Posted by on August 24, 2016

In the first part of this posting, I said that Donald Trump has laid out a “know nothing” economic policy.  But no one can accuse Hillary Clinton of this.  She knows exactly what each of us needs in every aspect of our lives.  And she is going to give it to us.  Good and hard.

Clinton gave her economic policy speech on August 11 in Warren, Michigan.  She spoke in a factory of a company that formerly made automobile parts for the private sector but which now makes its living selling nose cones for the US military’s absurdly expensive and largely unnecessary F-35 fighter program.  The irony was lost on Clinton.  Instead, she took this corporate swerve to the public trough as an opportunity to contrast her plucky optimism – so long as we “do this together.  We are stronger together” – with Trump’s doom and gloom.  The pandering worked on me, I can tell you.

Now, let’s turn to the analysis.

Overarching Criticism

There is an overarching criticism of Clinton’s plan, which is ably made by Stanford economist John Cochrane in both an editorial in The Wall Street Journal (“The Clinton Plan’s Growth Deficit”) and a posting (“Clinton Plan”) in his The Grumpy Economist blog.

The basic criticism is that Clinton never asks herself the question: Why?  Why is it that many of her ideas, some of which are good (but which could be easily provided by a liberated private sector) and almost all of which are old and obvious, have not been implemented already?  In the words of Cochrane:

The “plan” offers neither a strategy for enactment, nor thought about why these are problems in the first place. Yes, it’s hard to find quality affordable childcare. Why? Could licensing, zoning, teachers unions, minimum wages, ObamaCare mandates, employee time rules, taxes, immigration restrictions and the like have something to do with it? Apparently, every problem in America occurs because the president did not “fight” hard enough for new programs and against the dark forces that oppose progress. Like a hyperactive overachiever approaching a mock-U.N. debate, Mrs. Clinton seems to trust that the opposition will wilt from the sheer volume, detail and righteousness of her proposals.

A “hyperactive overachiever approaching a mock-U.N. debate” – and I confess that I used to be one of these, but I grew out of it – is a great description of Hillary Clinton.  Almost as good at the Yuval Levin description in the “I wish I had said that” section here.

To make this tangible, let’s take a look at the policy prescription that takes pride of place in Clinton’s speech: her proposal to spend $275 billion over the next five years on improving infrastructure.  (More on this later.)  In his blog posting, Cochrane reprints a Fact Sheet from Clinton’s electoral website on this policy.  It is comical in its detail – except for numbers, of course – and hubris, part of what Cochrane calls Clinton’s “thousand-course smorgasbord of government expansions.”  But as to its feasibility, Cochrane has the following comments:

Further, why are roads and bridges still a problem? President Obama has been after “infrastructure” stimulus since 2009. If you ask that question, and listen to answers, they are pretty clear. It’s nearly impossible to build infrastructure these days. Endless regulatory reviews and legal challenges bog down builders. The Davis-Bacon Act, which mandates prevailing wages, and other contracting restrictions balloon costs. Politicians and agencies pick terrible projects—high-speed trains to nowhere. Even those can’t get built….

In return for more spending, Mrs. Clinton could have offered serious structural reforms: repeal of Davis-Bacon, time limits on environmental reviews, serious cost-benefit analysis, and so forth. Such a package would have been irresistible.

Instead her plan simply asserts that Mrs. Clinton will “break through Washington gridlock” and “cut red tape”—promises made and forgotten by every presidential candidate in living memory. If the Sierra Club sues to block her worthy commitment to “upgrade our dams and levees,” will she really short-circuit the legal process, and how?

And what is Clinton’s major proposal to “break through Washington gridlock”?  She is going to “make full use of the White House’s power to convene.”  She is going to:

get everyone at the table – not just Republicans and Democrats, but businesses and labor unions, academics and experts, but, most importantly, Americans, like all of you…because we need the best ideas that are out there making a difference.

Cochrane calls this “roll-your-eyes funny.”  Personally, I was torn between thinking of these words being delivered with the syrupy southern accent of Frank Underwood from House of Cards and a nauseating vision of a troop of Girl Scouts being led through Kumbaya by Clinton dressed in khaki shorts and a red scout tie (from Armani, of course).

Although he has clearly identified the practical problems with Clinton’s plan, I still think that Cochrane is being too charitable.  For almost all of the problems she identifies, a careful analysis would show that the problem either does not exist or that government is its source, not its cure, or that any government attempt to fix the direct problem would have indirect consequences that are far worse.  But to see this, we need to turn to some of her specific proposals, which is what we do next.

Policy Proposals

There is no way to discuss every dish in Clinton’s smorgasbord of free stuff from POTUS.  This would take far too long and would be far too boring.  Instead let’s just focus on some of the headline proposals.  (Since even this will take a long time, I will make liberal use of hyperlinks.)

Clinton wants to increase the national minimum wage, although she is still being coy on the amount.  As part of her effort to buy off Bernie Sanders’ supporters, the Democratic Party wrote $15 per hour into their platform.  I have already written at length about the wrongheadedness of this proposal (in the “Hillary Clinton” section here).  The only thing that I would add is that, even if you believe that a minimum wage would be helpful, a “one-size-fits-all” national policy is madness.

The cost of living and prevailing wage rates differ massively from state-to-state (and also within states, but leave this aside).   The Heritage Foundation, a conservative think tank, has just published a report showing the differential impact of a national rule.  In wealthy states like Connecticut, Massachusetts and Washington, a $15 minimum wage would only affect about 22-23% of the existing employees.  Conversely, in places like Arkansas, Louisiana, Mississippi and Oklahoma, 45-52% of workers would be affected.  The job losses would also be uneven, with much higher losses in the states with prevailing low wages.  In other words, a national minimum wage would most hurt the people in the poorest states.  It would also take away a key competitive advantage of these states, but then the elimination of competitors is often the only true objective of “pro-labor” laws.

The losers are also all red states.  That will teach ’em.

Clinton also wants to make public college tuition-free for all families earning up to (initially) $85,000, with the limit rising to $125,000 by 2021.  This would eventually make an estimated 83% of US college students eligible for free tuition.  Although this last-minute sop to those feeling the Bern has not yet been costed, it is expected to cause at least $500 billion in more federal spending over the next 10 years, with many estimates going higher.

I have written so much about the failures of American education, and its system of financing, that I have no intention of repeating the arguments (which can be found in the relevant sections of here, here, here, here, here and here).  Suffice it to say that a vast amount of this money will be spent cranking out worthless degrees, both in quality and content, at an ever higher cost for increasingly unmotivated and misplaced students.

But there is a further point to be made, which is that if the Democrats stay true to the form displayed in their party platform on K12 education, then this will certainly be a program written by and for the teachers’ unions that are a key part of Clinton’s base.  This is analysed at length in an article entitled “Clinton Abandons The Middle on Education” which appeared in The Wall Street Journal, written by two education scholars from Harvard and the Hoover Institution (a conservative think tank).[1]  Using recent polling results, the article shows how far out of the mainstream – including the majority of Democrats – the party platform is on issues like testing, merit pay, parental “opts out,” charter schools, tenure and pupil discipline.  Although the authors claim not to know who wrote this plank, they smell a rat that looks an awful lot like Randi Weingarten, who is the President of the American Federation of Teachers and who was once featured as the first “obscure public enemy” in this blog.

On trade, Clinton has caught up with Trump’s ignorance.  But since she can’t admit that she and Trump are on the same page about anything, and since she could never outdo Trump when it comes to bashing foreigners in front of a Rust Belt audience, she said:

But the answer is not to rant and rave – or cut ourselves off from the world.  That would end up killing even more jobs.  The answer is to finally make trade work for us, not against us.

Clinton buys into the same neo-mercantilist nonsense as Trump.  To her mind, trade only “works for us” when it produces exports and jobs.  The fact that it might produce a lot of really cheap and high quality imports, driving up living standards for everyone, is irrelevant.  Clinton also never explains how she is going to sell this “zero-sum” view of trade to our international counterparties, who might be equally clueless.

Clinton wants companies to share profits with their employees, behavior that she is going to encourage with tax breaks.  (In the same speech, she bemoaned the fact that “the smallest businesses…spend 20 times more per employee to prepare their taxes compared to larger companies.”  The speech was also peppered with other tax carrots and sticks to support Clinton’s goals.  She apparently does not realize that the Tax Code has grown to nearly 80,000 pages in large part because of this kind of social engineering.)

Clinton justifies this on grounds of improved efficiency, but she never explains why, if this is true, private sector employers couldn’t have figured this out on their own.  And John Cochrane has pointed out that the evidence in favor of this efficiency gain is probably subject to severe selection bias.

Clinton also wants to come to the rescue of Obamacare, which is clearly now in exactly the death spiral that any sensible person foresaw (see “Between Two Generations” here).  Her solution is a public option for medical insurance.

With 12 of the original 23 government-funded co-ops already bankrupt (shortly to be joined by 8 of the remaining 11), with private insurers abandoning the exchanges in droves and with average insurance rates looking to increase by 24% in 2017, the Democrats have reached back into an old playbook: when the government fails, give us more of it!

Megan McArdle at BloombergView has done a good job deconstructing the argument for a public option.  The short summary: a policy predicated on the government’s ability to “increase competition, and drive down costs,” as Clinton claimed, should be viewed with, shall we say, an element of caution.  In reality, a public option is nothing but a stalking horse for a single-payer endgame.  It would also inevitably become the conduit for shovelling money into another open-ended entitlement.

Speaking of shovelling money and single-payer endgames, Clinton also wants to reduce the age for Medicare eligibility to 55.  She hasn’t put a figure on the cost of this yet, but since the program is already $55.6 trillion in the hole on an actuarial basis, I guess a few more trillion won’t matter.  And while we are at it, we should be “protecting and expanding Social Security,” as Obama has also proposed.  This suggestion has been picked apart in one of David Stockman’s classic take downs.

We then have Clinton’s portfolio of “family friendly” policies.  These include “quality, affordable childcare available to all Americans,” subsidized to a maximum of 10% of incomes.  Clinton will also guarantee equal pay for women and she will require paid family leave.

I have already dealt with the hoary fallacies about the gender pay gap (see footnote 2 here).

Regarding childcare and paid family leave, I offer the following epiphany: having children is a costly exercise in all kinds of ways.  Childcare and unpaid family leave (if that is what your employer offers, although a great many already offer the paid variety) are just two of these costs.  But it is very unclear to me why these should be treated differently, for example, than the cost of having an extra room in your house or all of those clothes.  It is also unclear to me why we should be subsidizing childcare so that a parent can leave the house to work.  If the parent can earn enough to cover the cost of child care[2] and provide a decent return on his or her time, then there is no need to provide a subsidy.  If this is not the case, then this is the market’s way of delivering a very clear message: stay at home!

It is also absurd for Clinton to decry wage stagnation and call for things like mandatory paid family leave.  As I have noted before when commenting about the BloombergView article “American Capitalism Isn’t Broken After All” in a footnote here, much of the explanation for lagging wages is the growth of government-mandated employee costs.  Since companies care about the total cost of an employee, including the cost of any government mandates, wages are the things that have to give.

And there is a final point to be made here.  In America, we have chosen an economic system that results in a degree of inequality that is displeasing to some.  But we have chosen it for a very good reason:  it is the only system that has ever produced rising standards of living for the great mass of people.  Given that we have made this choice, it is illogical to object to its every manifestation.  Yes, wealthy people have better childcare, better medical care, better food, etc. – this is what it means to be wealthy as opposed to poor.  If you want to keep the benefits of an economic system that produces greater wealth for nearly everyone, you cannot the object to every consequence of inequality.  No matter how many “rights” you may want to invent.

Running throughout Clinton’s speech are crude Keynesian arguments for stimulating the economy and growing employment.  This is a tricky area for Democrats because, after all, President Obama himself has proclaimed that “America’s pretty darn great right now” and that it is experiencing “the best jobs market in decades.”  So, it’s a little unclear why the economy needs additional stimulus, but I guess that Clinton is acting out of an abundance of caution.  Not desperation.  Caution.

In addition to being righteous in every possible moral and cosmic sense, Clinton often claims that her policies will help the economy and employment.  The increased minimum wage “won’t just put more money in the pockets of low-income families – it also means that they will spend more at the businesses in their neighborhoods.”  This, we are told, is “Economics 101.” Equal pay “will boost family budgets and get incomes rising across the board.”  Strengthening unions “leads to better pay and benefits” and more spending, of course.

This all has a very 1930s vibe to it since these are exactly the arguments used by New Dealers to justify every attempt to hold up wages or prices, all of which contributed to the length and severity of the Great Depression.  But this backward-looking observation must be wrong because Clinton ends her speech with a call to “build the future.”

In the 1930s and today, all of these claims come down to one simple proposition, which is that, contrary to all laws of economics, the way to increase the demand for labor is to artificially inflate its price.  I will leave it to my readers to form their own opinion on the likely success of this policy.

Which brings us to the last issue:  Who is going to pay for all this?  You’ll be terribly surprised to hear that the answer is “Wall Street, corporations and the super-rich…(who)…should finally pay their fair share of taxes.”  Now, “fair share” is a very elastic term and it is not possible to know what Clinton means by this.  However, the Congressional Budget Office (CBO) has just come out with some new numbers that shed light on this issue.

In 2013 (the latest year for which the CBO has produced figures), the top 1% of Americans earned 15% of all pre-tax income; this same 1% paid more than 25% of all federal taxes, including income, payroll and corporation tax.  The next 19% of the high earners made 38% of the pre-tax income, but paid 44% of the federal taxes.  The top 1% faced a 34% average tax rate, the highest since 1996 and the sixth highest since Jimmy Carter was in office.

Add in the impact of government transfers and benefits, and the skew becomes even more pronounced.  In fact, the bottom 60% of the population receives more in government transfers and benefits than they pay in federal taxes.  All of this is provided by those shirkers in the remaining 40%, who also foot the complete bill for things like the military, the judiciary, the FBI, the National Park System, etc.

Obviously, Clinton is free to think that the rich are still getting an insufficient soaking, although it would be nice if she chose to express this opinion in a less misleading way.  But she should be aware of one thing.  The rich have, as economists put it, a rather high “elasticity of taxable income.”  In simple terms, this means that if you increase their taxes, they find ways – including through working and saving less – to declare less income.  Which translates into less tax revenue to pay for free stuff from POTUS.  In fact, this is pretty much what happened the last time taxes were sharply increased on the wealthy in 2013.  Tax rates jumped but total collections stayed flat.

Or, as Margaret Thatcher famously said, “The problem with socialism is that you eventually run out of other peoples’ money.”


This blog post is already overlong, but I did promise to finish with the area where Trump and Clinton see (ignorant, narcissistic, bloviating and fraudulent) eye to (lying, corrupt, hypocritical and war-mongering) eye.  This is the need to spend vast amounts of federal money to upgrade America’s infrastructure.

There are three points here.  The first relates to fiscal stimulus, the second relates to the actual need for infrastructure improvements and the third relates to the popular argument that infrastructure spending is particularly advisable now because government borrowing rates are so low.

Reading Clinton’s speech, you could think that improvements in infrastructure are almost a fortuitous by-product of her proposal.  The real aim appears to be fiscal stimulus and job creation.  Here are her introductory words:

So starting on Day One, we will work with both parties to pass the biggest investment in new, good-paying jobs since World War II. We will put Americans to work building and modernizing our roads, our bridges, our tunnels, our railways, our ports, our airports.

I guess that this sounds better than the old Keynesian recommendation for the government to employ people to bury $100 bills and then for the private sector to hire others to dig them up, or Paul Krugman’s musings about the stimulatory effects of an alien invasion.

Cochrane deals with this argument summarily in his WSJ piece:

America’s foremost economic problem is sclerotic growth…. Nobody thinks that stagnant growth is centrally the fault of bad roads and bridges. No, the economic argument behind Mrs. Clinton’s proposal is simply the endless drumbeat of fiscal stimulus: Spend taxed or borrowed money on anything, and the “multiplier” will increase “demand.”  We’ve been at this since 2008….And if U.S. growth hasn’t been kick-started by the trillions of stimulus so far—the government has accumulated $8 trillion of debt since the recession began—how will another $50 billion a year help?

Now, the second item: the alleged need for infrastructure improvements.  The best analysis I have seen on this subject is David Stockman’s “The Madison Country Bridges in Nowhere and the Perennial Myth of Crumbling Infrastructure.”  Nobody is better at unpacking government statistics than Stockman.  If a president is ever elected with a true vocation to rip apart Leviathan, then he or she better have Stockman along; he knows where all the bodies are buried.  His conclusion is in the title.  Crumbling infrastructure is a myth that both Trump and Clinton have bought.

And, finally, there is the argument that this is a particularly attractive time to carry out massive infrastructure programs because government borrowing rates are low.  I am sure that you have heard this one.  I think that both candidates have endorsed the idea.  Larry Summers, the former Treasury Secretary and one-time candidate for Janet Yellen’s seat, has been pushing this idea to anyone who will listen.  Paul Krugman, the “Nobel Prize winner, newspaper columnist and destroyer of nations[3],” is also a fan.

Unfortunately, the argument is wrong.

As my very able co-blogger and first-born male child recently noted, the correct measure of costs is the foregone opportunities.  But the opportunity cost of a massive government infrastructure program is not the 1% to 2% that the federal government has to pay to borrow money these days, particularly not when this number is artificially suppressed by a hyperactive Federal Reserve.  The opportunity cost is the return on the similar projects that will be crowded out (primarily from the private sector) if the federal government is bidding away resources for this program.  And this cost is not 1-2%[4], but rather something like at least 5-7%.  This is the appropriate “hurdle rate” to apply to these projects, not the fiscal threshold given by the borrowing rate.[5]

The usual Keynesian response to this observation is that these expenditures would use otherwise idle resources which therefore have zero opportunity cost. But how — in a world of sub-5% unemployment, booming construction activity and a shortage of precisely the type of labor and capital goods that would be required for this type of investment[6] — can anyone maintain this? How can even a diehard Keynesian pretend that infrastructure projects have no opportunity cost because there are a bunch of 55-year-old former coal miners in Appalachia and steelmakers in Pittsburgh who have left the labor force?


I started out this two-part posting with some literature and I will end it the same way.

Like Tolstoy’s unhappy families, each of Trump and Clinton is wrong in his or her own way.  Predictably, the one thing on which they agree – the need for a big boost in infrastructure spending – is the one thing that no one should support.  As is so often the case, the only thing on which the major political parties can achieve a bipartisan consensus is error.

Roger Barris

Weybridge, United Kingdom

I am certainly glad I did not say this…

“Women have always been the primary victims of war.  Women lose their husbands, their fathers, their sons in combat” by Hillary Clinton, checking the male privilege to die in war (after probably having been sent there with the encouragement of Clinton, Madeleine Albright or Samantha Powers).  Despite her feminist bluster, this shows that, deed down, Clinton has the instincts of a parasite afraid of losing a good host.


[1] Yes, such a thing exists.  I was surprised too.

[2] More properly speaking, to cover the cost of child care if we eliminated all the ways that this is inflated by bad policies, as described in the quote by John Cochrane.

[3] This comes from the intro to the ContraKrugman weekly podcast by Tom Woods and Bob Murphy.  Well worth a listen, as I have said before, if only for Murphy’s encyclopedic knowledge of Krugman’s writings and his ability to point out inconsistencies and hypocrisies.

[4] In any event, this is the risk-free rate, which should never be used to evaluate risky projects such as infrastructure investments.  This is Finance 101 and political hacks like Summers and Krugman should not need to be told this.

[5] For further details on this argument, I recommend the exchanges between Tyler Cowen (on the side of the angels), Brad DeLong (aka, MiniMe to Krugman’s Dr Evil) and BloombergView’s Noah Smith (playing his usual role as the tedious mouther of conventional left-wing nostrums). It was a lengthy exchange, but some of the salvoes can be found here and here (with Twitter exchanges and links).

[6] I have to admit here that I may be falsely extrapolating from my European experience.  Even though Europe has experienced a less robust recovery than the USA, the type of resources necessary to carry out infrastructure projects (or build or repair homes, for example) are in rather short supply here.  I suspect the same is true in the States.

Posted in: Economics, Policy, Politics


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