Trump's Economic Proposals and How They Might Backfire

When presidential candidates are campaigning for office, they will promise everything from free healthcare to free lawn care if that is what is needed to get the votes they need to win. So when they do get elected, many of them renege on a great number of their campaign pledges. Sometimes, it’s because they never had any serious intention to go through with their pledges. And sometimes, it’s because they just didn’t have enough political capital to do everything they wanted to do.

However, for reasons that experts will be studying for years to come, Donald Trump is not like most politicians. During the 18 months that he campaigned for the presidency, Trump said a great number of things, ridiculous things, that would have permanently tanked any other politician’s career. Who else remembers that back in 2004, Howard Dean’s aspirations for the presidency was destroyed all because of a scream? Simpler times, indeed.

One of his more ridiculous pledges was to enforce a complete and total shutdown of Muslims entering the United States. That pledge has been quietly withdrawn. A year ago, he also said that he would “absolutely” require Muslims to register in a federal database. When he was asked how that would be different from the way Jews had to register with the government in Nazi Germany, he repeatedly answered by saying “You tell me.” Thankfully, that, too, has been withdrawn.

If it quacks like a Nazi...
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Now it appears that Trump will have to backtrack from his most famous pledge - his pledge to build a “big, beautiful, powerful wall” on the US-Mexico border. Even Newt Gingrich, former Speaker of the House and ardent Trump supporter, admitted that Trump’s promise to get Mexico to to pay for the wall may have just been “a campaign device.”

It has only been a few days since Trump won the presidential election and he is already going back on some of his biggest promises such as punishing corrupt special interests or locking up Hillary Clinton. Many of his supporters are not likely to be happy about Trump’s flip-flopping. This will mean that even before he begins his presidency, he will likely lose a lot of good will from the many people who voted for him.

However, this is not a moment for anyone who opposed Trump to be allowing themselves to enjoy feelings of schadenfreude. That is because Trump will most likely resort to other methods to placate his supporters and the fact of the matter is that Trump is a deal-maker and he will make the kinds of deals that are profitable to him, but not necessarily anyone else.

So among the first things that Trump will do as president is to fulfill his pledge to rip up trade deals. The TPP will be the first casualty. It’s unclear if Trump would actually be able to abolish NAFTA as he said he would. After all, NAFTA has been in place for a long time and there will be many vested interests who would be severely opposed to such a move. On the other hand, the TPP, which is still in its embryonic stage, would be much easier to terminate. The rationale behind it would be to prevent a “job-killing” deal that might cause a trade deficit for the US.

To complement that decision, Trump will likely push to keep another promise, which he also knows will face little to no opposition from the newly elected Republican Congress - his promise to levy a one-time 10 percent tax on all repatriated corporate profits that are currently being held offshore. Added together with the Federal Reserve’s independent plan to gradually raise short-term interest rates in the near term future, there is a good chance that at least within the first few months of Trump’s presidency, the US might see a spike in capital inflows, which could have a large stimulative effect on the US economy.

I'm rich, bitch!
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Trump is hoping that the repatriated capital would be able to be used to generate US$1 trillion in private sector infrastructure investment over a decade to rebuild the country’s infrastructure. That way, he hopes to create thousands of jobs which would have a cumulative effect on the economy. However, repatriation of corporate profits is a temporary fix. Realistically, to raise the kind of capital needed to overhaul the nation’s infrastructure over the long term, Congress would also need to raise taxes such as the the federal gas tax and tying future increases to inflation. Needless to say, however, raising taxes is not popular and probably won’t be considered.

Unfortunately, the bad news doesn’t end there. The repatriation of corporate profits will come at the expense of other countries around the world and this could particularly hurt Europe. After all, as a result of a US$14 billion penalty from the US Justice department stemming back to the subprime mortgage crisis, Deutsche Bank, one of the largest banks in the world, almost faced a Lehman Brothers-like collapse a few short months ago. Deutsche Bank barely survived but the Eurozone debt crisis and negative interest rates continue to haunt it and other major European banks. A sudden loss of significant US Dollar reserves, which would likely follow such a generous corporate tax and a Federal Reserve interest rate hike, could very well hurl the entire European continent into yet another banking crisis.

Trump might receive less support (in fact, he might face fierce resistance) but another thing that he might attempt to do is fulfill his pledge to impose a 35 percent tariff on all imports coming from Mexico. What is much less certain, however, is his pledge to impose a 45 percent tariff on all imports coming from China. In fact, as unlikely as the former may be, the latter is even more unlikely. An imposition of even minor tariffs can and do lead to economic retaliations, which if left unchecked, could spiral into a vicious trade war. And a trade war could be devastating. It is likely that those sums that Trump suggested were yet another example of “campaign devices.”

So far, that would mean that Trump would have killed a trade deal that was never born in the first place and force corporations to repatriate their profits back to American banks. The first suffers from a bad case of “the seen and the unseen” and the second would be easy for the Democrats and other progressives to ridicule as yet another example of trickle-down economics. In other words, they’re both weak sauce. Trump would need to deliver something much bigger to appease the voters and Congress.

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So if Trump can’t punish China and Mexico, there are other countries that Trump can punish to show his loyalists that he is “doing something” for them without having to face too severe a backlash. The easiest target will likely be South Korea.

Politically, South Korea would be easy to throw under the bus. Unlike China, it doesn’t have a billion-strong population and it is not the second largest economy in the world. And unlike Mexico, South Korea doesn’t share a long border with the United States that has allowed for centuries of trade, easy immigration (legal and illegal), and cultural exchanges. Furthermore, South Korea is an American ally in an unfriendly far-away neighborhood, which means that South Korea has little choice but to be more cautious (read, timid) in its dealings with the US.

For a deal maker like Trump, South Korea is the perfect negotiation partner - one that he can kick around and squeeze for as much concessions as possible. Trump will twist arms and deploy brinkmanship-esque negotiation tactics with regards to military cost-sharing plans and renegotiating the ROK-US Free Trade Agreement.

Threatening South Korea by stating that he would be willing to walk away from the alliance would certainly be an effective strategy. It would certainly cause initial resentment among South Koreans, but it probably will not change the fundamentals of the partnership. As a result, unless South Korea balks (which is highly unlikely) the alliance will not break.

Whether or not the free trade deal gets renegotiated to Trump’s satisfaction, the renegotiation alone would take years. In the meantime, Trump would be able to tell the voters that he is looking out for their best interests by squeezing more money out from “ungrateful and free-riding allies.”

Trump's preferred means of negotiations
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However, Trump might not have much room to put too many other Asian countries in a vice grip. That is because now that the TPP is dead, China is wasting no time to push ahead with their version of the TPP - the Regional Comprehensive Economic Partnership (RCEP). Just as the TPP excluded China and Russia (something Trump didn’t know about until it was pointed out to him by Rand Paul) as a way for Washington to set trade rules for the fast-growing Pacific-rim region before Beijing does, the RCEP will exclude the US for the very same reason.

So although Trump might still do away with the TPP, he cannot completely abandon trade deals with Asia.

For its part, as a result of the previously mentioned closer relationship between the US and Russia and a continued (if somewhat sputtering) Asia Pivot, China might think it necessary to continue to accelerate its military modernization program, which would further cause nervousness among China’s smaller neighbors or even compel them to shift allegiance to Beijing.

So if Trump cannot afford to squeeze East Asia too hard, there are two other related areas that he could exploit. The first is to rescind Obama’s policy and allow TransCanada Corp. to re-submit its application for the proposed Keystone XL oil pipeline in return for a larger percentage of profits generated. Furthermore, he could put the Environmental Protection Agency on a much shorter leash (as it had been under the George W. Bush administration) in order to encourage more U.S. energy exports.

Naturally, however, this would lead to a larger glut of supplies, which in turn would lower oil prices and help the US grow its oil market share. Although some individual oil companies will certainly suffer as a result of sustained low prices, in the larger scheme of things, this could nominally help the US. However, not everyone would be celebrating this turn of events. OPEC members and other natural-resources based economies in Africa and Southeast Asia would not be happy.

Even wealthy countries like Saudi Arabia are struggling as a result of low oil prices and facing ever dwindling foreign-exchange reserves. Things have become more desperate among poorer OPEC member states such as Russia and Venezuela (and other smaller Gulf kingdoms, albeit to a lesser extent). Combined with an ongoing Sunni-Shiite proxy war and continued conflict in Syria, it is highly unlikely that anyone in the Middle East is celebrating Trump’s victory.

Speaking of Syria, one thing that Trump would certainly do to great fanfare is to withdraw US forces from that country. Trump is a deal maker and truth be told, for the US, the Syrian conflict is a moral one. And for a deal maker like Trump, intangibles such as morals or loyalty don’t carry any weight. Regardless of how that conflict turns out, the US would not see direct profits from it. However, due to the aforementioned Sunni-Shiite proxy war, that does not mean that a US withdrawal would help to usher in peace in the Middle East.

It should be noted, however, that withdrawal from Syria would not mean that Trump would push for a general withdrawal from the Middle East region altogether. Trump has always projected himself as a strong leader to the point of thuggery. A single terrorist attack would likely compel Trump to retaliate disproportionately, which could very well keep the vicious cycle of US involvement in the Middle East ongoing.

There is, however, one bright side - if it can be called that. An unintended consequence of growing unease in the Middle East as a result of continued drop in oil prices would likely be that Middle Eastern governments are going to seek assurances that they will not be toppled by their own people. The Arab Spring still remains fresh in Middle Easterners’ collective memory as many are still living through its consequences. In order to ensure regime survival from their own people and each other, Middle Eastern governments could very well increase their arms procurement, thus helping America’s arms industry to make even more money than before.

(Although the TPP may be dead, Trump’s policy advisers have said that the military aspect of the Asia Pivot will still continue and that Trump would do so by enlarging the US Navy. This will also help to raise jobs and help the arms industry be more profitable. In the long-term, however, increased defense spending is unlikely to help the US economy.)

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Thankfully, however, as a result of Trump’s narrow focus on only making deals that are profitable, there is little chance that there will be a war between the US and North Korea. There is no reason to attack North Korea because there is no way that doing so would profit Trump or the US. In fact, it is entirely possible that Trump might wish to pursue engagement with North Korea because he might want to exploit North Korean natural resources. Whether such an endeavor would be fruitful, however, is another matter entirely.

Besides, another reason why there most likely will not be a war with North Korea is that to date, no nation state armed with nuclear weapons has ever been attacked.

The future does not look too bright for Donald Trump. If he pushes through the aforementioned pledges, they will certainly benefit the US. At least in the short run as the country will be awash in capital that will provide an economic stimulus but without the Broken Window effect. However, the negative effects that they would have on developing economies in Asia, Africa, and even in Europe could lead to a prolonged worldwide economic recession. This would have a domino effect and the US would not be spared.

Unless Trump pursues better policies that would help to promote free trade and cooperative partnerships with other countries around the world, there is a very good chance that Trump would end up being a one-term president.

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Bernie Sanders: Yet Another Demagogue

I am currently writing my next post for my “What Would Homo Economicus Do?” series but for personal reasons, I have not been able to spend a lot of time writing.

However, just today, a friend posted on his Facebook page an article from Occupy Democrats about a list that Bernie Sanders made. It was a list of corporations that didn't pay income taxes.

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The first thing that I thought when reading the article was that Occupy Democrats really should learn to date their articles. As Sanders' list was a response to an op-ed piece that was signed by 80 Wall Street CEOs that advocated for austerity spending in the United States, I naturally thought that this was a recent article. I searched all of the Wall Street Journal to find the op-ed piece but couldn't find it.

It was only later when I found the letter in the Journal's archives as the op-ed was published in the Wall Street Journal in 2012, making Sanders' list about three years old too.

The article was titled “Bernie Sanders Calls Out 18 Corrupt CEOs For Stealing Trillions, Outsourcing Jobs, and Evading Taxes.”

As much as I disagree with Sanders about almost everything, to his credit, he himself did not use the word “steal” when describing the bailouts that corporations were given by the government. Though there were corporations that were screaming to be bailed out, there were also those that didn't want the bailout money but were told to take it anyway. 

By definition, that cannot be “stealing” and it once again goes to show the intellectual bankruptcy of headlines.

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However, there were many other things in the article that I thought was nonsensical, misleading, and pure demagoguery. The following is my list of what I found wrong here.

1) “The Wall Street leaders whose recklessness and illegal behavior caused this terrible recession...”

Was the sub-prime mortgage crisis a result of recklessness? Without a doubt. But was it illegal? Hardly.

2) “Before telling us why we should cut Social Security, Medicare and other vitally important programs, these CEOs might want to take a hard look at their responsibility for causing the deficit and this terrible recession.”

The bailout of 2008 was approximately US$700 billion and was given out to a total of 951 recipients. Of those 951 recipients, 123 companies have so far failed to repay the government and resulted in a loss to taxpayers. However, even after including the losses incurred from those 123 companies, taxpayers have made a net profit from the bailout in total. Thus far, taxpayers have profited by US$57.7 billion.

On the other hand, how much does Social Security and Medicare cost? It depends on whom you ask. If you ask the Cato Institute, a libertarian think tank, the War on Poverty has cost US$19 trillion over the past 50 years.

However, the Devil is always in the details. For instance, if you ask Mike Konczal, a fellow at the Roosevelt Institute, a progressive think tank, the federal government spends US$212 billion per year on “what we could reasonably call “welfare.””

Even if we take the Roosevelt Institute's much lower price estimate, whereas the bailout of 2008 was a one-time payment of US$700 billion, which resulted in a US$57.7 billion profit for taxpayers, since 2008, the US government has spent a total of US$1.484 trillion on welfare.

The bailout was hugely problematic for many reasons, and it is something that everyone should have opposed from the beginning. But at the very least, it generated a profit for taxpayers. What has spending on welfare gotten people? Has it lifted people out of poverty? No, it hasn't. But wasn't that the goal of welfare?

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3) “Our Wall Street friends might also want to show some courage of their own by suggesting that the wealthiest people in this country, like them, start paying their fair share of taxes.”

“Fair” is a tricky word. It can mean different things to different people. That's why Sanders and others like him keep using that word. But let's look at the numbers, shall we?

According to the Pew Research Center, those with adjusted gross incomes of more than US$250,000 paid nearly half of all individual income taxes. In contrast, people whose incomes were less than $50,000 paid just 6.2% of total taxes.

Whether paying nearly half of the income tax is fair or not is open to debate. But people should not pretend or insinuate or otherwise that the less well-off are somehow paying more than the well-off.

4) “...at least a dozen of the companies avoided paying any federal income taxes in recent years, and even received more than $6.4 billion in tax refunds from the IRS since 2008.”

We should get the terminology right. The federal income taxes that corporations pay are called corporate taxes. And it's true that many corporations do not pay corporate taxes. That is because there are two ways to tax a corporation.

The first way is to consider the organisation as a single entity and tax it accordingly, thus taxing any surpluses or profits that the corporation makes at the organizational level. A corporation that chooses to pay its taxes this way is called a C Corporation.

The second way is to tax the individuals who get money from the corporation. A corporation that chooses to pay its taxes this way is called an S Corporation.

This is the Wikipedia entry for the difference between C and S Corporations:

An S corporation, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Sub-chapter S of Chapter 1 of the Internal Revenue Code.

In general, S corporations do not pay any federal income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns. This concept is called single taxation; if the corporation is taxed as a C corporation, it will face double taxation, meaning both the corporation’s profits, and the shareholders’ dividends, will be taxed.

So, it is true that many corporations do not pay the federal corporate income tax. But that is because individual shareholders elect to pay the personal income tax on profits, not the corporate one.

Whether or not dividing the tax schemes this way is equitable or efficient is a different topic. However, using the fact that many corporations do not pay organizational corporate taxes to imply that that is some kind of evidence of widespread tax dodging is tantamount to lying.

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5) “They might work to end the outrageous corporate loopholes...”

The phrase “close the loopholes” is the refuge of the fool. It is easy to say “close the loopholes” and end the debate feeling like a self-righteous 19-year-old Political Science major who has discovered the Holy Grail that would cure all of society's ills. But there is a reason tax loopholes exist.

One of the reasons that corporate taxes are pernicious is that they encourage businesses to use debt finance, rather than equity finance even though debt finance makes companies riskier. That is because payments on debt are tax deductible, and dividends are not. This gives many businesses strong incentive to use debt rather than equity finance.

So why not end the deductibles on corporate debt payments? That is because if that “loophole” was closed, that would put illiquid industrial firms with heavy capital costs at a MASSIVE disadvantage.

If you think Detroit is suffering now, wait and see what would happen if Sanders and his supporters get what they want and all these pesky loopholes get closed. I'll be here with a bucket of popcorn while the Social Justice Warrior types once again claim that this hypothetical future is further evidence that The Man hates black people.

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6) “Many of the companies also have outsourced hundreds of thousands of American jobs to China and other low wage countries, forcing their workers to receive unemployment insurance and other federal benefits. In other words, these are some of the same people who have significantly caused the deficit to explode over the last four years.”

Firstly, outsourcing jobs is important to ensure that the prices of goods and services remain cheap and that businesses can remain competitive.

If Sanders could get things done his way, the vast majority of American factory workers would still have union-wage jobs because they would still be producing television sets in America. That sounds good except that those television sets would be much more expensive than television sets from, say, Korea or Thailand. American factory workers might earn a bit of coin under Sanders' economic plan, but everyone else not working in factories would see that their money buys them fewer goods and services.

There are two types of Fortress America. The first one is the type proposed by conservatives and neo-cons. A powerful American military that can eliminate threats anywhere in the world and a country that would close its borders to brown-skinned and yellow-skinned people who might want to commit acts of terrorism against Americans. Except that the US' military is already practically uncontested but it still has a difficult time trying to completely defeat illiterate goat-lovers.

The second one is the type proposed by progressives. A rich American workforce that will allow people to live as comfortably(?) as they did under the New Deal and a country that would close its borders to trade with brown-skinned and yellow-skinned people who might be able to sell things more cheaply.

Except that a choice has to be made – pursue inefficient economic policies that lead to meteoric rising prices and economic stagnation OR pursue comparative advantages and creative destruction that lead to cheaper goods and services for as many people as possible and economic productivity, which unfortunately also comes with job insecurity.

You must choose one or the other. You cannot have your cake and eat it, too.

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7) “These are the names of TRAITORS who have forsaken their people and nation to worship at the altar of greed:”

And THIS is what it comes down to, isn't it? Occupy Democrats, the Occupy Movement in general, Sanders, his supporters, etc. do not understand economics. And even though information is free and open to all, they do not want it. They do not want the facts. After all, facts are so TL;DR.

What they want are enemies to hate and traitors to blame. Anyone to blame for all their problems aside from themselves.

Is Sanders an idiot? I think that it is easy to claim that politicians are idiots. But being able to get voted into office and maintaining an incumbency rate in the high nineties despite dismal popularity rates is not something that any fool can do. So, I think that merely saying that politicians are idiots is intellectually lazy and counterproductive.

But the likes of Occupy Democrats who chant “Go, Bernie, Go!” without actually looking into the facts? They are not nearly as smart as they like to think they are.

If you have read this whole thing and you also happen to support Sanders, believe me when I say that I am not telling you to support Marco Rubio or Rand Paul. God knows that they are lying snakes in the grass, too. I don't expect to change your opinions or your core beliefs.

But, God, I dearly hope that I have given you cause to try to see for yourselves what you are advocating.

“I have here in my hand a list...”
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Welfare vs. Taxes in Korea: Nobody wants to Pay the Piper

It might appear that Korean politicians are not complete fools after all.

When President Park Geun-hye was campaigning to become president, she promised that she would deliver a lot of goodies, and much more, without ever raising taxes.

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A few days ago, however, Representative Kim Moo-sung, the chairman of her own party, said, “It is impossible to finance welfare without tax hikes, and it is inappropriate for politicians to deceive the people.”

Representative Kim was not alone in voicing this sentiment.

So do Koreans want a greater welfare state? The answer seems to be “yes and no.”

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As Steven Denney said in his recent article in the Diplomat, in a poll that was commissioned by JTBC, 46.8 percent of the public favor welfare cuts over a tax increase. 34.5 percent of the public think that a tax increase is needed to pay for welfare; and 18.7 percent didn’t know what to think.

So it might seem that many people do not support expanding the welfare state. However, one always has to remember the old adage about lies and statistics. That is because 52.8 percent of the respondents, a clear majority, supported increasing the corporate tax rate.

What Mr. Denney got absolutely right was when he said “The simple fact of the matter is that South Koreans might not support more welfare, if it means that they have to pay for it.”

(What Mr. Denney got absolutely wrong was that he thinks Korea needs a welfare state.)

Isn't that typical? Everybody wants to go to the party, but nobody wants to pay the piper. Case in point, when salaried workers angrily protested that many of them were likely to pay additional taxes this year instead of receiving a tax rebate, a move that was made by the government in order to help pay for its welfare programs, Finance Minister Choi Kyung-hwan said the government would consider revising tax return regulations.

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It yet again goes to prove that Frédéric Bastiat was absolutely right when he said, “Government is the great fiction through which everybody endeavors to live at the expense of everybody else.”

So who will be made to pay more taxes? The easy answer seems to be to raise the corporate tax.

After all, Finance Minister Choi said that the government may consider raising corporate taxes and that “the government does not regard corporate tax as too sacred of a realm to enter.”

But will raising corporate taxes come at no cost? I will let the maestro speak for himself.

However, as succinct as Milton Friedman was, this video did not even cover other questions. Could it cause domestic corporations to invest less in order to pay less corporate taxes? Or might it cause them to invest elsewhere? Could it lead to more corporations hiding their money in overseas bank accounts? How much more will it cost taxpayers for the government to investigate and try business owners for tax evasion? Could it dampen foreign investments? If so, by how much?

Assuming that we can even find answers and practical solutions to those questions, then we have to ask the second batch of questions. Will welfare benefits remain constant? Will increasing welfare benefits help to lift the poorest Koreans out of poverty so that they will no longer need to rely on welfare? How will aging and low birth rates affect welfare programs, future taxation, and the national debt?

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In regards to the Saenuri Party's leadership's dithering about welfare benefits and taxes, Mr. Denney rhetorically asks “Is this strategic dissonance, or does Saneuri simply not know what it wants?”

It is certainly not the latter. All political parties in the world want the same thing. They either want to attain or retain political power. Ipso facto, the correct answer is the former.

However, this dissonance is not limited to the Saenuri Party. It is an ailment that the entire country is suffering from. To use an analogy, all democratic republics in the world act like a mirror; and are, therefore, a reflection of the body politic. And as I said earlier, everybody wants to go to the party, but nobody wants to pay the piper.

Mr. Denney, (and other like-minded people) was wrong then, and assuming that his position has not changed, he is wrong now. Korea does not need a welfare state. If anything, it is the very last thing it needs.

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