Republicans Versus Conservatives

We came down hard on The Donald for his tariff increases and rightly so.  We also said that we are happy he won in 2016 and we are even happier that his predecessor is gone.  Jonah Goldberg in his G-file tries to make it a problem with populism:

The funny thing is that this move toward protection is celebrated or condemned as a fulfillment of Trump’s “populist” agenda. I get that we label protectionism “populist” these days — though I’m old enough to remember when protectionism was a technocratic cause. But populism is supposed to mean putting the interests of “the people” first. (The problem with populism is that populists never mean all the people; they only mean their people.) And this move isn’t in the interests of most people.

It isn’t.  It is a problem with elections and Republicans in particular.  Reagan and W are the two most conservative presidents since Coolidge and he was not a free trader either.  Almost everyone remembers that W did some backsliding on tariffs:

The temporary tariffs of 8–30% were originally scheduled to remain in effect until 2005. They were imposed to give U.S. steel makers protection from what a U.S. probe determined was a detrimental surge in steel imports. More than 30 steel makers had declared bankruptcy in recent years. Steel producers had originally sought up to a 40% tariff. Canada and Mexico were exempt from the tariffs because of penalties the United States would face under the North American Free Trade Agreement (NAFTA). Additionally, some developing countries such as ArgentinaThailand, and Turkey were also exempt. The typical steel tariff at the time was usually between zero and one percent, making the 8–30% rates seem exceptionally high. These rates, though, are comparable to the standard permanent U.S. tariff rates on many kinds of clothes and shoes.

Holman W. Jenkins, jr. in the WSJ reminds us that Reagan made much more extensive choices than W:

Reagan slapped import quotas on cars, motorcycles, forklifts, memory chips, color TVs, machine tools, textiles, steel, Canadian lumber and mushrooms.

Holman argues that it didn’t matter because they were negotiated.  Perhaps.  What does matter is that Republicans backslide on tariffs because there are intense big winners and widely dispersed small losers.  Sadly, protectionism is a good political game and our most conservative presidents including Reagan have played it.  The Donald does too.  We are rightly worried about The Donald continuing to play it because he is not a conservative.  We will continue to encourage him towards free trade while reminding everyone that free trade was not supported by either presidential candidate in the 2016 general election.  Yes, it would be better if this was Mitt’s second term but that was not a choice in 2016.



Decisions Without Theory

We knew when we supported The Donald in the general election that we would have to take the good with the bad.  It was better than taking the bad with the worse.  The problem is that The Donald does not have any theoretical background.  He has created a majority by picking and choosing positions.  We still like our vote in the 2016 general election but we don’t like his position or recent actions on tariffs.  Since the two candidates in the general election shared little except for the same positions on tariffs we still like our vote in 2016 because of The Donald’s actions prior to increasing tariffs. Unfortunately, The Donald’s lack of theoretical background means that we get tax reform (yea!) and the opposite, protectionism (boo!).

Sidebar: Herself ran as a protectionist although her husband was willing to sign on to reductions in tariffs.  Given her dishonesty folks might have hoped that her articulated positions would not be implemented.  We see no solution to hoping that she was dishonest about tariffs.  End Sidebar.

The WSJ editorial board has a good summary:

Donald Trump made the biggest policy blunder of his Presidency Thursday by announcing that next week he’ll impose tariffs of 25% on imported steel and 10% on aluminum. This tax increase will punish American workers, invite retaliation that will harm U.S. exports, divide his political coalition at home, anger allies abroad, and undermine his tax and regulatory reforms. The Dow Jones Industrial Average fell 1.7% on the news, as investors absorbed the self-inflicted folly.

We have a few quibbles.  We don’t know that it will divide his coalition and it will help a few workers but hurt the majority so we are in agreement with the WSJ.  The Donald became a hero, and rightly so, when he reduced taxes on corporations and, to a lesser extent, on individuals.  We wish he made another choice but we are not surprised given his rhetoric.  The oddest quote came in this WSJ article:

“This is going to be effectively a tax increase,” said Brian Nick, chief investment strategist at Nuveen.  [Emphasis added]

There is no need for modifiers.  This is a tax increase.  It will help a few substantially while hurting many a little.  The problem is that The Donald has no theoretical grounding so he cuts some taxes while increasing others.  On tariffs, providing lots of protection for a few while hurting many a little might make political sense but it makes no logical sense.  Cutting corporate taxes benefitted many without hurting any particular group.

This is how it will be for the next seven years.  The Donald will do some great things and some stupid things.  It is better than the last president and better than the 2016 alternative.  We would prefer it wasn’t so but it is.  We would prefer that we had an optimal choice in 2016 but there wasn’t.  We hope he will change his mind on tariffs but we are not holding our breath that he will undo this colossal mistake.

Healthcare And Incentives

Clark Harvighurst, professor emeritus at Duke, writing at the WSJ Editorial Page has an interesting article related to health-care and taxes.  He mostly addresses it to three CEOs, Bezos, Buffett, and Dimon who he summarizes with BB&D.  We love the ampersand too Clark.  We are 100% in agreement with his point that excluding health-care benefits provided by employers from employee income is major problem with the US health-care system.  We are not convinced, however, that folks react exactly how he describes.

To be clear, when an employee receives health-care benefits paid by the employer it is valuable to the employee but it is not part of gross income as determined by the Internal Revenue Code.  Specifically:

Under IRC sections 105 and 106, employer-provided health benefits, including reimbursement and insurance, are generally excluded from the income of employees.

It is one of those weird parts of the tax law that excluded almost $22,000 in income from MWG tax return a few years ago.  We agree that BB&D would provide a major service if they pushed to treat health-care income as taxable like other income.  We are not convinced that the beneficiaries are acting as Clark says.  Here is his quote:

Because employees don’t pay taxes on employer-paid insurance premiums, most workers assume that—and behave as if—their health-care costs are borne by employers. True, most employees now pay some share of premiums directly, along with copayments and deductibles. But they still unknowingly pay far more in lower take-home pay. When working Americans say they like their health plans, it’s clear they aren’t seeing the whole cost picture.

We don’t see it that way.  It seems to us workers act as if health-care costs are not taxable while wage income is.  Thus, getting a whole dollar of health-care insurance rather than a dollar of wages that are reduced by FICA and income taxes seems rational.  We think they are knowingly taking less take-home pay.  Folks buy way too much insurance (they cover everything they can) because it is cheaper with before-tax-dollars.

Sidebar: Another problem with the current system is that a few folks are worse off under this deal.  An example is the Lady de Gloves who did not take the health-care play offered by her employer because MWG was already covered.  She got nothing while most folks got thousands of dollars worth of insurance.  End Sidebar.

It is also rational for the employer since they pay a dollar in health care instead of a dollar plus FICA.  So we see the current system as a rational reaction to the current irrational tax system.  We do agree with Clark that the current system makes many of us uninterested in that actual costs of medical care.  We entirely agree with Clark that we hope BB&D can change the tax treatment of fringe benefits.  If we can fix corporate taxes then why not this?


Priorities are critical.  As department chair, we have lots of nodding agreements supporting this, that, and the other thing.  Chairs have a long list of goals but because of the regular demands of the office like budgeting, scheduling, and students and the difficulty of creating coalitions only a few priorities ever get addressed.

Sidebar One: We recollect it was Woodrow Wilson used his experience to compare politicians to college faculty and administrators.  We found the quote here: “As compared to the college politician, the real article seems like an amateur.”  We don’t have Woodrow’s experience but tend to agree.  End Sidebar One.

The same is true of formal politics at every level, especially the national level.  The recent State of the Union speech was criticized because it, like most of it predecessors, was a long laundry list without priorities.

Sidebar Two: Well, it seemed to us that immigration was the priority.  We think that one priority, especially immigration, is OK. End Sidebar Two.

We are interested in what to push.  We had mused about the possibility really free trade rather than the mixed results of agreements like the Trans-Pacific Partnership.  Michael Brendan Dougherty’ polemic against free trade helps us see the difficulty of such progress. To his credit he recognizes that his position on taxing assets (nonproductive property) puts off folks but then he tries to lump the free traders with him.

First, he tries to link open borders with free trade:

We should not fool ourselves that somehow some authority out there called “the market” wants no limits on the supply of labor and then open our borders in response. Doing so against the consent of the people would jeopardize the democratic character of our society and doom what’s left of the egalitarian ethic that makes democracy possible.

The Venn Diagrams of folks for free trade and open boarders do overlap, especially on the WSJ editorial page, but they are two different things.  We are in the part that doesn’t overlap.

Next, he tries this:

Governments have a right and sometimes a duty to inspect what comes into their ports, not only for security reasons but to enforce the rules of the market that entrepreneurs depend on.

This is certainly a duty and great opportunities for cronyism and graft.  A small example of cronyism is when Irish butter was banned in Wisconsin.  It is part of the argument for thousand-page agreements. The US would like other countries to limit non-tariff issues to security and market concerns.  The problem is the agreements expand into questionable areas.

[Ron] Paul [as an example of a doctrinaire libertarian] thinks that if Japan’s government subsidizes the manufacture of a car to the tune of $4,000, then American consumers should just rake in the free gift from Japanese taxpayers. I do not. I think mercantilists can erode the support for worthwhile trading arrangements in both countries at once. I similarly fear it will be deleterious to a liberal system if these nations succeed in creating monopoly pricing power for their firms.

We support the American consumers as Paul does.  Part of the reason is the accounting problem of what is a subsidy?  Another part is the difficulty of creating monopoly pricing power.

Lastly, Michael gets into a double dose of security.  First, we need military stuff and we can’t depend on other counties for it and second, the US Navy is critical to maintaining the freedom to trade.  The first part seems like a good argument to support fracking but at least some military stuff will need to be imported.  From whom seems to be the interesting question. We agree on the importance of the US Navy but fail to see any connections with tariff policy.

If conservatives are this far apart on priorities it is easy to see why political progress is hard.  It is not clear what priorities Michael has other than never Trump although he seems to be on the social and international beat.   He tried humor, we think, in Anthony Kennedy Can’t Be Allowed To Die.  Arguments matter but it will be hard to support any of Michael’s political priorities ahead of ours.  Baseball is another matter entirely.


Nope On Trade

We tend to agree with Larry Kudlow.  We believe that there are government policies that will awaken the growth fairy.  Per capita economic growth is critical to funding the government and providing for the people.  We generally agree with Larry’s article on The Donald and Davos.  America is open for business.  There was one part with which we strongly disagree:

In an illuminating interview with my friend and CNBC colleague Joe Kernan, Trump said he’s willing to deal on trade — including NAFTA, and perhaps the Trans-Pacific Partnership (TPP). But he correctly insisted on reciprocity. Barriers should be torn down by both sides. Arbitrations must protect America, not penalize it.

Arbitrations must protect America from what?  The answer would seem to be cheaper washing machines for consumers.  America first would mean the opposite.  We should tear down our barriers and not care about the barriers elsewhere.

Yes, it is more complicated than that.  America also benefits from free trade policies by other counties and we should encourage capitalism. Still, Larry should know that free trade is a good thing and surely he believes that raising taxes such as tariffs is a bad thing.

Three Trade Ideas

The Donald, Kevin Williamson, and Jonah Goldberg have put forth take ideas and actions recently.  It shows the difficulties of politics.  In politics we need to make priorities and often end up supporting the least worst solution, like The Donald.  Kevin and MWG are for unilateral tariff elimination.  We agree with Kevin that:

Which is why my preferred Plan B — unilateral free trade — is, politically speaking, a DOA proposition. I simply reject the notion that free people should have to ask the permission of, well, anybody before they can buy ordinary goods from whomever they like, including producers in China, India, Poland — or on Mars.

Well, we think of it more as tax policy than human rights but we are still on the same page.  Jonah is close to that and The Donald is very far away from us.  Let’s start with The Donald.  He recently gave a speech in Davos where the WSJ reported:

[The Donald] also echoed previous calls for “fair trade,” saying the U.S. would “no longer turn a blind eye to unfair economic practices.”

“We cannot have free and open trade if some countries exploit the system at the expense of others,” [The Donald] warned.

The [Donald’s] administration drew criticism from abroad this week for its announcement Monday that it would impose steep tariffs aimed at protecting U.S. makers of solar panels and washing machines.

All three paragraphs represent foolishness of the first order.  Theresa May, in the same article, speaks for us when she says:

Free trade and the global rules-based system had together “delivered the greatest advances in prosperity we have ever known.”

The Donald had an excellent year in 2017.  This is a rocky start for 2018.

Sidebar One:A president does not and should not have control of the country such that, good or bad, it is all on him.  Events were such that The Donald had a banner year in 2017.  It was not all him.  End Sidebar One.

Jonah takes, and has always taken, our side in the trade issues:

[The Donald’s] administration is now moving to put some teeth on its promise to punish “unfair” trade from China and other countries. This week it imposed punitive tariffs on Chinese and South Korean manufacturers of washing machines and solar panels. The move is ill advised on its own, but you can be sure this is just the beginning of renewed debate over the benefits of free trade, with any number of once-passionate opponents of the government’s “picking winners and losers” rushing to defend the sagacity of “America first” economics.

Jonah is getting to be like Conrad Black.  Conrad can’t write an article without puffing up at least one of Nixon or FDR.  Jonah just has to fly his Never Trump flag but he does get to a good point in his conclusion:

Every form of statism — from absolute monarchy to socialism to fascism — involves the state forming an alliance with some faction or another and giving it preferential treatment. Protectionism is simply statism applied to trade.

Sidebar Two: Unlike Jonah, we are not convinced that folks have a hard time distinguishing between pro-business and pro-market.  He says: “But it is a rare corporate titan who favors a free market if doing so is bad for his or her bottom line.”  It is much more general than that as his quotes from Adam Smith indicate.  Neither businessmen nor workers want a free market.  Only consumers do.  End Sidebar Two

Jonah’s conclusion of protectionism as statism leads to Kevin’s idea that the left, where the statists dwell, might be the opportunity for free trade.

Capitalism isn’t what it used to be [the kinds of businesses].  And neither is free trade. Once largely an Anglo-American project, free trade today is a European project, a Canadian project, an Asian project, and a pan-Pacific and trans-Atlantic project, too. It is, properly understood, a global humanitarian project. For the moment, the leaders of that project are people such as Trudeau, Merkel, and Shinzo Abe. And Michelle Bachelet, too: The remarkable fact is that Chile’s socialist president is more pro-trade than is the nominally Republican president of the United States of America.

There is a big problem with Kevin’s analysis.  There is also a minor point in ignoring the UK and Theresa’s quote above.  His major example is the Trans-Pacific Partnership (TPP). Here is an an example of the big problem:

So far, the Democratic party has largely resisted efforts to purge members who supported TPP, fast-track negotiating authority for the president, and other pro-trade measures.

The problem is that Kevin opposed TPP as a free trader.  None of us, Jonah, Kevin, or MWG, were enamored with TPP and the thousands of pages it entails.

The problem is that our first preference is unilateral free trade.  Our second preference is one sentence free trade on a bilateral basis.  We are not interested in imposing thousands of pages interpreted by hoards of bureaucrats on ourselves or other countries.  The statists who Kevin hopes to work with are interested in such agreements.  We tend to favor negotiation but perhaps we need to move to free trade absolutism.  It is always the problem in politics.  Sometimes negotiation takes you so far from your goals that you lose more that you gain.


Quasi-Experimental Results

Some results are in on the quasi-experiment designed by the GOP.  The recently passed tax reform bill coincides with an Apple announcement in the WSJ that it:

would make a one-time tax payment of $38 billion on profits accumulated overseas and ramp up its spending in the U.S., as it seeks to emphasize its contributions to the American economy after years of taking criticism for outsourcing manufacturing to China.

An interesting part of the coverage is the difference between the WSJ reporting and the WSJ editorial page.  Here is more of the WSJ reporting cited above:

Apple said its one-time tax payment was the result of recent changes to U.S. tax law, under which companies must pay a one-time tax of 15.5% on overseas profits held in cash and other liquid assets. Profits held in other forms will be taxed at 8%. The company said in November that it had earmarked $36 billion to cover deferred taxes on its $252.3 billion in overseas cash holdings, assuming that it would eventually pay U.S. taxes on a portion of it by bringing it home.  [Emphasis added]

The news gives the new tax rate rather than the reduction, which would seem to be the interesting part, and suggests that the profits would have come home eventually anyway.  The details are not complete here but it looks like the news folks are confusing financial accounting and tax accounting.  The WSJ editorial page has a different take:

Apple said Wednesday that it will pay $38 billion in taxes on the $250 billion or so in cash the company holds overseas; that’s a lot of money for Social Security checks and food stamps. Apple also said it would invest or spend on purchases some $350 billion in the U.S. over five years and add 20,000 jobs.

Apple’s windfall for the U.S. Treasury is the result of the reform bill’s 15.5% “deemed” tax rate on profits previously earned overseas whether or not they are returned to the U.S. The old system featured a one-two punch of taxation abroad and than again at home at a punishing 35% rate if the money was repatriated.

Apple had no plans to return the money to the U.S. under that regime, and ditto for many other companies that together have some $2.5 trillion abroad. Republicans broke this logjam by lowering the top rate and creating a permanent system that taxes income where it’s earned. Now Apple can put this cash to whatever the company deems the highest use, without arbitrage from tax policy.

We can’t live out the other option of high corporate taxes and there is only one Apple so we can’t randomly assign anything.  We can’t make any statistical statements and there is some possibility of arguing cause and effect because it is only a quasi-experiment.  The results, however, seem robust to us because of the previous statements of corporate officials and the proximity of the tax change and the results.