Trump’s working class sellout, tactical nuclear weapons, government shutdown, tax reform and immigration

Since Donald Trump became US president, his core economic agenda has been sidetracked repeatedly by so-called cultural issues. However, now the administration is stepping up its tax reform effort. Even so, other issues threaten to derail this agenda item too (like nuclear war on the Korean Peninsula!). Of course, it’s not even clear we’re talking about tax reform here. Much more likely, Trump has sold out and is now merely pushing for tax cuts for the wealthy.

Nevertheless, the risk to the economy of failure is not that big. And the risks of a government shutdown have receded due to Hurricane Harvey. Now, the real risk is a military confrontation in Korea. Thoughts below

We are knee-deep in the political economy this week as the US Congress heads back into session. Ostensibly, after eight months of infighting in the Trump Administration and Trump’s stoking cultural wars, President Trump’s tax reform speech in Springfield, Missouri last week marks a re-focus on the economy. But this shift won’t happen. Here’s why. While a lack of unanimity in the Republican Party makes tax reform more difficult, the Trump Administration is also likely to be sidetracked by immigration – something that could tear the Republican Party apart.

In the past, President Trump had threatened to shut down the US federal government unless Congress made sure that any legislation increasing the debt ceiling also ensured a wall on the border between Mexico and the United States was funded. The President has backed down from this threat simply because he cannot shut down government in the aftermath of the devastation caused by Hurricane Harvey. 70% of home damage costs aren’t covered by insurance and I have seen all-in hurricane cost estimates as high as $150-180 billion. Trump knows he can’t be seen wrangling with a Republican Congress when so many people are in need. That would risk a huge backlash and damage any credibility he has as being ‘not just another politician.’ So the word here in DC is that risk of a shutdown by October 1st is limited. Instead, we are looking at a December time frame for this same fight to be taken up again.

With Russia on the back-burner, if Trump can delay this battle over funding the Wall, his tax reform agenda has a better chance of taking center stage. But immigration now promises to pop up in yet another way because Trump is now poised to rescind the Deferred Action for Childhood Arrivals, or DACA. This ‘Dreamer’ program is an Obama-era initiative that was established in 2012 to prevent deportation of American residents who came to the US as minors but failed to go through a lawful immigration process. Once the Dreamer program is rescinded, Congress will have six months to take action or the 800,000 individuals who have signed up face deportation.

The Republican Party is split on immigration. Trump swept to power in 2016 in large part because of an anti-immigrant, anti-NAFTA stance with which many blue-collar workers strongly identified due to America’s dwindling manufacturing base, offshoring, income inequality, and economic stagnation in the Rust Belt. Even Democrats in the Rust Belt support parts of Trump’s trade agenda. Look at  Ohio Democrat Marcy Kaptur’s recent op-ed as a prime example.  But the immigration issue is more contentious. 

The Heritage Foundation, a conservative think tank, opposes reforms like the Dreamer program because it believes these immigrants would cost the government trillions of dollars because of their demand for social services and retirement benefits. Many conservative members of Congress agree with this position and oppose the Dreamer program. Another Republican think tank, the American Action Forum, headed by former Bush 43 CBO Director Douglas Holtz-Eakin, takes the exact opposite view, saying Heritage  grossly underestimated the economic benefits of immigration that emanate from increased tax receipts and increased household consumption. Senator Marco Rubio, Trump’s Republican primary opponent is on this side of the issue.

I think this fight will take all of the oxygen out of the room. In six months, 800,000 people could be eligible to get deported. Congress will have to act in that six months and face the mid-term election consequences based either on their failure to act or on the legislation they put forward to replace the Dreamer Act. There is going to be a lot less room for tax reform if the Republican Party is wrangling over immigration. And let’s remember the Wall will also still be an issue. After the immediacy of Harvey recedes, the possibility of a government shutdown increases.

This leaves no room for tax reform. But frankly, I don’t think Trump is actually talking tax ‘reform’. He’s talking tax cuts. And those cuts are skewed toward the wealthy. Larry Summers has a piece out at the FT that I recommend that gets at the heart of the issue. Here’s the important bit:

The Tax Reform Act of 1986 was all reform, with no net cut. The current effort is mostly cuts, with very little structural reform. The 1986 measure was about raising taxes on companies. The current effort is about reducing business taxes. TRA 1986 was about facing down well-heeled lobbyists; these groups seem centrally involved in the current effort.TRA 1986 was all about bipartisanship as Ronald Reagan worked closely with Democratic leaders. There is nothing bipartisan about the “Big 6” (Mr Cohn, Paul Ryan, Mitch McConnell, Steven Mnuchin, Orrin Hatch and Kevin Brady) driving the current effort.

And, given the increase in debt/gross domestic product ratios and rising income inequality, there is a stronger case to be made today than even three decades before for not moving in the costly, regressive direction the Trump administration appears headed.

Mr Cohn had a bad day with facts last Friday. In addition to his erroneous statements about the history of tax cuts, he asserted on CNBC that: “The biggest public pension funds are the biggest owners of equity in the world. They’re the policemen, they’re the firemen, they’re the teachers, they’re the civil servants of America today who have their money in public pension funds being managed in the U.S. equity market. We’re helping Americans by delivering returns back to them.”

There are two problems here. First, as CNBC noted while pension funds do hold stocks, most are held by the wealthy. Second, the vast majority of the pension funds to which Mr Cohn refers are defined benefit plans, with employers liable for a benefit tied to a worker’s salary path. This means, of course, that workers themselves do not have a wealth interest in how the stock market performs.

There are two big takeaways here. First, Trump is playing up immigration and trade to advance a cultural war that his working class base supports. But he is also selling out his base. All of the benefits of his tax agenda – now his signature economic proposal – are going to the rich. See my posts on this here and here. Second, as Summers points out, this isn’t even tax reform. He’s talking about tax cuts – tax cuts for businesses and the wealthy like corporate taxes, capital gains taxes and inheritance taxes. And he’s been very specific about the levels of cuts he wants here where he has been quite vague about what he’s delivering for the middle class. That’s a sellout.

Even so, the economy isn’t going to fall apart regardless of what happens with Trump’s tax cut agenda. Nuclear war, though, is a totally different story. The latest here is that Kim Jong Un has ordered intercontinental ballistic missiles to the coast, prompting very hot rhetoric from South Korea. There is a non-zero chance this ends in military confrontation, with the potential that the US employs tactical nuclear weapons to defeat Kim. That’s pretty scary.

Military experts are saying that an unpredictable Kim could be convinced to halt further development on his nuclear capabilities but that, given the precedent in Iraq, he will not be convinced to give up his nukes. He does not want to end up like Saddam Hussein. The bottom line is that North Korea is likely to remain a country capable of nuclear strikes unless the US goes to war and takes out the Kim regime – something that would certainly result in nuclear strikes on South Korea and perhaps Japan or US territories. That’s a totally different world than the one we’re living in right now.

So while I am watching to see what happens with Trump’s tax cuts, I am much more concerned about Trump’s desire to use a military response to North Korea. Trump likes simple solutions and, on the surface, the military option in North Korea has that appeal.