized and the women fired up, will satisfy the unions without driving small business away, be able to sustain the withering attack that will come from big business and the hard right, and manage throughout to keep Trump safely tethered or in his cage. Sanders and Warren are too far left, Buttigieg cannot get the black and tan votes, Bloomberg is too old and is going to have trouble with the non-white vote on account of baggage from his time as mayor of NYC.

This probably means Biden, Klobuchar, Buttigieg if he solves his problem with the non-whites and can hold on to the evangelicals in the South once they realize he is gay, or Steyer, if he can solve the problem of name identification and the stigma of being a billionaire – and for all of them, that they can enchant or scare the youth vote into staying engaged and getting out to vote. If Bernie is tossed under the bus, this is going to be a tall order under the best of circumstances.

One can foresee a Democratic convention with three to five candidates going in, each with a share of the delegates but no clear front runner – a sight not seen since the 1950’s. If such should happen, it might be possible to run the convention in a constructive fashion, and come out with the entire party enthusiastically united behind the selection, but the risk is that the convention will divide itself into warring factions with the winner winding up not being the consensus leader but rather a compromise, mutually unsatisfactory to most, but with a good sized number walking away unsatisfied and planning on staying home. Which could be a disaster.

Fasten your seatbelts, everybody, it is going to be one hell of a ride.
 

On Warren’s wealth tax

mckee

“Congress! Congress! Don’t tax me --
“Tax that fellow behind the tree”

--- Anon, circa 1930

Elizabeth’s plan sounds so reasonable, how could anyone find fault with it? A static wealth tax on the super-rich of a few pennies per year on every dollar over $50 million. Come on, who can really find fault with just a couple of pennies from the super wealthy?

The unsavory part of her argument on this issue lies in her promise that no tax increase in other taxes now being paid by the middle class will be necessary to pay for any of her social programs because they will all be financed in the future by the taxes on the super-rich. This is demonstrably not true.

The whole idea of a wealth tax has the super-rich-howling like mashed cats, and has the Republicans from edge to edge with their hair on fire. But her plan is also opposed by a fair number of middle-of-the-road economists, scholars, and tax professionals for the very sound reasons that it would have a repressive impact upon the economy, that it cannot be counted on to produce consistent revenue streams into the future, and that it would be extraordinarily difficult and expensive to administer and enforce.

Let’s take a look at these reasons one at a time:

The Penn-Wharton Budget Model (University of Pennsylvania’s Wharton School of Business) estimated that the wealth tax proposal would cause the nation’s annual economic growth to decrease by 0.2 percentage points each year over ten years, according to a New York Times report. The PWBM was previously applied to Trump’s 2017 tax cut, were it predicted that the cuts would increase economic growth by 0.06 percentage points annually over ten years – a very low figure that did not please the Trump Whitehouse. The model reports that Elizabeth’s wealth tax would be three times more impactful than Trump’s tax cuts, but in the opposite direction. Thud.

Taxing the entirety of one’s wealth by a fixed rate that is anywhere close to the expected ROI (return on investment) from that wealth will, because of normal fluctuations in the economy and over time, inevitably erode the base wealth. Consider for example, according to Forbes, the average ROI for all investment income for fiscal 2018 was 4.8%; the ROI of huge fortunes tend to fall with the range of national averages. If Elizabeth’s tax were in place for this year, her proposed top rate of 6% on billionaires would wipe out the year’s income and erode the base of every fortune with an actual ROI for the year in the range of the year’s 4.8% average. Every year the actual ROI fell below the fixed rate of tax, wealth would be eroded. Further, once it is gone, a recovery to par or above the next year will not return the base to the previous figure.

Bernie touts this aspect as a positive feature of his plan, not a bug. He proposes a maximum tax rate of 8% on wealth over $10 billion, and predicts s that the wealth of billionaires will be reduced by half within 15 years. Bernie wants the super-rich class to eventually disappear and his plan is truly aimed at redistribution of wealth through taxation.

An aspect more practical and easier to understand is the expense and difficulty in administering and enforcing a wealth tax. Although we rely upon self-reporting for income taxes, the process is aided greatly because most income is also measured and reported by third-party sources. Our employers and all manner of individuals and businesses we are in contact with are all obligated to report to the government when substantial income is paid over to us – and in the case of employment, to withhold and remit directly to the IRS an estimated amount against the potential amounts due. This wide net of required reporting plus mandatory employee withholding make the cross checking of sources into a relatively simple matter and bring the overall administration and enforcement of the income tax laws a manageable endeavor.

The measurement and taxation of static wealth, however, is a different matter. The accumulation of wealth is a private matter, and there are few opportunities for reliable third-party reporting, as in the case of income. Consider the difficulties and expense in administering and collecting estate taxes when large estates are involved. In 2018, the IRS audited 1283 returns of estates in excess of $10 million.

It often takes years to complete and close a single estate return that satisfies everyone from the administrators of the estate to the beneficiaries to the taxing authorities. Given the estimate of over 75,000 families with wealth in excess of $50 million, and a target for compliance of auditing one-third of the wealth tax returns filed, this means there will be somewhere around 25,000 wealth tax returns to be audited every year - an impossibility with the IRS at present staff levels, None of the candidates estimate how large the IRS would have to become to service the requirements of the wealth tax returns, or the expense of it all.

Nor do the candidates seriously discuss the efforts and counter measures that will be required to stave off the armies of sophisticated CPAs, lawyers and tax professionals who will come forward seeking ways to avoid or defer the imposition of taxes. An article in a recent on-line journal on tax accounting estimated (with some degree of anticipation, to be sure) that preparation of annual returns for the super-rich who are subjected to the wealth tax proposed by Elizabeth or Bernie could easily exceed $150,000 per return per year. The expected hoopla that will be created when this process has to be repeated for the tip-top of the super-rich every year boggles.

In 1990, twelve of the 34 nations of the free market countries of Europe had in place some form of wealth tax. Today, only four retain this type of tax. According to an NPR report, the countries which abandoned their form of wealth tax did so in the main because (a) they were too tough to administer and too expensive to enforce, (b) too many rich people were fleeing the country and (c) they did not bring in the amounts of revenue (when compared to the cost of administration) sufficient to justify the problems.

Elizabeth estimates that her wealth tax will produce $2.75 trillion over ten years. Bernie says the tax will result in the wealth of billionaires being reduced by half over 15 years. We cannot have it both ways. The inevitable result, once the wealth base begins to be seriously eroded, is that revenues from the tax will begin to dwindle and there will be a need to seek other sources to sustain the social programs.

Final conclusion? If the objective is redistribution of wealth, Elizabeth’s tax is a mechanism that will probably contribute to that goal. If the objective is to develop a steady, dependable source of revenue for the multitude of social programs that are being proposed, this new tax will face many problems. Either way, Elizabeth will have a difficult time with this issue in the general election.
 

An eye on the ball

mckee

When Will Rogers was asked about his politics over 90 years ago years ago, he replied, “I am not a member of any organized political party. I am a Democrat.” The truism persists to this day. As what may be the most important election of this century approaches, the Democratic candidates seem hell-bent on twisting themselves into pretzels trying to convince that they are sufficiently to the left and pure enough for the primary while avoiding any traps or dead ends that might sabotage their chances in the general election.

In the political polls published every few minutes, the top four candidates – Biden, Sanders, Warren and Buttigieg – are favored nationally by over 70% of those responding, with the rest of the pack splitting up less than 20% of the favorable responses. To make matters more complicated, and despite an already overcrowded menagerie of wannabes, two of the bottom layer now consist of latecomers Michael Bloomberg and Tom Steyer – billionaires both – who have begun throwing bundles of money into the works. Both have committed to putting their own money into the campaign, at least through the primaries, and are not dependent upon contributions. Whether money alone can catapult either into the top tier of candidates remains to be seen.

With a huge issue for Democrats being the search for a solution to the unsustainable shifting of wealth to the top 2%, with everyone focusing on the necessity of undoing the tax benefits and other devices Trump has granted to the super rich, and with the middle and lower classes continuing to see their shares dwindle and their futures becoming bleaker as the rich continue to become richer, it is difficult to understand how the Democratic party can be expected to follow either these two American oligarchs anywhere. Watch for the cognoscenti to have a field day dissecting the hoopla these two are going to cause.

Money, for everyone else, is a bugaboo. Three campaigns – Harris, Castro, and Booker - appear to be on or close to life support. Harris and Castro have overhauled their organizations, releasing staffers, and closing offices – almost always an indication of pending collapse. Booker, who cannot seem to get any traction, is running out of money and recently announced that he may not make the cut for the December debates. The newest entry, Deval Patrick, once the governor of Massachusetts, was all but invisible when he announced to nobody in particular in June that he was running. He is still all but invisible today, without even a dent in the polls and complaining that money sources are all dry or committed elsewhere.

The early poll numbers that appeared to put Yang in the running may have been the result of curiosity rather than genuine interest. There has been no sign of continued movement beyond his initial bump, which, with his internet savvy, he managed to engineer into participation in every debate until now. It does not appear that he will make the December cut. Yet he hangs on.

With her campaign stuck in neutral, with little money, and with no visible organization, Gabbard also hangs on. Her remarks and a recent personal visit to Syria’s Bashar al Assad generated blistering criticism from all quarters, and have left her without a single friendly face among the media. She is even losing ground in her home state, having triggered an aggressive primary opponent for her House seat. She recently announced she is giving up her House seat to concentrate on the presidential primary. When she does depart the campaign scene, it will be to a few months as a lame duck congresswoman and then to obscurity. Perhaps this is the reason she hangs on.

Of the original cast of over 22, Bennett, the senator from Colorado, continues to ride in the caboose with a skeleton staff, having but spending almost no money. He has not appeared for any of the debates except the first, but announced that he still expects to stay though New Hampshire – for some reason that is not readily apparent.

Of the crowd at the bottom – and excepting the two billionaires – only Klobuchar appears to be steadily rising from the deep anonymity where she started to a standing that now places her next in line in many polls, just below the top tier. She is demonstrating an ability to keep a steady eye on the middle of the road, where elections are actually won, she consistently remembers that the main objective is to beat Trump, and she steadfastly refuses to be drawn into any name calling or policy fights with other candidates. She raised a respectable $17.4 million as of September 30 and has made all the debates including December.

That leaves the big four – Biden, Sanders, Warren and Buttigieg - each dragging their own anchors, each with identifiable members of the commentariat who can be counted on for favorable but subtle coverage almost daily, and each followed by a noisy coterie of enthusiastic helper-outers from within the party faithful who are loudly proclaiming that their candidate is the only true way.

The problems of these four are mundane and legion. Sanders calls himself a “democratic socialist,” which is enough to scare the bejesus out of anybody over 50. Also, because the primaries are supposed to be selecting a Democrat to lead the party, it is a problem for many that and Bernie is not a Democrat. With Elizabeth it is that she sees a black-hearted Republican capitalist under every rock, and is convinced the only solution is government protection against everything. Mayor Pete is going to be a wonderful candidate – in about 10 more years. Except for the non-white vote, the fact that he is gay poses no risk to his election. The only area where objection will be found among white voters is with the evangelicals to the far right, and they are not going to vote for any damn Democrats anyway, so nothing is risked here. The non-white vote is another matter. No Democrat has won anything without carrying the non-white vote and Buttigieg has only 2% of this bloc at this time.

And that leaves Joe. He has been around longer than anyone, has made every mistake one can make, and has never received anything but lukewarm interest from the party poohbahs. Even when Joe is getting a friendly mention in the press, he gets an elbow. They always – always without exception – bring up one of Joe’s faux pas or gaffs or tangled-tongue mishaps as an aside to whatever actual story is being covered for the day. And yet, here he is. Despite all the baggage piled around him, Biden is on top of the pack of Democrats in the primaries where he has been since the beginning, and he is a clear leader in every measure of the general contest between any of the Democrats and Donald Trump.

If only the Democrats did not have to resolve the pesky policy decisions between the left and the more left and could simply declare that their primary and single objective was to beat Trump, preferably by a candidate with coattails sufficient to bring along the House and Senate. If that was only the objective here, there would probably be no question that Biden should be the candidate and that everybody else ought to get out of the way. The party could get behind Biden, and the general election against Trump could start right now.

Wait a minute. Isn’t that the number one objective right now? Doesn’t everything else pale by comparison to the mandatory, essential necessity of ousting Trump? If the Democrats can’t get this right in their primary elections, what are the chances that they won’t screw it up in the general?
 

The bully doubles down

mckee

Anybody remember Trump announcing that trade wars were easy and would be won quickly? This was over two years ago, and as we head toward the third full year of seriously compromised relations with China, is there anyone out there who still believes that?

Trump announced the imposition of an additional 10% tariff on $300 billion worth of Chinese imports, almost everything China imports to us in the area of consumer goods. This is on top of the 25% in tariffs he has already imposed, which will bring the total to 35% on most items. He repeats the completely false and misguided assertion that these tariffs are being paid by the Chinese, not us. In fact, and in most cases, the tariff is nothing more than a fancy sales tax imposed on top of the retail price and paid by the consumer.

Fox News faithfully repeats Trump’s moronic nonsense, and every Republican insider who should know better looks the other way. Treasury’s Mnuchin and Commerce’s Ross, who surely knows better, have kept their mouths firmly shut. Senator Risch and his foreign relations committee and Senator Wicker and his commerce committee remain silent.

Trump scoffs, and says the Chinese are having to absorb the cost through devaluing the yuan. This further demonstrates Trumps stunning lack of understanding of basic economics. Trump accuses China of manipulating the yuan not understanding that devaluation is the reverse of what a manipulator would attempt – it is going the wrong way. It is true that China raced to stabilize the yuan when the bottom dropped out, putting the floor at 6.99 yuan per dollar, but the fall itself was a market adjustment resulting from the ongoing trade war.

The only impact the fall of the yuan will have in the long run is to increase the inflation in China as the Chinese economy moves to absorb the deflation by raising prices. There will be some short-term opportunities in the U.S. for deals at old prices while the market adjusts, but the end result will be much higher prices reflecting real values underlying the yuan. The losers in China are those holding paper and fixed contracts at the old prices who have to accept payment with the revalued yuan. New deals will be at new values, and Trump’s notion that China will absorb any of the new tariffs will evaporate.

As the bottom was falling out under the yuan, our stock market tumbled down the worst drop of the year on Friday and Monday. China has ceased imports of soybeans, and the stockpiling has reached proportions in the U.S. never seen before. Farmers are going broke and Trump has in place a $16 billion bailout for farmers hurt by the trade war. And still nobody says anything.

According to the Wall Street Journal, Trump has collected $63 billion in tariffs on Chinese imports through June of 2019, paid by the American importers as the goods arrived in ports in the U.S. The associated press reports that the latest tariffs will cost the average family an additional $200 per year, starting just in time for the holidays. This is on top of the average $830 per year the existing tariffs already cost the average household per year, which will raise the total to over $1,030 per year in loses due to increased prices for the average family – meaning that every dime of the savings to the middle-class family allegedly granted by the so called 2017 tax reform bill will be erased completely beginning yet this year.

Further, China has announced that it will impose counter tariffs on U.S. imports, further slamming American exporters and potentially magnifying the damage to both of the world’s biggest economies. Trump claims he will continue to “tax China” until they make a deal, continuing to claim, with his eyes tight shut, that China is paying this bill not the American consumer.

So far, the impact of Trump’s war against China has netted the U.S. exactly zero in terms of new or improved marketing deals – no change in any quarter of any measurable kind in any area of trade relations with China. China is showing no sign of being willing to accept any of Trump’s demands. Instead, it is publicly hunkering down in an obvious strategy to wait out the end of Trump’s term. All of the Democratic candidates have promised to abandon Trump’s ill-conceived program of general tariffs as first orders of business if and when the administration changes in 2021.

This is a war of attrition here, and the question is who can hold out the longest as their economy crumbles, their exports dry up, and their consumers go without? We may have the stronger economy with probably greater resilience, but China, at a population of 1.386 billion, has four times our number to spread the pain around, plus a managed economy that can be regulated to smooth the ride, plus a thousand year history of being able to maintain with total self-sufficiency. On top of all this, China is our biggest creditor, holding some $1.1 trillion in U.S. treasury bills. While no one expects China to dump these investments, if it should even decide to rattle the cages a little, the bond market may well panic.

In China, all we are doing is slowing their growth rate from what was in the range of a whopping 10% to a still healthy 6%. In the U.S., we were hoping for a reasonable domestic growth rate of 3% or so – Trump promised 4% to sustain his 2017 tax cuts, but nobody believed this was in the cards. Now, after almost two full years of tariffs, most economists predict our rate of growth will soften to a middling 2% - it is currently healthy but wobbling at 2.1%. One study, released in February of 2019 by a non-partisan economic consulting firm in Washington, predicted that by three years out, the economic impact of the general tariffs in place then would be a decline in the U.S. GDP of just over a full one percent, an impact on an average family of four of $2,390 in increased prices per year, and a loss of 2.2 million jobs.

The majority of experts appear to expect foreign trade to continue a backslide which will significantly affect inflation and drag the profitability of American multinational companies towards if not over the brink. The heaviest cost will fall on the middle class in terms of increased prices on consumer goods and the loss of jobs. Even Trump supporters do not offer rosy pictures; most say only that it is not as bad as it seems, pointing to the fact that Caterpillar was able to absorb $70 million in tariff costs and still turn a profit. $70 million! It is astonishing to see someone try to make a positive statement of the government imposing this magnitude of unnecessary tax cost on a single business.

Congress could fix it, but it won’t. The Republican majority in the Senate behind Leader McConnell are paralyzed and have done nothing, despite the contention by most experts that Trump’s tariffs are against the law. Tariffs are supposed to require Congressional authority unless necessary for national security. Trump has jammed the entire general tariff structure, including all the consumer tariffs, under an executive order based on national security.

So, now what? As Trump surrounds himself with incompetent sycophants, refuses to accept advice from anyone genuinely knowledgeable, and continues to make stuff up any time he is faced with a tough question, one might ask, “How can it get any worse?”

Watch and learn, my friends, just watch and learn.
 

On the Trump trade war …

nckee

Take this statement: “We are losing billions of dollars through on-going trade deficits and it has to stop.” Is this true or false? It is the mainstay of Trump’s attitude towards foreign trade. It does have a seductive ring to it, and a recent CBS poll says that six in ten of us favor Trump’s efforts. Some recent man-on-the-street interviews give the impression that many of us think showing a little muscle is a good thing. Trump says that trade wars are easy to win. A little short-term pain is all that is happening here and that all will be well soon. After all, isn’t this just part of Making America Great Again?

No, it is not! The facts are that Trump’s entire pitch on foreign trade is total malarkey. Every single word out of Trump’s mouth is wrong. Every word. What he has said demonstrates a stunning failure to grasp even the fundamentals of international trade. He clearly does not understand the consequences of a bilateral trade imbalance and he has not the faintest idea of how tariffs work.

First and most obvious, we are not losing any money as a nation in trade deficits. In a growing economy, an imbalance in trade is merely an indication that there are surplus dollars on one side available for discretionary spending. Since we are by far the largest economy in the world, it is expected that we will have the most in surplus dollars for discretionary spending. The U.S. has operated with a worldwide negative trade balance since 1975 and our economy has grown and continues to grow exponentially. In its simplest form, the outflow of excess U.S. dollars from one year’s imports provides funds to our trading partners for the next year’s increase in exports, and both economies prosper.

Unless political pressures get in the way, or truly illegal or unwarranted government intervention is involved, we do not need to worry about the other country. As long as our own economy is strong and growing, with modest inflation, manageable interest rates, and exchange rates close to par, the market forces alone will keep our interests in a workable position relative to our trading partners.

When one or more of these ratios get out of whack, such as where one side gets unfairly involved in specific markets by way of price fixing, subsidized dumping, or currency manipulation, for example, direct action may be warranted. Adjusting or withholding foreign aid, implementing domestic subsidies, imposing trade embargoes and the use of specific, targeted tariffs are common methods of correcting or countering specific ills in specific trading conditions often found in foreign markets. When needed, these measures are applied deftly, with tweezers and scalpel – not a mean ax or wrecking ball. The objective is to target the precise problem without tipping over the whole table.

One aspect that everyone agrees should not be considered is any notion that trade can be brought into balance by the imposition of general tariffs. One would think that the disastrous consequences of the last attempt to protect the U.S. economy with general tariffs – the Smoot Hawley tariffs of the 1930s – would prevent ever again any serious attempts at trying to force an adjustment to the balance of trade through general tariffs. The Smoot-Hawley tariffs were a disaster; they had no impact on general trade, triggered worldwide retaliation, and worked to worsen and prolong the great depression by years. It took the U.S. decades to rectify the damage done by these tariffs.

And yet, here comes Trump. Against all advice, Trump is using general tariffs to push us into a trade war with China, our second largest trading partner, without cause other than his subjective belief that trading with China is not “fair” and with no defined objective to end his war other than that trade with China has to become “more fair.”

General tariffs are an excise tax upon the U.S. consumer, no matter what Trump and his henchmen try to claim. The objective of a tariff is to artificially increase the price of the item in order to drive the volume of sales or imports down. If the price increases, demand goes down. This is basic economics. The direct impact is on the exporting country because their exports will go down and their revenues will suffer. But the indirect impact is on the consumers in the importing country because their costs are going to go up. Furthermore, general tariffs have the effect of a double whammy because they invariably foster retaliatory tariffs by the other country.

The point is that these tariffs are NOT just being paid by the Chinese exporting companies or the Chinese government. The effects of tariffs are felt by everybody in the market, both sides. After less than three quarters of a year of general tariffs, being since mid-summer 2018, the impact already felt by the U.S. consumer from higher costs and lost jobs is estimated at an average of over $860 per family. This figure will dramatically increase if Trump imposes the next round of tariffs on $300 billion in general trade from China, which he has threatened to do by the end of June.

The imposition of broad tariffs have not produced any results other than to depress markets and cost jobs in both countries and increase the cost of most products involved to consumers in both countries. By the end of May 2019 these tariffs are estimated to have reduced U.S. long-run GDP by 0.2%, reduced wages by 0.13%, and eliminated 156.000 full time equivalent jobs. If Trump imposes the next round of 25% general tariffs on the remaining $300 billion in Chinese imports, which he has threatened to do by the end of June, the hit on our GDP is expected to be at or around -0.45%. (The Tax Foundation, May 31, 2019) In the U.S., each tenth of percentile in reduction of GDP translates to $20 billion, or 79,000 full time equivalent jobs

Trump is ignoring the progress that has been made in trade with China and is making demands that China cannot and will not meet. China is not coming around, we are not well positioned, and no deal with China is imminent. Most experts agree that China is giving every sign of being ready to hunker down and weather out the storm for as long as Trump remains intransigent – or in office. His decision to double down and expands the tariffs broadly across the entire market is about to turn into a complete disaster.

To be sure, is China faring less well than us, with its long-term growth rate slipping from 9% to less than 6%. The turmoil in the market has caused problems with its monetary supply, strengthening the dollar against the yuan (which is going the wrong way if one wants to dampen the volume of imports from China), and wreaking general havoc in its financial markets. But China, culturally and politically, is better positioned to withstand the stress. The Chinese economy is regulated to a degree not possible in the U.S., with targets and objectives broken down into specific five-year strategies. The Chinese are always maneuvering with the long-term effect in mind and the Oriental patience is legendary.

On the other hand, Trump is steadfastly ignoring all the sound economic advice he is being given from all sides – including from well qualified Republicans. Even though the political pressures on Trump from the collapsing export markets and the massive increases in consumer prices throughout the U.S. economy are enormous, and even though China has not flinched or quivered even an eyebrow, Trumps inability to admit error and his penchant for doubling down in the face of impending disaster indicate no relief in sight. Trump seems determined to take the recovering and steadily growing economy he inherited from Barak Obama and, having jerked one of the foundational underpinnings out with an unsupportable trillion-dollar tax cut, he is now determined to wreck international trade. It will only take a few more moves to stall the economy out and turn it all into a nose-dive.

Hang on tight.

Socialism yesterday, today, tomorrow

mckee

The term “socialism” has always been an enigma to Democrats. Its basic theory forms the underpinnings of some of the most long-standing, valuable, and endearing programs of our country and yet the Democrats treat the term itself as an anathema in a political campaign – as if it is the worst thing one could say about a candidate or his or her promises.

In the arena of political debate, the Democrats leave the definition of terms to the Republicans – and they get it wrong. With eyes tight shut and both ears firmly plugged, the far-right poohbahs and cognoscenti loudly maintain that socialism is a misguided, experimental theory that has never worked anywhere or at any time; that if any part of it is adopted in the United States, it will inevitably lead to ruin and despair. Republicans then apply the term to every idea or program proposed by every Democratic running for anything.

The Republicans are wrong in the modern application of socialism, but no one ever calls them upon their errors. They confabulate socialism with communism, and then use the horrible post war conditions of Eastern European autocracies or the corrupt and ineptly managed Venezuela as their examples of socialism run amok. But modern socialism is not communism, and the failures are more due to the consequences of the repressive totalitarian regimes and the corrupt and incompetent administrations rather than to any economic inadequacies of socialistic principles. But rather than take the Republicans on in any debate over these mistakes, the Democrats, individually and collectively, simply run off and hide.

If anyone looked in a different direction, they would see that every democratic country of the industrialized world operates upon at least some underpinnings of socialism. When one compares the economic achievements of these modern western democracies, the results are quite different than what the Republicans represent. Modern socialism puts the emphasis on regulatory controls rather than government ownership. It does not mandate government ownership of all business; it does not negate the profit motive; and it does not forbid the accumulation of wealth. It allows for substantially free markets with ample room and opportunity for individual innovation and achievement, so long as the results are not oppressive or unfair and so long as benefit to the community is not ignored.

The strongest examples of successful socialistic economies are in the Scandinavian countries of Northern Europe. When one examines the economies of Denmark, Sweden, Norway and Finland, and the economic history these countries have enjoyed since the end of World War II, one finds that all are thriving under fundamentally socialistic principles operating within the sphere of democratic governance. According to a recent study by The Heritage Foundation, they are all equal to or ahead of the United States in most quadrants of economic measurement, including not only their average standard of living but in sustained growth, economic freedoms and in the levels of contentment of their middle classes.

The emphasis in modern socialism is on economic guarantees, individual protections, and in safety nets rather than government ownership. It maintains that benefit to the community is or should be a necessary element for anyone utilizing the resources of production and exchange – whether by public or private means – meaning that the aggrandizement of private business must include a public benefit objective along with the accumulation of wealth and realization of profit as being a necessary goal to be achieved.

Although we claim to be a free market, capitalist-based economy, we already incorporate many of these modern, socialist based concepts in our laws today, and we have steadily done so since the turn of the 20th century. Public schools, fire departments and police are socialistic institutions that no community would do without. The early anti-monopoly and unfair competition laws enacted in the 1900s were ground-breaking innovations of the day and were quickly followed by government regulations establishing minimum wages and maximum hours, protection against child labor, requirements for workers’ compensation insurance and unemployment compensation, and laws and regulations pertaining to safety in the workplace. Social security benefits and Medicare health coverage for the aged and disabled are so firmly established, they are considered to be untouchable by even the most extreme right winger. More recently, we have added laws and regulation for the protection of the disabled, towards equality of women in the workplace, and of preventing discriminatory practices towards minorities. The debates today are not whether to keep these programs, but how best to maintain and improve them to the better benefit of all. The socialistic underpinnings are seldom even mentioned.

All of these laws, collectively, could be considered cornerstones of modern socialism –and virtually every one of the laws in the areas summarized were brought about by Democrats, over the objection of Republicans, upon the objection of creeping socialism.

With all of this background, it should be no surprise that Bernie Sanders continues to attract huge crowds of young voters accepting with enthusiasm his version of socialism. Even more dramatic is the cadre of new members of Congress who were elected in 2018 and who are openly advancing the notions of democratic socialism as part of their basic platforms. This, despite the strong efforts of the media, the Republicans, and even members of the mainstream Democratic party to convince them otherwise.

The newer generations of voters, who do not have the experience of the cold war with its frightful examples of the Iron Curtain countries struggling to industrialize under the repressive communist rule, have no reason to instinctively run away from the concepts of socialism. The result is a new wave of voter beginning to think about the differences between Republican and Democratic governance in a more insightful fashion, ignoring the clattering outrage of the old arguments by the simple process of accepting a new banner for Bernie’s ideas – “Democratic Socialism.”

Despite all this, whenever the specter of socialism rears up in political campaigns today, instead of debating the Republicans head-on over any of their foolish premises, the Democratic candidates still go hide. They twist themselves into pretzels to avoid having some proclamation or campaign promise of theirs besmirched with the awful sobriquet. It is bad enough for a Democrat to have to put up with being termed a “liberal,” (which is also left for the Republicans to define) but to be caught off guard and tagged a “socialist” without solid cover to hide under is considered a campaign-ending blunder.

Except for Bernie Sanders, every one of the top line Democrats seeking to unseat the old fool in 2020 is running away from the arguments of democratic socialism. Biden, Harris, Warren, Booker, Klobuchar, Gillibrand, and O’Rourke have all been pointedly quoted as saying they are not socialists, that their programs are not socialistic, and that socialism is not something that is needed in U.S. With the Democrats avoiding any debate on the matter and running away at even the mention of the word, the entire subject of socialism is still left to the Republicans to shape and mold as they wished.

Only one candidate so far, besides Bernie, has addressed the place that socialism might play in a presidential campaign. Pete Buttigieg’s direct answer to CNN’s Jake Trapper, in response to a question about Trump’s declaration that the U.S. would never be a socialist country, is illuminating. Mayor Pete observed that the word “socialism” as losing its power, and that today, it was more likely to be “the beginning of a debate, not the end of a debate. You can no longer simply kill off a line of discussion about a policy by saying that it's socialist,” Pete said, “If someone my age or younger is weighing a policy idea and somebody comes along and says, 'You can't do that, it's socialist.' I think our answer will be, is it a good idea or is it not?" Yeah, Man! Here is a response to the Republican’s challenge that makes sense!

Nevertheless, the Democrats are starting out this silly season just like always – by ceding the high ground of the debate – the definition of terms – to the Republicans and trying to maintain that there will not be even the taint of socialism anywhere to be found in their promises and programs. This means that they will have no place to go when it comes time to roll out the details of their programs and actually put meat on the bones. To attempt to argue that solutions can be reached to the problems at the core of the Democratic Party’s agenda without reference to socialism or socialistic principles is sophistry. When the Democratic candidates start rolling out the details of their programs, the socialistic elements are going to be obvious. This means the candidates are going to get caught, which means the insidious result will be a weakening in the structure of the Democratic position.

The point is that no one is advocating the overthrow of capitalism. The solutions to be offered in all of the programs to be advanced are going to be in the area of socialistic protections and provisions to be added our existing systems: additional protections to the markets from unfair tactics and rigged or artificially dampened opportunities; additional protections to individuals against exploitation or abuse; and additional safety nets where required in the event of unsustaining cyclical reversals. It does not really matter whether we term the results we expect after adding these devices to be free market capitalism with a degree of socialistic protections or socialism with an overlay of free market capitalism. The point is that our economy now exists and is going to exist into the future with elements of both capitalism and socialism, as both are necessary and essential to the operation of the society to which we have become accustomed.

Given all of this, it is pure foolishness to start the argument with fully one half of the topic declared completely off limits for discussion.

Isn’t the practical solution obvious yet?
 

Cheney to Bush revisited

mckee

Many of us heaved a semi-sigh of relief when Trump announced John Bolton for national security advisor. “Whew,” we thought, “at least he did not try to put Bolton up for Secretary of State.” It was going to be difficult enough having this cold-eyed firebrand at the elbow of our terrifyingly unpredictable president, but at least it was in the NSA’s role of an advisor not a doer. Filling the NSA job had proved to be a disaster for Trump. This appointment would be the fourth individual to fill the post in less than 15 months, and Trump desperately needed to get it right. Bolton missed out on the first round of Trump’s appointments but had obviously been pacing the halls waiting for a call. So, one hoped, Bolton might be safe. He’s a loudmouth war hawk, but he cannot get us in much trouble from an advisor’s seat, we thought, as long as we have responsible grown-ups out in front, running Defense and State.

But the 70-year-old Bolton has been involved in insider politics close to 40 years. A graduate of Yale (’71) and Yale law (‘74), he practiced law for a few years and then, with Reagan’s arrival, he moved into the revolving doors of the capitol political arena. He began moving back and forth, from a variety of positions in Justice and State when the Republicans were in, then to conservative think tanks, connected law firms and Fox News when they were out, steadily climbing the ladders of power with each move. His top post previous to Trump’s election was Ambassador to the United Nations under a recess appointment by George W. Bush. He did not serve long, for he was forced to resign when it appeared that he would not be confirmed by the Senate.

According to a white paper presented to Trump’s transition team, the National Security Advisor position was supposed to be “as an honest broker of policy options for the President in the field of national security, rather than as an advocate for his or her own policy agenda.” He was to be the eyes and ears of the administration, identifying the hot spots around the world and winnowing out the essential details to keep the president fully informed. He was not expected to be out in front shooting his mouth off, nor was he expected to be seen traveling around looking like he had any authority over anything. That there is a huge difference between an “advisor” and an” advocate,” is apparent when one considers that the advocate roles all require Senate confirmation while the advisor role does not.

But there is no sign that either Bolton or Trump ever read the NSA job description. Bolton was never content to stay behind the curtain and speak only to the ear of the president. Within weeks he could be found searching out microphones, cameras and podiums everywhere to air his views on a variety of topics. An off-hand remark to the Federalist Society leapfrogged Bolton over Pompeo into the middle of a sticky issue with Pakistan. Bolton met with Israel’s Netanyahu at the prime minister’s home in Israel that had the trappings of a state dinner. At one time or another, Bolton has declared himself opposed to the Iran nuclear treaty, in favor of a pre-emptive strike against North Korea, in favor of assisting regime change in Syria, in favor of toughening the U.S. stand against China, to include military options, and declaring that the International Court at the Hague was officially dead to the U.S.

Recently, Bolton, not Pompeo, declared that Russia should get out of the Ukraine, return Crimea, stop using assassination tactics, and quit interfering with U.S. elections. It was Bolton who stepped forward to walk Trump’s words back when he got ahead of himself on troop withdrawal from Syria, and Bolton and Pompeo together went on the fence mending tour through the Middle East. It has not become unusual to see Bolton and Pompeo issue joint statements of policy on U.S. matters.

The recent departure of Mattis marks the last of those considered by many to be the adults in the room, at least with regard to foreign policy. With the exception of Bolton, the men at these essential posts are now second-string deputies or inexperienced sycophants leaving no one to step up with the gravitas to speak truth to power. Bolton has become it, the man, the trusted counselor with open access to a willing ear. This, to the extent that several of the cognoscenti compare it all to be in the same category and in the same manner as a prior trusted relationship.

The word is that Bolton-to-Trump has become the same as Cheney-to-Bush -- times two.Happy New Year.

With eyes tightly shut

mckee

Most objective historians consider the Iran nuclear deal to be a signature achievement of the Obama Administration. It was not a perfect deal, but it satisfied most of the concerns of most of the nations upon most of the terms that most of the participants considered to be important and which all could then embrace. It was accomplished at a historic table that had never been assembled before. And all of the nations agreed that it was a brilliant diplomatic feat that clearly belonged to the United States, attributable in substantial part to the skill of Secretary of State John Kerry and the international leadership of President Barack Obama.

So, with his eyes tightly shut and his fingers plugging both ears, Trump stepped right up to kill the deal.

After refusing to admit that Iran was in full compliance with all terms of the agreement, and against all advice from the moderate voices from everywhere, Trump abruptly announced in May of 2018 that he was pulling the United States out of the deal. Trump followed this in early November with the re-imposition of stringent economic sanctions against Iran. The thinking, as announced by Trump, is that this will force the Iranian leaders to come back to the table and agree to a stronger agreement.

Never mind that strict sanctions have been tried before and seldom work. Never mind that so far, there has been no indication of any interest by Iran in cooperating with any of Trump’s unilateral demands. Never mind that so long as the present Ayatollah remains as supreme leader, there is little likelihood of any change, no matter what the more moderate voices might want.

The tragic consequence is that Trump paid no attention to what Hassan Rouhani, the moderately inclined, Scottish trained lawyer who is the current president of Iran, had managed to accomplish on his end in bringing about the adoption of the deal by Iran. Trump seems to ignore or be oblivious to the progress that has been made within Iran and to the consequences to that progress that will probably result from his actions.

Rouhani had been the lead negotiator for Iran during the negotiations of 2003-2005, when a temporary suspension of the nuclear program was arranged. He resigned from the effort in 2005 when the ultra-conservative hard-liner Mahmoud Ahmadinejad was elected president of Iran. In 2013, Rouhani beat the conservative successor designated by Ahmadinejad to become the seventh president of Iran. He then convinced the supreme leader to stay out of the way to the renewed negotiations for a nuclear compromise. He installed the more moderate Mohammad Javad Zarif as Iran’s foreign minister, to head the negotiations for Iran. The sudden moderation in the leadership of Iran, away from the hawkish doctrinaire of Ahmadinejad, and with the tacit agreement of the supreme leader to keep silent, the way was paved for the negotiations to be restarted.

Although Rouhani had faced stiff resistance from within Iran throughout the years of negotiations, with the announcement of a successful agreement and the anticipated cessation of economic sanctions, Rouhani’s popularity in Iran shot up. He was re-elected president over the more conservative candidate backed by the Ayatollah in 2017. For the first time in over 35 years, ever since relations with Iran were cut off in 1980, a pathway appeared for the possibility of reopening discussions with the west.

It was only an expectancy, for the supreme leader, the Ayatollah Ali Khamenei, is a hard line, hawkish cleric who, under the complicated political structure that no one in the west seems to understand, can exercise controlling influence over the presidency and parliamentary operation of the country at any time. Rouhani had persuaded the Ayatollah to step aside during the negotiations, but the ultra-conservative factions continues to be strongly critical of any deal made with the international powers. But at least the formal agreement was a step in the right direction.

Trump’s action ends any chance of this progress. Although Rouhani continues in his efforts to work with Russia, China, and the European powers to salvage any part of the deal that he can, and he has announced that Iran would continue to adhere to the requirements of the deal, Rouhani’s domestic opponents are clamoring for his resignation. One conservative news outlet likened him to the disgraced former British prime minister Neville Chamberlain. Despite the steps by the E.U. and other nations to uphold the deal, Iran’s economy is in severe stress. Iran’s currency has plunged in value against the dollar, bringing huge price increases in everything from cell phones to medical supplies. Many European companies are abandoning Iran rather than risk being curtailed by the United States. Given the rift between the Rouhani faction and the conservative followers of the Ayatollah, it is unlikely that any meaningful capitulation to Trump’s demands will occur.

The huge problem is the lack of a realistic, attainable declaration of policy by the United States towards the middle East. This whole thing was a hipshot from Trump without listening to any advice and without any evaluation of consequences. His foreign policy for the Middle East is so muddled with exceptions and inconsistencies as to be unintelligible. Trump’s declaration to Iran is an unrealistic statement of demands – it is not an invitation to negotiate, it is a demand for capitulation, and one that most observers predict is destined to fail.

So much remains uncertain. What is our policy towards Europe going to be as events unfold in Iran? What will we do if the European allies do not back the U.S. but continue to work against us to maintain open trading channels with Iran? Will the U.S. actually apply sanctions against its own allies if this happens? What of the waivers that the U.S. is granting (to South Korea, Japan, India, China, Taiwan, and Turkey, among others) – what is the basis for these exemptions and how long will these last? What will the reaction be of those not receiving waivers? With the sanctions and exceptions, and the workarounds coming out of Europe, it is obvious that there is going to be a ton of money to be made – some legitimately and barrels full under the tables. Is anybody watching the money?

Unless Trump is persuaded to change direction and moderate his demands, it appears the inevitable result will be an unstable Iran in the midst of an unstable middle East, with the same problems we face in North Korea, only worse. The economic impact of the continuation of sanctions by the United States, without participation by the rest of the Western powers, will serve only to impoverish Iran, drive an impenetrable wedge into relations with the United States, and cement relations with Russia and probably China.

The upshot of it all? It is a mess, and unlikely to improve anytime in the foreseeable future.
 

A billion-dollar non-solution

mckee

So, Trump is sending federal troops to the border in California and Arizona to defend us from the murderous thieves and marauding thugs that make up the approaching caravan of Guatemalan migrants. Never mind that the approaching migrants mostly consist of families and largely include women and children; that there is no indication of any element of organized crime or criminal gangs, and that all of Trump’s declared fears in this area are totally groundless – and worse, he knows it.

And never mind that the so-called caravan, which started out over 7,000 strong, has dwindled to around 3,500 and continues to shrink. It is in central Mexico now, about 800 miles from the border, and moving about 20 miles a day. Its size continues to dwindle as it moves north, with people and families dropping out either to return to Guatemala or remain in Mexico. It will be at least another month before any of them reach the U.S. border.

And never mind that this is not the first such caravan of immigrants to approach the southern border. There have been at least three earlier crowds, all of which were processed without difficulty. No one knows how many there will actually be this time, but at the present rate of attrition, the actual number will probably be well within what any of the major border crossing facilities are equipped to handle on any given day without assistance. The general consensus is that there will be no actual need for additional support at the border or in any of the other immigration control resources when this caravan actually shows up.

While we may not be sure when the approaching caravan is going to arrive, or how many there will be, Trump has announced that the troops will be at the border in time for the mid-term elections! He started out promising around 800, then upped it to 5,200, then announced Wednesday last, off the cuff and catching the Pentagon by surprise, that it might be as many as 15,000 strong. What a wonderful idea. What could possibly go wrong?

15,000 is about the size of a modern, mechanized infantry division. A division can be operational at around 10,000 and is fully staffed at 20,000. Suffice to say the modern division normally goes to field armed to the teeth with automatic and semi-automatic weapons, artillery resources, close-in air support and armor. If not actually deployed to a combat situation like Afghanistan or the middle east, the soldier in the modern division will spend his or her day at the home base in constant training to hone and keep sharp the battle skills necessary to bring this massive armament to bear if and when needed. Deployment to the border will provide very little in the way of usable training experiences – meaning the equivalent of a full infantry division is being pulled off line for a totally non-military exercise for one to two months.

In addition, everybody needs to be housed and fed and provided with transportation. The modern army no longer moves on its feet, meaning they will need all manner of ground vehicles plus airplanes and helicopters – lots of them – for everybody to get around in. This does not come cheap, with estimates of the border deployment of a month and a half or so running to $1 billion with the number at 5,200 troops, translating to costs of upwards of $3 billion if the number reaches 15,000.

Here is the clinker. The U.S. military is prohibited by law from becoming directly involved in the enforcement of domestic laws – including immigration – without specific authorization from Congress, which Trump does not have. The posse comitatus law of 1878 forbids the use of the military for domestic law enforcement. All the federal troops can do is provide logistical support to the border guards. They cannot become involved in any way with the arrest and detention of the immigrants. This is without a doubt the most expensive means Trump could have selected to provide nothing but back-up to a situation that may never develop into an actual problem.

All of the responsible voices around the old fool have told him that this is an absurd use of U.S. active duty combat soldiers. General Mattis said so in public, but the president overruled him. It has been fully exposed in reality to be 100% a political stunt aimed at the right-wing base just prior to the mid-term elections.

There is no way anything productive can come out of this. Anybody remember Kent State?