Economics

Biden's Debt

    On behalf of the Baby Boomers, I would like to issue a hearty "Thank You" to our parents' generation who saved the world from Hitler and Tojo, and to our kids and grandkids who will pay for our profligacy over the past few decades. We've been in the sweet spot.

    Democratic leadership has chosen to make huge further debt increases a hallmark of the Biden administration with the $1.9 trillion Covid bill, which has little to do with fighting the disease,  and a subsequent $2.0 trillion Infrastructure Bill. Their political gamble: independents and Democrats who claim to be "fiscal conservatives" don't mean it; voters are addicted to "free stuff". 

    How bad is it? 

        - For those who love numbers, the National Debt Clock shows a concise summary of federal, state, and local income, spending, and debt. Currently Federal debt is 129% of the value of all of the goods and services produced and sold in the United States annually (up from 104% in 2016). Official Federal spending is 193 % of revenue (up from 115% in 2016.)  For every dollar that the Federal government takes in, it spends two.  

        -  As a baseline pre-Covid, the Federal Fiscal Year 2021 budget of $4.829 trillion projected a deficit of $966 billion. Spending was 60% mandatory (Social Security; Medicare; Medicaid; food aid), 20 % military; 1 % interest on debt, and 20 % all other (Health and Human Services; Education; Housing; Transportation; Parks; whatever).  Thus far, Congress (with Pelosi, Trump, and McConnell at the controls) has passed five Covid relief bills costing a total of $3.5 trillion. 

        -  International comparisons are risky, but China reports about $8 trillion of debt, or about 55% of GDP, and the paths are diverging.  

        - Perhaps most disturbingly, Congress has given up on the budget process in place since 1974. Instead of Congress adjusting the President's proposals and negotiating trade-offs, eight of the last ten budgets have resulted from last minute Continuing Resolution Authorities, which just agree to keep on keepin' on with what the government is doing.  

     Let's try to distill the most common debt arguments from the cacaphony of special interests, doomsayers, and political panderers. 

            For the Democratic team who would layer on a few more trillion dollars: 

                1. Debt doesn't matter. Since the US dollar is the international Reserve Currency (generally used for global financial transactions) the Federal Reserve can just print more money.  In a different era the Federal Reserve saw a primary obligation to protect the value of the currency; today's chair emphasizes the "twin mandate" to  maintain full employment, and vows to keep interest rates low for years.  The premise is that the economists will foresee the inflation problem before it arises, and take timely difficult political decisions when they need to.   In essence, the financial world is full of fairies and unicorns. 

                2. We need to invest in infrastructure; it will pay for itself.  This is true in some areas - notably the interstate highway system;  perhaps the airline industry; broadly in education; perhaps in some aspects of "Green Energy".  But some rigor in calculating a Return on Investment is necessary. California's High Speed Rail "train to nowhere" provides a cautionary tale of fraudulent promises and political corruption. Most of the Corona virus spending is designed to mitigate pain rather than to build lasting infrastructure for the future. Beware the lobbyists.  

                3. This is an opportunity to address wealth inequality. Substantial taxes on the super rich would help to close the gap. True, but a couple of cautions: the addition of a tax on existing wealth is problematic, so we are probably talking about income taxes which would produce much less, and the likes of Bezos, Zuckerberg, Bloomberg, Gates, Steyer, and Benioff are not stepping up. Ditto the Wall Street donors who support the non-Elizabeth Warren wing of the Democratic Party.  The days when the rich voted Republican are long gone, so the Democrats would need to gore their own ox.  

        And for the Republican / conservative folks who are concerned for their grandchildren:

                1. Today's interest rates are about 1.3 % on the 10 year Federal bond; over the past 50 years they have been as high as 15%, averaging about 6%. When they return to "normal", there will be a brutal squeeze on funding for the "discretionary" 40 % portion of the Federal budget, particularly the 20% non-military portion.   

                2. Deficits will ultimately be solved by budget constraint with higher taxes (unlikely) or by inflation which targets people living on fixed incomes such as pensions, bonds, or Social Security.  Older citizens vote disproportionately.    

                3. China has aspirations to replace the dollar with the yuan as the global reserve currency. In terms of global influence, it is far better to be a lender than a borrower. 

    Within the next few weeks the debt question will come to a head. Nancy Pelosi wants to give no quarter, passing the next Corona virus relief bill at $1.9 trillion, with Chuck Schumer relying on the "reconciliation" process in the Senate with 50 Democratic votes.  The Democratic establishment has not allowed Biden to negotiate with 10 moderate Republicans who have a proposal which strips out the extraneous junk. The diversion of including a $15 minimum wage will apparently fall off - either because the Senate Parlimentarian does not think it qualifies for reconciliation, or because Joe Manchin and Kyrsten Sinema have vowed to vote against it. But Democratic leadership wants a fight and the $1.9 trillion boondoggle is it unless Manchin or Sinema signal otherwise. 

    A few decades ago our politicians realized that they could have both guns and butter with lower taxes if they just passed on the bill to future generations.  The virus accelerated the process, but the direction has been clear for awhile. 

 

bill bowen - 2/25/21


Engaging China - Background

    The history, culture, and world view of China are very different from that of Europe and North America. Some background refreshment is needed before assessing current events and suggesting policy positions. 

    Important guidance is contained in Sun Tzu's Taoist classic, The Art of War. Written some 2500 years ago during a period of warfare between competing Chinese kingdoms, the short book is a staple of Chinese education and American business schools.  Two themes recur throughout the short 13 chapters: the importance of profound knowledge about yourself, your adversary, and the terrain in which you are engaged; and the goal of winning through maneuver, with conflict a last resort.  Consider the advantage of having over 300,000 Chinese students in the United States, up from 100,000 a decade ago.  Consider the advantage of broad  English language proficiency on the one hand, and the lack of Westerners' ability to read Chinese newspapers on the other.  Consider the 2014 Chinese hacking of the the US Office of Personnel Management's records of some 22 million Americans, including sensitive background check information - who can be blackmailed?; who can be recruited? Consider Chinese government-connected telecommunications manufacturer Huawei which has been banned by the US and  intelligence-sharing allies.  We start with a major disadvantage in the "profound knowledge" dimension. 

    A brief Chinese history is also enlightening: 

        - 1839-1860: The Opium Wars with England and France which resulted in ceding territory (Hong Kong), legal rights over foreign nationals, commercial concessions, freedom of navigation on Chinese waterways, and unfettered prosteletyzing by foreign missionaries. 

        - 1850-1864: The Taiping Rebellion, led by Christian millenarian Hong Xiuquan. Millions killed.  

        - 1862 - 1877:  The Dungan "Muslim Rebellion" in western China. Millions killed; survivors moved to Russia.  

        - 1911:  The collapse of the Qing Dynasty, with the eventual emergence of the Koumintang  party under Sun Yat-Sen, and the Chinese Communist Party. 

        - 1927-1949:  Civil war between the Koumintang under Chiang Kai-Shek and the Chinese Communist Party under Mao Zedong, with an interruption for World War II. Communists win; Koumintang retreats to Taiwan. Millions killed. 

        - 1942-1945: World War II. Japanese occupation of northern and coastal China. Millions killed. 

        - 1950 - 1953:  The Korean War. 180,000 Chinese soldiers killed. 

        - 1958-1962:  The Great Leap Forward. Forced collectivization of agriculture. Some 30 million died, largely of starvation. 

        - 1962:  Brief war with India which secured Chinese position along mountainous border. Preceded Chinese support for Pakistan in the India-Pakistan War of 1965.  

        - 1966 - 1976:  The Cultural Revolution. Youthful Red Guard - led effort to exorcise remaining elements of pre-communist thought. Ended in 1976 with the death of Mao and the ascention of Deng Xiaoping. 1.5 million killed. 

        - 1969: Brief clashes with Russia in the Far East and in central Asia. 

        - 1979: China invades Vietnam in response to Vietnam's deposing the Chinese-aligned Khmer Rouge in Cambodia. Small clashed continue for a decade. 

        -  2001: China joins World Trade Organization as an advantaged "developing nation", with the US and Europe hoping to spread Western trading practices, including restrictions on state-owned or sponsored enterprises. By 2020, the global Chinese trade surplus was $535 billion - $317 billion with the United States. 

        - 2009: China issues extensive sovereignty claims to the South China Sea and begins to build military facilities in the Spratley and Paracel Islands. Minor skirmishes with Philippine and Vietnamese fishermen. 

        -  2012:  Xi Jinping (age 59) assumes leadership of Chinese Communist Party. Exempted from term limits in 2018.

        - 2013:  Belt and Road Initiative adopted by Chinese Communist Party to invest some trillion dollars in infrastructure projects in Asia, Africa, and Europe to create trading network, recruit allies, and employ Chinese labor and manufacturers.  

        - 2015:  Made in China 2025 Initiative adopted by the Chinese Communist Party to move manufacturing toward high technology with mostly domestic produced components in information technology, robotics, aerospace, pharmaceuticals, semiconductors, rail, agricultural equipment, new energy vehicles, advanced materials, and ocean shipping. Intellectual property targeted. 

        - 2017: Forced assimilation of Muslim population in western China begins with construction of concentraion camps for some 1,000,000 Uighurs.  

        - 2020:  New Hong Kong security law, which contravenes the 50 year "One Country, Two Systems" agreement which underpinned the turnover of the former British colony in 1997. 

        - 2020:  Amid the coronavirus disruptions, China surpasses the United States as a destination for foreign direct investment from other countries.  Based on current exchange rates, the US Gross Domestic Product is 50% greater than China's, but at projected growth rates, China will catch up by 2028. On a per capita basis we remain well ahead.  

    That is a lot to absorb. A few themes can guide next week's assessment of the Trump administration approach and the early indicators of the Biden administration approach:

        1. After centuries of carnage and humiliation, it is logical for the Chinese people to accept a trade-off between stability and growing prosperity on the one hand, and restrictions on individual liberty on the other. 

        2. The Chinese have a long history of  modest-sized military border disputes.  An American military presence is appreciated by many of China's neighbors.  

        3. A centrally planned, well disciplined industrial and financial system can achieve strong results (at least in the span of decades), particularly if trading partners and competitors are fragmented and undisciplined. The contrast with the decentralized, entrepreneural, capitalist system of the United States is intellectually interesting, and of global importance. 

        4. Up until 2016, American presidents were preoccupied with the Middle East while Chinese leaders laid out clear plans to surpass the United States economically, and to dominate their neighbors militarily.  Trump brought the focus of American foreign policy to China. 

   There is much to ponder in this most important relationship ... and whether ther Biden team will have the skill, interest, and fortutude to take it where it needs to go. 

bill bowen - 2/4/21

 


Biden's Establishment Team

      When Donald Trump entered American politics he blew up the Republican Establishment. One implication was that he wound up with a lot of third rate people briefly on his team - Paul Manafort; Steve Bannon; and Anthony Scaramucci to name a few.  Rience Priebus did bring the national Republican Party to the campaign and was briefly rewarded as Chief of Straff, and there were several qualified former generals who temporarily stepped up - John Kelly; James Mattis; HR McMaster -  but by and large this was deliberately not an administratiion for the Establishment. 

    Joe Biden is the polar opposite. After 47 years in Washington, and eight near the pinnacle of the last Democratic administration which ended just four years ago (is that even possible?), he is the ultimate candidate of the Democratic Establishment, pulled out of the dust bin when it looked like Bernie Sanders might sink them all. His personnel selections go to the Establishment - for better when it means that most are qualified and experienced; for worse when it means that they may well be prisoners of past failed policies or just adept at currying bureaucratic favor. 

    First, the domestic crew, where like it or not, they will do their best to implement the policies which they believe got them (oops, him) elected: expansion of public medical coverage; phasing out carbon based energy; somehow stimulating the economy; making it easier for illegal immigrants;  restricting charter schools; protecting abortion; not being Donald Trump. For most of these things, the department head doesn't much matter. The Congress may provide a check - assuming a Republican Senate - but the executive branch will march to the Left. 

    Some thoughts on key players who might make a difference: 

        - Janet Yellen: As Treasury Secretary, perhaps a lateral transfer or demotion from her time as Federal Reserve Chair.  She is well qualified in terms of both technical knowledge, and experience working in the politics of Washington.  One concern: she has a long history of wanting low interest rates to help the economy in the short term. With 27 trillion of debt and ongoing trillion dollar deficits, we will be entering a period where fiscal prudence is demanded. Federal Reserve Chair Powell is committed to low interest rates for years. The Senate can only do so much. 

    - Prospective Chief of Staff Ron Klain has been  with Biden since the 80's, most recently as Vice President Biden's Chief of Staff, with a focus on the 2009 Recovery Act (among the slowest in history), and the administration's Ebola czar. While the Obama administration's Ebola response was not impressive, Klain knows all of the domestic and international agencies and should be helpful in the next phase of the coronavirus response. 

    - The announced candidate for head of the White House's Office of Management and Budget, Neera Tanden, whose role involves negotiating the many trade-offs that have to be made, was a Hillary confidant, helped write the Affordable Care Act, and most recently has headed the uber-liberal Center for American Progress. She tweets more than Trump and has recently gone out of her way to insult Trump, his supporters, and Lindsey Graham. (And that's the Washington Post biography.) Senate confirmation is uncertain.   

     Second, the international crew, where Biden has more latitude to act, and where he is committed to reverse Trump's emphasis on what is best for America. 

    - John Kerry is a "twofer": 

        As President Biden's Special Envoy for Climate, he will be empowered to bring the United States back into the Paris Climate Agreement which he helped to create as President Obama's Secretary of State, and which President Trump left in 2017. He will be asked to implement Biden's commitment to spend 2 trillion dollars to transform the transportation and power sectors of the economy. For what it is worth, the stark change of policy with each administration change shows the folly of making major changes by executive order rather than by treaty, which would require building national consensus, as was most recently done on the North American free trade agreement.    

    Most troubling about Kerry, Biden has placed the climate czar on the National Security Council with  the Secretaries of State, Defense, and Treasury and the Director of National Intelligence.  It is hard to believe that Kerry will stay in his lane amid discussions about the Iran nuclear deal, which he also negotiated.  That he (illegally, but openly)  had discussion with Iranian and European leaders in the early years of the Trump administration suggests Biden may not be in charge of this most important risk.  

   - The rest of the national security team  include some with experience on VP Biden's staff (Anthony Blinken as Secretary of State and Jake Sullivan as National Security Advisor); some with significant Obama Administration experience (Alejandro Mayorkas -who led DACA implementation - as Homeland Security Secretary); and some careerists (Avril Haines as Director of National Intelligence, and Linda Thomas-Greenfield as UN Ambassador.)  The Secretary of Defense position remains open, with Michele Flourney the most qualified  to make the difficiult financial prioritizations which are to come - but while she would check the female box, she would continue Biden's failure to appoint Blacks to senior positions.  Like Biden, the group has a history of being wrong on Afghanistan, Libya, Iraq, Syria, and ISIS, and none posesses significant experience with China, which outgoing Director of National Intelligence John Ratcliffe emphatically calls the greatest threat  to democracy and freedom since World War II. 

    Don't look for any carry-overs.  Searching for middle ground is a good campaign slogan.  

 

bill bowen - 12/4/20