CORONA (NO LIME)

It seems unquestionable that when China gets a cold, the market sneezes.  When the world gets China’s cold - the market seizes.  As the various exchanges register “Shock and Aaaaaaargh!” at the potential impacts of the Corona virus there is a distinct chance that this will expose the fragility of the Trump economy.  The economic boom so frequently touted by the President is something I’ve long said was built on toothpicks, that it might very well disintegrate if any small thing falls out of place – and a microscopic virus seems to be proving that point. It’s also illuminating something perhaps a bit more surprising – there are many more things in common between Donald Trump and Bernie Sanders than the conventional wisdom would hold to be the case.   

On what do I base these assertions?  First, let’s take four basic assumptions as starting points – if you want to challenge me on those feel free but I’m pretty confident they are correct and that the only real debate surrounds their impact, not their existence:

1.       Trump inherited a strong, improving economy from Barack Obama.

2.       The tax cuts passed in Trump’s first year assisted in heating that economy up, creating at least a mini-boom.

3.       The administration has evidenced little to no concern with the growth in the federal deficit; and,

4.       The administration has aggressively sought to counter the typical impacts associated with tariffs.

Now – let’s take those points in turn. 

Trump Inherited a Strong Economy

Barack Obama’s style infuriated conservatives but, perhaps more impactfully over the past two presidential election cycles, it frustrated and disappointed liberals, particularly those farther left.  Obama was far too measured for their taste – liberals were expecting a figure whose every speech would evoke the Gettysburg Address and every bill would be a new Voting Rights Act.  Instead Obama, while certainly capable of rising to the occasion when required (witness his speech following the murders of worshippers in South Carolina) was perhaps best described as “plodding but effective”.  (Warning:  Here come the sports analogies). They wanted Jim Brown but got Larry Csonka.  They wanted Ted Williams but got Stan Musial.  They wanted Michael Jordan but got John Havlicek.  (Further Warning – Irish sporting analogy ahead) They wanted Rory McIlroy but got Padraig Harrington. 

Enough.

The point is – all of those alternatives are great in their own way – they’re just not “the greatest ever” and aren’t all that flashy.  Obama’s probably going to end up being ranked somewhere in that category of Presidents.  Nowhere is this truer than in the realm of the economy.  The one thing no politician ever gets credit (or blame) for are the “things that don’t happen”.  If Herbert Hoover had prevented the Great Depression – would anyone have even known?  If James Buchanan had quietly sat both sides down and stopped the Civil War from happening – I’m certain people would not revile him as much as they do now but I’m equally sure that, because the Civil War would not have happened, no one would realize the danger of the bullet that had been dodged.

To me – when it comes to measuring the Obama performance – it’s a bit like asking “how sharp are the shark’s teeth that did not bite you”?  When Obama was coming in to office the economy was in something resembling free fall.  Lehman Brothers had failed, the banking system was hanging by a thread, the remnants of the auto industry were about to collapse without access to cash (which is tough to get with no banks), pensions had been wiped out, the world economy was teetering.  It was bad – really bad. 

But the fact that we are sitting here today tells you that while the economy may have been on a cliff’s edge in 2009 – it never fell off.  The fact that this didn’t happen is perhaps Obama’s greatest triumph.  He did what Hoover and Buchanan did not. We’ll never know how sharp the teeth were that did not bite.

How this happened is one of the better stories of the last fifty or so years. In large part it goes like this - having taken an active part in the transition between administrations (a stark contrast to the actions of Trump as detailed in Michael Lewis’s “The Fifth Risk”), Obama was able to effectively lobby for the passage of an economic stimulus plan.  More impressively, once in office the administration of those funds was accomplished in a way that managed to maximise their effectiveness.  Rather than financing a number of politically attractive huge projects (in a manner similar to that done during the New Deal) a more careful, deliberate course was followed.  No enormous dams, federal office complexes or national monuments (all of which could be named after prominent politicians) were built – instead the money was carefully apportioned to managed projects involving strategic investments – and ended up being historically free of waste and corruption.  The entire endeavour is described in Michael Grunwald’s book “The New New Deal”, which makes a strong case in favor of the methods used to apportion the funds.

But whether you accept the effectiveness of the incentive plan or not one thing was certain – it was not designed to bring about immediate or even “brisk” recovery.  Instead the approach was based upon gradualism – a slow, sometimes barely discernible return to prosperity.  This proved infuriating to conservatives, who decried the pace (or even the reality) of the recovery.  But more telling for the current election cycle this was even more frustrating for the left wing of the Democratic party, which had thought the incentive program offered an opportunity to funnel funds to traditional government backed programs – not a stimulus package for the private sector. The fact that this was not the approach taken led to discontent on the left – perhaps most graphically represented by the fact that throughout 2011 one Bernie Sanders was spending significant amounts of his time in New Hampshire, preparing for a primary challenge to Obama. Donald Trump was contemplating a similar run - when he wasn't trying to prove Barack Obama was born in Kenya.

Obama did have one factor acting to his advantage – the strategy was working.  While the economy could, at any one given time, be described as “lethargic” it was, over the span of years, clearly improving.  In the 2012 election Obama’s Republican opponent, Mitt Romney, vowed to achieve 6% unemployment if elected.  This was deemed an outrageous figure, pie in the sky stuff. Obama simply vowed to stay the course – keep the same strategy and continue the slow growth.  Hardly the stuff of legend.  Nonetheless, by 2016, after winning that 2012 election – the unemployment rate under Obama was not at Romney's promised 6% level - it was, in fact, around 4%.  Clearly whoever inherited the economy following the 2016 contest would be walking in to a solid, well performing, growth-based situation. That someone turned out to be Donald Trump.

Superheating the System

Let’s start this next section with a question. If you were to be given a credit card with a million dollar credit limit – are you then a millionaire?  I know most would say “no” – but why not?  If you see something with a million dollar price tag on it – you can buy it – that’s what a millionaire could do.  If you want to invest $100,000 dollars in ten separate business ventures – you could do that.  That’s what a millionaire could do.  If you want to fund a pension fund with a million – you could do that. Just like a millionaire.

Of course, what is not factored in to this is the annoying little fact that you will have to pay back the million – eventually.  But during the period of time that the bill doesn’t come due – shit, you’re a damn millionaire.

Here we come to the great Republican con game of the past 40 years.  While selling themselves as the staid proponents of fiscal austerity the GOP has been the largest band of profligate spenders in history.  In each of the Republican administrations since Ronald Reagan the federal deficit has grown, the national debt has exploded, the revenue base has been eroded and – incredibly – the party has promoted itself as the avatars of frugality.

Oh – by the way – they have done so successfully

The basic plan goes like this – you come in to office criticising the Democrats as a bunch of socialist, half crazed, anti-American lunatics who want to give all your money away to gang members and drug addicts.  You then assure people that if they turn the economy over to you these activities will stop, you will curtail all this craziness and – get this – you’ll be able to cut everyone’s taxes and make sure no one feels any pain. 

Of course, these are the things that would cause pain – cuts to military spending, cuts to social security, cuts to medicare, cuts to student loans, cuts to transport spending, cuts to farm subsidies, cuts to veterans’ benefits – you get it.  You could get away with attacking grants to public broadcasting (unless they are seen to be a direct threat to Big Bird), and you could make a lot of hay cutting art subsidies or food stamps – but those were red herrings – the size of the cuts were miniscule.

The tax cuts however – they were not illusory.  Each administration would come in with a single, overriding top legislative priority – get those cuts passed.  The reason was quite simple – a tax cut to a country is the equivalent of giving itself that million dollar credit card we talked about at the beginning of this section – except it was more like a multiple of billion dollar cards. 

If you spend like a millionaire for a short period of time it will become similar to a sugar high – to all watching you from the outside you’ll appear to be doing better than ever.  You’ll have a better home, drive a better car, wear better clothes, eat better food.  The same is true of a country after a tax cut.  There’s more money out there (lots more for some), there’s more economic activity, business is up, spending is up, unemployment goes down. And here’s the thing that Democrats don’t seem to realize – this is not “illusory”.  The economic boom that accompanies a tax cut is quite real- it’s just not sustainable. 

Republicans, in fairness to them, have made feeble attempts to cut spending for some of the large, pain inducing programs previously listed.  The problem is this – those are all good programs. Not just popular – but good, important, necessary areas in which government is expected to, and should, perform.  We need a military. We need social security. We need functioning roads and airports, educated students, health care for veterans and the elderly (really, more than just that) – so when you attempt to cut those programs – you lose elections. So while the previous Republican administrations of Reagan and the two Bushes probably did intend to cut spending to offset their tax cuts (although it is hard to envision how they ever thought they’d cut enough) they were never actually able to do the job – and it wasn’t because of the Democrats.

We know this because during the two Democratic administrations there was actual evidence of fiscal responsibility.  The Obama successes have been detailed – but during the Clinton years the federal government posted surpluses – an unheard of development. (Obama did not but that was largely down to the stimulus package and TARP program inherited from Bush II).  This was helped by the brakes applied by Republican congresses – but remember – they never went after the really important programs because, well, they were important.

Which brings us to Donald Trump.  Trump, who is not a conservative and was not, until the party morphed into his image, a Republican, has simply done away with all pretense when proposing an economic plan.  He passed huge tax cuts upon taking office, knowing that this would superheat the strong economy he inherited, he made no effort to reduce spending other than cosmetic things like spending on national parks, he actually boosted spending on things like his ridiculous wall, “Space Force” and other chimerical programs.  At the same time he reduced regulation, knowing this would open the gates for companies to exploit areas without fear of federal restraints.  (This is called “getting government off your back”.  Other examples of operations where government was not “on the back” of big business would be WorldCom, Enron, Bear Stearns, Lehman Brothers and some Dutch tulip company back in the day).

Unsurprisingly all of this additional money, reduced regulation and promise of more of the same led to the spurt in economic growth the country has enjoyed for the past few years.  It is not illusory – the economy is in a legitimate “boom” period – but, like a gangly teenager going through a growth spurt – it’s getting bigger but not “stronger”.

Treating the economy like this is dangerous, and cannot be sustained for long.  Trump doesn’t care.  As far as he is concerned it only has to be maintained until November, long enough for him to tell everyone how great things are.  That’s why the latest Chinese export has him so worried.  The Corona virus just might disrupt his timetable.

Why Does This Matter?

Look – if this was only about who was going to end up as President after the November election – this really wouldn’t matter.  Economies go up and down, elections get held, there are plenty of other reasons to cast a vote that don’t involve deficits, budgets, taxes, monetary theory, trade policy – the wonky things. Go ahead - vote for (or against) someone because of guns, abortion, the judiciary, civil rights – those are all incredibly, incredibly important. But I want people to at least consider the following arguments because I think they are important as well.

As I’m writing this I’m looking through the collected works of someone whom I greatly admired.  Paul Tsongas was a Democratic Senator from Massachusetts whose office I worked in while attending college.  He was unreservedly liberal when it came to social issues, but was also a self-described “pro-business” Democrat. This meant that he did not, for example, automatically discard someone’s value as a person simply because they were rich. To him the word “billionaire” would have simply meant someone who had a billion dollars, not someone who was inherently evil.  Prejudice is prejudice, no matter if it is based on skin color or dollar signs.

He was also a great opponent of something that is not really thought about much anymore.  Here is something he wrote about in 1991 (and that I touched on at the beginning of this article):

The students will not believe the teacher.  How could this be, they will ask. How could Reagan and Bush have gotten away with balanced budget rhetoric at a time of massive budget deficit realities? How could they lull the American people into accepting such staggering debt without widespread revolt?

More pointedly, they will ask, why did people allow this enormous accumulation of debt which now burdens their generation? This, of course, raises the pointed question of generational morality.

That was 1991.  The annual budget deficit that he was up in arms about was $245 billion.  This year it is estimated to surpass $1 trillion.

For one year.

That is nearly inconceivable and, to me, represents an enormous danger.  The problem is – it doesn’t seem to bother too many people on the right (Trump) or the left (Sanders) very much at all.  At least anymore. 

Republicans were, at one time, up in arms about the deficit. Having signed on to Trump’s use of the company credit card (and the accumulation of a one trillion annual bill) that is not the case any longer.  Democrats (other than the Tsongas wing of the party, who are becoming increasingly less conspicuous) have never been overly concerned about the concept of deficit spending, though the level of unsupported expenditure has not been as high under Democratic presidents as Republicans since the 1960’s. The Bernie contingent certainly has no problem with such spending.

In fairness to both parties the lack of concern about the rate of deficit spending is not simply a case of “whistling past the graveyard”.  Economists on both the right and the left are able to justify their position on deficits on the grounds that the true measure of the impact of the deficit is not the overall size of the debt, but the cost of servicing that debt.  If interest rates are low then the cost of servicing the debt will not become a drag on the economy – instead the borrowing will act as a kind of “perpetual stimulus” keeping the debt easily serviceable while the economy motors along.  Here, in theory, is how this works itself out according to a recent article in Slate:

The main reason economists have traditionally warned governments against borrowing too much is that doing so could slow down the economy by pushing up interest rates and “crowding out” private investment. In theory, a country could also end up trapped in a debt spiral, where it can no longer meet its interest payments and is forced to default. But for developed nations that print their own currencies (sorry, Greece), those aren’t really serious concerns these days. As Olivier Blanchard, the former chief economist of the International Monetary Fund, has explained at length, we live in an era of rock-bottom interest rates that have made it easier for governments to sustain even high levels of debt. In the United States, interest payments as a percentage of GDP are just over half of what they were in the mid-1990s. The signs of crowd-out are also all but nonexistent: Borrowing is cheaper for companies now than at any time since the 1950s. There are also signs that advanced countries can carry vastly higher debt loads than we do and still be just fine: Japan’s debt-to-GDP ratio is more than double ours, and yet it’s currently borrowing money at negative interest rates, meaning investors are essentially paying Japan to hold their money.

The Slate article goes on to note that while this is currently the prevailing wisdom – they could be wrong. That moment of humility is expressed thusly: “In the end, all predictions about the economy are informed guesses, and it’s possible that, down the line, circumstances might change in unexpected ways.” That seems to be the position on all sides – they could be wrong, but there is no evidence to that effect and it’s a bet worth taking.

The problem is – there is evidence to the contrary and if you have any regard for history – fairly recent history – you would never take that bet.  It was only the 1970’s when the country faced interest rates that were in the high teens. Yes – that was forty odd years ago – but that’s the thing – if rates spike every 60 years or so – then within the next 20 years we’ll see a repeat event.  When that happens the irresponsible growth of the national debt will not be “just fine” – it will be crippling.

I can just see the people who know a bit about the events in the ‘70’s shaking their heads.  “What happened during that time was unique – you can’t base policy on the chance of an energy crisis, coupled with currency devaluation and slow economic growth repeating itself”. What are the odds of something like that happening again?

The thing is – there are any number of situations that mirror that scenario – some of which are repeating themselves during this current period.  How about this – in the next 10-15 years global warming could create a situation where it is readily apparent that energy policies have to change.  This creates a 1970’s type energy crisis.  The reason such a change becomes “readily apparent” is the impact of rising sea levels on urban areas – huge infrastructure changes may be needed to preserve the seafronts in Boston, New York, Miami Beach – every major city that is coastal.  This leads to economic chaos and monetary shortages which manifest itself in high interest rates.  The high rates cause spikes in the debt service payments that are the current generation’s legacy.  This leaves the next generation slaves to this debt and unable to finance the needed rebuilding program. They'll essentially have to deal with the economic mess for their entire lives.  Nothing in this scenario involves anything particularly “new” – and while it isn’t something that will inevitably happen –it certainly could.  Suddenly the bet everyone seems so willing to make isn’t such a sure thing.

The “Modern Monetary Theory” that pushes for the continuance of deficit spending is enormously risky – and flies in the face of Tsongas’s cry for “generational morality”.  The willingness of the extremes on the right and left to overlook that fact is troubling, as is the point of view that “moderates”, the tag applied to people who still worry about things like running trillion dollar deficits, are seen as being “against change” or “snowflakes” (depending on who is doing the name calling).  Since both Trump Republicans and the Sanders contingent on the Democratic side agree that deficits aren’t that big a deal – a vote for either of them in November makes very little difference on this issue. Plus, that’s not the only issue that Sanders and Trump agree on – when it comes to China, where the Corona virus started (remember the Corona virus- this is an article about the Corona virus…) Trump and Sanders aren’t that different either, especially when it comes to one particular area – tariffs.

What’s the Deal with Tariffs?

Up to now I’ve been giving examples of how Donald Trump has attempted to superheat the economy, creating a boom that, while unsustainable in the long term, could very well last long enough to get him re-elected.  It’s a strategy very similar to the one that Michael Cohen described Trump using when seeking to finance a deal – he creates a deceptive cash flow picture, convinces the target banks to front him cash for a speculative deal (in effect “vote for him”) and then after securing the funds he’ll default and force a re-negotiation.
 

There was one element of the Trump administration’s actions that did not seem to fit this model – the use of tariffs, which has been a staple of Trump’s trade war with China.  Tariff’s are a controversial tool – whether they are effective at all is still very much up for debate.  One thing, however, is certain.  In the short term the use of tariffs by themselves are a drag on the economy.  It raises the price of goods within the borders of the nation that imposes them, and, due to the inevitable retaliatory measures that the targets of the tariff will impose, it reduces trade for impacted industries and sectors. 

The key phrase there is “by themselves”.  Trump, when putting tariffs in place, typically never uses a tariff alone but accompanies the action with massive amounts of federal assistance for the impacted sectors.  If any other administration were to try this the immediate cry of “socialism” or “welfare” would arise – but Trump has the Republican party so strung up that no one is left to make that charge. Nonetheless – it is true – the single largest trade based social welfare program in U.S. history is being run by Donald Trump right now.

Remember when we talked about the Obama administration’s supervision of the stimulus package?  One of the larger elements of that package was the effort to preserve the auto industry.  Most Republican’s hated that program.  Mitt Romney advocated for letting the automakers declare bankruptcy rather than spend any federal money to support them.  It was derided as the worst instance of socialist meddling in U.S. history. All told the auto industry benefited from about $18 billion in federal largesse, which was a hell of a lot of money. Still – there is a U.S auto industry today and so the effort can be deemed a success from that point of view. 

Republicans in Congress still profess to hate the whole thing (even though it was started by George W. Bush).  The market, according to them, should have been left to decide the matter.  All such bailouts are bad policy say these staunch conservatives.

Ummmm.  Well, maybe not all such bailouts.

You see, since the beginning of Trump’s trade war with China the U.S. agricultural industry has received $28 billion in federal subsidies, dwarfing the auto bailout.  This is just as “socialist” an approach as that taken by Obama (and, before him, Bush). Wait a second – strike that.  This is far more socialist than the auto bail out.  At least the auto industry was actually failing – the U.S. agricultural community isn’t in danger of collapse, they were just not going to be making as much money as they did before Trump imposed tariffs on the Chinese.  This is wealth redistribution that rivals, well, Mao Tse Tung, amongst others.  Yet, magically, this enormous grant of federal money passes into the hands of a favored group without any appreciable objection from the GOP.

Why?

The reason goes back to the motivation behind the Trump tax cuts and deregulation movements.  The economy only gets superheated when people (and corporations) have cash to spend – and if a tariff is going to remove cash from as big a sector of the U.S. economy as the agricultural industry – then that would endanger the boom – and cash would need to be thrown at that sector to avoid such a result.  In order to prevent tariffs from having the effect tariffs always have – you must counteract the tariff through direct government intervention – and if that is “socialist” in its nature – well, Donald Trump and Eugene Debs would pretty much see eye to eye on that one.

One other person who would agree with using government funds to counter the impact of tariffs is Bernie Sanders – who was loudly proclaiming this same strategy long before the Republicans in Congress became converts.  Trump and Sanders both espouse the same strategy for using tariffs – use them as protectionist measures for securing domestic jobs while aggressively providing government assistance to those who are impacted by this blatant interference with free trade.  You can agree or disagree with the approach – that’s a different discussion.  All I am trying to establish here is that Sanders and Trump do not differ that much in their current positions on tariffs.

However – please note that the key word here is “current”.  If, as I think the rest of this essay makes clear – the economic trend of the first three Trump years is unsustainable – then the Trump approach to tariffs and trade will likely end as soon as the first cracks in the boom appear. There are a number of reasons for this – but the primary one is the fact that a trade war is not something that is of long-term use to Donald Trump.  A superheated economy that gets him re-elected is fine – and protective tariffs where no one feels any pain in the short term help achieve that goal. But once that has been accomplished – a trade war with China is never going to be in the best interest of an international developer like Trump.  Watch for the pressure on China to ease if Trump is re-elected.

How Does the Corona Virus Threaten This?

The house of cards that is the Trump economy is predicated on one overriding premise – make it last long enough to get him through November.  If the economy collapses or evidences significant weakness before then – the whole thing falls apart.  Corona virus is possibly the bug in the punch bowl.  The unsustainability of a boom engendered from stimuli like tax cuts, regulators looking the other way and tariff programs that offer an excuse for rampant federally funded welfare unravels if people are suddenly afraid to spend and speculate because they are worried about the global impact of a pandemic.  Instead of pumping all that money in to the system people will hold it – and the boom will end. 

Again, do not make the mistake of calling a boom like this “artificial”.  The economic effects are real – it’s just that they are not capable of lasting – and when you come out the other side of an accelerated "boom" cycle you do worse, as an economy, than you would have if you had simply let the economic trend develop organically. 

In short, this is an argument for, that dirty word again, moderation.  When you drink moderately you have a good time, and while you might be a bit tired after spending a long night out with friends – you are up for doing it again. When you drink heavily you have a great time, but it doesn’t last as long and you throw up in the cab on the way home and can’t figure out why that one guy won’t talk to you anymore.  When you eat moderately you enjoy a good meal.  When you pig out your taste buds explode with ecstasy – and then you feel like garbage and have to pop an endless series of antacids to stop the reflux.  The same thing goes for economic moderation.  The Obama recovery was slow, sometimes agonizingly so, but it was built to last.  The Trump bump – God only knows what’s going to happen when we wake up from this one.

This is an essay about Corona – and a few other things.  In the end the Corona virus may end up being a bit like Toto in The Wizard of Oz.  While everyone is looking at the smoke and mirrors at the end of the hall – it may quietly draw back the curtain of the man creating that ruckus.  Here’s the thing – Frank Morgan, the actor who played the Wizard – he looks and sounds a bit like Donald Trump.  He also can be mistaken, at times, for Bernie Sanders.

Stay healthy everyone.  And vote wisely.