It is time to make some fact based decisions about drugs. The War On Drugs is every bit the failure Prohibition was. Want some heroin? If you live in a rural or urban setting, it is available. That brings us to the five reasons we need to rethink our strategy on illegal drugs,

• Hypocrisy runs rampant in the selection of which drugs are illegal.
• Everything we thought we knew about addiction has been turned upside down.
• The War On Drugs created an economic system where African-Americans especially are incentivized into becoming criminals.
• Sentencing disparities contribute to the breakdown of black families and to distrust of our criminal justice system.
• And last but certainly not least, the US’s insatiable appetite for illicit drugs and our War On Drugs has killed thousands, devastated economies and destabilized the justice system in Mexico and other Central American countries.

It is time to admit a costly mistake and move on.

Dangerous drugs, there is some confusion here…

Cocaine usage was blamed for about 6,500 deaths in 2015 according to National Institute for Health data. Cocaine is illegal in all 50 states.

The Center for Disease Control estimates that excessive alcohol use is responsible for 88,000 deaths in the US each year, shortening the lives of those who died by an average of 30 years. Further, excessive drinking was responsible for 1 in 10 deaths of adults aged 20-64 years. Alcohol is legal in all 50 states.

According to the US Drug Enforcement Administration drug sheet, no deaths from marijuana overdose have ever been recorded. This could be because the lethal dose for marijuana is 1,000 times higher than the effective dose, or the dose required to have a noticeable effect.  In contrast, alcohol can become lethal at only 10 times the effective dose. Marijuana is legal in only a handful of states.

According to the Center for Disease Control, cigarette smoking causes about one in five deaths in the US annually. Tobacco causes more than 480,000 deaths annually in the US (including deaths from secondhand smoke). Tobacco is legal in all 50 states.

The National Institute for Health estimates the number of deaths from heroin overdoses at over 12,000 annually. This is a 6.2 fold increase from 2002 to 2015. Heroin is illegal in all states.

The National Institute for Health also estimates that almost 18,000  US citizens died in 2015 from Prescription Opioid Painkillers. These painkillers (with a prescription) are legal in all 50 states.

Methamphetamine, also known as Meth,  is responsible for 19,500 deaths per year in the US. Meth is illegal in all 50 states.

Most addictive?

Duffy’s NAPA Valley Rehab is a drug rehabilitation center in north central California. They have put together a ranking of the ten most addictive drugs along with a dependency ranking. http://www.duffysrehab.com/blog/articles/10-most-addictive-drugs-in-the-world/

Drug                                       Dependency Ranking

1. Heroin                                   2.89
2. Crack cocaine                   2.82
3. Nicotine                               2.82
4. Methadone                         2.68
5. Methamphetamine        2.24
6. Alcohol                                  2.13
7. Cocaine                                 2.13
8. Amphetamines                 1.82
9. Benzodiazepines              1.89
10. GHB (Designer drugs)   1.71

If you are looking for marijuana, you won’t find it on the above list. Also, nicotine and crack cocaine are tied with the second highest Dependence Rankings. Alcohol and cocaine are also tied in sixth place.

Many people perceive heroin having an almost unbreakable dependency. This is not correct. During the late part of the US’s ill-fated involvement in Vietnam,  soldiers deployed in Vietnam accessed extremely high-grade heroin at a very low price. Consequently, we brought thousands of heroin addicts back to the US. in the late 1970’s.  There were all sorts of dire predictions of rampant heroin addiction in the US. Fortunately, it just didn’t happen.

An economics professor I had used the concept of “mutual exclusivity” to explain what transpired. In this case, it is almost impossible to be a heroin addict while holding a job and caring for a family. Mutual exclusivity means something has to go, either the heroin or having a job and family. For the majority of these returning soldiers, it was the heroin that went.

Addictive personalities and non-randomness

Many people believe we need to keep illicit drugs illegal because if a person tries a drug like heroin, they will immediately become addicted. This simply isn’t true!

There is a predisposition to being addicted and this includes people with addictive personalities. According to studies, about 10-15% of the population falls into this category. The difference between those with addictive personalities and the rest of the population is the difference between abusing and using.

While most of the population can enjoy a drink now and again, someone with an addictive personality will want to enjoy 10 or more drinks. Many people  enjoy going to church once a week. Someone with an addictive personality will want to go every day. And, while most people can enjoy cocaine on an occasional basis, someone with an addictive personality will need it every day.

Getting back to the War On Drugs, someone with an addictive personality will go to any lengths and pay almost any price to feed their addiction. Trying to make drugs more difficult to obtain by imposing longer prison sentences on sellers and stepping up border enforcement are a waste of time. Much more cost-effective to treat the individual addictions.

It is also important to recognize that having an addictive personality is not random in the population. People in the lowest income brackets (who can least afford it), are almost three times more likely to be cocaine or marijuana addicts than those in the highest brackets. Although not as dramatic, they are also much more likely to be addicted to nicotine and alcohol.

This also begs the question, are these people poor because of their addictions or are they addicted because of their economic state? For the majority, drugs are a way to escape their reality. According to  Stanton Peele, Seven Tools to Beat Addiction (2004), “Addiction is an intense involvement people fall into for solace when they cannot find better gratifications in the rest of their lives.”

Besides socio-economic status, some other predictors of addictive personality are youth, lower intelligence, mental health issues, pathological gambling and  compulsive sexual behavior. Again, the point to re-emphasize is that a person that tries cocaine has roughly the same chance of addiction as if they tried alcohol. The determinant of their reaction is if they have an addictive personality.  http://suburra.com/blog/2011/10/05/addictive-personality/

Perverse economic stimulants create drug dealers

Imagine yourself as a poor African-American kid living in a run down, segregated neighborhood.  While many white kids at your school started out way ahead of you because their parents made the time to read to them at early ages and provided them with a range of travel and activities. In other words, school has never been easy for you.

Now, in middle school, you have two different alternatives for your life. One alternative is to escape the ghetto and become a teacher. You’ll work harder than you ever dreamed at school to turn your grades around. Consequently, you’ll probably be abandoned by your friends for acting white. If you actually graduate from high school, get accepted at a college and manage to survive all the forms to get financial aid, you’ll more than likely move from the only world you’ve ever known into a white college town.  If you beat the odds (again) and  graduate from college, you’ll maybe make $35,000 a year and pay taxes on that.

Or, you can say screw it to school, start selling drugs now, dropout at 16 and become a full-time drug dealer.  You’ll make more money in a week than the teacher makes all year. Move up the hierarchy and you have unlimited earnings. Flashy cars, cool clothes, sex and prestige, all there for the taking.

These are the perverse incentives the War On Drugs created. Throw one kid in jail or kill another one in a shootout and you have a dozen more minority kids without other great choices wanting to take their places.  In areas with little hope, the opportunity to make unlimited money in a discrimination free industry stifles incentive to succeed legally.

The color of justice

The U.S. has the highest incarceration rate in the world, dwarfing the rate of nearly every other nation, according to the International Centre for Prison Studies.  Many of these inmates are in jail because of drug crimes.  A study published in The Journal of Law and Economics, vol. XLIV (April 2001), authored by David B. Mustard at the University of Georgia found, “An individual sentenced in the same district court, who commits the same offense, and has the same criminal history and offense level as another person receives a different sentence on the basis of race, ethnicity, or gender. The percentage difference is greatest for those convicted of drug trafficking, where blacks are assigned sentences 13.7 percent longer than whites.”

Longer drug sentences for blacks undermines faith in our criminal justice system. This is another byproduct of the War On Drugs.

Far more important, drug laws remove the most ambitious black men from their communities. This has a severe destabilizing impact on their families and communities.

Undermine other governments

The US’s insatiable demand for drugs internationalizes our War On Drugs. Mexico’s War On Drugs, waged at our behest, has resulted in over 160,000 deaths and about a 19% drop in their GDP. It has almost completely eliminated Mexicans faith in the integrity of their criminal justice system.

One of the most basic human rights is safety, If Mexican families can’t feel safe in their homes, they will leave and guess where they are going to go?  We will never be able to build a wall high enough or thick enough to keep them out. If the US wants a secure border with Mexico, the best thing we can do is to legalize all illicit drugs and make Mexico a safer place to live.

Summing-up

There is also a philosophical argument for legalizing drugs. Those of us who are true conservatives believe in laissez-faire, which simply means that if what you are doing doesn’t adversely affect anyone else, government has no right to regulate your activities.

So, if you and your partner want to use cocaine at a local nightspot, that should be your right. However, there are limitations. If your senses are altered by the cocaine and you decide to drive home, you have now become a danger to everybody else on or near the roadways you intend to use. That is a problem.

The differentiation is pretty simple. Use whatever drug you want, don’t bother anyone else and that is just fine. Endanger the safety of others and expect the full force of the law applied to you.

While the United States suffers through one of the darkest leadership crises in our history, the chance for meaningful drug law reforms on the federal level are non-existent. However, it is time to start meaningful discussion, ask tough questions and educate ourselves.

While rational people celebrate the Republican failure to replace Obamacare, it is worth a trip back in time when Frugal Ron got it right and accurately predicted the mess Republicans would have replacing the Affordable Care Act (ACA).

In 2015, the U.S. Supreme Court was preparing to rule on the constitutionality of the ACA. If the Court had struck down Obamacare, Republicans who controlled both the House and Senate, would have been forced to come up with a replacement. On March 14, 2015, Frugal Ron published “The Supreme Court and Obamacare”. Some quotes from this prescient article predicted what would happen if Republicans had to re-write a health care law instead of just complaining …“Republicans seem under the illusion the Affordable Care Act will simply go away. We’ll go back to pre Obamacare and all will be well with the world. Unfortunately, this scenario is naïve at best and blatantly stupid at worst .”

“The insurance industry won’t allow efforts to re-engineer the Affordable Care Act without the insurance mandate. The insurance mandate is the requirement that everyone must have health insurance or they will have a penalty fee added to their taxes.  One Obamacare criticism is that not enough people have signed up to keep the system solvent. Take away or weaken the health insurance mandate and the problem is exasperated. Under intense time pressure from all directions, Republicans would be forced to re-write the Affordable Care Act to include the federal exchanges and with no other substantive changes.” Or, as happened recently, simply leave Obamacare in place.

What happened?

The Republican plan to replace Obamacare unravelled for a number of reasons. Even many Trump supporters figured out their health insurance costs were going up dramatically without the ACA subsidies. Furthermore, the subsidies were immediate relief where with the Republican plan, they would have to wait a year to get the tax credits.

Ultimately, the argument boiled down to how this was going to affect the middle class and the working poor. The Congressional Budget Office projections found that the Republican’s American Health Care Act  would dramatically increase individual’s health insurance costs while lowering federal spending minimally.  Frugal Ron  hit another home run in October, 2013 with “A True Conservative’s endorsement of Obamacare”.

“Without Obamacare, costs borne by people with health insurance will become more onerous. For individuals, the logical decision for a young, healthy person is to not buy health insurance. Odds are, they won’t need to use it. If something catastrophic happens, they’ll get treatment and if worse comes to worse, they’ll declare bankruptcy. This raises insurance premiums even higher and the next year more healthy young people opt to take their chances without health insurance.”

“How big a problem is this? An Employment Policies Institute study found 43% of the uninsured – about 20 million people – earn more than 2.5 times the federal poverty level, or $55,125 for a family of four. The authors – who include June O’Neill, the GOP-appointed head of the Congressional Budget Office from 1995 to 1999 – write “because most people at that income level are able to get insurance, (they) thus may be classified as ‘voluntarily’ uninsured.””

What Frugal Ron missed

While Frugal Ron basks in the sunlight of his accurate prediction about the nightmare Republicans would have if it ever came to replacing Obamacare, he gets a heavy dose of humility for predicting a Republican Congress would give Trump everything he wanted.

In an August 1, 2016 posting titled “A Donald Trump Presidency”, Frugal Ron wrote, “If Trump wins the presidency, it is logical to assume Republicans will maintain control of the House and Senate. Because of his electoral mandate, Congress will give him pretty much of what he demands.”

Thankfully, enough Republican Congressmen are showing resolve, independence and some common sense to wreck Trump’s agenda. The cause is certainly aided by the ultra right-wing Freedom Caucus, who seem to hate anything that helps U.S. citizens lead more productive and enjoyable lives.

For many elected Republicans, the bottom line was simply job survival. Women’s’ marches of hundreds of thousands and belligerent town hall meetings where Republican members of Congress had to do the impossible of defending their American Health Care Act all contributed to the bill’s downfall. It certainly didn’t help the Republican cause that according to a Quinnipiac University poll, only 17 percent of voters wanted Obamacare replaced. https://poll.qu.edu/national/release-detail?ReleaseID=2443. In another poll by Hart Research, 68 percent of respondents wanted to keep what works of Obamacare and fix the rest.

What next?

President Donald Trump predicts, “ObamaCare will explode and we will all get together and piece together a great healthcare plan for THE PEOPLE. Do not worry!” Hopefully, President Trump will hold his breath waiting for the Obamacare explosion.

The Congressional Budget Office and the Kaiser Family Foundation (KFF) are considered the most accurate sources of unbiased health cost information. The Congressional Budget Office projected that Annual Average Benchmark Premiums would be $5,200 in 2016. The KFF estimates the average annual premium in 2016 was $4,583. http://kff.org/health-reform/perspective/how-aca-marketplace-premiums-measure-up-to-expectations/  This is important because  if Obamacare is to meet its goal of having no effect on the federal budget (compared to before the law’s enactment), average premiums need to be at or below the Congressional Budget Office’s  projection.

While the The Affordable Care Act has successfully kept health care cost increases low, it is flawed.  It is too easy for citizens to either pay a tax penalty or claim an exemption to avoid buying insurance. There are 14 different exemptions enabling people to  avoid buying insurance. In addition, the tax penalty for not buying health insurance is too low. This results in 20 million US citizens without health care insurance. Both of these problems need a fix to maintain a large pool of insured healthy people.

The weak mandate requiring everyone have approved health insurance drives up the cost of insurance dramatically in thin, mostly rural, markets. Right wing Republicans argue that by removing the mandate completely,  that costs will go down. This is completely illogical.

Summing-up, Frugal Ron got it right, Republicans didn’t

After seven years of listening to Rep.(R) Paul Ryan and other Republicans complaining about the Affordable Care Act, it is fun watching them twist in the wind while trying to  put together a replacement bill. They claim to be on the verge of passing a  bill in the House. But even if they do this,  it will experience a quick death in the Senate.

Republicans can’t seem to escape their dogma. Never before has a party with the presidency and solid majorities in the House and Senate blundered so badly and accomplished so little in their first 100 days in office.

No wonder they are such failures. Trump and his minions try to end extremely popular veteran and elderly programs along with Obamacare. Republicans try to use the savings to fund tax cuts for the rich, build walls and enact Executive Orders to cut off the lifeblood of our economic growth (immigrants) and enact out of control defense spending increases. Past administrations blamed gridlock on opposing parties controlling Congress. Donald Trump and Republicans only have their own incompetence to blame for their lack of accomplishment.

Republicans aren’t able to contain their giddiness over their plan to slap a 20% tariff on all goods and services imported into the United States. In 2015, the total value of all imported goods, services and income payments brought into the U.S. was $3.6 trillion. Multiply this by 20% and you have the federal government collecting an extra $720 billion annually. This covers the U.S. government’s current $580 billion spending deficit, Donald Trump’s $100 billion tax cut for the rich and a good chunk of his $54 billion defense spending increase. Even better, any negative consequences of the tariff (which might cut demand for their goods and services) falls on foreigners. And, if demand for imports drops because of the tariff, then the slack will be made up by new US factories coming online with more high paying manufacturing jobs. What could possibly go wrong with this stroke of genius?

The answer is plenty. First, this plan is highly inflationary. Second, it will start a trade war and third, it will lower economic growth. This scheme, with various renditions, has been tried before. Most notably by economic basket cases like Argentina, Brazil and Venezuela.

Inflation

If you were raised after President Bill Clinton signed the General Agreement on Tariffs and Trade (GATT) in 1994, you probably don’t know what inflation is. Price inflation simply means the erosion of your buying power as prices rise faster than your wages while the value of savings plummets. People quickly learn not to save since the buying power of $10,000 is much less six months from now. Without savings, companies can’t borrow for new technology and a country’s worker productivity and relative wages fall.

Lowering and getting rid of tariffs with the GATT Agreement and opening our markets to more open trade put the final dagger into inflation in the US. At a time like now when we are at a full employment economy, too much income would be chasing too few goods and leading to inflation; open trade acts like a pressure valve. Now, goods from other nations can flow into the US holding inflation in check. Add in a 20% tariff on imports and the pressure valve becomes much less effective.

Besides upsetting the balance described above, the tariffs themselves are highly inflationary. While Republicans try to make the point that tariffs are a cost to the exporting country, that is not correct. In almost all cases, retailers will treat tariffs just like any other cost. Assuming a retailer works on a 40% profit margin (which is conservative), the 20% tariff is now a 28% increase in the retail price.

Much of economics is defining who are the winners and who are the losers resulting from a given economic policy. In this case, it is a no-brainer that the biggest losers are US consumers whose buying power will be sharply diminished by the Republican tariffs. Lower income Trump supporters will be hit disproportionately hard.

Republicans want us to believe that tariffs will make US made goods competitive, spurring a frenzy of factory building here. This is highly unlikely to happen. Building factories is an expensive long-term commitment and the longevity of Donald Trump’s Administration does not appear to be a good long-term bet. A new administration and Congress could wipe away the Republican tariffs with a swipe of a pen.

More likely, domestic competitors will simply raise their prices to the new tariff enhanced levels and reap extra profits.

Trade wars

The nasty thing about unilateral tariffs is that they don’t exist in a vacuüm. Countries hit by our tariffs will reciprocate. Just because we pick a number like 20% for our tariffs doesn’t mean other countries will use the same level. China and Japan could slap a 30% tariff on agricultural goods and deal a particularly hard blow to a vulnerable industry that also happens to comprise Trump’s main base of support.

The last time we engaged in a trade war was after the Smoot Hawley Act signed by President Herbert Hoover in 1930 that raised tariffs on over 2,000 products. Canada was the US’s biggest trading partner at the time. Mackenzie King was the Canadian Prime Minister and had cut tariffs in the 1920’s. He warned Hoover that Canada would retaliate if Hoover signed the Smoot Hawley Act. Two months after the act signing Canada raised tariffs on US goods and lowered tariffs on imports from British Empire countries, consciously giving Canadians inducements to buy from England instead of the US. Believing he had done enough to stand up to the US, King called for a general election. He was wrong. His Liberal party was crushed by the Conservatives who promised and passed even higher tariffs on US goods. This is a lesson that won’t be lost on foreign leaders as they craft their responses to the US tariffs.

Lower productivity

A nation’s productivity is generally closely correlated to wage growth. What unrestricted trade does is force a nation to focus on expanding its most productive industries and contracting the ones it doesn’t do so well in. This increases productivity and hence wage growth.

Unfortunately, as covered in many other posts on this website, the US’s reliance on huge government budget deficits that overwhelm private savings and result in behemoth Capital Account deficits negate many of the advantages we should be getting from more open trade. Nevertheless, things could be worse.

If Republicans enact their 20% tariff, things will get much worse. China is a big time buyer of US corn. If China imposes a large tariff on US grain, Chinese farmers will start growing more corn, even though they are better at growing other crops. They will also import more corn from South America and other countries that are less productive corn producers than the US. They may even find it advantageous to feed Canadian or Australian wheat to their cattle. All of these are distortions caused by the US tariffs will lower the productivity of Chinese livestock producers.

Extrapolate these costs over the entire global economy and the lower productivity will lead to slower or no growth, which is defined as a recession.  And, this is global recession we are talking about.

Summing-up

For the first time in many decades, Republicans have come up with a plan for reducing the federal budget deficit. We should commend them for this. We cannot go on indefinitely borrowing $trillions from foreign entities.

Unfortunately, their plan comes with huge costs. Make no bones about it, this proposed tariff is a mega tax increase. Rather than the actual tax increase that President Bill Clinton balanced the budget with, this tariff increase will have far-reaching negative global growth results.

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

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.

Healthcare is getting more expensive for individual US citizens. Many of the biggest insurers are pulling out of certain markets because of large financial losses. Some consumers will see double-digit increases in their insurance in 2017 following some double-digit 2016 increases. This will hit rural areas having the least competition the hardest.

The healthcare cost culprit – not what you expected

Affordable Care Act (ACA) opponents will seize on health insurance premium increases as proof positive that they were right all along about Obamacare causing insurmountable healthcare costs. Unfortunately for their arguments, they are wrong.

Figure 1 compares health care costs as a percent of Gross Domestic Product (GDP). Health care costs include insurance premiums, deductibles and all other costs associated with health care in the US. Measuring this as a percent of GDP shows how costs are growing compared to the rest of the economy and takes inflation noise out of the picture.

President Obama signed the Affordable Care Actin 2010 following several years of high healthcare cost growth. Some of the ACA cost containments were implemented in 2010 with sign-ups beginning in October 2013.

Health care costs did go up in 2014 from 2013’s value of 17.3% of GDP to 17.4% of GDP. Unfortunately, the 2014 cost data is the latest available from the National Health Statistics Group.

Figure 1

The Milliman Medical Index is another calculation of all healthcare costs that does have 2015 data. Their 2015 cost increase of 4.7% is the lowest in the 15 years they have calculated their index. This is in spite of an almost 10% increase in prescription drug costs in 2015. http://www.milliman.com/mmi/.

What’s going on here?

So, to any logical person, this should make no sense whatsoever! How do we get double digit increases in health insurance costs (along with ever-increasing deductibles) when total healthcare costs are just keeping pace with the economy or rising less than 5%? If you read why large health insurers are leaving certain markets, the mystery starts to make sense.

Over and over, insurers complain they aren’t getting enough healthy young adults enrolled. If they are stuck with older customers who run up 80% of their healthcare costs in the last few years of their lives, insurers are going to lose money. And, if the healthy young people going uninsured wind up having major medical bills they can’t or won’t pay, guess who pays them? Typically, about 70% goes to the private insurers one way or the other. Those costs are incorporated into even higher insurance rates next year.

This is the same thing that would happen if the government didn’t require drivers to have car insurance. Safe drivers would logically decide to save money and not buy  insurance. Insurance companies would be stuck with bad drivers that have lots of accidents

So, how do all these people get by without buying insurance? The ACA has a mandate that requires all people to buy health insurance. If someone doesn’t buy insurance, the mandate requires they pay a fine on their federal tax return. They will pay the higher of 2.5% of household income or the total of $695 per adult and $347.50 per child under 18, up to a maximum of $2,075.

However, it is even easier if they claim one of the 14 exemptions the ACA allows. One of them allows a person to claim they are or were the victim of domestic violence. They do not have to offer any documentation of the domestic violence.

Summing-up

Obamacare supporters stress they do not want health insurance to be a financial burden on anyone, hence their exemptions. Yet, their kindness is jeopardizing the health insurance industry and by extension, the healthcare industry. As sign ups for insurance continue their downward trend, this nullifies the goal of Obamacare, to spread costs out across a wider population. This needs fixing.

For those still foolishly calling for the end of Obamacare, what is happening now should be a wake-up call. A loose mandate is resulting in double-digit rate increases. Imagine if there was no mandate?

Donald Trump is the Republican “Miracle Man”. He claims to be an outsider. Yet, as a politician, he has outsmarted all his competitors. This and his policies makes him the most dangerous man in the US.

Every day he says something incredibly foolish or outlandish. He calls Hillary Clinton “Crooked Hillary”, yet one of his speeches has more falsehoods in it than Ms. Clinton tells in a year.

Miracles for everyone!

Trump promises to wipe out the US’s debt while making huge increases in defense spending. If his poll numbers are down among women, he promises them government-funded maternity leave and day care. Silly us for questioning how he is going to pay for all this. It will all be funded by all the economic growth his policies will bring! In other words, a miracle.

Other presidential candidates like former Texas Governor Rick Perry in 2012 made a number of small mistakes and one Trump sized one in forgetting which federal agencies he was going to close. After that, he was finished. Wisconsin Governor Scott Walker said stupid things during his presidential run and just like Trump, simply makes stuff up. Walker topped the Republican polls for months. But after his Canadian border fence gaffe and removing any doubt about his lack of intelligence during the presidential debates, his star faded and he was finished. These are not Miracle Men.

Yet, Donald Trump somehow is managing to stay within a few percentage points of Hillary Clinton and could very well win this election. So, how does he get away with it? Here are a few random thoughts on his success.

• Establish a bedrock super dedicated base with the least educated, gullible and most easily manipulated voters. For Trump, no matter how bad he does, he can count on his white non college educated base to provide continued support. Throw in rural Republicans who will vote a straight ticket regardless of who is on the ballot and you have a credible percentage.
• Trump’s core voters want to believe him. Trump identified white men without college degrees as a group that believes they are disenfranchised. He promises them just what they want to hear, that he is going to bring their high paying manufacturing jobs back. He gets them to believe this whopper and anything else he says seems believable.
• Sexism. A female large animal veterinarian breaking into a male dominated field in northern Wisconsin in the late 1980’s provides some unique perspectives that apply to politics. For a woman to gain acceptance, she can’t be as good as her male colleagues. Being better than them doesn’t cut it either.  She has to be perfect. Hillary Clinton is by no means perfect. Of course, there is a double standard here. But, that is the way it is and Trump and surrogates play it to perfection.
• Consistent deflection. Donald Trump is a weak candidate. Yet, when he or his surrogates are pressed to explain his unexplainable policies, they use a rhetorical tool called deflection. They simply change the conversation to Hillary Clinton and typically, her e-mails. It is amazing how many supposedly high-powered interviewers let them get away with this.
• If there isn’t an external threat to safety, make one up. Trump continually overstates the threat ISIS poses to the U.S. How credible is this?  In 2015 and so far in 2016, toddlers with guns killed  more U.S. citizens than Islamic terrorists have. http://www.snopes.com/toddlers-killed-americans-terrorists/ https://www.washingtonpost.com/news/wonk/wp/2016/05/01/toddlers-have-shot-at-least-23-people-this-year/
• Irrational supporters. Trump supporters somehow justify their loyalty with illogic. One favorite: “Congress will step in and stop some of Trump’s craziest plans.” Yup, just like Congress stopped President George Bush’s invasion of Iraq, his tax cuts and his out of control spending and borrowing that brought on the Bush Recession.
• A weak competitor. Democrats do extremely well when they have a charismatic genius as their candidate. Some examples are John Kennedy, who surrounded himself with the best and the brightest, Rhodes Scholar Bill Clinton and University of Chicago Law School Professor Barack Obama. Hillary Clinton is certainly not charismatic. I can’t imagine Bill letting her out of the house with those god-awful sunglasses. She may be intelligent, but one has a hard time believing it with some of her decision-making. People simply don’t like Hillary Clinton and she may very well be the biggest reason Trump could win this race.

The reality

The Miracle Man constantly promises to bring jobs back to the US by renegotiating trade deals.  The US’s Merchandise and Trade Balance is out of whack indicating a net export of jobs. However, some bellicose president trying to pressure his country’s biggest lender to change their legitimate trade policies isn’t a solution.

Unfortunately our trade deficit is our fault. It is not caused by some other country. We need to recognize the reality that every country’s Merchandise and Trade Balance equals that country’s Net National Savings. The way to end our country’s Net National Savings deficit is to eliminate our $500 billion federal government spending deficit. That requires a conservative president making the federal government live within its means, not some blundering ignoramus enacting tax cuts for the rich and huge spending increases for defense and whatever his daughter suggests.

Summary

While Frugal Ron recognizes Hillary Clinton’s faults, he remains convinced  a Donald Trump presidency will be an unparalleled disaster. However, considering people’s blind desire for change in light of today’s low unemployment rates, the record number of people working, the unprecedented rises in median income levels of late, the record high stock market levels, the low levels of chronically unemployed, the record low-level of inflation and the few U.S soldiers in harm’s way, maybe Donald Trump is what voters deserve.

The only call to action in this article is simple. Rational people must out vote the irrational. The stakes have never been higher.

Senator Bernie Sanders’s  blames a lion’s share of the United States’s economic problems on Wall Street banks and trade deals. Given the opportunity, should he win the presidency, he would break-up the large banks and re-write the US’s international trade treaties. The net affect of all this would be zero jobs created.

The problem

Senator Sanders is correct in saying the US is exporting jobs. In fact, we are presently buying almost a half trillion dollars more goods and services annually than we are selling to other countries.

Bill Clinton was elected president in 1992 and was sworn in to office in January 1993. During his eight year term, he signed one major international trade agreement (GATT), a minor regional one (NAFTA) and granted China most favored nation trading status.  The U.S. Merchandise & Trade Balance in Figure 1 is the annual dollar total of all our exports minus all our imports. Exports and imports are all-encompassing and include goods, services, dividends, interest payments and everything else transacted.

As one can see, our trade balance has been negative every year in the chart (it was positive in 1991) and has gotten steadily worse since Clinton assumed office. If we stop this post right here, we can blame Bill Clinton for destroying our industrial sector and make this look clear-cut and simple, just like Senator Sanders does. Unfortunately, it isn’t simple and Clinton deserves our praise not our anger.

The rest of the story

Having a positive or negative trade balance is not dictated by trade agreements. Trade agreements impact the volume of trade, but not the direction. In 1992, our total exports were $781 billion and in 2015 they totaled $3.3 trillion.

Where this gets a bit more complicated is that each country’s annual Merchandise and Trade Balance must equal that country’s Net National Savings Rate. If the United States buys more than it sells, it must borrow money internationally to pay for the deficit. Equally, the accounts must balance if the driving force is US borrowing. Adding in employment data at first makes this more complicated, but also provides some answers.

Figure 2 illustrates how employment does not follow trends in the Merchandise and Trade Balance. In other words, a big trade deficit does not necessarily mean high unemployment. When Clinton took office, besides signing trade agreements, he passed a significant tax increase and balanced the budget. Following was one of the most sustained economic booms in our history. The blue line representing the Employment rate (100% – Unemployment rate) continued rising into the first year of the George W. Bush Administration.

At the same time that US employment was reaching record high levels, our Merchandise and Trade Balance was dramatically dropping. What was happening in this period was demand for goods and services was outpacing our ability to produce more in a full employment economy.

In days gone by, this was a prescription for rampant inflation. Now, due to more open trade, the pressure was relieved by other countries meeting our demands. Hence we imported much more than we exported even with record high employment. Consumer purchases were financed by foreign lending. Consumers got home equity loans and ran up their credit cards. Few asked where the money was coming from.

Voters put an end to the good times by electing George W. Bush in 2000. Upon assuming office in 2001, he started cutting taxes and combined this with over 7% average annual spending increases. The Clinton budget surpluses disappeared and were replaced by huge deficits. These deficits were bigger than domestic lenders could cover. Consequently, we became the world’s biggest borrower. By 2006, we were borrowing over $800 billion annually from people and governments outside the US.

This massive borrowing preceded the Great Recession starting in 2008.  Just like in the Clinton Administration, the same rules of balancing international transactions stayed in place. During the Clinton years, consumer spending drove this. During the Bush years, borrowing drove the equation. So while in 2006, we borrowed over $800 billion from outside the US, we now wound up buying an extra $800 billion of goods and services to balance the transaction.

How does this happen? The Terms of Trade (which are currency values) change enough to make domestic producers unable to compete with foreign producers. This doesn’t mean they were inefficient, it was just currency values were killing these companies. While we were borrowing everything in sight, China practiced conservative government and had huge positive Net National Savings that they lent to us. Consequently, China boomed and we busted.

The simplified equation is Net National Savings = private savings + government savings. During the years after Clinton left office, the US has had moderate to high private savings. Unfortunately, these were dwarfed by government spending deficits leaving us with negative National Savings and therefore negative Balances of Trade. When other countries balance their private savings with prudent government spending and attain a positive Net National Savings, we call it “Currency Manipulation”. I call it conservative fiscal management.

What we and Bernie Sanders should have learned

This is extremely important.  The US economy didn’t tank because of trade agreements with China. Our economy crashed because we had huge negative Net National Savings Rates caused by irresponsible spending and tax cuts that caused massive government spending deficits that overwhelmed our private savings. China followed a much different path and accumulated high positive Net National Savings Rates. Renegotiate all our trade agreements and have the same Net National Savings Rate and we will still have the same equally large negative Merchandise & Trade Balance.

Unfortunately, when President Obama assumed the presidency in 2009,  he increased spending dramatically his first year in office and even worse, continued the Bush tax cuts and added some of his own. Being somewhat lucky, the impact of his continuing $trillion deficits government spending deficits were blunted on the international credit markets because US private savings increased. This reduced the amount of needed foreign borrowing.

Thankfully Obama eliminated his own and many of the Bush tax cuts in the 2012 Budget Reconciliation Act. After his first year in office, he also dramatically cut his spending increases and currently has an average annual spending increase of just over 2.5% for his term in office. Perhaps coincidentally, the federal budget deficit has shrunk into the $500 billion range, our Net National Savings and Merchandise and Trade Balances are in the $500 billion range and employment has expanded to high levels.

All is not cream and roses. The high employment rates we have include record numbers of part-time jobs. Many US workers are under used and under paid. Things could be better.

What should Sanders do?

It makes a simple speech that even Donald Trump supporters can understand when you externalize our economic problems and blame foreigners for them. If we can move beyond worthless talk and onto solutions, what we really need are truly conservative politicians (and voters) willing to pay the entire cost of government with increased taxes while making hard decisions about government’s real purpose and follow through with needed cuts.

If we want to eliminate our trade deficit (Merchandise & Trade Balance), we need to quit wasting time blaming trade agreements and successful people (otherwise categorized as “Wall Street”). We need to be true conservatives and balance our federal government’s spending.

The fine print

During this season, promises flow like lava from a volcano. It would be remiss to leave readers with the impression that simply balancing our Net National Savings will lead to a reindustrialization of the US. This simply isn’t going to happen. The good paying jobs where people stood in a line and did the same thing over and over again all day are gone and never returning. Automation has eliminated untold numbers of jobs that aren’t coming back.

Getting our act together, dramatically lowering the budget deficit and bringing our National Savings Rate close to zero will make more US jobs internationally competitive. However these positions will demand more education and higher skill levels. These are the jobs where the US has a competitive advantage.

Summing up…

A country’s Net National Savings Rate equals  private savings plus government savings. Today, private savings are fairly reasonable. If government savings could be brought to zero, that would virtually eliminate our Net National Savings deficit and consequently our Merchandise and Trade Balance. Maybe asking voters to be responsible doesn’t win elections.  Yet, if Bernie Sanders wants to show real integrity, that is the speech he needs to give.