Larger Pay Checks Definitely Coming; Obamacare Insurance Mandate Ends; War with North Korea Possible… But Not Likely

In Brief

  1. The major Republican tax cuts and reform bill has been finalized and signed by President Trump. Ninety percent of US middle-class households will have their taxes reduced noticeably starting in February.
  2. The Tax Bill essentially eviscerates the non-Medicaid part of Obamacare by eliminating the requirements that all have some form of health insurance. Between 10 and 20 million households will be freed from paying a high tax penalty from not having such coverage or the even greater expense of paying for very costly and unwanted health insurance.
  3. A blunder by one side or the other could set off a major war with N Korea but neither side wants that outcome…for either it would be a catastrophe.
  4. Predictions the Republicans will be devastated in the November 2018 elections are foolishly premature.

In-Depth

What’s Important

A Major Shooting War with North Korea?

Possibly, but probably not.
Sometimes wars happen by chance, or because of a stupid blunder by one side or the other, but most of the time at least one side thinks they can win at a reasonable cost.

Let’s start with a basic fact. A WAR BETWEEN THE US AND N KOREA WOULD BE A MAJOR CATASTROPHE FOR THE US, S KOREA, N KOREA, CHINA AND PROBABLY JAPAN.

Consider the situation from the N Korean side.

They cannot defeat the US in a major war. They can inflict massive damage on S Korea and create thousands of US casualties and far more S Korean casualties, but they cannot win.

The US and S Korea have made it clear that in any war they will kill or jail all senior leaders of N Korea especially Kim Jong-un and his family. They will also destroy N Korea’s military and all threats to the US and S Korea and permanently end the Kim family dynasty.

Just recently the US released a study that contradicted a widespread notion that Kim is a madman capable of totally irrational acts. The WSJ reports…” The assessment by the main components of the U.S. national security community has shaped their thinking toward North Korea in two major ways, U.S. officials said. It means they believe Mr. Kim understands that any attack on the U.S. or its allies threatens the security of his country and his grip on power. And it means they believe there is potential to alter his behavior through diplomacy to lower the threat of war.”

Kim is not irrational. He has had a rational strategy begun generations ago by his grandfather. The US now agrees that he may be a brutal dictator, but is rational.

Based on that, it is important to focus very clearly on two things vitally important to Kim in his role as N Korea’s “Emperor”.
They are:

  1. He lives a life of absolute luxury, is a lavish sybarite and will not willingly give-up that lifestyle.
  2. His three-generation family dynasty is crucial to him and his legacy. He will not casually destroy it.

Both will be destroyed in a major war. He may blunder into a major war, but will not purposely start one sure to destroy all he values. He is not some Samurai or Crusader riding into a final battle for pride and glory.

We hear constant bluster from N Korea…threats and promises of war. That is nothing new and is why the S Koreans mostly ignore it. The recent bluster from the US is new and strident but not at Kim’s level. It does not need to be because the U.S. message is clear. CONTINUE IN YOUR CURRENT DIRECTION OR START A WAR AND WE WILL DESTROY YOU.

Kim would be wise to not treat that as bluster or a bluff. The Trump administration seems committed to that statement. But, it does not inevitably lead to war in the short-term or long- term.

Ironically, the reason for my optimism rests with the strategic priorities of China and its power over N Korea.

China holds a death-grip on N Korea’s economy. 90% of all the North’s trade is with China including virtually all its fuel. Without oil, petrol and diesel from China, Kim’s military, people and industry cannot move or operate.

The UN Security Council, with Chinese and Russian support, last week enacted sanctions that in conjunction with previous sanctions reduce N Korea’s permitted imports of such products to 10% of normal levels. [Imagine the US with only one-tenth of its normal gasoline supplies. Industry and personal transportation would come to a near halt.]

China of course must decide to operationally impose these sanctions, but it desperately wants to avoid a U.S. – N Korean war. Such a war would be a catastrophe for it and risk pulling it into active fighting. Even short of that, it would create the flight of millions of refugees into China from N Korea across their 900-mile common border. It would also cause massive instability on the Korean peninsula with unknowable long-term consequences such as a U.S. military presence on China’s border and/or a reunited democratic Korea. Both are anathema to China.

Will the US move to war anytime soon? That is highly unlikely unless Kim does something really stupid. The analysis above suggests that is not likely.

The US has many more cards to play over months and years before it needs to resort to all-out war with N Korea to eliminate the nuclear threat of the Kim regime.

As Defense Secretary Mattis has repeatedly said, war with N Korea would be an absolute catastrophe. Hundreds of thousands if not millions of S Koreans and American civilians in S Korea would die or be injured. Tens of thousands of US and S Korean military would be killed or wounded. The physical damage to N and S Korea would probably cost trillions to repair with the US, as always, on the hook for much of it as S Korea would be devastated.

The sanctions are squeezing N Korea tighter and tighter and have yet to fully play out. More sanctions and tighter enforcement are likely as the Trump administration is not likely to back-off.

The Chinese and Russians appear to have now recognized that as proven by their acquiescence to additional draconian sanctions against N Korea.

The US has more cards to play in the diplomatic battles if further escalation is necessary. Should China not appropriately push N Korea to an acceptable deal, US initiated trade sanctions against China would send China into a recession that could threaten the Xi regime itself.

A massive build-up of anti-missile defenses in the US, S Korea and Japan would threaten not only N Korea’s nuclear deterrent but also China’s.

Japan, S Korea, Taiwan, Vietnam and other SE Asian countries are likely to go nuclear if N Korea is allowed to stay nuclear. That is a strategic nightmare for China and the world.

The world needs to understand that US policy and resolve have changed in a fundamental way…for better or worse, only time will tell.

Much more on that in future issues.

But, the good news is that Ronald Reagan’s “peace through strength” is alive and well.

Elections

THE TRUTH ABOUT THE POLITICAL EFFECTS OF THE REPUBLICAN TAX BILL

Let’s start with some hard facts about the impact of the tax bill on American families. They are quite different from most of what you have heard.

These facts are from the left-leaning Tax Policy Center [TPC] and, as such, underestimate the benefits to the average middle-class household. According to the TPC, 80 PERCENT of American households will get a significant tax cut, 5 PERCENT will get an increase in taxes, and 15 PERCENT will see little change. Those getting higher taxes are mostly high-income households in states like NY and CA, which have very high local and state taxes.

More neutral analysts and conservative ones estimate the benefits to be even higher for the middle class.

Numerous polls show the American people quite negative or dubious about the value of the tax bill to them. That is not surprising given that every Democrat and the vast majority of the media have been attacking the legislation in a constant drumbeat.

The same groups and many political pundits have used those polling results to predict massive Republican losses in the 2018 elections. Supposedly the Republicans have signed their political death warrant. Yet, the smiles at the White House celebrations of the bill’s passage on the faces of Trump, Ryan and McConnell were about as broad and sincere as any I have ever seen.

Which side is correct?

Again, let’s stick to facts:

  1. Every House Democrat voted against the Tax Bill.
  2. Every Senate Democrat did the same.
  3. Virtually every Democrat is on public record describing it as a disaster for the middle class, including their own constituents.
  4. The mainstream and some conservative media pilloried the bill day-after- day.
  5. Every voting Republican Senator voted for the bill and only a handful of Republican House members voted no.

Now, lay the hard facts side-by-side.

The tax bill will produce significant financial benefits for about 90 percent of the middle-class across the country.

The Democrats and media blatantly lied about that.

When Americans open their paychecks in February, they will see the reality and the lies exposed by more cold hard cash.

So too, millions of households will no longer have to pay as much as $2,000 in tax penalties for not having health insurance and millions more will not have to purchase health insurance they don’t want or can’t afford.

Numerous large and small businesses are already announcing bonuses, raises and investments because of the corporate tax cuts and hundreds of thousands more will be doing so in the New Year.

So, do your own political analysis. Think ahead to the spring when the American people know the truth. The Republicans hit four home runs with the Tax Bill. They are:

  1. The tax cuts themselves for the average family
  2. The business tax cuts that will create jobs and stimulate growth
  3. The end of the Obamacare health insurance mandate freeing millions of families from its unfairness
  4. Proof that the Republican Congress working with the President can get big things done

There is no doubt the Democrats have political history on the side as well as other factors as they campaign for the November 2018 elections. Especially important are Trump’s low approval ratings which may go up or may not.

But, all should belay definitive prognostication until at least next summer. Have no doubt that every Democrat that lied to his or her constituents will be confronted with those lies and their vote come the fall campaign. That will be of particular note in the ten states that Trump won in 2016 have a Democrat Incumbent Senator on the ballot. So too, Democratic House members in districts that can swing to the Democrats or Republicans will be confronted daily with their mistakes.

All would be wise to remember that at this point in 2015 just before the beginning of the monumental 2016 election year, there were five near certainties according to the pundits:

  1. Trump could not win the Republican nomination
  2. Hillary would easily win the Democratic nomination with no real struggle
  3. She would easily win the Presidency
  4. The Democrats would take control of the Senate
  5. The Democrats would win numerous House seats and perhaps even control

All five expert consensuses proved quite wrong.

Myself, I’ll constantly adjust my predictions based on the facts, not on wishful thinking.

That, after all, is my commitment to you.

Major Legislation and Policies

Tax Bill Clean-Up

One legitimate complaint the Democrats have about the Tax Bill is that it was rushed and will have mistakes and contradictions. That is almost certain to be true. Expect corrections to some aspects of the legislation next year.

Predictions

Changes this week

Political Predictions – Elections

  1. The chance the Rs will lose at least a few seats in the 2018 House elections is 80 to 90 percent.
  2. The chance the Rs will lose their 241-194 House majority in 2018 is 10 to 20 percent.
  3. The chance the Republicans will still control the Senate after next year’s elections is 90 to 95%.
  4. The chance the Ds lose three or more of their 49 Senate seats in ’18 is 85 to 90 percent. [Ds added a 49 th seat.]
  5. The chance that Donald Trump will be the 202o R nominee is 90 to 95 percent.
  6. The chance that Trump will win a 2 nd term is 80 to 85 percent.

Policy and Legislative Predictions

  1. CORRECT– There is an 95-100% probability the Congress will pass and Trump sign major tax reform and tax cuts for most by Christmas. [Increase to near certainty.]
  2. CORRECT–There is a 95-100% probability that Obamacare will be very substantially changed by the tax reform bill. [Up from high probability.]
  3. There is a very high probability that additional legislative changes will be made to Obamacare in early 2018 to bolster or adjust several of its remaining provisions.

Media

Don’t forget the Tuchfarber 30 Day test—when you get upset about something in the news ask if it is likely to be IMPORTANT IN 30 days or so. Only seldom will it be so, and you can usually ignore it.

China’s Politics and Economy

China Watch

  1. NEW– The ambiguity, contradictions and risk of China’s economic policy is illustrated by two contradictory policy statements last week. On 12/20 the WSJ reported President Xi’s Economic Blueprint for 2018 stresses debt reduction less. Two days later Reuters reports that “China curbs lender-trust cooperation in fight against shadow banking” curbing a trust industry that has grown five times in five years to $3.51 trillion in an “industry which helps channel deposits into risky investments via products often designed to dodge capital or investment regulations”. China wants it both ways…continuing high growth and societal stability but also reining in the debt creation that created the high growth. The two are incompatible and a crash is guaranteed with only the timing in doubt.
  2. NEW– The fragility of China’s companies is illustrated by two headlines from last week, both from the WSJ. In the first, “HNA Seeks to Sell U.S. Properties: Chinese conglomerate to raise cash to pay off debt that funded acquisitions”. This is the same company the Chinese government is reining in. The other headline is “China IPOs in U.S. Aren’t Panning Out”.
  3. The International Monetary Fund [IMF] reported recently that China’s banks have insufficient capital to weather a credit or debt crisis. The problem is widespread but especially focused in the rapidly exploding “wealth management “arena and in the broader shadow banking arena where the authorities have not been able to keep up with “innovative” approaches by a variety of financial actors.
  4. NEW– Justin Trudeau, Canada’s Prime Minister, made a trip to China last week expecting to make a breakthrough on trade and getting commitments on labor and environmental issues. Basically, the Chinese handed his head to him.
  5. Australia introduced legislation to limit foreign interference in Australian politics leading to some swift political resignations of Australians ensnared by Chinese interests
  6. China is becoming more and more authoritarian, forcing its tech companies and US tech companies to monitor Chinese citizens and make the results available to the government.
  7. The US and Europe are increasingly unwilling to let China flout the World Trade Organization rules it pledged to abide by when admitted is 2001.

Until next week… HAPPY NEW YEAR!
Al Tuchfarber
Professor Emeritus of Political Science, University of Cincinnati