Politics, et Cetera
A publication from The Political Forum, LLC
Tuesday, August 25, 2015
They Said It:
The state should confine itself to establishing rules applying to general types of situations and should allow the individuals freedom in everything which depends on the circumstances of time and place, because only the individuals concerned in each instance can fully know these circumstances and adapt their actions to them. If the individuals are able to use their knowledge effectively in making plans, they must be able to predict actions of the state which may affect these plans. But if the actions of the state are to be predictable, they must be determined by rules fixed independently of the concrete circumstances which can be neither foreseen nor taken into account beforehand; and the particular effects of such actions will be unpredictable. If, on the other hand, the state were to direct the individual’s actions so as the achieve particular ends, its actions would have to be decided on the basis of the full circumstances of the moment and would therefore be unpredictable. Hence the familiar fact that the more the state “plans”, the more difficult planning becomes for the individual.
F.A. Hayek, The Road to Serfdom, 1944.
A TRAIL OF TEARS . . . LEADING TO DON TRUMP.
It didn’t have to be this way, you know. The American economy wasn’t predestined to look like a train wreck. It could have been different. In fact, it should have been different. Nor was the nation’s political system preordained, one day, to find an egomaniacal New York billionaire as its presumptive new leader. Yet, it is true, and deeply fascinating, that the first disaster led inevitably to the second curiosity. Let us explain.
Our narrative begins shortly after Barack Obama assumed the presidency and discovered that the economy was in the toilet, just as he had said it was when he was running for office. Naturally, he set about to fix it. Not so naturally, his vehicle was a so-called economic stimulus bill, which was formally labeled the American Recovery and Reinvestment Act of 2009. It began on February 17 of that year with a “stimulus” package of $787 billion, which was shortly thereafter revised upward to $831 billion, all and all the largest of its kind in history. Of course, the Keynesians described it as their crowning achievement and said that it would save the world from economic destruction.
In fact, it was a dud. Instead of spending the money on projects that might at least theoretically have stimulated economic growth, the Obama administration chose to distribute it, as sort of “thank you” gift, to myriad liberal constituencies, such as the teachers unions, local governments, and a select collection of old friends who were engaged in government-stimulating activities. Unfortunately, even by the administration’s own measures, the money failed to do much economic stimulating. Or as James Freeman put it in a Wall Street Journal column marking the stimulus law’s fifth anniversary (in the spring of 2014):
The $830 billion spending blowout was sold by the White House as a way to keep unemployment from rising above 8%. But the stimulus would fail on its own terms. 2009 marked the first of four straight years when unemployment averaged more than 8%. And of course the unemployment rate would have been even worse in those years and still today if so many people had not quit the labor force, driving labor-participation rates to 1970s levels. . . .
Shortly after the passage of the Recovery Act in 2009, Vice President Joseph Biden urged local politicians not to spend the money on “stupid things.” They ignored his advice, and so did Mr. Biden. The federal government poured billions into the government and education sectors, where unemployment was low, but spent only about 10% on promised infrastructure, though the unemployment rate in construction was running in double digits. And some of the individual projects funded by the law were truly appalling. $783,000 was spent on a study of why young people consume malt liquor and marijuana. $92,000 went to the Army Corps of Engineers for costumes for mascots like Bobber the Water Safety Dog. $219,000 funded a study of college “hookups.”
In aggregate, the spending helped drive federal outlays from less than $3 trillion in 2008 to $3.5 trillion in 2009, where federal spending has roughly remained ever since.
The legacy is a slow-growth economy: Growth over the last 18 quarters has averaged just 2.4% — pretty shoddy compared to better than 4% growth during the Reagan recovery in the 1980s and almost 4% in the 1990s recovery.
Almost immediately after this boondoggle, Obama and his allies moved on to their next economic priorities: “fixing” health care and “fixing” the financial markets. Naturally, they promoted both projects as vital to the economic recovery. And they insisted that failure to enact the proposed legislation would result in economic catastrophe. So they pushed. And they cajoled. And they bribed. And they cheated. And they coerced. And they twisted enough arms until they had the votes to pass their laws. And indeed, the effect on the economy was substantive – just not in quite the way that what Obama et al. promised.
It may not be easy to remember, given the passage of time and the ridiculousness of the claims in retrospect, but the Obama administration actually sold its health care bill as an economic necessity. Less than six months into the Obama presidency – and thus just after the “stimulus” had been enacted and was being implemented – the President’s Council of Economic Advisors released a plan purporting to show just how vital health care reform was to the economic recovery. Among other highlights, the White House pitched the plan based on the following:
We estimate that slowing the annual growth rate of health care costs by 1.5 percentage points would increase real gross domestic product (GDP), relative to the no-reform baseline, by over 2 percent in 2020 and nearly 8 percent in 2030.
For a typical family of four, this implies that income in 2020 would be approximately $2,600 higher than it would have been without reform (in 2009 dollars), and that in 2030 it would be almost $10,000 higher. Under more conservative estimates of the reduction in the growth rate of health care costs, the income gains are smaller, but still substantial.
Slowing the growth rate of health care costs will prevent disastrous increases in the Federal budget deficit. . . .
Reform would likely increase labor supply, remove unnecessary barriers to job mobility, and help to “level the playing field” between large and small businesses.
Needless to say, we don’t hear much about these “vital” economic impacts any more, and nor have we heard any reports that the people who produced this nonsense have been fired for incompetence. For the fact is that they were not just wrong in every projection they made, but embarrassingly wrong.
These days most people focus on the broken promises dealing with the nature and the type of plans people would be able to buy. “If you like your plan, you can keep it,” and so on. Yet, the more damning critique of the wildly misnamed “Affordable Care Act” is the fact that plans are not actually affordable. Plan rates have jumped. Health care spending has jumped. Out-of-pocket expenses both for consumers and employers who provide plans have jumped. The cost of providing care to the expanded Medicaid population has jumped. There has been nothing even remotely like the cost-savings that were promised. And given that, any hypothetical economic benefits have likewise been nonexistent.
Worse still, of course, the promised economic benefits have actually turned into economic damages. When the ACA was enacted, the Democratic Congress and the White House used every trick available to them – for example counting revenues for ten years but costs for only five – to have the reform package scored as a net revenue generator over ten years. As soon as the law was in place and fully implemented, however, that revenue disappeared and the law was, predictably, scored as a net revenue LOSS, which is to say a net cost to the government and a net addition to the deficit.
Unfortunately, the deficit is the least of the economic problems with the ACA. Last fall, for example, the Fiscal Times ran a piece detailing the work that Casey Mulligan, a professor of economics at the University of Chicago, had done for George Mason University’s free-market Mercatus Center. Among other things, the Times noted the following:
Newly released government data suggest that the Affordable Care Act is dragging down private sector hiring. Though the Act is projected by the Congressional Budget Office to cost nearly $1.5 trillion over the coming decade, it is important to keep in mind that the Act’s most serious costs might be found not in its price-tag, but in its labor market effects. . . .
These data show that businesses are hesitant to fill their job openings — or workers are hesitant to take them. With uncertainty surrounding the Affordable Care Act’s employer mandate looming large for employers, it is no surprise that hiring rates are failing to pick up. . . .
A just-released Mercatus Center study by University of Chicago economics professor Casey Mulligan illustrates how the Affordable Care Act creates disincentives to both work and hiring that extend far beyond the employer mandate. Key findings (summarized in the infographic below) are that aggregate employment hours will fall by about three percent and that more workers will become “29ers.”
The term “29ers” refers to those who will have their work hours cut to 29 hours a week so their employers can avoid paying penalties, and those who voluntarily work fewer hours in order to qualify for generous exchange subsidies. Full-time employees and their families are barred from receiving subsidies for healthcare if their employers offer insurance coverage that conforms to Washington’s standards.
This same prohibition does not apply to part-time workers. Additionally, subsidies decline as incomes approach 400 percent of the federal poverty line ($47,000 for individuals and $95,000 for a family of 4), and they completely drop off for incomes that exceed these thresholds. Again, less work translates into more subsidies.
Previous work from Mulligan has shown that under the Affordable Care Act’s penalties and prohibitions, up to 11 million low- and middle-income Americans could end up losing money by leaving unemployment or working more hours. This means the U.S. labor force participation rate will likely continue to fall, and it already stands at 62.7 percent. That is a level not seen since 1978.
Mulligan also found that the economic waste from the Affordable Care Act, stemming from businesses trying to avoid paying the penalties by shifting their workforce compositions to more part-time workers, leads to an overall productivity decrease of one percent. The penalties reduce per capita output by two percent — hardly something Americans can afford after years of subpar economic growth.
The only ways for the economy to grow are for people to work longer or to be more productive. The Affordable Care Act has negative effects on both of these inputs.
After the health care law was enacted, Obama and the Democrats moved on to “reforming” the financial markets. Naturally, the Dodd-Frank financial services reform bill was also pitched to the American people as an economic necessity. It would protect them, protect taxpayers, make financial services fairer and more equitable. The law would, in short, not only prevent another financial collapse like the one that precipitated the great recession, but would ban the very practices that had caused the collapse in the first place. What the White House called the “most far reaching Wall Street reform in history” was to be a magic talisman of sorts, guaranteed to clean up the industry that had caused so much pain and to ensure that it would never do so again. Sounds great, right?
Of course, the catches were many. And among the most notable was the massive increase in compliance costs, a burden that has been born especially by small banks and which has had a significant effect on financial sector’s profitability and ability to affect the job market and broader economy in a positive way. As the American Enterprise Institute’s Peter J. Wallison put it in a Wall Street Journal piece last summer:
Four years later, Dodd-Frank’s pernicious effects have shown that the law’s critics were, if anything, too kind. Dodd-Frank has already overwhelmed the regulatory system, stifled the financial industry and impaired economic growth.
According to the law firm Davis, Polk & Wardell’s progress report, Dodd-Frank is severely taxing the regulatory agencies that are supposed to implement it. As of July 18, only 208 of the 398 regulations required by the act have been finalized, and more than 45% of congressional deadlines have been missed.
The effect on the economy has been worse. A 2013 Federal Reserve Bank of Dallas study showed that the GDP recovery from the recession that ended in 2009 has been the slowest on record, 11% below the average for recoveries since 1960.
There is much more, but one example says it all. Several months ago J.P. Morgan Chase announced that it plans to hire 3,000 more compliance officers this year, to supplement the 7,000 brought on last year. At the same time the bank will reduce its overall head count by 5,000. Substituting employees who produce no revenue for those who do is the legacy of Dodd-Frank, and it will be with us as long as this destructive law is on the books.
Perhaps more notable – at least from our perspective – Dodd-Frank has become precisely the type of regulatory nightmare that gives both Big Business and Big Government a bad name. The primary beneficiaries of the “reform” law, it turns out, are the people who wrote it, the agencies that implement it, and the businesses big enough to reap the perverse “benefits” provided by the new regulatory burden. This is a classic example of rent creation and rent extraction – more accurately known as corporatism. Writing for the Washington Examiner last month, on the law’s fifth anniversary, Timothy Carney provided the gory details:
Dodd-Frank has stimulated the economy of Washington, D.C., creating a lucrative industry for bank lawyers, consultants, and the revolving-door lobbyists who helped write the complex legislation and ever-changing rules.
Dodd-Frank’s stimulus to the political class is clear as day. Barney Frank, the “Frank” of Dodd-Frank, now sits on the board of a bank, thanks to Dodd-Frank. Signature Bank’s CEO complained in 2010 that the law would make him “have to hire compliance experts and lawyers and other cost-generating personnel.” This year, Frank joined Signature’s board, extolling his “32-year career devoted to government and his distinguished expertise in financial services.”
When Amy Friend, Dodd’s chief counsel, joined financial consulting firm Promontory, the firm explained that she would help clients with “the regulatory implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which, at 2,300 pages, is one of the most complex and wide-ranging overhauls of the financial regulatory framework in decades.”
Frank’s chief counsel, Daniel Meade, went to K Street giant Hogan Lovells. The firm bragged that he was “a principal draftsperson of substantial portions of the Dodd-Frank Wall Street Reform.”
These are some of the most prominent Dodd-Frank cash-outs, but there are dozens of others. Lawmakers, congressional staffers and federal regulators who wrote, passed and implemented the law are now getting rich helping the regulated live with — and profit from — the law. One new Georgetown consulting firm, Fenway Sumner, is built around hiring alumni from the Consumer Financial Protection Bureau, created by Dodd-Frank as the supposed answer to the capture of other regulators by the big banks. . . .
The complexity and weight of the law is one reason the big banks welcomed it. “We will be among the biggest beneficiaries of reform,”Goldman Sachs CEO Lloyd Blankfein said in 2010. Blankfein explained why this year: “More intense regulatory and technology requirements have raised the barriers to entry higher than at any other time in modern history.”
JP Morgan’s Jamie Dimon sounded the same note in 2012. Dodd-Frank’s rules “make it more expensive and tend to make it tougher for smaller players to enter the market, effectively widening JPM’s ‘moat’,” as Business Insider paraphrased Dimon’s comments.
Now, as we’ve noted, each of these three laws is among the most far reaching acts ever passed by Congress. The Affordable Care Act was the culmination of more than a century of Progressive scheming and the largest expansion of the welfare state since Medicare was enacted half-a-century ago. The Recovery Act was the largest and costliest stimulus bill in American history, adding not just nearly a trillion dollars to the federal debt, but increasing baseline budget spending considerably and thus massively increasing annual budget deficits. And, as the White House itself noted, the Dodd-Frank law is the biggest and farthest reaching financial services reform bill ever enacted. Three of the biggest laws ever passed by Congress. And in total, the three together received nine Republican votes in both house. Read that again, if you will: NINE Republican votes total, in both houses, on all three bills combined. Three Republicans in the Senate voted for the stimulus. NO Republicans in either house voted for health care reform. And three Republicans in the House and three in the Senate voted for Dodd-Frank.
What this means is that these three bills – among the most significant ever passed – were passed strictly along partisan lines and shoved directly down the throats of the Republicans. Social Security had bipartisan support. Medicare had bipartisan support. The Civil Rights Acts had bipartisan support. Both of the Reagan tax cuts had bipartisan support. Welfare reform had bipartisan support. In short, every major piece of legislation passed in the United States Congress since the Great Depression – even the most controversial – had bipartisan support. Until Barack Obama was elected.
When Obama was first running for president in 2008, he promised that he would “transform” the country. He has more than kept that promise. What he did not tell us then, though, was that he would transform it to suit his ends and no one else’s; that he would, on the way to changing the country, completely bulldoze the more than half of the population in the country that identifies with the Republican party or is non-partisan.
You take the three laws detailed above and add in the health care law’s contraception mandate, the new regulations on energy production, and the executive actions on immigration, and you have a radical overhaul of the United States government in six years that has been enacted and implement in contravention of the wishes of a majority of the nation’s people. Back in 2008, Obama promised to be the Left’s answer to Ronald Reagan. Would that it were so. Reagan couldn’t even have dreamed of changing the nation as much or with as little popular support as Obama has.
The ramifications of all of this – the far-reaching and economy-stunting legislation passed with no support to speak of from more than half of the people and their republican representatives – are manifold. But at least two of the most important have been showcased on the world stage over the last several days.
The first of these has to do with the wealth effect created by Obama administration and Federal Reserve monetary policy over the course of the last six years. In the absence of a real and sustained economic recovery, the Obama administration and its allies at the Federal Reserve have had to rely on a wildly bullish stock market to create the illusion of growth and wealth. And that market is, as any schoolboy knows, in large part the result of central bank goosing/bubble creation. In the six-plus years since the passage of the Recovery Act, the Obama administration has all but neglected fiscal policy. Moreover, its regulatory policy has been a net drag on growth, all of which is to say that without the Fed and series of quantitative easings, the Obama administration would have no economic accomplishments about which to brag.
None of this is without cost, though, no matter what the Fed does or what the Treasury Secretary says. One of these costs is the exacerbation of slow economic growth, as our old friend, the inimitable Ed Yardeni explained this past May:
In my opinion, the Fed has significantly contributed to the weakness of the current economic expansion as follows:
(1) By keeping interest rates near zero for so long, risk-averse savers have had to accept bupkis for returns on their liquid assets, which rose to a record $10.7 trillion during the week of May 11. Many of them have been saving more, thus spending less. The 12-month sum of personal saving has been running around $700 billion since the end of the financial crisis in 2008, double the pace during the 1990s and the first half of the previous decade.
(2) Ultra-easy money attracted investors rather than nesters into the housing market following the 2008 crisis. They bought up all the cheap homes and drove home prices back up to levels that may be unaffordable for many first-time homebuyers.
(3) As I’ve discussed many times over the past year, thanks to the Fed, corporate bond yields have been trading below the S&P 500’s forward earnings yield since 2004, providing companies with an incentive to buy back their shares and engage in M&A rather than invest in plant and equipment.
Cheap money did stimulate some business investment, but the increased capacity wasn’t matched by more demand, resulting in some deflationary pressures. Stock prices have soared, but this has exacerbated the perception of widespread income and wealth inequality.
Additionally, and more to the point given the last few days of trading, the Fed – along with the rest of the central bankers in the world – have created an(other!) enormous asset bubble in the equities market. Again as Yardeni put it this past spring: “This is not investing. It is all about central bankers . . . These markets are all rigged . . . I just say that factually . . . I love these central bankers, they’ve been very good to the stock market.” Or as Martin Feldstein notes in this morning’s Wall Street Journal:
The excess price of equities was not the only mispricing caused by the Fed’s unconventional monetary policy. As investors reached for yield in a very low-yield environment, they depressed the spreads between Treasury rates and the yields on high-risk bonds and emerging market debt. The prices of commercial real estate have also been pushed to extremely high levels, driving down yields to unsustainably low levels. Banks and other lenders have boosted their short-term earnings by lending to lower-quality buyers and making loans with fewer conditions.
Much of this mispricing will likely unwind in the months ahead.
The second ramification of the Obama transformation that has been evident of late is the genuine and apparently irrepressible anger that has gripped a large segment of the electorate and especially the Republican primary electorate. Obviously, we’ve written a great deal about the Trump phenomenon over the last few weeks, and it looks like we’ll be writing about it for the next several months. As we’ve noted, among the factors motivating those who have decided to support Trump is anger with the Washington establishment and frustration with the Obama administration’s disregard for them, their needs, their wants, and their rights as citizens.
Two weeks ago, we wrote that the Trump followers want, among other things, a leader who will do to Obama what he has done to them, specifically to deride them with sarcasm and snark and to dismiss their concerns as unworthy even of consideration. There is, we’ll note, another component to the Trump-as-Obama experience. The Trump supporters want their guy to do to what Obama did to them on policy and regulation as well.
Most voters, even Republican voters, don’t care about the niceties of republican government. They see that the guy the Democrats nominated and elected has transformed the country without the benefit of sustained democratic support and in opposition to the institutions of republican government, and they want to transform it right back, even if that means shoving it down the Democrats’ throats this time. They don’t care if the democratic spirit and republican institutions have to be discarded to do so. They just want it done. If Obama can do it, then they want a guy who can do it too. And that guy is Donald Trump. Trump can cut taxes, repeal Obamacare, get the economy moving again, and rescind Obama’s amnesty for illegal aliens. And if he has to stick it to the Democrats and Congress in the process, all the better.
What we’re left with, then, is an economy that is underperforming, in part because of the legislative, regulatory, and fiscal burdens placed upon it by the current administration; a volatile asset bubble that has been inflated by the Fed, in part to compensate for the sluggish real economy; a president who has imposed his will on the people, even if that meant hampering the economic recovery; and a presidential candidate who promises to impose his own will on everyone, once elected, in order to reverse the policies of the last six years and implement new policies of his own.
In the six-and-a-half years since Obama took the oath of office, he and his fellow Democrats have by and large trampled on the institutions of the republic. This has created economic unrest and instability and has, in turn, motivated another candidate – and millions of supporters – who likewise seek to trample on the institutions of the republic. In short, we have a recipe for disaster, if you’ll pardon the cliché: economic dislocation and volatility, political insurrection against an out-of-touch elite, and a charismatic outsider who promises to tame that elite while fixing the country’s problems, niceties of democracy be damned.
Unfortunately, we have no idea exactly how all of this will turn out. We only know that it will not be especially pretty. Neither of the frontrunners for their party’s respective nominations has any serious plan to repair the nation’s broken fiscal policy. Neither has any idea how to jumpstart the sluggish economy. And neither has any idea how unpleasant and destructive unwinding the central bankers’ asset bubble will be – or, for that matter, what to do if that unwinding takes on a life of its own, as it almost certainly will.
Last December, we wrote a piece about the social tensions in this country and predicted unrest for a long time to come. Specifically, we wrote:
We believe that America’s ongoing social tensions are leading to a denouement, a point at which the tension simply must be resolved. We suspect that this point will be disruptive and ugly, to say the least, for a variety of reasons, not the least of which is the fact that most of the tension is poorly defined, while the proposed remedies to the tension are even more poorly designed. The problems are misunderstood and the remedies are useless, in short, which is to say that the bubbling gases of social unrest may eventually explode, but that explosion will not rectify the situation. The unrest will continue.
We’re beginning to think that we were too optimistic in that prediction. The tensions and expected denouement are, in truth, likely to transcend the mere social realm. They will include the economic and political realms as well – because they’re all interconnected.
Strap yourself in tight, gentle reader. The ride is going to get mighty bumpy.
It didn’t have to be like this, you know. It could have been different. But it’s almost certainly too late now.