Biden's Green New Deal

    This is a high risk moment for the long term economic viability of the United States.  We are exhausted and disoriented by the Coronavirus and the spending that has been undertaken to blunt the pandemic and stimulate economic activity.  In about a year Nancy Pelosi's House has generated "relief" bills for $2.2 trillion and $.9 trillion signed by President Trump, and a bill for $1.9 trillion signed by President Biden. For reference, the total value of all goods and services produced in the United States in a year is about $21 trillion, and our national debt is now about $28 trillion.  A prudent person would think that this is a good time to focus on implementing the $5 trillion in new spending, eradicating the virus, and planning how to avoid future disasters.  Not so for Ms Pelosi who takes to heart Rahm Emanual's maxim to never let a good crisis go to waste. 

    The new $2 trillion American Jobs Plan, announced by the White House on the day before April Fool's Day, contains everything that Bernie Sanders, Alexandria Ocasio-Cortez, or Nancy Pelosi could think of - a bit of traditional infrastructure to provide cover, a large amount of spending to usher in a green utopia in which all good investments are subsidized, and a set of new or greatly expanded programs to make society more fair. Let's try to untangle the content from the marketing. 

         "Infrastructure" takes on a ridiculous meaning to include: popular basics like roads, ports, bridges, the electric grid, and water systems which are investments to sustain the economy and society over long time spans and which are generally seen as government responsibilities (28%); other discretionary "upgrades" to a wish list including AmTrack expansion, broadband expansion, retrofitting of housing and schools, 500,000 electric vehicle charging stations, and building in "climate change resiliency" (37%);  a new ongoing social spending program of wage subsidies for caregivers (20%);  and greatly expanded support for manufacturing and research and development with a focus on climate change, workforce retraining, and semiconductors (15%). 

        In a normal world this agenda would be broken into dozens of components and the various Congressional committees would prioritize the most important (and politically attractive) within a broad budget framework. In the Democratic world of 2021, the first question is whether the Senate parlimentarian will allow the mess to be called a modification to the 2021 budget, and therefore appropriate for reconciliation which requires only a simple majority to pass. The second is whether Nancy Pelosi can hold together her majority of six in the House and Chuck Schumer can hold together his caucus of 50 in the Senate to pass the funding necessary to implement the Left's new vision - most likely in at least two tranches.   

        The shell game of how to pay for this transformation of America is equally disappointing. (The spending increases are positioned as a 10 year plan - on average $200 billion per year; the corporate tax increases $2.5 trillion over 15 years or $167 billion per year.)  As a starting point, in the economic boom year of 2019 we had a deficit of $984 billion - about 4.6% of GDP.  All of the current discussion of tax increases starts with the assumption that the ingoing deficit rate is OK, with the debate being about how much of new spending needs to be covered by increased taxes.  That said, there will be (and should be) increases.

            - The Trump tax cuts of 2017 reduced the top corporate rate from 35% to 21%; Biden proposes to increase it to 28%. Janet Yellen is taking on a global effort to set a minimum corporate rate of 13.5% to reduce the attractiveness of tax haven shopping among global companies. Efforts will be made to capture companies who still manage to pay no taxes with a minimum 15% tax on reported profits, . The discussion is reasonable, but in the context of ongoing deficits and vastly increased spending, it is under what is necessary. 

            - Personal taxes will also go up, but Biden has committed that increases will not impact couples earning under $400,000. Concepts under discussion for high earners include increasing the top rate from 37% to 39.6%; capping itemized deductions; extending Social Security taxes from the current limit of $142,800; taxing capital gains at 39.6% rather than 20%; lowering the estate tax exemption from the current $11.7 million and increasing the maximum rate from 40% to 45%.  There is no appetite for Elizabeth Warren's proposal to tax accumulated wealth in addition to income, and there is little appetite to change the limit of a $10,000 deduction for state and local taxes. The impact will be gentle. 

     Joe Manchin has made some noise about a 28% corporate tax rate being too high, and he and Kyrsten Sinema of Arizona have committed to retain the 60 vote majority for non-budgetary items like gun control, voting rights, immigration, and the minimum wage, but much of the damage will be done through reconciliation , which allows a simple majority to approve changes to the current year's budget. Thus will we get substantial federal government expansion and increased deficits with virtually all Democrats supporting and virtually all Republicans opposing.  One can only reflect how much difference one Senate seat in Georgia made.

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       bill bowen - 4/8/2021


Bringing Our "A" Game

    The issue of the day  - as clearly framed at the March 18-19 meeting of top U.S. and Chinese and officials in Anchorage - is whether China's ascendency over the past four decades is matched by an inevitable decline of the United States.  The New York Times professed  in 2012, that the centralized authority of the Chinese planning system was superior to messy Western democratic capitalism, and a quick Google of "Chinese System Superiority" provides a flood of similar sentiment today.  The tone of Chinese Foreign Affairs Commissioner in his 20 minute attack  was reminiscent of Nikita Khruschev's "we will bury you; your children will live under communism" rant in 1956.  Whereas Russia had a relatively small population and an economy based heavily on oil, gas, and wheat. China has more than four times our population and a diverse, robust manufacturing economy. The implications for American primacy are worth contemplating.

    Those of us born in the United States around the end of World War II have enjoyed an unusual period in world history, with one country representing about 5% of the world's population, setting up the management structure and writing the rules - particularly since the collapse of the Soviet Union in the 80's. We have occasionally found limits - the Vietnam War; the 2008 economic crisis - and we have relied on allies - particularly western Europe, Japan, the British Commonwealth, South Korea - but it has been our game. We have run the international banking system and enjoyed the global currency; English is the de facto international language (for civil aviation for example); when things go wrong we have deployed our overwhelming military strength.  American companies have dominated the age of the internet. Our farmers feed much of the world. At the moment this legacy remains ours, but the Chinese have overtaken us in patents issued and will soon in Gross Domestic Product (although we remain far ahead per capita.) With this competitor we will need to bring our "A Game" 

  The editors of the Wall Street Journal are fearful that, despite a hostile assessment of China  and some rhetoric matching the perspective of the Trump administration, Team Biden (with many of the same players) will revert the Obama administration's feeble response to challenges from Russia (Crimea; eastern Ukraine), China (cyber attacks; intellectual property theft), and Iran (Suleimani's local wars; the nuclear deal on which the WSJ believes that John Kerry was "fleeced".)  Beyond some specific decisions and rhetoric, there are a few things to watch to see if what results will be China achieving near parity with a still  vibrant America or whether our paths are going in the opposite directions.  

    1. Whether our politicians and our thought leaders can objectively analyze strengths, weaknesses, and recent events. The Trump administration cleaned up the mess that it inherited in the Middle East, and shifted the national attention to China with a major emphasis on trade - a  subject of central importance to the Chinese and leverage for us. The fact that trade was a Trump focus cannot be allowed to put it off limits for the Biden administration. The fact that Trump was more active than recent presidents in supporting Taiwan should not result in a retreat by Team Biden.

    2. Whether we can end our flurry of woke self-flagellation that has been driven by several high profile killings of Black males by police and the NYT-driven narrative that our society has always been racist and sexist.  Chinese propaganda draws heavily on Black Lives Matter talking points and stresses  the moral bankruptcy of the imperialist West. US advocates need to move beyond "consciousness raising" to proposing solutions. The American model is the embodiment of Enlightenment thinking; generations of legal immigrants have come here successfully seeking liberty and opportunity; we are a "Work in Progress", but far superior to the dehumanizing, centralized control model of the Han Chinese. If we are to remain the world leader, we need to have confidence in our principles. 

     3.  Whether we can get control of our mushrooming debt.  The self-absorbed Baby Boomers (ages 57 to 75) and Millenials (ages 41 to 56) have discovered that they can have guns, butter, and low taxes by passing on the bill to Generations X, Y, and Z. The Coronavirus relief bills have provided a break with the traditional American values of fiscal discipline and personal responsibility. We have crossed over from debating how low personal taxes should go to debating how high government payments should be for people who are not working - and whether there should be any work requirements at all. Now comes the Infrastructure Bill spending with some investments which will have a long term benefits, but with many which are liberal wish lists of government expansions such as child care and free community college. If we are willing to trade off a bit of growth for higher taxes on corporations, that could be a rational decision, but more unfunded spending on social programs will sink us when that day eventually comes. 

    And then there is the problem of Joe Biden whose mental health has held up better than expected in his first few months in office.  There is a reason that Xi Jinping is asking to meet with him despite Biden calling him a thug, and there is a reason that Vladimir Putin has proposed a debate with Biden despite Biden calling him a murderer.  And then there's Hunter ....  Leadership matters also. 

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   This week's subject seemed to call for an old favorite from Bob Dylan. 

 

Bill Bowen - 4/1/2021