The subtle effects of global over-expansionary policies can be argued, and will only become clear in the next downturn, but on one thing we can all agree: they have caused an explosion of debt. At mid-2014, global debt totaled $199 trillion, or 286% of GDP compared with 269% of GDP in 2007 and 246% of GDP in 2000. In the United States from 2007, the peak of the last debt boom, to the third quarter of 2015, debt increased by 33% compared to a 25% increase in nominal GDP. The world’s funny money artists have made it cheap to borrow and expensive to save. President Trump, without entering into complex details of monetary policy, could reverse this trend very simply – by putting a tax on new debt.
If we are indeed to enjoy the benefits of four years of President Donald Trump, a few things are clear. There is little point in attempting to explain to him the arcana of monetary policy. The man has a short attention span, and in any case his entire career and fortune have been spent in amassing billions through his ability to borrow astounding quantities of funny money – and in many cases, not pay it back. Thus Janet Yellen and the Fed can breathe fairly easy; to the extent Trump has a view on monetary policy, he agrees with them. One would not attempt to argue military strategy with Attila the Hun; similarly, it is futile to argue the downsides of unsound monetary policy with a New York real estate tycoon.
You have to understand, with Trump as President we will be more than half way to Mike Judge’s surrealist fantasy “Idiocracy.” Policies will need to be dumbed down, not simply to pass muster with a low-information electorate, but to pass muster with a low-information President. There is no point proposing policies of intellectual brilliance and subtlety, which the Big Boss rejects because he doesn’t understand them.
However, there are other ways to achieve the same effect as a return to proper monetary policy. We can assume that unlike Hillary Clinton, Trump’s mind is open to free-market non-Keynesian arguments, so there is some hope of persuading him to reverse the worst of the follies of the last 20 years, if we can condense the reversal into a sufficiently arresting sound-bite.
The best soundbite appears to be “Global debt is at record levels, so we must tax it.” Trump knows the damage that can be done by excessive debt; apart from his own financial difficulties he lived through the 2008 crash like the rest of us. Trumponomics also probably includes the principle that if you want less of something, you should tax it. A debt tax would achieve many of the benefits of a return to sound monetary policy, and is comprehensible to a President who may be low-information but is not not mindlessly Keynesian, committed to public spending and inflating our way to national bankruptcy.
A U.S. President can do nothing about the follies of the world outside the United States, except by example – and an example from President Trump would very likely repel rather than attract the majority of world statesmen. (Maybe it would attract Vladimir Putin, but he presides only over a pipsqueak economy.) However, President Trump could affect the U.S. economy by proposing legislation or taking executive action. Hence a tax on debt acquisition is well within his intellectual and constitutional capabilities.
In the third quarter of 2015, U.S. household debt was $14.1 trillion down slightly from 2007, so households in general have not been the problem. Home mortgage debt, at $9.4 trillion, was down 12% from 2007, thus showing that incentives work; if bad mortgage lending causes huge losses in the banking system, banks will indeed cut back on their mortgage lending. Consumers, on the other hand, have not actually improved their behavior; non-mortgage consumer credit is up 34%, about as much as credit in general.
Since much of this debt is at credit-card rates, well into double digits, there is no point in adding an annual cost to it, which would not be noticed. Instead the acquisition of a new credit card or incurrence of a new consumer loan should be penalized by an up-front fee of 1% of the new credit limit or the loan amount, payable in cash and not chargeable to the credit card or the loan itself. Similarly, the incurrence of a new mortgage loan should be charged with a 1% up-front fee; this alone will go far to paying the costs of housing defaults and deflating any bubbles.
Business debt in 2015 was $12.6 trillion, up 25% from 2007, a similar rise to GDP, but the 2007 figure was already far too high. A 1% up-front fee on business taking on new debt, non-deductible against tax, should go far to reduce leverage in the U.S. corporate system and counteract the iniquitous effects of a decade of funny money. It will also encourage business to fund itself in long-term markets, to the great benefit of its cash flow and will put out of business altogether such unsound ephemera as mortgage REITs, which buy 30-year mortgages and fund themselves in the overnight repo market.
State and local governments have increased their debt by only 5% since 2007, well below the increase in nominal GDP. Well done, chaps! Their debt tax could perhaps be set at only 0.5%, to reward their better behavior while still discouraging them from reversing it.
The most difficult problem is the federal government (and also the Fed.) The Fed can be taxed, to discourage it from crazed debt-funded “quantitative easing” programs. It would simply return a lower amount of money to the government every year, a mere bookkeeping entry, but even a nominal additional cost of gigantic bond-buying programs would act as some deterrent to Janet Yellen and her colleagues from imposing them.
That leaves the Federal government. The tax receipts it gained from the debt tax would benefit it, helping to balance the budget. According to Fed figures, household borrowing totaled $418 billion in 2014, while new business borrowing totaled $702 billion. With a 1% debt tax imposed, that’s another $11.2 billion in revenue for the Federal budget. It doesn’t go all that far to eliminating the $500 billion annual budget deficit, but it certainly helps.
However, the deficit itself is a bigger problem. Even if we could work out some entity to which the federal government might pay a tax penalty as it incurred more debt, making it do so would simply make the deficit bigger, which as the past few years have shown is no disincentive at all to our over-entitled lawmakers.
Here we need a Trumpian solution. Representatives and Senators need to pay a financial penalty directly for deficit spending. That way, their incentives would be aligned with those of the federal budget. Congressmen and Senators are currently paid $174,000 annually. The budget deficit for 2016 is projected as $544 billion. Let’s remove $300 from each legislator’s remuneration for each billion of the budget deficit – in 2016, that would leave them with only $10,800. That sounds draconian, but it reflects the lousy job they have done over the last decade. We needn’t worry that they will starve, or that nobody will want the job – there’s massive competition every time a Congressional seat comes open. We have only saved $87 million from the budget deficit, but never mind.
With this structure, the legislators would only get back to their full salary by balancing the budget. That seems a little ungenerous. So let’s double the upside, giving them $600 for each $1 billion they reduce the deficit and removing that amount if they increase it. Then if 2017’s deficit is again $544 billion, they would again make $10,800. If, as projected, it has increased to $561 billion, they would make even less, only $600 for their year’s work. However, if in 2017 they made $200 billion progress towards balancing the budget, reducing the deficit to $344 billion, they would make $130,800, with the chance of making $337,200 if they got as far as actually balancing it.
The real benefit to the fisc would come during recessions, in which the budget deficit naturally increases. If in the next recession the budget deficit has increased to $1 trillion, then each Congressman and Senator would owe the Treasury $262,800. That would make them go on a fiscal austerity binge pretty quickly. If they got the urge to do an Obama-style “fiscal stimulus” of another $800 billion, it would cost them $480,000 each, in cash. No doubt Nancy Pelosi could afford this, and the better-known liberals would be bailed out by their billionaire donors, but ordinary Congressman and Senators without links to billionaire donors would balk at the cost of such wasteful profligacy, and would therefore vote it down. Keynes would be dead, and all thanks to President Trump’s reform!
In an ideal world, we would elect a President and legislators who would balance the budget, and would select a Fed chairman who pursued sound monetary policies. In the world we have, Donald Trump may well be our next President, so we must design simple policies that he will understand and approve, which achieve much the same effect. The debt tax, with the additional Congressional wrinkle, fulfils this criterion and does the job. In all walks of life, we must work with the materials we are given.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)