My good friend Lou Barnett has written an outstanding explanation of the financial condition of the United States, and why. I urge you to read this and pass it along. It has many of the economic data points we need to prove Republican fiscal policy works—and Democrat fiscal policy is a killer.
2024 ALEC Speech,
Lou Barnett, ALEC, April, 2024
I usually begin my speeches with a joke but I’m beginning this one with an apology and a suggestion that if you drink coffee getting a cup right now maybe a good investment.
I will condense three speeches into one: the recent election, the state of the US economy, and the challenges facing you, America and Trump.
How are Presidents Nixon, Reagan and Trump alike? All three created new coalitions to win their elections. All three ran against the establishment. All three had strategies that focused on attracting the votes of their opponents. Nixon drew Democrat George Wallace’s supporters by using Wallace’s arguments about the radical left destroying America, Reagan spoke to Democrats about are you better off today than you were four years ago, and Trump in 2016 got the Bernie Bros which he did again in 2024.
This comparison is too big to fully explain here but if you want to understand how each was a seismic change and an opponent of America’s elites, I would recommend reading Kevin Phillip’s The Emerging Republican Majority which is not about Nixon’s 1968 election but about the ethnic, religious, cultural realignments in America that produced Nixon’s win. If you read the book thinking about Reagan and Trump, you will see the same themes and realignments taking place.
Nixon’s impeachment ended his realignment.
Bush’s breaking his no new taxes pledge promoted the Ross Perot candidacy and ended the Reagan coalition.
Trump has already faced what Nixon did without crumbling. His defeat in 2020 had more to do with Covid than his policy or his tweets. Like President Grover Cleveland, his polices were favorably remembered and, like Cleveland, he was re-elected after one term out of office.
Coincidentally, Cleveland, a Democrat, is much like Trump in that he combined what is called Classical Liberalism with populism. Classical liberalism is small non-interventionist government, freeing men to achieve great things, opposing corruption and special interests, supporting sound money (gold) and no foreign entanglements. Interestingly, he also opposed the powerful Democrat elites in New York’s Tammany Hall like Nixon and Reagan did with the Rockefeller wing of the Republican Party and Trump did with the so-call Rhinos.
Republicans took the Senate with a four seat gain plus having the VP to break ties. All appear to be solid conservatives.
Republicans held the House with fewer seats than they had before. There are two likely reasons for a massive Presidential win and barely holding the House. First, I suspect that most Republican campaign consultants are guys who have been around for decades and they ran traditional conservative campaigns similar to Governor DeSantis’ presidential campaign which was focused on social or cultural conservative issues. Trump has no problem with those issues but the MAGA agenda is an economic construct that draws the votes of the “forgotten man”: Democrat and Independent Hispanics, Blacks and whites who feel left out of today’s economy and who vote only when Trump is on the ballot. Many this year were 0 for 4 or 1 for 4 voters meaning that in the last 4 elections some voted once and some not at all. The second reason is the states and gerrymandering. Republicans lost 3 House seats in NY after a gerrymander this year. Our California gerrymander came from a phony fair Government Redistricting Commission in 2021. We held seats in the off year but the presidential year turnout had more Democrats and it looks like we lost three seats. So, 6 seats were lost due to recent redistricting.
While I am at it, what is populism? I’m sure that we have all read about the evils of populism and been told to avoid it like the plague.
Populism is not a philosophy. Populism is appealing to the people with ideas for the benefit of the people, not the benign “public interest”. President Woodrow Wilson (an intellectual and president of Princeton University), Franklin Roosevelt (a rich, Harvard graduate with a career in politics and government) have a lot in common with today’s white, rich, college educated woke leaders.
Trump could easily say what Ronald Reagan did in his Time for Choosing speech in 1964: “I’d like to suggest that there is no such thing as left or right. There’s only an up or down..”
When Trump was elected in 2016 pledging help for the common man despite the government saying that the economy was great and people were doing well. Three months after he took office, the numbers were updated and, in fact, the people had not been doing well.
They say history doesn’t repeat but it rhymes.
Some of what I am about to say is going to sound unbelievable if not flat out crazy, so let me reference economist Richard Vetter who has spoken at ALEC.
His critically important book Out Of Work explains that during the 1930s Great Depression that half the country was doing very well. They had plenty of money, buying that newfangled expensive automobile while the other half couldn’t find a job.
One way of looking at the Great Depression is as recession with no recovery and where banks either go out of business or stay in business but just don’t lend.
Something very strange happened in 2007-8. Yes, there was a recession but that’s not it.
Real, not numerical, GDP changed.
In the 1930s Great Depression, there were low interest rates but banks were not lending and they were buying government securities. The Robber Barons survived but small businesses were wiped out. Robber Barons had sold their products at below market prices to drive competitors out of business and they continued to have access to the big New York banks.
After gold was confiscated in 1933, the Fed’s assets skyrocketed similar to what we call quantitative easing today.
In 2007-8, we also had low interest rates but banks were also not lending but buying government securities with one major exception. Huge companies even if they were zombies were able to continue to exist by getting cheaper loans from big banks every year as interest rates declined.
Some might suggest that today’s Robber Barons are not railroads but tech companies who also use pricing to capture market share but they buy potential competitors so the big tech companies have gotten bigger and the small competitors are gone.
It’s not Standard Oil, the railroads, and steel but Apple, Microsoft, Alphabet, Amazon, Nvidia, and Meta. The big banks were deep players in both periods.
In both periods there was a massive contraction in lending to small and medium sized businesses and mom and pop entrepreneurs and there was no real (not numerical or statistical) GDP growth after adjusting for inflation in those times.
In both cases, the banking system broke down. There was no surge in lending as usually happens after a recession in American history.
Not only was there no credit creation but the circulation of currency went down. If money isn’t moving, your economy isn’t growing but virtually no one is talking about the drastic drop in currency circulation in the US.
GDP includes government spending. More government spending, more GDP. 20.2% of GDP is government.
So, is GDP the measure of real economic growth that people assume? Not really.
Real Median Income, Real Median Family Income and Real Median Household Income
Under President Reagan who began with a recession, it was up 10%
Under Bush, down 5%
Clinton/Gingrich enjoying the peace dividend and it was up 10%
Under W, it was stagnant
Under Obama, stagnant
When Trump took over in 2017 it was the same as in 1998.
Under Trump, real income went up 15% in three years. Then Covid.
Biden -5% in three years, the worst since the Great Depression.
So, where are we today?
Federally, 23% of tax revenue, $1.1 TRILLION is now interest on the national debt.
Ask yourselves if the federal government was spending too little money in 2019 when the budget was under $5 trillion? Then we had COVID. We are now spending $3 trillion per year more than 5 years ago. That’s a 75% increase in 5 years. Plus, the government says we had 23% inflation.
Yes, Trump cut taxes but Federal revenues are up over 30% since those tax cuts.
Some people warn that Trump’s call for tariffs will result in a Smoot-Halley type tariff retaliation. However, most everybody else already has a VAT or Value Added Tax.
Investment adviser John Mauldin says “You could actually reduce income taxes across the board, especially and significantly for the bottom 50%.” “… you simply can’t raise income taxes enough to make up a $2 trillion difference. You would literally need to tax 100% of incomes on the top 50%. And it still doesn’t get there.” “Deficit spending, especially at the level we are doing it, is by definition inflationary.”
Last month the official government inflation rate increased to 2.6%.
The average P/E or Price/Earnings ratio for America’s 10 biggest companies and they are very big is 50. That means that it would take 50 years of earnings to recover the cost of the stock. That’s obviously not good.
We’ve had great employment numbers almost every month and then, I think, total revisions reduced the employment numbers by 900,000 for this year.
Commercial RE vacancy rates are skyrocketing, some up to 80% and loans are coming due. This is a $3 trillion bomb.
The cost of housing has gone up. In 2020, the income to buy the average home in the US was $53,679, now, in 2024, its $121,398.
Federal Reserve Board of Governor Michelle Bowman said: “Given the current low inventory of affordable housing, the inflow of new immigrants to some geographic areas could result in upward pressure on rents.” The Fed is also worried about wage growth. They fear that people making more money will create inflation. That kind of insight is why they are paid the big bucks.
We now have about 10 million illegal immigrants. The government is paying to house them. That’s housing for 10 million Americans that is gone.
In my home state 20% of Californians spend half or more of their paycheck on housing. 56% of California renters are slammed by housing costs vs. 35% of homeowners.
In 1960, 70% of young people lived away from home. Today, fewer than half do. This reduces marriages and families. 63% of GenZ men say they haven’t had a dating relationship in a year. And, it’s even higher for the working class GenZ job growth.
In September, employment soared with government workers increasing by 785,000. You’ll be relieved to know that that many new people weren’t hired by the government. For the first time on record, they counted teachers returning to work as new employment. They faked the numbers on both the Household Survey and on the Establishment Survey. This dropped the Unemployment rate to 4.1% instead of rising to 4.5% which would have triggered the Sahm (salm) Rule signifying that the US was officially in a recession.
Also in September, the number of people who needed more than one job to pay the bills hit an all-time new high.
Since Biden took office, government employment has expanded 1.5 times faster than the private sector.
550,00 government, 250,000 education and 800,000 new health care total 1.6 million new government jobs.
Full time job growth has been negative for 9 of the past 12 months. Temp and part-time jobs dropped to their lowest level in ten years.
100%, of the NET new jobs since Biden was elected went to people who weren’t born in the US. That doesn’t mean they all went to illegals but we know that the federal government was placing illegals in jobs in the food industry and elsewhere in the US.
A libertarian Republican friend said of course they are hiring foreigners; they are willing to do the work.
But an illegal with government paid housing can work for less than an American who would have to be paid more to pay for their own housing and taxes, right? So, who would big corporations hire?
Everyone, of course, has not suffered. Remember Vetter and the Great Depression.
California is home to venture capitalists and 3 of the 5 biggest world tech companies and their tech billionaires. Joel Kotkin observed that “since 2022, all the net jobs created were in government or supported by the public sector, while private employment actually dropped.” “57% of adults believe that the state is headed in the wrong direction, up from 37% in 2020. 4 in 10 are considering an exit. Some 70% of renters, generally a Democratic constituency, expect “bad times” ahead.”
Both Keynesian economists and the Federal Reserve believe that debt and spending is what drives the economy.
No debt, no growth. Borrow, don’t save.
Financial services use to be 2% of the US economy. Today, it is about 9% or about 1 in 10 jobs.
So government is 20.4% of GDP and Financial Services are 9%, that’s 29.4% of GDP.
Historically, wealth growth in the US has been disproportionately in the Financial Sector as has the growth in billionaires.
The too big to fail (or indict) banks are bigger today than ever before.
My point here is that 10% of the US GDP is moving money, not building anything. Which is not to say that they don’t influence policy.
Rosenberg Research found in October that “Private sector is in recession, having dropped -0.4% on a YoY basis.” “But the Public sector soared ahead by +2.8% YoY”.
Brownstone Journal was founded by Jeffrey Tucker who I will quote later.
Last month, they published a study entitled Recession Since 2022: U.S Economic Income and Output Have Fallen Overall for Four Years
They argue that when you take real inflation into account, that the real economic numbers produce a recession because the loss in the value of our money is not completely taken into account by the government.
They take a deep dive into the phony government stats including something called hedonic adjustments for the geeks in the room.
For example, the CPI “contains a proxy for the cost of homeownership” by using “owners’ equivalent rent of residences, this category has a relative importance of 26%, meaning it makes up more than a quarter of the CPI……the cost of owning a home has risen much faster than rents over the last four years and the CPI has grossly underestimated house cost inflation.”
Government created regulations “can affect hedonic adjustments that typically adjust prices downwards when government statisticians believe a product has improved. The difficulty of estimating such improvements can result in artificial cost reductions due to perceived benefits to the consumer that do not actually exist. For example, if it is assumed that a regulation increases the quality of a product, then even a dramatic increase in price could register as no price increase or even a price decline in the national accounting which is used to compile the gross domestic product (GDP).”
Bias also occurs when consumers aren’t directly charged, like health insurance. Premiums pay for both the insurance and the medical services/commodities. The CPI ignores both and imputes the cost from the profits of Health insurers. If profits decline, the cost of health insurance in the CPI will decline regardless of increases in premiums.
These hedonic problems not only distort the true level of inflation but “it affects estimates for consumer spending, artificially reducing a price index and increasing the estimate for real consumer spending and therefore overall economic activity.”
Nominal pre-inflation Disposable Personal Income (2019 to 2024 quarter) was 35.3% while REAL Disposable Personal Income was 12.9%. Retail Sales are either up 23.1% or up 3.2% for those same 5 years. Both sets of numbers come from the US Bureau of Economic Analysis.
Practically speaking the Real Disposable Personal Income increase of 12.9% becomes a real decrease in income of 2.3% over that time period.
“According to our adjustments, cumulative inflation since 2019 has been understated by nearly half. This … resulted in cumulative (GDP) growth being overstated by nearly half”.
“… these adjustments indicate that the American economy has actually been in recession since 2022.” “On a per capita basis, the results are worse because the population has increased approximately 2.1%” in that period of time. Groucho Marx could have been working for the government when he said “Who are you gonna believe, me or your lying eyes?”
Trump is off to an amazing start in just 3 weeks with not only Cabinet appointments but strategies like having Congress adjourn for 10 days after he takes office so he can make recess appointments that don’t require hearings, and vetting people with his own staff and not the FBI.
He has Elon Musk and Vivek Ramaswamy heading a private Department of Government Efficiency which Musk says will cut $2 Trillion out of government spending. Considering the $3 Trillion in growth under Biden, this maybe doable despite its size.
But Trump has also talked about cutting not just taxes on tips and social security and overtime pay but ending the federal income tax and using tariffs to pay the bills.
This would require bigger cuts than Musk says that he can easily do.
The Department of Education is one Department that Trump has personally called for abolishing. If they only get rid of the staff and regulations, and continue to block grant the money to the states, the states will be able to eliminate their staffing that was required to implement the federal regulations so there will be state savings as well.
The more that they can block grant, the more overhead at the federal and state levels can be eliminated.
I expect that the Trump admiration would be open to state requests for waivers and open to groups of states who want federal regulations and/or state oversight agencies abolished.
At least one person has suggested that under Robert Lighthizer and Peter Navarro, Trump will pursue a 21st century version of what was known as the American System invented by Alexander Hamilton.
Government spending was for productive projects like roads and railroads. Central banks did not print money or fix rates.
Trump wanted an infrastructure bill in 2016 but didn’t get it despite both parties always wanting to bring home the bacon to their states. I can only assume that he didn’t get it because legislators didn’t want to give him a win. We may see a $1 Trillion bill next year with money for most if not all states.
Trump also imported deflation, ie. lowered prices.
Historically, deflation benefited Americans but the Fed does everything it can to produce inflation of 2%.
An analysis of imported goods in 2019 showed that despite tariffs imported goods prices declined. China and the EU devalued their currencies to beat the tariffs but that made all imported goods, not just those with tariffs, cheaper for US customers.
Big AG has controlled prices and kept them high by exporting products so that there was no downward pressure on the US markets. Trump’s reset reduced exports which increased US supply and reduced US prices.
Kennedy will raise issues including food and food additives many of which are banned in Europe, and the huge rise in many diseases in the US today.
The US spends over $4 trillion on health care each year, more per capita than any other nation, but we now lag in life expectancy and the CDC says 130 million Americans, 50 million more than 30 years ago, have chronic conditions. If Kennedy and Trump can reverse these problems, our massive cost of health care can be cut to the federal and state governments as well as to all Americans.
Separate from the Trump Administration, polling shows massive support for eliminating Big Pharma’s immunity. 2/3 of Americans strongly support that and only 13% are opposed. This may be brought up by others.
You may not go to farmers’ markets so you should be aware of this issue. 78% of Americans support Food Freedom, the ability to buy food from farmers without government approval. Only 10% oppose. So don’t think of these constituents as big government tofu fans but a friend in the cause of freedom.
The economic theories of comparative advantage and free trade while correct in a perfect world are destroyed by subsidies and non-tariff barriers. Trump is likely to allow foreign companies to sell goods in the US but only if they are manufactured here. This may lead your states to have more manufacturing.
In the truly good old days, comparative advantage and free trade were based on a gold standard where currencies could not be manipulated, budget deficits were very difficult and the exchange of goods for gold was of equal value.
Green New Deal subsidies will probably be gone. Corn may again be eaten rather than a reduction in your gas mileage.
During Covid, we learned that the supply chain was a problem with medicines and supplies being manufactured overseas which we could no longer get when we needed them. Expect that work to be brought home and jobs created. Ditto the military parts we currently buy from China.
The Federal Government owns land in every state and up to or above 50% in many states. Do you need more land? Ask the Feds for it. Sell it to make some money to pay off state debt and enjoy ongoing sales or RE taxes.
As Lisa Nelson observed, “When the Tax Cuts and Jobs Act passed in 2017 it was like the economy was on steroids. Salaries went up, unemployment plummeted, capital investment rose, and companies began reshoring money and jobs that were previously held overseas.”
The challenges are bigger for Trump now than they were in 2017.
Trump knows that and his plans are bigger than in 2017.
Unfortunately, there is a big but.
Republicans have a very narrow margin in the House and a Senate with a lot of old members of “The Club”.
The time will come when members of Congress are reading horrible predictions in the mainstream media and they are going to need to know that their states actually want change and that their state legislators are not going to hang them for making changes.
So, every bone in my body tells me that ALEC and state legislators will have a big say in what Washington does in the next two years.
In closing, let me ask you why does everyone say think outside the box? What is inside the box that they don’t want us to think about?
