Topic: Government and Politics

Why Does President Trump Want to Pump Prime the Economy?

It is difficult to forecast what President Trump’s fiscal legacy will be. He’s sought credit for a recent reduction in public debt, but pledged not to touch the entitlement programs which are its key long-term driver, while also cutting taxes. His team has talked of the need for high-quality infrastructure investment to boost productivity, but leaked memos suggest priority projects must be “shovel ready” and “direct job creators” – different short-term aims.

Anybody hopeful that the fiscal conservative lines of this muddled agenda might win out might want to think again. It looks as if Trump has “stimulus” rather than a supply-side agenda in mind. Here’s an interview excerpt from The NYT:

Trump seemed much less animated by the subject of budget cuts than the subject of spending increases. “We’re also going to prime the pump,” he said. “You know what I mean by ‘prime the pump’? In order to get this” — the economy — “going, and going big league, and having the jobs coming in and the taxes that will be cut very substantially and the regulations that’ll be going, we’re going to have to prime the pump to some extent. In other words: Spend money to make a lot more money in the future. And that’ll happen.”

Let us presume for the sake of argument that Trump is a Keynesian who believes that government spending can be used to re-inflate the economy from downturns. Let us also assume that this kind of agenda works as Keynesian theory predicts. We can still ponder: why does the U.S. economy need a fiscal stimulus now? Theory (even Keynesian) and evidence suggests it does not.

1. Theory would suggest fiscal stimulus is not effective when there is little “spare capacity.” Whatever Trump thinks about the veracity of the statistics, the US economy is close to “full employment.” The civilian unemployment rate currently stands at 4.7 percent, only slightly above the Congressional Budget Office’s estimate for the “natural rate of unemployment.” The job openings rate is now running above that seen pre-crisis, quit rates are about the same as they were prior to the crash. The U5 unemployment rate (which adds marginally attached workers to the official rate) and the U6 unemployment rate (which adds those who are part-time for economic reasons) are at levels seen in the middle of the 2000s and construction unemployment is lower than in 2007. In such an environment, any attempted macroeconomic stimulus through infrastructure investment would be highly likely to crowd out private sector activity.

2. Theory suggests fiscal stimulus will be offset by monetary policy. Given the Fed has begun to raise its target rate, Keynesian theory would suggest monetary policy would offset any expansionary fiscal policy. Paul Krugman spelled this argument out clearly when he wrote “spending can be withdrawn later on without hurting employment, because once you’re out of the liquidity trap the Fed can offset the contractionary effects of a fiscal tightening by holding off on the monetary tightening it would otherwise have pursued.

CBO Projections: Unhealthy Basis for Health Policy

In the political hullabaloo over efforts to shift costs of health care to someone else, the argument for keeping Obamacare’s compulsory insurance and ever-expanding Medicaid enrollment relies naïvely on notoriously comical Congressional Budget Office (CBO) 10-year “projections.” 

CBO claims the initial House Republican plan would eventually cause 3 million to “lose” health insurance simply because they would no longer be fined up to 2.5% of income for not buying a policy designed by and for politicians. This not a loss, but a gain – in freedom of choice.

CBO claims the GOP plan would “lose” another 14 million by not expanding Medicaid enrollment as rapidly as Obamacare hopes to. The federal government pays about 57% of the cost of Medicaid for poor people, but 90-93% (until 2022) to the 31 states that provide Medicaid to those earning up to 138% of the poverty line. That has added 17 million to the Medicaid rolls, and enriched big health insurers and Kaiser Permanente.

The Wrong Way to Enforce Immigration Laws

Yesterday, the Los Angeles Times noted that reports of sexual assault and domestic violence are down in Latino-dominated areas of Los Angeles. NPR also published a story yesterday about four cases of domestic violence dropped by four Latina women in Denver, Colorado. The underlying factor blamed in both stories is federal enforcement of immigration laws at local courthouses.

I wrote about the fallout of this abhorrent practice last month in the Washington Post.

Seizing a person who is seeking refuge from violence subverts the protective function of police officers. If individuals fear as much from law enforcement as they do the criminals living among and victimizing them, they will not come forward to report crimes or cooperate with criminal investigations.

While immigration enforcement is often done under the banner of “public safety,” victims of crimes will be less likely to come forward if doing so risks breaking up their families by deportation. This puts more people in harm’s way and enables abusers and predators free rein among people too fearful to ask for the help that they need.

Moreover, despite the “law and order” rhetoric touted by the Trump Campaign and now Administration, these efforts make police officers’ jobs more difficult.

One Los Angeles Police Dept. detective told the Los Angeles Times, “It is my job to investigate crimes… . And if I can’t do that, I can’t get justice for people, because all of a sudden, I’m losing my witnesses or my victims because they’re afraid that talking to me is going to lead to them getting deported.” When he recently approached a group of Latino workers to investigate a crime, they stood up and walked away. Even though Los Angeles has repeatedly asserted its self-appointed status as a “sanctuary city” for immigrants, one of the workers uttered “Trump is coming,” as he left.

All the pro-police rhetoric in the world cannot make-up for the real-world problems that misguided immigration enforcement can cause. Emboldening violent criminals by making large swaths of the population too scared to come forward not only makes police work more difficult, it can make it more dangerous.

Supporting the police means respecting their jobs and enforcement priorities, not just reciting tough-on-crime pablum. If the Administration really cares about police officers, it should start listening to what they have to say. Immigration agents can find other ways to enforce the law than to pick on the most vulnerable at their time of need.

GOP Responses to Trump Budget

President Donald Trump’s budget issued last week would cut $54 billion from nondefense spending. Budget director Mick Mulvaney did a nice job assembling an array of sensible cuts, as I discuss in this CNN op-ed and this blog.

Recipients of handouts and pro-spending activists are not happy with the proposals. But many of Mulvaney’s proposed cuts are for local activities, such as housing and schools. If programs are important, then local governments can fund them with their own taxes, which would be a more efficient, transparent, and democratic fiscal approach.

Some GOP members of Congress are not happy about the cuts either. Republicans generally consider themselves to be fiscal conservatives. But for some members, their oft-expressed concerns about deficits might be just philosophical musings, not a guide to their actual policy positions:

  • Senator Rob Portman (R-OH) responded to Trump’s cuts by coming to the defense of federal funding for Lake Erie restoration, which he called “critical.” Yet the senator’s official website complains about the federal “spending spree, piling up new deficits onto our massive debt … Washington’s fiscal irresponsibility passes the problem to future generations.”
  • Representative Michael Conway (R-TX) opposes farm subsidy cuts, saying “Agriculture has done more than its fair share” in restraining deficits. (That’s not true—farm aid has risen in recent years). Yet on his website, Conway says, “Our nation is in a budgetary crisis … As a CPA and fiscal conservative, I am committed to working with my colleagues to cut spending and put our fiscal house in order. Congress does not have a blank check; it is vitally important that we balance the federal budget.”
  • Senator Lisa Murkowski (R-AK) complained about the Trump budget as well. She “attacked plans to cut or eliminate programs that help the poor pay heating bills, provide aid for localities to deal with wastewater and subsidize air travel in rural areas like her home state of Alaska.” Yet her website says, “Senator Murkowski believes one of the most essential functions of Congress is to pass a balanced budget that sets a responsible spending plan for federal government services. For too long, the U.S. government has been spending more than it takes in and borrowing large sums of money to make up the difference. To set the nation on a more stable financial path, it is critical for Congress to set sustainable funding levels for the federal government, reduce overall spending levels.”
  • House appropriator Hal Rogers (R-KY) complained about Trump’s proposed cuts to foreign affairs activities. Yet his website says that he will “remain steadfast in fighting against government waste and any bills that increase the government’s reach on your dime.” As it turns out, foreign affairs has greatly increased its reach on our dime, and so Trump’s proposed cuts make a lot of sense.

President Trump recently signed an Executive Order requiring agencies to eliminate two regulations for each new one imposed. He should ask members of Congress to be similarly responsible on spending. For each proposed spending cut they disapprove, they should identify and pursue two similar-sized cuts elsewhere in the budget.   

House GOP Leadership Gives ObamaCare-Forever Bill a Touch-Up Job

Responding to conservative protests that the American Health Care Act would immortalize ObamaCare rather than repeal it, the House Republican leadership has announced several amendments. (See my initial analysis of the bill here, and my analysis of the Congressional Budget Office score).

The amendments do not even come close to fixing the problems with this fatally flawed bill. Indeed, by expanding the AHCA’s tax-credit entitlement, it will make the bill resemble ObamaCare even more.

ObamaCare’s Medicaid Expansion                                 

Original AHCA provisions:

As introduced, the AHCA includes language that supposedly repeals ObamaCare’s expansion of Medicaid to able-bodied, childless adults. In fact, it would expand the Medicaid expansion and make it permanent.

The original bill would have allowed the 19 non-participating states to implement the expansion until 2020, allowed participating states to expand enrollment until 2020, and would have kept paying states the enhanced, 90 percent federal “match” for each expansion enrollee until that enrollee disenrolled. Expansion advocates in those 19 states hailed the bill for removing obstacles to those states implementing the expansion.

The bill thus would have repealed the Medicaid expansion in name only. By 2020, there would have been so many more Medicaid expansion states and enrollees, that Congress would rescind the repeal and keep the expansion in perpetuity.

Amendment:

The amendment would prevent the 19 states that have not implemented the expansion from doing so. This is a welcome change—but it is not nearly sufficient.

Even with this change, there would more Medicaid-expansion enrollees after “repeal” than before. The 31 expansion states could keep adding new enrollees to the expansion until 2020, and keep receiving the enhanced, 90 percent federal “match” for those enrollees after 2020. The AHCA would still reward state officials who did the wrong thing (expanding Medicaid) and punish state officials who did the right thing (refused to implement the expansion). The bill would still create increased pressure on Congress to rescind this “repeal” before 2020.

The amendment would allow states to impose work requirements for able-bodied Medicaid enrollees. Again, this is a welcome change, but not nearly sufficient.

Work requirements could reduce dependence on Medicaid, reduce Medicaid spending, and reduce pressure for Congress to preserve the expansion. Yet work requirements are only (politically) feasible for able-bodied adults. And the states where work requirements are most needed—the 31 states that have implemented the Medicaid expansion—are the least likely to impose a work requirement. Why would they? States that use work requirements to help Medicaid-expansion enrollees achieve financial independence would see only 10 percent of the savings. The other 90 percent goes to Washington. The amendment’s optional work requirements are a fig-leaf proposal that does little if anything to improve the AHCA.

Minimum Wages and Bad Use of Terminology

A news story today leads with the headline “Minimum-wage hikes could deepen shortage of health aides” (h/t David Boaz). The key section (reported on ABC News):

It’s a national problem advocates say could get worse in New York because of a phased-in, $15-an-hour minimum wage that will be statewide by 2021, pushing notoriously poorly paid health aides into other jobs, in retail or fast food, that don’t involve hours of training and the pressure of keeping someone else alive.

Contained within this story is some bad economic reasoning and terminology but also an interesting, but rarely discussed, effect of minimum wages.

First, the mistake. Take the headline. The basic economics of the minimum wage tells us the raising the statutory price of labor above some equilibrium will lead to a reduction in the quantity of labor demanded. But it also says there will be an increase in the quantity of labor supplied. Far from causing a “shortage” of health aides then, raising the minimum wage leads to a surplus of labor. Raising the pay rate increases the return to working in the industry relative to being on welfare, and presuming budgets are unchanged (the article explains that most home care is paid by government programs), the quantity demanded falls at the same time. The gap that arises is precisely the “unemployment effect.”

It’s not clear then why raising a minimum wage would lead to fewer people seeking to be home care or health aides. Assuming demand is fixed, it would lead to fewer people being health care aides or health care aides being less available (shorter working hours etc). Yet that is not what the article claims—it suggests supply of available workers is falling, despite the pay-off to the job increasing.

What’s the point that the article is getting at then? It can be the case that raising a minimum wage changes wage rate differentials between industries. The article states that the average home care wage is about $11 per hour, whereas a quick Google search suggests many low-paid retail and fast food jobs may pay less than that in certain regions. If a hypothetical fast food job would pay $9 per hour in a free market and a home care job $11 per hour, then raising the statutory minimum to $15 can eliminate the differential. This makes fast food jobs more attractive on the margin, particularly given the home care training, and could mean the relative supply of workers increases in these industries compared to home care.

DOJ Enters the Fray…Against the CFPB

There’s another installment in the ongoing saga of PHH v. CFPB, the legal case challenging the constitutionality of the newest federal agency, the Consumer Financial Protection Bureau. And this installment is a weird one. The Department of Justice has now joined in, filing a briefagainst the CFPB. Yes, the federal government is now effectively on opposing sides of this case.

If you haven’t been following the story, I have a few posts that can bring you up to speed. At this point, a panel of judges has ruled against the CFPB, and a majority of them found that the CFPB’s structure is unconstitutional. (I find it difficult to see how anyone could find otherwise.) Part of the problem with the agency’s structure, as the court found, is that it has a single head who is removable only for cause. The director is not accountable to any elected official. To cure this problem, the court decided that the director should be removable by the president at will. This would make the agency more like a traditional executive agency—like the Department of Justice, for example—and less like existing independent agencies. Although it is important to note that even most independent agencies, like the Securities and Exchange Commission, are headed by a multi-member board and the chair of that board serves as chair at the will of the president. 

Now the federal appeals court in D.C. is rehearing the case en banc. That means that all 11 of the active judges on the court will hear the case and issue an opinion together. On Friday, the DOJ filed a friend of the court brief in support of PHH.

While it is extremely rare (although not unheard of) for one part of the government to file a brief in opposition to another part, it is not entirely surprising in this case. In ruling against the CFPB in the earlier hearing, the court handed the president a new bit of power. One of the reasons that our government has three co-equal branches is to allow them to serve as checks on one another. As Judge Kavanaugh noted in his opinion for the panel in the original hearing, quoting Justice Scalia “The purpose of the separation and equilibrium of powers in general, and of the unitary Executive in particular, was not merely to assure effective government but to preserve individual freedom.” Arguably, the government filing on both sides of a case is a sign the system is working as planned.