Submitted by Eric Peters, CIO of One River Asset Management
Spending: The Federal gov’t will spend $4.4trln in 2019 (21% of our $21trln GDP). 62% of our $4.4trln spending is on “mandatory” programs (Social Security $1,046bln, Medicare $625bln, Medicaid $412bln, plus income support, child tax credits, child nutrition, student loans, etc). 30% of spending is “discretionary” (Defense $886bln, Veterans $83bln, Health/Human Services $70bln, Education $60bln, Homeland Security $53bln, State Dept $40bln, HUD $30bln, Energy Dept $30bln, $266bln in other agencies). The remaining 8% of spending ($363bln) pays interest.
Revenue: The Federal gov’t will collect $3.4trln in 2019 (16% of our $21trln GDP). 49% of that $3.4trln in revenue will be collected via income taxes ($1.6trln). 36% is via Social Security tax, Medicare tax, and unemployment insurance tax ($1.2trln). Corporations pay 7% of gov’t revenue ($225bln). Customs/excise taxes account for 3%. The final 5% comes from the Federal Reserve, estate taxes and miscellaneous sources. The $3.4trln the gov’t collects falls short of the $4.4trln that it will spend in 2019, so that $1trln balance is our deficit – which is roughly 5% of GDP.
Pendulums: Corporate taxes were introduced in 1909. They were 1% and rose until 1926 when they hit 13.5%. They were cut to 11% into the 1929 bubble, but then rose for a couple decades to pay for WWII and the Korean War, hitting a high of 52.8% in 1968 to fund the Great Society (programs to eliminate poverty and racial injustice) and Vietnam War. Those were years of peak equality in America. Ever since, corporate tax rates have bumped lower, even as profit margins have been increasing. Nixon cut them to 48%, Carter 46%, Reagan 34%, and now Trump 21%.
Historically: The 16% of GDP the Federal gov’t will collect in taxes in 2019 is well below the 19% level that tends to be America’s average. In 2007, before the Great Recession, corporations paid $395bln in taxes on profits of $1.5trln (26.3% tax rate). In 2015, corporations paid $390bln in taxes on profits of $2.1trln (18.5% tax rate). After the recent tax cuts, that effective tax rate will fall further. The long-term US budget deficit is 3%. The fact that we’re now running a 5% deficit at a time of above trend growth and full employment is historically unprecedented.
The Green New Deal: The Great Society was a set of US domestic programs launched by Lyndon Johnson in 1964–65. The goal was the total elimination of poverty and racial injustice. New major spending programs that addressed education, medical care, urban problems, rural poverty, and transportation were launched. The Great Society in scope and sweep resembled the New Deal domestic agenda of Franklin D. Roosevelt in the early 1930s. Today’s Green New Deal is an emerging set of initiatives to remedy economic inequality and climate change.
Infinity and Beyond: Republican control of the Presidency, House and Senate led to trillion-dollar deficits, forecasted to grow inexorably. With interest rates close to inflation rates, and the dollar strong, issuing new debt has been easy. So let’s call that modern-day fiscal conservatism. The Green New Deal will be funded by MMT (Modern Monetary Theory), which holds that the gov’t can spend money by simply creating it, constrained only by the fact that if politicians spend too much money, they’ll use all the economy’s productive capacity and spark inflation.
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Anecdote: “The pendulum has returned to its starting point,” said the CIO. “We had a massively regulated, terribly inefficient economy,” he continued. “Carter started deregulating. Then Reagan. They got government out of the rule-making business.” Efficiency surged. “Deregulation made the market the final arbiter of which businesses succeeded and failed.” But as lobbyists swarmed the swamp, antitrust legislation lifted like a fog. Natural economic forces exerted themselves.
“Now the economy is dominated by oligopolistic markets. Tech is the one major exception.” Tech is still an industry where new business models leap ahead, killing competitors. “You and I couldn’t start an airline today. The industry has so consolidated that only a few remain.” The top four US airlines have 70% market share. The top four wireless networks have 98.5% market share. “And monetary policy amplifies the problem.” Yesteryear’s economic enemy was government regulation, today’s is a combination of oligopolistic markets with unlimited access to cheap capital.
“We’ve come full circle. Before Carter/Reagan you had government-endorsed rent seeking via regulation. Now you have government-granted rent seeking via anti-trust. And rent seeking is awful for an economy.” Productivity growth remains inexplicably anemic. “We’re now tolerating low-productivity, inefficient companies with record high profit margins.”
Politicians granted oligopolistic markets to capital owners, cut interest rates to boost their asset values, then cut corporate taxes. “I’m an owner of capital. But how much better are we going to make it for God’s sake?” he asked. “When I grew up Democrats were the protectors of the post-war regulation that handcuffed America’s entrepreneurial zeal. Republicans unshackled us. Now, they’re the status quo.” The pendulum swung too far.
“I may not agree with the details of the solutions I hear, but we’re beginning to ask the right questions. How will we address the inequality we created? How will we provide and pay for healthcare? Education?”