Donald Trump trade threats lack credibility

US bluster has caused most of the world to rally to China’s side

Lawrence Summers

US President Donald Trump: his rhetoric notwithstanding, it is wrong to say nothing has been achieved through negotiation with China © AP

As the possibility of a trade war between the US and China looms, threats and counterthreats are hurled back and forth and markets gyrate, economic logic and truth appear to be an early casualty. There are certain points of fact on which there should be no disagreement.

First, globalisation and trade have caused significant disruption to the US economy but this has had little to do with trade agreements of the last generation. It is now clear that increased imports especially from China have inflicted substantial burdens on manufacturing workers, particularly in the the north central part of the country. Where too much conventional analysis goes wrong is in attributing this to trade agreements and in failing to recognise offsetting job gains from exports.

The reality is that the US economy was largely open by the 1980s and that every major trade agreement has reduced other nations’ trade barriers by far more than it altered any American trade barriers. This is most true of China’s 2001 accession to the WTO, in which the US only committed to continuing to keep its markets open on the most favourable nation terms that had already been ratified each year for more than a decade but won major changes in Chinese economic policy. The real reason for economic disruption was not trade agreements but the emergence of emerging markets as major participants in the global economy. This is not something the US could stop or, given its export interests and broader interests in global co-operation, could plausibly aspire to contain.

Second, much of President Trump’s rhetoric notwithstanding, it is wrong to say nothing has been achieved through negotiation with China. Only a few years ago, China’s current account surplus was the largest relative to GDP among significant countries, it was holding its currency down to maintain demand for its exports, and most software used on its personal computers and videos on sale in its major cities were pirated.

Today China’s global surpluses are far below past US negotiating targets of a few years ago, China has spent about $1tn propping up its currency, and IP protections are far better enforced than a few years ago for major US software and video producers. Of course major issues remain but the view that multilateral pressure without bluster is ineffective is belied by experience.

Third, extraction of IP through joint venture requirements is largely a problem for companies outsourcing production from the US and not for American workers. Corporations headquartered in the US often complain bitterly that if they wish to enter the Chinese market they must enter into joint ventures with Chinese counterparts who demand transfer of intellectual property and then operate on their own.

These complaints are often accurate. Notice, however, that they typically involve cases where the company in question produces for China in China and so have little impact on US employment. In many cases a substantial number of the company’s shareholders are foreign and it pays taxes to many governments. It is more than a little ironic that an administration that condemns outsourcing should make standing up for those who move production to China so central a priority.

Fourth, bilateral trade bluster is not an effective strategy for the US. While most countries feel somewhat threatened by Chinese trade and business practices, it has been the unfortunate accomplishment of US trade policy in recent months to cause most of the world to rally to China’s side because of our disregard for the WTO and the global system.

Not only does having many others on its side make it easier for China to resist the US, it also undercuts the effectiveness of our sanctions. China can still export to other markets and US producers who use Chinese inputs lose competitiveness when only they are forced to pay tariffs. History is clear that moments of high trade truculence like that pursued against Japan in the early 1990s accomplished very little while imposing substantial costs.

Fifth, threats have to be credible to be effective. In recent weeks, every time the US has pushed its strategy markets have had mini-collapses, and every time it has appeared to pull back markets have rallied. How in such a world can it seem credible that the US will actually carry through on its threats? And without credibility why should one expect strong responses from China? I return from a recent meeting with senior Chinese officials with the clear sense that they are more bemused than alarmed by what they see as a boomeranging US approach.

The US can do much better for itself and for the global economy but this is the subject for a subsequent column.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

The Geopolitics of London: Making a Global Financial Center

By Jacob L. Shapiro and George Friedman

If London were a city-state, it would boast the 20th-largest national economy in the world. Its national per capita gross domestic product would be greater than that of the United States. It would be the 15th most populous country in Europe and, most important, it would have voted to remain in the European Union.

But London is not a city-state, and it can never aspire to be one. For just under a millennium, London has been the capital of England; for more than three centuries, it has been the capital of the United Kingdom; for more than a century, it was the capital of the largest empire ever conquered. London embodies the paradox of all great cities. Great cities are the ultimate expressions of their national cultures, often serving as the seat of power for millions, even billions, of people who do not actually live there. But just as often, the interests of the cities diverge from those of the rest of the nation.

Source: Geopolitical Futures (Click to enlarge)

Such is the case for London. The power it wields and the opportunities it offers have attracted people from all over the world. The city has become a strategic necessity for the country in which it resides. The role London plays in that strategy changes according to the necessities of the times, and it’s just as likely as not that its interests actually align with the United Kingdom’s.

Consider Brexit. No part of the United Kingdom will feel the ramifications of the UK’s departure from the EU more deeply than London, which by dint of strategic necessity became a European financial and economic powerhouse. That is why Londoners voted with the Scots and the Northern Irish to “Remain”—because London, not England, will bear the brunt of the short-term disruptions to come.

But London has transformed itself many times before, and there’s no reason to believe it will be daunted this time around. As much as it would like to remain Europe’s primary financial capital, London has been and always will be a national capital.

Bridgehead Revisited

For the first several centuries of Britain’s existence, much of the world used London as a bridgehead for invasion. But after the Industrial Revolution, when the British Empire reached the height of its power, London instead became a bridgehead for England to invade much of the world.

Source: Geopolitical Futures (Click to enlarge)

The city had grown only more powerful since it became England’s capital. The majority of British wealth and power became concentrated in southern England and, to a lesser extent, the Midlands, Britain’s most fertile areas. The Greater London area was by far the richest and most populous simply because it was a trade hub for the country and, by extension, the rest of the world.

Advances in agricultural technology enabled people around the world to live longer. The resultant population boom raised demand for virtually all goods. At first, English farmers who worked in cottage industries could not keep up with demand, so huge factories were created to keep pace. Later, farmers in southeast Britain began to leave their homes for the cities—at first, mainly London—to seek out better paying jobs. By 1801, London had a population of 960,000. By 1911, it had a population of 7 million.

London became even more important in its role as Great Britain’s main port. Great Britain simply did not possess enough raw materials to keep pace with demand. And so it began to import larger and larger amounts of raw materials from its imperial possessions. Even the imperial possessions it could not keep began trading with Great Britain on a massive scale. In 1784, the US exported eight bags of cotton to England. (That is literally what the statistics say, without further clarification.) Within 15 years, the US was exporting 40,000 bales of cotton to England each year, and by 1900, that figure had risen to 7 million. The story was much the same for other commodities like sugar and tobacco.

London was not the only city to reap the benefits, of course. By 1900, Glasgow, Manchester, and Liverpool all had populations of over 1 million people. Northwestern England, which before had been a relative backwater, became Industrial England. New nodes of political and economic power that had not existed before sprang into being, the effects of which became truly apparent only in the decades following World War II. But in the 19th century, none came close to rivaling London’s immense wealth and power.

London was the main seat of political power and had also become a center of commerce. And it was the largest manufacturing town in the country that had been the vanguard of the Industrial Revolution.

Ground Zero of a Revolution

After World War II, London was a shell of its former self.  The UK kept many of the trappings of imperial power, of course. It developed nuclear weapons, maintained a relatively impressive military, and held a permanent position on the UN Security Council. But in large measure, the UK’s fate became directly tied to Europe’s fate, and no region of the UK could coexist as easily as London could as both capital of England and European hub. British power became metropolitan power, and London remade itself once again, as it had so many times in the past, to meet the challenges of the day. With all the ingenuity and cosmopolitanism it had acquired as an imperial capital, London built itself up at a dizzying pace and became Europe’s—and the world’s—pre-eminent financial center.

It regained its place as a global financial center precisely because London had been ground zero of the Industrial Revolution. Much of the infrastructure necessary for finance was already present in London, and compared to all other potential challengers, the regulatory framework was more predictable and friendly to investment in London than anywhere else in the world. In relatively short order, it put its wealth of experience in global finance to work and so was able to recover from World War II more quickly than other European cities.

It wasn’t easy to get there—the UK was heavily indebted until the 1960s—but when it did, it arrived with authority. It became a global banking hub, boasting the largest foreign-exchange market in the world, and it was already one of the world’s oldest insurance markets. For the rest of the UK, the sterling was used daily, but London profited from specializing in the trading of offshore currencies, especially dollars held outside of America.

Notably, London soared higher than ever because of the Maastricht Treaty, which created the European Union and paved the way for the adoption of the euro. The United Kingdom never adopted the euro itself, but that didn’t stop London from financially dominating the European Union. According to the House of Commons Library, financial and insurance services accounted for 7.2% (124.2 billion pounds) of the United Kingdom’s total gross value added in 2016—a fairly small proportion in the UK’s overall economy. London, however, accounted for 51% of that total. In fact, when you compare industrial variation in total gross value added of UK combined authorities, London presents a much different picture than the rest of England. Roughly 14% of London’s GVA came from the finance and insurance industry, while just 2.1% came from manufacturing. The opposite is true for every other UK combined authority.

Source: Geopolitical Futures (Click to enlarge)

Some 2.2 million jobs in the UK are related to financial and related professional services.

About 47% of those jobs are located in London and in the southeast, according to TheCityUK. No other region of the UK has a percentage higher than 10%; Wales and Northern Ireland boast only 4%. Moreover, the jobs in London are generally geared toward international finance, whereas in other regions they are focused more on British finance. The UK’s global value added per head has obviously benefited from its position relative to the EU—but here again, London has experienced those gains to a far greater extent than the rest of the country.

Source: Geopolitical Futures (Click to enlarge)

London’s time as the undisputed king of European finance ended on June 23, 2016, when the United Kingdom voted to leave the European Union. There were many precursors to this change, but one was more important than all the others, and it is perhaps the most overlooked: the collapse of the Soviet Union and the reunification of East and West Germany. Just as German unification in 1871 defined European history for decades to come, Germany’s second unification in 1990 has also defined Europe’s future—a future that Britain could no longer control. Remaining in the EU would have meant subordinating British interests to German interests, and there was never going to be much of a future in that.

The more daunting challenge emanating from across the channel is the reactivation of great power politics. The most disastrous periods in London’s history have come when Great Britain did not have the power to repel foreign invaders. Ironically, the UK’s decision to leave the EU underscores a far bigger threat to London than international banks leaving the city or tough German negotiating tactics: the attendant conflicts and rivalries that have delegitimized the European Union.

Against these national forces, London is relatively powerless. Its fate rests in the hands of the nation it sustains, a nation that can in turn protect London only by maintaining old allies such as the United States and developing new ones in Europe and beyond. The fate of the UK, meanwhile, depends on London’s ability to find new ways to create and share wealth with future generations of British citizens.

For more than a thousand years, London has been the UK, or some iteration of it.

Though the two see the world differently right now, they can afford to. The future will not be as kind, and when tha future comes, the interests of nation and city will be joined once more.

Consumer Credit May Weigh on Economy

Evidence is mounting that consumer lenders are slowing their credit card, auto and other loans

By Aaron Back

Consumers drive the U.S. economy and if they moderate their spending, overall economic growth could be lower than expected.
Consumers drive the U.S. economy and if they moderate their spending, overall economic growth could be lower than expected. Photo: Erica Yoon/Associated Press 

Weak consumer lending risks becoming a headwind for an otherwise healthy economy.

Evidence is mounting that consumer lenders are slowing their credit card, auto and other loans.

Monthly data from the Federal Reserve shows that total consumer loans outstanding rose at a seasonally adjusted annualized pace of just 3.3% in February, down from 4.9% in January and 6.0% in December.

For all of 2017, consumer loan growth already slowed, dropping to 5.4% from 6.8% the prior year, according to the Fed data.

Change in total revolving consumer credit, seasonally adjusted annual rate:

Source: Federal Reserve

Revolving consumer credit lines, primarily credit cards, have slowed even more sharply. Total outstanding revolving credit was up a seasonally adjusted, annualized 0.2% in February. That is the lowest monthly reading since revolving credit fell in November 2013.

There are two explanations. First, lenders have grown more cautious over the past year in response to rising delinquencies and defaults on their loans. The Fed’s survey of senior loan officers shows more bankers tightening terms on consumer loans than not in four of the last five quarters.

Shares of consumer lenders have underperformed lately, reflecting concerns over slower loan growth and credit issues. A group of five major card issuers fell an average 9% in the first quarter while two major auto lenders fell 10%, analysts at Keefe, Bruyette and Woods pointed out in a recent note. That compares with a 1% decline in the S&P 500 over the same period.

Second, consumers may now be paying down loans that they accumulated over the past few years of strong credit growth. This effectively means that consumers are saving more.

It also means that modestly rising wages and lower taxes won’t spur consumer spending as strongly as investors appeared to believe last year. Consumers drive the U.S. economy and if they moderate their spending, overall economic growth could be lower than expected this year.

How Inequality Fueled the Euro Crisis

Benedicta Marzinotto

BRUSSELS – Since the Great Recession of 2007-2009, most economists have begun to regard finance as a key driver of the business cycle. But the precise dynamics are not yet fully understood.

For example, the University of Chicago’s Amir Sufi and Princeton’s Atif Mian argue that credit expansion leads to nasty recessions, which emerge as soon as households, for whatever reason, lose access to the financing they need to roll over their debts. But this argument misses a key factor, exemplified by the eurozone crisis.

The creation of the euro was accompanied by large-scale financial liberalization, including the elimination of capital controls and the adaptation of the legal framework to allow any European bank to open branches abroad. This process led to growing competition in the banking sector and a progressive increase in the ratio of private banks to public ones.

The result was an across-the-board decline in long-term interest rates, and an increase in credit as a share of GDP. European households almost everywhere became more indebted, but the impact of this credit expansion on private consumption was fundamentally different in the EU’s core countries, where current-account surpluses grew, and in the periphery, where countries accumulated deficits.

Why did the same credit-supply shock produce such varied responses? As a recent study shows, the eurozone’s financial-liberalization process amounted to a more profound shift for the periphery than for the core, with the former having had less open capital accounts, more public banks relative to private ones, higher long-term interest rates, and lower credit-to-GDP ratios.

The same study argues that in the more financially repressed peripheral countries, the main expectation associated with the liberalization process was that those who had previously lacked access to credit – say, because of low incomes or low savings – could now borrow, in order to finance more consumption. In other words, it was low-income households – which represent a large share of the population in the relatively more unequal countries of the periphery – that played the largest role in changing their economies’ external positions.

In the eurozone core, by contrast, the initial upshot of the euro’s introduction was mainly more and better saving opportunities, characterized by improved risk-return trade-offs. This primarily benefited wealthy households, which could, for example, borrow to make long-term investments that would finance future, rather than current, consumption.

Because higher-income households comprise a larger share of the total in these countries (which also tend to have lower levels of inequality), aggregate consumption remained subdued. With inequality starting to rise in the 1990s – particularly in Germany – these households had all the more incentive to increase their savings.

The contrasting trends in the periphery and the core were intensified after the global financial crisis erupted, and the eurozone entered recession. In the periphery, low-skill groups were the first to be ejected from the labor market. With troubled commercial banks more risk-averse, these struggling consumers could no longer borrow to roll over their debt and finance current consumption, which came to a halt, deepening the recession.

In the core countries, by contrast, the key borrowers were wealthy, and thus suffered the least. If they did face negative income shocks, they could use their savings as a cushion. So the severity of the bust was a function not simply of the level of household debt, but rather of the distribution of debt across income levels.

To some extent, this is good news. With the periphery having already endured the initial financial-liberalization shock, future credit-supply events are less likely to affect them disproportionately. And the shifting of macroprudential regulation from the national level to the European Union may reinforce this outcome by further helping to harmonize bank-lending behavior.

But there is a snag: EU-level financial regulation is limited to the large systemic banks. As a result, it is unlikely to affect the operations of the small local banks lending small amounts to impatient low-income consumers.

The best way to strengthen eurozone financial resilience is to address borrowing incentives. And the best way to do that is to improve the position of low-income borrowers by investing European resources in education and job quality. Even in the core, more equality of opportunity might improve morale, thereby reducing precautionary saving. Human-capital upgrading and more equality of opportunity should play a prominent role in negotiations over the EU’s next Multiannual Financial Framework, with the European Investment Bank possibly also providing support.

As it stands, the common denominator of existing eurozone-reform proposals is the completion of a banking union, which many believe is needed to reduce financial fragmentation and break the vicious circle between banks and sovereign debt. This is the area where progress is most likely in the run-up to June’s European Council meeting. But, while a banking union would be a positive step, it will be incomplete without efforts to reduce inequality.

Benedicta Marzinotto is Lecturer in Economic Policy at the University of Udine and Visiting Professor of EU Macroeconomic Policies and Governance at the College of Europe.

How to Get Your Tax Weekend Back

This weekend millions of Americans and/or their accountants are preparing to file income tax returns. Tax day is an annual event as significant as the Fourth of July – though far less fun.

Photo: Getty Images
My friends outside the US – and I have many – observe our ordeal with a combination of amusement and pity. They don’t like taxes either, and often pay far more than we do. But their governments, for the most part, don’t put people through such torture every year. They appear to have found better ways. Why can’t we?
Today we’re going to look at who wins and who loses under the new tax law. I think many of you will be surprised.
Bearing the Burden
The bottom 50% earn 11.3% of the adjusted gross income and pay 2.8% of the income taxes. The top 50% have 88.7% of the AGI and pay 97.2% of the taxes. That’s why we call the system “progressive.” By design, it gives those at the bottom a lower rate.
In fact, it favors more than just that bottom half. As the chart shows, everyone except the top 5% pays a lower share of the total income taxes than their share of total income. That’s not necessarily true of every taxpayer, since these are averages, but it’s certainly true for most. The top 1%, which we are often told gets wildly favorable treatment, doesn’t look so lucky by this measure. It only received 20.65% of the income but paid almost 40% of the taxes.
Let me point out again, this tax structure is not an accident. The tax system is designed to produce this result. The public wants the wealthiest Americans to pay a higher percentage of their income, and they do. Provisions that reduce taxes for the middle and lower classes mean those in the top brackets pay more.
Some caveats on this data: It omits payroll taxes, which for those on the lower end are often higher than the income tax. Wealthier people also have more ability to shift income into favorable categories. But in the aggregate, they still pay higher rates on more income than majority of the population does. We have a highly progressive income tax system by any fair definition. The share of tax paid by the top 20% of Americans also changes when social-insurance levies are included. It drops to about 67% of total federal income taxes paid from roughly 87%. (WSJ)
The “Tax Cut Act” Increased Taxes for the Rich
Changes in the recent tax bill will make the system even more progressive starting this year. You would never know that if you read the media, which seems to think that the tax bill was a panacea for the rich. Wealthy people in high-tax states will certainly have to pay more. But that’s the responsibility of those state governments, some of which seem intent on driving out their best revenue sources.
Laura Saunders, writing for the Wall Street Journal, uses analysis from the nonpartisan Tax Policy Center to demonstrate that the very top earners will now pay an even higher percentage of overall taxes. The top 1% go from paying 38% of total income taxes to a little over 43%.
According to Saunders,
The results show how steeply progressive the U.S. income tax remains. For 2018, households in the top 20% will have income of about $150,000 or more and 52% of total income, about the same as in 2017. But they will pay about 87% of income taxes, up from about 84% last year.
By contrast, the lower 60% of households, who have income up to about $86,000, receive about 27% of income. As a group, this tier will pay no net federal income tax in 2018 vs. 2% of it last year.
After the income tax, the most important revenue raisers are for social insurance, such as Social Security and Medicare. They will provide about 34% of the total tax take this year, according to the Joint Committee on Taxation. Corporate taxes will account for 7% of revenue, down from 9% in 2017. The rest of the total comes from excise taxes, estate and gift taxes, and other sources such as customs duties.
Roughly one million households in the top 1% will pay for 43% of income tax, up from 38% in 2017. These filers earn above about $730,000.
According to Roberton Williams, an income-tax specialist with the Tax Policy Center, the share of taxes paid by the top 5% will rise despite the fact that people in it were the largest beneficiaries of the overhaul’s tax cut, both in dollars and percentages.
Why are income taxes negative for the 77 million households in the bottom two tiers, which earn 13% of income? In recent decades Congress has chosen to funnel benefits for lower earners through the income tax rather than other channels such as federal programs. Some of these, such as the earned-income tax credit for the low-income workers, make cash payments to filers who don’t owe income tax.
The tax overhaul further lowered the share of income tax for people in these tiers, in part because it nearly doubled the standard deduction and expanded the tax credit for children under the age of 17.
People in the lower tiers do owe other federal taxes, such as for Social Security and Medicare. If these tax payments are included, their share of federal taxes paid turns positive.
Losing Your Deductions
In order to pay for the tax cuts on corporations and the lower income tiers of the country, the Republican Congress had to scramble to find additional sources of revenue in order for the new tax plan not to increase the deficit more than it did. And they found some of that revenue by taking away deductions. There are literally scores of smaller deductions that you were previously able to itemize that will not be available in 2018, or 2019 at the latest. Let’s look at just some of the bigger ones.
1.   Everybody knows that state and local income taxes (SALT) will no longer be completely deductible. You will be allowed to deduct only up to $10,000. That is especially painful for people living in states with high income taxes and/or property taxes. And while Texas and other low-tax states don’t have an income tax, local governments are financed by property taxes that are typically higher than those of a lot of states. There are just six states that don’t have an income tax. The darker blue your state is in the following chart, the higher your total state income taxes are and the more pain you will feel.
2.   Starting in 2018, homeowners can take a mortgage interest deduction on a loan of up to $750,000, down from the current limit of $1 million. When the median home in California is $480,000, a lot of homeowners are going to have mortgages in excess of $750,000.
3.   I am not certain what Congress was thinking, but they took away the deduction for personal disaster losses. Now you can take deductions on personal losses if those losses amount to more than 10% of your income. In the future, you can deduct those losses only if the president declares their cause a national disaster. So you would more than likely be able to deduct losses from a hurricane or earthquake, but if your home were destroyed in a flood not associated with a larger disaster, you would not be able to take a deduction for your loss. The same thing goes for a fire. Or for vandalism. This provision makes me wants to throw the yellow flag for piling pain on top of more pain.
4.   Today, if you move more than 50 miles for a new job, you can deduct reasonable moving costs. Starting this year you can’t.
5.   Divorces are never fun or easy. They tend to cost a lot of money, on top of the emotional toll they take. Under current law, alimony is deductible by the former spouse making payments and is included as income to the recipient. In the new bill, however, these payments are no longer deductible by the payor. Nor are the payments included in the recipient’s gross income. Instead, the person getting the alimony has to pay taxes at the rate paid by the person paying the alimony. And since it’s usually the man who makes more money and pays the alimony, the woman will get taxed at the man’s tax rate. No matter what her actual income is. Ouch. This provision is effective for divorce and separation agreements signed after Dec. 31, 2018. (CNBC)
6.   A Bloomberg article highlights the fact that business deductions for meals may be going away. Yes, corporations get a reduced tax rate, but essentially, the new law says that entertainment expenses are not deductible. Business lunches are entertainment and not deductible.
Ah, I remember the days when you could deduct 100% of your meals and entertainment. Yes, I know that during the Reagan years the top rate was 70%.
But no one paid that. There were so many loopholes and deductions that my effective rate was much lower than it is today.
The problem is, there is a great deal of confusion over what might count as a deductible expense. If an expense is considered entertainment, it is not deductible. If you think that change is not going to make a difference in the revenues of high-end restaurants, you’re not paying attention. I don’t think the change affects Chipotle or McDonald’s much – they’re not exactly business-meal destinations. There are always consequences to tax rules, but I think some of the unintended consequences are going to be more painful than people currently think. Corporate accountants are going to strictly limit the ability of their employees to take their clients out to dinner.
7.   The Republican Congress has spent a great deal of its time patting itself on the back over the 20% tax break on pass-through tax corporations. The thought was that they were helping small businesses to keep even with the big players who got most of the corporate tax cuts.
Well, not so much. It turns out that a lot of us with pass-through corporations don’t qualify, and if you are a modern business with lots of contract labor instead of actual W-2 employees, you don’t qualify either. Why do doctors not get a tax break but architects do? You would think a restaurant owner would qualify. Not necessarily. If you advertise the best pie or steak in your area, you may lose your tax exemption.
Seriously. Who writes these rules? This cute infographic from Bloomberg illustrates part of the problem. No one really knows who qualifies for what.
8.   Lots of “little” things (unless of course they are your deductions, and then they become big) are no longer deductible. Companies have been able to subsidize commuting and parking expenses and deduct them. No more. And that $20 a month subsidy you got for commuting to work on a bicycle goes away.
You can no longer deduct your cost for preparing taxes under the new tax plan, and if you do your own taxes, you can’t deduct the cost for the software.
No more deductions for the commissions you pay your agent or your manager or even for your union dues. Hollywood actors and professional athletes are not going to be happy about that first part. If you’re an actor, you no longer get to deduct your audition travel expenses or acting lessons, either.
And while the new tax law nearly doubles the standard deduction for married couples and singles, up to $24,000 and $12,000 respectively, you do lose your personal exemptions. Many families with multiple children will feel that loss of exemptions keenly. I can tell you from personal experience that having more than two kids is expensive. But then again, lower-income families get an enhanced child tax credit.
And my personal pet peeve: You can’t buy sporting tickets and give them to clients and claim them as a business expense. I don’t imagine that Mark Cuban and Jerry Jones here in Dallas or any other professional team owner will be happy. That change has got to leave a nasty mark on their corporate sales. And it’s not just professional sports. I have a number of friends who are college sports fanatics, and they had ways to make their ticket purchases a charitable deduction or a business expense. And they loved to use the tickets as a business perk. Now that’s gone, gone.
Some people were able to itemize their investment management and consulting fees, tax-preparation fees, unreimbursed employee expenses, and certain hobby expenses. Gone as well.
To be fair, there are a number of really good portions of this bill. As noted above, the increase in the personal deductions will mean that fewer people on the lower income scale will pay any taxes at all. Also, the lifetime state tax exemption doubled to $11.2 million for individuals and $22 million for married couples.
And with that I’m going to stop talking about taxes, even though I could easily write at least three or four times more than I have, and will probably get back to some of the other details later. There are so many. But I have a personal issue that I want to talk about. If you have high blood pressure, you might want to skip this.
Immigration Fiasco
I am going to go in a different direction for a few paragraphs. Personal privilege. This kind of, sort of comes under the heading of economics. Almost any real economist understands that in order to grow an economy you have to increase productivity and/or increase the number of workers. There is no other magic bullet. If your society is not producing enough children, then you need to be bringing in immigrants if you want to see GDP growth. And for a country built on immigration, you would think we in the US would get that – which is why I don’t understand the whole anti-immigration movement. Yes, we need to control the process, and we need to figure out how to attract better-educated and higher-income workers (as Canada is doing), as well as the service workers who make the world go ’round; but we are not dealing with the issues of immigration and illegal immigrants in a rational manner. This fact was brought home to me in a very personal way this afternoon.
Warning: This is going to upset nearly every reader – but you will be upset for different reasons. Some of you will more or less agree with me, and some of you will think I’m dead wrong. But either way, we need to make some decisions in this country.
This is a personal story. Mary has been working for me for 16 years, cleaning my house, moving me, and doing so many other things. She has become family (as she has with all of her other clients). She’s been in the country for at least 20 years. She is one of the most honest people I know, often bringing me money that I have somehow put in the wrong pocket or drawer. She came to the US a long time ago on a visa, physically lost her visa and her passport, but stayed anyway and began to work. She is married to a US citizen and has three children, the youngest of whom is 10. She pays her taxes like every good citizen. She has been trying to firm up her immigration status for a very long time, and a lawyer finally arranged for her to go back to Juarez to deal with the consulate there, taking along papers from officials here who told her she could simply apply, ask for “forgiveness,” then come back into the US and get her US citizenship. It was supposed to be easy.
She found out today that she was turned down. And now she is stuck in Juarez, not the safest of cities. Some bureaucrat at the consulate in Juarez decided that her (US citizen) 10-year-old son doesn’t need his mother, that her (US citizen) husband can live without his wife, and that this sweet, honest taxpaying lady who has never been a problem to anybody in her life shouldn’t be allowed back into the United States for at least a year. Maybe longer. And then she can ask again. No guarantees.
This is America? The land of the free and the home of the brave? Is that the business we are in, separating mothers from their young children? And keeping out the very people we need?
I know that a number of people are upset about illegal immigration. I totally agree that we need to get a handle on our immigration rules. And our borders. But we need to recognize that there are families in this country who have been here for decades, the Dreamers among them, who are important contributors to our economy. If for some reason they all left, the GDP of this country would simply collapse. I am talking a Great Depression here. They make that much of a difference. And immigrants have made that much of a difference to the US for the last 250 years. Maybe I’m a little bit more sensitive to the situation here in Texas, but we are absolutely used to Hispanics and immigrants of all flavors working, and we never ask if they are illegal or not.
There are darned few US citizens who don’t have immigrants in their family histories. But for whatever reason, each generation of immigrants wanted to keep the next group that came out. They were literally trying to build a wall in California in the 1870s to keep the Chinese out
I simply don’t get it. Trump rolled over on the DACA bill, giving the Democrats hundreds of thousands more potential immigrants than they had actually asked for. In doing so he angered a bunch of people in the Republican caucus. And you would have thought the Democrats would be ecstatic. All Trump asked for was a lousy $25 billion to build his wall, a cost that would have been spread out over a number of years. Seems like a reasonable horse trade to me.
Now, let me be clear. I think the wall is kind of silly. Will it inconvenience people who are trying to enter the country illegally across our southern border? Absolutely. Do I think that someone who really wants in will not figure out another way? Not a chance. Think Cuba in the ’60s. But $25 billion to settle our most thorny immigration issues? Chump change.
A few years ago, in a small, intimate meeting, I really pushed Texas Senator Ted Cruz, who was running for president and touting his anti-immigration line. He knew who I was because we had met before, the first time at his request. We have had long conversations, and honestly, whatever you may think of him, the guy is remarkably brilliant. We have had our disagreements. The host of the dinner put me next to him at the dinner table, and Ted asked me to give him my best shots in the Q&A that would follow the meal. I told him he didn’t want me to do that, but he said, “Bring it on.” Well, I did.
After some of the difficult economic questions, which he did pretty well with, I specifically brought up my maid. He gave me glib answers. I was not in the mood to let him go on this one. Okay, I might be a little passionate about it. Every time he tried to dodge the question, I came back and asked, “Senator, do you want to deport my maid?” This went on for some time as I kept interrupting him with this very firm question.
When he finally realized I wasn’t going to stop asking in front of a group that he wanted to impress (and get a lot of money from), he said that immigration policy should involve a three-step process. First we should get a handle on who is coming in and control our borders. I totally agree. Second, we should reform the immigration process so that we get more people who are beneficial to the US. I absolutely agree. And then, he said, when those two things are done, “I believe the American people will do the right thing about the illegal immigrants in this country.” Which was basically his admitting that no, he really did not want to deport my maid or any of the other multiple millions of people who are contributing to American society. It was the correct answer, but you basically had to beat him up to get to it, because the issue is so contentious that many of Ted’s constituents around the country just want to say, “Send them back!” By the way, that is not the attitude of his Texas constituency. But you need more than Texas to be elected president.
What is it about the American political world today that we can’t have rational compromises?
You don’t get everything you want all the time. So work out something in the middle and move on down the road. What we’ve done on immigration is to leave well over a million people (and maybe a lot more) in limbo.
America is supposed to be better than this. I am ashamed. It is just another very sad example of how we are broken. Schumer? Pelosi? You should be ashamed. As should all the Republicans who defeated the DACA bills last month in the Senate. Sometimes you have to do what is right for the country. Being worried that you might give Trump a “W” if you compromise is not what I call thinking about the country.
The anti-immigration people are simply economically ignorant. We need more immigrants, not fewer.
Fort Lauderdale, Chicago, New York, and Raleigh
I travel in a few weeks to Fort Lauderdale, then Chicago, then New York and Raleigh for mostly private speaking engagements. I’ve been putting off a trip to New York for too long, and I have too many people I need to see.
And finally, just a brief note to those of you who have been asking about the changes that are afoot. I promise that I will let you in on the details very soon. Some of you think I’m building up to a big announcement about the future of this letter; but let me address those questions in one fell swoop: Thoughts from the Frontline is not being put out to pasture! I can promise you that the coming changes are exciting and will benefit both you and me. But rest assured that you will continue to get this letter for free for as long as I can write it.
And now it really is time to hit the send button. Have a great week!
Your wondering how we will balance the budget analyst,

John Mauldin