#I think Mao talked about this once but there's a chart for growth and at some point your ability to criticize your own work exceeds your

[seravphs]

I’m scared to post knight Gojo thank you for being so nice to me about it bffs 💛

#I’m nervous! I’m so nervous!! #thinking about the John Green quote about potential and fear of failure #knight Gojo is really scary to me because the last project I think people really liked from me was Teen Dad Gojo #which I've made my peace with even though I used to be really embarrassed of it but if I peaked at sixteen #I could not continue to live with myself that's so embarrassing #knight gojo is my attempt at showing how much I've improved but what if I finish it and I realize I actually haven't improved at all #you don't understand how much this idea horrifies me #I don't want to be frozen in time like any living thing I want to grow! #I'm not normally this insecure about my writing because I am at heart just a blockhead who just bulldozes through life driven by impulse bu #I think Mao talked about this once but there's a chart for growth and at some point your ability to criticize your own work exceeds your #ability to create because you're good enough to recognize quality but not good enough to manufacture it #anyway! knight gojo is going out tomorrow and I'm going to stop being a baby about it and if it sucks it sucks and I keep learning #thanks for being here with me guys <3 let's have a sleepover after I drop the fic <3

[foursproutwealth-blog]

Stockman: "Bitcoin Is The Poster-Boy For An Unhinged Financial System"

New Post has been published on http://foursprout.com/wealth/stockman-bitcoin-is-the-poster-boy-for-an-unhinged-financial-system/

Stockman: "Bitcoin Is The Poster-Boy For An Unhinged Financial System"

Authored by David Stockman via Contra Corner blog,

The lemmings are now in full stampede toward the cliffs. You can literally hear the cold waters churning, foaming and crashing on the boulders far below.

From bitcoin to Amazon, the financials, the Russell 2000 and most everything else in between, the casinos are digesting no information except the price action and are relentlessly rising on nothing more than pure momentum. The mania has gone full retard.

Certainly earnings have nothing to do with it. As of this morning, the Russell 2000, for instance, was trading at 112X reported LTM earnings.

Likewise, Q3 reporting is all over except for the shouting and reported LTM earnings for the S&P 500 came in $107 per share. That’s of signal importance because fully 36 months ago, S&P earnings for the September 2014 LTM period posted at $106 per share.

That’s right. Three years and $1 of gain. They talking heads blather about “strong earnings” only because they think we were born yesterday.

What happened in-between, of course, was the proverbial pig passing through the python.

First, the global oil, commodities and industrial deflation after July 2014 took earnings to a low of $86.44 per share in the March 2016 LTM period.

After that came the opposite—the massive 2016-2017 Xi Coronation Stimulus in China. The new Red Emperor and his minions pumped out an incredible $6 trillion wave of new credit, thereby artificially stimulating a global rebound and a profits recovery back to where it started three years ago.

The difference of course is that $106 of earnings back then were priced at an already heady (by historical standards) 18.6X, whereas $107 of earnings today are being priced at a truly lunatic 24.6X.

After all, nothing says earnings bust ahead better than an aging business cycle, a cooling Red Ponzi, an epochal shift toward central bank QT (quantitative tightening) and a massive Washington Fiscal Cliff. Yet every one of those headwinds are self-evident and have made their presence known with a loud clang in the last few days.

Self-evidently, we are now 36 months closer to the next recession in a business cycle which at 101 months is already approaching the 1990s record of 118 months and facing far greater headwinds. Foremost among these is the unprecedented but unavoidable turn of the central banks—after two decades of relentless expansion— toward interest rate normalization, QT (quantitative tightening) and trillions of debt and other securities sales (demonetization or balance sheet shrinkage).

The new Janet Yellen in tie and trousers made that perfectly clear at yesterday’s confirmation hearing:

Powell said he expected the balance sheet to shrink to about $2.5 trillion to $3 trillion over the next three to four years under a program set in motion by Yellen……On interest rates, Powell said: “I think the case for raising interest rates at our next meeting is coming together.”

Actually, the promised balance sheet shrinkage process is going to rapidly escalate from $10 billion per month of Fed bond sales now, to $30 billion by spring and $50 billion by next October. That amounts to a $600 billion annual run rate; and when the ECB and other banks join the “normalization” party in 2019 and beyond total central bank bond sales will pierce through the $1 trillion per year level.

And that’s a very big deal because the law of supply and demand has not yet been abolished, meaning prices and yields in the global bond market are heading for a big reset. For instance, if the UST 10-year benchmark note normalizes to a yield of 4.0%, its price will fall by more than 40% from current levels (2.35%).

Needless to say, the entire market for risk assets including equities, junk bonds, corporates and real estate is predicated upon current ultra low yields and historically unprecedented leverage. So smash the price of the benchmark bond by 40% and you have a cascading chain of downward valuation adjustments that will reach the tens of trillions.

But that’s not all. The 19th Party Congress is over, but the Red Suzerains of Beijing wasted no time throttling down China’s red hot credit bubble and hyperventilating housing market. The chart below is the smoking gun—-and puts the lie to the foolish Wall Street meme of the moment that the world economy is in the midst of an outburst of “synchronized growth”.

Actually, it’s puffing on the exhaust fumes of a veritable housing hysteria during the run-up to China’s 19th Party Congress, which saw home mortgage issuance soar by nearly 60% in 2016.

Now, however, Beijing’s clampdown is giving Ross Perot’s famous “sucking sound to the south” an altogether new definition. In the most recent period, year over year mortgage growth actually turned negative—-meaning China’s gigantic apartment construction and building materials complex will be cooling rapidly, too.

Needless to say, what happens in the Red Ponzi does not stay in the Red Ponzi. The modestly rebounding global figures for industrial production, trade and GDP reported recently were just feeding off the massive credit impulse evident in the red line below.

When S&P earnings were peaking back in September 2014, China’s total credit growth from all sources—including its $15 trillion shadow banking system—had slowed to a 15% annual run rate, but then was gunned to upwards of 30% during the Coronation Boom from early 2016 onwards.

But now that Mr. Xi’s very thoughts have been enshrined in the Communist Party constitution—check-by-jowl with the wisdom of the Great Helmsman, Mao Zedong—-credit growth is plummeting. Even China’s new Red Emperor recognizes that $40 trillion of debt on a purported $12 trillion economy (actually far lower when massive malinvestments are deleted from the reported GDP “flows”) is a recipe for collapse.

Xi Jinping may well be delusional about the capacity of centralized bureaucrats–even ones with all the guns— to tame and stabilize the greatest Ponzi-style digging, constructing, borrowing, spending and speculating scheme in recorded history. But his goal is a third term in 2022, and in the interim he means to mop down China’s fevered borrowing and building spree with alacrity.

Accordingly, the global commodity and CapEx cycle will rapidly weaken as the red line in the chart heads toward the flat-line. The talking heads will not be gumming about synchronized global growth much longer.

But what they will be talking about soon is a US Fiscal Cliff like none before. It now seems that the desperate GOP politicians of Capitol Hill have come up with so many fiscal gimmicks that they may actually cobble together 51 votes in the Senate.

But the emerging Rube Goldberg Contraption, which sunsets all of the individual tax cuts after 2025, and then piles on top a “trigger tax”, which most surely would turn the whole things into massive ($350 billion) tax increase after a 2024 “growth” test, is actually a giant debt trap.

In fact, between 2018 and 2024 the emerging Senate “compromise” would generate upwards of $1.4 trillion of new debt including interest on the added borrowing. That’s because as we explained yesterday the Senate tax bill is front-loaded with the annual revenue loss peaking at $250 billion in 2020 and diminishing steadily thereafter to just $145 billion in 2025 and a slight surplus in 2027.

Consequently, the public debt builds up rapidly in the early years—long before any added growth could possibly move the needle. We will provide more detailed calculations on this crucial point tomorrow and completely debunk the “growth will pay for it” story.

But suffice it to say here that the massive front-loaded borrowing embedded in the Senate tax bill would come on top of the $6.1 trillion already built into the CBO baseline for the 2018-2024 period and another $1 trillion that will be needed for disaster relief and the Donald’s massive defense build-up and dramatically heightened pace of global military operations.

In a word, we do not think you can finance $8.5 trillion of new Federal debt in an environment in which the Fed and its convoy of fellow traveling central banks are also selling bonds by the trillions. That is, without triggering a “crowding out” effect of the kind that has been in hibernation every since Greenspan’s cranked up the Eccles Building printing presses after the 22% stock market plunge in October 1987.

The irony is that the GOP is setting up a fiscal cliff which will exceed $1 trillion per year of new borrowing as early as 2020 ($775 billion baseline plus $225 billion of revenue losses and added interest from the tax cut) based on the erroneous view that domestic economic growth is being stunted by high corporate taxes.

This chart below should put the lie to that confusion once and for all. Even as the effective corporate tax rate has been marching down hill for decades, the trend rate of economic growth has been steadily falling.

Notwithstanding today’s GDP blip, real final sales have grown at just 1.2% per year over the last decade or by only one-third of the rate extant when the effective corporate tax rate was more than double the current 20% level.

So today’s lemming actually are marching toward a Fiscal Cliff—- oblivious to the true meaning of the Senate tax bill maneuvers. But by definition, at the blow-off peak of a great financial bubble markets are oblivious to everything except the price action.

In that context, Bitcoin is neither an outlier nor a one-off freak; it’s a poster boy for an unhinged financial system where honest price discovery, two-way markets, fear of risk and financial discipline have been completely destroyed by the central banks.

Whatever its eventual merits as a private money and payment system away from the grasping hand of the Deep State, bitcoin (and the mushrooming slate of other cryptos) at the moment is in the throes of the kind of mania that reminds us of why runaway bubbles eventually generate their own demise.

For want of doubt, Zero Hedge early today calculated out bitcoin’s accelerating rate of rise.

Needless to say, the sequence below is not the birthing throes of a new money being born; it’s just another iteration of the same old lemmings stampeding toward the cliff:

$0000 – $1000: 1789 days

$1000- $2000: 1271 days

$2000- $3000: 23 days

$3000- $4000: 62 days

$4000- $5000: 61 days

$5000- $6000: 8 days

$6000- $7000: 13 days

$7000- $8000: 14 days

$8000- $9000: 9 days

$9000-$10000: 2 days

$10000-$11000: 1 day

Big dip overnight was bought and as US equity markets prepare to open, Bitcoin just topped $11,000…

#Wealth

[foursprout-blog]

Stockman: "Bitcoin Is The Poster-Boy For An Unhinged Financial System"

New Post has been published on http://foursprout.com/wealth/stockman-bitcoin-is-the-poster-boy-for-an-unhinged-financial-system/

Stockman: "Bitcoin Is The Poster-Boy For An Unhinged Financial System"

Authored by David Stockman via Contra Corner blog,

The lemmings are now in full stampede toward the cliffs. You can literally hear the cold waters churning, foaming and crashing on the boulders far below.

From bitcoin to Amazon, the financials, the Russell 2000 and most everything else in between, the casinos are digesting no information except the price action and are relentlessly rising on nothing more than pure momentum. The mania has gone full retard.

Certainly earnings have nothing to do with it. As of this morning, the Russell 2000, for instance, was trading at 112X reported LTM earnings.

Likewise, Q3 reporting is all over except for the shouting and reported LTM earnings for the S&P 500 came in $107 per share. That’s of signal importance because fully 36 months ago, S&P earnings for the September 2014 LTM period posted at $106 per share.

That’s right. Three years and $1 of gain. They talking heads blather about “strong earnings” only because they think we were born yesterday.

What happened in-between, of course, was the proverbial pig passing through the python.

First, the global oil, commodities and industrial deflation after July 2014 took earnings to a low of $86.44 per share in the March 2016 LTM period.

After that came the opposite—the massive 2016-2017 Xi Coronation Stimulus in China. The new Red Emperor and his minions pumped out an incredible $6 trillion wave of new credit, thereby artificially stimulating a global rebound and a profits recovery back to where it started three years ago.

The difference of course is that $106 of earnings back then were priced at an already heady (by historical standards) 18.6X, whereas $107 of earnings today are being priced at a truly lunatic 24.6X.

After all, nothing says earnings bust ahead better than an aging business cycle, a cooling Red Ponzi, an epochal shift toward central bank QT (quantitative tightening) and a massive Washington Fiscal Cliff. Yet every one of those headwinds are self-evident and have made their presence known with a loud clang in the last few days.

Self-evidently, we are now 36 months closer to the next recession in a business cycle which at 101 months is already approaching the 1990s record of 118 months and facing far greater headwinds. Foremost among these is the unprecedented but unavoidable turn of the central banks—after two decades of relentless expansion— toward interest rate normalization, QT (quantitative tightening) and trillions of debt and other securities sales (demonetization or balance sheet shrinkage).

The new Janet Yellen in tie and trousers made that perfectly clear at yesterday’s confirmation hearing:

Powell said he expected the balance sheet to shrink to about $2.5 trillion to $3 trillion over the next three to four years under a program set in motion by Yellen……On interest rates, Powell said: “I think the case for raising interest rates at our next meeting is coming together.”

Actually, the promised balance sheet shrinkage process is going to rapidly escalate from $10 billion per month of Fed bond sales now, to $30 billion by spring and $50 billion by next October. That amounts to a $600 billion annual run rate; and when the ECB and other banks join the “normalization” party in 2019 and beyond total central bank bond sales will pierce through the $1 trillion per year level.

And that’s a very big deal because the law of supply and demand has not yet been abolished, meaning prices and yields in the global bond market are heading for a big reset. For instance, if the UST 10-year benchmark note normalizes to a yield of 4.0%, its price will fall by more than 40% from current levels (2.35%).

Needless to say, the entire market for risk assets including equities, junk bonds, corporates and real estate is predicated upon current ultra low yields and historically unprecedented leverage. So smash the price of the benchmark bond by 40% and you have a cascading chain of downward valuation adjustments that will reach the tens of trillions.

But that’s not all. The 19th Party Congress is over, but the Red Suzerains of Beijing wasted no time throttling down China’s red hot credit bubble and hyperventilating housing market. The chart below is the smoking gun—-and puts the lie to the foolish Wall Street meme of the moment that the world economy is in the midst of an outburst of “synchronized growth”.

Actually, it’s puffing on the exhaust fumes of a veritable housing hysteria during the run-up to China’s 19th Party Congress, which saw home mortgage issuance soar by nearly 60% in 2016.

Now, however, Beijing’s clampdown is giving Ross Perot’s famous “sucking sound to the south” an altogether new definition. In the most recent period, year over year mortgage growth actually turned negative—-meaning China’s gigantic apartment construction and building materials complex will be cooling rapidly, too.

Needless to say, what happens in the Red Ponzi does not stay in the Red Ponzi. The modestly rebounding global figures for industrial production, trade and GDP reported recently were just feeding off the massive credit impulse evident in the red line below.

When S&P earnings were peaking back in September 2014, China’s total credit growth from all sources—including its $15 trillion shadow banking system—had slowed to a 15% annual run rate, but then was gunned to upwards of 30% during the Coronation Boom from early 2016 onwards.

But now that Mr. Xi’s very thoughts have been enshrined in the Communist Party constitution—check-by-jowl with the wisdom of the Great Helmsman, Mao Zedong—-credit growth is plummeting. Even China’s new Red Emperor recognizes that $40 trillion of debt on a purported $12 trillion economy (actually far lower when massive malinvestments are deleted from the reported GDP “flows”) is a recipe for collapse.

Xi Jinping may well be delusional about the capacity of centralized bureaucrats–even ones with all the guns— to tame and stabilize the greatest Ponzi-style digging, constructing, borrowing, spending and speculating scheme in recorded history. But his goal is a third term in 2022, and in the interim he means to mop down China’s fevered borrowing and building spree with alacrity.

Accordingly, the global commodity and CapEx cycle will rapidly weaken as the red line in the chart heads toward the flat-line. The talking heads will not be gumming about synchronized global growth much longer.

But what they will be talking about soon is a US Fiscal Cliff like none before. It now seems that the desperate GOP politicians of Capitol Hill have come up with so many fiscal gimmicks that they may actually cobble together 51 votes in the Senate.

But the emerging Rube Goldberg Contraption, which sunsets all of the individual tax cuts after 2025, and then piles on top a “trigger tax”, which most surely would turn the whole things into massive ($350 billion) tax increase after a 2024 “growth” test, is actually a giant debt trap.

In fact, between 2018 and 2024 the emerging Senate “compromise” would generate upwards of $1.4 trillion of new debt including interest on the added borrowing. That’s because as we explained yesterday the Senate tax bill is front-loaded with the annual revenue loss peaking at $250 billion in 2020 and diminishing steadily thereafter to just $145 billion in 2025 and a slight surplus in 2027.

Consequently, the public debt builds up rapidly in the early years—long before any added growth could possibly move the needle. We will provide more detailed calculations on this crucial point tomorrow and completely debunk the “growth will pay for it” story.

But suffice it to say here that the massive front-loaded borrowing embedded in the Senate tax bill would come on top of the $6.1 trillion already built into the CBO baseline for the 2018-2024 period and another $1 trillion that will be needed for disaster relief and the Donald’s massive defense build-up and dramatically heightened pace of global military operations.

In a word, we do not think you can finance $8.5 trillion of new Federal debt in an environment in which the Fed and its convoy of fellow traveling central banks are also selling bonds by the trillions. That is, without triggering a “crowding out” effect of the kind that has been in hibernation every since Greenspan’s cranked up the Eccles Building printing presses after the 22% stock market plunge in October 1987.

The irony is that the GOP is setting up a fiscal cliff which will exceed $1 trillion per year of new borrowing as early as 2020 ($775 billion baseline plus $225 billion of revenue losses and added interest from the tax cut) based on the erroneous view that domestic economic growth is being stunted by high corporate taxes.

This chart below should put the lie to that confusion once and for all. Even as the effective corporate tax rate has been marching down hill for decades, the trend rate of economic growth has been steadily falling.

Notwithstanding today’s GDP blip, real final sales have grown at just 1.2% per year over the last decade or by only one-third of the rate extant when the effective corporate tax rate was more than double the current 20% level.

So today’s lemming actually are marching toward a Fiscal Cliff—- oblivious to the true meaning of the Senate tax bill maneuvers. But by definition, at the blow-off peak of a great financial bubble markets are oblivious to everything except the price action.

In that context, Bitcoin is neither an outlier nor a one-off freak; it’s a poster boy for an unhinged financial system where honest price discovery, two-way markets, fear of risk and financial discipline have been completely destroyed by the central banks.

Whatever its eventual merits as a private money and payment system away from the grasping hand of the Deep State, bitcoin (and the mushrooming slate of other cryptos) at the moment is in the throes of the kind of mania that reminds us of why runaway bubbles eventually generate their own demise.

For want of doubt, Zero Hedge early today calculated out bitcoin’s accelerating rate of rise.

Needless to say, the sequence below is not the birthing throes of a new money being born; it’s just another iteration of the same old lemmings stampeding toward the cliff:

$0000 – $1000: 1789 days

$1000- $2000: 1271 days

$2000- $3000: 23 days

$3000- $4000: 62 days

$4000- $5000: 61 days

$5000- $6000: 8 days

$6000- $7000: 13 days

$7000- $8000: 14 days

$8000- $9000: 9 days

$9000-$10000: 2 days

$10000-$11000: 1 day

Big dip overnight was bought and as US equity markets prepare to open, Bitcoin just topped $11,000…

#Wealth

[isaacscrawford]

A Brief History of Price Controls by Annoyed Republican Administrations

By UWE REINHARDT

Although, unlike most other nations, the U.S. has only two parties worth the name, their professed doctrines compared with their actions strikes me as more confusing than the well-known Slutsky Decomposition which, as everyone knows, can be derived simply from a straightforward application of Kramer’s rule to a matrix of second partial derivatives of a multivariable demand function.

The leaders of the drug industry, for example, probably are now breaking out the champagne in the soothing belief that their aggressive pricing policies for even old drugs are safe for at least the next eight years from the allegedly fearsome, regulation-prone, price-controlling Democrats. My advice to them is: Cool it! Follow me through a brief history of Republican health policy, to learn what Republicans will do to the health-care sector when it ticks them off.

Republicans like to tar Democrats over allegedly socialist policy instruments such as price controls, global budgets and deficit-financed government spending. Democrats usually roll over to take that abuse, almost like hanging onto their posteriors signs that says “Kick me.”  I say “abuse,” because Republicans have never shied away from using the Democrats’ allegedly left-wing tactics when health care chews up their budgets or turns voters against them.

Think of the early 1970s. Like most other economies in the world, the U.S. economy then suffered very high inflation, led by health spending widely judged to be out of control. So Republican President Richard Nixon thought nothing of slapping price controls onto the entire U.S. economy, keeping them longest on the health care sector. (I cannot imagine Democrats ever having the guts to do that or, for that matter, to sojourn to China, there to pay court to Mao Tse Tung, the self-anointed Communist Emperor of the Middle Kingdom).

Think of the 1980s. Ticked off by the ever increasing grab for taxpayers’ money triggered by Medicare’s retrospective reimbursement of hospitals then in place, Republican President Ronald Reagan thought nothing of slapping onto that sector a set of centrally administered Medicare prices for the whole country. That new pricing scheme, based on the Diagnosis Related Groupings (DRGs), reminds one of nothing so much as Soviet style pricing, to cite the mournful, subsequent mea culpa of one of the former bureaucrats tasked with implementing that system between 1983 and 1986.

I recall making in the early 1990s a presentation to the Missouri Hospital Association, where I opened up with the following slide:

(I actually wore that uniform at the podium. I had been bought by my wife, in 1989, from a Russian at the Brandenburg Gate in Berlin, immediately after the fall of the Berlin Wall. The photo was taken in 1990 by our son Mark, at the tank museum of the Aberdeen Proving Grounds in Maryland, before a WWII Russian T-62 tank.)

Evidently enchanted by the price-controlling, cost-containment power of President Reagan’s Soviet pricing scheme for hospitals, President George Herbert Walker Bush imposed, in 1992, a similar scheme on physicians treating Medicare patients. Known as Medicare Fee Schedule (MFS), it was based on the Resource-Based Relative Value Scale (RBRVS), a pseudo-scientific design that seeks to base relative Medicare fees for particular services on their relative cost of production. A problem with that approach, of course, is that relative costs do not coincide with relative values. It would set the fees for, say, a hypothetical transurethral tonsillectomy as much higher than that of the traditional transoral one, simply because the transurethral approach is more time consuming.

Anticipating that physicians would game the new Medicare Fee Schedule by responding to lowered fees with commensurate increases in the volume of services recommended and delivered to patients, the Bush Sr. Administration coupled the new fee schedule with Volume Performance Standards (VPS), a fancy euphemism for nationwide global budgets, one for surgical and the other for non-surgical physician services delivered to Medicare patients. Democrats may dream of global budgets. Republicans do them. That anyone seriously thought a global budget for as large an entity as the entire U.S. could ever work – that it was productive to punish conservatively practicing physicians in Duluth, Minnesota for huge volume increases in Dade Country, Florida — is a testimony to the far reaches of the human mind.

Predictably disenchanted with the non-performance of the Volume Performance Standards, a Republican House in 1997 morphed it into Medicare’s Sustainable Growth Rate (SGR). The SGR became law. It was global budgeting still for the entire nation, but so stringent that Congress dared apply it in only one year, otherwise kicking it down the road unused, for eventual resolution.

That resolution came in 2015, with the so-called “Doc Fix,” the still controversial Medicare Access and CHIP Reauthorization Act (MACRA). That act was sponsored and introduced to the Republican House of Representatives by a Republican Congressman from Texas who is also a physician. It was promptly signed into law by President Obama, after it was passed with a bi-partisan vote in both chambers. The MACRA quite sensibly seeks to establish a direct link between Medicare payments to a physician and the quality of the services delivered by that physician. Alas, once packaged by the bureaucracy into concrete regulations for operation in the trenches, the resulting complexity of measuring quality in practice and even the validity of these operational metrics now predictably has physicians all over the country up in arms. 

And so it goes, to plagiarize Kurt Vonnegut.

So it is prudent to wonder just what health policy will come down in the years ahead from the Republican Mount Olympus ruled by President Trump. Republican Presidents, members of Congress and Governors may like playing golf with the leaders of the health-care industry and share a Bourbon or two with them; but they don’t like it when that industry’s endless, energetic search for mammon chews up their budgets, and they do not hesitate to react to that fiscal hemorrhaging with fury, often resorting to the allegedly socialist tactics they usually ascribe to the Democrats.

What can be said about health policy also applies to U.S. fiscal policy. Democrats have never been able to shake off the label that they are the party of deficit-financed government spending – that they practice the much maligned, socialist Keynesian economics — in spite of plenty of history to the contrary. Consider, for example, the graph below published by the non-partisan Congressional Budget office (CBO).

The time paths of federal tax revenues and spending clearly show what former Vice President Dick Cheney reportedly explained to an amazed then Secretary of the Treasury Paul O’Neill: “Reagan taught us that deficits don’t matter.”

Deficit financed government spending and tax cuts are usually considered the very core of Keynesian economics, aimed at shoring up the demand side of the economy. It is based on the idea that there is not enough demand to buy the products the supply side could deliver. It is a policy much decried by Republicans and the media supporting them, e.g., The Wall Street Journal or the anchors and talking heads on Fox News TV. It stands in contrast to so-called supply side economics, which seeks to rev up the economy by changing the financial incentives  (mainly taxes) and regulatory burden faced by the supply side of the economy, assuming that the barrier to faster economic growth lies on the supply side of the economy.

Although during the election campaign in 1980 President Reagan had promised to balance the federal budget by 1984 and rev up the economy just with tax cuts that, through faster economic growth, would be self-financing, in fact his administration coupled the huge cuts in the individual tax rates it got swiftly passed by Congress with huge increases in defense spending and even farm support, driving up federal deficits to levels easily three times as high as the previously much decried, relatively puny deficits registered by President Carter (see chart below). By the end of President Reagan’s eight-year term in office, the public federal debt had tripled. By the time President Bush Sr. left office, it had quadrupled.

Had President Reagan really tried his hand at supply side economics, he would have lowered substantially the corporate tax rate from the statutory level of 35% to closer to 20% or even below, to keep U.S. capital and investments at home. Instead he left the high statutory corporate tax rate in place and even increased the tax take from the corporate sector by closing some loop holes. Reagan’s tax policy – especially his second-term efforts to close loop holes and broaden the tax base — actually seemed to slouch toward policies many Democratic economists would and did support. The point here is that overall, one can fairly argue that Reagan’s fiscal policy slouched much more toward the much maligned Keynesian policy of driving economic growth, rather than to solid supply side economics.

Seemingly paradoxically, corporate executives tend to go along with cuts in individual rather than corporate tax rates. It is so because they all manage two companies: one owned by shareholders, and the other, increasingly large company owned by their families. When given a choice between tax cuts for either or the other of the two entities, they naturally lobby for the second, which is what Republican presidents – Reagan, Bush Sr., Bush Jr. — have always faithfully delivered. We shall see what President Trump will do in that regard.

The CBO graph above also shows the eventual decline in the federal deficit and emergence of a federal budget surplus under Democratic President Clinton (although in fairness it must be said that then House Speaker Newt Gingrich gave him a helping hand). When President George W. Bush ascended to the White House, he actually inherited a federal surplus and the prospect of shrinking public debt. His fiscal policy frittered away both.

President George W. Bush, starting in 2001, basically repeated the rather reckless Reagan strategy of trying to goose the economy through increased government spending coupled with massive cuts in individual income-tax rates, all financed with large deficits and rapid increases in the federal debt. Under his reign the federal public debt rose from $5.6 trillion to close to $10 trillion.  With the Medicare Prescription Drug, Improvement and Modernization Act of 2003, he even put a brand new future entitlement – heavily subsidized drug purchases by Medicare recipients – on the federal tab. That even after that action deficit financing of large future entitlements can so easily be hung around the neck of Democrats attests to the political power of the Republican oral tradition.

Finally, the CBO chart clearly shows that it would be unfair to impute the huge budget deficits and run-ups in the federal debt after fiscal 2009 to President Obama. In the wake of the global financial crisis of 2007-2009 – not of either President Bush’s or President Obama’s making —  government revenues plummeted and much of the increased spending came from the so-called automatic stabilizers – mainly entitlements such as Medicaid, unemployment compensation, food stamps etc. – long ago baked into federal law. Neither of the two presidents had any control over these trends. Indeed, according to the CBO’s Budget Projections of January 2009 – published before President Obama had moved into the White House – the projected deficit in President Bush’s last budget, submitted in October 2008 for fiscal 2009 (October 2008 to September 2009), was close to $1.2 trillion. Surely that did not conform to the President’s idea of sound fiscal policy.

With this brief historical background, one can just see what might happen to fiscal policy under the reign of President Trump.

My hunch is that, to win a second term, he will heed Vice President Cheney’s dictum and, once again, practice the good old Keynesian economics that the American public loves so much: large tax cuts combined with massive, job-creating increases in federal spending on defense and on infrastructure projects, including, perhaps, sparkling new elementary- and high schools and perhaps even new health-care facilities in inner cities, to own up visibly to the folks living there to whom he had promised help, and all debt financed as good investments to make America grow and great again. Why not?

The alternative, asking the private sector to finance these infrastructure projects, may seem attractive to Republicans at first blush, but one must wonder how folks in the so-called “fly-over” country will react when all of a sudden their hitherto free roads and bridges are converted to toll-charging facilities, with tolls set on Wall Street by rapacious private equity firms beholden only to their equity investors in the US and abroad. It might not be a vote getter.

Keynesian economics has worked well for Republicans, because voters love it, as they seem to get something for nothing, federal debt and future taxpayers be damned. And in a world financial market awash in capital with nothing to do, safe U.S. government bonds will find many eager buyers.

It is all quite confusing, even to a Ph. D., and perhaps especially to a Ph. D., because, as I noted in the introduction, U.S. politics are ever so much more intellectually taxing than is the good old Slutsky Decomposition.

Article source:The Health Care Blog