About Bernard Munk

Dr. Bernard E. Munk has had a career spanning academia, public service as well as long involvement as an owner and operator of companies engaged in both trading and production. He has also been a financial advisor to private investors, family offices and hedge funds. Read more on his Economics and Politics blog ? ECOMENTARY.COM

Trump’s China Wrecking Ball Express

The recent arrest in Canada, under a request from the US, of the CFO of Huawei, the leading Chinese telecom equipment manufacturer, doesn’t seem to be an accident. In the context of the growing commercial dispute between China and the US, it will undoubtedly inflame the Chinese. In our view, it is a catastrophic strategic error. Was it merely an agency of the US government acting without Presidential instruction? Was this bad political governance or just an errant bureaucratic mistake? Either way, the consequences seem horrendous. Continue reading

The Credit Raters Oligopoly

Sometimes, the obvious solution to Agency Problems turns out to be impossible. Disorganized Crimes discussed to an obvious agency issue in the meltdown of the 2007-8 Credit Crisis. Who paid for credit ratings seemed to be an obvious conflict of interest problem for issuers of complex mortgage securities. Credit rating agencies competed for business of credit issuers, and the rating issuers didn’t want to lose issuer business by looking more deeply into the real credit quality of complex mortgage structures, and, more particularly, what could happen if the housing market went into sharp decline. Institutional buyers of mortgage securities needed particular ratings of these structured issues that would qualify them as consistent to their respective investment mandates. They were label and yield driven.
Everything was fine…until the wheels came off the mortgage bus!

Obviously, conflicts of interest made quality credit reporting highly suspect, deeply troubled by agency considerations. Solution: Have buyers pay for ratings!

Maybe? Maybe Not!

Along comes a new credit ratings agency with that kind of business model. The new Credit Rating agency business model seemed to be an obvious way to break up the credit ratings oligopoly? That’s what Jules Kroll thought, and his successful prior career in providing security to large firms seemed to make him a highly qualified entrant to the Credit Rating market.

Guess what? Credit portfolio managers like free lunches. Pay for ratings that known credit raters provide freely to the credit issuers? Didn’t happen! Kroll found it difficult to attract customers.

After struggling for a few years, poor market responses convinced him that to get customers he had to play on the traditional rating agency ball field. Let the issuers pay. Back to square one.
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What’s the real lesson from this market test? Markets don’t price extreme events very well! Credit crises don’t happen frequently and 2007-8 had some singular peculiarities. They are not an everyday event ,and in addition, there was a new regulatory regime in place after Dodd-Frank and the Fed got involved with financial intermediary balance sheets. Users of credit ratings didn’t place a high enough value on receiving credit ratings likely to be less influenced by the obvious Agency issue of having the issuer pay the Rater for its services. The obvious conflict of interest got very little attention, and few customers of credit ratings were willing to pay for them. Mr. Market spoke loudly!

A similar situation might be the relative lack of shareholder interest in comparative compensation data that Public Firms must now release when Executive Compensation plans are being established. That raises interesting issues on assessing the costs and benefits of regulations designed by regulators with the “public interest” in mind.
At the end of the day, the failure of a buyer-paid credit rating agency tells about how markets tend to diminish “highly less probable events.”

Sometimes the “obvious” isn’t really so obvious!

Why is Distrust of Politicians So High?

The Founders argued over successive terms for Congress and the Presidency but allowed life terms for Judges (subject to “good behavior”). Was this an accident or did they have a different notion of fidelity when it came to Judges as opposed to Legislators and Executives?



Was Montesquieu correct in asserting that Direct Democracy fell because of factions–majoritarian politics— and were the Federalists specious in their argument that the faction would have to win in each Sovereign State so that the argument made in Federalist 10 really does not hold up when one considers “vote trading” by representatives?



Cronyism is the market’s response to more rules and more distance from rule making

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The American and French Revolutions contained two embryonic themes brought down throughout history: overthrowing the power of absolute monarchy and to one degree or another, empowering the people’s representatives with the power to govern. A generic feature of the American Revolution and its enduing Constitutionalism was its evident fear of an unshackled executive authority as well as the fear that populism would lead to legislative majoritarianism. There was a corresponding faith that Liberty would create a multitude of economic opportunities that should remain largely unshackled. The dividing line within the Constitutional Convention was the need for a strong central government to defend the new Republic from external and internal enemies and the fear that too strong a central authority would usurp the power of the thirteen separate sovereignties that were giving up some of their authority to create centralized authority for the purposes of safety from abroad and domestic harmony within. The latter concern was often conjoined with a preference for transparency and a faith that local control — seen and disciplined by local voters — would limit the feared excesses of a State over its own inhabitants.

The rather sophisticated structure of “checks and balances” designed into the Constitution was always a compromised outcome that reflected the need to create Federal authority while preventing such authority from becoming a new absolute “monarch” all on its own.



The same thematic division still runs thru American politics: between political leaders who “know what is best for the people” (and who also dislike “market generated outcomes);” and politicians and political theorists who believe that creating opportunity is sufficient while favoring minimal interference with market determined outcomes.



At a philosophical level, “market types” believe political rights begin with paying strong attention to property rights and “control types,” who believe that the “people” have both a right and a duty to push outcomes in an egalitarian direction, because equal opportunity is not sufficient for justice.

Can Mudville Be Fixed?

In a previous essay, we lamented that Mighty Casey had struck out. Maybe what is needed is not another Casey, but fixing Mudville. That means changing our expectations of good governance and then doing something about a reduced menu of expectations. There are many sources of our disaffection with government. Our political fragmentation, however, assures us that there is not a single silver bullet. As a country we have very different expectations concerning what our Government should provide for us.

From an historical perspective, what we wanted in 1776 and later in 1787 was that Government should insure our liberty and our freedom. Those were simpler times and the Founding Fathers prescribed a stronger national government that could marshal the resources to defend our nation and protect us from violent uprisings internally. The Philadelphia convention of 1787 was highly fearful of the outbreak of domestic uprising, coming as it did shortly after Shays Rebellion was put down only through a massive effort by the State of Massachusetts.

The Founders wanted an orderly state, hopefully not torn apart by faction. Federalist #10 (Madison) was devoted to just that issue: factionalism, and how the separate sovereignty of the 13 States coming together in a Union would provide a protection against factionalism. The Fathers were also strongly aware of the precarious nature of our finances. The Continental Congress had made long-term sufferers out of its own Army by its failure to raise sufficient resources to pay the Army and its officers. After the Constitution was written, Hamilton, as the first Treasury Secretary, federalized the separate States’ debt thereby creating a viable financial system that could support the new Government and its armed forces. Tax revenues then came largely from taxes on trade—tariffs! It would not be until the 20th century that the US turned to personal income taxation. In spite of the brilliance of our Founders, history must judge their failure to place term limits on the legislature as a strategic error.

Term limits were thoroughly discussed during the deliberations in Philadelphia and while some limits had been in effect under the Articles of Confederation, they disappeared completely in the final draft of the Constitution. Even from Madison’s voluminous notes, it is unclear how this omission was contrived. Government was smaller and stayed smaller, absent the Civil War, until the advent of the Great Depression. Perhaps the small size of the actual government and the limited scope of its interests at the Federal level dictated that outcome? We cannot be sure.

The size and extent of Government’s intervention into private endeavors is very much at the source of the observed cronyism and corruption that so disfigures our current governance. It might seem strange that government size would be a source of corruption, given that smaller states also suffer the malady. Consider, however, the nature of any Government effort, either through specific legislative enactment or through the rules of a government agency designated by that legislation.

The bureaucracy writes the rules and largely interprets them even though the formal legal structure comes from the Congress and is signed by the President. Each activity that is so described by the legislation both prohibits or directs that private actors, firms, households, individuals, associations, NGO’s —all domiciled in the private sector—are to undertake an activity or to forsake an activity under the sanction of a Government regulation.

Each such regulation sets up incentives to abide by the directives but the regulation also implicitly sets up a shadow price that measures the value of non-compliance to the regulation. Thus, regulations set up incentives for behavior of agents in the private sector and clearly these agents respond to these incentives. Then comes the investigation of such deviations and the enforcement by the specific government bureau or agency designated to compel private behavior. How do markets respond to these incentives?

Largely, in the US, it is first by lobbying efforts paid for by affected private agents. The lobbying can take place in the designated bureau and/or it can take place in front of particular legislators. Here a quid pro quo often occurs. Private agents want a “seat at the table,” and they are wiling to purchase the necessary admission tickets. They can contribute directly to a sympathetic legislator’s campaign to purchase that seat at the table.

The absence of term limits has created many permanent politicians, each of whom requires resources to maintain his elected status. Markets work—often all too effectively—and we then observe special interests buying tickets to the cronyism and corruption circus. The circus never pulls down its tent. It is a permanent fixture of expanding government interference in the affairs of the private sector.

Now Mudville complains that its true wishes are not heard, that no one in Washington really hears what they want. That’s tinder for a political candidate willing to state he hears the cries of the disaffected. Sound familiar? Clearly, no joy in Mudville. Instead, we have frustrated grievances by a great many angry voters. Can representative government survive this tumult? One has to wonder?

“There is No Joy in Mudville, Mighty Casey Has Struck Out!”

I loved this poem as a young boy thinking about baseball in a much simpler era. It was post WWII and there were no major television networks. You read about the Majors in the newspapers—the clubs were in the East and the Midwest. Migration was to be many years in the future. The war was over and the newspaper was one’s major source of information. The Cold War had begun, but we didn’t have the troubling doubts about Presidential and Congressional leadership that today race across our phones, tablets and other Internet connected devices.

We got through the harrowing experience of Korea and we began to notice that there were few “mighty “ anymore. Information flowed more readily across the television networks. Government provided information was more carefully parsed. Idols fell more frequently from exposed clay feet. Still, most of America believed what Government told us. Witness the support polls for the Viet Nam war that continued high well into the 1970’s despite the nightly baths of tragedy that streamed over national television. Then came Watergate, the resignation of a corrupted Vice President and finally the first resignation of a President.

Today, we have a surfeit of what passes for news, much of it highly infused with the political opinions of the networks, newscasters and the overabundant ‘talking heads.’ The Web is full of “bots” that convey “information” that incentivized sources wish to provide for what seems to be a still gullible public. And, above all, we have a troubled Presidency, attacked as illegitimate by one side of the aisle and supported on the other by a much-threatened, confused and silenced party.

The massive waves of dissent that redounds across America remind us of our earlier, troubled era of the Viet Nam war and our painful exit. Viet Nam taught us not to believe in what our Government told us, and our agony stretched past the fourteen years of our troop involvement. Revelations about the extent of lying during the war dragged on for at least a decade following our exit. There might have been little joy in Mudville as the war wound down and American forces were withdrawn but our malaise continued well through the 1970’s. The decade was troubled by incendiary politics, slowing growth and inflation and the post mortems of government mendacity during the war. Troubles were not confined to America. South East Asia exhibited horrifying murders and genocide in Laos and Cambodia; the Middle East exploded in another war and the decade’s end was underscored by the cancellation of our participation in the Moscow Olympics over the Soviet’s invasion of Afghanistan and our covert support of the Mujahedin against the Soviets.

There was a seeming respite in the 1980’s and the evident beginnings of a huge technological computer revolution that was gaining ground at every step. Plus, we had a very likeable President who seemed to ‘take it to the enemy,’ with his adamant refusal to kowtow to the Russians; his famous taunt to Gorbachev to tear down the Berlin Wall (which finally fell a year after his Presidency) and his constant stress on the American exception. His term ended with palpable celebrations despite the Iran Contra investigation and the evident cover-up that had cloaked its continuance. The residue of distrust of Government did not subside. It might have been tempered during the Reagan era, but it did not vanish.

Another recession and a shortened Presidency following Reagan ushered in the booming 1990’s, troubled once again by an impeachment proceeding (that failed) and a shocking defeat of Government sponsored health care. Markets boomed, however, and whatever distrust we as a people had developed was often subsumed by a huge stock market rally. It was to some a “unipolar” world with a collapsed former enemy seemingly weakened irretrievably by the fall of the Soviet Communist Party and the liberation of its East European satrapies. China was the new Casey at bat, with its rather unique Chinese Capitalism moving millions of impoverished families into the penumbra of growing wealth. They moved from agriculture to newly built factories. A growing class of wealthy Chinese began to tour the world, replacing the seemingly moribund Japanese of a decade earlier. It all seemed glorious and the US seemed to escape the Asian collapse of 1997 as we sped to the Dot Com world. Even the recession of 2001-2002 didn’t humble us, but 9-11 made us aware that new threats had emerged with asymmetric warfare now ascendant.

The debacles in Iraq affirmed our suspicions that much of the information that Government provided was either wrong or intentionally shaded. While Bush II served two terms, he was widely undermined by a media that seemed to thrive on his malapropisms. The contrast to a well spoken, Harvard educated, social activist infatuated the press, but the Obama era was a watershed for acrimony between the two major parties.

Obama succeeded in passing Medicare, but its terms were unacceptable to the losing party. Obama withdrew forces from both Afghanistan and Iraq only to see Iraq collapse and the rise of ISIS. The divisions in our body politic were widening. Then came the campaign of 2016 from which we have not recovered at all.

Some see Trump’s capture of the Republican nomination as a political fluke while others blame it on a vast conspiracy fomented by Russian computers! His election is incomprehensible to the party that won the popular vote but lost in the Electoral College. They see conspiracy everywhere and our practicing “payback,” at every turn.

Bipartisanship is non-existent even at the water’s edge, despite the long period of foreign policy cooperation that had stretched some 60-odd years through even the early 2000’s. Economic policy is a one party game and immigration policy changes are blocked at every turn. Unless the polls are wrong again as they were in 2016, it seems quite likely that come January 2019, we will have totally divided government and the increased likelihood of rule by executive order. We may see a rancorous attempt at Impeachment. The mists are too thick to see past 2019 into 2020’s Presidential contest, but the level of distrust and disenchantment with Government is surely rising.

Meanwhile, as Government becomes more a story of the regulation derby, it also must mean, “who you know” becomes far more important than “what you know.” Voter disenchantment can only rise. If Trump’s victory lay in his recruitment of those voters who felt increasingly disenfranchised and unheard at senior government levels, what is likely in 2020 and beyond? A split of legislative and executive power may produce a kind of quasi-stability, but it cannot produce joy in Mudville. There will be no “mighty Casey” in our future.

The lamentable state of democratic order in America is hardly confined to our shores. Some 25-odd countries, all of who possess some sort of democratic republic structure seem to be suffering as well from widespread voter disaffection. Prior to Trump’s election, troubles in Australia and Canada produced similar symptomology. Those elections went different “political directions,” (one right, one left) but that is a key to understanding the current dilemma in democratic republics. Next is the Brexit upset and then Greece! Then comes the wide disaffection within the EU, including perhaps the failure in Italy. The rise of right wing anti-immigration parties in Sweden, in Hungary, in Austria and even in France and Germany, play a recurring theme. Dis-affection with Government, mistrust of Government, political fragmentation and consequential rule by executive order are now widespread across the democratic universe.

When the “national interest” becomes fragmented, “special interests” invariably rule by default. In the absence of term limits on legislators, particularly in the US, staying in office become a perpetual money-raising game. Those who have access to money can buy media time and a vast proliferation of Internet ads. Media consultants may provide strategy and tactics to electoral candidates, but they drive an increasing wedge between the average voter and the elected. The voter begins to think he is a chump. How long before that distrust mushrooms into support of an extremist candidate?

Trump’s 2016 election strategy was derided by the “liberal media,” but despite its odious historical comparisons to Germany in the 1930’s, it provided a vehicle for disaffected voters. They crossed over, because he brought them a road to travel on. He emphasized how unlike them were his opposition. He was “fighting” the establishment (for himself, to be sure) but for “them!” He gave them a hope that they would be “heard,” and they repaid him by crossing over. He perpetuated an invalid economic narrative that they were the “victims” of globalization and too many immigrants sucking away their jobs and undermining their pay structures. It was wrong, but it was credible.

He is not the first politician in history to construct a faulty but believable narrative. His ostensible wealth and previous success did not transmit to the disaffected that he lived in a very different world than his would be voters! On the contrary, it spoke of his success in besting the powers that be in the liberal cities where he built his hotels and buildings. He knew the “game!” He didn’t deny playing that game. He trumpeted his success in winning those concessions. He was a Master of the Game, and in spite of their hugely different class backgrounds, his crossover voters ate up his rhetoric.

When Media America constantly questions how he regularly insults accepted liberal norms, they see their champion. That is his strength and in a hugely fragmented body politic. His “minority” politics thrives. The consummate testament to his strategy is that the Democratic Party is now fragmented between espousers of “socialism” (despite its continuous history of failure wherever it has been tried) and capitalist democrats who know how to win with the money provided from “special interests.”
It may be that the November elections will feature a Republican defeat in the House and possibly an overturn in the Senate, but that will mean a two year era of rule by executive decree and constant legal appeals to the Courts to overturn Trump inspired orders. This can only mean more fragmentation and a deeper division of the electorate.

It is hard to judge whether the current level of political invective and disharmony has historical precedent. Certainly the decade before the outbreak of the Civil War showed how extremism and the lack of bi-partisanship could rip apart a country. But, 1860 and 2020 are separated by more than time. News traveled slowly in 1860. “News,” or whatever passes for that much- trammeled noun, travels instantaneously today. Truth loses out continually to immediacy—as Trump has learned. The Washington Post may flash four or five “Pinocchio’s” each day, but working class voters in Ohio are likely to ignore that. Beside, the “press” is a kept lady in their view. It doesn’t belong to “their kind.” It really doesn’t matter, despite the constant rant of the critics, how much Trump lies or distorts the information. Germany’s history proved how a “big lie” can work, and sadly, it continues to be proven day in and day out here in America. It is alleged that Trump rises early to “tweet” America its new truths. That is not accidental. He sets the agenda, irrespective of the truth table that accompanies the tweet.

Will an impeachment stop this game? Highly unlikely, unless one believes that the Senate could convict? If the Mueller investigation finally comes up with compelling evidence of an actual conspiracy between the Russians and the Trump campaign, perhaps that could turn the tide. So far, despite the Cohen and Manafort agreements to “cooperate,” no one has seen any substantive evidence that will document such a conspiracy.

The foregoing points up how important the Regulatory State has become, ironically even more important under Trump than before. The growth of Government is the prime source of political corruption. The more we allow Government to enter our lives, the more political corruption will occur. All regulatory efforts create two incentives: one to prohibit and one to avoid the prohibition. In turn, this makes the money flow that influences the legislators and the regulators in a particular direction. Lobbying and campaign finance are not an accident. They are market’s reaction to impending or actual legislation or regulation. The Smithian dream of a huge market of small firms each competing in its own way falls victim to the nightmare of much, much larger firms with very large resources to not only “listen” for changes in Congress and the regulatory establishment, but to promote those changes that are instrumentally important to the particular firm. The banking industry is a perfect example. The cost of compliance rising rapidly since Dodd Frank drives small banks into the arms of larger banks, better able to defray the cost of compliance. It is no different in a host of other industries.

At the end of the day, Pogo (a comic strip character from my forgotten age) was right: “I have seen the enemy. It is us.” The great tragedy of American politics is that “redress of grievances” produces excesses of Government intervention and regulation. If something is wrong with your corporate or personal life, get a Congressman or Congresswoman to address your grievance. If you are poor, there are many NGO’s that will pick up your cry. If you are poor and a member of a racial minority that’s even better. If you are not employed in the manner you feel you ought to be employed, find a “loudspeaker” to vent your case. Are you potentially harassed by your employer, find a media stringer to write your story of abuse and a class action lawyer to take your case!

The growing abundance of “Government Remedies” breeds the cabal of corruption that we witness daily in our political governance. Is there a way to reduce corruption and cronyism? There is no silver bullet, but there are some things we could do if we understood the problem and were willing to unite to limit its incidence. That is the subject of another essay. This one, like today’s baseball games, is already too long.

Leadership Deficits and Inherent Bias

While researching a new book on political economy and the events of 2016-17, I have been reluctant to voice opinions on the current state of economics and politics since the election of 2016. The sad event at Charlottesville and the subsequent media controversy over the President’s “fitness for office,” have forced my hand. Here is a small observation.

The President’s compulsive responses via Twitter or Q&A’s at his infrequent news conferences seem to create a continual fury that destabilizes any hope that thoughtful legislation can pass. Health Care reform has gone down already; legislation authorizing a large infrastructure program has not gotten off the ground; a well integrated tax reform is hinted at by the Secretary of the Treasury but has not been made public; immigration reform is either dead or in the courts for piecemeal remediation and foreign policy measures seem episodic or at best confused. Further, watching the President in his entertainment and recruitment mode during his various “rallies,” diverts attention from the essential leadership elements of a successful Presidency.

The clock is ticking on Debt Lift legislation and is now encumbered by Presidential threats that if there is no funding for the “Wall,” there will be a “shut down.” Bottom line, governance at the Presidential level is a shambles. This is not the first Leadership Deficit suffered by America, but it comes at a truly inopportune time. It does not seem as if the Trump Administration has made progress on “making America great again.”

The latest tempest is the story that Gary Cohn, the national economic advisor and often thought to be the next Chairman of the Federal Reserve, has publicly condemned the Trump administration by stating “This Administration can and must do better in consistently and unequivocally condemning these groups [neo-Nazi’s and white supremacists] and do everything we can to heal the deep divisions that exist in our communities.” Whether Cohn will resign or stay and whether he will be taken off the short list for the Chairmanship of the Fed are still open questions. Underlying all of this is a deeper question: Do the Twitter comments and the off the cuff remarks of the President tell us anything about any inherent bias he may have?

When you calmly think about the President’s first response to Charlottesville, it is hard not to notice the Presidential equivocation on responsibility. Why would a senior politician—let alone the President—seek to impose seeming “fairness” to both Neo-Nazi’s, KKK’ers and White Supremacists’ and the ‘Antifa’s who brawled with them at the University of Virginia?

The US repudiated slavery more than 150 years ago; we fought an expensive war against Nazism and expended billions of dollars in reviving a modern Germany that repudiated its own historical monstrosities; we have a more than 50 year history of trying to counter racial inequality through a host of Civil Rights legislation; and we have spent over a trillion dollars attempting to put down jihadist terrorism over very similar threats to freedom. Why then the sudden, unexpected attempt to equate two extreme sources of violence? It seemed to be such a simple line to draw in the sand. Does the President have a tin ear with regard to the vile conduct of racial bigots in the US?

There are two possible explanations for his extemporaneous attempt to apportion blame to both sides. One is a total misunderstanding of the likely reactions of both the media and the US population as a whole or an inherent bias that cannot be forgiven. The second one is that such a response plays to the Trump base. If the second reason is the case, and the two subsequent Trump rallies subsequent to Charlottesville hint at that explanation, then our future is grim. Stirring up that ‘witches brew,’ will cause continual legislative failures certainly until November of 2018 and a deeply divided country that desperately needs thoughtful and weighty Presidential leadership.

Congratulations to Gary Cohn for “doing the right thing” that could be very costly to any ambition he might have had to chair the Fed and congratulations to him as well for not resigning and staying the course of trying to achieve a more rational tax and expenditure policy as head of the National Economic Council. His courage was badly needed, but it highlights the enormous leadership deficit at the top level under which we continue to suffer.

Losers’ Grief

The shock of the Trump electoral victory has entailed copious quantities of grief among Democrats and Liberals of all persuasions. If you follow the TV News and Commentary shows you see an almost perfect representation of the Kubler-Ross 5 Stages of Grief

“The five stages, denial, anger, bargaining, depression and acceptance are a part of the framework that makes up our learning to live with the one we lost.” (The Kubler-Ross Five Stages of Grief).

Clearly the losers are now past denial. That took a few days particularly stimulated by the popular vote showing Clinton had won the popular vote but lost the electoral vote. (Currently, the popular vote margin stands at some 2.6 million).

The first stage of denial was the question: How could she have lost Then, came the denunciations of the Electoral College itself by some of the more rabid Clintonites, The arguments that the Electoral College was a denial of one man-one vote were feeble because even the smallest knowledge of our Constitution history explains why the Founders created voting by States. The Electoral College is not an accident of history. It is precisely because we became a Union of sovereign states.The Founders did not want our union upset by the passions of a majority.That should have been sufficient, because there is no chance today that small states will give up their electoral power. Rage coupled to denial, however, is a powerful emotion and it took some days and weeks until those tirades vanished. Anger persisted, however, particularly with extreme venting over immigration and healthcare. The early announcements of the first Trump cabinet appointments poured more oil on the fire. The fire has not yet burned out.

The recent tirade by retiring Senator Reid accompanied by the shameful remarks of his House counterpart, Nancy Pelosi, indicate that Democrats are now into the bargaining stage. (Pelosi called the appointment of Dr. Carson as Secretary of HUD “a disconcerting and disturbingly unqualified choice.”) Some Democrats feebly threatened to shut down Congress over the continuing budget resolution until the majority moving on to depression and acceptance realized that they were about to emulate some of the Republican ‘s worst prior mistakes over the budget. Despite anguished cries that the resolution would deprive some of healthcare benefits, it has turned out, everyone is essentially protected until early spring, by which time much of the Cabinet will have been confirmed and the new Administration is writing the rules on health care.

Will acceptance finally occur Yes, but the real Congressional fighting is yet to begin. The run-up to the Inauguration does not seem peaceful despite a lack of fireworks from the White House. While Trump continues his victory tour, Obama is focused on how history will regard him and is not using a flame thrower on his successor. The next part of the melodrama has begun: the Trump Coronation and the Obama Legacy.

TRUMP’S POLICIES: campaign promises and the realities of governance

please find our post at www.ecomentary.com and use any browser EXCEPT GOOGLE CHROME You can use the following URL http://ecomentary.com/trumps-policies-campaign-promises-and-the-realities-of-governance/

As we have reported before, Google Chrome tagged the www.disorganizedcrimes.net web site even though there is NO MALWARE.Unfortunately, Google Chrome runs by its own rules and no matter what is submitted to them they post the “potential Phishing site” even if one tells them otherwise and makes sure the site is clean.Power Corrupts Absolutely

 

Happy Thanksgiving

TRUMP’S POLICIES: campaign promises and the realities of governance

The surprising electoral victory by Donald Trump (and his loss in the popular vote) has the media intensely speculating on the likely domestic and international polices of the incoming Administration. The pre-campaign rhetoric is being searched for relevant inferences on the new Administration ‘s likely policy agenda of economics and international policies. That is likely to be misleading precisely because Trump ‘s election campaign was so different from traditional Presidential campaigns. What it took to win might be quite different than what it will take to govern. Even the early appointments do not yet give us a definitive picture to the actual governance menu that Trump presents.

The gap between campaign promises and likely policies should serve as a warning that predicting the actual policy menu of this President is likely to be fraught with more than the usual uncertainties. Without sufficiently definitive statements from the President elect, since his victory, preconceived hopes and inherited prejudices rule, particularly in the media. After Henry Kissinger’s meeting with Trump, his comments to the press referred to the difference between election promises and substantive policy. He was puzzled as well.

Still, markets are forward looking and responses have been seemingly positive at least regarding economic policies thought to be likely. Yet, market reactions often fasten on previously noted criticisms of people and industries without any definitive explication of what actual Presidential preferences will be. Trump ‘s criticism of some major Silicon Valley giants has been cited as a reason in the decline in their shares, but at this point no one really knows how policy will be shaped by his relatively weak connections to the Hi-Tech industry. The transition between the old and new Administration is likely to contain unexpected surprises.[1]

Presidential transitions have traditions and both the President and the President Elect at their first meeting seemed to recognize that both can gain from a smooth transition that excludes painful pre-election charges and focuses instead on what will be good for Americans of every stripe. The “progressive and/or liberal” media has been less forgiving of the transition process, as have some of the badly bruised Democratic politicians. Democrats are still in disbelief that voters turned against what they thought were their needed “progressive” ideas, particularly since major polls predicted victory. Rather than looking at their own their own agenda and bias, the “kept” media and the progressive zealots are trying to assign blame to external events, such as the querulous behavior of the FBI, to explain the Democratic Party defeat. The claim that FBI Chief Comey caused Clinton ‘s loss seems like “sour grapes,” but it will provide impedance to a smooth transition and opposition to the Trump policy agenda in its first 100 Days. Perhaps even more importantly, that continuing disbelief and heavy criticism of the President Elect will serve to prevent the Democrats from a useful inward meditation over what American voters want as opposed to what Democrats told them they ought to want.

We had long thought the Republican Party would need a thoroughgoing internal revolution beginning with what they believed their Party stood for, but as it has turned out, their victory has closed off that review, at least for now. Instead, it is the Democratic Party that has been badly split open. The split between the parties, however, surely will widen once the actual Trump agenda becomes public accompanied along with the appointments in the new Administration. As the new Administration formalizes its policies, it is quite likely that bitter factional disputes will still emerge from under the Republican tent.

At this stage, then, appraising the likely Trump legislative and administrative agenda is chancy and predictions may fail when the rubber finally meets the road. Nonetheless, we try below to put together what we think the top policy advisors and the President Elect will choose as their main lines of policy. We divide our analysis between International Economics and Politics and Domestic Affairs, even though they are clearly interdependent.

Geopolitics and Geo-economics

As Commander-in-Chief, the President will be faced with immediate decisions because while our troop involvement is in the anti-ISIS campaign is small, significant military and economic resources are deployed and there is no immediate “discharge of the war.” Trump is on record saying, “I will destroy ISIS” but the practical content of that intended destruction has not been made clear.

Trump’s foreign policy pronouncements have also included objecting to the Iran “deal,” supporting Israel, demanding NATO members increase their support, a possible change in our stance toward Russia, immigration reform (including the Wall), protecting the homeland, China (both currency “manipulations” and Chinese exports) and ending the traditional “free trade” orientation of American international economic policy. That forms a very big agenda and clashes with traditional Republican preferences in many areas.

The list requires attention to both foreign and domestic affairs and would tax even the most well prepared President Elect. Unfortunately, after such a strenuous political campaign, the new Administration has to have policies for these areas immediately without perhaps sufficient internal deliberation as to the form such policy changes are to take.

It doesn ‘t seem that Trump undertook major policy reviews during the campaign and with less than two months before inauguration, the new Administration is going to be extremely busy developing the details of its policy agenda. Moreover, because the Trump utterances during the campaign challenge traditional Republican ideas, Trump will have to spend a major effort to argue his policy case to the American and foreign publics. At the same time, we should expect significant interruptions to policy formulation from events outside the US that operate on their own time clock.

Iran and Russia: Trump repeatedly denounced the Iran deal. He claimed US negotiators got snookered. A simplistic approach that worked in the campaign requires significant articulation when it comes to implementing changes. Still, it seems that Trump will be unlikely to leave this running wound alone. He will need to do something not only to be consistent with his campaign statements, but also because Iran is so heavily involved with the various American allies in the Mideast. The news will still carry reports of deaths and casualties to our troops abroad, so the wars there can scarcely be avoided. In addition, European allies of the United States endorsed the agreement and already are promoting business deals in Iran. Can Trump construct a strategy that is at least consistent with his pre-election critiques while maintaining the support of European allies that previously supported the ending the Iran embargo Possibly, by linking a change in the Iranian agreement with a new look ‘ at Russia. If he chooses to deal with both Iran and Russia (Putin) at the same time, he may find he has some leverage. This would be a bi-modal policy menu. Let’s begin with Russia.

Clearly, the embargo has hurt the Russian economy. Without access to international capital markets, much investment to improve the Russian economy has been neglected. This surely affects Putin directly, but in a larger sense, reviving economic growth in Russia benefits not only Putin, by solidifying his position with his own people, but also such investment could improve Russian life while creating better tax resources for the Russian government.

Suppose Trump offered Putin an end to the embargo and entry into western capital markets in exchange for Russia ending its Iranian love affair Would Putin be willing to substantially cut back support for Iran and perhaps withdraw Russian military support for Assad How much benefit does Russia gain from shipping military hardware to Iran and spending precious resources keeping the Russian military occupied in Syria The devil will be in the details of any Russian pull back in Iran. Trump could offer US relief on Crimea and the Ukraine if Putin agreed to move out of Syria and stop supplying weaponry to Iran. Trump would also have to find a way to separate US interests in the Baltic States from his apparent disinterest in the Ukraine and Crimea. Separating Iran and Russia could offer additional benefits for Trump. A weakening of the military supply pipeline to Iran might make it easier for the US to exert tighter control on Iranian support for terrorism around the world (particularly for Hezbollah) and tamp down terrorist threats to Israel. That might create further openings for peace negotiations between Israel and the Palestinian Authority. In addition, negotiating an accommodation with Putin would bring German domestic politics into play because a substantial portion of inbound Russian investment has traditionally come from Germany. With the possible exit of the UK from the EU, German business might well be supportive of a Putin-Trump negotiated end of the Russian embargo. The political left in the EU that wanted expansion to the East is not a Merkel ally anyway, and she will need to button down her center and right wing support for the upcoming elections this spring. Merkel undoubtedly was not pleased by the Trump rhetoric on Muslims, but her own political survival will be her immediate focus. If Trump can move the Russians out of Syria, the enormous pressure of potential Muslim immigration into Europe could be relieved, making Germany’s neighbors in the EU much happier with their prospects.

The Obama administration was addicted to a kind of naive idealism that sacrificed the domestic interests of many of its allies. That came back to haunt Democrats in American voting booths, even when not well revealed by faulty polling. One could not expect Clinton to have gone back on the Iranian deal that she so heavily endorsed, but Trump ‘s victory has left him with an opening to satisfy both foreign and domestic critics of his election rhetoric. A successful deal with Putin would mark finished to the Democratic Party contention that Trump was “unqualified” to be President.

China: Trump’s focus on “exported American jobs,” and his complaints about Chinese currency manipulation have also seemed simplistic. The progressive media denounced his views on China because they claimed a trade war would ensue, but one can also read this situation quite differently. Given the collapsing bubble in China, does it make sense for the Chinese to take a hard line against Trump if he tries to tamp down Chinese exports to the US, particularly steel and aluminum China has an immense capital flight problem that exacerbates its currency depreciation. Suppose China is induced by Trump negotiators to put on its own export quotas (a feat that the Clinton administration accomplished when faced with rapid Japanese auto exports in the 1990’s) Trump could claim some victories for his “Art of the Deal,” technique. How many jobs such export controls would produce is perhaps less meaningful then the demonstration of loyalty to the blue-collar Democrats that crossed over and sustained his election. Similar export quotas applied to a few other “visible” industries would give Trump some credibility with his new domestic allies. Would China be willing to do that

An export quota also offers the Chinese Communist Party some leverage on its own cronies. China has an extensive crony reward system, so it could help XI Jin-ping to discipline some members of the industrial elite and their allies in the CCP. After all, it is the rich who have the money that seeks exit from China. Export controls offer a new stick with which to beat the Chinese moneyed classes. China is not a “Free Trader,” so they would have no ideological reservations of exerting more controls at their own border. They can ration the implied rents that come from enforcing such export controls. Export controls reward the “old” versus the “new,” and it is the old industrialists that they need to keep in tow. If China would put non-cooperation with North Korea on the negotiating table, they might get some additional leverage in future negotiations with the new US Administration. By now, even the Chinese realize that controlling North Korean nuclear and ballistic missile ambitions is becoming more dangerous for China itself.

Critics will assert historic Chinese pride that resists “bowing down” to an American President and would likely doom such an outcome from the beginning. Perhaps, but Great Powers can still negotiate without appearing to be subservient. It is always a balancing of interests. There is leverage here for both political leaders. Giving kudos to Trump, the Chinese could also earn some credit at the table on other issues important to China in the geopolitical arena. Trump is not an ideologist. He will look for short-term gains wherever he can find them. The “Art” in such a “Deal” will appeal to Trump.

Trump on Brexit: The new administration can hardly object to the UK’s wish to regain its domestic sovereignty and thereby control its own borders. Trump is preaching from the same pulpit to a similar American choir. He wants to be less tied down by foreign entanglements, and be less responsive to European demands on climate and immigration. The UK will still be the US’s closest ally and supporting the UK will put pressure on NATO members in the EU to carry more of the defense burden that Trump has criticized. It may also make EU members more willing to be supportive of a program to crush ISIS. Trump inherits a lot of possibilities that his predecessor has left him, and he can continue to draw the line more solidly between his new administration and the policies of his defeated opponents

Immigration, the Wall and North American economic relations: Now elected, Trump can gain domestic political support by showing he is going to carry out his “Wall” proposal even if in a less drastic way than implied during the campaign. The Wall doesn’t have to be a huge infrastructure project that will be difficult to finance and to engineer. He can build a bit of brick and mortar and use chain-linked fence and then move to a much more sophisticated monitoring program, carrying a “Big Stick to get some help from Mexico. What he really needs is improved joint-enforcement. Mexico can reduce extensive brick and mortar by actually helping to police trips to the border by Mexican and other Latino migrants. Once it becomes known that Mexico itself is policing the new “Wall,” we might expect a much smaller volume of immigration. More adequate surveillance can come from better technology on both sides of the border instead of brick and mortar. If Trump builds a little (probably essential to calm his supporters to build a “Great Wall” structure) while massively engaging in digital deterrence, it will slow down illegal crossings and win support of US technologists. He can even make hay politically by showing he is “rounding up some of the usual suspects” without appearing to be a “racist.” Furthermore, capturing and deporting those immigrants who have committed crimes or those who don’t have the proper documents, need not trigger huge outcries from civil libertarians, if done thoughtfully and humanely. He will, however, have to face the “family breakup” issue. Legal support for such a program doesn’t need new Congressional agreement. The law is already there, but it does need thoughtful and sensitive enforcement. His ideological critics will shriek, but this could be managed with conscience and constant monitoring of the program. It will need support of the bureaucrats, as will other domestic programs (see below). With the right kind of leadership, it is definitely possible. His first requirement is to show he is stopping the flow.

International Climate Policies: The politically motivated assertion by the Obama Administration that climate issues were already scientifically determined and only right wing ideological objections remained to be quashed was both misleading and actually counter-productive. Trump has a chance to lead with a fresh stance. There are many thoughtful scientists who don’t think the climate issue is merely politics. The inability of long-term climate models to predict shorter-term climate behavior has led to some serious questioning of whether or not we already have the proper model. Nonetheless, Trump can steer around the current impasse by coming to a nuanced position that says in the absence of certainty, policies should go part of the way. Then, the argument shifts to how much, at what cost, and which nations will jointly underwrite the cost of less carbon in the atmosphere. Broached this way, some of the political toxicity is taken out of the argument while a focus on the efficacy and the cost of such measures comes to the fore. That can be welcomed by both climate change doomsayers and climate skeptics. It also points the way to deal with the international aspects of large-scale coal burning in developing countries such as India and China. Shifting the debate from the extremes has to be a plus for all participants, although we should recognize it will not still the voices of those who have made “saving the planet” a religious undertaking. The Art of the Deal cannot please everyone. The lesson is not to try to please everyone, but move ahead on a defensible basis. A similar approach can be implemented with regard to issues such as overfishing and forest burning.

The extreme climate crowd shouts doom and gloom. A thoughtful approach that moves coherently and economically might never quell the alarm of the “doomsayers,” but it does not have to face the criticism that “nothing is being done.” A simple program of carbon taxation will take out much of the bite from the climate crowd.

Domestic Economics

Trump is in a good position to move ahead on tax policies as long as he is caring of traditional Republican budgetary concerns. Again the Art of the Deal means essential focus on the details of cutting taxes but not throwing the US onto a sharply growing budge deficit path.

The economy has grown far too slowly over the period since 2009. While the deficit has shrunk as a percentage of GDP, that percentage could fall even faster with faster growth GDP growth. The Democratic taunt of “trickle down economics” can be defanged. Tutoring Trump ‘s enlarged voting public on the importance of increasing economic growth can weaken those fears. Even Larry Summers spoke to this issue during the campaign, chiding his Democratic colleagues that they needed to be growth-oriented. Getting to 3 or 3.5% growth will take a lot of strain out of the tough decisions over Medicare and Social Security. Growth of business investment spending has been poor during the past eight years and if a higher growth rate is to be achieved, business spending must grow sharply. Cutting corporate taxes should help, but quelling erratic and inconsistent Government regulatory interference will create a more certain environment for CEO’s and CFO’s to invest. A multi-year tax plan will give business the chance to properly isolate better from poorer projects and give business confidence that increased earnings will turn out to be increased earnings net of tax. Proper incentives are the first step in winning this game. In addition, the Trump Administration can hold the carrot of a much reduced “repatriation” tax (say cut to 7 or 10%) that will quell much of the concern of domestic business over higher interest rates in the future and generate needed tax revenues. Again, it is a question of details, not direction. The progressives will cry “trickle down,” but if the Administration moves strongly in the first year, some results might well appear before the next bi-election in 2018 and perhaps cement Republican control in the Senate even further.

Trump appointees will have to concern themselves with two potential pitfalls: thousands of bureaucrats who are in charge of implementation and the inertial momentum bureaucrats supply and second, the “balanced budget” Republicans that are rightfully (no pun intended) concerned with allowing the deficit to grow after a major tax reform is put in place.

The corporate and personal income tax rules must be drastically changed. Simplicity, lower rates, and less cumbersome collection procedures would improve growth and incentivize expanded business investment and personal savings. This is supply side economics coming to the fore. It couldn’t happen at a better time. If US imports are restricted by either foreign- operated export controls or higher tariffs, US exports will not grow as fast or may actually decline. That means the economy will need more stimulus from domestic consumption and investment. A more predictable tax environment will enhance both. Trump rightfully criticized the lack of transparency and the crony capitalism of the prior administration. He has a chance to show he can that he can lead but also demonstrate credible results through a simplified tax code that leaves less to crony manipulation and more to predictable tax receipts. Provided that budget savings can be found, a simplified tax code that doesn’t lead to excessive deficits will provide great economic thrust in the coming years.

Most economists would prefer a simple consumption tax that rewards savers, but that might be one bridge too far in the initial year of the Trump administration. Progress on tax code simplification will open that door to even a more simplified tax system if ensuing growth causes Trump to be re-elected. The charge that growth leads to very unequal income and wealth outcomes can be answered by stripping special provisions such as incentives to convert income gains to capital gains due to large differences between tax rates on income and capital gains. An income tax rate of say 20% and a capital gains tax rate of 20% have much to recommend it. It avoids the shifting issue and the distortions that ensue from that differential. The new Trump tax techies should be running the numbers now on what might occur from a huge simplification of tax rates on income and capital plus eliminating much or all of the penalties on repatriating overseas business income.

Finally, we come to perhaps the most political parts of the tax code, estate taxation. From his earlier statements, one might predict that Trump will seek a substantial reduction in the estate tax rate, if not eliminate it entirely. The estate tax doesn’t raise sufficient revenues to create concerns for the deficit monitors, but it is a highly charged from the standpoint of growing wealth disparities. (Estate and Corporate taxes at the Federal level represents some 9% and 11% of Federal Tax Revenues). In addition, wealthy taxpayers are the source of significant charitable contributions, often motivated, at least partially, by the fact that the donor has a partner—The US Internal Revenue Service—in making gifts. A top marginal federal tax rate of nearly 40% implies that the cost to the giver is only 60 cents for every dollar gifted. Will the wealthy be less giving if marginal income tax rates drop sharply along with substantial reductions in estate taxes

Economic forecasting, much as we might think it is scientific, is likely to stumble when predicting in an environment of rapidly changing economic growth and complex changes of both income and wealth taxation changes at the same time. One can hazard a guess that rising wealth that can be passed to heirs at relatively low or zero tax rates might well create even more charitable giving on the grounds that a larger relatively untaxed estate would provide even more reasons for the wealthy to increase their charitable activities.

While this is an interesting theoretical problem for tax experts, the real debate will not be about efficiency and growth. It will be about perceived wealth and income inequality politicized by incorrectly characterized by the inequality issue. What we saw in the Sanders and Clinton campaigns was a huge display of rhetoric, not much based on solid economics. For example, the 99%-1% juxtaposition turns out to be quite faulty. Where inequality has really shown up is not in the 1%, but in the .001 (a tenth of one percent) segment of the income distribution. The progressive argument against the wealthy is more noise than substance. That debate, however, will pale against the claims and cries of the Progressives who have long built their case on massive wealth redistribution. What is needed is a factual debunking of the argument, but the data are there to do just that. Trump will have to tread artfully through this political economy jungle to hew a thoughtful program of tax reform.

Health Care: If it was not clear during the campaign that the simple statements about abolishing Obamacare were at best wishful thinking, it has since been made quite obvious, even admitted by the President Elect in his “60 Minutes interview with Leslie Stahl on November 13th. The new administration can ‘t just abolish the Affordable Health Care Act. Too many people would be left without any healthcare program. That means that the obiter dictum will be change, not abolition.

Here, the terrain gets tricky as the new Administration must navigate between the extent of coverage and the coverage costs. The new Administration will start from the fact that rising costs to those now covered are making potential converts on both sides of the aisle. The existing structure of coverage and the shattered private insurance market that has been created by the rise in costs has created a sharp break in expectations. Even those arguing for a more extensive health care system now realize that rather than “bending the cost curve downward,’ (the mantra of those policy wonks that supported the AHC act), has been an illusion. Moving 20 million people onto the health care rolls plus the rising costs of an aging population simply overwhelmed any cost saving that might have arisen by covering everyone. Much sooner rather than later, health care costs have risen so sharply that even the most progressive of the health care advocates realize the present plan is unsustainable. This means that the debate must shift and that will test the political acumen of the New Boys in Town. A Trump health care plan will come, but the tug of war between budget sanity and the political necessity that government provided health care is here to stay. That will define the playing field. Some tough choices will have to be made between how much expense the changed health care system will allow for the aged. Extending massive health care to those in their last few years of life is not a pleasant theme even for dedicated Progressives. At the end of the day, there is neither a free lunch nor free health care. If cost controls are not put on the expense of the ‘last years of life,’ there can be no permanent cost control. Conservatives rejected the death panel approach to governing the extent of care that should be paid by Government, but some answer to this vexing question will have to emerge if health care costs are to be controlled. This issue remains in the background, but since 60% or more of the health care budget comes from those in the last two to three years of life, it is an issue that cannot be avoided. For the country, it may be better that the past opposition to AHC must re-frame the issue and its solution.

The last hurdles will be pre-existing conditions and coverage of young adult family members living at home. The President Elect has already conceded on these two points so the struggle will be over the precise content of the reformed features, not the essential element of Government coverage. The Progressives on the Democratic Party side will attempt to skew the argument to show that the new Trump administration is “taking benefits away.” That is politics within the Beltway. At the end of the day, the Republican majorities in both Houses confirm the fact that changes that satisfy the budget watchers will be the only ones that pass both houses of Congress.

A similar kind of argument will take place over changes in Social Security, even though the time line of Social Security Insolvency is longer. It is possible that with so much to do on other domestic issues a well as a considerable agenda on the foreign policy side, that the new Administration might not get anything done substantively in its first two years. The domestic priorities will be tax reform and health care. Reforming Social Security may slip even if it too is a ticking time bomb.

Financial institutions Reform: Despite the throaty moral outrage of Senators Sanders and Warren, the 24,000 odd pages of the Dodd Frank (DF) bill need real scrutiny. It is questionable whether DF has really solved the To Big To Fail problem. It is has clearly made large banks less willing to take risk and the Volcker rule has cut earnings of these denizens of the finance world. It has done so however through an enormous posse of regulators now housed in the banks themselves while moving much lending to the shadow banking market that is not heavily regulated. This confirms the well-known effect that regulation changes where the problem is pushed without solving the issue. Dodd Frank directed attention away from the GSE ‘s who were considerable contributors to the collapse of 2008/2009. Worse, the Obama Administration restructured property rights of the owners of GSE debt which was raised by the GSE ‘s before they were conservatorized. That issue is still in the courts, but the current Administration has adroitly hidden the causal role played by the GSE ‘s in the mortgage market collapse of 2007-2008. Almost surely, had Fannie and Freddie not underwritten the subprime market, the housing bubble could never have grown to the size it did in 2007. Neither of these entities were paragons of accounting virtue prior to the collapse, but they were intimately involved with the Congress and were difficult to stifle. Neither Sanders nor Warren discuss the cronyism and corruption of the GSE ‘s despite prior criminal cases successfully prosecuted against them. This is only one of the main areas that need to be cleaned up for the US to have a viable and sensibly regulated financial sector.

During the current Administration, the largest financial institutions paid literally billions of dollars in fines that nearly always were set by agreement rather than definitive court proceedings. That is an unhealthy process for Government and it is part and parcel of the cartelization of the finance business that has taken place during the Obama administration. Similarly, competition in other areas of the economy, such as media and communications, airlines and internet sales, to name just a few industries, is now characterized by a few large firms with plenty of clout within the Beltway. Whether the Trump administration is willing to take on the anti-competitive pressures that have built over the last eight years is questionable despite Tumpis express concerns over AT&T ‘s proposed acquisition of Time Warner and his concerns about Amazon ‘s principal shareholder, Jeff Bezos. While nothing explicit has been said about these areas of the economy, they clearly need attention. Cartelized capitalism is neither good for growth nor for freedom.

The Judiciary and the Fed

It is easy to see that Republicans dodged a generational bullet in the Supreme Court by holding the Senate and winning the Presidency. A much more liberal (statist) Supreme Court would have certainly arisen with a Clinton victory. While the Democrats may now play the old Republican filibuster card on Supreme Court nominees, the new Republican Senate majority can, if it so chooses, change the voting rules by using its majority. Despite Senate Majority Leader reluctance to end the filibuster, it might be the only alternative in order to fill the vacancy on the Supreme Court. The famous line in the movie Independence Day, says it all: payback is a bitch! That said, this is not a major strategic issue. It is simply tactical maneuvering.

The Federal Reserve: Another area for payback stems from the eight-year period of low interest rates engineered by the Fed. Oversight is coming, notwithstanding the attempts by the Fed to escape a legislative lasso. Among many economists, former Chairman Bernanke’s immediate efforts in 2008/2009 to resurrect our credit markets, are applauded, but that support does not extend to the long period of QE and a near decade of low, often zero interest rates. Savers have been punished and the reach for yield suggests significant distortions in the allocation of savings and credit.

The fact that the Fed has been able to do this largely without significant Congressional oversight doesn’t mean it will be able to do this again in the future. The Congress will in fact pass legislation to interrupt the Fed’s total independence. Chairman Yellen ‘s reign extends only until February 2018, and she will not be reappointed. While there is no current suggestion she will resign before her term expires that could occur if the Congress gets extremely testy with the present Chair. The new administration will be appointing two new members of the Fed’s Board of Governors and it is likely that the new appointees will pair with some of the current members who oppose Yellen’s policies. This will create an unusual situation in an institution that thrives on consensus decision-making. It could create momentum for Yellen to end her Chairmanship prior to the end of her designated term, because a badly split FOMC would create great incredulity in financial markets. How the Fed is finally treated by the new administration will also be related to how this administration deals with the much-hated Dodd Frank bill. Dodd Frank reform will become a circus dominated by cronies and lobbyists. There is considerable support to end the autonomous and separately funded, Consumer Protection Bureau. It is hard to see that agency not getting its wings severely clipped. The Congress wants to and will assert its powers of governance over the Bureau, if it does not kill it entirely. Surely, Congress will end its unlimited funding via the Fed.

The Clinton-Trump contest offered voters a juxtaposition of two rather distinct economic policy formulations. Clinton ‘s focused on further regulation of economic agents. Her menu would have replaced market choices with regulatory expansion and increasing taxes to pay for more Government programs notorious for their inefficiency. Inevitably, that would have meant even more cronyism and corruption. Whether it would have produced more equality of outcome is doubtful because the wealthy have more access to modifying offensive regulation than the poor.

The Political Revolution What did voters choose

The ideology behind the Clinton policy menu implied that Democratic policy mandarins would have been happier if the economic pie were more equitably distributed perhaps even if that resulted in a smaller pie. Aside from the morality of such a choice, it is a highly questionable political theory because the wealthy invariably have more escape remedies than the poor. The proof may lie in the simultaneity of massive regulatory expansion and the evident decline in the US economic growth rate over the past decade. Is the alleged reduction in equality of income and wealth that we now observe merely an accident or a principal outcome of increased regulation and interference over many decades One suspects that there is a latent connection here.

The Trump menu also has two prongs: one is to diminish our integration with the rest of the world economy. One implication of such policies is rising prices of imports and import substitutes and a reduction of labor supplies formerly produced by immigrants without proper papers. That has to raise costs to consumers which is welfare reducing. Reducing the international specialization of labor could produce more domestic jobs, although that is not clear. Current exports could be reduced or grow more slowly either through higher costs or retaliatory measures from overseas customers. In that case, domestic jobs growth could slow or even decline. Indirect effects are often not properly foreseen when a major policy orientation takes place.

The second prong encompasses proposed tax rate reductions on personal income, corporate income and inherited wealth. Taken in isolation tax cuts should stimulate economic growth. Unfortunately, while growth could improve, tax reduction is likely to have negative consequences for the US budget deficit. That means that the outcome is not likely to be predictable until one specifies the rest of the economic policy menu. One needs to know what will be cut from the budget as a consequence of decreased tax revenues. Put another way, there are supply side effects and likely aggregate demand effects at work at the same time. Without specifying the mix, it is difficult to be confident when predicting the impact on growth from each of the two parts of the Trump menu.

In many ways, neither the Clinton nor the Trump campaign promises represented optimal strategies for the US from a strictly economic point of view. That was not their intent. Both candidates focused intensely on bringing different slices of the voting population to their cause, and neither spoke to the larger dimensions of stimulating economic growth sufficiently. By way of contrast, forgetting which classes of voters benefit most, what would a more ideal policy menu look like

The dominant economic problem in America is the evident decline in our growth rate. Choice expands when economic growth improves; both at the household and firm level but also at the policy level as well. When the economy moves from a 2% to a 4% growth trajectory, the traditional guns ‘ ‘ versus butter division gets much less constraining. However costly our current health care policy is, a bigger economic pie and larger government revenues make the collapse of the health care system much less imminent. Similarly, fixing Social Security gets a longer time horizon. Moreover, financing substantial infrastructure improvement becomes more plausible.

What about jobs, even for those whose skill content has not kept pace with modern technology It is inevitable with higher growth that the demand for labor all kinds of labor—will improve. Higher growth does not mean that the wages of the less skilled will become relatively more attractive, although tightening labor markets undoubtedly will push up wages across the board. Will tax reduction move the economy toward a higher growth path Nearly all economists would agree this is the most likely outcome although the distribution of income and wealth might not become more equal.

The only negative aspect of more growth comes from the old Starve the Beast argument: namely, there will be much less pressure to reduce the scope of Government activity when the Government coffers are fatter.

The second part of the story relates to the increased constriction of our possible economic growth possibilities due to increased regulation. It is not just a question of reducing taxes. It is surely a question of simplifying our tax codes and reducing the punishment on the supply side of the economy from the existing, overly complicated and activity-reducing tax mix at the margin. Corporate taxes are shifting American industries abroad. High personal tax rates create huge incentives for tax avoidance through complex tax schemes. High corporate tax rates lead to more tax competition between countries. If we wish to increase growth, we have to reduce the disincentives to growing.

The same incentive theme appears throughout any sensible economic policy agenda. Our regulatory state offers disincentives for both investment and saving at the corporate and personal level. We can see this most clearly by the sharp drop over the past two decades in new business formation as well as the reduced levels of business investment in current GDP measures. It has simply become too complicated and too expensive for many entrepreneurs to create new firms. New firms are the source of job growth. Older firms buy expansion through external acquisition, often reducing jobs as a consequence. This is where the growth story is most telling and where the job story is so depressing. Less new firm growth means fewer new jobs. It also means that large corporate enterprise finds more opportunities from external acquisition rather than internal growth. That leads to more cartelization of the economy and expands the crony capitalism that has become such a political hot button.

Going forward, the Trump administration will be constrained by the promises made during the campaign. That is an unfortunate consequence of a democratic republic. It is simpler on the campaign podium then it will be when policy choices have to be made within the new Administration. Simplicity of campaign slogans disappear when real governance must begin.

Elections have consequences: let the games begin

As Obama famously said at the beginning of his first term: “elections have consequences. I won.” This one will be no different, and the ire of individual Congressmen, now empowered by Trump’s unexpectedly long coat tails, will play out, as they become judge and jury on pet Obama-inspired programs. The ancient Chinese proverb, May you live in interesting times, should be remembered for how it was first uttered: it was the curse of a defrocked Chinese Mandarin, exiled after being fired from his Government post in the capital.

The games formally begin on January 20, 2017 but the jockeying for priorities and for the people who will lead the new Administration has begun in earnest. Political leaders in countries outside of the US don’t quite know what to expect from this new Administration. This is true in the U.S. as well. We really don ‘t know the who and the what of the Trump program at this stage. The power of the Presidency is unlike almost any other democratic republic, and this President has gotten his win by articulating complaints more than by making many promises to his rather widened constituency. Some of these promises worked to attract voters, but cannot largely satisfied as stated.

Some astute historians and political writers have likened Trump’s win to Andrew Jackson’s win in 1828. Jackson was also angry and outspoken, but was a hero to many. He was a very active President, known for inviting in the “Folk” to the White House, mud on their boots notwithstanding. He offended the powers of then Washington political denizens and he flouted his authority by tossing insults their way at every occasion. He saw his victory as one of the “people over the political elites.” Sounds like Trump, doesn ‘t it with the Tweet replacing the Shout Jackson was very ‘down home’ and when he didn’t like something, he said so. Trump has insulted many and was particularly scathing to his opponent. American Presidents wind up with cronies no matter how they vituperate against the existing Beltway crowd. Jackson had his, and we can be sure, this President will have his own as well. Trump liked to claim he would drain the Swamp within the Beltway. It is doubtful he has a big enough pump. American history has rhymed, once again, even if it has not repeated.

[1] Amazon, whose founder, Jeff Bezos, owns the Washington Post was criticized by Trump. AMZN trade above 844 on October 5 but fell to 719 on November 14 (the week following the election). It has since risen to 785 on November 22.

Indexing Stock Options or Granting Stock: which is a better method of compensating executives?

Rewarding a CEO (or for that matter, any senior corporate official) by using an indexed stock option only goes part of the way in properly compensating management and they fail to adjust for the risk that managers take but do not disclose.[1] In nearly every case over the past several decades of corporate misgovernance, shareholders and sometimes Boards, only learn after a corporate disaster that huge, undisclosed risks were taken along the way. Options, indexed or not, offer leverage to managers but provide no downside penalties for bets that turn out badly for the shareholders. One-way optionality is a serious problem for corporate governance.

It is not wrong for corporations to take risks, nor is it wrong that benefits from risk taking are shared with management. What does matter, however, is that equity holders be well informed about the kind of risks to which their investment is exposed well before they purchase their shares. For that, shareholders depend not only upon what managers tell them in quarterly and annual reports, but also upon competent and well informed Boards who monitor the managers. Our current system of corporate governance doesn’t accomplish that as we have clearly outlined in our book, Disorganized Crimes that captures many of these issues since the 1990’s Boom through the financial disasters of 2007/2008.

It is highly unusual for Boards to reward significant performance without judging corporate performance against the company’s corporate peers. Sadly, however, Boards often don’t know or understand the risks that their managers take and are less likely to know about risks taken by competitors. Indexing stock options doesn’t do anything to disclose those risks. Options are still a one-way bet with no downside for managerial misbehavior, incompetence or excessive risk taking.  What’s the alternative

Granting stock, rather than a stock option, is a better alternative. It would at least put managers in the same risk position as their less than well-informed shareholders. It would also make managers far more aware that they are gambling their own money as well as that of their shareholders when they place the company into a high-risk situation.   ‘Heads I win, tails you lose,’ is a bad compensation metric, even if it is indexed against the performance of the industry.

It’s about time to deal with the real problem, not the taxation aspects of different compensation forms. If it ever turns out that income tax rates on currently earned income versus capital gains income get equalized, the real issues of managerial compensation would appear far more distinctly.   Compensation based upon transparent risk reporting and corporate accountability is what shareholders really need.

Let’s focus on the real problem to be solved, not the tax system that makes option compensation seem so attractive. Options distort the reality of undisclosed managerial risk taking. It’s time we pay attention to the

[1]This is a reply to the OpEd of Robert C. Pozen that appeared in the WSJ on November 14, 2016. See “A Nobel Idea to Pay CEOs What They’re Actually Worth: Indexing stock options would reward only skilled executives who beat their industry average.” http://www.wsj.com/articles/a-nobel-idea-to-pay-ceos-what-theyre-actually-worth-1479168732

Options, equity grants and corporate governance

The following post was sent to the WSJ as a reply to Robert C. Pozen’s Op Ed (WSJ 11/14/2016) ostensibly as praise for the recent Nobel prize awarded Professor Bengt Holmstrom.   As the Journal didn’t reply (surprise), we post it here to our smaller but more well informed audience!

Paying a CEO (or for that matter, any senior corporate official) using an indexed stock option only goes part of the way to properly reward management for its efforts. It fails, however, to adjust for the risk that managers take but do not disclose to achieve the results which their efforts sometimes achieve. In nearly every case of corporate misgovernance over the past several decades, shareholders and sometimes Boards, learn that huge risks were taken along the way only after a corporate disaster. Options, indexed or not, offer leverage to risk taking managers with no downside penalties for bets that turn out badly for the shareholders. Indexed options don’t solve that problem and such misaligned incentives are indeed a significant cause of corporate misgovernance.

It is not wrong for corporations to take risks. They should and do so every day as a matter of normal corporate strategy. What does matter, however, is that equity holders be well informed about the kind of risks to which their investment is exposed even before they purchase their shares and the sometimes disguised incentives for risk taking given to management.   Shareholders depend not only upon what managers tell them in quarterly and annual reports, but also upon competent and well informed Boards to monitor what managers do on a day to day basis. Our current system of corporate governance doesn’t accomplish that as we have clearly outlined in our book, Disorganized Crimes and which captures many of these issues from the 1990’s Boom through the financial disasters of 2007/2008.

It is highly unusual for Boards not to reward significant performance and frequently Boards do judge the particular company against its peers in distributing such rewards. But, Boards are often unaware or understand the risks that their managers have taken. They hear good news quickly and easily. Bad news arrives slowly, often only after financial disaster strikes the shareholder. Indexing stock options doesn’t disclose those risks when the company’s share price is rising. Equity options are still a one-way bet with no downside for managerial misbehavior or incompetence. Granting stock, rather than an option, however, would at least put managers in the same position as their less than well informed shareholders.  Granting the stock itself would make managers far more aware that they are gambling their own money as well as that of their shareholders when they take the company into a high risk situation. Heads I win, tails you lose is not a good compensation metric, even when the option is  indexed against the performance of the industry. It’s about time to deal with the real problem, not the taxation aspects of different compensation forms.

If income tax rates on currently earned income versus capital gains income get equalized, something implicit in the incoming Administration tax proposals, the real issues of managerial compensation would appear more distinctly. Compensation based upon transparent risk reporting and corporate accountability is what shareholders really need. It’s time to focus on the real problem to be solved, not the tax system that distorts the common reality of undisclosed managerial risk taking and the no lose equity option that promotes that behavior.