In Brief
- Tax cuts and tax reform are now domestic issue #1 for the Trump and Republican agendas.
- China is ramping up for a crucial Party Congress [every 5 years] on Oct 18 to re-elect Xi Jinping as party leader. This Congress will have very substantial implications for Chinese, regional and world politics, including the N Korean crisis.
- Everyone needs to remember that the white working-class is the key swing voter group for 2018 and 2020 and many Democrats don’t seem to realize it or be willing to stop driving them away.
- The loss of Trump’s candidate in AL is a defeat for the President and diminishes his clout with Republicans in tight races. It is, however, a relatively minor blow soon to be overrun by other events and news.
- Obamacare repeal and replacement self-destructed for a 2nd time. But, repeal or major changes to it are essentially inevitable as it is structurally and financially unsustainable.
- The NFL has been killing its Golden Goose of a money-making juggernaut with its support of some players disrespecting the flag and national anthem. It is too late to reverse some of the financial and PR carnage.
- President Trump and the San Juan PR mayor might both want to tone things down quite a bit.
In-Depth
Forecasts
I see no cause to modify my political forecasts this week but facts are starting to emerge that will justify changes. Watch the Virginia gubernatorial and legislative races for clues.
Current Political Forecasts
- The chance the Rs will lose at least a few seats in the 2018 House elections is 80 to 90 percent.
- The chance the Rs will lose their 241-194 House majority in 2018 is 10 to 20 percent.
- The chance the Ds lose two or more of their 48 Senate seats in ’18 is 85 to 90 percent.
- The chance that Donald Trump will be the 202o R nominee is 90 to 95 percent.
- The chance that Trump will win a 2nd term is 80 to 85 percent.
What’s Important
Tax cut goals and realities
It is too early to get into the weeds on the details of tax cuts and reform. Many, many details are still being negotiated and we are in for another long, complicated, legislative process. It may even get close to the ugliness of the Obamacare repeal debacle.
I would caution all, in advance, not to get overly exercised over every headline, report, or self-serving quote from some vested interest.
The major official Republican goals are:
- Cut corporate rates and change policies to encourage job creation, wage increases, investment in facilities, machinery, and productivity enhancing products and services.
- Raise US GDP annual growth to over 3% to create jobs and higher tax receipts in the future.
- Cut taxes for the middle class.
- Make it easy for far more people to file their own tax return.
Note that one of the major goals is not cutting taxes for the wealthy or for everybody.
There are going to be winners and losers in this process. Some wealthy people are going to get major tax breaks. For example, wealthy older people and their heirs will get a major tax break if the estate/death tax is eliminated. But many salaried high-income earners will likely see their taxes go up.
And, although a large majority of lower and middle-income folks [under $100.000] will see tax cuts, some will not because of deductions like state taxes and local property taxes may be lost. Each of us won’t really know until the legislation is passed, the IRS creates the detailed rules and tables, and we file a return under the new rules.
The lobbying will be ferocious over big and little issues with industries and interest groups maneuvering to get benefits for their particular cause or client. I’d like to point out a few specific groups to watch as the debates play out and details emerge. These groups are at the intersection of politics and economics so don’t try to apply only economic logic to them.
- The pro sports leagues didn’t choose a very good time to diss the President.
The mega company CEOs didn’t pick a particularly good time to diss the President over the Charlottesville disaster. - Wall Street’s overwhelming bias toward funding Democrats won’t win them many victories in a Republican crafted bill.
- Watch how the democratic-socialists/ anti Wall Street politicians like Sanders and Warren vote.
- Watch how your own representatives vote on key issues.
- Watch how many Democrats support a tax bill that helps most of their constituents. Folks in various states and districts will be dramatically advantaged or disadvantaged by the details. For example, most Democrats in Manhattan will be disadvantaged but in rural Minnesota Democratic reps and senators may have to vote against the interests of their voters in order to support the party line.
- Note that there is not a single Republican Senator representing any of the top-10 highest state and local government tax states.
It is going to be really interesting as it plays out.
I’ll be coming back to both the politics and policy issues surrounding tax reform regularly in future weeks and months.
Trump, the NFL, and identity politics
Some of you will be screaming at me for labelling this article as important. But it is.
The battle in the NFL and sports in general over the flag and anthem isn’t really about sports.
The real story is about identity politics and its polarizing impact. Sports just happen to be the place it has burst forth in a clear way that hundreds of millions of Americans are witnessing.
I urge you not to dismiss whatever lessons we learn from this political-cultural battle.
There will be lessons for sports but the more important lessons will be about American society as a whole. Do we let race divide us in fundamental ways? We have a choice.
More on the specifics of the NFL as an industry below in Media.
Media
The NFL– a profit-making enterprise
According to CBS News the operators of two of the largest US ticket marketplaces report NFL sales are down 17.9% and 31%.
As I suggested last week, pro sports ultimate resolution of this clash between social justice, free speech, patriotism and money will be resolved in a simple predictable way…FOLLOW THE MONEY.
The NFL doesn’t exist for the sake of sports or football. It exists to make money. Pro football is a great sport and the NFL a highly successful league but neither would exist if it didn’t make money.
At today’s games most of the teams linked arms and stood for the national anthem. In a game in London, England some did not. Overall, several dozen players spread across a variety of teams protested in a number of different ways.
We’ll see what the consequences are.
KNOW THIS…if you purchase pro football tickets or purchase concessions at a pro football game you are attending with free tickets or watch pro football on TV you and those like you will decide how this battle gets resolved by what you do with your feet, eyeballs, and wallets.
It is extremely ironic but your vote on this issue is totally your choice and as important as when we vote at our polling place on election days.
Sports media liberal bias
Until very recently the sports world and sports press were very patriotic and leaned conservative.
That has now morphed in to left-leaning bias especially on ESPN.
We’ll see how that plays out with profits and losses as the average sports fan is not liberal or a social-justice warrior.
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 soOnly seldom will it be so and you can usually ignore it.
Elections
The Key to 2018 and 2020 elections
Please remember that the reason Trump won in 2016 and the reason the Republicans are stronger across the country than any time since the 1920s is that starting after their 2000 defeat the Democrats purposely drove away the white working class. They are still doing so.
Trump has grabbed those voters with both fists. [Pollsters now define that group as white voters without a 4-year college education—about 25% of all voters.]
If that dynamic persists the Ds are doomed to long-term [not necessarily permanent} secondary status.
Trump’s dispute with the NFL over protests during the national anthem is a case in point. Although the Democrats and the press think they have the high-ground on a social justice issue, instead they are driving the white working class and white middle-class further into the R base.
I’d be remiss if I didn’t note that Hispanic and Asian voters, the rapidly growing part of the D coalition, don’t give a rip about this issue. So, the demographic battle is between the 12% of the voters who are African-American and 70% who are Caucasian.
Care to guess the political winner here?
Trump’s defeat in Alabama
Trump suffered a real but modest defeat in Alabama this week as his candidate, Luther Strange, for whom he staged a major rally, lost badly to the favorite of evangelical Christians, Roy Moore.
This will weaken, at least slightly, Trump’s clout with Republican candidates in tight contests during the 2018 elections.
Trump took a gamble and lost this one.
Global Politics
Kurdish independence referendum
The Kurds are an ethnically distinct people of about 25-30 million folks spread across Turkey, Iraq, Iran and Syria. They are Sunni Muslims and probably the largest ethnic group in the Middle East without their own country. About 5 million Kurds live in Iraq, in its northwest provinces. They are fierce and effective fighters [the Peshmerga] and staunch US allies.
This week 93% of the Kurds in Iraq voted to seek independence from Iraq. This vote is not legally binding on Iraq or even on the Kurdish leadership. But, it is a very important statement of a longer-term goal.
The US, Turkey, Iran and Iraq all oppose Kurdish independence. The US because it guarantees more civil wars in the region. Turkey because it has a huge Kurdish population that will want to have the eastern part of Turkey join a Kurdish state and there is already a civil war in Turkey between the Turkish people and the Kurds. Iran has a similar problem, although on a smaller scale and for Iraq, Kurdish independence severely threatens the tri-polar Shite Arab-Sunni Arab- Kurdish Muslim state that is modern Iraq.
The more dangerous threats will come as the last ISIS controlled arears are retaken over the next few weeks and Kurdish militias are eye-to-eye with Iraqi Shiite militias and Turkish troops in Syria and Iraq.
Turkey, Iraq and Iran are all now punishing the Kurds with embargoes, threats, border closings and in other ways.
As I have written previously I doubt very much that the map of countries in the middle-east, especially Iraq and Syria, is likely to look like it does today by 2030 or so. Recall the demise of the Soviet Union and of Yugoslavia.
Stay tuned.
Republicans
One more time with failure on Obamacare repeal and replace
Once again, the Republicans are trying to repeal and replace Obamacare in the Senate. It failed a month or so ago when a grandstanding John McCain defeated a bill almost single-handedly. He is still grandstanding by demanding a bipartisan approach. Bipartisanship on this issue is a pipedream. On Obamacare, the Democratic leadership wants no repeal and replacement, just capitulation from Trump and the Republicans.
Commitments by McCain, Collins and Paul to vote no, as well as threats from Cruz effectively killed the bill in its current form.
Graham-Cassidy is not totally dead as the sponsors are committed to continue working with the White House and their Congressional colleagues on it.
Democrats continue to say they want a bi-partisan approach but negotiations based on that concept have gone nowhere so far.
The demise of Tom Price as HHS Secretary creates another hurdle that at a minimum will slow down both political and regulatory change.
Failure to repeal and replace is likely to guarantee the gradual collapse of Obamacare. It is fiscally unsustainable for both the federal and state governments. The premiums charged for its 9 million recipients are astronomical and rising rapidly. Few insurance companies will write Obamacare policies because those policies lose billions for them.
We’ll see what happens.
China’s politics and economy
China’s politics and economy are so important to the global economy and the general situation around the globe I am adding a regular section on it to the newsletter. The section will periodically include detailed articles on specific things but will also list each week evidence that suggest an economic soft landing for China—a controlled slowdown to “normal” economic growth levels—or a hard-landing—a more rapid, extended and dangerous bursting of China’s asset bubbles.
I WILL ADD AND DELETE ITEMS TO THIS SECTION AS RELEVANCE DICTATES. “NEW” ANALYSES WILL BE SO LABELLED AND REVISED SECTIONS WILL BE LABELLED “CHANGED”.
New or Major evidence for soft landing
- The WSJ reports that Chinese regulators removed emergency measures they put on the Chinese stock exchanges in support of equities following crashes in 2015 and 2016. This is a sign of confidence and stability.
- The political leadership, including President Xi, and the financial regulators have promised to rein in excessive speculation and credit growth. [We’ve been promised that for many years and the debt has continued to sky.]
New or Major evidence for hard landing
- NEW—Party Secretary/President XI continues to purge opponents and those offering him only weak support so as to have almost complete control of the levers of power when the economic/financial crisis starts to bite. On Oct 18 every 5-year Party Congress starts. Expect major news at the end of it and for months to come.
- S&P has joined Moody’s and Fitch in downgrading China’s debt because of excessive and growing levels of that debt. They do not see a short-term crisis but caution against the future situation.
- Two quotes from separate stories in a recent WSJ accurately describe where things are with China’s economy. “China’s economic mandarins are unlikely to permit an overly sharp slowdown in investment that could tank commodity markets right ahead of the twice-a decade Communist Party leadership shuffle kicking-off in mid-October.” “An all-powerful leadership can likely keep the forces of disruption at bay for some time. But they haven’t disappeared…”
- China is preparing for the start of its every five-year 19th Party Congress in the middle of October. At the meetings, General Secretary Xi will be re-elected as General Secretary, the Party’s official leader, and most of the ruling members of the Politburo will retire as they have reached the official retirement age of 68. Xi has been maneuvering for years to pack the new Politburo with his allies and will probably succeed setting himself up to continue his rule after his new 5-year term ends in 2022. Most experts think that is his goal and that he will set the stage for it at this fall’s Party Congress. This will also set the stage for major economic and financial reforms likely to slash China’s high growth rate which has been “bought” with a massive accumulation of debt. Such reforms are almost sure to be accompanied by a long, slow economic hard-landing and much social and political unrest. Thus, Xi feels he must have total control for himself and the country to get through the coming crisis. Stay tuned…
- A WSJ story reads— “…China has been reeling in some of its biggest deal makers on mounting concerns about capital leaving the country and debt loads posing a risk to its economy.”
- The WSJ’s Heard on the Street [Sept 8] wrote…” This doesn’t mean China’s bad loan problem has gone away, it just has been swept under a convenient nearby rug.”
- If the US imposes major trade sanctions on all nations still trading with N Korea it will create a global trade war and send China into an economic tail-spin. Three numbers tell the tale. China exports about $600B to the US—about 5% of its total GDP. The US exports less than 1% of its GDP to China. China exports less than $3B to N Korea—1/200th of China’s exports to the US. A global trade war would be devastating for all and probably send the global economy into recession or at least stagnation. But, keep in mind the balance-of-power and magnitude of the economic and financial damage here and that General Secretary/President XI is up for re-election to those two posts this fall and next spring. MUCH MORE ON THIS IN COMING WEEKS.
- WSJ article points out that the yield curve in China has flattened—the prices of 3-year bonds are essentially the same as 10-year bonds. Such flattening is often, but not always, indicative of an economic slowdown on the horizon. The article also mentions the mantra that I have been preaching…that the government of President Xi is manipulating the economic and financial system to assure no major problems before he is re-elected as party leader this fall and President next spring.
- Several weeks ago, the IMF raised its projections for Chinese growth but sternly warned that rapidly increasing Chinese debt will hit 300% by 2022. Others like the Institute for International Finance [IIF} asserted in June that Chinese debt already totaled over 300% of GDP, a high percentage for a developing country.
- China is now officially and publicly instructing its companies that they must stop foreign investments in areas like insurance, hotels, other real-estate, gambling facilities, etc. Foreign investments are to be directed to two areas. The first is into strategic areas, as defined by the government, such as technologies where the intellectual property gained fits with government plans for China to become a major, worldwide competitor in various fields. [Sound like Japan in the 1970s and 80s?] The second area is into investments consistent with China’s One Belt-One Road strategy to tie it more completely with all of Asia as well as Europe and Africa.
These all indicate concern that economic, financial and political risks are rising.
Tidbits, interesting facts and Insights
Trump derangement syndrome
There are many reasons to like or dislike Donald Trump. Even many of his allies and supporters would like to take away his access to Twitter. Many others have furiously negative disagreements with his policy positions and style.
All of that is fair game.
But, we need to get-a-grip.
Rasmussen reported this week that Americans are split 50-50 on who is a bigger threat to America, Trump or N Korean dictator and thug Kim Jong-un. Huh!
69% of Democrats pick Trump as more dangerous than Kim.
Give me a break…
Menendez and McCain
Senators John McCain[R-AZ] and Robert Menendez [D-NJ] are wild cards in the Senate for the next few months in a way that may well influence crucial votes. McCain is being treated for brain cancer but still single-handedly and shockingly defeated the repeal and replacement of Obamacare. He is active now but the future is unknown. Over last weekend he revealed that the prognosis in his fight against cancer is not good.
Menendez is involved in a multi-month criminal trial over potential political corruption by him. The judge has ordered him to be in the courtroom which means he cannot be in the Senate participating on most votes.
With the partisan split in the Senate being 52R-48D even one vote can make the difference on a major issue. Stay tuned…
Until next week…
Al Tuchfarber
Professor Emeritus of Political Science, University of Cincinnati