Greedy Goblin

Monday, February 27, 2017

Trumpian economic justice

It started as a comment for Tobold. It might end up as explaining (not inventing) the biggest change of economic doctrines in our lifetime. Trumpenomics if you please.

Tobold summarized the question using the orthodox approach of economic justice: "The party that wins elections is the party of which the "99%" believe that it is the party that represents their interests against the elite. It is quite an achievement for an administration full of billionaires to make people believe that it is the opposition who represent the elite."

He is right. Trump is a billionaire. His friends are billionaires. His cabinet is 1/3 Goldman Sachs, 1/3 Oil&Coal execs, 1/3 Military: he might as well lead a junta of a banana republic. The stock markets see unprecedented jumps. Unless you assume that all the billionaires of the US went altruist overnight, this can mean only that this government will work for making the top 1% more rich than ever.

On the other hand, he proclaims himself to be the champion of the lower classes, "the forgotten men and women". He promised various ides to rise them up. You have to accept that he is trying to deliver on every promise: the wall, the border tax, the Muslim ban, the evicting of immigrants, cooperation with Russia. He keeps on doubling down on everything he said during the campaign. Of course one can claim he is an idiot, but he is surely not a con-man, since he'd now back off from his promises if he didn't mean to keep them. So he must try to keep the core promise that he repeat every time: "the forgotten men and women will never be forgotten again"

The two points above seem to be contradictory. You can't be the man of the big business and the poors + middle class at the same time! After analyzing how his promises would affect various groups, I realized something revolutionary: yes, you can and not by some trickle-down daydream. To see how, you must see how one-dimensional the orthodox economic justice idea is: the more rich someone is, the more should be taken from him, the more poor someone is, the more should be given to him. This is why they measure inequality by comparing the top 1% with the bottom half. One goes down, the other goes up, this is obvious:

But it's not true! The sum of the two graphs is approximately 40% only! Let's see the income quintiles from 2013:
The last column is split into top 1% and "rich-but-not-top" but it's misleading. Since the "rest" has 19x more people, the actual numbers are 198K/year and 1.53M/year income. With these numbers, the income Gini coefficient is 0.44. Let's take 1/3 of the income of the top 1% and give 2/3 of it to the lowest quintile, 1/3 of it to the second lowest quintile like the socialists suggest! The Gini goes down to 0.36.

Now leave the top 1% alone and instead take 1/3 of the income of the "rich-but-not-top" and distribute it the same way! The Gini goes down to 0.26! 0.26 is much lower than 0.36! The reason is that the total income of this larger population is larger than of the 1% and also because of their bigger weight in the Gini calculation. If we'd double the income of the top 1% but make everyone else equal, the Gini would go down to 0.22! The point is that you can get bigger income equality by redistributing the income of the "rich-but-not-top" than by redistributing the income of the top 1%. This can be the definition of Trumpenomics: support the top 1% and the bottom half at the expense of the "rich-but-not-top".

On top of "lower Gini than socialists aim for", Trumpenomics have several advantages:
  • The 1% can run, the "rich-but-not-top" can't. It's well known that taxing attempts on the top 1% fail due to them leaving the country, at least on paper, by moving their income into companies that pay tax in an offshore paradise. A lawyer or engineer has much harder time running away.
  • The lower classes compare themselves not to the billionaires but to the "Joneses". People they know, they see. Redistributing the wealth of his highly trained professional ex-high school classmate has bigger psychological effect on him than taxing some billionaire in Manhattan.
  • The top 1% are the "Atlases". Hit them and the economy suffers. The "rich-but-not-top" are not running large companies, they are either self-employed small business owners and highly trained professionals. Take their money and they just work harder!
  • The wealth of the top 1% can only be redistributed by income/corporate tax which - even when they don't run - punishes work. The "rich-but-not-top" can be taxed for property and sales tax on their consumption which do not punish work.
The two biggest economic promises of Trump are getting rid of the non-citizen workforce (plus welfare leeches) and supporting domestic production by 35% border tax. Both of them directly support the lower income workers - who compete with immigrants and whose jobs are moving to abroad - while directly increase the costs of consumption: the "rich-but-not-top" must hire citizen gardener and housekeeper for much higher and pay the increased cost of domestically produced products. Sure, if food costs 35% more, it costs more for everyone, but for the poor it's overcompensated by much higher salaries, for the top 1% it's irrelevant.

I believe Trump just stumbled upon some holy grail of economics and will do something nobody thought possible: he'll move towards "economic justice" (decrease Gini) while cutting taxes which increases the GDP. Please note that he won't actually redistribute, non-working poor gets poorer as prices go up but the working poor gets higher salaries. Ergo, he truly is a "blue collar billionaire" who brings back the 50'-es dream: any hard working person can earn near median salary.

PS: this guy doesn't get it:


Anonymous said...

"It's well known that taxing attempts on the top 1% fail due to them leaving the country, at least on paper, by moving their income into companies that pay tax in an offshore paradise. A lawyer or engineer has much harder time running away."

Taxing attempts fail because of taxing loopholes. Closing those should be trivial. If you answer why it is not trivial, you find the reason why Trump will not put further taxes on the 1%.

His 35% border tax is not universal, unless he has announced he is bringing his own production back to the USA? Has he also announced that other countries have agreed not to reciprocate?

Gevlon said...

@Anon: strange that no countries found the way to close those loopholes. By the way France tried to put high taxes on the top 1% with as few loopholes as possible. Result: the billionaires moved to Belgium and Italy or even Russia (Depardeau).

luobote kong said...

This isn't anything new. Asian economies have been doing this for decades. Two differences though. Firstly they run a trade surplus. Second democratic accountability is more fluid. While Trump appears to be adopting the latter characteristic he is constrained by the former with the trade deficit. The resulting deficit (owned by Asian and other sovereign funds) can only be paid by taking money out of the economy. Until that part of the equation is resolved Trumps dream is no more realistic than the free market purists that preceeded him.

maxim said...

So Trump is essentially cementing the 1% oligarchy while buying off the low-income people with loot from pre-1%-rich.

Not buying into the whole "Atlas" narrative. Atlases are not as good as they used to be, only a matter of time until they start shrugging.

Trump better give the low-income people something more solid that temporarily boosted paychecks.

dobablo said...

Yes making everyone poorer reduces inequality, but isn't the idea to try and make everyone better off? If the 99% sits equally in a just-about-managing group then what are the rewards for economically useful activities such as hard work, entrepreneurship and self-improvement?
Having said that, I've yet to see anything on on Trump's economic policy beyond:
1) Give big gains to businesses by eliminating regulations.
2) Give big gains to the forgotten Americans by forcing localisation and restricting the work pool.
I wait am awaiting further details on the potential size of those gains and the associated costs with the policies.

Anonymous said...

@Anon: strange that no countries found the way to close those loopholes.
I'm not that same anon as in #1 comment,
The reason why no countries find ways to close loopholes is because democracies have no self-defense mechanisms against the concentrations of wealth that allow the 1% to twist government to their interests until a crisis(or crisis; plural) shuts down the economy. The reason F. Roosevelt was able to accomplish so much in the 1930's was the catastrophic collapse had shaken loose the grip on power enjoyed by the "elites" of that era. The Democrats of today are no longer the Democrats of the 1930's and that is why they have lost power.

Gevlon said...

@lubote kong: trade surplus can be achieved by the import tax. Most American export is high tech or entertainment that remains competitive after paying 35% toll (surely every other country will implement the same tax on American products), while most American import is easy to produce domestically.

@maxim: don't say it's not genius

@dobablo: no government can make everyone better off. Governments can only redistribute money and power (by regulations)

Anonymous said...

So basically a slight variation on the Keynsian form of capitalism that actually
in effect during the 50s years. How the wheel turns...

maxim said...

I have an odd feeling that both Perestroika and Russian Revolution a century earlier were essentially this. The truly powerful cementing their power while throwing their support base to the dogs.

... I might be stretching things for Russian Revolution, but Perestroika does fit.

Anonymous said...

I have a question for the Republicans here. If it helps, I'm a registered independent and find troubles with both parties in our current system.

Most Republicans (and Democrats, really) try to claim the moral / religious high ground from each other.. How can Republicans be very steadfast in their religious defense of anti-abortion beliefs, but forget one of the most common religious tenets in the belief that the rich should take care of the poor and equality? I suppose the same question could be asked of Democrats in reverse. How can they defend themselves on religious grounds when debating equality, yet forget their nobleness when debating abortion?

I've never understood both sides' ability to selectively use religion in political arguments. Whycan't we have a 3 party system?

Smokeman said...

Anonymous said...

"I have a question for the Republicans here. If it helps, I'm a registered independent and find troubles with both parties in our current system."

I expect that virtually everyone has trouble with both parties. They just choose the one they have LESS trouble with and go with it, compartmentalizing out the stuff they "don't like."

The problem with too many parties is they can only "win" with the help of people in the other parties. This naturally coalesces them into two parties, or two groups or parties. Or one coalition of parties that crushes the others.

The only way to get around this is to have a government that does not represent people at the local level, as in... count the party votes, and allocate seats to match the count and let the party's voters select the seat holder. Of course, those seat holders will always be "Lame Ducks" who can get nothing done because the other elected seat holders won't let them.

If you had no parties at all, they would naturally form as the well heeled would assemble coalitions of like minded candidates under one banner. Basically, forming a party.

There is more power in numbers than there is in being right.

Rob Kaichin said...

I could quote Thatcher's comment on socialist Labour, I could quote Orwell's comments on doublethink and the outer party.

I won't.

Instead I'll ask:When robots come. To take their jobs, how will his economic 'justice' hold up?

In the UK we're taking more and more of the traditional trades' jobs into robot hands:a new multibillion pound factory employs 30, not 30k.

When it all comes crumbling down, what answers will Trump offer?

Gevlon said...

@Rob: services! Waiter, gardener, housekeeper, cab driver.
You know, the jobs now filled with immigrants.

dobablo said...

Governments do more than just redistribute the pie. Their policies are rarely zero-sum. Good governments grows the pie by investing in long-term programmes with indirect rewards that fall outside the scope of businesses investment (education, infrastructure, healthcare, research) while regulating to correct market inefficiencies (fiduciary, trading standards, finance, environment) with the aim of promoting a more stable long-term economy.
Poor governments shrink the pie via inefficient redistribution of resources, over/de regulation

Unknown said...

The US has the reserve currency which means it has to run a trade deficit by definition. If the US didn't run a trade deficit there wouldn't be enough dollars overseas for foreigners to trade and hoard. There aren't any other nations that want to be the reserve currency or have the capability to do so right now. Germany is hell bent on running a trade surplus, so is China and Japan. The EU is not stable enough, other countries are too small or too politically unstable. One proposal is to replace the dollar with a basket of currencies overseen by the IMF. Perhaps one day that will happen. In the meantime everyone is eager to sell their goods overseas to prop up their economies. They drive down their own workers' wages to get a competitive advantage against other nations, but so many are doing this at once that the result is poverty for labor.

Mathematically, if some countries run a trade surplus other countries must run a deficit. There's no way around this, it's basic accounting. If Germany wants to run a surplus other countries must borrow.

Most US federal debt is held domestically. Countries that issue debt in their own currency cannot default unless they make a political decision to do so (Russia chose to do this in the 90s, feel free to think about why). If you print the currency you control it. You can print more to pay your debts as needed.

By contrast, countries that borrow in a currency they don't control can indeed default. This includes countries that use the Euro. The Asian economies used to borrow in dollars and got raped so hard by the IMF that they vowed "never again" and now run huge trade surpluses. This lets them run up big foreign currency reserves which they hope will prevent it from ever happening again.

Is Trump constrained by the budget deficit not to cut taxes or spend money on campaign promises? No, he can do whatever the fuck he wants. As Dick Cheney said "Deficits don't matter". The truth is that if you run a trade deficit with the rest of the world you have three options: (1) run a government deficit, (2) allow your private sector to shrink, (3) allow your private sector to run up more debt. We know the government can't default against its will but the private sector can and if you let that happen, whoops you just caused a depression and cratered your industries. Now look at the some of the evidence. Bush Jr mailed checks to every taxpayer in America, twice, added a multibillion dollar Medicare prescription drug benefit and started numerous wars. Obama bombed even more countries and spent trillions bailing out Wall Street. What happened to the dollar during over this period? It grew in value so much that Trump now complains about it. Why did this happen? Because other countries still need a place to dump their goods overseas. The US is willing to buy and other countries know they'll get paid back. This arrangement will work until it no longer does, and no one can predict when that will happen.

Baelnor said...

As rich but not top professional, this resonates hugely and I never thought of it this way before.

Smokeman said...

Blogger Gevlon said...

"@Rob: services! Waiter, gardener, housekeeper, cab driver.
You know, the jobs now filled with immigrants."

To be fair, even these jobs need other people that have jobs to provide the employment.

There is a foreseeable future where even if jobs are brought back to the country of consumption, there is still a future where robots are doing all of the work.

The answer to that is tax a corporation's profit directly, ignoring the labor component except as an expense. Currently, in the US, we tax WORKERS, not corporations. But all that tax comes from the places they work as "withholding." Eliminate the 16th Amendment and transfer ALL tax to corporate profits in a progressive scale based on business type. (Road building and other "Public Works" would be non profit and untaxed.)

This of course, won't fly because large corporations would massively lobby against it.

The other direction is a very totalitarian one, with currency controls and really creative QE. And no one under the top 1% wants that.

Guess which way we'll probably go.

Gevlon said...

@Smokeman: "profit" is only existing in the books of the company. It's hard to assess from the outside, just think how market shift after and unexpectedly bad quarterly report. It's pretty hard for the tax authorities to determine how much they must pay. And it's pretty easy to them to move the profit overseas.

Taxing work is much easier. Taxing end-user purchase is even easier. Taxing items crossing the border is even more easier. My utopia is the easiest:

Smokeman said...


The problem with your tiered utopia is all manufacturing and agriculture will just move to the lowest tier zone, because that's where the low rent labor is.