News Shorts, Feb. 19-25, 2018
Trump Administration Budget Means Slashes in Crucial Investments for the Future
Feb. 18, 2018—From the standpoint of the American System of Economics, the nation’s commitment to the frontiers of science is a crucial parameter indicating whether it is on the path to progress. For our purposes today, two of the most important frontier areas are nuclear fusion power, and space exploration, both of which hold the unique promise of providing a qualitative leap in productivity for the economy.
By this standard, the FY2019 budget just proposed by the Trump Administration is as much an abomination for fundamental scientific progress as it is for the general welfare of the tens of millions of poor Americans, who face cuts in food stamps, medical care, and other subsidies.
The Administration’s FY 2019 budget request for the magnetic fusion program cuts the budget from the FY17 level of $380 million, to $340 million for FY2019. Within the total, the U.S. contribution to ITER, the international fusion energy project ongoing in France, is raised from the FY2017 appropriation of $50 million to $75 million. (To fulfill the U.S. commitments to ITER, the budget should be $150 million per year. The Senate has been zeroing out the ITER funding, so the paltry $50 million was a compromise with the larger amount allocated by the House.) ITER representatives have said that continued shortfalls by the United States imperil the program.
As a result of the ITER increase, and the overall decrease, the domestic fusion experimental program would be cut from $330 million to $265 million, in effect destroying the domestic fusion program. The budget document does not detail how such a life-threatening reduction would be accomplished. But with MIT’s Alcator already shut down, the General Atomics Doublet is a target, as is the world-class research at the Princeton Plasma Physics Lab.
As far as the investment in space exploration and science goes, he proposed budget request allocates about $19.9 billion to NASA, an increase of meagre $370 million over last year’s request. Overall the budet emphasizes exploration systems development. This includes an early 2020s manned orbit of the Moon, and plans for robotic lunar landers “in the next few years.” But the new initiatives are dependent upon reduced Federal support, betting instead on commercial capabilities and public-private partnerships.
Part of the “cost-saving” measures is the proposal to zero out funding for the International Space Station (ISS) in 2025 and allocates $150 million “to encourage development of new commercial low-Earth orbital platforms and capabilities for use by the private sector and NASA,” in the words of the agency’s budget overview.
New Proposals to Generate Credit to Fill U.S. Infrastructure Gap
Feb. 18, 2018—President Trump’s long-awaited announcement of the Legislative Outline for Rebuilding Infrastructure in America on Feb. 12, contained few surprises. It featured no great projects, no unifying vision, and a plethora of ways to “incentivize” a flow of funds from anywhere but the Federal government, each more toxic than the last.
The only remotely promising aspect of his funding plan was the section on creating a Federal Capital Financing Fund, a bow to the concept of capital budgeting , by creating a mandatory revolving investment fund which would not be counted in the operating budget. But even that was tentative, and one suggestion among many major ripoffs.
Qualified public officials from both sides of the aisle agree that the funding sources anticipated by the Outline will never come close to being adequate to deal with the nation’s infrastructure needs. The states and localities don’t have the money, and the private investors won’t take on the necessary scope of projects required.
What’s needed is the American System approach to generating credit: the use of Federal credit to create an investment fund, a bank, that can mobilize the trillions of long-term, low-interest loans needed to revolutionize the economy with high-speed rail, new water systems, and 21st century energy systems like fusion power. That approach is detailed in a proposal circulating on Capitol Hill, which we include on this blog. Its core proposal is to invite holders of U.S. Treasuries, now earning a paltry rate of interest, to trade them in for stock in a new infrastructure bank, which would turn them into profitable assets, as the Bank proceeded to invest in U.S., infrastructure. Interest on that stock would be guaranteed by a dedicated stream of Federal funds (the rise in the gas tax would be one place to start), and the now-worthless debt would be “put to work,” with profit for all.
Interestingly, prominent Chinese figures have repeatedly indicated their interest in such a venture. The first serious proposal came on Jan. 16, 2017, when China Investment Corporation (CIC) chairman Ding Xuedong said that CIC wants to change its holdings of U.S. Treasury debt, into an investment in building of new infrastructure in the United States. Ding was speaking to the Asia Financial Forum in Hong Kong. He said that the current return on China’s Treasury holdings, at that point $50 billion, was too low, and that such a scheme (the currently proposed bank would offer 4%) would be of great benefit.
The latest reflection of the Chinese willingness to put its money behind the U.S. infrastructure drive came on Feb. 14, in a guest column by Dr. John Gong, professor at the University of International Business and Economics, on the China Global Television Network. Gong wrote:
I have a great idea. Bank of China and other major banks from China are now flush with dollar cash and other dollar-denominated liquid assets, totaling over $3 trillion US dollars, mostly in the form of holdings in US treasury bills and bonds. This money can be readily used for Chinese investors to participate in America’s infrastructure boom. By that I mean Chinese investors can participate in those infrastructure projects as active equity investors, and maybe contractors or suppliers at the same time.
Call it the Belt and Road. Call it America-belt-America-road. I don’t care, as long as China’s current account trade surplus can be somehow transformed into a capital account stock, in the form of money invested in America as permanent equity shareholders, and more importantly permanent stakeholders of a stable and prosperous Sino-US economic relationship. This could be a win-win mode for both countries.
The other major holders of long-term U.S. Treasuries, besides China, are U.S. commercial banks and Japan—so the proposed infrastructure bank would not be simply a U.S.-Chinese venture. It would harness both domestic and foreign capital to rebuild the country.
Democrats Slam Trump Infrastructure Plan, Offer Weak Alternative
Feb. 18, 2018–On Friday, February 9 Democratic Representative Peter DeFazio presented a clear statement of principle concerning infrastructure, in broadcasting the “Weekly Democratic Address” . DeFazio is the Ranking Member of the House Committee on Transportation and Infrastructure.
The statement highlighted elements of the post-World War II progress in the development of infrastructure, including Eisenhower’s, and Reagan’s roles ( to show the historic bi-partisanship on this matter), stressing the advent of the era of Federal responsibility for projects, and then charges that Trump will take the country backwards to a pre-Federal era.
DeFazio followed that statement up, after the Feb. 12 release of the Trump Plan, with an even harsher assessment , showing the devastation the Administration plan would cause. This includes the overall cuts in infrastructure, the proposed major privatization of different elements of federally run infrastructure, and the unrealistic switch from Federal to state and local financing.
On Feb. 14, he joined a bipartisan group of lawmakers in a meeting with President Trump to discuss the infrastructure issue.
But do the Democrats have a plan?
DeFazio cited in the “Weekly Address”, the Democratic alternative, called “A Better Deal” . This seems be typical of the Democratic approach up to this time: Defend the General Welfare, but not too much.
The “Better Deal” is a one trillion dollar plan, financed by an increase in the Federal Gas Tax. Such plans, while showing better intent, still do not come close to addressing the generally admitted eight trillion dollar requirement, to begin both the rebuilding and new project construction needed to reverse the general physical breakdown in the United States.
And What Are the Republicans Saying?
Feb. 18, 2018—House Transportation and Infrastructure Committee Chairman Bill Shuster (R-PA) released a statement in response to the White House infrastructure plan on Feb. 12, in which he emphasized his desire for the infrastructure bill to be “bipartisan, fiscally responsible, and make real long-term investments in our Nation.” He also called for building up the Highway Trust Fund.
Shuster, who is retiring this year, has long put emphasis on the need to raise the gas tax, which hasn’t gone up since 1993, leading to a significant shortfall in the Highway Trust Fund. In his statements to The Hill, after a meeting with the President and other lawmakers from both parties on Feb. 14, Shuster claimed that the President was open to the gas tax plan, and that he would be receptive to other plans to expand the federal monies for the nation’s infrastructure.
The Republican leadership in both Houses, however, has stated firm opposition to raising the gas tax.
Republican Ray LaHood, a former Congressman and Transportation Secretary under Obama, has been voicing dissatisfaction with the President’s plan. Asked Feb. 12 by NPR whether he thought the plan to get state and private money on the line would work, LaHood said “that idea just probably won’t work because the states and local government don’t have the money.”
He added a push for more Federal investment: “And the reason we have an interstate system in America that was built over the last 50 years is because our national government made investments. The reason that Europe and Asia has some of the best rail systems is because the national government made a commitment. And that’s where the rubber really hits the road when it comes to having a national vision.”
In a later interview with Bloomberg, the former Secretary was even tougher. Many of the states are broke, he said. The plan for Federal spending of $20 billion a year on repairing the crumbling infrastructure is “very insufficient.” Not only must the gas tax be raised, but there must be an infrastructure bank—as well as PPPs, increased tolling, etc.
LaHood is extremely active with non-governmental organizations pushing infrastructure, as well as playing a role with the ProblemSolvers Caucus in Congress.
Corporate Tax Cut Spurs Surge in Stock Bubble
Feb. 18, 2018—An analysis released by CNBC on Feb. 15 confirmed the prognosis by JPMorgan Chase head Jamie Dimon about the expected impact of the 2017 corporate tax cut. Rather than spurring companies to pour money into investment, or wages, the windfall has been used to push up corporate stock buybacks to unprecedented levels.
The level of stock buybacks since the December passage of the bill has now reached over $170 billion. This can be compared to the previous high of $147 billion in 2016, as well as the 2017 level of $75 billion.
During a Dec. 13, 2017 event of the Axios Smarter Faster Revolution in Ann Arbor, Michigan, about whether the bill would result in job creation, Dimon had said: “You need a competitive tax system … companies will retain more capital and start to use it over time… Some will raise wages. Some will buy companies. Some may do dividends and buybacks. Don’t act like that is a bad thing. That is their money. Think of it as a QE4. That money gets recirculated in the American system.”
Until the bubble pops.
Americans for Financial Reform Blasts Plan to Loosen Rules on Derivatives
Feb. 18, 2018—On Feb. 15, the Financial Institutions and Consumer Credit subcommittee of the House Financial Services Committee took up a series of bills intended to loosen further any regulations on derivatives trading (“de-risking”). Derivatives speculation (or gambling) has created hundreds of trillions of dollars of debt in the world economy—with no regard or relationship to the creation of physical wealth.
The Americans for Financial Reform, a coalition of 200 civic and labor groups, issued a several-page statement blasting the bills. Some excerpts follow:
…we are deeply concerned that much of this legislation moves in the direction of reducing, and in some areas nearly eliminating, key safeguards on derivatives transactions put in place after the 2008 financial crisis. We believe weakening derivatives risk management requirements in this manner would be a serious error. It is well known that derivatives played a crucial part in the 2008 financial crisis. However, public knowledge of this issue is often limited to the role played by credit derivatives in the collapse of the American International Group (AIG). Through one of its subsidiaries, AIG purchased over $400 billion in credit default swaps obligating it to cover losses on subprime mortgage loans, and failed to properly risk manage these derivatives. When unexpected losses and margin calls hit the company, the entire global insurance company failed, triggering a $180 billion bailout – the largest taxpayer bailout in U.S. history….
The large risks posed by derivatives are inherent and directly linked to their usefulness as instruments of risk transfer. Derivatives allow the transfer of the risk of future market price moves between different economic counterparties. This is done by tying future derivatives payments directly to future market prices. The path of future market prices is of course difficult to predict, and prices move in a particularly extreme and unpredictable manner during periods of market stress. This means that the future risk exposure from derivatives commitments is always uncertain and speculative, and can increase rapidly in times of financial stress. A seemingly small derivatives commitment today can create an enormous and unpredicted cost tomorrow. This is why it is so tempting to use derivatives as instruments of market speculation, even for commercial entities that may initially use them simply to hedge risks. And this is why it is crucial to require derivatives counterparties to responsibly manage their risks and ensure that they are prepared to make the payments that may be required of them in the future.
Unfortunately, much of the legislation under consideration by the Subcommittee today would severely and sometimes fatally weaken these risk management requirements. We believe this would be a grave error.
Industry lobbyists have consistently argued that post-crisis regulations have raised the cost of OTC derivatives transactions and therefore must be weakened or reversed. They argue this despite the fact that according to the latest data there is currently $542 trillion in notional value of derivatives globally, representing some $12.7 trillion in market value, far higher figures than ever existed before the great expansion in OTC derivatives markets that occurred prior to the 2008 financial crisis.3 But beyond this, it is important to see that to proper goal of financial regulation is not to minimize the costs of derivatives transactions to financial market users. Prior to the 2008, derivatives were clearly underpriced, since the true risks of these contracts were not reflected in costs to users. When these risks were revealed, a massive government bailout was triggered to address the costs of previously unmanaged derivatives risks. The goal of market regulation is instead to ensure that the true risks and costs of OTC derivatives are properly reflected in the market price to users. This may result in higher costs for some users, but it ensures that the economically efficient level of risk transfer takes place and that society is protected from the fallout of another derivatives-related financial meltdown.