Titanic seems the right word for our twin health and economic disasters. But while they appear to be one and the same thing, Donald Trump actually sailed full-steam into two separate icebergs. One was coronavirus, which despite its invisible community spread, was a forseeable disaster that Trump could have minimized with a change in course. To be precise, it was foreseen by everyone except President Trump. That second thing we hit was a lurking underwater mountain of corporate debt, something everyone in the White House ignored — again despite ample warnings — because those job numbers seemed so damn good. The fallout from coronavirus has shown yet again that reality is a cruel teacher if you aren’t paying attention to the lesson. Trump’s lazy stewardship of the ship of state didn’t just wipe out every job created under his tenure — he wiped out every job Obama created as well.
Thanks to its dramatic impacts on our health and economy COVID-19 has given America a new appreciation of the importance of math and graphs — especially those that flatten the curve versus ones where the line rises in exponential infinity. In that spirit, I’ve got a couple of graphs — both types — to illustrate my economic arguments. But first let’s recap how we got here.
I'm really - there's more of a chance that I stay on the Titanic than - than I go on, you know, on a Donald Trump boat.
Ana Navarro
Like it or not, we’re all passengers on Donald Trump’s Titanic now. It’s playing out just like the original did too, with the rich getting the life-boats while those crammed into steerage have some life-vests tossed their way as they jump into icy water. For those traveling in the middle class, maybe there’s room in a boat. Or not.
But we still have a democracy so unlike 1912, we get a vote on what comes next. The election in November means we only have to survive another nine months on board Trump’s disaster spectacle if we so choose. Same span of time as your mom’s pregnancy, a suffering that brought you into this world. Although your mom wasn’t threatening the lives of hundreds of thousands of her fellow Americans with her incompetence and bad advice, so this may be a less-than-perfect metaphor.
Also unlike the Titanic passengers in that icy water, we get a say in the design of RMS Carpathia — the rescue ship. Boy will we need a proper vessel for the job come 2021, this thing we’re facing is just getting started. You can forget that happy talk of V-shaped economic recovery curves. To continue straining my metaphor — the alternative captain may have essentially been chosen, but the shape, size and quality of our rescue will be up to the entire of the Democratic Party. Assuming they beat Trump and take the Senate away from the GOP. Nothing is guaranteed, but since Trump was planning his re-election campaign around a focus on the economy, odds of a Democratic win are promising. When fighting for a different future it’s important to know the past. Or as George Orwell framed it in 1984:
Who controls the past, controls the future. Who controls the present controls the past.
In plain but dull language, the way the majority of voters interpret the past determines the politics and economics of our future. It was my home state of Mississippi that taught me the hard reality of this Orwell frame.
In that spirit, I want to review how we booked passage on this particular disaster ride. Our creaking healthcare system, massive inequality and breathtaking quantities of business debt are actually intertwined failures with a common source — the supply-side theory that Ronald Reagan popularized. Thanks to the GOP it has dominated our economics ever since.
Remember the famous Reagan line during his debate with Jimmy Carter: “There you go again”? Never mind what we now know — that someone stole Carter’s debate preparation book from the White House, allowing the Reagan team to prepare his quips in advance and deflect Carter criticisms. Pundits gushed over Reagan’s quick and supposedly clever response and political scientists now teach their students that this was the moment when Reagan sealed his victory.
Lost in the myth-making is what Carter actually said. Re-play the tape:
Transcription:
President Jimmy Carter:
Governor Reagan as a matter of fact began his political career campaigning around this nation, against Medicare. Now we have an opportunity to move toward national health insurance ...
[camera cuts to Reagan smirking ...the smirk fades as Carter continues to talk]
… with an emphasis on the prevention of disease, an emphasis on out-patient care, not in-patient care. An emphasis on hospital cost-containment to hold down the costs of hospital care for those who are ill. An emphasis on catastrophic health insurance, so that if a family is threatened with being wiped out economically because of a very high medical bill then the insurance would help pay for it. These are the kind of elements of a national health insurance important to the American people. Governor Reagan again typically, is against such a proposal.
Governor Reagan [laughing]:
There you go again.
Flash foward to where we now sit. South Korea and the U.S. discovered their first cases of the coronavirus on the same day, January 20, 2020. Three months on there are well over 50,000 dead in the U.S. as I write — 158 souls per each million of population — versus 240 dead in South Korea which is 5 dead per million. The different outcomes are not just the actions of a competent government implementing testing and contact tracing in South Korea versus Trump failure. It’s also that South Korea has a comprehensive, effective national health care system capable of performing this minor miracle. Back in 1980 when Reagan was laughing at Jimmy Carter for wanting nice health-care for everyone, South Korea was vastly behind the U.S. But Koreans overthrew their dictatorship in 1987 and used democracy to build a health system that saves lives — and it saved their economy to boot since they never had to resort to shelter-in-place orders and economic shutdown.
Now don’t misunderstand. I’m not letting Trump off the hook; he hit coronavirus head-on at full speed despite plenty of dire warnings. Last fall Trump ignored the generalized pandemic warnings coming from his own White House economists. In January he ignored the warnings of his national security team. In February he did nothing as the disease grew inside the United States; he was unconcerned that the CDC botched its test roll-out. He ignored the shortage of medical supplies in the federal emergency stockpile. Meanwhile his Commerce Secretary, Wilbur Ross, spent February encouraging US industry to ship precious and in-demand N-95 medical masks, ventilators and PPE gowns to China. Once coronavirus containment failed due to a lack of testing, Trump refused to support social distancing until it was too late — because his friends were telling him that social distancing would hurt the economy.
While the economic damage of coronavirus is strong and stark, our economy was headed for problems long before this particular coronavirus escaped from a bat and somehow got into a human’s blood stream. There was a mountain of debt of all kinds, but the most worrisome was and still remains the massive corporate debt riding inside the stock market. There have been warnings about this — and other debt — from the Institute of International Finance, from researchers at the Federal Reserve Bank of St. Louis, and from a variety of financial bloggers, writing in places like Zero Hedge and Forbes. I promised graphs, here’s one of the exponential kind. It was used by Jesse Columbo in Forbes to illustrate the severity of U.S. corporate debt in 2018.
This graph shows U.S. corporate debt in 2018 as $9 trillion. By the time of the March market crash it had reached $10 trillion. Total business debt including small medium and family business is $15.7 trillion. This is what Emre Tifik of the Institute of Internation Finance said to the New York Times about business debt on March 11, 2020:
“We have been always saying that we are sitting on top of an unexploded bomb, but we don’t know what is going to trigger it,” said Emre Tiftik, director of Research for Global Policy Initiatives at the Institute of International Finance, a Washington-based financial industry trade group. “Can the coronavirus be a trigger? We don’t know. Maybe.”
The next day the Dow fell a record 2,352 points, the sixth-worst drop in history. Four days after that, the Dow lost another 2997 points — a 12.93% loss that topped the 1929 Black Monday record. Let’s look at a slightly different graph of the same corporate debt, this time expressed as a percentage of GDP — it suggests a correlation between high levels of corporate debt and market crashes over the last 40 years.
The $1.5 trillion Trump-GOP tax cut bill in 2017 — which was mostly corporate tax cuts — was the single biggest piece of economic malpractice of the Trump years. There is a lot of competition, including Trump’s deregulation of finance and banking, his shift in federal support away from clean energy to coal and other carbon-rich fuels and his persistent attacks on Obamacare and other federal health programs — pandemic response being the one that jumps out as being especially problematic at the moment. The tax cut did even more damage than Trump’s pièce de résistance: his trade war. Which was actually a war on America’s manufacturers, and it considerably depressed the number of manufacturing jobs instead of producing a manufacturing boom as Trump promised.
Why was the tax-cut so bad? With inequality raging at all-time highs, the tax-cut transferred even more wealth to the super-rich. It super-charged corporate stock buybacks, which in turn super-charged the markets. In the Pamplona-style bull-run that followed, corporations took scary risks — such as indebted companies borrowing even more in order to buyback their own stock to make their market price look more attractive. In the last decade, American corporations spent trillions buying back their own stock in order to inflate share price and “transfer money to shareholders”. Most of the Trump tax cut went to buybacks — not to salaries or productive investment. The Trump bull market? A sugar-high of corporate stock buybacks.
The economic carnage in Trump’s America is not just coronavirus. It’s also the legacy of the supply-side economics that created a business culture addicted to tax cutting, deregulation and easy money from the Fed — while simultaneously disregarding obligations to employees and customers. Corporate stock buybacks, for instance, were illegal prior to 1982. Reagan appointees to the SEC (Securities and Exchange Commision) changed that rule. The tax-cut part of supply-side is what drove the politics of the whole hot mess; this is the famous graph that kicked it off — The Laffer Curve — which became a key support pillar of the Reagan tax cuts.
The “Laffer Curve” was designed and promoted by economist Arthur Laffer to support his claim that tax cuts would actually increase tax revenue, not reduce them. He maintained that there was an optimum rate of taxation and by cutting taxes to reach it, you would also bring in more money. To the left of the “revenue maximizing” sweet-spot of the parabolic curve, tax revenues will fall if you reduce the tax rate too-low. But Laffer claimed revenues would also fall off to the right side of the sweet spot if you went to higher tax rates. George H.W. Bush famously called Laffer’s ideology “voodoo economics”. But Bush jettisoned his objections once Reagan chose him as VP.
The Reagan tax cuts not only failed to raise additional revenue, they contributed to Reagan more than doubling the size of the federal deficit during his time in office. Many have laughed at the Laffer Curve but it’s no laughing matter — this justification of tax-cutting has been the big driver of GOP politics since Arthur Laffer did his first crude drawning on a cocktail napkin in 1974. It’s such an important artifact of our politics that the “Laffer Curve Napkin” is on exhibit in the Smithsonian’s Museum of American History in Washington, D.C.
Even Arthur Laffer thinks the curve is simply a political and rhetorical tool — not something based in any real mathematics or economics. This from his 1981 interview in Reason Magazine:
The thing is, it's a pedagogic device that allows one to explain the point to a congressman or senator very quickly and get them to understand the point. When the Treasury says that we've raised tax rates by 10 percent and therefore we are going to get 10 percent more revenue, that's nonsense ...The whole point of the curve is to illustrate this and to make it so that, when the congressmen get together to discuss tax legislation, they do not foolishly make the mistake that every time you raise taxes you collect more revenue and every time you lower them you collect less. This is not true
…. I use the Laffer curve to make a straightforward point which is obvious in another context: you can overprice your product and lose money because the quantity you sell falls off; and you can underprice your product and lose money because the increase in volume doesn't make up for the decline in revenues. What you want to understand is that taxation and revenues are not related in a one-to-one fashion.
Ex-supply-side-Republican-turned-Keynesian Bruce Bartlett described the politics of the Laffer Curve in an NPR interview:
"Basically, it was a way to have your cake and eat it too."
The Laffer Curve emerged from the philosophy called “supply-side economics” because proponents claimed that by cutting taxes and regulations, you increase the supply of goods — which in turn causes demand and along with it, a robust and growing economy. It is the opposite of a Keynesian “demand side” economics. It’s also a variant of the same old laissez-faire capitalism that’s been around for centuries — and more recently pushed by Ayn Rand under the rubrik “Objectivism”, or sailing under the Milton Friedman banner as the “Chicago School of economics”. Sometimes its called neoliberalism. Another name is libertarianism. Despite the existence of some odd little-known libertarian-socialist variants, libertarianism is essentially the same thing while adding a dose of corporate fascism, a la the Koch Brothers or Robert Mercer. The Koch variant is an offshoot of the Austrian school of economics developed by Ludwig von Mises and popularized in the U.S. by Friedrich Hayek. Another moniker is austerity politics, as promoted by the Austerians. Free-market fundamentalism might be the best descriptor. This is a god with a thousand names. My favorite one is the oldest: greed. Essentially the same thing as the biblical warning, “For the love of money is the root of all evil.”
Trump — fake populist but genuine supply-sider
Despite the shape-shifting of its nomenclature, this economics is mostly rubish in all its forms, but that hasn’t stopped it from becoming the dominant economic system in the world for the last 40 years. During its tenure, we’ve had four major stock market crashes, the last of which rivals and may yet exceed the Great Depression. But failure doesn’t kill it. The Black Monday crash of 1987 was fixed through Federal Reserve intervention by Fed Chair Alan Greenspan. The lesson to the markets was that the Fed would be there to catch them when they fell no matter what. So reckless fiinancial inventions and bets on Wall Street would always pay dividends. If the music stopped, the Fed would pony up whatever was needed to crank-up the merry-go-round again. Something Greenspan promptly did after the Dotcom Crash, with a low-interest intervention that created the housing bubble. Which in turn caused the 2008 Crash and the Great Recession both. After the failure of the Bush years, supply-siders rebranded themselves as Austerians and created the Tea Party in order to keep playing the same old game. It paid off when the GOP won the 2010 midterms during Obama’s first term. The new GOP Congress then blocked further stimulus of the economy, stiffled the implementation of Obamacare and forced massive cuts in federal and state-level spending, which greatly slowed recovery from the Great Recession.
Supply-side economics most recent calamity was its disastrous implementation in Kansas by GOP Governor Sam Brownback. This was another of Arthur Laffer’s pet projects. Both Brownback and Laffer were rewarded by Trump for their failures. Brownback got the State Department post of Ambassador-At-Large for International Religious Freedom — which made the religious right extremely happy. Their support of Brownback demonstrates the Religious Right also worships at the altar of supply-side economics, praying for the deepest tax-cuts and final slashes of spending for schools. They might talk God, Jesus and fellow man, but bottom line, the Religious Right is all about the money and how to keep it. Just ask Jerry Fallwell’s pool boy.
Last summer Trump rewarded Arthur Laffer as well, giving him the Presidential Medal of Freedom.
From the Washington Post:
“Few people in history have revolutionized economic theory like Arthur Laffer,” Trump said at a ceremony in the Oval Office. “I’ve heard and studied the Laffer curve for many years. A very important thing you did, Art.”
Trump didn’t suddenly discover Arthur Laffer last year. Laffer and another supply-side luminary, Stephen Moore, have been part of Trump’s economic brain-trust since the 2016 campaign. Together Laffer and Moore wrote a 2018 book lauding Trump’s economic genius: Trumponomics: Inside the America First Plan to Revive Our Economy. The book’s forward was written by Trump economic advisor Lawrence Kudlow — yet another supply-sider inside the White House. Here is what Kudlow wrote:
… when Arthur Laffer, Steve Moore, and I sat down with this billionaire businessman turned politician in Trump Tower in the spring of 2016, the three of us saw Trump in a whole new light. Here was a pro-growth, pro-business candidate who understood the vast underperformance of the U.S. economy and, even more importantly, the potential for dramatically faster growth. He wanted tax cuts. He wanted to deregulate, he wanted to get the government out of the way.
Boy did Trump ever get government out of the way. Right when we need it most.
This is the heart of my argument. Trump’s main characteristic in government is the same one the Republican Party has always valued over the last 40 years — a pro-financial markets guy into cutting taxes on the rich, slashing regulations on business and finance, and limiting social spending where they can. Trump and the Republican National Committee are outraising Biden and the DNC because America’s rich are very, very happy with Donald Trump.
People misread Trump as populist in part because he indulged in some very not-supply-side trade wars and because of his anti-immigration rhetoric and wall-building. But he only dresses as a populist to grab votes. Granted, his deeply inbred racism makes him perfect for the role. But his main game is cutting taxes and slashing regulations. The resulting drop in government revenue will provide future fuel to the GOP as well for their never-ending fight against social spending. Or as ex- GOP insider Bruce Bartlett tells it:
Virtually everything Republicans say about taxes today is a lie. Tax cuts and tax rate reductions will not pay for themselves; they never have. Republicans don’t even believe they will, they are just excuses to slash spending for the poor when revenues collapse and deficits rise ...
If Trump wins in November, the GOP will be cutting every piece of social spending they can to make up for the trillions we’re spending to bail out business now. You don't even have to wait for the next Congress to get an idea of what they’ll do — Trump has already submitted his 2021 budget calling for drastic cuts to the social safety net, including Medicaid and Medicare among other things. Trump’s budget was dead-on-arrival in Nancy Pelosi’s House. But if the GOP retakes the majority, a lot of Americans will find themselves in a Back-To-The-Future-style time-trip to Hooverville.
Toto, I've a feeling we're not in Kansas anymore
We call the fates of the Titanic and the Concordia - as well as those of the space shuttles Challenger and Columbia - 'accidents.' Foreseeing such undesirable events is what engineers are expected to do. However, design trade-offs leave technological systems open to failings once predicted, but later forgotten.
Henry Petroski
I said we should participate in the design of our rescue. But what might that look like? Certainly it has to be different than anything we’ve seen before, because we are in uncharted waters. The economic disruption from coronavirus lock-down is intertwined with a financial crash bigger than the one that caused the Great Recession. You might think the markets have recovered since the Dow is back up. But they haven’t, not really. They were simply put on life support with the Fed pumping an unprecedented $4 trillion dollars into corporate bond-buying and other forms of market support. Think of it as a giant Fed ventilator; and we have no idea if the patient will wake up if and when support is removed.
The thing about this massive Fed action to introduce liquidity into markets is that it validates a central premise of a hitherto untried economic philosophy: Modern Monetary Theory. The Fed is pumping that $4 trillion into the economy as we speak by running their imaginary printing press. Not the real one that actually prints dollar bills, but the digital version where they essentially say to the markets — “Poof, here is a bank account with one trillion dollars. You’re welcome”. There is no discernable damage so far — no taxes are going to be raised to pay for that $4 trillion, no Treasury Bonds will be sold to cover it. The Congress didn’t vote it and we the taxpayers don’t have to pay for it. One moment the money was not there, and the next it was. In principle, it’s not much different than the quantitative easing the Fed used to get us out of the Great Recession after the Congress blocked fiscal spending. In that case they used invented money to buy Treasury bills, which increased the supply of money and fed it into the markets.
With Modern Monetary Theory these powers of money invention — which have already been proven by Fed action to exist — would be used to fund things that actually help ordinary people, like health care, green energy, infrastructure or a guaranteed annual income. The big bugaboo thrown at MMT is that it will cause inflation. But again, the Fed has been doing this for a decade with nary a hint of inflation in sight.
The idea of using money created by central bank fiat flies under another name as well: “helicopter drop money”. This was the name given to it years ago by the neoliberal economist Milton Friedman as way of denigrating the idea. But despite the derision of supply-siders of all stripes, the idea is still around and rapidly gaining currency. One of my favorite economists, David McWilliams of Ireland, has embraced it in recent columns:
… we are on our way to “helicopter money”, which is free money given to all citizens. It will take lots of taboo-breaking within central banking circles to get there, but it will happen eventually in one shape or another.
For those who want to dive in, Vox has a fairly decent if somewhat complicated and in-the-weeds explainer of Modern Monetary Theory. They point out that contrary to the critics, MMT theorists are very concerned about inflation and have developed mechanisms (theoretical ones at least) to make sure it is kept in check. MMT proponents also believe in good old fashioned taxing and spending the traditional fiscal way as well — so that continues with MMT. If you just do magic money all the time and it’s not in the service of creating a real economy, you will reach Zimbabwe sooner or later. But not now — not while the world faces risk of a deflationary spiral pulling us all into a depression greater than the one of the 1930s. I’ll quote some more David McWilliams:
Ultimately, the Great Depression only came to an end when the brilliant Franklin Roosevelt abandoned the gold standard in 1935, printed money, opened up the taps, borrowed and spent, faced down conservative opinion in order to boost demand and boost employment.
This is the story the IMF should be telling us. A coming depression can be avoided by massive government spending right now, paid for by central banks without causing debt ratios to rise or risking austerity in the future as governments seek to balance the books. One of the greatest and most dangerous myths is that there is a limit, when faced with an emergency, on government expenditure. This is simply not true. In 1946, for example, the UK’s debt to GDP ratio was nearly 300 per cent.
The greatest risk now is not spending and the reason is simple: when companies go out of business, they don’t open up again and when people lose their jobs, they lose their skills and their networks very quickly, becoming unemployable reasonably rapidly. This is why long-term unemployment is so hard to fix. The way you fix long-term unemployment is not let it happen …
Capitalism is suspended. A form of war communism is upon us until this virus is beaten. Part of that armoury is “free money” or helicopter money, printed by the central bank and deposited in every account, which I have already recommended. Another tool in the arsenal is huge government spending, financed by the central bank, with the aim to avoid, in as much as we can, the depression that the IMF has warned about.
I’m giving Dorothy from the Wizard of Oz the final word: “Toto, I've a feeling we're not in Kansas anymore.”
Now for your moment of Titanic Zen
It is supply siders such as Arthur Laffer and Stephen Moore that have been leading the charge to get Trump to forget about coronavirus and re-open the economy. While they don’t care about flattening the coronavirus curve, they did succeed in flattening the nation’s ability to collect taxes from the rich.
A number of Reagan-era conservatives left the GOP over Trump. But most stayed, with many seeing Trump not as the opposite of Ronald Reagan — but his second coming. Grover Norquist is one of those. Norquist leads the pack as a tax-cutting, regulation slashing, supply-side advocate. He said this to The Atlantic shortly after Trump entered office:
“Trump’s regulatory regime is Reaganite,” Norquist told me. “His tax cut is Reaganite. He’s more aggressive than Reagan on labor issues.” All that other stuff—the crazy tweets, the chaotic White House, the Russia investigation, the travel ban—is just noise. What Trump was really elected to do, Norquist maintained, were the things Republicans had been coveting for years. And Trump is already doing just those things.
Grover Norquist outlined his philosophy of government to the Harvard Crimson a decade ago, after the 2010 GOP midterm victory:
I want to drop the government in half over the next 25 years, and then drop it in half again. The government’s about 33 percent of GDP, 33 percent of the economy. We want to take it down to 16 and a half percent, then take it down to eight percent, all of which would take us to where we were at the turn of the century …
What’s hurting the US economy is total government spending. The deficit is an indicator that the government is spending so much money that it can’t even get around to stealing all of the money that it wants to spend. But the tip ofthe iceberg is not what hit the Titanic—it was the 90 percent of the iceberg under water.
One consequence of a decade of supply-side tax-cutting was recently reported by Pro-publica:
Dire shortages of vital medical equipment in the Strategic National Stockpile that are now hampering the coronavirus response trace back to the budget wars of the Obama years, when congressional Republicans elected on the Tea Party wave forced the White House to accept sweeping cuts to federal spending.
Among the victims of those partisan fights was the effort to keep adequate supplies of masks, ventilators, pharmaceuticals and other medical equipment on hand to respond to a public health crisis ...
Perhaps eliminating all those lifeboats wasn’t such a good idea. The moral of this little zen-story? Elections have consequences and we’re still paying for 2010 when all those progressives sat it out because there wasn’t a public option in Obamacare.
Vote. All the time, every time. If you don’t like any of them? Vote for the least-bad alternative. It’s called democracy.
Before you go ...
If you want to know more about the weakness of our economy prior to coronavirus, I’ve researched it in-depth and written up my findings in an economic essay on Medium called Dr. Strangelove Economics: or how I learned to stop worrying and love the crash. Caveat: it’s long. On the other hand, it’s broken into ten separate film-themed fun chapters, each of which stands on its own — so you can pick and choose according to whatever strikes your fancy.