Triumph of the Swamp

Perhaps one of the most irresponsible bills in US economic history has just been passed. Eventually we will all suffer for it.

To understand about this bill, let us start with some diagnosis about the needs and priorities of the US economy. This has to start with the living standards of what in the US is called the middle class (the working class in the UK). It is astonishing that in an age of unrivalled human progress, in technology, communications, medicine and everything else, the median earner in the US is no better off than they were thirty years ago. There has been growth in that time, but almost all of it has flowed to those at the top, leaving everyone else behind.

So the first priority of any economic bill has to be redistribution. This is not to punish the wealthy, but to reward everyone else. We have already seen the consequence of not doing this: it leads to despair, jealousy and bitterness, and that shows up at the ballot box in populism. So now we have a populist administration, but they have not rewarded those who voted for it, but punished them even further. After populism is demonstrated as a failure, what comes next may be more violent, or just possibly an extreme version of socialism.

Inequality of outcome is bad, but inequality of opportunity is worse, because that entrenches inequality across generations. So the second priority of any economic measure has to be to improve public services, especially education, but also health, transport, infrastructure and social safety nets, all of which are far worse in the US than in any other developed country. Some targeted spending to improve education in deprived areas and to help places where historical employers have moved out would be a high priority.

But we also know that the public services are inadequate today, but will collapse in the future due to demographic changes, unless radical new funding solutions are found. Part of this has to involve reducing entitlements, for example raising retirement and Medicare eligibility from 65 towards 70. But another part has to be allocating more money. We already start to see what happens when a generation reared on debt and inadequate pension provision starts to age. An article in Time last month looked at families stuck with huge end-of-life costs of their parents – this problem will accelerate quickly. There will also be a growing need for a universal basic income or similar scheme as traditional jobs continue to vanish.

This is one reason why the deficit matters. Borrowing can be acceptable policy when the currency is a reserve currency and when it has a purpose. But growing the deficit at a time when the economy is already booming and with such obvious unfunded future needs is just reckless. A priority at this point should be to reduce the deficit, to allow for a transition to a more affordable regime.

As far as business is concerned, it is sound policy to reduce the corporation tax rate, although more should have been done to eliminate allowances and the rate cut did not need to be so drastic. But, as far as priorities are concerned, two things that corporate America does not lack just now are profits and cash. PE ratios are at cyclical highs already, and firms have not responded by investing but by share buy backs and dividend growth. The evidence that a further infusion will have a different result is slim. The real priority for corporate policy must be to encourage competition. Sadly, every step taken so far will only entrench incumbents further. And the steps towards deregulation will only make a future crisis more likely – one that will be tougher to deal with once the deficit has grown.

The tax bill that just passed served precisely the opposite of all these priorities. Why did they do it? The Republican Party is not short of smart economists or deficit hawks. Their motivation is simple – greed and power. As wealthy people, they will benefit personally. More important, so will all their donors, who represent their future tickets to any hope retained power. And of course the party and the president needed to pass some major legislation to create any sort of message for that donor money to promote. It is a triumph for the swamp – the same swamp that we were told would be drained.

They might just get away with this shameless looting, at least in the elections of 2018 and even 2020. The Republicans learnt from the mistake of the Democrats in 2009, when they hoped that Obamacare would become popular once people felt the benefits. In practice, these came too slowly, so this tax bill makes sure that benefits to individuals are front-loaded, to add to the feel-good factor from the spurt of growth that any stimulus induces. They care less that most of these gains will expire in a few years, because by then elections will be fought over other matters. No matter too, they hope, that the personal gains will probably be inflated away or lost through some other unintended consequence from the bill – perhaps the voters can be distracted into blaming immigrants or other outsiders.

This bill is the latest application of the principle that started around 1980, that I call the Great Wrong Turning. My favourite analogy for that would be a city with a dominant historic firm. That firm would provide most employment in the town, and follow classic business principles of long-term value maximisation. It would understand that this would include offering decent wages, an emphasis on training by involvement in local schools, and also reinvesting in research and development to maintain competitiveness.

This policy worked for our fictional firm until the 1970’s, by when things had skewed too far away from profits and in favour of workers. The workers often went on strike and started hoarding benefits that harmed the ability of the firm to compete. An adjustment was necessary. But, around 1980, instead of the fine-tuning needed, the owners lurched into an opposite direction. They started taking more and more out of the business in dividends and senior remuneration. The owning family became rich, but somehow came to need more and more to satisfy their desires for fancy apartments and holidays and schooling for their kids. Meanwhile training, pension provision, R&D and re-investment were all starved.

Any business school student would identify this strategy as milking the business, and correctly predict its long-term demise. Yet this is precisely the strategy that the US has followed since 1980, and most of the world has copied it to some degree. The initial rebalance in 1981 had some justification, but doubling down in 1986, 2001 and again now is little more than looting, and dooms the economy to spiral downwards. The most ironic part is that each claim for growth from implementing the strategy becomes less credible, because the very people who generate growth by spending as consumers are the ones who have been progressively starved.

I believe that there will come a time soon when a consensus will see this so-called small government policy for what it is. Indeed, like so many of Trump’s extreme policies, this one might ultimately benefit humanity by creating a momentum for a decisive change in direction. Sadly there will be damage along the way, to individuals and the overall economy, both in the US and globally.

And there is a further risk; that when the change finally comes, it will not be smooth and thoughtful but brutal and driven by revenge. We could all end up in a Chinese type model. We could end up in a protectionist world of stalled progress. Or we could end up at war. The swamp should celebrate quickly, for they will not have much to celebrate when the reckoning comes.