During his first term, Donald Trump signed a bill significantly reducing corporate tax rates and lowering personal income tax liability for most Americans. He has promised to further lower income tax rates for corporations and individuals in his forthcoming second term.
This has provided the opportunity for Democrats and other opponents of tax reductions to make the perennial claim that tax cuts signed by Republican presidents have and will continue to blow up the national debt. This claim is demonstrably false.
There are some economic issues that provide room for argument depending upon which economic school one adheres to. However, this issue is not debatable. No tax cut signed by a Republican in the past fifty years has increased the debt more than it would have otherwise increased had the tax cut not been implemented.
It’s easy to understand why the public believes this superficially plausible claim. If the government is running deficit X under the current tax schedule and that tax schedule is reduced, the government will collect less revenue and the deficit will increase to X + less revenue collected. It makes perfect sense.
The only problem is it has never been the case that the government collected less revenue after a Republican tax cut. Never. Ever.
Don’t take my word for it. Just look at tax receipts. Since this tax cut/debt fable began during the Reagan years, look at tax receipts after the tax cuts he signed. They increased so significantly that by his last year in office the government was collecting almost double the amount of taxes it was collecting in Carter’s last year.
While this may seem counterintuitive, it is nevertheless true. The explanation probably lies in what has come to be known as the “Laffer Curve,” named after economist Art Laffer. This theory also has its own little Democratic Party myth built into it. Democrats like to claim Laffer was wrong when he said “tax cuts pay for themselves.” This myth is wrong in two ways.
“Dow closes at record high after blow-out jobs report” proclaimed NBC News on Saturday. It is not surprising the story would ignore all historical perspective, even history within the past few months. Incumbent presidents routinely take credit for job creation during their administrations and the gullible American public largely believes them. Perceived as prospectively continuing the policies of the Biden administration, good news from the jobs report helps Kamala Harris’s election chances.
It isn’t just ignoring that only two months ago, the Bureau of Labor statistics revised downward their previously reported number April 2023 – March 2024 by over 800,000 jobs (around 27 percent)*. It’s the surreal practice of even talking about supposed job creation over the past four years as if most of it weren’t just recovering jobs lost during the 2020 Covid lockdowns.
During March and April of 2020, the BLS reported net job losses of almost 22 million. Of course, these were not the type of job losses sustained during the 2008 financial crisis. These were people ordered to stay home by the government as part of a suite of responses to Covid that did nothing but harm.
As people were allowed to go back to work, there were several months for which the BLS reported millions of “jobs created.” But everyone understood these were mostly just people previously ordered to stay home returning to work. At least while Trump was still president.
But once Joe Biden was inaugurated, the national media started ignoring that reality and treating higher than usual jobs reports as vindication of “Bidenomics.” The truth is it took years just to recover the number of jobs lost during March-April 2020. The 22 million jobs reported lost during that period were not added back until September 2022.
That’s 31 straight months of zero jobs created on net while millions of undocumented mouths to feed entered the country. That is an economic blow the likes of which modern Americans have never experienced in their lifetimes. And the problems it created were by no means solved after September 2022 when the economy finally began adding new jobs on net. One cannot just start counting jobs created after September 2022 as “net jobs.” One also has to recognize the opportunity costs of the lockdowns.
Equity markets continued to sell off on Monday prompting continued calls for the Federal Reserve to cut interest rates in September. Combined with the dismal jobs report on Friday, the selloff has also soured the outlook for a “soft landing.” Economist Mohamed El-Erian echoed the opinions of many others that the Fed held interest rates too high for too long, thus failing to prevent a recession and sharp stock market correction.
Putting aside the free market objections to the Fed being involved in manipulating interest rates – or existing at all – this analysis is useless at best for several reasons.
First, Fed rate cuts always come “too late” in the business cycle to prevent market crashes and recessions. Looking back at Fed open market operations history, one can see that even when the Fed had been cutting rates for over a year, as it had been prior to the 2008 crash, it did not prevent the bubble it had previously blown up from popping.
There are several reasons why the Fed will always be “too late.” The first is fundamental. While the Fed is holding interest rates artificially low, malinvestment is occurring. Capital is being directed towards projects that aren’t really profitable at market interest rates. These can include unwarranted expansion of otherwise profitable business ventures or capitalization of projects that shouldn’t be launched at all (see “Pets.com” from the 2000 dotcom crash).
At some point, the reality of unprofitable investments fueled by unsustainable debt asserts itself and those malinvestments must be undone. The market overcomes the efforts of the Fed and liquidates unprofitable ventures, unsustainable debt, and, unfortunately, millions of jobs that never should have been created in the first place. All of the above must be redirected towards better use, which takes time. That period of reallocation is called a recession.
It should be noted that even the Fed’s efforts to avoid recessions with monetary policy are wrongheaded. What it attempts to do with interest rate policy and monetary inflation is keep inefficient, unprofitable businesses alive. These are sometimes called “zombie companies” because they aren’t really viable going concerns. They are only able to keep operating because the Fed creates conditions under which they can borrow money at artificially low rates.
Regardless, economic laws are like forces of nature. They always win in the end, often immediately after supposed experts announce their demise. Recall Fed Chairman Ben Bernanke’s 2008 reassurance that “subprime is contained” or President Bill Clinton’s triumphant 2000 declaration that “we’ve ended the business cycle.”
This time around, Fed rate cuts may have even less chance of achieving the mythical “soft landing.” That’s because part of what used to be part and parcel of rate cuts has already been done, namely monetary inflation or as it is now euphemistically called, “quantitative easing.”
Prior to 2008, the Fed achieved rate cuts by purchasing government debt securities in open market operations. This simultaneously added new dollars to the economy and drove down interest rates. The latter was simply supply and demand. A greater supply of money meant its price – interest rates – declined. Conversely, when the Fed wanted to raise interest rates, it sold securities to its member banks, decreasing the supply of money.
Since the 2008 crisis, the Fed doesn’t manage interest rates that way anymore. Because its member banks built up huge deposits at the Fed, for which the Fed paid them interest, it could now manipulate interest rates by simply changing the rate it paid its member banks. This effectively separated interest rate policy from the creation of new dollars or the destruction of existing ones.
The Fed’s response to the 2008 crisis was twofold. It forced interest rates down to near-zero by lowering the rate it paid on deposits and added trillions of new dollars to the economy by purchasing government and mortgage-backed securities. It promised at the time to unwind the vast expansion of its balance sheet – from less than $1 trillion to over $4 trillion – when the “once in a lifetime crisis” was over.
But after unwinding only a small fraction of that increase 2018-19 coupled with modest interest rate increases, the Fed increased its balance sheet to just under $9 trillion and took interest rates back to the zero bound in 2020.
This is where it gets complicated. Conventional wisdom says the Fed began “tightening” in 2022 with the first in a series of interest rate increases in March and reduction of its balance sheet later in the year. Indeed, the Fed did eventually raise the federal funds rate to over 5% (where it remains today) and reduce its balance sheet from a peak of $8.9 trillion to about $7.2 trillion as of this writing.
However, the balance sheet reduction is not the tightening it appears to be. That is because even though the Fed has reduced its balance sheet and the M2 money supply has decreased slightly from its 2022 high, a “stealth easing” has been occurring that no one is really talking about.
Most people probably don’t realize what terms like “net zero” really mean in terms of their way of life. I use the words “way of life” purposely instead of “standard of living” because I don’t believe the latter term conveys the magnitude of the effect eliminating fossil fuel use would have.
Eliminating fossil fuels would return civilization to a pre-industrial existence, one which a large percentage of the current world population would not survive. Those who did survive would live at a level far below what anyone living in the fossil fuel-powered world could even imagine.
So, why are so many so eager to embrace a narrative that promises such hardship for themselves and their children? Certainly, there is some delusional belief that “renewable” energy will replace most fossil fuel energy, but it seems impossible that most people honestly believe that. Regardless, their leaders are coming right out and telling them a substantial lowering of their standard of living will be necessary – what Barack Obama often called “shared sacrifice.”
Whether Mr. Obama or his ilk will be doing any of the sharing is a subject for another day.
Before trying to explain the average American’s willingness to believe, I will tell you my own reaction to the climate change narrative from the perspective of one who remembers when it was not a major issue, even for environmentalists. It is only fair that I do my best to explain my own biases as they were when “climate change” first became a thing.
Unlike most people I know, I’ve always had a predisposition towards the free market. I had it long before it would have ever occurred to me to say the words “free market.” But even while working those first, minimum wage jobs everyone works in their teens or early twenties, I had a general impression that commerce was a good thing and business owners were making a positive contribution to society.
This despite a liberal arts education that, in retrospect, did everything it could to convince me otherwise.
This impression was bolstered by my even earlier interest in history. History, or “social studies,” as it was called in my Catholic grammar school, was my favorite subject. I did well in it. If you asked any of my grammar school classmates in 1979 what I was going to be when I grew up, most would have guessed history teacher.
An interest in history and a predisposition towards the free market aren’t mutually exclusive, the overwhelming anti-capitalist bias in modern college history departments notwithstanding. In fact, any objective look at the history of the past five hundred years would only confirm one’s belief in the free market.
All this is relevant to the way I saw the climate change narrative when it first became one of the dominant narratives in the major media. Having a knowledge of history that supported my pro-free market disposition, I found the climate change narrative extremely dubious right from the start.
Let’s review what we were asked to believe at the time. We have a certain political movement that promoted an alternative economic system to capitalism for hundreds of years. That economic system was implemented to various degrees in virtually every country in the world. And at the moment it spectacularly failed, its proponents suddenly discovered a threat to the planet that could only be solved by adopting that failed system.
It is the first week of the month, meaning we can expect a new ADP jobs report on Wednesday and the foolishly much-anticipated BLS jobs report on Friday. Based upon whether jobs created in March based on the report beats or misses expectations, President Biden will either gloat about the results or talk about something else.
Biden is certainly not unique in this respect. Every president since the report was created has tried to take credit for the jobs created during his administration. In most cases, pronouncements on this subject are carefully worded to read literally that “XXX jobs were created during my administration,” acknowledging that perhaps some other factors contributed to the supposed new jobs than the dear leader’s will and mighty actions alone.
So, at least we have that.
Nevertheless, the tweet we can expect from the president on Friday, BLS willing and the creek don’t rise, will imply heavily that it was his policies that are directly responsible for the hundreds of thousands of new jobs the report says were created the previous month.
There are several problems with this whole scenario, the most serious among them being that the Federal Reserve considers this report (or an alternative report based on the same methodology) in deciding how to conduct monetary policy going forward. Voters also take these reports seriously, to the extent they remember them on election day, and certainly the pronouncements of the incumbent president on the total number of jobs created during his previous term.
The first thing people should understand is the jobs report is largely fiction. It is not a literal tabulation of the total number of jobs created minus those lost. No one knows that information. Rather, the BLS conducts a phone survey, applies some formulas, and largely guesses how many jobs were created. It’s not as if there is nothing to it, but it is a very imprecise tool. That’s why it is common for the BLS to significantly adjust its findings for previous months while reporting the latest findings. And even the adjustments are based largely on voodoo.
Think climate change models. Or Covid mortality projections from March 2020. The BLS jobs report may or may not be quite that bad. But as the great Vincent Vega would say, “It’s the same ballpark.”
But while poking holes in the methodology of the jobs report is good fun for nonbelievers in the government religion, it misses the main point: trying to ‘create jobs’ in the first place is dumb. It is economically counterproductive. It’s the opposite of what any for-profit business should be trying to do.
Whether bringing a new product to market or simply trying to remain competitive in an existing market, businesses are constantly trying to produce more products at lower cost. The most significant costs for most businesses are labor costs. Therefore, businesses are constantly trying to produce more output with less employees.
I was in the hearing aid business a few decades ago. As a minority shareholder and chief operations officer, it was my job to build out a network of retail stores, manage our manufacturing operations, and manage the relationship with a foreign manufacturer that provided us products not previously available on the American market. We also had a plan to sell less expensive hearing devices in pharmacies.
Opening our first retail store was an exciting endeavor. We had a good location in a plaza with a solid anchor on a very busy intersection. We prepared our grand opening for months and were understandably excited for our first day of business. We ran ads in all the local newspapers and looked forward to our first patient walking through the door.
The advertisements did generate phone calls, but the first one was not from a potential customer. It was from the State Department of Health, informing us there had been a complaint about one of our newspaper ads. We were required to submit a response to the complaint after which the department would make a determination of its validity and any further action against or required of us.
Obviously, the complaint didn’t come from a customer; we had no customers yet. The complaint came from a local competitor who literally waited for our first hour in business to call the state. This is the way the world works.
The complaint was found to be without merit – our ad was not misleading or out of compliance with any regulations – but it certainly took the edge off an otherwise happy day. We lived and learned.
A few years later, after confirming there were regulatory barriers to selling “assistive listening devices” (not quite hearing aids, but helpful for mild hearing loss at about 1/10th the price), we tried to lobby the state legislature ourselves. We successfully got our revision to the applicable statutes into a bill about other matters that was sure to pass and were told by the lobbyists we hired that it appeared we would be successful.
Then, on the very last day of the legislative session, the language was taken out after an all-out assault by a much better-funded set of lobbyists claiming our devices would be dangerous if not fitted by an audiologist.
Obviously, our device that peaked at 30 decibels (the average iPod at the time peaked at over one hundred decibels) posed no health risk to those who used it. But it did pose a revenue risk to those who hired the lobbyists – the audiologists. They also argued that hearing loss in some cases indicated other health issues that may not be discovered if the patient didn’t have an exam by a licensed professional before attempting to treat their hearing loss.
In 2022, the FDA approved the sale of full-blown hearing aids over-the-counter (OTC). Apparently, those other health conditions are no longer a concern. The big corporations have finally adapted their business models to include lower cost products and thus they can be allowed without small upstarts like our little firm disrupting their dominance. So, for almost twenty years, consumers were deprived of a significantly lower cost option for hearing loss for no valid reason whatsoever.
This is the way the world works.
One might ask, “How can you say there is no such thing as regulatory capture after having those experiences yourself?”
Simple. The term ‘regulatory capture’ implies there were once regulatory agencies that operated in an adversarial relationship with large corporations for the so-called “public good” that were later ‘captured’ by those corporations and made to serve the corporations’ interests. But that never happened.
‘Regulation’ itself is and has been from the very beginning a practice created by large corporations for the sole purpose of crippling or eliminating competitors.
2024 is a presidential election year which means both major political parties will be telling their fairy tales about how they have in the past and will again in the future, if you will only elect their man, “save America.” It’s important to remember that both political parties are “progressive” parties, however one of them may object to that appellation. The Republicans merely embody the original progressive profile: fervently Christian, Republican, and corporatist.
The only difference in the Democratic Party is the Christian part. They are equally as religious but have replaced Jesus Christ with “Gaia” or more commonly “the environment.” But otherwise, they’re essentially the same.
We will hear much this year about the supposed gulf in ideology between the two parties. One claims to champion free markets, individual liberty, and limited government, while the other claims to look out for the little guy, protect the earth for and from future generations of humans, and pursue a more “equitable” distribution of wealth.
But once in power, either party will essentially do the same thing with only slight differences in emphasis. They will both govern as progressives have governed for the past one hundred plus years. And it is important to realize that, once the sales pitch about “progress” is set aside, progressivism boils down to one, giant rip-off. Military adventurism, business regulation, fighting climate change, and even “diversity, equity, and inclusion” are all part of it.
Certainly, there are people who genuinely believe in these things, just as there were during the early progressive movement. But they are the true “useful idiots.” The people who will actually make any of the latest progressive initiatives reality are all crony capitalists in bed with the government, just like a century ago.
Before the progressive era, the traditional way for governments to rip off their citizens was military spending. The highwater mark was war. A war that would cost $150 billion in today’s dollars was made to cost $500 billion instead, with the “profits” flowing to contractors, politicians, and other parasitical fauna. So, every government that thinks it can win is on the lookout to gin up a nice, juicy little war.
But even outside of war, military spending has been and remains a scam. The United States fought a 20-year war in Afghanistan, accompanied by several other military adventures in the Middle East including the large one in Iraq. When the last of these was supposedly ended in 2021 – and before the war in Ukraine began – military spending was still scheduled to increase in 2022.
U.S. President Donald Trump, flanked by Senior Advisor Jared Kushner (standing, L-R), Vice President Mike Pence and Staff Secretary Rob Porter welcomes reporters into the Oval Office for him to sign his first executive orders at the White House in Washington, U.S. January 20, 2017. REUTERS/Jonathan Ernst TPX IMAGES OF THE DAY
When Donald Trump first ran for president in 2016, the familiar notion that a successful businessman would “run the government like a business” reemerged. We’ve heard this whenever a successful entrepreneur, usually a Republican, has run for president. Of course, the government cannot be run like a business for reasons I provided in 2012 when Mitt Romney was the latest candidate who would purportedly do so.
In short, the private marketplace runs on voluntary exchanges while the government runs on force. Success in the former does not prepare one for success in the latter. It may even make one less prepared for the intrigues of politics, as Donald Trump, Jr. seemed to be saying in his recent interview of Matt Taibbi.
But free market proponents often make the further mistake of assuming that a successful business owner will at least be prone to pro-free market policies. After all, who knows better the blessings of capitalism than a capitalist himself or herself?
This is also mistaken. While running their businesses in the marketplace, successful entrepreneurs are a great boon to society. But when it comes to policy, capitalists are terrible for capitalism. Among history’s most successful capitalists this has virtually always been true.
For the entire history of commerce, business owners have sought the aid of government power to limit or eliminate competition. In 1807, long before the Progressive Era, the New York State legislature granted Robert Fulton, inventor of the steamboat, a 30-year monopoly on steamboat traffic in the state of New York. As Thomas DiLorenzo writes in How Capitalism Saved America, this allowed Fulton to charge exorbitantly high prices until Cornelius Vanderbilt defied the legal monopoly and undercut him.
The Progressive Era itself was a bonanza of crony capitalism. The popular myth about this period has so-called “robber barons” forming monopolies and exploiting customer and employee alike until progressives like Teddy Roosevelt came along to save the day with heavy government regulation.
As Murray Rothbard proved beyond any reasonable doubt, literally no element of this popular myth is true. In fact, it is the opposite of the truth. It is true that hugely successful business owners like John D. Rockefeller and J.P. Morgan attempted to form monopolies over various sectors of the economy. However, every attempt to do so without the government’s help ended in failure.
Federal Reserve Board Chairman Jay Powell surprised no one on Wednesday by announcing the Fed has raised its target for the federal funds rate another 50 basis points to the 4.25% – 4.50% range. What did surprise the stock markets, based upon the sharp selloff following his remarks, was his statement,
“Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. The historical record cautions strongly against prematurely loosening policy. We will stay the course, until the job is done”
That’s basically what he has said during every public announcement since embarking on an historically steep round of interest rate hikes over the past six months. That this surprised investors indicates how deeply ingrained the “Fed put” has become in the psyche of the financial community. The stock markets continue to fluctuate below their all-time highs, therefore everyone assumes the Fed will announce a “pivot” at the next meeting, since it always in the past.
So, as each meeting approaches, the market begins to rally in anticipation of an announcement or even a hint of said pivot at Powell’s press conference. Then, Powell reads the same statement he has given after every previous meeting and the market sells off.
Needless to say, this is a terrible way for capital to be allocated, even given the existence of a central bank in lieu of a free market. But over a decade of zero interest rate policy (ZIRP) has trained investors to act even more irrationally and for equity prices to become even more separated from fundamentals than they have been in the past.
The Fed’s Balance Sheet
Ironically, Powell made another statement which is demonstrably false and is receiving no attention from investors or the financial media. He said, “In addition, we are continuing the process of significantly reducing the size of our balance sheet.”
The Fed has not significantly reduced its balance sheet. Let’s remember that in August 2019, the Fed’s balance sheet stood at approximately $3.7 trillion, down from its peak of $4.4 trillion 2014-17. The Fed reversed its modest tightening policy and began easing, increasing its balance sheet to $4.1 trillion by February 2020.
Once the Covid-19 lockdowns began, the Fed exploded its balance sheet to over $7 trillion in just three months, eventually taking the total to $8.9 trillion by March 2022.
One would think that “significantly reducing the balance sheet” would mean something more than Powell’s announced plan to reduce it by a mere $45 billion per month June-August 2022 and then by $90 billion per month every month thereafter. But the Fed hasn’t even managed to do that. As of this writing, the Fed’s assets still total almost $8.6 trillion.
In other words, while the Fed has raised the federal funds rate significantly this year, it has not attempted to reduce the supply of money. As a result, M2 has barely decreased since its peak of $21.8 trillion in March 2022. And without decreasing the money supply, the Fed cannot significantly reduce price inflation anytime soon.
Back in the 1990s, there was this new phenomenon called “the internet.” It grew exponentially. Entrepreneurs saw the business potential for reaching more customers than they had ever dreamed they could reach through conventional methods. Consumers had more choices of every conceivable product – including information – than they ever had in history.
Like all technological advances, it produced big winners and big losers. Vast fortunes were made by those who built businesses that worked better on the internet. Vast fortunes were lost not only by those internet commerce replaced, but also by those who went long on businesses that didn’t work on the internet – Pets.com being the most infamous example.
The internet revolution was much like the industrial revolution in this respect. It advanced human flourishing in general exponentially but was decried by all those it damaged economically. Many brick and mortar retailers were put out of business, just as the automobile put blacksmiths out of business.
Legacy media faced annihilation. They were no longer the gatekeepers of information. The new generation of internet users had access to information from all over the world at the click of a mouse, including information previously filtered, spun, or suppressed by legacy media. There was a point at which those who had long decried its information gatekeeping and establishment propaganda gleefully counted down the days until the New York Times went bankrupt.
Governments didn’t like the internet much, either. Untaxable interstate commerce was replacing taxable brick and mortar commerce. Republican Congressmen lamented the internet was so new they didn’t know who to regulated it. And, of course, no government has ever liked the free flow of information. That’s why a First Amendment was necessary over two hundred years ago.
The current war on the free flow of information over the internet is led by the political left, but it didn’t start there. Long before conservatives were being deplatformed for opposing wokism, the political right was after internet publishers for criticizing the war on terror. Julian Assange is only the highest profile example. Online porn has also been targeted by the right since the internet’s earliest days.
As with laissez faire capitalism, it seemed like those who stood to lose had two choices: adapt or die. But there was a third choice: call in the government. And that’s just what all those who stood to lose did.
The decades-long destruction of America’s laissez faire free market was accomplished in much the same way.
