I’m a Conservative and Learned to Stop Caring About the National Debt

Last Monday, the Trump Administration reached a deal with Speaker Nancy Pelosi and congressional leaders to eliminate the sequester and spend more money, all but guaranteeing trillion dollar deficits each of the next two years. This red ink has caused consternation among budget hawks and “fiscal conservatives.” Back in the early 2010’s, I was one such individual, fretting about our nation’s financial health.

Let me be clear, I was wrong during the Obama years to worry about the national debt and budget deficits. Data increasingly shows deficits and rising debt are sustainable at much higher levels in the US, a country which issues debt in its own currency, with fewer negative side-effects than feared. It’s even unclear the national debt matters at all. In fact, if there is a problem in Washington, it is that the deficit is too small. I urge fellow conservatives to join me and stop worrying about the debt.

Conservatives say we believe in the wisdom of market forces. If markets were worried about the US’s financial health, they should demand higher levels of interest to compensate for this risk. Well, US interest rates are exceptionally low, implying tremendous calm about our financial health. Even amid worries about entitlements in the future, our cost to borrow for 30 years is only about 2.6%. A decade ago, the market demanded 4.5%; in the late 1990s when there was a surplus, we borrowed at 6%. Frankly, the Treasury should exclusively issue long-dated bonds to lock in these rock-bottom rates for a generation. Why the Trump Administration has failed to do this is beyond my comprehension and a dereliction of duty.

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We should use today’s cheap financing to increase the deficit and enact pro-growth fiscal policies. A nation with a debt/GDP ratio of 100% that borrows at 3% for 30 years and can grow nominal GDP at 4% would see its debt/GDP fall to 75% when the debt comes due or 56% at 5% nominal growth. If you believe America can grow in the future as it has in the past (5% nominal [3% real and 2% inflation]), you should support large deficits funded by locked-in, low rates as GDP growth will diminish the debt burden.

Let’s also dismiss this notion of having to “pay off the debt.” Individuals have to get their debt (on credit cards, mortgages, student loans etc) to $0 eventually because we hope some day to stop earning an income and retire. The lack of income requires a lack of debt service payments. As a whole, the US economy will never “retire.” We will generate GDP and tax revenue forever (or at least, that should be the plan), and as such, we will simply refinance the debt, issuing new bonds to repay old ones. We don’t ever need to bring the national debt to zero. Again, given how low rates are today, we should minimize refinancing risk by locking in these rates for as many years as possible.

Ultimately due to technology, globalization, and central bank policy, there is an excess of global capital. Austria issued a 100-year bond at around 1.2% while investors are literally paying for the privilege of lending to Germany. Yes, they give the German government $100 and accept less than $100 back in 10 years’ time. There is over $12 trillion of debt globally that guarantees a negative return to maturity via negative yields. In this world, thanks to the strength of our domestic economy, America has globally high interest rates. We shouldn’t be afraid to satiate yield-starved global investors by offering them more and more US treasury bonds at yields that are still cheap relative to our underlying economic fundamentals. Borrowing when money is cheap is a winning strategy; let’s take advantage of the global savings glut.

In the past, conservatives have worried deficits would undermine the dollar. Well, the trade-weighted dollar is within 2% of its all-time high. Higher domestic yields have foreign investors flooding into US assets, again unafraid by US debt dynamics. Frankly, the dollar is arguably too high at these lofty heights, weakening the global competitiveness of US manufacturers and exporters. To offset this strength, we could reasonably fund part of this deficit by printing dollars to monetize a portion of the deficit, rather than fund it with new bonds.

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Why are markets unworried about rising US debt levels? Well, countries keep running higher debt totals with no problem. Japan has moved well past 100% debt to GDP, a level once thought scary, and is now well past 200% with no default worries. This is because government debt (in a country that issues debt in its own currency) seems to be more of an accounting exercise than of economic importance.

If tomorrow, we cut taxes by $1 trillion, the public sector would incur $1 trillion of incremental debt, but that’s negated by the $1 trillion of new private sector savings in the form of foregone taxes. Indeed, we are seeing this play out with Trump’s tax cuts increasing the budget deficit (the public sector) and the personal savings rate (the public sector) rising past 8%. In America’s national accounts combing and netting public and private sector balances, no net liabilities (as a government bond bought by a US household is a public sector liability and private sector asset) are created, and it is for this reason that higher debt levels have been sustained without problem. With our reserve currency and high private sector savings (households retain a net worth of $108 trillion, providing ample capital for government debt and to fund private sector investments), our government debt functions as little more than an accounting exercise given offsetting private sector holdings, and is not something to worry about. As long as the US debt remains largely held by US households, the central bank, and captive foreign investors, there probably is no limit to the stock of debt we can carry.

Now while the debt doesn’t matter, deficits do. What is the optimal deficit level? Really, it depends. With the Federal Reserve, we do not demand they target a level of interest rates, as no number is naturally better than another, rather we ask they target preferable conditions, namely “full employment and stable prices.” Similarly, the deficit level itself should not be the target, rather strong economic conditions should be the goal, with deficit spending to accommodate this target. Overly loose fiscal policy can cause excess inflation whereas overly constrictive policy excess unemployment.

Frankly, the Federal Reserve has failed to deliver its objectives with a structural preference for excess unemployment rather than excess inflation for the past two decades. For the past 20 years, core inflation has been 1.7% vs the 2% target, for a cumulative “miss” of 6%.

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This bias has been a driver of rising inequality and stagnant median incomes because it is when the labor market is tight and economy is running hot that wage growth is the best. However by tightening policy as inflation nears 2%, the Fed cuts short periods of time when laborers get bigger raises, resulting in wage growth that lags economic growth and a hollowing out of the middle class. An economy that is run somewhat cool is one where the top 1% reap an inordinate share of the gains because growth is strong enough to sustain high corporate profits while a not-too-hot labor market allows employers not to raise wages much and cede much of those profits to workers. Given this long-running miss in the inflation target, combined with the fact inflation hasn’t been a problem in decades (it hasn’t been 3% in 26 years), now is an opportune time to use fiscal policy to achieve what monetary policy refuses to: a hot, tight economy, which can deliver disproportionate gains to working people, rebuild the middle class, and reduce inequality. In coming pieces, I hope to discuss fiscal ideas conservatives should support to enhance economic growth, rebuild the middle class, increase personal responsibility, and strengthen families.

Importantly as a final note, a preference for deficit financing should not be confused with supporting wasteful spending or ever-growing government. Wasteful spending is never justified as it is always preferable to spend on projects that generate the best returns for citizens. Similarly, bigger government isn’t needed to increase the deficit; cutting taxes significantly while holding spending flat will widen the deficit. Ultimately, I would prefer increasing the deficit primarily via middle and working class tax cuts combined with some incremental infrastructure investment. And because while debt doesn’t matter, but deficits can impact inflation by heating up an economy, running a structurally higher deficit is not necessarily sound. When the economy is too hot, the deficit must contract to avoid excess inflation. But right now, that is the least of our problems.

Given this recognition that market forces welcome more US debt, that government debt is more of an accounting exercise than economic concern, and that the economic environment of low inflation supports a higher deficit to boost wage gains with minimal externalities, now is an opportune time for the Administration to boost the US deficit by 1-2% of GDP ($200-400 billion) via a combination of debt issuance and dollar creation. This policy would further boost the Trump economic boom and deliver more gains for middle-income households. It’s time conservatives accept that our deficit worries in the Obama years were just plain wrong and that we unapologetically run up more red ink.

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Taking on China in this Cold War: An 11 Step Plan

With President Trump recognizing the 75th anniversary of D-Day in Europe this week, I found myself wondering how the historic giant of that era, Winston Churchill, would view the present day, particularly the West’s relationship with China. Churchill not once, but twice, was early to see the threats oppressive, domination-seeking regimes posed to freedom loving people everywhere. While the political intelligentsia called for appeasement toward Hitler’s Nazi Germany, Churchill called for strength and resolve, nearly destroying his political career. Similarly, as World War II was nearing its conclusion, he saw the threat posed by Stalin’s Soviet Union, minimized by President Roosevelt and others. Indeed, the Soviets wouldn’t cede any of the Eastern European territory they had taken back from the Nazis, descending an “Iron Curtain” across Europe. Churchill was right both times; the establishment wrong.

As we engage with an increasingly powerful, emboldened, and repressive China, we should remember the painful lessons of history. I suspect Churchill would applaud Trump’s trade actions, lock arms with him, and call for more aggressive global action until China agrees to follow international law and join the ranks of civilized nations. Let’s make no mistake: China is an extraordinarily repressive regime. Political dissent is not tolerated, the government uses technology to track its citizenry’s every move, Taiwan lives under the threat of invasion if not for American support, Chinese Christians face constant persecution, and at least one million Muslims have been locked away in literal concentration camps for “re-education.”

Rather than confront China for these horrendous abuses, the Western elites have gone the route of appeasement, this time economically, to disastrous results. The Clinton and Bush Administrations bet that economic prosperity would lead to political liberalization. As such, they let China into the WTO, let it keep preferential developing nation status, let it depress its currency and subsidize its manufacturers, thereby stealing our industrial base, functionally raping and pillaging the Rust Belt, and costing at least one million manufacturing jobs. To this day, China continues to take Western technology and steal IP, and if a Western company complains, it loses any access to their market. When China hacked into Anthem or OPM, amassing data on millions of Americans, there wasn’t any outcry from our elites who instead remain obsessed with Russia.

This strategy of economic appeasement has instead been one of economic surrender with disastrous consequences. We have succeeded in making China incredibly wealthy, rebuilding its country and military, while giving them over $3 trillion in foreign currency reserves. Yet, the Chinese Communist Party has used this track record of economic success to further entrench itself, growing ever more oppressive and totalitarian. Economic appeasement toward China has only succeeded in making a dangerous, totalitarian regime more powerful with greater economic resources with which to challenge the West. Abject failure.

Fortunately, this soft on China approach, an unmitigated disaster, has come to an end with President Trump working to defend America’s industrial base. This is a generational opportunity to fix the US-China relationship. Postponing the inevitable battle only helps China, which has grown stronger every year. Often, it is only clear you’ve entered a “Cold War” well after it has begun. Well, it has begun; China’s been waging economic war on America for years, but our leaders are only now waking up to it. China is hell-bent on supplanting America as the world’s most powerful nation, leveraging its export-driven economy to move further up the value chain, entangle itself permanently in world supply chains, and build out its military might. Its imperial island building in the South China Sea leaves no doubt as to its ultimate intentions. After all, it is only natural for authoritarian leaders who oppress people inside their borders to seek to oppress those outside their borders as well.

Just ask yourself: how would the Cuban Missile Crisis have gone if the Soviet Union supplied America with most of its consumer goods, or rare earth metals, or medical ingredients, or worse all of the above? I suspect it would not have gone as well as quickly. We must be clear-eyed; relying on China economically poses a clear national security threat. We must disentangle our supply chain today so that China cannot use economics to leverage better military or geopolitical outcomes. Ultimately, economic security is national security.

Thus far, Trump has levied 25% tariffs on $250 billion of Chinese imports. Unsurprisingly in trade deal negotiations, China has backtracked, in keeping with their history of never living up to promises. Fortunately, rather than accept a bad deal, Trump had his team say “no,” raise the tariff rate to 25%, and contemplate further tariffs. However, this is not enough. Until and unless China faces real economic pain, they will never agree to follow the international rules and make real concessions. Recognizing that this trade conflict is but one front in an ongoing economic Cold War, we must enhance the pressure. The President must publicly and forcefully, perhaps with a detailed address to the nation prior to the G-20 summit, explain the threat China poses and call for a national, coordinated response.

Currently, China is coordinating policy, imposing tariffs, but also cutting taxes, and easing monetary policy to support growth. Ultimately, America has far more leverage and tools if our government’s institutions can unite and coordinate behind a central mission: to grow the economy, repair our industrial base, and enhance domestic economic security and sufficiency. Wars are when a nation is united and policy is coordinated. Now is the time for such a national effort. To do so, I would humbly suggest the President announce the following action plan as he prepares for the G-20.

 

  1. Trump should announce we will not re-open negotiations with China. Ultimately, these talks have increased business uncertainty, and consequently, some businesses have been slow to readjust supply chains or launch new investments domestically in case talks lead to a deal. Make it clear to executives they should assume the tariffs are the permanent “new-normal,” and uncertainty will diminish, and growth will pick-up as they invest in boosting domestic capacity.
  2. For America to re-engage with China on trade talks, China will have to, as the only pre-condition, actually stop the flow of fentanyl into America. While recently they have increased regulations on fentanyl, they must enforce these laws. Chinese fentanyl, which President Xi lets come to America, has poisoned our streets and killed at least 45,000 Americans. Xi and the Chinese government is at the least complicit in this mass murder of our citizens. They should be held to account for this. They must commit to paying the US government $45 billion ($1 million per American dead due to China) as a show of good faith to merit a reopening of the trade dialogue. Until they publicly commit to the $45 billion, which we can use to end the opioid epidemic, there will be no trade discussions. I suspect this means no trade talks for some time.
  3. Trump should announce tariffs on the remaining $300 billion of Chinese imports by July 1. As these are more consumer facing (ie iPhones), the tariff rate should begin at 10% on September 1, rising to 25% on January 1, 2020. By staggering the tariffs as such, corporations will have ample time to begin moving supply chains and reshoring jobs to minimize product disruptions and price changes. An orderly implementation of tariffs will calm consumers and markets, ultimately making them more productive
  4. Trump should, effective no later than year end, ban and embargo Huawei, ZTE, and any other Chinese-linked entity from core technology infrastructure susceptible to espionage. Any foreign network using Chinese equipment would also be banned from having secure communications with the US.
  5. As seen by China’s threats on rare earth metals, they cannot be relied on as a stable supplier, yet we rely on them for most of our medical ingredients, which is unacceptable. Any product where China accounts for more than 33% of the supply would be protected by additional national security tariffs to take effect January 1 to promote more domestic production and self-sufficiency.
  6. Chinese state-owned entities would be barred from issuing either stock or borrowing money in US dollars to limit China’s ability to finance its economic war upon us.
  7. No Chinese individuals planning to return to China can receive student visas. We will no longer educate the global competition. Our schools will educate Americans first and foremost.
  8. America works best when it works together, so recognizing this, and to ensure calm in financial markets, the Federal Reserve should announce it will coordinate monetary policy with fiscal policy. It’s time for the Fed to stand with Trump and not with China, which needs to see our economy slow. Namely, in conjunction with these actions on trade, the Fed should announce an immediate 1% interest rate cut to 1.38% and end to balance sheet normalization. Moreover, the Fed should pledge to increase the supply of dollars with an unlimited QE program whenever the trade-weighted dollar passes $125 (it is nearing a record of $130) to defend against foreign currency manipulations and protect American exporters. These policies will boost growth and minimize any disruptions to markets.
  9. Until and unless Democrats agree to immediately use the tariff revenue (at least $90 billion in year 1) to fund new infrastructure projects via a new “China Rebuilds America Fund,” which would make the tariff policy clearly pro-growth, Trump should order the Treasury to dividend all China tariff revenue to each state government on a per capita basis (ie a state with twice the population gets twice the revenue), ensuring fair and equitable distribution. With the influx of cash, each state government can recycle the tariff revenue into their economy as they see fit (lower taxes, infrastructure, or more school spending) with no strings attached.
  10. Trump should direct every regulatory body to streamline permitting and regulatory processes and hasten coordination with private sector bodies and companies to increase apprenticeships and job training to increase US domestic manufacturing capacity as quickly as safely possible.
  11. Finally, the Administration should begin “break-glass” preparations to freeze and seize China’s US Treasury holdings in the event the Chinese government tries to sell to disrupt financial markets. The treasuries could be placed in the Medicare and Social Security trust funds to improve their financial health. Such a move would cripple China financially but should only be taken if China retaliates in a particularly destructive fashion.

 

This policy playbook, combined with already announced policy actions, would show that the Administration is taking the China threat seriously. Increased tariffs and sanctions would put tremendous pressure on the Chinese economy while coordinated policy-making from the executive branch, Federal Reserve, and congress or state governments can ensure the domestic economy continues to run hot. Policy coordination is absolutely critical.

As we stare down China, history will remember this moment as a generational opportunity to protect our industrial base and a free world. It is a time for choosing; will we be a nation of Churchills or Chamberlains?

Use China Tariffs to Fund New US Infrastructure Spending

Last week as the Chinese negotiations backslid, President Trump decided to raise tariffs on $200 billion of Chinese imports to 25% and potentially implement tariffs another $325 billion of goods rather than accept a weak deal. Given the underlying strength of the American economy, which is maintaining 3% growth as unemployment plumbs 50-year lows, Trump is right to hold out for a real deal to protect America’s industrial base and intellectual property from Chinese theft. Strong underlying momentum will help insulate our economy from trade-related volatility while higher tariffs, over time, will incentive businesses to onshore production.

In the near term, the President should grab the opportunity to score a major bipartisan win and accelerate economic gains by pushing a China-tariff funded infrastructure bill. After the White House meeting, Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer signaled an interest in spending upwards of $2 trillion on new infrastructure, asking the President to find a way to pay for it.

Well, the 25% tariffs on $250 billion of Chinese imports will generate about $62.5 billion of tax revenue per annum while implementing 10% tariffs on remaining Chinese imports will generate another $~33 billion, for about $95 billion in annual revenue. And so, Trump should propose the creation of the “China Rebuilds America” fund where all of this revenue is deposited to spend on new infrastructure projects in what will be a clear win for the American economy.

New construction related spending and employment will offset any near-term trade disruptions to keep growth humming while also expanding the long-term capacity of the economy thanks to new productivity enhancing infrastructure. By requiring state and local governments to match federal funding, annual incremental infrastructure spending could reach $190 billion, the pace needed for a new $2 trillion infrastructure effort.

Additionally, by getting Democrats on board with this plan, Trump would show a unified front to China, which only further enhances our bargaining power to strike a new trade agreement. Plus by strengthening the economy further, there is less need for us to accept a quick deal, ensuring we get a better one. A resilient economy will also calm US financial markets, an indictor the President clearly cares about.  There will now be a clear benchmark for China in our trade negotiations: until they are willing to offer enough concessions to outweigh tariff revenue funding major infrastructure improvements, we have no reason to say “yes” and remove the tariffs. America would clearly have the leverage in trade talks.

By joining these two policies, Trump has the potential to deliver on campaign promises and reshape America’s economic trajectory headed into the 2020 election. Pressing harder on tariffs until China capitulates in negotiations will help rebuild America’s beleaguered industrial base while also supplying the funds to modernize America’s aging infrastructure. Striking a major bipartisan agreement on infrastructure will also help solidify Trump as the consummate negotiator and dealmaker to swing voters.

For the past two decades, America has built China into a global superpower thanks to chronic, massive trade deficits that have exceeded $4.5 trillion cumulatively. It is long past time we make China rebuild America, not only to help our near term economic prospects but also to ensure we have the capacity to maintain the advantage in our long-term strategic conflict with China, who is quickly becoming our most potent rival.

It’s time we rebuild America’s roads, bridges, airports, and rail, and with Trump’s tough trade stance, we can have China pay for them. If Democrats can’t find a way to “yes” on more infrastructure spending, they will show themselves as putting politics before the national interest. But President Trump must take the initiative, by holding firm against China, raising tariffs and publicly offering to put all tariff revenue into the “China Rebuilds America” infrastructure fund, which would exemplify Trump’s pledge to put America First.

 

 

 

Trump Should Propose the “China Rebuilds America” Fund Now!

Following a midterm election in which Republicans gained seats in the Senate but lost their House Majority to Nancy Pelosi and the Democrats, President Trump needs to manage a divided Washington to continue delivering on campaign promises and advance America’s interests, which in turn will boost his own re-election chances. As the consummate negotiator, Trump must strike fast to put Democrats on their back foot and immediately offer a deal that will aid America’s workers and economy: a Chinese funded infrastructure bill.

Right now, the American economy is rocking, maintaining 3% growth, which has pushed unemployment below 4% and wage growth to around 3%. The manufacturing sector, which has been enjoying its strongest stretch of job creation in over 20 years, is resurgent. It’s no wonder then that the GOP was able to take Senate or Governor races in manufacturing-heavy states like Indiana, Tennessee, Missouri, and Ohio. Trump needs to ensure economic growth continues to broaden out to further tighten labor markets and push wage growth higher so that all workers see their paychecks rising.

Investing in infrastructure, which enjoys broad political support, will create jobs now, and importantly by modernizing and expanding our infrastructure capacity in everything from rail to broadband, we enhance the long-term potential of our economy. Strategic infrastructure investments will boost near-term growth and employment, forcing wages higher, while also increasing wages over the long-run for all Americans. In so doing, he lays the groundwork for his own re-election. However, we can’t borrow more money to have a multi-billion-dollar boondoggle while deficits are running around $1 trillion.

And this is where China enters the picture. Trump has rightly singled out China as our top long-term geopolitical foe, and they have used unfair trading practices and intellectual property theft to amass a cumulative $4.5 trillion trade surplus with America since George W. Bush foolishly let them in the World Trade Organization (WTO). With this wealth transferred from Americans, China has rebuilt its economy and military. We have literally funded China’s rise as our top rival.

In an effort to right these historic wrongs and restore our industrial base, Trump has correctly levied tariffs on about $250 billion of Chinese imports to level the playing field and eventually force China to negotiate in good faith. From January 1 onward, these tariffs will generate about $62 billion in revenue, which currently goes into the Federal Government’s general budget and reduces the deficit. If, as threatened, 10% tariffs are placed on China’s remaining imports, the annual tariff run-rate will approach $90 billion.

Trump should immediately and publicly offer House Democrats a deal: all Chinese tariff revenue is put in a segregated trust fund (named the China Rebuilds America Fund) to invest in new infrastructure projects in partnerships with state and local governments. By making states and localities together put up 50% of the funding, you can increase accountability and double the effective size of the infrastructure program. We can cap annual federal spending from the China Rebuilds America Fund at $50 billion ($100 billion with state matches) as over time China tariff revenue will fall as companies move production back into the US, which in turn will create new jobs. By capping the fund, infrastructure spending can then continue for some time even as the tariffs are removed. Importantly, by recycling tariff revenue into productivity-enhancing projects, Trump will be offsetting any near-term dislocations caused by the China trade situation and actually accelerate economic growth.

By getting Democrats on board with this plan, Trump would show a unified front to China, which only further enhances our bargaining power to strike a new trade agreement. This is compounded by the fact that Trump’s tariffs will be funding growth-accretive infrastructure. By strengthening the economy further, there is less need for us to strike a quick deal, ensuring we get a better one. There will now be a clear benchmark for China: until they are willing to offer enough concessions to outweigh tariff revenue funding major infrastructure improvements, we have no reason to say “yes” and remove the tariffs.

By proposing the China Rebuilds America Fund, Trump can retake control of Washington, show voters he is a deal-maker, get implicit backing for his tough on China trade stance, provide tangible change to voters via better infrastructure, and boost economic growth. Additionally, he achieves two critical strategic priorities: rebalancing trade with China and modernizing American infrastructure. If Democrats don’t accept this win-win deal, it’d be a proof point to voters they are uninterested in governing and are simply the party of obstruction. Trump wins if they accept this offer because it will help America, and he wins if they say no because it will show Democrats to be hypocrites on their promises for bipartisanship.

It’s time we rebuild America’s roads, bridges, airports, and rail, and with Trump’s tough trade stance, we can have China pay for them.

 

 

How to Protect Social Security and Medicare

Recently, the social security trustees offered yet another stark reminder that America is nearing an entitlement crisis. Within a decade, the Medicare hospital trust fund will be insolvent; within two decades, social security will be. When that happens, each program will be forced to automatically cut benefits—in the case of social security by over 20%. To fully fund the shortfall for the next 75 years, we would need to immediately inject about $17.5 trillion into the two programs, $3.5 trillion into Medicare and $14 trillion into Social Securitya financial impossibility. 

Over time, it is a financial necessity to make some changes to the programs, like a gradual increase in the retirement age, to improve their financial situation and ensure they will be there for future generations. Donald Trump promised to govern on behalf of the forgotten men and women of the working class who in particular rely on these programs in their sunset years, which is why it is critical he takes steps to sure up their finances. 

 

Now, not only is it financially impossible to fully fund these programs for perpetuity today, it is unnecessary. The $17.5 trillion shortfall is a best-efforts estimate that can shift materially if for instance economic growth is faster than forecast, which would result in higher tax revenue. Nonetheless, Social Security and Medicare clearly face shortfalls, and we should find ways to extend the trust funds’ lives. Fortunately, there actually is a way to materially extend these programs’ lives, reduce today’s budget deficit, make mortgage rates lower, and not reduce benefits by a dollar. 

 

The United States Treasury should sell $2 trillion in zero  couponputable, perpetual bonds (more on their structure below) to the Federal Reserve, America’s central bankIn turn, about $600 billion would be granted to the Medicare hospital trust fund and $1.4 trillion to Social Security’s trust fund. With these additional sums, Medicare would be able to meet current benefits into the mid-2030s, about a 10 year improvement, and Social Security into the mid-2040s, about a 5 year improvement. This step would provide more security and certainty to older Americans and give us more time to make gradual changes to the programs for future beneficiaries to further extend their solvency. 

 

Now as is the case with existing trust fund sums, this $2 trillion would be invested over time in US treasury debt. With the budget deficit likely to surpass $800 billion annually in coming years, the trust funds’ buying power would essentially cancel out 2-2.5 years of new budget deficits. By buying US debt, we would be selling fewer treasuries to private investors, this reduced supply would mean we can sell our debt at a higher price, all else equal. In other words, we would sell debt at a lower interest rate. Paying less in interest would bring down the US budget deficit somewhat. Additionally, US treasury interest rates are the benchmark off of which most banks determine their mortgage rates, business loan interest rates, and so forth. So, a lower treasury rate will translate to lower mortgage rates, making home buying more affordable. 

 

To some, this may sound too good to be true. If we are putting more money into entitlement programs, and bringing down the cost of debt in the process, there must be a catch, and they would point to the $2 trillion in bonds the government would sell to the Federal Reserve. Note though that the bonds sold to the Fed are “zero coupon,” which means they pay no interest, meanwhile the trust funds would be using the proceeds to buy US treasury debt that does pay interest. Additionally, these zero-coupon bonds are “perpetual,” meaning they never have to be paid back. In reality, these Fed-owned bonds hold no economic value. However, the Fed would “print” $2 trillion to send to Medicare and Social Security in exchange for them. At this point, some may say I am merely proposing printing money to pay for entitlements, which will cause inflation and weaken the dollar. As I will explain, that is actually not what I am proposing, but first, let me rebut the case that printing money in the first place would definitely be inflationary.

 

Over the past ten years, the Federal Reserve has printed about $3.4 trillion buying treasury and mortgage bonds, nearly quintupling its balance sheet to $4.3 trillion. During this time, the US dollar has actually strengthened by over 26% on a trade-weighted basis and core inflation has averaged less than 1.6%, below the Fed’s target of 2%. The many predictions that Fed policy would create runaway inflation simply have not come true. 

 

Moreover, it is worth noting that the fashion in which the Federal Reserve operates its monetary policy has exacerbated income inequality and the stagnation of median incomes for the past two decades. Targeting 2% inflation, the Fed tends to raise interest rates as we near full employment. Now, it is during periods of at or near full employment where workers are more in demand than in supply, meaning they enjoy the greatest wage increase. Immediately after a recession, even as business improves, there are many people eager for work, so businesses don’t have to increase wages even as the business grows, leading to higher profit margins. Periods of full employment reverse this with workers getting a bigger share of the pie. However in its fear of inflation, the Fed raises rates as the labor market improves, truncating the time spent in a tight labor market relative to the time in a loose labor market

 

As this continues over each economic cycle, business owners get a gradually increasing piece of the economic pie at the expense of workers, widening inequality and leaving our middle class behind. In fact, over the past twenty years, core inflation has averaged 1.7%, missing the Fed’s 2% target and showing its preference for low-inflation periods when businesses have the bargaining power to tight labor market periods when workers do. Using the Fed balance sheet to support entitlement programs that particularly benefit middle and working class Americans would help counteract this bias. 

 

Now to those still unsatisfied by my argument that using the Fed to create money is not problematic, I wish to explain why I am not proposing printing money. Rather than have the Fed print $2 trillion, I recommend selling $2 trillion in zero coupon, putable, perpetual bonds. True, zero coupon perpetual bonds have no economic value, but note the word “putable.” Putable means the Fed can “put back” (sell) the bonds at face value to the treasury if certain conditions are met. Namely, in any month when the core PCE index (the Fed’s preferred inflation measure) rises by 3-3.5% year over year, $50 billion of bonds are put back, 3.5-4% $75 billion, 4-4.5% $100 billion, 4.5-5% $125 billion, and over 5% $150 billion.

 

Essentially if I am wrong, and this program causes inflation to rise materially above the Fed’s 2% target, the Fed would be able to sell the bonds back, taking the US dollars back out of circulation, thereby tightening policy to bring inflation back down. Given that inflation hasn’t passed 3% on an annual basis in 26 years, it is likely that little if any of this $2 trillion bond is ever put back to the treasury. And if such a period comes sufficiently in the future, the amount saved on interest payments thanks to Social Security and Medicare buying treasury debt may well exceed the cost of buying back these putable bonds. I would venture a prediction that this $2 trillion bond issuance does not lead inflation to breach the putable levels over the forecastable horizon.

 

Given the structural undershoot of inflation, a middle class that has been left behind, and the pressing need to provide support to Medicare and Social Security, selling these bonds to the Federal Reserve is a gamble well worth taking. I would recommend beginning with this $2 trillion program, because the sum is large enough to postpone our entitlement crisis several years, but I wouldn’t attempt to fund all of the $17 trillion shortfall today as that would raise the risk of causing excess inflation, undermining the purpose of the program. Rather, it is best to take one step likely to succeed today, and then, 5-10 years down the road, the exercise can always be repeated if it proves as successful as I anticipate.

 

While virtually all Americans agree it is critical to preserve these programs as best as possible, some may question the wisdom of perpetuating them in their current form, and to them I would highlight some key points. First, we should ask honestly ourselves whether Congressional Democrats and Republicans, who both clearly like to spend money when in power, would actually permit Social Security and Medicare to cut benefits when their trust funds run dry? Or rather, would they either raise taxes or sell more debt to the public to fund the shortfall? It seems clear to me that it is better to try my strategy of issuing perpetual debt than issuing debt that has to be repaid to investors or raising taxes on hard-working Americans.

 

Some others may argue that it is unwise to take this course of action when there would remain a $15 trillion problem. To them, I would make two points. First, I think it better to solve part of the problem than none of it. Second, I don’t pretend this plan is a be-all, end-all solution. Rather, it is intended to add several years of viability to these programs to ensure they can meet the promises made to those at or near retirement who need certainty. It would be fantastic if this $2 billion Federal Reserve bond were paired with measures like gradually lifting the retirement age by 2 years starting in 2024 and moving future Social Security benefit cost of living adjustments to chained-CPI from headline CPI. These measures combined with the $2 trillion cash infusion would greatly extend the lives of Medicare and Social Security. Like President Reagan in 1986, I believe Republicans should take the lead in solving entitlement problems before the crisis is upon us. However, I would rather issue this zero-coupon bond then permanently raise taxes.

 

Last, it is critical to emphasize again that while many worry America faces a public debt problem and a deficit problem, it does not face an inflation problem. That is largely because the Federal Reserve has run a structurally hawkish monetary policy that has led to below target inflation and lackluster median wage growth. While the Fed, through its quantitative easing program, has been happy to buy bonds to push up asset prices and make the rich richer, it has consistently acted to raise rates and slow the economy as it senses that upward wage pressures are increasing.As such, the one risk my policy increases, inflation (albeit as highlighted above, I emphasize my skepticism inflation would materially rise), is one the economy can afford, if only to counteract the years of overly hawkish Fed policy that have left the middle class behind. Moreover, given the putable nature of my bonds, any period of higher inflation would be short-lived as the Fed puts the bonds back to the Treasury and takes dollars out of circulation. All told, these risks stack up attractively versus the potential of putting $2 trillion into entitlements without issuing debt that has to be repaid or raising taxes.

 

Donald Trump was elected President because he promised to bring new thinking to our politics, and given the size of their problems, new and innovative thinking is needed to secure Social Security and Medicare. Issuing $2 trillion in zero coupon, putable, perpetual bonds to the Federal Reserve would greatly enhance these programs’ viability at no cost to taxpayers. In fact, by pushing down treasury bonds’ interest rates, taxpayers would save money in coming years.

 

Let’s act now to protect the retirements of America’s forgotten men and women.

Facing the Truth on Immigration and DACA

In recent days, the debate over immigration policies have raced ahead amid charges of racism, amnesty, an impending government funding deadline, and the March 5 expiration of DACA (Deferred Action for Childhood Arrivals), even grinding government to a halt. Remarkably, a group of republican Senators, led by Lindsey Graham, wish to capitulate to democrat demands, granting a path to citizenship for 3 million illegal immigrants, give their parents work permits, and in exchange, republicans would merely get $2.7 billion for border security, a pittance, and only modest changes to our legal immigration system.

Such a policy will give millions amnesty without taking actions to ensure we don’t face a flood of illegal immigrants again in 25 years, repeating Ronald Reagan’s 1986 immigration mistake, granting amnesty now for border security that never materializes. If Americans wanted blanket amnesty, we had ample opportunity with the candidacies of Jeb Bush, Marco Rubio, and Hillary Clinton. Donald Trump staked out the only law-enforcement, citizen-minded immigration policies, and he won. To capitulate now is to ignore the message voters sent in 2016. DACA is the only bargaining chip Trump and republicans have; they must use it to reform a legal immigration system that has hurt working American citizens.

Since 1999, real median household income is up less than 1% to about $59,000. Working people have suffered two lost decades even as the rich get richer. A major reason why is the surge in immigration. America is now home to over 45 million immigrants, compared to less than 20 million in 1990. Over 13% of our population is foreign born, the highest level since before World War I. It has been steadily increasing since hitting 5% in 1970.

            Historically, our immigration intake has been cyclical, which is to say we take in a large number of immigrants, and then slow down the intake as we assimilate them into our culture. As that process ends, we let immigration levels rise again, a process that has worked well. That pattern played out in the 1900s with high immigration levels through World War I, which we then slowed through 1970 (a period where coincidentally the modern American middle class was built), and which subsequently have been rising. With immigrant levels at a century high, we have to decide whether to let this uptrend continue or slow immigration as the RAISE Act would do.

Just from an economic perspective, the data argues for slower immigration. During the immigrant boom of the past twenty years, the middle class hasn’t enjoyed any real wage gains. We recognize the laws of supply and demand in almost everything but immigration. When supply goes up, prices go down. Immigration increases the supply of labor, driving the price lower. This is great for business owners who employ laborers (hence why the corporatist GOP establishment favors ever more immigration), but bad for wage-earners. If America had a sustained labor shortage, that would call for more immigration, but if anything, we’ve suffered from an excess of labor.

Over the past 20 years, the unemployment rate has averaged 5.9%. The Federal Reserve estimates the unemployment rate consistent with a full labor market is 4.6%. In other words, for the past two decades, America has had a structurally loose jobs market with 1.8 million Americans unnecessarily unemployed on average. During this time, the flow of immigrants has continued unabated. It’s no wonder wages have barely budged. We are doing a bad job getting the people already here employed; there’s no need to keep bringing in a record number of new people too.

            Even today with the unemployment rate at 4.1% and talk of a tight labor market, fewer Americans under the age of 55 are working than in 2000, even though the population of 25 to 54 year olds has grown over 5 million. While the labor force participation rate among prime working age adults is at or near highs in nations like Germany and Japan, ours is well below last decade’s level. Not to mention after years of loose jobs markets that benefited employers, America’s workers will benefit from a prolonged period of tight employment where businesses are competing for workers, forced to raise wages. In a tight labor market, businesses would have to train American citizens, improving their potential earnings, rather than import skilled labor and let American citizens form an underclass. Considering their lower median earnings and higher unemployment rates, African-American and Hispanic-Americans would disproportionately benefit from a tight labor market policy, making the charges of racism from immigration expansionists all the more laughable.

            After two lost decades for America’s working people, now is the time to slow immigration and let citizen wages rise. If Republicans and Trump truly want to listen to their base and help the forgotten men and women, they can’t capitulate to amnesty for millions of “dreamers,” and must negotiate lower legal immigration levels to make the dreams of America’s citizens more attainable. If they can’t hold this line, what was the point of the 2016 election?

It’s Time to Back Trump

Within the political and chattering class, some conservatives, describing themselves as part of the “Never Trump” movement, have attacked Donald Trump as a threat to the republic and the conservative movement while attacking GOP leaders who support him, like Marco Rubio and Paul Ryan, as sell-outs or charlatans. These attacks couldn’t be further from the truth. Most recently, Ohio Governor John Kasich has been generating headlines by distancing himself further from Trump, in an attempt to lay the groundwork for another run for the Presidency in 2020. Conservatives need to recognize that much, though not all, of what Trump has run on represents the future, not the demise, of the conservative movement. While he is an imperfect messenger, Hillary Clinton would likely do irreversible harm to this country, which is why conservatives must back Trump.

In April 1998, there were 17.64 million Americans working in the manufacturing sector; today that number is 12.28 million. Put another way, we’ve lost 800 jobs every day for 18 years. During this time, real median incomes have fallen, and the African-American poverty rate languishes over 25%.

The typical working American is worse off today than at the turn of the century; for this, both parties share blame. While economists focus on the lost decades nations like Japan have suffered, the simple fact is outside of Silicon Valley and the DC and NYC suburbs, much of America has suffered two lost decades as well, a symptom of a nation in decline.

Trump has refocused the debate around the plight of ordinary Americans, something conservatives have failed to do in recent years. Conservatism is an inherently populist ideology; we prefer giving power to everyday individuals than concentrate it in the hands of supposed experts. Conservatives have faith in the genius of every man and woman. Since 1988, that has been forgotten as the GOP became the Chamber of Commerce Party. Trump is rightly realigning the GOP around the working men and women of this country.

While Trump is imperfect, the general election is about who is the better candidate, making it a simple choice. Given his lack of a political record, there is some uncertainty about what he would do, but we can be certain of what Clinton will do. She will nominate liberals to the Supreme Court while he may nominate conservatives. Take even an area where Trump supposedly disagrees with orthodoxy: trade. Does anyone really believe the same government that has run VA hospitals so terribly negotiated perfect trade deals, particularly when we know China has amassed $3 trillion in reserves?

True, Trump lacks a foreign policy record and is something of a wildcard, but no record is better than a record littered with failure, from ISIS taking territory across the Middle East to China building militarized islands throughout the South China Sea. As Secretary of State, Hillary Clinton left a world on fire; no wonder global warming appears to be such a problem…

It is said every election, but in 2016, the stakes really could not be higher. Implicit in the Never Trump argument is the belief the damage of a Clinton Presidency is containable, which underappreciates the power of a party’s 3rd term in power. Controlling the White House for 12 years cements policies and structurally shifts the political center. The Roosevelt-Truman terms shifted the country left for two generations, making support for more entitlements and welfare the new political center as evidenced by Republicans eventual acceptance of Social Security. Similar, the three Reagan-Bush terms shifted the political center rightward for a generation on most economic issues with even Bill Clinton declaring the era of big government over.

Clinton will cement the leftward shift begun by Obama for a generation with Obamacare, political correctness, and new regulatory regimes across the economy becoming entrenched political facts, unlikely to be rolled back for years, if ever. For eight years, Obama has pushed our economy, society, and foreign policy footing into one that looks more like Europe. A Clinton Presidency makes a reversal from that path all but impossible. We see the results of Europe’s experiment, and they’re devastating: slow growth, high debt, chronic youth unemployment, and atrophying military power.

The race is tightening, and in the polling averages, Trump has taken the lead in Ohio and Iowa while other states like Florida, North Carolina, and Nevada are too close to call. With momentum at his back, now is the time for reluctant Republicans to get behind Trump. Whether Trump wins 85% or 90% of republican voters on November 8 could very well determine who wins the Presidency. Leaders like John Kasich must really ask themselves if they are willing to sow division and make it easier for Hillary Clinton to continue Obama’s disastrous policies as President.

Donald Trump is our last chance to turn back from the current path of decline and decay. Conservatives need to get behind the republican nominee or risk losing the country we all have fought so hard to build.