Magical thinking will not save Trump’s tax plans
The Republican party’s sums on revenue and debt simply do not add up

© Zebedee Helm

Americans love government programmes but hate taxes. Over the past 40 years, Republicans have catered to these opposed preferences with magical thinking. They cut taxes but not spending, raising deficits in the process — exactly what conservatives promise not to do.

Donald Trump is no exception. He promises a cut in corporate tax from 35 per cent to 15 per cent, along with a one-off lower tax rate to induce US companies to repatriate more than $2tn in profits held overseas. The top individual tax rate would also be cut from nearly 40 per cent to 33 per cent.

What the president has presented is not a tax plan so much as rough principles around which the administration can negotiate with Congress. Even so it is striking that Mr Trump has offered no substantive loophole closures, let alone spending cuts, to help pay for his proposals.

The result, according to the Tax Policy Center, will cost the government about $2.4tn over the next decade. This is politically unpalatable to Republicans, who have pledged to support only revenue neutral tax reforms.

The administration — channelling Ronald Reagan’s adviser Arthur Laffer — says tax cuts will create economic growth, offsetting the fall in revenue. While the cuts should provide a temporary demand stimulus, there has been little evidence in the past 20 years that tax cuts sustainably boost growth. Tax cuts in 2001 and 2003 during George W Bush’s administration did not jump start growth. Neither did Obama-era cuts. Yet in 1990, when President George HW Bush raised taxes, gross domestic product growth went up for five years. Bill Clinton’s presidency included tax rises and strong growth. History has not been kind to Mr Laffer’s ideas. There is no alchemy in which tax cuts pay for themselves.

A reduction in taxation without spending cuts, on the other hand, always creates deficits. In this, the Trump proposals resemble Reaganomics on steroids. Mr Reagan came to office promising small government and low taxes. He passed both tax cuts and tax reform, closing many loopholes. But he spent so much that the deficit doubled as a percentage of GDP during his first term. He sopped up some of the red ink with higher business, payroll and energy taxes.

Mr Trump would increase the deficit again, at a time when the overall public debt burden is much higher. It would also set up a conflict with the Federal Reserve, which is likely to respond to a runaway deficit with rate increases.

The image of an American economy groaning under heavy tax burdens is not accurate in any case. US taxes are low by historical standards and compared to other rich nations. All levels of government — federal, state and local — collect about 26 per cent of national output in tax. In prosperous Germany the figure is 37 per cent.

If growth does not improve before the 2018 midterm elections, the Republicans risk losing control of Congress. Ideally, cutting corporate taxes would lead to higher capital investment and spur an expansion. Well-targeted tax cuts can indeed have this effect. Broad reductions in the headline rate often do not. In the 1950s, the top marginal tax rate for individuals was 90 per cent and the corporate rate was over 50 per cent. Today, it is roughly 35 per cent in both cases.

Many individuals and companies take advantage of loopholes to pay far less. Yet both real GDP and real per capita GDP were growing more than twice as fast in the 1950s as in the 2000s. As Warren Buffett points out, people invest when they think they can make money, not because of tax rates.

A one-off lower tax for repatriation might bring a large chunk of the overseas cash back to the US. Yet after the last initiative in 2004, much of the money that returned went to share repurchases, not investment. If that happens again, it may shore up the markets, but not the real economy. If cut-rate repatriation is allowed, companies should be forced to show that they are using a significant portion of the funds for capital investment.

Republicans promised throughout the 2016 presidential campaign to cut taxes and trim the deficit. But their first attempt to reform tax via a repeal of Obamacare (in essence a tax cut disguised as a health proposal) failed. Now, the president has proposed to balloon the deficit in an unproductive way. He is looking ever more like a conventional, trickle down conservative.

No amount of magic can change the fact that his budget sums do not add up.

Bernanke’s Confetti Courage

Former Fed Chairman Ben Bernanke’s book titled “The Courage to Act” is now available in paperback. This isn’t a surprise because, after all, his proclivity to print paper encompasses the totality of what his courage to act was all about. The errors in logic made in his book are too numerous to tackle in this commentary; so I’ll just debunk a few of the worst.
Bernanke claimed on one of his book tour stints that the economy can no longer grow above a 3% rate due to systemic productivity and demographic limitations. But his misdiagnosis stems from a refusal to ignore the millions of fallow workers outside of the labor force that would like to work if given the opportunity to earn a living wage. Mr. Bernanke also fails to recognize the surge of productivity from the American private sector that would emerge after the economy was allowed to undergo a healthy and natural deleveraging cycle.
Also, the former Fed Chairman should learn a lesson from history. According to Former OMB Director David Stockman, the three-year stretch from 1983 to 1985 during the heart of the Reagan boom, growth in the U.S. economy averaged over 5.5% per year. Reagan also enjoyed a rising dollar, falling inflation, lower taxes and tumbling interest rates. All that is needed to grow the U.S. economy above the 3% threshold is to boost productivity; but the only way to accomplish this is to first deleverage the economy from its record 350% debt to GDP ratio, which would fix the broken savings and investment dynamic. Therefore, the best way to lift the economy out of its debt-disabled condition is to reverse Bernanke’s foolish “courage to act” in regards to the record breaking and massive distortion of interest rates he imposed on the economy.
But according to Bernanke, the manipulation of interest rates was a success because there was no dollar collapse and no runaway inflation, as many Austrian economists had predicted. However, the only reason there was neither of each is that our major trading partners followed Bernanke’s lead and performed the very same QE and ZIRP utilized by the Fed. Nevertheless, what Bernanke did create is a triumvirate of asset bubbles extant in bonds, stocks and real estate that cannot be undone without first crippling the economy. And the Fed’s allure of virtually-free money for eight years engendered the accumulation of a record amount of new debt that still needs to be unwound.
Therefore, the primary retardant to growth isn't the current level of tax rates, unlike what the new Republican regime would like you to believe. In fact, the effective corporate tax rate is just 14%. The salient and impending danger lies in the precarious position of asset bubbles and leverage that will lead to unprecedented interest rate volatility and market chaos in the near future.
What Bernanke also appears happy to overlook is that our over-leveraged economy has eviscerated the American middle class by robbing savers; and saddling them with stagnant real wages and a reduced standard living.
Indeed, the truth is the Fed not only delayed a depression in 2008, but also rendered the economy into a condition of perpetual stagnation. The pitiful 2% annual GDP growth rate experienced since 2010 has now slipped below 1%. The economy only grew at 1.6% during all of 2016 and just 0.7% during Q1 2017.
Looking forward through the remainder of 2017, we find that commercial and industrial loan growth is rolling; over along with distress in student, auto and credit card assets. And even the grossly distorted data from the Bureau of Labor Statistics (BLS) is faltering. April BLS jobs data showed a sharp slowdown in the Household Survey to just 156k net new jobs created, down from the 472k figure in March. Studies have proven data from the Household Survey leads that of the Establishment Survey during inflection points of the economy. This is what we see now; in addition to a global banking crisis that is already fracturing in China, Japan and in Europe.
It’s really just common sense; artificially-low interest rates, asset bubbles and over-indebtedness cannot be fixed by simply printing money like it is confetti. But the worst news is the efforts that began under Mr. Bernanke have merely delayed the inevitable depression that will only be exacerbated by the increased precipice from which asset prices and debt levels must now fall. For those investors who have yet to seek protection for their portfolios from the coming reality check, the courage to act is now.

How to Break Your Smartphone Addiction


When people talk about addiction, the first thing that comes to mind are illegal drugs, alcohol and tobacco. But in the mobile era, behavioral addiction is much more prevalent and pervasive — and the culprit is the ubiquitous smartphone. Adam Alter, a marketing and psychology professor at New York University, says it’s an addiction by design — and one that’s insidiously hard to break.

In his new book, Irresistible: The Rise of Addictive Technology and the Business of Keeping Us Hooked, he explains how humans are hardwired for addiction and offers suggestions on how to break the habit. He discussed his findings on the Knowledge@Wharton show, which airs on SiriusXM channel 111.

An edited transcript of the conversation follows: 

Knowledge@Wharton: Part of the title of your book is “keeping us hooked” on technology. It’s a real concern.

Adam Alter: The technology that we consume now is delivered in ways that are very mindful.

The companies that produce the devices that bring the technology and bring the information to us are very mindful about what they’re doing. They are trying their best to ensure that we spend a lot of time on their devices. That’s how they make money. It is a business, and they’re very careful about the way they design the tools that deliver content to us.

Knowledge@Wharton: I would love to say there’s no way this can be an addiction, but I’m starting to see it with my kids and I’m concerned. This is a problem that a lot of families need to consider and not just something to push to the side.

Alter: It’s very important to define addiction when you’re talking about behavioral addiction because it is very different from the typical definition of addiction.

We usually think of addiction as the brain’s or the body’s response to a certain substance. This is not what we’re talking about here. We’re talking about experiences and behaviors. But what’s interesting is that the body and the brain respond pretty much the same way to these experiences. You see the same release of dopamine, which is a chemical in the brain that makes us feel good. And you see the same behavioral responses.

If you’re told you aren’t allowed to use your phone for the next week, for most people that produces anxiety. There was an interesting study done where teenagers were given a choice: You can either break a bone in your body or you can break your phone. There are two things that are funny about the response.

A total of 46% of people prefer a broken bone to a broken phone. But even the people who say they’d prefer a broken phone, when you watch them make the decision, it’s not like a snap decision. They agonize and start to think about all the things that could go wrong and what happens if I don’t have my phone. A lot of them say, “At least when I’m recovering from the broken bone, I have the phone to comfort me.” This really is an addiction. It’s pretty extreme.

Knowledge@Wharton: What has shifted so much from being willing to deal with a broken bone over being worried about losing a phone for a few hours?

Alter: The biggest thing, especially for younger people, is that phones are the way that they communicate with others. It’s basically the backbone on their social lives. Without a phone you lose contact with people, which for humans is one of the worst things that can happen. We would rather have physical pain than social pain and being ostracized, ignored or left out. For a lot of people, the idea of not having a phone is the idea of being out of communication. That’s the biggest thing.

But there are other things, too. When you think about phones, the thrill you get when you check whether you have a text message or when you hear the ding of a text message, or when you check how many likes you have on an Instagram post or whatever — all of that is unpredictable. But when it works for you, when you get a lot of likes, a lot of shares, a lot of retweets and so on, that feels really good. Being deprived of that for a week, for a lot of people, is very unpleasant.

Knowledge@Wharton: There was a national day of unplugging in March. That is a great idea, but how much of an impact could it really have?  

Alter: What this is designed to do is give them a day where they have an excuse to unplug and to see how great that can be, because we have forgotten [what it’s like]. We now assume that the only way to live is with this tech surrounding us constantly. One of the things I advocate is that people spend three or four hours every day in a tech-free period. Maybe 5 p.m. to 8 p.m., your phone is in a drawer far away. You interact with people or with nature or whatever else you want to do.

Knowledge@Wharton: You’re a dad of a young boy and getting ready to have a second child, so your kids are literally born into this mobile era. How much of a challenge is it now for parents to change the thought process about this?

Alter: It’s a massive challenge. It’s a bigger challenge than I think it’s ever been. The kids now who were born into the iPhone and iPad eras are 10, and any child who’s younger [also started out in the mobile era]. … They don’t know that there is an alternative. For those of us who are older, we have a sense of what could exist out there, what it’s like to have a face-to-face conversation. For a lot of these younger kids, we have no idea what their lives will be like when they’re teenagers and adults.

Because they’ll have grown up in this kind of soup that involves all these things all the time, they won’t know what the alternative is. It won’t appeal to them. And it won’t even be a viable alternative because their whole lives will revolve around tech.

Knowledge@Wharton: But there’s also the concern about the changing scope of having face-to-face conversations. The concern is that it may never come back.

Alter: At least we’re nostalgic for that. If you’re nostalgic for something, you strive for it. We might try for the kind of contact we used to have with people. If you have a child who’s never experienced that, there’s nothing to be nostalgic for. It just seems like part of an era that’s long past, part of the olden days. Those kids are not going to have that same pang. And that’s the concern, that it needs to be built back into the culture otherwise these kids will just be deprived of it, perhaps for their whole lives.

Knowledge@Wharton: What are the most concerning pieces to you about social media, especially with this loss of connection?

Alter: One of the biggest problems is when kids are young they test things out in the social world. If I’m a kid, the way it used to work was, I’d say something mean, the other kid would scrunch up his face. He’d cry. I’d feel bad and never do it again. That’s if you’re like most people. That doesn’t happen anymore.

If you only interact with people online, you bully, you send out all sorts of bad vibes and never really get the feedback. You never learn to empathize. You never learn what it feels like to hurt someone.

You end up having this blunted sense of how to interact with people, and that’s pretty damaging across lots of spheres.

It makes it harder to form social bonds. It makes it harder to work in the workplace as well.

You obviously have to try and interact with people face to face in the workplace. But if the first time you ever do that is when you’re much older, you’ve missed that critical period when you’re younger where you learn what works and what doesn’t.

Knowledge@Wharton: It’s a little bit like a phony sense of freedom.

Alter: That’s a really good way of putting it. It liberates you to be mean and to do things that are insensitive that perhaps you would learn not to do when you’re younger because you see what the consequences are. If you never see those consequences, you just keep doing that thing over and over again. That’s human nature.

Knowledge@Wharton: That’s part of what we’ve seen play out in the political election in the United States.

Alter: Absolutely. That’s certainly a possibility. I think social media is an inherently negative vehicle for communicating information because you are either anonymous or removed from other people. You never have that feedback. It’s easy to bully.

The most negative thing in humanity is YouTube comments. Those anonymous comments on YouTube are just streams of invective. A lot of this election was run in that same sort of anonymized way where people threw all sorts of insults at each other from afar. It makes it very hard to come together if you don’t have that physical connection at certain points.

Knowledge@Wharton: There is a choice that some people are making – that they would much rather have a smartphone than a better pair of shoes or a jacket.

Alter: These things used to be seen as luxuries, and they’ve all become essential. That happens over time partly because they drop in price, but partly because they’ve become indispensable. It’s just very hard to do basic things. It’s hard to work, hard to travel, hard to communicate now without these phones. They become a part of what’s essential about living. Instead of being wants, they become needs.

Knowledge@Wharton: Do companies understand the potential pitfalls and that they need to start addressing these as problems?

Alter: The big companies definitely understand these issues. Google has or had a person on board known as a design ethicist, and his job was to basically advise them about potential pitfalls with their products.

If they were designing a product that was particularly addictive, his job was to say, ‘I think we need to tweak this thing so we make it maybe slightly less so. Or we need to add this feature here that allows people to get away from this.’ Whatever he was suggesting was designed to make the product friendlier to humanity, in a sense. A lot of these companies are not just aware of this, but they bring in these experts who [make] sure that the products aren’t predatory in some way.

… It’s really the portability of the phones that makes them so dangerous. Content is king, but it needs to be delivered to you in some way. The thing about these phones is that if you stop most people at any point in the day and ask, “Without moving your feet, can you reach your phone?” the vast majority of the population will say yes.

That could be in the middle of the night. That could be during the day at work. It could be pretty much anytime, anywhere. That’s because they wear these devices. They’re in their pockets. They’re attached to their hips. They’re literally right there. I think that’s what makes them so insidious, that they’re always a part of what you’re doing.

There’s even a study showing that if you have a phone upside-down on a table while you’re have a conversation with someone, the content and the connection that you form is degraded.

You don’t form as strong a connection because what it suggests to you is that there’s a whole other world out there that you should be paying attention to. It reminds you that this isn’t the only thing going on, when what you should be doing is focusing on that conversation as though it’s exactly the only thing going on in that momento.

Knowledge@Wharton: How can we address the problem?

Alter: It sounds so simple. It sounds like all we have to do is just say, “No, I’m not going to use this. I’m going to put it away for a certain number of hours.” That’s obviously the first thing to try to do. The other thing you can do on smartphones is sort of de-fang them. You can make them a little less potent. Take off all the sounds that tell you that there’s a new email. Remove push notifications. Make sure that the phone isn’t telling you when to pick it up, that you’re deciding it’s time for me to pick it up.

When you see an icon for Twitter or Instagram or whatever it may be, that signals to you that you need to push this button. It’s sort of Pavlovian, like you are the dog [trained to do a certain task] to get the reward. The best thing to do about that is to bury those icons in a folder in the third screen of your phone. The only way you should ever access those apps that you find to be particularly addictive is to search for them by name. That way you’re deciding actively when you want to check them, instead of them signaling to you, “Hey, I’m here. You should check me out.”

There are other things you can do as well. A lot of social media works by you sending something out into the world and then wondering how much feedback you’re going to get. Am I going to get one like? No likes? Ten likes? A hundred likes? You can de-fang that sort of quantitative feedback by using what’s called a demetricator. It changes the feedback from the continuous scale of how many likes you get to whether you’ve got a like. It will say, “You have likes” instead of how many. “This has been shared” instead of how many times. “You have a comment” or “You have comments” instead of how many. The early evidence suggests that people become less hooked on getting that constant updated feedback, so they spend less time checking.

Knowledge@Wharton: A lot of companies want their employees to have that connectivity even when they’re away from the workplace.

Alter: That’s why it’s partly a cultural problem. It’s very tricky. Businesses want something very different from what consumers want in this case. If you think of 100-calorie packs, you can now buy a lot of snacks that are unhealthy in 100-calorie packs, which is totally irrational.

People are paying a lot of money for less food, and what they’re really paying for is they’re outsourcing self-control. I’m saying to the company that makes these snacks, “Give me less of this. I’ll pay you so that I don’t have to eat more of it than I should be.” Instead of buying the bigger pack and just taking what you should be eating, you’re paying the company to give you less, which is crazy from a consumer perspective.

But there’s something similar from, say, the Facebook perspective. They could create a version of their product that helps you with self-control in the same way that these food companies do.

They might say, “We have a version of Facebook you’ll pay $100 a year for and we’ll make sure that it’s superior in the following ways. It’s less addictive for these seven reasons.” That’s a cultural change. And the good news is Facebook gets revenue because a lot of people will pay for this device. So, it’s good for business, but it’s also good for the consumer.

Fixing Fixed-Investment Incentives

Jim O'Neill
City of London

LONDON – Back in February, I noted that the global economy at the end of 2016 was in a stronger cyclical position than most people had expected, given the political upheavals of the previous 12 months. That upward momentum carried through to the first quarter of 2017.

According to the latest “nowcast”-type indicators, world GDP growth is exceeding 4% – perhaps the strongest performance seen since before the 2008 financial crisis.
Still, some observers – and not just chronic pessimists – have countered that the evidence remains anecdotal, and that it is impossible to predict how long the current economic moment will last. Indeed, there have been other periods in the long post-2008 recovery when growth returned, only to peter out quickly and become sluggish again.
To bolster long-term economic growth, business investment will have to increase.

Unfortunately, this is easier said than done. In Western economies in particular, non-residential fixed investment is precisely the factor that was missing in previous, short-lived cycles of acceleration.
No one can say for sure why non-residential business investment has failed to recover in recent years. But I suspect that the slightly pessimistic conventional wisdom on this question is wrong.
The conventional argument asserts that wary CEOs have come to see long-term risks as “just not worth it.” The many uncertainties they face include concerns about excessive regulation, burdensome corporate taxation, high debt levels, erratic policymaking, the political backlash against globalization, and doubts that consumer spending outside (or even within) the United States will last.
A less pessimistic view holds that, after 2008, it became inevitable that the global economy would unhitch itself from the US consumer engine and adjust to the rise of emerging consumer economies, not least China. When that happens, we can all live happily ever after.
I tend to side with this less pessimistic crowd. As I pointed out in March, China’s economy did surprisingly well in the first quarter of 2017, and that seems to be the case in the second quarter as well. In fact, China’s latest monthly data show signs of economic acceleration, especially in consumption. And it was evident in the first-quarter data that Chinese consumers are becoming an increasingly important driver of economic growth.
When confronted with the numbers, pessimists respond by insisting that China’s recent strong economic performance is only temporary – a product of yet more unsustainable stimulus. And even if growth does last, they argue, the Chinese authorities will not allow Western businesses – or even Chinese businesses, according to ultra-pessimists – to benefit from it. But whether or not the pessimists turn out to be right about China, it is odd that business investment remains tepid even during times when the engine of global growth is located elsewhere, such as in the US or Europe (Germany in particular).
During my time as the head of the British government’s Review on Antimicrobial Resistance, I had to develop a better understanding of the pharmaceutical industry, and I learned that there is something to be said for microeconomic forces – and for basic common sense.
Consider the future, which always has been uncertain and always will be. And yet the biggest economic busts have happened when businesses were not uncertain enough – when they were sure that the future would be rosy. An overabundance of certainty might explain the 2000-2001 dot-com bubble, and many others.
But if, thanks to the increased availability of so much information (including different viewpoints and opinions), we now know that the future is always uncertain, the behavior of Western businesses (and many in the emerging world) is eminently logical, especially given the current workings of the financial system. Why would business leaders invest in an uncertain world, rather than paying dividends to demanding (but generally risk-averse) investors, or buying back some of their companies’ own shares (thereby improving the price/earnings ratio and, better yet, increasing their own remuneration)?
At the end of the day, the CEOs and the most aggressive investors are all happy with this approach.
Unfortunately, the same cannot be said for the company’s employees, past and present, who reap no benefits in their paychecks or pensions (which are actually being eroded by the low yields on government bonds across Western countries).
It is past time for our elected governments to change the rules of the game. For starters, that means updating the tax code to make debt issuance far less attractive, especially when the proceeds are being used to buy back shares. At a minimum, it should be harder to buy back shares than to issue true dividend payments. That way, at least all shareholders, not just senior-executive insiders, will benefit.
Furthermore, those same executives should not be remunerated on the basis of short-term price-to-equity targets. More investors should be demanding that the incentives change to reflect true measures of long-term performance.
To its credit, the Norwegian Sovereign Wealth Fund recently spoke out in favor of such changes.
Other large institutional investors and policymakers should follow suit, to give the corporate world a nudge. If we change the incentives, we just might finally see business investment make a comeback.