The ‘Begging the Question’ Fallacy of Typical Trumpcare Illogic.

In logic, there is something called the “Begging the Question” fallacy. According to the Philosophy Department at Texas State University, the fallacy occurs when “an argument’s premises assume the truth of the conclusion.” For example, someone who asserts that “happiness is the highest value for human beings, since all other values are inferior to it” is begging the question; the premise that all other values that are not happiness are inferior has already asserted that happiness is the highest value. The argument doesn’t prove anything except its own premise.

Conservatives typically employ this fallacy to support either their repeal of Obamacare or the repeal of Medicaid (the true intention of Trumpcare). Two interviews on NPR today (6/28) illustrate the conservative use of this fallacy in its obfuscating way.

Some version of the fallacy running amok within conservative discourse is something like the following:  Obamacare has caused skyrocketing health insurance premiums since premiums after Obamacare’s passage have skyrocketed. The premise that the rise in premiums after Obamacare was passed assumes the truth that its passage caused the “skyrocketing” premiums people are ostensibly experiencing today. It is a useful fallacy to employ when you believe listeners won’t identify the tautology within the logic, or when you cannot establish causality and only correlation.

Conservative pundit Matt Schlapp employed this logical fallacy this morning on NPR’s Morning Edition. On the program, Schlapp asserted that under Obamacare, Americans “have seen just astronomical increases, double-digit increases, doubling of premiums,” and that Democrats, therefore, have no argument against Obamacare causing a rise in premiums. In other words, the premise that Democrat’s “don’t have a leg to stand on” regarding premium increases assumes that the Democratic party’s Obamacare law caused those premium increases. Schlapp and others who employ this fallacy typically do not cite any evidence backing their conclusion up, since such evidence is not likely to definitively prove their claim.

In order to prove their claim, and insulate their arguments from the criticism I pursue herein, they would need to prove that elements of the Obamacare policy have caused the premium increases. One way to do so would be to demonstrate that the rate of growth in health premiums historically was slower prior to Obamacare’s passage. In other words, if premium increases grew faster after Obamacare was signed into law than they did before it, then Conservatives would have a more truthful claim to assert.

Unfortunately, such evidence does not exist. According to the Kaiser Family Foundation, premiums for employer-subsidized health insurance grew at a rate of 3%. Historically, the story is similar:

kff-chart

So too did Medicare spending slow:

7305-10-figure-3

Now some conservatives may argue that a 20% adjustment to premiums in 2016 vindicates their position. But as the first table above shows, that 20% adjustment is still lower than premium increases historically.

A second interview on NPR today similarly employed the Begging the Question fallacy. Robert Moffet of the Conservative Heritage Foundation asserted that expanding Medicaid the way Obamacare did (or tried to) was not the original purpose of the program. Claiming that Medicaid was originally intended for the poor and indigent, Moffet concludes that it is becoming instead a “backdoor mechanism to establish a middle-class entitlement for long-term care.” In other words, Medicaid is not being used as intended because it is being offered to people it was not intended for.

For one, Medicaid was not necessarily created exclusively for the “poor” and/or “indigent.” For one, the threshold for “poor” has always and consistently changed as economic growth and political churn have proceeded. Two, the Medicaid program itself only references its intention for “low-income” Americans – a dubious term as malleable as the “poverty” threshold has been. Yet nothing in it technically suggests that middle-income Americans cannot or should not qualify.

Secondly, there is a problem with the context the assertion denies or is unaware of. Specifically, the acceleration of income inequality and the disproportionate accumulation of wealth at the highest tiers of the income distribution. Reams have been reported on this topic, and I will not reference them all (for a general primer, see here).  What is important to understand is that wealth (and the money, capital, investments, etc. that create it) is finite: there is only so much money to go around. When it disproportionately accumulates to the few at the expense of the many, therefore, more Americans will be left with less wealth. And with less wealth, spending on other needs and wants must also lessen, as has certainly happened. Thankfully, premium increases have been slower than tey have historically been. None the less, any increase for such a basic need hurts even middle-income households; most especially since such households are typically denied other social welfare benefits.

The question then is whether Medicaid was intended to help these “low-income” people, and, if not, can such spending still be justified. The answer to that question is more subjective than objective – one again dealing with issues of fairness. Ostensibly, Mr. Moffet feels that expanding Medicaid to cover “middle-income” Americans is unfair. That is fine, but one must also similarly concede that if Medicaid was intended to help relieve the burden of health expenses for those who cannot afford it themselves, or have a hard time affording it, then certainly is it also fair that Medicaid be expanded to “middle-income” Americans, especially at the lower end of that quintile. Whatever the case, it is a bit disingenuous to declare that Obamacare is a back-door to another entitlement in order to reaffirm your Conservative bona fides by invoking that stalwart Conservative shibboleth of the modern Conservative philosophy – entitlements! (for an interesting take on the other shibboleth’s typically employed to obfuscate a lack of evidence and logic, see here).

I hope logic, honesty, and justice-oriented discourse will see better days in the near future.

 

Trumpcare/BCRA Addendum

Several new items and thoughts occur about the Senate’s version of Trumpcare, titled the Better Care Reconciliation Act (BCRA).

First, it is wildly unpopular. More than 40 economists (some of whom are the most cited macroeconomics and health policy economists), including approximately 8 Nobel laureates to date have signaled official opposition. So, the economics of the bill is not good for the country. So too do religious persons have a problem with Trumpcare. The United States Conference of Catholic Bishops has denounced the bill, stating “these changes [that the BCRA promises to Medicaid) will wreak havoc on low-income families and struggling communities, and must not be supported.” Lastly, not even the American people want the bill. In other words, the bill has no economic, populist, or social justice merit. For whom, then, is this bill being produced for (and let’s be honest, we all know who)?

Two other points, however, are worth mentioning. First, Trumpcare exposes a phony belief behind all conservative reform attempts. As pointed out by Atul Gawande in the New Yorker today, Trumpcare proponents believe that health care is an activity one only pursues when sick.  Americans only seek health care when they catch pnuemonia, for example, or only when breast cancer symptoms are apparent. While this is certainly true in many cases, it is not exclusively true. The other way to practice healthcare is incrementally/preventatively. One pursues health in an incremental way by seeing doctors regularly, even if healthy. All Americans have had this experience; vaccinations before entering schools; physicals to qualify for athletic competitions; etc.. As Gawande notes, professional studies conclude that the incremental approach to health care improves health outcomes. Because so, Obamacare incentivized the incremental approach, encouraging Americans to maintain health and identify major problems before they become prohibitively expensive to deal with. The BCRA, however, potentially undoes such incentives by allowing states to waive certain requirements the ACA imposed on all insurers in all states, such as requirements for preventive services. With substantial evidence suggesting the benefit of preventive care, why not maintain that requirement of the ACA?

The second point is central to understanding the questions and concerns I raise about the BCRA above. Namely, the BCRA is less a repeal of Obamacare, and more a repeal of Medicaid. Not only is this point made by Gawande in the article linked above, but it has also been suggested by moderate/conservative commentators in recent days.  At its root, the comfort conservatives generally have about denying the poor and disabled access to care stems from a belief that a social welfare program such as Medicaid is unfair to those of us who pay for it (through taxes), but do not directly benefit from it. This ethos also usually holds that these social programs wasteful since they are run by government bureaucrats whose job is reliant on administering the program. No Medicaid, in other words, means no job for those in the federal government who work to administer the program. Hence, they abuse their position in the federal government in ways that make their job necessary. And as such, since Medicaid is funded through tax transfers, we the tax payer are essentially billed twice over: enough to pay the salaries of plan administrators, and medical services rendered to Medicaid recipients. These recipients would be better off with some tough love, they say, arguing that Medicaid creates dependency on the system by disincentivizing work (since they do not need to anymore to pay for their health needs).

The reality of Medicaid, however, is much different. First, Medicaid is not inefficient, billing the American taxpayer unnecessarily. Medicaid is instead more efficient than any private insurer currently operating. Secondly, Medicaid has been found to have no effect on labor force participation, positive or negative (nor does it increase use of other welfare programs, such as SNAP). Instead, the majority of Medicaid recipients work, with only those recipients who are disabled or elderly accounting for the majority of Medicaid recipients not working. When one recognizes that Medicare, the other social insurance program Americans have access to, is similarly more efficient than private insurers, many of the claims against federal programs for reasons of inefficiency and dependency fall flat.

I would argue instead that these social welfare programs are an important pillar to maintaining a dynamic economy. As I argued in another post, healthy workers are more productive, and a strong system of social insurance helps allocate our labor force to those domestic industries more easily (for a good and complementary argument to my own, see here). But even if you do not accept that this is a benefit in reality, or a benefit worth pursuing, surely those arguments typically made against Medicare cannot also be acceptable.

That would mean that all we are left with is what is “fair,” and though I certainly have strong opinions about what I think is “fair,” they are highly subjective, as would be any discussion of fairness. But since that is the case, let us proceed on those terms, and not the current disingenuous ones described above.

The Senate’s Trumpcare Update

I have been away for a while for professional and personal reasons. In general, summertime gives me less fodder to write about since this blog is primarily meant to extend answers, lines of inquiry, and needed clarifications from class. Alas, I find the finally released Senate update of Trumpcare too important to let pass unacknowledged.

First, it has been humorous to watch conservatives defend the secrecy that the Senate undertook to amend the House’s version of Trumpcare. A pillar of contemporary conservative philosophy is that a large and active federal government undermines liberty since federal politicians cannot possibly retain a concern for the best interests of the American people while upon their federal perch. Instead, conservative doctrine asserts that states and local government are more likely to be genuinely concerned with and working for the welfare of citizens since those politicians are closer to local realities and local voters. With power in the federal government bestowed on conservatives then, you would think they would be very open and very frank about their lawmaking, so as to avoid the same charges of indifference they levy at defenders of federal authority. Yet, with both versions of Trumpcare, the American people received none of that frankness or openness. Ryan et. al. in the House infamously rushed through their bill before the Congressional Budget Office could score it. For good reason too: the law would lead to twenty-three million fewer people being insured by 2026, pushing the overall number of uninsured Americans in 2026 above fifty (fifty!) million people.  For a bill that has such an effect on the lives of twenty-three million Americans, it is hypocrisy at its best when it is written and rushed through a vote by a party who proclaims the inherent threat of power’s abuse by a large, centralized governing authority.

Now the Senate’s version has come out. The CBO has yet to score it (it won’t be much better, if at all, and may even be scored to be worse, as measured by how many Americans will be insured, and which Americans will benefit most from the law). It was, however, done completely in secret, with no bipartisan outreach at all (by the house too). What’s more, a bill affecting the healthcare of men and women of all stripes was entirely crafted by men. For a party bent on warning about the danger of ceding power to a federal authority, it appears they have no problem abusing that authority to affect the daily lives of millions of Americans. In effect, they have just proven their own concern.

For the economics of the plan, all we need to do is follow the numbers: tens of millions left uninsured; rising deductibles and/or premiums; significant reductions in the amount of people in poverty or with disabilities covered by Medicaid; decreases in the tax burdens of wealthier Americans.

Most conservatives will assert that by reducing taxes on wealthy Americans (taxes that were used to subsidize the cost of health insurance for poorer Americans) such as Trumpcare will do will lead to economic dynamism through higher labor participation rates and the increased spending attendant with it. The rationale follows this logic: lowering taxes will lead people to spend more of their money; more private spending will lead businesses and companies to hire more employees in order to meet increased demand; increased hiring will lead to increased private spending by the newly hired, and so on. In economics, the theory that substantiates this claim – lowering taxes leads to economic growth and increased tax revenue – is called the Laffer Curve ( I am not kidding). This theory, however, has not only recently proven disastrous for the people of Kansas (see here, here, and here, for a sampling), the theory itself has been disproven by empirical economics (see this power point for a good bibliography), and only survives as a theory. As such, the claim propping up Trumpcare cannot be substantiated by any real-world experience.

Nor can the economic dynamism claim be logically substantiated by current economic conditions. In theory, cutting taxes to spur spending makes sense at a time when labor force participation is low (this is what happened after The Great Recession’s onset). However, such an action does not make sense for our contemporary time when labor force participation is high. The most recent employment statistics put current unemployment at 4.3%, below the natural rate of 5%. Overall labor force participation has steadied since a precipitous drop after The Great Recession’s onset, hovering consistently between 62% and 67%. With wages growing (albeit slowly), it appears that there is not some shadow labor force choosing not to work at all (to be sure, this is hard to measure. But one way is to look at wages: if employers believe there is a labor force not yet hired but willing to work, they have no incentive to raise wages. Since wages are starting to rise, it is more likely that most people who want work are working). Hence, cutting taxes will not lead to more employment, leaving those currently without insurance, or kicked off of it due to the expected rise in premiums and deductibles , uninsured permanantly.

Not only does the evidence above suggest a serious illogic behind the plan, but a similar logic substantiates the ACA in its current form for the same economic dynamism outcome (so too do polls gauging comparative support for both plans). That is, keeping the ACA in place is better for the economy than it is not. Specifically, the ACA (or some other insurance system that insures most people by choice or mandate) is better for economic growth and productivity. For if most Americans can be reasonably sure that any employer they are hired by will insure them, then they are free to make their labor mobile, maximizing the gains they receive, and leading to a more efficient allocation of the American labor force. Take the proverbial West Virgina coal miner, likely unemployed or underemployed for a long time now, suffering from serious work-related health issues.  If her skills are no longer employable in West Virginia but are employable in a related industry requiring similar skills (say oil extraction in Texas), she is more likely to seek this work since both employers are legally required to offer her health insurance that will serve her medical needs. What’s more, even if she were to not obtain a job offer prior to leaving West Virginia and still leave for a new labor market in search of new work, she would be able to obtain health insurance privately. Yes, she would likely avail herself of subsidies, and benefit from the mandate for not penalizing pre-existing conditions. Still, her labor would be more mobile. And as it is true for her, so it is true for many others. With labor being mobile because of insurance made available and affordable (in no small part because of taxes levied on wealthier Americans), the economy becomes more dynamic, productive, and efficient.

What we are left with, then, is a Senate Trumpcare plan that will make insurance more unaffordable for middle-income Americans (by phasing out subsidies, and lowering the subsidy-qualifying threshold), and poorer, disabled, and elderly Americans (through the phasing out of, and capping federal expenditures on, Medicaid). All this in order to lower taxes on the wealthy, and for no apparent benefit to the larger macroeconomy. Since when is being or becoming “great” measured by how much the rich benefit at the expense of the poor? No history of America, nor economic experience or logic, can substantiate that claim. SHAME!

 

Gold Standard Basics

A student recently emailed me about the gold standard, and why it is not feasible anymore. Here is my response.

There are two major problems with using gold to back an economy. First, the gold standard limits growth capacity of an economy. Secondly, the gold standard limits the ability of a central bank to respond to economic disturbances.

Let us first consider how the gold standard limits the growth capacity of an economy. The gold standard was a policy of fixing the supply of money in an economy to the value of gold it possessed. The supply of money means how much money an economy has circulating. In economic terms, matching the supply of money to the amount of gold an economy possesses is called “pegging.” For example, if an economy possesses one billion dollars worth of gold, then that economy should only have one billion dollars worth of money circulating (for a good explanation, see here).

Generally speaking, proponents of a gold standard (e.g., Ted Cruz in the last presidential campaign cycle) approve of the gold standard for two reasons: because they believe it promises the most price stability; and because it limits the ability of central banks (who are usually unaccountable to the democratic will of citizens ) to cause what they perceive as harm to the economy with things like deficits, debt, and inflation, etc..To be clear, price stability means that prices do not fluctuate too much. Price stability is preferable because people like to be able to predict how much something is going to cost in the future, within a limited range of variability. For example, for budgeting purposes, it is preferable that the price of milk remain somewhat predictable for households. So too is it true for businesses owners: it is preferable that the cost of the raw materials they use in the production of their goods remain somewhat predictable. If they were not predictable, neither households nor businesses could budget appropriately, causing many businesses to go out of business when things turn bad, and many households to go bankrupt. Because economies must peg their supply of money to the value of the gold they possess under a gold standard, businesses could not adjust prices according to the supply and demand of that good they are selling. So, hypothetically, if an economy has its entire supply of money circulating, and there is an increase in the demand for a good they are selling, a seller could not raise prices of its goods too much. For all of the money is already in circulation. Hence consumers would not have access to new money to cover the increased costs via things like credit cards, loans, etc. , and, therefore, prices would generally remain stable.

This logic, however, is what limits growth as well. The gold standard expects businesses and economies to trade-off expansion (and the profits that go with it) for price stability. Normally, a business experiencing high demand for the goods it produces will increase both the price and supply of the good (law of supply). How could they do this? Well, one way would be for the business owner to expand production with the profits or savings they have accrued. However, for most businesses, such profits and savings are not enough to expand to a degree that makes such expansion worth it. In economics, this is considered a problem of scale. So how might a business expand its production enough to remain profitable for the owner, and add to the growth of the larger economy? They would seek new money for expansion through attracting capital (for example, selling shares that provide the buyer a claim on future profits – we call them stocks), or by obtaining a loan, which provides a bank with a claim on the expected future profits that its loan made possible. If we apply the same hypothetical conditions I used above, however, then new money is not available. Hence expansion cannot proceed, which denies the business owner of profits, denies banks and shareholders of sources of revenue that they could further invest in other opportunities, denies unemployed workers new job opportunities since no new jobs are created (and free-market economies need all people buying things), and denies current workers raises since wages cannot be increased as easily as they might have otherwise been. When this happens for millions of businesses and workers simultaneously, it harms the health of the larger economy. This is how the gold standard limits growth, harming us all.

But if there is a potential trade-off to be made with price stability, isn’t it worth it? Unfortunately, history proves that price stability does not accompany the gold standard. Instead of price stability during the years when the gold standard was the norm, we see significant price volatility. In contrast, prices were much more stable once economies rid itself of the gold standard (for a good and easy-to-understand explanation of this can be found here – pay attention to the graphs!)

Why is this so? Part of the answer lies in the gold standard itself. Logically, keeping prices stable by pegging money supply to gold works. But, it works only if we assume there are no supply shocks to the amount of gold. For example, if there is a sudden decrease in the amount of gold we have, the money in circulation would be worth less, making it hard to buy the same goods at their old/current prices. If prices drop too fast, businesses have to further adjust by firing workers and decreasing production (since no one is buying their goods). This leads to problems associated with a surplus of goods not being sold (they become less valuable), and an increased inability to pay debts they incurred from their production costs. This is how depressions start (including our depression in the 1920s). This could also happen were there a sudden discovery of gold: on the belief that the increase in the supply of money will lead to increases in purchases, prices soar. However, the profit motive gets in the way of such price inflation being a good thing. That is because the wages of workers generally do not increase at the same time as prices do, or at the same rate as profits increase (in economics, this is called the problem of “sticky” wages – employers do not want to increase the pay for workers and will avoid doing so while they can sell their goods at higher prices, leading to higher profits). What you then have is a temporary rise in the money supply, which leads to a drastic rise in prices, which benefits only those with enough money already to shoulder the burden of high prices (very successful businesses with stocks of capital, wealthy individuals, etc.), which leads soon thereafter to a steep recession, then depression, etc. This is not good for an economy.

These reasons lead us to the second reason why the gold standard has been determined illegitimate: it constricts the ability of a central bank to respond to economic shocks. If an economy pegs its money supply to the value of gold it possesses, and a shock occurs, it cannot respond by providing to the economy more money unless it discovers new gold. When the gold standard was the norm, economies would transfer gold to countries they owed money to because of trade deficits. What’s more, if they needed to print more money, they could buy more gold from another country willing to sell it to them at a fixed exchange rate. However, in times of crisis, no economy wants to get rid of its gold. So no economy sells gold, leading to disastrous consequences. If a crisis hits, and an economy needs more money in its supply, it cannot print anything unless it has the gold to back it up. If the gold is not there, then there is no way to respond, and the economy must proceed on whatever course it must, including depression. Conversely, in today’s economies, because we are not beholden to a gold standard, economies can print or restrict the money supply as it sees fit, according to what is best for the economy. Though this makes many fiscal conservatives mad – DEFICITS! – contemporary economic thinking since post-depression economists (notably Keynes) proves that such deficits are the far better trade-off.

I should note that there is even more to the story of why the gold standard is not feasible. Particularly, the story of exchange rates, and trade surpluses and deficits that I briefly mentioned above. There is also a more significant story about the gold standard and its role in creating and sustaining the Depression. The last link above is a good place to start, but there are many others that a simple google search will provide.

For these reasons, however, the gold standard has been abandoned. The gold standard made our economies too volatile, restricting stability, growth, and GNP (we use GDP today). Since leaving the gold standard, economies have been much more stable (see here, and the second article I link above). Tellingly, a poll of economists at a conference at the University of Chicago in 2012 asked if returning the U.S. to the gold standard would be better for price stability and employment for average Americans. All – that’s right, ALL! – said no. 

No gold here, and we are all the better for it.

JH

Good Reading Can Be Found At…

Since I cannot comment on the many things I read, but these many are still worth reading and reflecting on, I have provided some links below;

  1. For more budget talk see here, here, here, and here – the first three are from the NY Times, which I have access to with a subscription. The last is from Bloomberg View, a site that is free. There are many stories on this topic from many sources. Whatever you choose, be sure it reliable (Breitbart is NOT reliable, most major newspapers are).
  2. For an interesting take on the Irish economy, see here – as an Irishmen (in part), I find monitoring political and economic developments in Eire interesting and illuminating. Partly because of Eire’s fraught history with imperial Britain and the problems that relationship continues to cause, its emphatic embrace of Catholicism as a pillar to its governing ethics in the face of rapid secularization, the maintenance of its culture amongst its diaspora, and its influence on the history and development of the “human rights” and “nation-state” concept. IN full disclosure, the Tanaiste (pr. TA-NU- SHTU, sort of like America’s Vice President) under Enda Kenney is my wife’s cousin – Eamon Gilmore. Given that his role was to specifically attract Capital to Eire, and solidify its trading relationship with markets in and beyond the EU, I think he deserves more credit than he is given in this article – which is none.
  3. Don’t forget about Sessions.
  4. When economic nerds can’t get along.
  5. And, in Philly: we are not growing as fast as others, but faster than some.

Stay woke,

JH

Budget Talk From Subway Walls and Tenement Halls

The most significant economic news in recent days has been the release of president Trump’s budget. Though only Congress has the authority under the Constitution to stipulate how the federal government raises and spends money (i.e., fiscal policy), President’s can have significant influence over the fiscal policies that Congress ultimately settles on. So we need to pay attention to any Presidential budget proposal. For from such proposals we can glean the personal values and political philosophies of any President and the influence they bring to bear on all policies.

For President Trump, this budget suggests two things. One, the poor should bear the brunt of any attempt to reduce the deficit. Two, President Trump is still searching for a consistent political philosophy that doesn’t contradict itself – contradictions easily seen in this budget proposal.

The spending first. President Trump’s budget is worth 4.3 trillion dollars. The majority of this spending is directed to military/defense spending, and the maintenance of Social Security and Medicare (a government-run, health insurance system that people buy into with taxes taken out of their paycheck). Additionally, Trump’s budget increases military/defense spending by 469 billion over ten years, adds 200 billion for infrastructure spending, and 48 billion for “other.” 

Now, the cutting. Trump’s budget slashes federal spending on programs that are disproportionately spent on the poor, sick, and children. Medicaid is a government-run health insurance program designed to provide the poor and working poor health insurance since they cannot afford it on their own. The Children’s Health Insurance program is a similar program but aimed at poor children. These two programs are cut by 616 billion dollars over ten years. The Supplemental Nutrition Assitance Program (SNAP) provides the poor and working poor with federal money to help in the purchase of food for themselves and their families (there are restrictions on what they can purchase – see here). Another government program to help the poor is called the Temporary Assitance for Needy Families program (TANF). TANF is a block-granting program that gives states federal money to spend on needy families attain self-sufficiency. Among the goals of this program is to reduce the need for TANF by recipients by providing job preparation, prevent and/or reduce out-of-wedlock pregnancies, and encourage the creation and maintenance of two-parent families. Together, these programs would be cut by 190 billion and 16 billion dollars over ten years, respectively.

The budget further cuts programs to help low-income students receive loans for college (143 billion), help those with a disability who are receiving disability payments (72 billion), and reducing retirement benefits for federal employees (63 billion), among other cuts.

Notably, the budget did not directly incorporate his proposed tax cuts – cuts that disproportionately favor the wealthy (like himself, and his cabinet who holds more wealth than nearly 33% of all Americans). At this point, we can only conjecture why, but my guess would be that juxtaposing the cuts to the poor with the transfer of wealth to the rich could not possibly play well, even for austerity hawks on Capitol Hill. But, I will return to the tax cuts in a moment. To the spending cuts themselves, however, we should ask: is this economically sound? As far as I can tell, no. And for obvious reasons.

First, the budget incomprehensibly assumes a GDP growth rate of 3%. As Larry Summers, Jason Furman, and many other bonafide economists have noted, a 3% growth rate is nearly impossible (you can choose to disagree with them, but these are serious economists, unlike Mulvaney, Mnuchin et.al., so come with your evidence). Secondly, the budget engages a mathematical sleight-of-hand: the 3% growth it incomprehensibly assumes (equating to approximately 2 trillion dollars)  is used first to make up for the lost revenue from tax cuts. Later in the budget, however, the same 2 trillion dollars is used again to pay for those programs that it is increasing its spending on (see here, here, and here). This is either a demonstration of their incompetence, or a sad attempt to lie in the belief that they wouldn’t be caught.

There is also a logical fallacy inherent in this budget. A supply-side/Laffer Curve-dependent budget like this one assumes that cutting taxes leads to increased individual spending: give people more money in their paycheck, and they will spend more, thus increasing GDP. Now, there are notable problems with this theory, but let’s focus on the logic. The logic asserts that giving people more money or letting them keep more of their money will lead to more spending. For example, a family that used to go out for dinner once a week may now go out to eat twice a week with that extra money. That extra meal is good for the economy, for that spending translates into someone else’s income which is then spent on other things, etc. (this is the business cycle at work).

This logic makes sense, however, if those cuts are more targeted to those individuals with lower incomes. Targeting a tax cut to lower income individuals make such a cut progressive because the cut would provide more benefit to poorer people than richer people. If, however, the opposite is proposed, and tax cuts are targeted at the rich, then those cuts are regressive since they would not likely induce more consumption. Why? Imagine a wealthy family – one that earns enough to be placed in the top 10% of the income threshold (in 2016, the average family in the top 10% earned nearly $295,000, while the minimum to reach that threshold was lower at approximately $133,000). The average family in this category already earns more than enough to go out to dinner every night of the week, depending on other familial budget needs such as mortgage, transportation, food, education, etc. Since this family already has enough money to buy dinner out seven nights a week, would cutting their taxes make them more likely to buy an extra dinner? No, unless we added an eighth day to the calendar to accommodate this need. Therefore, since this family is less likely to be induced to spend the money they gain from a tax cut, a tax cut for them provides less benefit to the economy since that money will likely be saved instead of spent, cateris paribus. Conversely, because the poorer family could not have afforded that extra dinner before, and that money is more likely to be spent on that dinner than saved in a bank, their tax cut benefits the economy more.

So if supply-siders are serious about the benefits of tax cuts, then their fiscal policies and budget proposals should be targeted to lower income quintiles. Is it so? Of course not. Instead, President Trump’s last tax proposal ultimately gave the top 1% of earners more of their money back than they did poorer earners. Hence any claim by the Trump administration for being fiscally prudent is inaccurate at best.

Even better, the logic doesn’t even hold together consistently in this budget proposal. Even though we have demonstrated above that tax cuts cannot generate the type of growth the Trump administration assumes, and that the way such cuts are targeted make them regressive (i.e., less beneficial to the economy, hence providing another reason to deny their poor assumption of 3% growth), lets assume for a second that such tax cuts could provide unprecedented growth for the contemporary American economy. If so, and cutting taxes actually increases government revenue enough to either reduce the deficit or increase spending in some areas while maintaining spending in other areas (defense and social security respectively, for example – and the Trump budget asserted they could do BOTH, which is the double-counting gimmick outlined above), then why do we need to cut anything? In other words, if cutting taxes can lead to the growth they assume, then the revenue for the government that that growth generates could theoretically be used to maintain SNAP, TANF, and other programs that help poor and vulnerable Americans in need of assistance without increasing the deficit. After all, as we saw above, helping the poor would provide more benefit to the economy than helping the rich. If we indulge the Trump administration’s fantasy of 3% growth, then there would technically be no need to reduce spending in these areas. For, the increased growth would provide more than enough to maintain spending in those programs as well. Why the inconsistency?

I am left to conclude that the reason for this logical inconsistency is either because the Trump administration really doesn’t know what they are doing, or they really hate the poor. There is some evidence of the former (see here, and here, for example). But I am more inclined to believe the latter. After all, the recently passed Trumpcare bill by the House was just revealed by the Congressional Budget Office (or CBO, the official scorekeeper of Washington fiscal and monetary policies and policy proposals) to devastate the affordability of health insurance to those with pre-existing conditions and the poor on Medicaid now (for analysis of it, see here). In addition to the proposed cuts to programs that provide school lunches, programs (like athletics, art, music, mentoring, etc.), and services for students with learning and/or physical disabilities – all programs that disproportionately help the poor, we are left with: regressive tax cuts that help the rich more than the poor; taking away economic assistance the poor need (and helps the economy significantly); making it harder for the poor and sick to obtain affordable health insurance – all so America’s wealthy can have more in their paycheck, more to pass on to their heirs, and more in their dividend statements. Sad!

I am aware there are many who feel that such trade-offs made in favor of the rich are the “hard” decisions America has to face. Such decisions, and conversations thereof are inherently moral. After all, at their heart is who should the government protect or help more? We are all free to answer that question in the way our values compel us to. But, how often do we look back on history, to those persons we consider history’s most important and inspiring figures, and find that those we hold most dear were those who helped the rich over the poor; the powerful over the powerless? Put it this way: were Jesus alive today (or any major religious figure), would he (or she, it, they, etc.) advocate for giving the poor more or less help?

I think that answer is obvious.

“the words of prophets are written on subway walls, and tenement halls.”

-Simon and Garfunkel

JH

Workers of the World, Compete!

Two interesting pieces of news recently that are worth sharing for their economic implications. The first is a story in The New York Times about the growth of noncompete clauses in the American labor sector. For those who don’t know, or can’t infer, what a non-compete clause is, you should understand it as an agreement to not work with a former employer’s competitor once you have left the employ of that employer (for a larger definition, see here).

For example, take someone who worked for a shoemaker who had invented a new type of sole that suddenly became very popular (e.g., Vibram’s), leading to larger market share and larger profit margins. As an employee, you may be privy to how those soles were made, thus making your labor more valuable to a competing firm since you could then divulge the secret to making those soles. In order to protect their trade secret (as well as to protect the market share and profits that resulted from it), your employer would ask you to sign a non-compete clause in which you promise to not seek or gain employment from a competing shoemaker for a stipulated amount of time. For workers on the factory floor for this shoe company – the “blue-collar” workers – noncompete clauses would be less necessary and less likely than noncompete clauses for their white collar counterparts. For such employees, work is more likely to be so highly specialized that it does not require knowledge of any valuable trade secret that a competing firm could take advantage of. Normally, such workers are encouraged to seek new employment with a new firm through higher wages and/or higher benefits – they sell their labor and the skills they possess to the highest bidder. Such competition incentivizes employers to offer higher pay and benefits, leading to a stronger economy. The ability for workers to leave an employer for higher wages and benefits is one factor in making our economy both dynamic and “healthy,” since higher wages/benefits result in more competition and more spending (which translates to someone else’s income, who then spends that money, etc.).

The growth of noncompete clauses changes this situation. As the story from the Times notes, non-compete clauses are no longer restricted to executives or other “white-collar” employees. Instead, they have grown more common amongst all levels of employment – even those highly specialized jobs that do not require any tradeable secret that could otherwise threaten a company’s market share and profit margins. One way to interpret this development is that companies have gone further than simply claiming intellectual property rights. Now, they are claiming ownership rights to all factors of production, including labor skills.

What does this mean for the average, blue-collar employee? One way to interpret this development is that the skills she possesses and employs for wages are no longer hers; they are the company’s. And, if she decides to try to employ them with a higher bidder, she cannot due to her non-compete clause. Because the threat of her leaving her current job, her only leverage, has been taken away by the non-compete clause, her bargaining position is decreased, and her employer’s bargaining position has improved. For example, assume that this employee had no intention of leaving her current job, and her contract is up for its annual review (in which she and her employer agree to an annual salary and compensation package, such as health, medical, and retirement benefits). If her employer is aware of the non-compete status of her contract, what incentive does the employer have in increasing her salary and compensation package? Since she is legally bound to not sell her skills to another bidder to the non-compete clause, she is faced with either maintaining her current job, leaving and becoming unemployed for the term that the non-compete clause stipulates, or retraining to learn a new set of employable skills that are not covered in her non-compete clause (assuming there is local work to be learned). Under these conditions, why would an employer negotiate faithfully?

Now, add to this discussion some recent news (at least, to me) of the comparative growth in real GDP globally that can be found here. What we can see is that rGDP growth in North America has fallen behind all of its peers, including those economies in East Asia, South Asia, and the Pacific where their growth has nearly six times higher! Could there be a causal relationship between non-compete clauses and rGDP growth?

One has to be very careful to not confuse correlation and causation. For that reason, I cannot say that the two are directly related. However, a quick google search of “noncompete clauses in East Asia” returned a report that suggests that these clauses in China are more restrictive, applicable to only the highest levels of Senior Management and above. If this is true, then there could be something to the relationship between GDP growth and labor dynamism (there are many other factors that surely contribute to this divergence, in ways more and less obvious. I am merely trying to draw a line from one set of facts to another, with potentially fruitful avenues for further inquiry)

During a time in which capital is concentrated into ever fewer hands, and an attendant inequality continues apace, it is as important as ever to ensure that our economy remains dynamic. The growth of non-compete clauses hinders such dynamism, hurting the vulnerable and helping the powerful. I hope we can see our way to a fairer future.

JH