​Joseph Stiglitz’s new book People, Power and Profits provides an updated manifesto for the progressive-socialist agenda.  His manifesto is a call to solve our nation’s problems by relying more on government and, therefore, less on individual economic freedom.   Specifically, this agenda calls for higher tax rates on the rich and businesses, rapid increases in federal spending, government control over markets and a massive increase in government regulations.
What Stiglitz fails to do is provide his readers with any historical context of how this agenda has worked.  Progressive-socialist policies are not new.  Over the past century the US experimented with these policies on five separate occasions: 1913-1920, 1929-1940, 1965-81, 1988-95 and 2004-15.  Unfortunately, these years were among the worst years in our economic history.  There was no increase in the value of the average worker take-home pay over this entire 52-year period.  Since 1900 all of our economic progress occurred when policymakers avoided Stiglitz’s recommendations.
Not only have Stiglitz’s policy recommendations failed in the US, they have failed whenever and wherever they have been implemented.  To one extent or another progressive-socialist policies are the norm throughout much of the world.  The US is the only major country that has rejected such an agenda and embraced individual economic freedom for most of its history.  This is why Americans enjoy living standards higher than 99.9% of those in the rest of the world.  
As with other so-called progressive economists, Stiglitz is preoccupied with equality.  This preoccupation leads him to praise policies enacted during the Great Depression of the 1930s.  Stiglitz isn’t the only progressive economist to extol the merits of the Great Depression.  Thomas Piketty, who wrote Capital in the Twenty-First Century, does so as well.  Their admiration for the worst economic debacle in US history relates to what has become their prime economic objective—income equality.  They apparently believe America is better off when incomes are more equal, even if it takes a collapse in the economy to achieve such an objective.
Research from the Fraser Institute shows income inequality is fairly stable whether countries are rich or poor.  The main difference is the poor are much better off in rich countries than in poor countries.  This is why so many people in poor countries want to come to America.
The main weakness of Stiglitz book is its dearth of meaningful data.  Without such data, the author is able to make outlandish, general statements about US history without presenting a scintilla of evidence.  Had the author seriously examined the history of US economic policies and their consequences, he would have concluded that the only time the US lost its way was whenever the country followed his agenda. 
In addition to dealing with economics, Stiglitz touches on climate science by repeating the progressive mantra “…excessive emissions of greenhouse gases present an existential threat to the planet....“  As with his economic statements, he fails to provide any evidence for such an existential threat.  As for economics, the historical evidence is clear—the real existential threat to prosperity is the progressive-socialist agenda.  

​In spite of the latest kerfuffle, the odds still favor an agreement on trade.  Even without an agreement, the recovery will continue and stocks will recover.
The main problem the US has in dealing with China is the country’s reputation as an unreliable partner.  China has a well-earned reputation for not abiding by its agreements. 
When it was admitted into the WTO it agreed to open its country to foreign financial institutions and to respect intellectual property rights.  China also agreed to respect international boundaries in the South China Seas.  China has consistently violated such agreements.
The Trump Administration has insisted upon certain guarantees that any agreements should have triggers that go into effect in return for violations.    Among these triggers, Trump has demanded that current tariffs on China continue and should only be removed as China complies with its agreements.
Trade negotiators for both the US and China had indicated they had reached agreement on 90% of their issues.  Then last week US negotiators received a revised agreement changing some of what had been agreed upon.  One major change involved China refusing to change its own laws to comply the agreement.  China would still agree to do certain things, but would not change its laws to make such changes legal in China.
Backing away from an agreement already reached reflects a lack of sincerity and trust.  Since these were already the main issues the US faced with China, Trump was forced to call their hand.  Either China was serious in complying with whatever the two countries agreed to or there would be no agreement.
The ball is now in China’s court.  China has to decide whether extending the current 10% tariff on China’s exports is an acceptable temporary penalty for assuring their compliance.  The alternative is an additional 15% tariff and a further disruption to trade. 
As he has all along, Trump is playing a dangerous game.  Tariffs are disruptive to both countries.  I had assumed the current dislocations from tariffs would slow real growth to the 3% area.  If Trump follows through and raises tariffs on China to 25%, growth in the US is likely to move closer to 2½%.  The disruption to China’s economy would be even greater as more production moves from China to other countries.
Avoiding tariffs is clearly in the best interests of both countries.  The main problem is President Xi Jinping.  He cannot be seen as caving in to US demands.  Any trade agreement between the two countries will have to be designed to allow Xi to save face.  Trump has negotiated enough deals to know that if the US fails to allow such a concession, the disruption from tariffs will continue. 
In a worst case scenario, another round of higher tariffs would be enough to slow the US recovery.  But it won’t be enough to stop it.  With the S&P 500 10% below its fundamental stocks remain a strong buy.

​Stock prices acted appropriately in response to the Fed’s announcement.  There’s no way to sugar coat what the Fed did.  Having already moved 25% of my equity portfolio to cash, I’ll now move another 25% to cash. 
The unanimous decision by members of the Fed’s Open Market Committee ignored all signals coming from both financial and commodity markets.  Instead, of looking at financial markets, which look to the future, the Fed looked backward at the economy and concluded everything was fine.  They ignored all signs suggesting the Fed was becoming overly restrictive. 
While it’s possible the financial signs are all wrong, it’s also possible the Fed is wrong. 
The prudent action would have been to postpone any move to make monetary policy more restrictive and wait six weeks for its next meeting.  Instead, the Fed decided to “dam the torpedos” and ignore the possibility it had already become restrictive.  It doubled down on any restraint by raising interest rates, continued to sell $50 billion in securities each month and laid out a plan for further restraint this coming year. 
The 600 point swing in the Dow that followed the Fed’s announcement strongly suggests the Fed is on the same path today that it took in 2008.  If so, stock prices will head even lower in the months ahead. 
As in 2008, the Fed will eventually figure things out and make the right move.  While I hope I’m wrong, the fact that today’s potentially destructive decision was unanimous and so hardheaded provides little comfort this Fed will do the responsible thing any time soon.
 

​The latest decline in stock prices and narrowing of yield spreads are signs associated with a recession and even a developing financial crisis.  The Fed’s current policies have all the signs of a policy mistake similar the one that produced a financial crisis. 
In 2008 the Federal Reserve failed in its primary mission.  That mission is to make sure there is sufficient money in the economy to prevent a decline in business activity. 
Monetary policy was once straightforward.  The Fed would buy securities to make money more available and it would sell securities to make money less available.  This straightforward approach ended in 2008 when the Fed changed its operating procedures.
In 2008, as the economy entered a recession, the Fed sold $300 billion in securities.  In retrospect, it should be clear that continuing to sell securities amid an economic downturn was a terrible mistake. 
The Fed belatedly did the right thing in the first half of 2009.  It purchased back the $300 billion in securities it had sold.  Almost immediately, the stock market began to recover and by mid-year the economic began to recover.
The Fed spent the next five years purchasing an additional $3 trillion in securities.  This was three times the amount it had purchased since its founding in 1913.  The purchases were so excessive that banks left $2 trillion of these funds on deposit with the Fed.
No one knows how such massive purchases of securities have impacted the monetary system.  Nor is apparent how the $2 trillion banks have on deposit with the Fed will impact the amount of money in the economy. 
This year, as in 2008, the Fed has again sold $300 billion in securities.  One difference this year from 2008 is that banks have shifted $472 billion of their deposits with the Fed into the economy. 
What isn’t known is whether the Fed’s sales of securities are powerful enough to overwhelm any stimulus from banks’ shifting of funds into the economy.  It’s conceivable that, as in 2008, the restraint from Fed sales of securities is the dominant force driving monetary policy.
The Fed’s ongoing experiments with monetary operations have created challenges in interpreting the impact of it monetary actions.  Given the unknowns surrounding monetary policy, the Fed’s most prudent course of action is to stop selling securities and pause with any further increase in interest rates. 
If the Fed pauses in its moves toward monetary restraint, it will reduce the odds of a recession and send stock prices sharply higher. 

​President Herbert (Trump) Hoover has proven he’s not the genius he thinks he is.  After igniting a positive surge in growth with tax cuts, Trump’s tariffs will undermine the very growth the President is looking for. 
While President Trump’s business instincts are often positive, they are consistently negative when it comes to international trade.  He and his advisers use highly-flawed numbers for trade deficits as a guide to unfair behavior by others.  However, trade deficits can appear to show serious problems where none exist.  A trade deficit can as easily reflect a desire among foreigners to invest in the US, as they can some insidious behavior.   
Trump’s imposition of high tariffs on imports of solar panels, washing machines, steel and aluminum, provides certain industries and companies with government assistance.  The assistance comes at the expense of companies and individuals who pay higher prices for these items. 
It might appear the benefits to some companies are offset by the higher costs to others.  This isn’t the way trade works.  The efficiencies from the complex interactions of market forces overwhelm those from government dictates.  This is why countries promoting free trade tend to have higher productivity and higher wages than countries that protect industries with tariffs.
When Trump decides to reward some and harm others he is following in the footsteps of President Herbert Hoover.  Hoover encouraged Congress to place tariffs on foreign goods to protect American businesses and workers.   As the Smoot-Hawley Tariff moved through Congress in October, 1929, the stock market crashed.  It was a prelude to the Great Depression.
Blaming other countries for unfair trade is easier than to admit to our own weaknesses.  One self-inflicted weakness has been our high tax and regulatory burdens.  Trump has been removing these. 
Whatever trade complaints we might have had against foreign countries, Trump’s tax and regulatory reforms have leveled the playing field.  They have given US companies a major competitive advantage over businesses in other countries.  Instead of allowing this benefit to play out, the President’s imposition of tariffs is in the process of undermining his greatest policy achievement to date.  This is hardly the work of a genius. 

​​Many thanks to Kevin Short and @iHeart  radio for interviewing me about my book, #RichNationPoorNation listen to the interview here goo.gl/DJBFLX

Republican legislation to cut and reform taxes has the potential to be the most significant policy development of the past year.  If it passes Congress, it will not only boost productivity growth and incomes, it will spur further pro-growth legislation.
Key similarities in the House & Senate bills  
Here are similar provisions in each bill that will likely be in the final bill. 

1. Both bills cut corporate tax rate to 20% (House in 2018, Senate 2019).
2. Both House and Senate bills reduce tax rates by increasing the brackets that apply to current rates (the House bill has 4 tax brackets, the Senate 7).
3. Both bills double the standard deduction to $24,000 for married couples.  (Currently 30% (45 million people) itemize, by doubling the deduction only 10% (15 million) would itemize.  IRS would have 30 million fewer detailed returns to check meaning more scrutiny for those who itemize.
4. Both bills repeal the personal exemption for each family member (currently $4,150).
5. Both bills repeal the AMT (alternative minimum tax).
6. Both bills repeal the deduction of state and local (The House bill allows filers to deduct up to $10,000 of property taxes).
7. Both bills change a provision allowing for the exemption of $1/2 million in profits from the sale of a home (you must live in the house 5 out of 8 years instead of current 2 out of 3 years; House bill limits the deduction for high earners).
8. Both bills double the current estate tax exemption from $5 million per person to $10 million (adjusted for inflation).  For 2018 the exemption is $22.4 million for married couple.

Key differences in the House & Senate bills
 
The most important difference between the bills is the Senate bill repeals the mandate to buy health insurance.  The House bill does not.  In addition, the House bill limits deductions for some higher earners, raising the top marginal tax rate for certain payers.  The Senate bill slightly lowers the highest marginal tax rate.
 
How Senators will vote 
Predicting votes in the Senate can be hazardous, but here’s what I expect and why.
Sen. Ron Johnson (R. WI) says he opposes both the House and Senate bills because they fail to allow a tax cut for pass through businesses, such as limited liability companies and partnerships.  Johnson is a businessman who has identified a major shortcoming in both the Senate and House bills.  The flaw is a mistake that will be corrected in each bill.  Johnson will then vote yes.
Sens. Jeff Flake (R. AZ) and Bob Corker (R. TN) have expressed concerns about the budget deficits caused by the tax bill.  They already voted for the budget which included the $1.5 trillion loss in revenue.  There is no reason for them not to support the final bill.  They vote yes.
Sen. Rand Paul (R. KY) was the only Senate Republican to vote against the budget.  However, he has been instrumental in promoting many of the provisions in the Senate bill.  He will vote yes.
 
Sen. John McCain (R. AZ) was one of only three Republicans to vote against repealing Obamacare.  He said his vote against repeal was due to the lack of transparency regarding its replacement.  He agrees that the procedure for tax cuts and reform has been more transparent.  McCain will vote yes.
Sens. Susan Collins (R. ME) and Lisa Murkowski (R. AK) are the other two Republicans who voted not to repeal Obamacare.  They have expressed concern over repeal of the mandate to buy health insurance, saying it can increase the cost of health insurance premiums. 
The Senate tax bill includes Murkowski’s main objective of expanding oil drilling in ANWR (Arctic National Wildlife Refuge).  Murkowski will vote yes.  This leaves Susan Collins as the only no note.
If this analysis is correct (and no other Senators step up to block the bill), the Senate will approve the tax legislation with 51 votes. 
The Compromise
The final step will be the compromise between the House and Senate.  It is likely to repeal of the mandate requiring people to buy health
insurance.  Doing so not only counts for reducing the deficit, it also increases savings for those earning less than $50,000 a year.
The compromise will also eliminate most of the deductions associated with state and local taxes.  The House will probably get to keep their $10,000 allowance for state property taxes. 
Eliminating the state and local tax deduction will encourage high-tax states to reduce both their tax rates and their spending in an effort to stay competitive.  It will further boost real growth nationally and curtail the cycle of raising taxes to increase public employee benefits to fund contributions to liberal lawmakers.
Voting to prevent most individuals from a tax cut might seem to be a difficult decision for Democrats.  It isn’t.  Many recognize how this bill will lead to explosive growth and the demise of many of liberal assumptions.  All Democrats will oppose the legislation.
The final vote will be close.  However, with the jobs of so many Republicans depending on a victory, the odds favor passage of this important policy change.