By David Stockman as originally published on Contra Corner and reprinted here with permission
Good riddance to Steve Bannon. The last thing America needed was a conservative/populist/statist alternative to the Welfare State/Warfare State/Bailout State status quo. Yet what Bannonism boiled down to was essentially acquiescence to the latter—even as it drove politicization deeper into the sphere of culture, communications and commerce.
Stated differently, the heavy hand of the Imperial City in traditional domestic, foreign and financial matters was already bad enough: Bannonism just gave a thin veneer of ersatz nationalism to what was otherwise the Donald’s own dogs’ breakfast of protectionism, nativism, xenophobia, jingoism and strong-man bombast.
By the latter, of course, we mean Trump’s essentially content free notion that America was falling from greatness mainly due to stupidity, corruption and a penchant for bad deals among Washington pols; and that the undeniable economic malaise, if not decline, of Flyover America was due to some kind of grand global zero sum-game.
That is, what rightly belonged to America was being stolen by immigrants, imports and the nefarious doings of foreign governments and globalist elites. What was needed to make America Great Again (MAGA), therefore, was a Washington-erected moat to hold back the tide of bad people and unfair foreign economic assaults and a new sheriff in the Oval Office with the “smarts” (with which he believed himself amply endowed) to start “winning” again.
In truth, Trump had it upside down from the beginning. The unfortunate arrival of Steve Bannon to his campaign in August 2016 only served to give the Donald’s disheveled basket of bromides, braggadocio and bile a rightist political edge and proto-intellectual rationalization.
The real problem, in fact, was not the evil flowing into the American homeland from abroad—whether imports, illegals or terrorists. Rather, it was the outward flow of Washington’s monetary and military imperialism that was gutting capitalist prosperity domestically and generating terrorist blowback abroad.
Needless to say, Bannonism never identified the real culprits: Namely, the Wall Street-enriching Bubble Finance policies of the Fed, which forced foreign central banks to buy dollars and trash their own currencies to keep exports “competitive”; the military-industrial-intelligence-foreign aid complex of the American (/) Imperium; and the massively insolvent institutions of the Welfare State social insurance system (Social Security and Medicare) and prodigious spending on means-tested entitlements (Medicaid, food stamps EITC, etc.).
Consequently, the Bannonized agenda had no inkling, either, that fiscal catastrophe was imminent. And that the Trump administration had no real choice except the politically unpalatable path of cutting spending and/or raising taxes—-or eventually getting buried by the inherited fiscal tidal wave cresting at the end of a failed (102 month old) recovery.
Nor did it grasp that the real cause of Flyover America’s distress is the Fed’s multi-decade regime of financial repression and Wall Street price-keeping policies which: (1) deplete the real pay of workers via the FOMC’s absurd 2% inflation target; (2) savage the bank balances of savers and retirees via ZIRP; (3) gut jobs, investment and real pay in the business sector via the C-suites’ strip-mining of corporate balance sheets and cash flows to fund Wall Street-pleasing stock buybacks, fatter dividends and M&A empire building; and 4) impale the bottom 80% of households on a unrepayable treadmill of (temporarily) cheap debt in order to sustain a simulacrum of middle class living standards.
At the same time, these pernicious monetary central planning policies did fuel the greatest (unsustainable) financial asset inflation in recorded history, thereby showering the top 1% and 10% with upwards of $35 trillion of windfall wealth (on paper). At bottom, Fed policy amounted to “trickle-up” with malice aforethought, and it was sponsored and endorsed by the beltway bipartisan consensus.
It is no wonder, therefore, that Trump’s flawed candidacy and pastiche of palliatives and pettifoggery appealed to the left-behind working classes of western Pennsylvania, Ohio, Michigan, Wisconsin and Iowa– -as well as to the retirees of Florida and culturally-threatened main streeters domiciled in the small towns and countryside of Red State America.
In these precincts, the election was not especially won by Trump. Rather, the electoral college was essentially defaulted to him by a lifetime denizen of the Imperial City who had no clue that war, welfare and windfalls to the wealthy were no longer selling in Flyover America.
Then again, Bannon’s raw nationalism and the Donald’s walls and xenophobic expostulations were not remotely up to the task of ameliorating America’s economic, fiscal and financial ailments. There simply were no bad trade deals that accounted for the stagnation of median household incomes after 1989 or the 35% decline of real net investment by the business sector after 2000.
To the contrary, the vast off-shoring of American production and breadwinner jobs after 1987 was due to wage arbitrage fueled and exacerbated by the Fed’s chronic and increasingly egregious easy money policies. The latter resulted in an explosion of household borrowing that sucked in cheaper foreign goods and the sharp inflation of domestic costs, wages and prices, thereby curtailing US exports and encouraging massive import substitution.
By contrast, under a hard money regime on the free market, interest rates would have risen to premium levels after 1987. That would have triggered, in turn, a systematic deflation of domestic prices, wages and costs, thereby minimizing the gap between domestic production and the China Price for consumer goods, the Mexican Price for assembly labor and the India Price for back-office services.
That is to say, the theory of comparative advantage and universal societal welfare gains does work under a regime of hard money and free market pricing of money, debt and other capital assets. But under Bubble Finance, domestic inflation and subsidized debt-financed consumption simply result in the hollowing-out of the domestic economy and an alienated flyover electorate that, at length, apparently has no use for the nostrums of wizened beltway lifers.
In any event, the capture of American production, jobs and wages by the Mexican economy after NAFTA and the Chinese economy after Mr. Deng’s pivot to exporting in 1993 and its ascension to the WTO (World Trade Organization) in 2001 was due to bad money (from the Fed), not stupid negotiators at the USTR, Commerce and State.
Accordingly, one year has passed and the Donald has done virtually nothing to erect a trade moat: no quotas, high tariffs or serious attacks on foreign barriers to US exports.
In fact, Bannonite mercantilism has been left to suck its thumb. That’s owing to the perceived need to humor China on the false Korea problem. After all, Washington’s commitment to regime change and 65- year occupation of half the Peninsula is the real cause of the crisis, not the Fat Boy of Pyongyang’s desperate quest for nukes in order to avoid the fate of Saddam and Khadafy.
Likewise, there has been no meaningful protectionist trade action because no one can prove that it is a defect in the NAFTA deal—- rather than the vast hourly wage gap between Detroit and Mexico—that accounts for 4 million per year units of assembly capacity in the latter; or because figuring out a scheme to tax or penalize the output of IBM’s 130,000 wage arbitrage driven tech employees in India is probably beyond the capacity of even Trump’s protectionist hatchet men (Peter Navarro, Bob Lighthizer) to accomplish.
So with no trade action to address the bread and butter grievances of Trump’s economic left-behinds, the White House defaulted to the Congressional GOP’s asinine tax bill—-a swamp creature formulated measure of the lobbies, by the PACs and for the campaign money.
Moreover, once the Dems get done savaging it as a giveaway to the rich and powerful corporations, there will be no saving grace of jobs and growth to be pointed to by imperiled GOP candidates come next November.
That’s because in the face of the cheapest debt and equity capital in recorded history, no one in their right mind can argue that reducing the corporate tax rate from 35% to 21% will result in anything more than increased financial engineering. Any company that has wished to build a factory, warehouse, grocery store or Pilates studio in America has not been stopped by the after-tax cost of capital—–even if it did elect foreign production due to cheaper labor or better proximity to supply chains or end markets.
So not understanding the cause of America’s failing economy and the artificial but dangerously intensifying mal-distribution of wealth, Bannonism has degenerated into welfare for the rich. That is, a further cycling of business cash flows into stock buybacks, bloated dividends and unproductive M&A deals.
These predictable actions, of course, will add insult to injury on the wealth misdistribution front—given that 85% of stocks and other risk assets (outside of defined benefit pension plans) are owned by the top 10% of the population and 40% are owned by the top 1%.
Nor is foreign trade the extent of the intellectually threadbare economics of Bannonism. There is likewise no case that America’s GDP is lower or that there are fewer jobs available to native Americans owing to immigration—legal or otherwise. The latter neither take American jobs nor burdens native taxpayers with expenditures in excess of their tax payments.
In fact, one sure route to higher aggregate growth and more tax-revenue is to have more immigrant workers. They latter could be easily regularized through a guest-worker system; and its participants could be rewarded for their contribution to American society with an earn-your-way-to-citizenship program based on cumulative taxes paid over an extended period of time.
Finally, as to the matter of crime, America’s colossally stupid and failed war on drugs accounts for most of the illegal immigrant/border-crossing-running crime, while the actual settled, working-class immigrant community has crime rates dramatically lower than those of the native population. Those are just plain facts.
So the obvious thing to do is de-criminalize drugs, put distribution in the hands of Phillip Morris rather than violent drug cartels and levy a modest nuisance (excise) tax on sales from drug stores, vending machines etc. That would sure beat spending $18 billion on just the first 700 miles of the Donald’s ridiculous 2,000 mile Wall on the Mexican border.
At the end of the day, when it comes to economics—Bannonism (and Trumpism, too) amounts to rightwing Keynesianism. That includes not only the $70 billion enlargement of the military pork barrel and the pending vast waste on border walls and enforcement, but especially the ballyhooed infrastructure program that is apparently next in rotation.
The fact is, there is no deficiency of US highways or airports or sewer systems than cannot be solved with higher user fees, less Federal pork barrel and more local tax and spend accountability. Washington doesn’t really need to do a damn thing about it except redirect the existing gas tax purely to the Interstate Highway system (as opposed to mass transit, local roads and bicycle paths), and activate the 10th amendment for funding the rest.
That is, let infrastructure be handled by private toll arrangements or state and local units of government which are in a far better position than the denizens of the Imperial City to match the benefits and costs of public infrastructure undertakings.
In short, there is not a single element of Bannon’s nationalist agenda that should be implemented or that would not do immense harm.
Unfortunately, while Bannon is gone and is actually being buried with malice aforethought by the Donald’s rage-tweets, the damage has been done.
The Trump administration has wasted a year on a dead-end agenda—-and ended up getting saddled with the Congressional GOP’s tax bill albatross in order to put up a fig leaf of accomplishment.
But that’s only the half of it. As we have pointed out repeatedly, the tax bill will add $415 billion to the baseline deficit during FY 2018 and 2019, and the GOP’s spending agenda for defense, disaster relief, border control, domestic appropriations add-ons, veterans and much more will add another $500 billion.
Simply put, the Donald has been walked into a monumental debt trap, which from this week forward will dominate the Washington agenda and will presently raise the odds of a government shutdown and debt ceiling crisis to DEFCON 1 levels.
Meanwhile, so fiscally clueless is the White House and GOP leadership that they came away from Camp David last weekend saying they don’t plan to bother with entitlement reform, either. As the nation’s #1 Fiscal Fake, Speaker Paul Ryan, put it, the GOP will now settle for “poverty reform”.
The GOP has narrowed his push for an overhaul of welfare programs such as work requirements for food stamps, housing and Medicaid, framing the issue Saturday as “poverty reform” that gets unemployed people off welfare and into the workforce. Though popular with the GOP base, McConnell and some House leaders worry the proposal could hurt swing-state Republicans in the midterm elections and cripple their majority.
Of course, even “work requirements” on these programs on top of the ones already there (all the Obama waivers have expired) won’t pass muster with the Senate RINOs. Yet even if they did get enacted, the savings might be $10-$20 billion per year (at the outside).
On the other hand, the Trump-GOP is now fixing to spend about $4.6 trillion in the fiscal year just ahead (FY 2019) and to borrow $1.2 trillion to finance it—-owing to slashing the revenue base that already was at a historically low 17.8% of GDP to just 16.4% of GDP (spending will total 22.3%).
When push comes to shove, we do not see a path to raising the debt ceiling to upwards of $22.5 trillion that will be needed by the end of FY 2019 in order to keep the government’s lights on.
Instead, the odds are rising rapidly that the Dems will use the rolling CR and debt ceiling showdowns of 2018 to drive home the point (partially false) that the budget crisis is owing to the GOP’s massive tax giveaway to the rich and the big corporations. And on the strength of that case and a crashing financial market, regain the House in November.
Then, of course, the Fire and Fury of Bannon’s apostasy won’t be the half of the Donald’s problem. Nor will an impeachment imperiled President be able to blame his demise on Steve Bannon, anyway.
Bannon’s economic nationalism was never more than the skin deep intellectualism of a failed schemer and power-hungry slob who somehow stumbled into the Donald’s unlikely campaign at the 11th hour. Folks, Bannon never even ran a political campaign before last August!
Besides, the Donald’s dogs’ breakfast of protectionism, nativism, xenophobia, jingoism and strong-man bombast didn’t really need an ideological framework in the first place.
It was never anything more than a wrong-headed mishmash of ersatz nationalism—a pig that even one like Steve Bannon couldn’t powder.