Two Worlds, One Nation

Ever since election night 2016, Frugal Ron has been in a state of depression. No election and very few events in his life have had the impact of Donald Trump winning the presidency. The world simply isn’t as bright as it used to be.

Over and over, this writer has tried to rationalize how anyone, let alone a nation, could vote for as reprehensible a person as Donald Trump. He’s cheated and humiliated all three of his wives, during his six bankruptcies he’s wiped out the savings of countless small investors that made the mistake of trusting him, he ridicules the disabled, he attacks Gold Star parents, he lies about his charitable giving and his charitable foundation broke laws by taking money donated by others to pay Trump’s legal expenses.

His statement that, “The concept of global warming was created by and for the Chinese in order to make U.S. manufacturing non-competitive,” makes one wonder,  just how stupid is this guy?  A compulsive and very poor liar, Trump continually denies his own statements. When the press comes up with video or audio of him saying these things, he vilifies reporters for their “vendetta” against him.  And yet millions of people voted for this person.

If things were going badly, this might be an explanation. However, the unemployment rate is 4.75%, wages are increasing at record rates, inflation is non-existent, the stock markets are at record levels and  the country is at peace. Millions more people are covered by health insurance and the government is finally out of determining who can marry who. Perhaps best of all, President Barack Obama did all this while increasing annual government spending at less than one-third the rate of his three Republican predecessors. The economy has only one direction to go under Trump. The question is, how bad will things get?

Even crazier, Trump and Republicans promise massive spending increases, huge tax cuts for the rich and financial deregulation; the same formula that gave us the George W. Bush Super Recession. Don’t be fooled by Republican promises of “change”. To a Republican, change means making things like they used to be.

So, is this column sour grapes from a sore loser? Absolutely. Whether we like it or not, Donald Trump is our president. When he mucks up the economy and sends markets spiraling downward, this doesn’t just affect those that voted for him, it affects all of us.

Two worlds, one nation

The 2016 election taught us how divided our nation is. People with college degrees voted overwhelmingly for Hillary Clinton. Voters without college degrees voted overwhelmingly for Donald Trump. Clinton voters get their news from mainstream sources, Over 60% of Trump voters don’t trust government generated data. They prefer Fox News and conservative talk show radio, neither known for accuracy and certainly not balance. Even worse are the alternative reality sites on the internet that simply make up the news that Trump voters desperately want to believe. For example, that Barack Obama is a Muslim.

The two worlds rarely meet. Urban people voted predominately for Clinton and the lower income rural areas went heavily for Trump.

You can chalk this up at least partly to globalization which increases the value,in rich countries of well-educated people and decreases the wages of less educated. Income differences based on education are at record levels. The average high school graduate makes $678 a week. The average college graduate makes $1,227 per week. The unemployment rate for high school graduates is 5.6% and for college graduates it is 2.5%. http://money.cnn.com/infographic/economy/college-degree-earnings/

From 1965 to 2013, the median wages of 25 to 32 year old college graduates working full time grew by $6,700 . During the same period, median wages of high school graduates in the same age group fell by almost $3,400 to $28,000. http://www.usnews.com/news/articles/2014/02/11/study-income-gap-between-young-college-and-high-school-grads-widens

For all of Trump’s promises, this isn’t going to change. The US job classification that the largest number of people belong to is “Truck driver”. This includes everything from semi drivers to delivery people. Yet, Amazon is testing drones for delivering packages while Google is testing driverless trucks. Politically we may be turning the clock back decades, but in the workplace, knowledge is power.

Lessons learned

In snatching defeat from the jaws of victory, Hillary Clinton delivered the presidency to the most uniquely unqualified candidate ever. Not only do we have a President Donald Trump, we have the most spend crazy, out of control big government liberals ever running the House and Senate. We aren’t going to change the election outcome, but there are some lessons to learn from it.

There is no such thing as a perfect candidate. However Democrats do very well when their presidential candidate is what I call a “charismatic genius”.  John Kennedy, Bill Clinton and Barack Obama all fit this category. They each had vision and more important, they could articulate their vision in a way ordinary people could relate to and buy into.  They inspired voters and voters genuinely liked them. Not to be ignored, all three were tall, handsome and looked like what people envisioned a president should look like.

Hillary Clinton lost the election because she couldn’t get the Obama voters to vote for her. Give part of the blame to vote suppression laws passed in Republican controlled states. Yet, the bigger picture is, Hillary Clinton didn’t inspire voters.  in fact, she was disliked so much, Democrats used surrogates to campaign for her.  Not a sign of charisma.

While Trump continually portrayed Clinton as crooked, she is far more honest than Trump and changed positions less often than most politicians. Her real problem is poor judgement. In her most important vote as a senator, she voted for the Iraq War. Poor judgement caused her to overrule any dissent from her advisors about using a private e-mail server while Secretary of State. People with professional positions have a work e-mail and a private e-mail and never shall the two get intermixed, Not a sign of genius to violate this axiom.

Democrats seem intent on breaking the glass ceiling and electing the first woman president. This is a wonderful goal, yet the more important goal is to nominate the most electable candidate.

What to expect from a Trump presidency

Barnum & Bailey are shutting down their circus, though it never was competition to the Donald Trump transition circus. Whether it is dismantling the Affordable Care Act before they have any idea what to replace it with or Melania Trump making cyber-bullying the focus of her time as First Lady. (One wonders if she could be so naïve that she doesn’t realize  her husband is the world’s most prolific cyber bully? Or, is she a lot smarter than we give her credit for and she is using this to get back at Trump for his philandering during their marriage that was revealed during the campaign?) At any rate, the Trump transition has been great entertainment. Unfortunately, once this clown act took office, the laughing stops.

Draining the swamp

Trump’s promise to end the influence of money in Washington took a detour. Betsy DeVoss, Trump’s nominee for Education Secretary, does not have an education degree and has no education experience. She has never attended public school, nor have any of her children. She supports public funding for Christian for profit schools over public ones. Not qualified you say? Well, she did give $9.5 million to Trump’s campaign.

Remember during the campaign when Trump was attacking Hillary Clinton for her close ties to Wall Street?  Trump has six Goldman Sachs executives in high places in his administration and his cabinet is the  wealthiest in history. Just think of how loud the wailing would have been if Clinton had won the election and installed these executives.

Trump’s inauguration committee sold packages for $1 million that included four tickets to what’s billed as an exclusive “leadership luncheon”. According to a document detailing the “58th Presidential Inaugural Committee Underwriter Benefits.” they will have a luncheon with “the ladies of the first families,” an “intimate dinner” with Vice President-elect Mike Pence and his wife and a “candlelight dinner” with “special appearances” by Trump and incoming First Lady Melania Trump as well as the Pences. If a woman put together a package like this, she’d be arrested for prostitution.

Trump, who is not known for doing anything unless it benefits him personally is true to form. The tax cut he is pushing most consistently is to end the estate tax. In 2015, you got to exempt the first $5.43 million of your estate before starting to pay any tax. Joe Sixpack,  if you ever expected to have a place at this table, you really are a fool.

International trade

Trump promises to bring manufacturing jobs back to the US by renegotiating trade agreements.  He won an election with this nonsense, but it will fail miserably in the real world. Here is the reason.

A  country’s trade balance has to equal its Net National Savings. If a country imports more than it exports, it can’t just create money to pay its bills. After running out of domestic lending sources, it has to borrow money from foreigners to pay for the extra imports. Or, if a country borrows from foreigners to pay its bills, the Terms of Trade (prices on exports and imports) are adjusted by the market  to make sure extra imports closely equal the Net National Savings deficit.

This is the scenario the US finds itself in. Because of our Net National Savings deficit, our exportable goods are more expensive than they otherwise would be and the things we import are cheaper.

The difference between exports and Imports is a country’s Current Account. This includes trade in goods, services, investment income, wages and anything else traded.

The US, consistently runs a Net National Savings deficit, so that is the driver in this equation. The Current Account will always match our Net National Savings. President Trump can negotiate artificial terms of trade (prices) with China, but at the end of the day, that pesky Current Account will still match our Net National Savings. We will simply wind up trading with other countries until the Current Account deficit matches the Net National Savings.  The Current Account in 2015 was -$478 billion. In this -$478 billion, we are sure to find many boatloads of manufactured goods.

What the Republicans (and Democrats for that matter) don’t want to talk about is: Net National Savings = Government Savings  + Private Savings. In 2015, Government Savings was a negative $782 billion. (The great majority of this was the federal government deficit of $569 billion.) Private Savings was $304 billion. Add -$782 billion to +$304 billion and the sum is -$478 billion. Source: Bureau of Economic Analysis, Table 5.1 Saving and Investment by Sector, Lines 35-41, January 2017. (Note Net National Savings are also called Net Lending or Net Borrowing, NIPAs and Capital Account.)

The important point is President Trump can negotiate all the trade agreements he wants, but until he and his Republican Congress get rid of the the $569 billion federal budget deficit, the US will continue having Current Account deficits, export jobs and mortgage our children’s future to foreigners.

The danger is that if Trump doesn’t get his way in the useless trade negotiations, he’ll start attaching the 35% tariffs he has threatened on our trade partners. This will allow domestic companies to jack up their prices and dramatically add to inflationary pressure. At the same time, other countries will return the favor to us and add similar tariffs to our exports. This will devastate sectors like agriculture that are export dependent. If Trump were to do something crazy in the name of America First and outlaw all foreign trade, the US goes bankrupt.

Again, the US Current Account deficit is our fault, not the Chinese or any other country’s fault.  We have a trade deficit because of our prolific government spending and more important, our inability to raise taxes to match our government expenditures. If voters want a positive trade balance, they made an enormous mistake in the last election.

The economy

Republicans love to spend outrageous amounts of money growing the size of government and they love to cut taxes. Consequently, they borrow money like drunken sailors. While Republicans Ronald Reagan and George W. Bush each raised annual government spending by around 80% during their terms in office, this looks like just a starting point for Trump and his Republican Congress. https://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&904=1980&903=87&906=a&905=2016&910=x&911=0

Trump has determined that we need to “hugely” increase defense spending. We have no idea how much “hugely” is, but no doubt with a Republican Congress egging him on, this is mega bucks.

Again, the Republicans are operating without any logic or common sense. According to the Stockholm International Peace Research Institute, which tracks military spending of 170 countries since 1988, the US spends more on defense than the next seven biggest spenders combined! We spend three times as much as China and seven times as much as Russia.

Trump has also called for another program, whose cost could soar to another $trillion, to expand and modernize our nuclear arsenal. Currently, we have 2,000 nukes deployed. According to a 2007 study by the International Physicians for the Prevention of Nuclear War, if only 300 of these warheads hit Russia, 90 million out of Russia’s population of 144 million would die in the first half hour. Those would be the lucky ones. Most of the rest would perish in the following months.

Trump also has a $trillion stimulus/infrastructure program and his tax cuts are expected to add somewhere in the range of another $trillion annually to the deficit. To update one of my favorite quotes from the late Republican Senator Everett Dirksen, “A trillion dollars here and a trillion dollars there and pretty soon you are talking real money.”

The size of the deficits resulting from Trump’s proposed spending increases and tax cuts are mind-boggling.  While Trump lives in his alternate reality that his tax cuts and spending increases will generate an economic boom that will more than cover their costs, history tells us otherwise. The Reagan/Bush tax cuts and 8% annual spending increases bought us the biggest budget deficits in history. The George W. Bush tax cuts combined with his almost 8% annual spending increases brought us even bigger deficits. While Barack Obama kept his spending increases modest, he was history’s biggest tax cutter by keeping Bush’s tax cuts and adding on his own in the form of FICA cuts. These resulted in over $trillion deficits throughout his first term.

The money to pay for these deficits will have to come from someplace. Figure 1 illustrates the source for financing much of past deficits, foreigners. Considering the size of Trump’s projected spending deficit and the possibility Trump might start a trade war with China, our second biggest lender, future availability of  foreign funds is not certain. If we have to rely on domestic sources to fund his deficits, it could lead to some of the highest interest and inflation rates this country has ever seen.

Figure 1

Source: Bureau of Economic Analysis, Table 5.1 Savings and Investment by Sector; Line 35, 1/22/2017
Source: Bureau of Economic Analysis, Table 5.1 Savings and Investment by Sector; Line 35, 1/22/2017
Wishful thinking

Perhaps you expect Congress to do the responsible thing and temper Trump’s fiscal policies? Republican members of the House Freedom Council (these are the Tea Partiers that led government shut-down efforts) say they are ready to vote for a budget that will raise the deficit by a $trillion by the end of the decade, all for the sake of repealing the Affordable Care Act. They’ll need to get used to far bigger deficits than that.

A little background, in 1980 when Ronald Reagan was elected president, the federal government’s spent $534 billion annually. In 2015, federal government spending reached $3.5 trillion. Over 70% of this increase took place while a Republican was president and controlled the budget veto.

Summing-up

The United States  has a long history of divisions. Not since the Civil War has the country been as divided as it is now. And, with Donald Trump, the most divisive president in our history, building walls, dividing families, taking away women’s reproductive rights and making health insurance unaffordable for a large segment of the population, only the most naïve will expect any improvement.

The only thing Trump and his Republican disciples in Congress have going for them are low expectations. If they can somehow avoid melting down the global economy and starting a nuclear war in the next four years, Frugal Ron will hail the Trump Administration as a success.

 


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