It’s hard to look beyond Donald Trump’s continuous and escalating sociopathic behavior since Thursday’s cruel and unwarranted Tweet storm.  But this morning my thoughts turned to Agent Orange’s upcoming trip to Hamburg, Germany and the G-20 Summit.  This group, which first met following the 2008 global financial meltdown, continues to focus on putting safeguards in place to prevent future manipulation of the international banking system.

However, in recent years the attending heads of state have expanded the agenda to include other issues which depend on international engagement and coordinated policy.  Among the most pressing are climate change, terrorism and immigration (which as we now know are not totally unrelated) as well as global economic growth based on expanding opportunities for free trade.  Trump, whose “America First” platform is contrary to all of these (with the exception of terrorism), is being described as “the odd man out.”  (Source:  The Hill, July 2, 2017).  On Thursday, the New York Times reported that host German Chancellor Angela Merkel issued the following warning to her American counterpart.  She…

promised to fight for free trade and press on with multilateral efforts to combat climate change at the G20 summit next week, challenging the “America First” policies of U.S. President Donald Trump…Merkel did not mention Trump by name but said global problems could not be solved with protectionism and isolation.  (Source: New York Times, June 29, 2017)

I am less concerned with Trump being out of step with other heads of state than I am about his efforts to create what he calls “a level playing field” through protectionism, deregulation and lower tax rates.  This is a sad and defeatist indictment of American exceptionalism.  Let me explain.

The first few sessions of the Introduction to Entrepreneurship class I taught at Miami University centered on opportunity recognition, the process of identifying and introducing new goods and services to satisfy market demand.  The key to success was innovation, the ability to provide products that were better, faster and/or cheaper than those currently available.  Sometimes the product represents a quantum advance in technology such as the first cell phone.  More often it is a variation of an existing product, an example being added features (e.g. GPS, heated seats, collision avoidance systems) to automobiles.

The third category is imitation, i.e. making a facsimile of an existing product, the primary selling point being price differential.  The example I always used was memory cards for digital cameras.  When Sony first introduced the memory stick on September 10, 1998, a 4 megabite card cost $24.99.  Today, you can buy a 64 gigabite SD card for $19.99 on Amazon.  And it is not made by Sony.  In other words, when you compete solely on price, you are only renting a customer.  There is no brand loyalty.  As soon as buyers have a cheaper alternative, they will migrate to the less expensive option.

I want to make this next statement loud and clear.  The United States has NEVER competed on price.  America’s economic strength and sustainability has always been dependent on innovation and investment in infrastructure from the construction of the transcontinental railroad to the development of the Internet.  To suggest otherwise demonstrates a lack of belief in American economic exceptionalism.  Want more proof?  You don’t even have to leave the continental United States.

Those states which adopted Trump-like “Us First” development policies–Kansas, Louisiana–are struggling.  In contrast, California with its higher marginal tax rates and stricter environmental standards is prospering.  According to Bloomberg View:

California is the chief reason America is the only developed economy to achieve record GDP growth since the financial crisis of 2008 and ensuing global recession, according to data compiled by Bloomberg. Much of the U.S. growth can be traced to California laws promoting clean energy, government accountability and protections for undocumented people. Governor Jerry Brown, now in his fourth term, considers immigrants a major reason for the state’s success.

California’s creditworthiness keeps getting better, measured by the declining premium global investors must pay to ensure against depreciation of the state’s debt obligations. That premium has diminished more than for any other state since 2012…Texas, which is the second-largest state in population, became cheaper compared to Treasuries and California in the market for state and local debt since the November election. Investors see security in the state with more protections for immigrants and more regulations. (Source: Bloomberg View, May 10, 2017.)

Although Angela Merkel may say she will try and convince Trump he should reverse his positions on trade and climate change, I am betting she hopes he does not.  That way Germany can become the global equivalent of California while Donald Trump becomes the Sam Brownback of U.S. presidents.  NOTE:  Brownback is the Republican governor of Kansas and has a 27 percent approval rating, second lowest, one percentage point higher than New Jersey Republican Governor Chris Christie.  (Source: Morning Consult, April 2017)

For What It’s Worth.
Dr. ESP

In his dissent of the Supreme Court decision in the 1932 case New State Ice Co. v Liebmann, Justice Louis Brandeis introduced the now oft-quoted phrase “laboratories of democracy.”  The case revolved around the ability of a state, in the absence of any federal regulation, to issue a license in cases where that government claimed such restrictions were necessary to protect public health and safety.  In the justification for his minority vote, Brandeis wrote:

To stay experimentation in things social and economic is a grave responsibility. Denial of the right to experiment may be fraught with serious consequences to the nation. It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.

This mechanism provided valuable input into two recent policy debates.  National legislation related to welfare reform in 1996 was based on a similar program initiated in Wisconsin by then governor Tommy Thompson.  And of course, the Affordable Care Act (ObamaCare) was modeled after a similar Massachusetts program under Governor Mitt Romney.  State-based social or economic experiments can lay the foundation for better policies and programs.

But just as often, these initiatives instruct us what we should avoid.  I thought about Justice Brandeis and my years of experience in state government while reading an under-reported story in this morning’s Washington Post titled, “With State Budget in Crisis, Many Oklahoma Schools Hold Classes Four Days a Week.”  As a result of Republican Governor Mary Fallin’s bet on supply-side, trickle down economic policy, the Post reports:

A deepening budget crisis here has forced schools across the Sooner State to make painful decisions. Class sizes have ballooned, art and foreign-language programs have shrunk or disappeared, and with no money for new textbooks, children go without. Perhaps the most significant consequence: Students in scores of districts are now going to school just four days a week.

Sadly, the only thing news-worthy about this story is recognition that Oklahoma is the latest jurisdiction to fall for this con game.  In June 2015, MarketWatch reported how Kansas Governor Sam Brownback (another Republican) had bankrupted his state.

There are two clear takeaways: first, supply-side economics didn’t even work with the deck stacked in its favor, and second, we’re seeing what happens when supply-side tax cuts on the rich fail to produce badly needed revenue. The end result is that the wealthy get to keep their tax cuts and everyone else gets to close the gap.

And like Oklahoma, public school support has been among the hardest hit with draconian budget cuts resulting in larger classes and a shorter school year.

Which brings us to Louisiana where the Republican Governor Bobby Jindal hoped to ride his supply-side experiment all the way to the White House.  In February 2016, Salon summarized Louisiana’s budget situation as follows.

This is not to say that the budget deficit ($940 million) is entirely Jindal’s fault. But it does stem in large part from his instituting in Louisiana the same kinds of budget-busting tax cuts that Sam Brownback has used to turn Kansas into a fiscal insane asylum. And it underscores the damage that could be done to the country as a whole if any of the supply-side-espousing Arthur Laffer wannabes currently running for the Republican nomination win the White House in November.

Again, public education took the sword while tax cuts benefited those who least needed them.

I leave you with Albert Einstein’s definiton of insanity, “Doing the same thing over and over again and expecting different results.”  Unless, of course, you are Donald Trump who, upon winning the Nevada Republican primary in February 2016, professed his adoration for the “poorly educated.”  Instead of calling his FY2018 budget proposal “A New Foundation for American Greatness,” a more appropriate title for a document which mirrors the experiences in Kansas, Louisiana and Oklahoma might be, “Making the Poorly Educated Less Educated Again.”

Sunday Morning Postscript

Sometimes, the devil really is in the details.  Yesterday, a CNN report on Jared Kushner’s growing involvement in the Trump/Russia connection flashed a picture of Kushner Tower, one of the Trump-in-law’s major investments.  There, for all to see, was the street address, and I promise, I am not making this up:  666 Fifth Avenue.  Who would have thought the  1976 blockbuster movie “The Omen,” starring Gregory Peck and Lee Remick was a documentary.

For what it’s worth.
Dr. ESP

The 1979 movie All That Jazz includes one of my all-time favorite musical performances.  After protagonist Joe Gideon (played by Roy Scheider) learns his latest movie was not well received by critics, his daughter (Erzsebet Foldi) and girlfriend (Ann Reinking) cheer him up with a song and dance rendition of Peter Allen and Carole Bayer Sager’s 1974 song, “Everything Old Is New Again.”  (NOTE:  If you’re not familiar with the film, it was directed by Bob Fosse and is semi-biographical.  SPOILER:  In one of the more ironic final scenes in cinema history, Gideon suffers a fatal heart attack after a life of chain smoking, heavy drinking and many sleepless nights.  In what might be considered a documentary remake, Fosse, in the role of Joe Gideon, passed away from a coronary in real life on September 23, 1987.)

It’s funny how the creative process sometimes is triggered by more than a single stimulus.  It often depends on a thread of seemingly unconnected events which appear somewhat circular.  One event reminds us of another and then another until we return to the original concept, but with a great degree of clarity.  I have no idea why I started thinking about this particular movie scene as I heard the the latest economic news, the gross domestic product during the first quarter of 2017 had grown at a sluggish 0.7 percent, the lowest rate in three years.

My first reaction was, “Not much of a vote of confidence in Comrade Trump.”  But that would be unfair.  His Orangeness, to date, has done absolutely nothing which could have such a impact on the macro-economy. No ACA repeal.  No tax reform.  No withdrawal from any trade agreement.  No condemnation of China as a currency manipulator.  Second reaction, “Maybe the Obama era of economic growth had run its course.”  But private sector employment is still strong.  Inflation is under control.

Then it came to me.  The “everything old” referred to basic economic and business principles.  The “something new” was the current administration’s belief it had a revolutionary program which would supercharge the national economy. (Maybe someone should tell them it is merely a warmed over version of the discredited theory of trickle down economics.)

Where had I heard that before?  At the beginning of the dotcom boom in 1995, I was staff director to the National Governors Association Committee on Economic Development and Commerce. We had invited a panel of CEOs from high technology companies, mostly from Silicon Valley, to talk with the governors about the opportunities and challenges associated with this “new economy.”  As expected, the business leaders were optimistic.  In fact, one CEO predicted the boom and bust business cycle might be a thing of the past.

Then Colorado governor Roy Romer reminded us.  “The new economy still plays by the old economy’s rules.”  To prove his point, Romer suggested the technology boom was more about speculation than traditional business metrics.  Venture capitalists were investing billions of dollars into companies which had little revenue and less profits.  They hoped to recoup their contribution, not from the profitable sale of goods and services, but through an IPO or purchase by a corporate suitor based on an equally speculative market valuation.  How did that turn out?

So, what is a possible explanation for a downturn in the economy when there has been little, if any, change in policy?  What old economy principle is in play?  The business community seems largely optimistic the new White House occupant is going to make their lives easier.  Like them, he abhors taxes.  And despises regulation.  But there is one thing they hate more than either of these perceived inhibitors to growth.  UNCERTAINTY.

And that’s where the administration has failed dramatically.  You put off business decisions if you cannot tell whether the U.S. is pulling out of NAFTA in the morning and honoring the treaty in the afternoon.  Residential developers cannot price construction if they don’t know whether the Department of Commerce is going to place a punitive tariff on Canadian soft wood.  And you certainly don’t invest in technology companies if there is the slightest chance Silicon Valley will soon be represented by a mushroom cloud rather than a semiconductor.

Since Comrade Trump seems to be a visual learner, maybe he should screen All That Jazz.  I suggest he also add Horton Hatches the Egg to the video library in the White House theater.  Not only would a member of the GOP appreciate the symbolism of a pachyderm as the lead character.  Horton could also remind Trump flip-flopping is a sign of indecision and lack of conviction.  Or as Horton constantly tells those who challenge his commitment to protecting his egg, “I meant what I said and I said what I meant.  An elephant’s faithful one-hundred percent.”  Thank you, Dr. Seuss for showing us what the anti-Trump looks like and how he behaves.

For what it’s worth.
Dr. ESP