Political Realignment is Here

In 2016 and 2018 I authored two blogs on the coming realignment of American Politics ( Shulmaven: The Coming Political Realignment and  Shulmaven: The Coming Political Realignment: Part II ) I believe the realignment I spoke of then and in subsequent related blogs is now here. The recent Republican convention once and for all buried the Right Hamiltonian* roots of the party and firmly made it over into a rightwing populist party combining the 19^th century Jacksonians and Know Nothings into one 21^st century coalition. Consistent with that, the party renominated Doanld Trump for president and JD Vance for vice-president. The party is now firmly isolationist, anti-free trade, anti-immigrant, pro-entitlements, and in many respects anti-Wall Street and above all “anti-woke.”

 

Prior to his withdrawal from the race, Joe Biden was veering sharply to the left with calls for national rent control, more student debt relief, medical bill relief and restructuring the Supreme Court. No longer a Left Hamiltonian, Biden was moving in the direction of a new social democratic party with policies along the lines of Elizabeth Warren and Bernie Sanders. My guess is that Vice-President Kamala Harris who as of today seems the likely Democratic nominee, will pull the party in same direction Biden was headed with an even greater emphasis on identity politics.  Afterall, she grew up in the hot house of far-left San Francisco Bay Democratic politics.

 

Now, where does that leave the Right Hamiltonians of the Republican Party and the Left Hamiltonians of the Democratic Party. For the time being they are without a home. Furthermore, the mood of the electorate seems to be very anti-establishment which will make it very difficult for the Hamiltonians of both parties to gain traction. However, it is likely that either political party will unfortunately drive our country into a ditch, making it likely that in 2028 a merged Hamiltonian Party will come to the fore. That will either be within the Democratic Party sans its social democrats or as a centrist third party.

 

*- I broadly define Right Hamiltonians as those who would use the power of government to support business and Left Hamiltonians who would use government to support labor. Both wings are internationalists.

Random Thoughts on the Economy and the Stock Market - No. 4

*-The failure of the Silicon Valley Bank last week represents the first bank run of the 21st Century with deposits cascading out with a few clicks on a smart phone being egged on by social media. The Fed and the FDIC came to the rescue by insuring deposits over the $250k limit. This granting of super-deposit insurance was by my reckoning, a mistake. Instead, the FDIC should enforced small haircuts on deposits in excess of $250k. My take would be to offer 95% to those depositors who wanted their money immediately and issue for those who could wait, a one year zero coupon note priced at 95. This would still be a far better deal than one that would have been typical in a bank failure.

*- This episode represents a complete failure of the bank regulatory apparatus in that Silicon Valley's 86% deposit growth in a year represented an unmistakable yellow flag. Further, the bank invested those deposits in long duration assets which should have been viewed as a per se violation of safe and sound banking practice. That would have triggered either the closing of the bank or the firing of its officers. I can't wait to hear the testimony of the regulators from the FDIC, the San Francisco Fed and the State of California testifying before Congress.

* - Despite what Senator Elizabeth Warren said, the Silicon Valley Bank would have passed the stress test that it was exempted from. Why? As usual the Fed was fighting the last war by gearing their stress test to asset quality. Silicon's assets, by and large, were not subject to credit risk; instead they were subject to gigantic interest rate risk that the Fed to ignored. Chalk that up the Fed's zero interest rate policy that finally ended in early 2022.

*- As fears of a generalized run on the banking system catalyzed borrowings at the Fed's discount window surged to record $153 billion, up from $5 billion the prior week. An additional $143 billion was to guarantee the deposits of the three banks that recently failed and $12 billion was allocated to the Fed's new, and dubious, term lending facility.

* - The Fed's Open Market Committee meets this week and only 10 days ago market participants were anticipating a 50bp increase in the Fed Funds rate. Now the debate is whether the Fed will do 25 bps or nothing. There are good arguments on both sides, but my guess is that the Fed will copy the ECB and do a 25 bps increase and signal at least a temporary pause.

* - Unfortunately there will be another shoe to drop. The value of office real estate has plummeted and those losses have yet to be recognized on the balance sheets of banks, CMBS', private equity, and pension funds. Along with bank stocks cratering last week, the shares of the office REIT's collapsed. See below for the price declines of a sample of office REIT's over the past year which are down 55%-71%.

           REIT                                52- Week High         Current Price        % change

BXP (Boston Properties)                   133                           51                       -62%

Cousins Properties                               42                           19                       -55%

Douglas Emmett                                  35                           11                       -69%

Kilroy Realty                                       79                           29                       -63%

SL Green                                             84                            24                       -71%

Vornado Realty                                    47                           14                       -70%

* - As a result my guess is that the path of least resistance for stocks is lower with a retest of the October lows likely.

 

My Amazon Review of Kim Stanley Robinson's "The Ministry for the Future"

A Disservice to the Politics of Climate Change

 

Sci-fi writer Kim Stanley Robinson has done a disservice to those of us who care about the peril of climate change. It isn’t clear from his book that he cares more about dismantling capitalism than solving the problem of climate change. His book will convince the diehard climate activists who are already convinced, but it rouses the suspicions of those of us who view the politics of climate change as a ruse to upend capitalism.

 

His Ministry for the Future, a U.N. body, is headed up by Mary Murphy a former Irish foreign minister. Operating out of Zurich in 2025 and beyond she is charged with solving the climate crisis. However, what could have been a very interesting personality, Murphy is a one-dimensional character as are all of the other characters in the book.

 

The book opens with a catastrophic heat wave in India and features the flooding of the Los Angeles plain along with other climate horrors. As the crises deepens Murphy convinces the central banks of the world to engage in quantitative easing by issuing a carbon currency. Although this sounds novel, it really is a modified cap and trade system, and it ignores the inflationary consequences of the currency issuance. Robinson is partial modern monetary theory (MMT), but the book was written before the inflation of 2021 and 2022 which discredited MMT and huge fiscal deficits.

 

Most troubling is Robinson’s tacit approval of eco-terrorism where swarms of drones take down aircraft and container ships triggering a global depression. Somehow the populace of the industrial west remains strangely compliant. Obviously, Robinson didn’t witness the panic of $5 gas in 2022 and how such enviro-friendly politicians as Bernie Sanders and Elizabeth Warren attacked the oil companies for high gas prices. Both of those politicians were cynically ignorant of the fact that high gas prices promote alternative energy.

 

Although Robinson to his credit seems to favor geo-engineering and carbon capture to reduce emissions, he does not mention nuclear power as a potential carbon free source of energy and further there is nary a mention of expediting permits for alternative energy projects. I guess he can only go so far for fear of losing his environmental constituency.

The book has a “happy” ending with climate emissions declining in the 2040’s, but Robinson’s path in getting there strains credulity. For example, has the northern plains depopulated and returning to grasslands and many corporations turning into industrial coops.

For the full Amazon URL see: A Disservice to the Politics of Climate Change (amazon.com)

An Open Letter to President Joe Biden

 

Mr. President:

 

I voted for you in the Democratic Primary. I did not vote for Bernie Sanders or Elizabeth Warren, but it seems you are trying to implement most of their policies to a T, a wholesale expansion of the welfare state. I guess you visualize yourself as the second coming of either FDR or LBJ. I hate to break it to you, but you do not have their raw political talent, and more importantly you don’t have their huge majorities in Congress to implement your program.  When I voted for you in the general election I had more modest aims, to restore respect for our government and achieve at least a modicum of competency. Given your predecessor that would be a huge accomplishment and you were terrific out of the starting gate.

 

However, with respect to competency, you botched up our withdrawal from Afghanistan, you are presiding over an immigration crisis on the Mexican border, and it appears, at times, that the CDC doesn’t know which end is up. Your climate agenda is a theme park of policy incoherence. You ask OPEC to pump more oil, while at the same time working to shut down domestic production. And you rejected out of hand a carbon tax which your Secretary of the Treasury fully advocated before she entered government. Further it is beyond me why you didn’t push for an immediate vote on the infrastructure bill when you had the chance. Its passage would have been a great confidence building measure all around. Instead, you listened to the shrill voices on the Left.

 

With each passing day I am losing respect for our government with a host of small unforced errors based on the faculty lounge world of political correctness.  Why did your Administration put out documents calling mothers “birthing people?” Your administration uses the term “Latinx,” a term by and large rejected by the Hispanic community. Come on Mr. President, these are not the words of a kid from Scranton.

 

In my view Senators Joe Manchin and Kyrsten Sinema are saving your presidency. The two of them are pushing you into the middle so you can be the candidate I and I believe most of the country voted for. Listen to them and the path will be open to a very successful presidency.

Biden Rises from the Dead

Left for dead a week ago Joe Biden swept from victory to victory on Super Tuesday. His coalition was built on very strong support from African-Americans and suburban white women. That coalition proved durable throughout the south, Texas, Minnesota and yes, Elizabeth Warren's Massachusetts. To be sure Bernie Sanders was correct in the notion that he would bring new voters into the process, but those new voters turned out in size to vote against him. He reminds me of an old business acquaintance of mine who created a massive a disparate coalition around him, unfortunately he got people who never agreed on anything to turn against him.

Yes, Sanders did well in California and Colorado where there were a large proportion of Hispanic voters, but not as well as the earlier polls predicted. Biden will have his work cut out for him to bring this large voting bloc into the fold. His problem will be, as my very lovely and very brilliant wife informed me, is that throughout Latin America there seems to be a proclivity for populists on the Left (Chavez) and populists on the Right (Peron). Sanders seems to be benefiting from this historical connection.

On the other hand there is much that voters don't know about Sanders and when they find out they will be far from pleased. For example Sanders views Medicare for All as a compromise from the complete nationalization of the entire healthcare industry, doctors included. He is also against private charity because he believes that the government should fulfill all of society's responsibilities to the poor. I wonder how all the Sanders supporters who work in nonprofits will feel about that.

The primary season is not over, but if Tuesday's results hold Biden should be able to do very well in Florida and Arizona and beat Sanders in Michigan, a state he won against Hillary in 2016. Thus the way is open for him to go into the Democratic convention in Milwaukee with a clear majority.

A Change in Registration

Today I walked into my county clerk's office and changed my registration to Democratic from Republican. Many of my friends asked, "what took you so long?" I guess I was hoping against hope that there would be real opposition to Trump within the Republican Party. That has obviously not happened and to the contrary the party has become even more sycophantic so much so that Republican House and Senate leaders have become mouthpieces for Putin. It is a far cry from the party of Ronald Reagan and John McCain.

The reason why I didn't register as an Independent is because I want to have a say in the Democratic nomination. No Bernie or Liz for me. Further history maybe playing out as I previously envisioned where the U.S. is realigning to three party system. A Hamiltonian Party (centrist Democrats and moderate Republicans), a Social Democratic Party (Bernie and his acolytes) and a Know Nothing Party (The zanies that make up most of today's Republican Party). My new home will be in the Hamiltonian Party. (See https://shulmaven.blogspot.com/2018/11/the-coming-political-realignment-part-ii.html)

My Amazon Review of Emanuel Saez's and Gabriel Zucman's "The Triumph of Injustice: How the Rich Dodge Taxes and How to Make them Pay"

The Taxmen

UC Berkeley economics professors Emanuel Saez and Gabriel Zucman have written a social democratic screed against economic inequality and a concomitant plea for confiscatory taxes on the super-rich. That is taxation not to raise revenue, but rather to reduce the number of billionaires. It is no accident that they have advised both Elizabeth Warren’s and Bernie Sanders’ presidential campaigns.

Their discussion involves a data heavy look at the overall U.S. tax system that includes federal, state and local taxation. They conclude that from 1950-1980 the tax system has gone from a progressive one to a largely flat tax system with mildly regressive aspects at the top end. They use adjusted gross income as the basis for their tax rates among the various income groups. By using that metric they exclude transfer payments which bias the results. Further that ignores the very large charitable contributions made by the super-rich which reduces their effective tax rates as defined by the authors.  Had they not made those contributions I would assume that the apparent regressivity would give way to progressivity.

What Saez and Zucman get right is the need to crack down on corporate tax havens that allow for the transfer of income from high tax to low tax jurisdictions. The tax allocations performed by multi-national corporations have been elevated to a high art by the global accounting firms. Thus it makes a lot of sense to form a global compact to limit this behavior and establish a minimum corporate tax on the order of 20-25%.

Domestically they advocate increasing the corporate tax back to the 50% heyday of the 1950s and increasing the top individual rate to 60 %( federal and state). On top of that they propose a 6% national income tax on all income, but they would eliminate state and local sales taxes. On the individual level they would characterize capital gains and dividends as ordinary income while indexing gains to inflation. Because they are French I would characterize their pies de resistance a wealth tax on the order of 2-3% for the richest Americans. As noted above that tax is not for revenue, but rather to penalize and to reduce the number of super wealthy people. My simple question is how is the confiscating of 2-3% of someone’s wealth each year bear any relationship to justice? Think of a large farm where the government takes 20-30 acres away each year from the farmer without compensation. That would be a taking pure and simple.

The authors propose using all of the revenue generated from there overhaul of the tax code to fund child care, pre-K, free college and Medicare for all. It sure sounds like Bernie and Elizabeth.

What the authors ignore are the second order effects of their ambitious plan. The stock market would meltdown under the weight of lower after tax corporate profits and the forced selling of shares by the super-rich. With that the already shaky finances of public pension plans would crater and the private retirement savings of millions of Americans would take a severe hit. What would they recommend? The answer is obvious: a bailout.

Instead of their meat ax approach to the tax code a scalpel would achieve much of what they desire. A moderate increase in upper-income tax rates, elimination of the capital gains treatment of carried interest, elimination of 1031 exchanges for real estate transactions and increasing the corporate income tax rate from 21% to 25%. Such a program wouldn’t cure their bloodlust for billionaires, but would reduce inequality without wrecking the economy.

There is one major factual error in the book. The authors state that the top rates for ordinary income and capital gains taxation are 37% and 20%, respectively. That is wrong. The Obamacare taxes make the high income top rates for ordinary income and capital gains, 39.6% and 23.8%, respectively. They are also wrong in attributing the growth in tax shelters following the 1981 Reagan tax cuts to the genius of the tax avoidance industry. That is not quite true. It was the increased depreciation allowances of the Reagan tax cuts coupled with the Garn-St. Germain Act deregulation of the savings and loan industry that enabled the tax shelter industry to flourish. It was given to them on a silver platter. Lastly they note that stock buybacks were illegal prior to 1982. That is not true. Buybacks were legal, but they were highly restricted.

Saez and Zucman have offered up a serious, though dubious in my opinion, proposal for radical tax reform. Credible responses are necessary especially if either Warren of Sanders become the Democratic nominee for president.

For the full amazon URL see: https://www.amazon.com/review/R1SW7XXSI2N8SC/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

  

Quick Question for Elizabeth Warren

Elizabeth Warren continues to refuse to say how much more middle class families would have to pay for her Medicare for All plan. She only says that the all-in costs won’t increase for those families compared to today’s insurance costs. However neither her primary opponents nor members of the press have yet to ask her to define the income levels for whom she perceives to be middle class. My guess is that it is lower than what most people think. Which means all-in costs will go up for those families above her definition of middle class.

Therefore her primary opponents and the press should press her on this point. Just do it!

The Democratic Debates: From Circular Firing Squad to Mutual Suicide Pact

I originally thought that the Democratic debates we witnessed last week would turn out to be a circular firing squad where each candidate would be in the attack mode; instead it turned out to be a mutual suicide pact. All you have to do is look at how most of the candidates took positions way out of the mainstream.

Although Medicare for All has the sound of a winning issue, in fact it is a loser once people realize that it would be the end of private health insurance for 150 million Americans and that a majority of all of the hospitals in the U.S. would go bankrupt because of the inadequacy of Medicare’s reimbursement rates. In a way the Democrats are sounding like Republicans in the sense that they want to “repeal and replace Obamacare.”

With respect to immigration the entire field came out for healthcare for unauthorized immigrants and most supported decriminalizing illegal entry in the first place. In other words they would exempt from deportation ANY unauthorized immigrant who hasn’t committed a serious crime.  Although all of the candidates talked a big game on immigration when asked what would be the first thing they would do upon election, not one of the 20 mentioned solving the immigration issue. I would caution that if the Left doesn’t solve the immigration issue, the Right certainly will and the result would not be pretty.

Then, of a sudden, Kamala Harris brought up Joe Biden’s opposition to forced school busing for the purposes of racial balance in the 1970s. Biden showed his age and hemmed and hawed without really responding. What he should have done was to give full-throated support for his position at the time. Although Harris may have benefitted from busing as a school girl, it was widely unpopular in both the White and Black communities and it ultimately fell of its own weight. Later Elizabeth Warren said she would support busing today. She will soon regret that statement. If you want to date the Los Angeles Unified School District’s slow descent into hell you can do no worse than 1977 when a massive school busing plan was introduced. All I can say Trump’s ad makers will a field day with all of the material that came out of the debates.

As to the candidates, Joe Biden showed his age and if he doesn’t quickly rebound he is a goner. Bernie Sanders is the same crotchety old man he was in 2016, only more so. He has passed his sell by date. Elizabeth Warren, in the height of conceit, has a plan for everything. It is one thing to be bold, but quite another to think that she can reorder a complex society of 330 million people. She wants to be the boss of everything. If Warren were an elementary school teacher, she would be a 5^th grader’s worst nightmare.

Both Kamala Harris and Cory Booker had their moments, but so far both appear to be more show horse than work horse. Nevertheless both of them may have the legs to go the distance. In contrast Amy Klobuchar is more of a work horse and perhaps that is why she is lagging in the polls. Pete Buttigieg is a bright guy, but running the U.S. is a huge leap from South Bend, Indiana. I think he is running for president because he doesn’t see a path to governor or senator in his conservative home state of Indiana. Beto O’Roarke looks like a one trick pony who should be running again for the Senate in Texas.

Given Trump’s unpopularity the Democrats are supposed to win in 2020, but as we witnessed in 2016 they have the ability to snatch defeat from the jaws of victory. Simply put, Trump can’t win, but whomever is the Democratic nominee can certainly lose.

  

The Coming Political Realignment

You have got to give Donald Trump credit. He destroyed the two reigning dynasties in American politics; the Bushes and the Clintons. He is now in the process of destroying the hollowed out shells of the Democratic and Republican parties. By the end of his term there could very well be two Democratic parties. A social democratic one headed by Bernie Sanders and Elizabeth Warren based on hostility to capitalism, an expanded welfare state and identity politics. The last of which can be viewed as fundamentally anti-American in the sense that it rejects our national motto, “E Pluribus Unum,” which means “out of many one”.  This faction is open to unskilled immigration, anti-trade and isolationist with respect to foreign policy.

I would characterize establishment wing of the Democratic Party, formerly headed by the Clintons as Left Hamiltonians. The favor big government but are friendly to finance, Hollywood and Silicon Valley. They favor open trade, an internationalist foreign policy, high skilled immigration, the regulatory state and thoroughly believe in the educational meritocracy that by and large runs the country. To them Trump is the ultimate outsider. My question is will they remain in what will be a very left wing Democratic Party with its hostility to the elites that they are?

On the Republican side we now have a very populist Jacksonian party that is hostile to nontraditional lifestyle choices, trade, immigration and foreign entanglements. It supports the existing entitlement programs and is voice of dispossessed white people who now believe that they are a minority group and are voting as such. They too are hostile to E Pluribus Unum. It was these voters that elected Donald Trump. To be sure there racism is present, but the grievances are real as they are looked down upon by the elites of both parties. On economic issues they are closer to the social democratic wing of the Democratic Party than the establishment Republicans, a fact highlighted by Donald Trump during the campaign.

I would characterize the establishment wing of the Republican Party, now a shell of its former self, as Right Hamiltonians as typified by House Speaker Paul Ryan. They favor big government where it can help big business, low taxes, open trade, high skilled immigration, and an internationalist foreign policy. They have more in common with the Left Hamiltonians in the Democratic Party than they do with the Jacksonians that are now running their party. The basis of a new party can be formed here similar to the way the Northern Whigs and the anti-slavery Democrats merged to form the Republican Party in 1854.

There is also a Jeffersonian wing in the Republican Party. They are called libertarians who favor a small government, an isolationist foreign policy and are wide open to the life style choices people make. It isn’t clear they have a home in the newly constituted Jacksonian Republican Party.

So fasten your seat belts, we are in for a wild ride over the next four years!

The Administration Indicts Itself

In a very Clintonesque State of the Union address with a host of small bore initiatives President Obama made a stunning confession. Early on in his speech he noted:

   “The cold hard fact is even in the midst of recovery, too many Americans

    are working more than ever just to get by – let alone get ahead. And

    too many aren’t working at all.”

No Republican critic could have said it better. To be sure the Republican response given by Representative Cathy McMorris Rodgers was long on her personal biography and content free. It appears that both parties are not yet ready to make the concessions needed to improve the lot of the American people.

Also of significance was what was not said. Given all of the pre-speech hoopla about economic inequality, President Obama struck a moderate tone on the subject speaking of “ladders of opportunity” and increasing the minimum wage. My guess is that the class struggle rhetoric of the Elizabeth Warren-Bill deBlasio wing of the party didn’t poll well in this most political of White Houses.  One can only hope that the cooler rhetoric will open the way useful compromise later in the year.