Friday, February 24, 2017

Trump's Econ 101 -- The Sam Brownback Mistake: Predicting Wild Growth That Can't Happen.

In 2012, Kansas Governor Sam Brownback cut income taxes on top earners, aka "the rich," as well as eliminating them for some 330,000 small businesses, promising an economic miracle. The opposite happened.

The Brownback experiment: Mess up your economy, then go after the judges.

Zombie lie n. Lie that just won't die, no matter what the facts are. Tax cuts lead to higher tax revenue is a zombie lie.

Donald Trump is going the classic Republican route with his "tax cuts on the rich will make everybody rich, believe me," and guaranteeing that "Nobody cuts taxes like I do, in fact I'm the best tax cutter you've ever seen, possibly in the world." Okay, he didn't say that, but he could have.

He's guaranteeing income tax cuts -- along with corporate tax cuts and elimination of the estate tax -- will stimulate growth so much that he's basing his budget on something like 3 to 3.5 percent annual growth. Then he's ordering his budget estimators to back-fill the budget using those growth numbers over ten years. Ordinarily, presidents use the Congressional Budget Office for these numbers, but they're lower, so, no, he says use his numbers.

Can anyone say catastrophic deficits? Anyone? Bueller?

Savvier economists don't simply say, "Who knows, Trump could be right!" They say maybe we're at or near the top of a growth cycle, and it's hard to project high growth. In fact, the Fed is already looking at rate hikes to cool off the economy to stave off inflation. The technical term is "taking away the punch bowl." Oddly enough, Trump is in favor of raising interest rates.

Cooling off the economy just when we get to something like full employment is the same as saying, "Sorry, no more wage growth for you, workers." But that's another hard-to-fathom matter for another day. Suffice it to say lower wage growth is no way to grow the economy at Trump-like projections.

Another reason not to expect a boom is that, unlike Reagan and Clinton, who came into office during economic downturns with plenty of room for an upturn, Trump is coming in during what will probably be called the Obama Recovery, which allows less growth. Also, with the boomers retiring in droves, they're not around to put back to work anyway, not to mention they're saving, not spending.

Finally, Trump wants to shrink the federal workforce while freezing their wages, round up undocumented workers -- even though they make up much of our agricultural and construction workforce -- and send them to Mexico, not to mention trashing Obamacare, roiling the healthcare market that happens to amount to seven percent of our economy, and all at the same time! Oh, and how about a trade war with Mexico and China? That will deliver growth, right? We could put a tariff on goods coming from Mexico and Canada and totally disrupt our supply chains, and that will mean jobs, right?

But, hell, he wants to expand America's number of nuclear bombs, so maybe that'll take up the growth slack.

Here's an article that examines what kind of growth we can reliably anticipate. Here's what Paul Krugman thinks. Here's Larry Summers' dim outlook for secular stagnation, though he feels substituting Keynesian fiscal stimulus for monetary stimulus could help us out of the trap (Republicans hate fiscal stimulus). And here's a look at what Brownback economics have yielded.

Trump, are you listening? (No, he's probably tweeting. Sad!)

Note. It's easy to attribute economic growth or recession to presidents during their terms when they didn't have any control over them. While that's generally true, Barack Obama came into his presidency with a TARP program that he accepted and allowed to run its course. That turned out to be a good move. He also can be given credit for the ARRA stimulus act that has been credited with helping in the recovery from the Great Recession, and his saving of the auto industry can be chalked up to his actions, as well. Finally, he didn't get in the way of the Fed, which under Bernanke and Yellen have guided monetary policy well, keeping interest rates low when they had to be. Quantitative easing worked, and the current low interest rates prove it. (How it unwinds is another story. Stay tuned on that one.)

When I referred to an Obama Recovery that will accrue to his credit, in all fairness what's happened since Trump's election can be properly added to the Obama Recovery while simultaneously being referred to as the Trump Bubble. Businesses and the wealthy are suitably feeling the "animal spirits" unleashed by Trump's promises of tax cuts and deregulation. Give Trump his due.

But here's the rub: Bubbles tend to pop with the gusto with which they are inflated. And, if the Trump Bubble is inspired by wildly erroneous predictions of growth and too much interference with markets in the name of America First, then Trump will write into history his own Trump Crash. He -- and we -- should be forewarned. Don't expect conservatives to do the warning. They've been waiting for this tax-cut and deregulation party for too long.

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