Elon Musk’s Controversial Politics: Beyond the Financials

As U.S. President Trump signed his “Big Beautiful Bill” into law on July 4, 2025, Elon Musk, shareholder and CEO of Tesla, announced that he would create a new political party (or “group” in European-speak). Musk opposed the projected trillions of dollars that the bill would add to the debt held by the U.S. federal government, though, as CEO of SpaceX, he was fine with cutting a trillion dollars from Medicaid, which provides health coverage to the poorest of the poor, and from food assistance while the defense budget was augmented. Musk’s proposed “America” group would likely draw support from Trump’s “MAGA” base, rather than from moderate Republicans and any Democrats. Whether Musk was more motivated by breaking up the political duopoly of the two major parties, or groups, to increase the practical options for voters or to split Trump’s support and punish the Republican party, such controversial political involvement by a major shareholder CEO is without doubt risky business. This is not to say that CEO’s should not be active politically apart from business strategy, for even business managers are citizens and thus may feel compelled to become active politically. This is to be lauded especially if the motive is out of duty to repair or otherwise improve a political system.

On the next working day after Musk’s announcement that he would be forming a new political party, “Tesla shares plunged nearly 7 percent . . . as investors registered dismay” at Musk’s “plans to form a third party and his intensifying feud with President Trump.”[1] Even though 7% is not exacting “plunging” or “crushing” Testa shares, beyond the hyperbole of journalists is the point that not avoiding controversy politically has costed Tesla and Musk himself financially. To be sure, billionaires can afford to lose significant wealth and still be left standing comfortably, and even in the case of business practitioners, economic reductionism doesn’t always hold. Also, political involvement can raise stock prices, as, for example, “Musk’s involvement in politics and his financial support for the president’s campaign were once seen by investors as a benefit to Tesla, fueling a steep rise in company shares after the election” in November, 2024.[2] No one but the most cynical would deny, however, that Musk’s chief motivation that led to his involvement in “DOGE” in the White House was for his businesses to benefit even though they did, initially. So that they took a hit when Musk broke from President Trump and then formed the America Party cannot be assessed only as concerns the financial impact on Tesla or SpaceX.

In American history, the notion that wealthy people should devote some time to public service for the benefit of the Union or their respective member-states was once well-known. Both because such people could afford financially to take time off from business and because their experience could be useful in governing, the notion of public duty was beneficial to the public good. Men like Thomas Jefferson and George Washington did not make public service into a career and did not go into politics primarily for its positive financial benefit. As a frustrated General dependent on the sovereign states whose delegates met in the Second Continental Congress, Washington would not have endured such hardships as he did were his motivation simply to benefit himself and his landholdings in Virginia financially. Even though Musk is by no stretch another Washington, more has been involved in Musk’s political motivation than maximizing Tesla’s stock price or gaining government contracts for SpaceX, and even getting back at Donald Trump. Government, moreover, is not just the aggregate of business interests without remainder.

Other billionaires might look to Musk’s example not in terms of his political ideology necessarily, but in terms of having enough financial cushion to weather political-turned-financial pushback from going beyond business to engage in public service—to give back, as it were, so to improve the system of government and add to the public good. It is admittedly very easy to be guided by personal and business financial considerations in delving into politics, whereas being willing to hold those at bay out of a sense of public duty is more difficult, and, frankly, increasing rare as American history has proceeded but not necessarily evolved politically. The notion that duty pertains to citizenship has become increasingly recessive in public discourse and consciousness. This is to say that duty-bound CEO’s are saints; rather, it is to say that we shouldn’t be so surprised when a billionaire businessman jumps into politics not merely for financial reasons, and thus not turn back to shore after a financial hit. Even if motivated by political ideology rather than in saving the union from itself (e.g., public debt), personal and business financial benefit is not the whole story, and the public good can still be a beneficiary. 

Mozi says, "'worthy people [are] those who are well versed in virtuous conduct, discriminating in discussion, and broadly knowledgeable!’ . . . . When the wealthy and eminent in the state heard this they retired and thought to themselves, ‘At first, we could rely on our wealth and eminence, but now the king promotes the righteous and does not turn away the poor and the humble. This being the case, we too must be righteous.'"[3]

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1. Jack Ewing, “Musk’s Idea of 3^rd Party Is Crushing Testla Shares,” The New York Times, July 8, 2025.

2. Ibid.

3. Philip J. Ivanhoe and Bryan W. Van Norden, ed.s, Readings in Classical Chinese Philosophy (New York: Seen Bridges Press, 2001), 58.

The U.S. Government’s Debt: Federalism Unbalanced

On May 5, 2025, the debt of the U.S. Government stood at $36.21 trillion, $28.9 trillion being held by the public and $7.31 trillion being intragovernmental. That total is $1.66 trillion more than the total federal public debt on May 5, 2024. Projected interest payments of $952 billion in fiscal year 2025 would be 8 percent higher than the interest payments made in 2024. By comparison, the U.S. budget for national defense in fiscal year 2025 totaled $892.6 billion. Whether going to investors of treasury bonds or defense contractors and other corporations, the combined $1.85 trillion for fiscal 2025 represents a transfer payment to the wealthy from American taxpayers rich, middle-class, and poor. Meanwhile, Republican lawmakers in the U.S. House of Representatives passed a bill in May, 2025 that would subject Medicaid and food assistance to significantly less money and subject the States with having to spend more on the administration of those programs. Principles of political ideology reside just below the surface. My task here is to flush them out and relate them to each other, rather than to impose my own ideology.

Fresh out of the Trump Administration, billionaire Elon Musk called the tax and spending bill a “disgusting abomination.”[1] Presumably this condemnation has to do with the “multi-trillion tax breaks” and the raising of the debt ceiling an additional $4 trillion, but the CEO of SpaceX would hardly object to the increase for defense.[2] Musk wrote that the “outrageous, pork-filled” bill would “massively increase the already gigantic budget deficit to $2.5 trillion” in spite of the cuts to healthcare and food for the poor that Musk supported.[3] U.S. Sen. Rand Paul promised to vote against the bill unless the debt ceiling would not be raised.

As of early June, 2025, who could say whether Republican opposition in the U.S. Senate would actually materialize beyond the rhetoric designed to give an impression of objection to voters back home. The Republican lawmakers in the House had quickly closed ranks to pass the House bill. Behind the numbers are values and ideological principles that can be difficult to see. Cutting federal programs that help the poor with subsistence living, such as with food and healthcare, can be said to imply a lack of compassion, especially if defense contractors would be getting more business from the federal government, but two political principles are also in play.

One is the belief that the role of government should not include providing even the basics to people; charities and families should supply basic needs to the poor. Overlaid with that principle is one concerning American federalism, wherein the federal government was originally intended to have very limited powers, and one way of limiting them was to make regulating interstate commerce and providing a common defense primary, with other domains of power being handled by the States. This principle is in accord with the differences between States in an empire-scale federal union of states because the state governments can more tightly match social programs with the political ideology of a majority of the voters in a state than can be done by Congress.

These two principles—the first being more general and the second more particular to the American federal philosophy—are not fully consistent, for according to the federal principle, Congress should take care that the state governments are not crowded out in taxing more so as to take on more in domestic programs—domestic being here within a given state. Whereas the view that the proper roles of government do not include making goods and services available to citizens applies to the States too, the principle of federalism favors expanding the taxing and spending abilities of the States according to how much of an entitlement-providing responsibility each state government wants, as per the relevant political ideology of the majority of the citizens of a state.

Re-balancing American federalism so the States regain some of authority that they once had should include managing the transition especially concerning programs relied on by the poor because they are vulnerable to suffering and even dying by slipping between the cracks. Relatedly, because in at least some of the several States, the majority of people believe that government should supply the poor with necessities, the more general political principle that government itself should not supply goods and services to individual citizens should give way to the second, federal principle. Put another way, were Congress to vote to restrict government itself, then more expansive ideologies in at least some States would be choked off. The general government principle should be decided therefore on the state level rather than by Congress.

Taking a page from the E.U., the U.S. member-states could conceivably be given more responsibility in funding defense beyond just militias, which are armies that the U.S. President can borrow. Not that the head of state of California should step over the federal president on defense policy as Macron of the E.U. state of France did in trying to head the E.U.’s defense policy against Russia in 2025. The defense budget of the U.S. Government could be reduced and the states could do more without the latter superseding the former. Together with transferring more non-interstate-commerce domestic programs to the states, the federal deficits could be reduced. President Reagan failed to rebalance American federalism because he favored the more general restrictive-government-role principle and thus did not facilitate states making up for federal cuts in domestic spending. To be sure, the state governments would have done so to various extents, given their distinct political climates.

Restoring power to the member-states heeds the fact that over a continent and beyond, one size (of public policy) does not fit all (States). Curtailing both federal defense and domestic spending while reducing federal taxation by less than the combined cuts but enough that state taxing abilities would no longer be crowded out from expanding to meet the incoming transfer of programs would put the federal government on the road to fiscal responsibility—meaning being able at some point to pay off its debt—while giving the state governments back more of the authority they had when the federal system was designed and put into operation. The horrendous fiscal imbalance of the U.S. (federal) Government can be interpreted as pointing, in effect, to how imbalanced the federal system itself has become. No one at the U.S. Constitutional Convention envisioned the federal level as handling everything of substance while the state governments become like municipal governments, so it should be no surprise that such a lack of fit would be reflected in a massive fiscal imbalance on the federal level.

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1. Bernd Debusmann, “Musk Calls Trump’s Tax Bill a ‘Disgusting Abomination’,” BBC.com, June 3, 2025.
2. Ibid.
3. Ibid.

Bottom-Heavy Federalism: The E.U. Stability and Growth Pact

With Russia still in Ukraine in 2025, the E.U. faced pressure to enact more laws and regulations at the federal, yes, federal level to reap the benefits of collective, coordinated action. Although the fear that Russia might invade one or more of the eastern E.U. states was probably unrealistic, given that Russia was still mired in Ukraine, the crisis of an invasion so close to the E.U. could legitimately serve as a “wake-up call” for the federal and state officials in the E.U. to get their federal system of dual sovereignty in order. The ability of state governments to successfully evade the state deficit and debt limits in the federal Stability and Growth Pact and the flipside of the Commission’s weakness can be read as indicative that more work is needed to get to a viable federal system. The states have been able to weaken the limitations successively over years, including by leveraging the fear of invasion by Russia as a call for more defense spending at the state rather than at the federal level.

By 1 May 2025, several E.U. states had notified the European Council of their intent “to make use of an exemption allowing them to go over budgetary limits in order to boost military spending. The Commission, the E.U.’s executive branch, had proposed earlier that year that E.U. state governments “could use an emergency clause to spend up to 1.5% of their GDP on defence investments over the next four years without breaching rules on public deficits and debt” at the state level.[i] The Stability and Growth Pact (SGP) mandates that any state’s government budget deficit be kept below 3% of GDP and government debt below 60% of GDP. The regulations are based on Articles 121 and 126 of the Functioning of the European Union basic (i.e., constitutional) law. The weakening of the strictures on states in violation has been the norm rather than the exception. In 2024, for example, the Commission suspended the debt limit out of concern that economic growth would be compromised by state governments raising taxes or cutting spending to reduce their respective total debt to below 60% of GDP. That such reasoning could be used at any time undermines the contention that 2024 uniquely justified the Commission’s caution.

I submit that in actuality, the Commission’s officials were coming to the realization after years of state violations that enforcement of the federal regulations was too difficult for such a weak federation. In other words, the state governments still had not delegated enough authority to the Commission that it could hold the states accountable on matters of exclusive federal competencies.

As for shared competencies (i.e., policy domains of authority), the lack of respect of several states for the federal regulations on deficits and debt suggest that the Commission has its work cut out for it in negotiating with state governments on cooperation on shared policies so federal and state policies on a given matter will not work at cross-purposes.

As for the competencies retained by the states, agreeing to shift at least some of them to the federal level (as enumerated federal powers) is needed so there is a check-and-balance between the states and the union. In other words, that state governments have gotten away with serially violating the Stability and Growth Pact suggests that the Commission does not have enough leverage even to enforce federal regulations on states. The overall balance of governmental sovereignty between the union and the states is itself problematic, or at least sub-optimal.

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1. Rory Sullivan, “Sixteen EU Countries to Trigger Clause Increasing Defence Spending,” Euronews.com, 1 May 2025.

Poverty Impeding Development

In the 1980s, the advent of some newly-industrializing countries (NICs) in east Asia, such as Taiwan and South Korea, was generating excitement around the world that the gap between the least developed countries (LDCs) and the developed countries (DCs) then had a viable bridge through foreign direct-investment; that is, what had been a dichotomy was becoming a spectrum. The hope that globally-circulating capital might raise even the LDCs out of poverty. Of course, there was scarce any thought that the combined pollution of an economically developing world would raise global air and sea temperatures above 1.5C. Human beings are too near-sighted for that, and, of course, there is the allure of profits and higher salaries and wages. Also, the sheer inexorability, or stubborn persistence, of poverty in scaring off rather than being lifted up from foreign-direct investment may have been minimized by the hope. Roughly forty years later, Oriana Bandiera of the London School of Economics spoke on the theory that economic opportunities are impacted by how much wealth a person has at the outset—the alternative theory being that the opportunities are just as good for the poor as for the rich because differences are due to exogenous (i.e., outside) factors. The micro-level condition of a country’s poor impacts the attractiveness of a country to foreign direct-investment.

Poor people are more likely to be doing casual, self-employed work than running a small business or raising livestock, according to Bandiera. Wage-labor tends not to go to the poor. Sustenance-level casual work, which is not as regular as wage-labor, is typically not enough to accumulate savings, which could be spent on training or education, or to buy livestock or equipment to increase production of crafts such that economies of scale might be realized. A bimodal structure thus emerges with equilibria being at subsistence level and middle-class, but not in between them. In terms of public policy, craft-oriented small-business loans can perhaps increase the number of poor people who can enter the interim space between the two equilibria. Only governments would be willing to take the risk, and should be willing to make sure that the loans are not spent on consumption, for pressing consumption needs are part of the reason why the poor do not save money on an ongoing basis.

Similarly on the macro level, the Asian NICs were distinguished from the LDCs in Latin America in the 1980s because only the former group had governments strong enough to withstand the political pressure from the people for increased government spending for consumption. Strong states, even if they are authoritarian rather than democratic, can resist popular pressure to exhaust government coffers by expanding entitlement programs. That by 2025 several E.U. states had deficits and debts greater than the limits prescribed by the Stability and Growth Pact and those governments faced no real accountability from the E.U.’s federal government adds support to the argument that democracy may be at odds with sustained and balanced fiscal policy unless, as the U.S.’s Thomas Jefferson and John Adams agreed, the citizenry who vote (i.e., the electorate) are educated and virtuous.  

In terms of business, enterprises in LDC’s tend to be smaller than those in developed countries (and NICs). Smaller organizations are less competitive in trade because they cannot realize the benefits of economies of scale. Such organizations also have less job-specialization and job variety. Bandiera even referred to the labor of such companies as a “disassociated group of self-employed.” Additionally, the CEOs of those enterprises tend to be managers more so than leaders, meaning that those CEOs spend more of their time oriented to functions inside the organizations and less time oriented to external stakeholders and even society as a whole. Visionary leadership is something that the head of a small business in a developing country cannot afford.

Even in business schools in developed countries, the business field of business environment has a place similar to that of Pluto in the solar system. Situating the field of business ethics within business environment is logically and conceptually dubious—but not to worry; few “scholars” of business ethics have actually studied philosophy, of which ethics is a subfield. One business ethics “scholar” at MIT told me in 2024 that ethics is actually situated in sociology rather than philosophy. Being in the humanities, I only smiled and wished her well. Rather than copy the business systems of developed countries, perhaps LDCs should grow their own varieties. The question is perhaps whether the governments should first not only invest in infrastructure, but also underwrite small-business loans to a sufficient portion of poor households before enticing foreign direct-investment. After all, forests develop in stages.

On the U.S. Government’s Budget Deficits and Debt: American Democracy Unhinged

It is true that a government’s budget can be read as a blueprint of priorities in terms of what is valued, and what is not so highly valued. The blueprint itself, as a whole, also evinces a priority in terms of values. As the big-ticket items, such as large spending categories and massive tax-cuts, get the most attention, whether a budget is in balance can go by the wayside, and what that says about the electorate (and thus the state of democracy) can easily be missed. Ultimately, public policy and even the votes of the elected representatives point back to the popular sovereign, the People—more specifically, the electorate, and its values. By 2024, the deficit and accumulated debt of the U.S. Government had reached such gigantic numbers that something could be said to be amiss concerning those values. The underlying culprit, which can be said to be an illness that is human, all too human, had by then infected American democracy beyond the wherewithal of virtually any elected federal representative to enunciate well enough that the electorate could look clearly at itself, and thus size itself up beyond the partial diagnoses that can be found in partisan attacks.

In late June, 2024, the (nonpartisan) Congressional Budget Office forecasted a $2 trillion deficit for the year, up from an earlier estimate of $1.6 trillion.[1] At the time, the federal accumulated debt stood at $34 trillion. Whereas in the 1970s, the debt as a percent of GNP was in the low 30s, the percentage for 2023 stood at just over 120 percent. Clearly, the trajectory of deficits and debt was disproportionate even on a percentage basis. Furthermore, interest payments made by the U.S. Government, which the CBO director said were “large by historical standards,”[2] were poised to exceed the entire defense budget in 2024; and that recipients of interest-bearing bonds tend to be on the wealthy side, whereas the poor and middle-class pay taxes, the ballooning debt could be viewed as an engine of wealth-transfer from the poor to the rich via the U.S. Government, hence increasing economic inequality as an indirect effect of fiscal public policy. In short, something systemic was out of balance, with ethical implications.

Blaming large ticket items (i.e., federal spending) provides us with an easy target but only gets at a symptom. Regarding the 2024 fiscal year, the Congressional Budget Office pointed to the $145 billion cost of the President’s changes to student loans and the $95 billion foreign aid for Ukraine, Israel, and Taiwan enacted in April as the two largest factors.[3] Almost a trillion dollars for three countries. Healthcare costs came in third.

To be sure, the changes in student-loan policy under President Biden were in large part due to the spurious vocational claims of for-profit “universities and feckless accrediting agencies, with unemployed former students as the victims. The foreign-aid spending was associated with foreign policy objectives—holding back Russia and sending a message that military aggression (by Russia) is no longer acceptable in the 21^st century being foremost. In short, both deficit-growing factors were oriented to protecting victims, and thus could be justified ethically. Increased public health-insurance costs too can be justified ethically, given the value of health irrespective of income and wealth.

Even lofty goals come with costs, however, which may not be affordable. A sovereign government with the authority to “print money” need not be constrained by what it can afford, absent constitutional language mandating a balanced budget. Of course, spending is only half of the deficit equation; taxation being the other. That spending had been outstripping revenue since the Clinton administration can be traced back to the Reagan tax cuts. Regarding the deficit in 2024, the Trump tax cuts should also be remembered. Moreover, the refusal of Congresses and presidents to raise taxes to cover increases in spending when the economy is fine or (especially) good is also a factor in how the U.S. Government’s debt got to $34 trillion.

Both the proclivity to increase government spending and the reluctance to increase taxes (or defeat tax-cut proposals) leads us directly “under the hood” to popular sovereignty: Government by the People. That is to say, the American electorate is ultimately to blame for not electing representatives, senators, and presidents who resist the twin temptations. To be sure, differing political ideologies on the proper size of government, and, more specifically, the federal government, are also legitimate in voting decisions.

A believer in a small federal government, harkening back to Thomas Jefferson, might vote for candidates in favor of tax cuts in order to “starve” the federal government. But this strategy ignores the unlimited ability of that government to enact spending bills. A “small government” ideology should go after spending and taxes with enough tax revenue over spending in the out years to pay off the accumulated debt.

A believer in a large federal government (in absolute terms and relative to those of the states) has no problem resisting tax-cut proposals; it is the notion that a government can or should grow by increased spending, especially without increased taxation to cover both the additional spending and to pay off the accumulated debt, that is problematic.

In the 1980s and early 1990s, the U.S. deficits (and debt) were significant in political discourse. David Stockton, President Reagan’s head of the OMB (Office of Management and Budget), wrote The Triumph of Politics to explain why Reagan failed to bring down the deficit numbers. The imbalance was in the public’s aversion to cutting domestic spending, Reagan’s increase in defense spending, and the president’s tax-cuts. In terms of the American electorate, the desire for immediate consumption, which includes tax-cuts, combined with the lack of responsibility can be cited as the ultimate source of the imbalance that may be inherent in democracy itself.

It is significant that Thomas Jefferson and John Adams agreed long after they were out of the political arena that a viable republic requires an educated and virtuous citizenry. Put another way, self-government requires a sense of responsibility in terms of fiscal governance. That the debt of the U.S. Government had been allowed to reach $34 trillion by 2024 can be interpreted as a verdict, or an x-ray, on just how fit the American electorate had been to govern itself through its chosen representatives. The real threat to American democracy lies within. The threat, in fact, by 2024 may have become much more serious than even that of unbalanced fiscal policy.  For the proverbial invisible “elephant in the room” may no longer have merely been the failure of the American electorate to exercise its popular sovereignty with fiscal responsibility on governmental taxation and spending: the rising unexamined question may ironically have already relegated fiscal responsibility altogether in silently asking whether $34 trillion ever gets paid off. Like an insect whose legs are still twitching even though it is already dead, the U.S. Government may have already been effectively bankrupt without anyone realizing it. If this was already de facto the case by 2024, then the damning verdict, not seen yet in plain sight, would be on another level entirely. 

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1. Jennifer Scholtes, “$2T in Red Ink: Foreign Aid, Biden’s Student Loan Policies Hike U.S. Deficit Forecast,” Politico, June 18, 2024 (accessed June 22, 2024).
2. Ibid.
3. Ibid.

Limits to Overused Fiscal and Monetary Policy Can Result in Self-Induced Governmental Impotence

“The [U.S.] federal budget deficit is growing faster than expected as President Trump’s spending and tax cut policies force the United States to borrow increasing sums of money.”[1] This observation was made just after the Federal Reserve Bank relented under pressure from the White House to lower interest rates because bond investors had been investing with a possible future recession in mind. With the U.S. Government’s accumulated debt standing at $22.4 trillion and interest rates already low, the limits to both fiscal and monetary policy were apparent even if most Americans in the political and business elite were focused on avoiding a possible recession in 2020.

According to the Congressional Budget Office in August, 2019, the federal deficit for fiscal 2019 would reach $960 billion; the deficit for the next year would reach $1 trillion.[2] Back during the Reagan administration in the 1980’s, deficits were in the hundreds of billions and the debt was in the trillions. It would seem that the fiscal imbalance had gotten worse since then, in spite of the fact that recessionary periods were greatly outweighed by stretches of growth. In fact, the U.S. in 2019 was in its longest period of economic expansion. Yet the deficits and thus debt rose rather than dropped. President’s tax cuts in that period of expansion played a significant role. Tax revenues for 2018 and 2019 fell more than $430 billion short of what the Congressional Budget Office had predicted.[3] In August of 2019, the president made public his consideration of payroll tax cuts just to guard against a possible recession (especially if one should hit before the next election day).

Using recessionary fiscal tools during an economic expansion means the deficits in good times won’t counter those in bad times. The result in the case of the U.S. has been a steadily increasing accumulated debt, rather than a debt from bad times being paid off in good times. That’s the fiscal theory, but it ignores the insatiable desire for instant gratification in human nature that can easily find power in a representative democracy. Accordingly, the use of leverage, or debt, by a democratic government should be extremely limited; tax cuts during periods of expansion can be seen as a red flag that a government has already gone too far.

Fortunately, lower than expected interest rates even before the Fed’s announced rate cut in August, 2019, reduced the amount of money the U.S. Treasury had to pay to its borrowers. So the public as well as policy makers could conveniently overlook the fact that the projected deficit for fiscal year 2019 was 25% higher than the prior year’s deficit. One weakness of a democracy is that if things look ok on the surface, needed work on the fundamentals—the substratum—will likely be put off. It’s more understandable that the electorate would have this weakness—less so for the elected representatives who know or should know the fundamentals and look out for the fiscal balance of the government. Speaking of balance, it is interesting that the federal system too was so much out of balance with the federal level holding most of the governmental power even though the States technically still had residual sovereignty. In other words, the tremendous fiscal imbalance can be viewed as an indication or manifestation of a more fundamental imbalance in the U.S. system of governments. In contrast, the E.U. suffered from an imbalance in the other direction, as the state governments anxiously guarded most of their powers.

See: Skip Worden, Essays on Two Federal Empires. Available at Amazon.

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1. Jim Tankersley and Emily Cochrane, “Budget Deficit Is Set to Surge Past $1 Trillion,” The New York Times, August 22, 2019.

2. Ibid.

3. Ibid.

Anticipating a Recession: Economic and Political Indicators in the E.U.

Anticipation in August, 2019, at least among bond purchasers on Wall Street, of an impending recession in 2020 had at least in part to do with the E.U. In particular, a large state, Germany, had a disappointing second quarter in terms of contracting economic output, and the increasing prospect of Britain seceding from the Union was thought to result in the E.U. economy turning recessionary. I contend that both of these baleful indicators were over-emphasized. Additionally, adding the increasing political polarization in the E.U. as another contributor to an upcoming recession would be too much.

Germany’s economy contracted just 0.1% from the 0.4% growth rate of the first quarter.[1] Placing such emphasis on a change from 0.4 to 0.3 might strike some people as being petty. Yet Carsten Brzeski, chief economist in Germany of the Dutch bank ING said at the time, “Today’s GDP report definitely marks the end of a golden decade for the German economy.”[2] A 0.1% change ends a golden decade. How fragile golden decades must be!

To be sure, “industrial output for June dropped over 5% compared to the previous year. And the ZEW indicator of economic sentiment for August plunged sharply, hitting its lowest level since December 2011.”[3] Brzeski pointed to increased uncertainty from a large state seceding from the E.U. and the U.S.-China trade negotiations as the main culprit. Whereas the British economy would likely be negatively affected in the scenario of secession without coordination, the argument that the E.U. economy would contract as a result is more tenuous. Even if the British economy of a fully sovereign U.K. were to falter, the E.U. economy, being, like that of the U.S., made up of state economies, would hopefully be able to absorb interruptions in trade with Britain. Moreover, the empire-scale of the E.U. (and U.S.) is, as a cluster, much larger than the state-scale of political entities within the empire-scale union.[4]  Baleful economic predictions in 2019 for the E.U. post-secession may have been exaggerated in part due to conflating the two political scales. References to Britain’s “divorce” from the E.U. serve as perfect examples of the category-mistake. No, Virginia, the U.K. is not another E.U.; rather, pre-secession Britain was/is a political sub-unit in the E.U., whose laws and court (ECJ) trump(ed) British law and courts.

The pre-secession trend of business moving from the state of the U.K. to other states may suggest that the E.U. economy would actually benefit from a “no deal” secession. Furthermore, the E.U. trades with other countries, so disruption in trade with a former state could be viewed relatively and thus seen as less baleful for the Union than some economic forecasters were predicting in 2019.

More crucial to the E.U., and less to its economy, were “insurgent movements from the anticapitalist far-left to the nativist far-right,” which have “made inroads” amid “eroding public confidence in mainstream conservative and social-democratic parties that for decades” had dominated at the state level.[5] Although it is tempting to label all this as political instability, the political institutions have funneled even parties like the 5 Star party, which came out of anti-corruption protests, into the nitty-gritty of coalition talks.

Even the political tensions in 2018 between the state government of Italy and the federal E.U. level, which “upset investors in Italian bonds and banks, hurting the flow of credit,” and the collapse of the governing coalition in 2019, which drive some investors into bonds, were not economic crises for the E.U. economy as a whole. Politically, however, Matteo Salvini of the League Party in Italy, could already be viewed as potentially damaging the E.U. federal system. He “challenged” the E.U. law on fiscal discipline for state governments, accusing the states of Germany and France of hypocritically getting away with exceeding the limits on state debt and deficits while the E.U. imposed austerity on the Italian government. His complaint was valid enough. On August 20, 2019, he repeated he would defy federal authorities on the tax-increase (rather than a decrease!) part of the austerity fiscal-discipline federal mandate.

In the early 1830’s, U.S. President Andrew Jackson was forced to deal with South Carolina’s Nullification Acts, which stipulated that the state government could defy federal law regarding laws that the state deems are detrimental to South Carolina. Jackson was aware that a federal system in which governmental sovereignty is split, as in the U.S. and E.U., cannot long survive when even just one state government can decide to defy federal law. So the political uncertainty regarding the growing power of the political extremes in the E.U. has primarily political implications. To put the economics before the political in such a case represents yet another over-statement of the economic. Politics does not reduce to economics. Although the former can obviously affect the latter, one of the domains should not be put foremost in the domain of the other. My thinking on political uncertainty is that its economic effects tend to be overstated. Even in political terms, political institutions have shown a remarkable ability to funnel, or normalize, what was once raw political conflict.

Related: Skip Worden, Essays on the E.U. Political Economy: Federalism and the Debt Crisis. Available at Amazon.

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[1] Julia Horowitz, “German Economy Shrinks as ‘Golden Decade’ Comes to an End,” CNN.com, August 14, 2019.

[2] Ibid.

[3] Ibid.

[4] Skip Worden, British Colonies Forge an American Empire: A Basis for Trans-Atlantic Comparisons. Available at Amazon.

[5] Marcus Walker, “Italy’s Government Collapse Sets Up a Power Struggle,” The Wall Street Journal, August 21, 2019.

Behind Corporate Loopholes: Wealth and Power

A company in the U.S. wants a tax loophole to apply. Starbucks, for example, wanted to be able to use the manufacturing deduction by stretching manufacturing to include the roasting of coffee beans. So in 2004 the company hired Michael Evans, a lobbyist at K&L Gates who had just a year before worked as a top lawyer on the U.S. Senate Finance Committee, which writes tax law. Evans was able to urge his former colleagues in the Senate to expand the definition of manufacturing to include roasting in a clause added to a 243-page tax bill called the American Jobs Creation Act.  As you might imagine, Starbucks was not the only company to get a tax break written into that law. By 2013, the manufacturing deduction had saved Starbucks $88 million that the company would otherwise have had to pay in corporate income tax. In 2012, corporate tax breaks and loopholes added $150 billion in lost revenue for the federal government, increasing the budget deficit by that amount.[1] Three lessons can be gleamed from the hidden corporate loopholes. 

First, the damage done to the U.S. debt by corporate loopholes has been significant. While dwarfed by the debt incurred to finance the Iraq and Afghanistan wars ($2.4 trillion added to the debt by 2013), $150 billion of lost revenue from corporate tax benefits for that period alone is nonetheless significant. 

Second, the “insider influence” itself violates the principles of openness and fairness, which are so esteemed in a democracy. The many points of access to influence legislation can be abused by legislators and lobbyists alike by their stealth dealings, sometimes literally in the middle of the night as a bill is about to be voted on. Ideally, the many points of access refers to the fact that various groups (and citizens) can reach legislators, not that the most powerful interests can abuse their ability to contact lawmakers for private gain (both to the interests and the lawmakers, thanks to political campaign contributions). In fact, for a lobbyist, including a corporate lobbyist, to have disproportionate influence on a bill to make it financially beneficial to the lobbyist's clients can be reckoned as a conflict of interest because even the information supplied is apt to be biased. The many points of access is meant to dilute the influence of the private interests that stand to benefit most from loopholes. 

Third, the contacts that lobbyists have in government from having worked there themselves can play a major role in the loopholes being granted and even in secret. Other self-interested interests cannot check the self-interested influence of the companies or industries that would gain most, so the private benefit gets away with eclipsing the public good. A law prohibiting former legislators and Congressional staffers from lobbying for at least ten years might make a dent in the inordinate insider influence of corporations in Congress. However, the influence of a Speaker of the House such as John Boehner, who became a corporate lobbyist after resigning from Congress, would hardly be diminished in his private influence, and thus earnings. Information that only insiders have sells. 

Like water, pent-up power naturally seeks its way around an obstruction with the objective of reaching an objective. The influence of wealth inexorably finds its way into the halls of power, especially in democracies as they have many points of access. This vulnerability is particularly great in cases in which candidates for public office must raise large sums of money to get elected. Asking the candidates to look the other way when a big donor is knocking at the door runs against human nature; even if laws prevent large donations, power finds its own way in the dark. The power both of candidates/lawmakers and corporations can be so massive that space itself bends toward mutual objectives. Perhaps the question is whether trying to bend space back only slightly is worth the time and energy of passing a law. Although removing the financial need of candidates for campaign funds (e.g., by public funding of advertising) could in theory take out part of the incentives on one side of the equation, corporations could tempt the incentive for private gain in other ways, such as with the promise of a lucrative job afterwards. 

In the end, the threat to the democracy is the inordinate power from the concentration of private wealth as in large corporations. The citizens are hardly focused in their collective use of their power, so the insiders in government tend to be influenced inordinately by the moneyed interest at the expense of the public good, the good of the whole.  

1 Ben Hallman and Chris Kirkham, “As Obama Confronts Corporate Tax Reform, Past Lessons Suggest Lobbyists Will Fight For Loopholes,” The Huffington Post, February 15, 2013.

See Institutional Conflicts of Interest, available at Amazon. Conflicts within the U.S. Government, in business, and between business and government are explored, as well as the very nature of an institutional conflict of interest. 

Holding the U.S. Debt-Ceiling Hostage: A Case of Political Expediency over Statesmanship

In April of 2011, S & P lowered expectations on U.S. Government debt from “stable” to “negative.”  Astonishing, the $14.2 trillion U.S. debt was still rated as AAA. The shift in expectations did not trigger higher borrowing costs because the market presumed that a political deal lowering the deficit would be facilitated by the warning-call. At the same time, Congress and the U.S. president were grappling with the need to extend the federal debt ceiling. The federal government was projected at the time to reach its borrowing limit by May 16, 2011, though the Treasury secretary, Tim Geithner, said he could use accounting options to push the date back to July 8. He assured the public that Republicans in Congress had told President Obama that they would go along with a higher limit. “I want to make it perfectly clear that Congress will raise the debt ceiling,” the Geithner said.  He also said the Republican leaders had assured the president that they “couldn’t play around with the government’s credit rating. They recognize it, and they told the president that.”[1] Such a recognition and statement by the Republican leadership, if true, would evince statesmanship over political expediency, for Republican lawmakers could have leveraged their votes on raising the ceiling to get more in negotiations on the budget. This would be particularly notable considering that appropriations to keep the U.S. Government's non-essential operations going were pawns in a Congressional-presidential power-struggle during the Trump administration. 

However, Rep. Paul Ryan, chair of the U.S. House Budget Committee and later to become Speaking of the House, said that while it was true that nobody wanted the U.S. Treasury to default, “(w)e want cuts in spending accompanying a raising of the debt ceiling. And that is what we have been telling the White House.” A spokesperson for Obama said a debt ceiling vote could not be contingent on upcoming negotiations over the budget.  So, in effect, the matter of default on the U.S. debt was being used for leverage in negotiations rather than held as untouchable.  It is no wonder S & P lowered its expectations concerning the ability of U.S. Government officials to avoid default by failing to raise the federal debt limit. Had the lower expectations been assumed to be a wake-up call for federal lawmakers and the executive, S & P would have been naive.

To say that no one wants default but then to hold it ransom is disingenuous and duplicitous. It is as if to say, “I don’t want to do it but I have to,” when in fact the deed does not have to do it. We see such statements from corporate managers and customer service employees. “Unfortunately, that can’t be done”—weakness that seeks to dominate typically takes assumes the passive voice as if to hide—when in fact the person or especially his boss could. Company policies are in actuality guidelines. Sadly, customers typically enable the false rigidity by taking it at face value rather than questioning it by going above the employee or even manager. 

Rep. Ryan could have resisted the temptation to gain greater advantage on the budget by holding the debt ceiling hostage. Even if he made the statement to cover himself with his political base in Janesville, Wisconsin, he bore responsibility for giving the appearance of putting partisan advantage over statesmanship.  

Given the encroaching nature of expediency whether for power or profit (or both), even verbal statements can get the ball rolling even for other political parties. Soon the government's duty to act in the public interest becomes a mere byproduct, as if by accident rather than primary intention. Given human nature, political expediency and the desire to make even more money are inherently antithetical to any self-enforced limitation. Hence in government, we can say that statesmanship involves voluntarily giving force to a self-imposed constraint or limitation. 

1, “Geithner Confident Congress Will Raise Borrowing Limit,” USA Today, April 18, 2011, p. 6A.

Instant Gratification Rules in American Fiscal Policy

With an expected deficit of $1.2 trillion for 2018-2019, the U.S. Government in December, 2017 enacted a tax cut with an expected revenue loss of nearly $1 trillion over a decade (assuming some growth from the tax stimulus) and, two months later, a budget deal passed adding $300 billion to federal spending in the next fiscal year.[1] All this was done with the U.S. debt at over $20 trillion—higher than the annual GDP at the time. With the  economy humming along with a low unemployment rate, the prospect for any fiscal discipline was bleak. Put another way, if budget surpluses could not come at the boom end of an economic cycle, then deficits would be likely in good times and bad. Behind the structural imbalance of contiguous deficits and an ever-growing debt is the all-too-human preference for instant gratification without a corresponding value being placed on self-discipline.

In a republic, the electorate elects representatives in part because direct democracy has no constraint on the immediate passions of a people. In the case of the U.S. Congress and White House,  the representatives had not by 2018 at least resisted the instinct for immediate benefit for the good of the American republics and their peoples—which together constitute the United States. Thomas Jefferson and John Adams agreed in retirement that an educated and virtuous citizenry is vital to a viable republic. The $20 trillion federal debt reflects back on Americans not in a good way in this respect.

For a republic—including one that is also a federation of republics—to be viable over the long term, some allowance for the long term must be made in the form of fiscal discipline. This is essentially self-discipline on a societal level. In the case of the tax cut and additional federal spending, Americans could “expect some of the strongest economic growth” in years.[2] This made the urge for instant gratification particularly alluring. In the medium term, Americans would face “more risk of surging inflation and higher interest rates—fears that were behind a steep stock market sell-off” in early February, 2018.[3] Notice that the negatives begin only in the medium term; hence they do not detract from the instant gratification. In the long term, the U.S. could have less flexibility fiscally in enacting a stimulus to combat a recession or even a crisis like that which had hit Wall Street in September, 2008. Additionally, “higher interest payments could prove a burden on the federal Treasury and on economic growth.”[4] The short term boost in an already booming economy could be expected at the time to hamper economic growth perhaps at a time of recession! Yet the force of this anticipation had no power in the enacting of the tax cut and additional spending. Knowledge, it appears, requires virtue manifesting as self-discipline. That it was missing reflects especially on the elected representatives of both parties, but also on the American electorate that elects and re-elects those representatives with impunity.

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[1] Neil Irwin, “Austerity Era Comes to End,” The New York Times, February 10, 2018.

[2] Ibid.

[3] Ibid.

[4] Ibid.

The Spanish Recovery: On the Roles of Budget Constraints and Exports

In 2007, the E.U. state of Spain “was hopelessly addicted to a credit-fueled construction boom that produced a shattering bust, leaving banks collapsing in the face of bad loans.”[1] A decade later, the state’s economy was “expanding at around 3 percent” over the previous year, “producing goods for export, generating jobs,” and pointing to possible E.U.-wide economic recovery.[2] The Spanish economy had returned to its pre-crisis size, according to the state’s government, yet the economy had not yet solidified a firm foundation and unemployment was still stubbornly high.

Although the credit-based building boom was doubtlessly not sustainable and fraught with risk, the ensuing budget austerity mandated at the federal level inhibited the state’s government from spending more money “on infrastructure projects to generate jobs.”[3] Contracting government spending exacerbates rather than ameliorates an economic downturn, even if deficits go up. The federal law on state deficits being at or below 3.5% of a state’s GDP did not have enough flexibility for the Spanish government to be able to minimize the period of the downturn. 

Hence, The New York Times concluded at the time of the recovery, “Spain’s resurgence is less cause for celebration than a grim reminder of how long it took.”[4] That is to say, the steep unemployment level, which had reached 25 percent, need not have endured as long as it did. Even in 2017, the unemployment rate remained above 18 percent (near 39 percent for the state’s youth).[5] 

It is difficult, therefore, to see even a return to the size of the economy before the debt-crisis as a recovery. To be sure, exports had grown “to close to one-third from about one-fourth of the economy,” and such an economic engine is clearly more stable than an over-leveraged construction-led economy.[6] An economy fueled by consumption-buying from within would be more stable still, however, and the stubbornly high unemployment rate attests to why such a solid foundation had not yet materialized. Even though the large SEAT auto-factory put €3.3 billion (about $3.8 billion) of new machinery into the operations, relying on one company for the surge in exports is not as solid as a diversified export-base.

To be sure, the increasing tax revenue in the state, albeit very modestly, enabled more money to flow back into the economy. Work on the long-planned expansion of the Barcelona subway system, a €6.8 billion project, had resumed. Yet such an infusion was needed especially during the crisis and in the ensuing years of extremely high unemployment.  The inflexible federal strictures of budget discipline did not allow for such counter-cyclical measures even in a rather extreme cyclical downturn.

Related: See Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.com.

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[1] Peter S. Goodman, “Spain’s Long Economic Nightmare Is Finally Over,” The New York Times, July 28, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

Is Democracy Inimical to Prudent Government Budgeting: The U.S. and India Contrasted

At a time when the U.S. Government sported an accumulated debt of roughly $20 trillion, with continued deficits expected to add about $10 trillion more over the next ten years, the most populous democracy in the world, India, laid out a prudent budget proposal—one that had been “extremely well thought-out,” according to Deepak Parekh of the Housing Development Finance Corporation in India.[1]

On February 1, 2017, the government of Prime Minister Narendra Modi made public its budget proposal for the following year. Even as the proposed budget “would significantly increase spending on infrastructure, rural areas and antipoverty programs,” the government’s annual deficit would be reduced to 3.2 percent of GDP from 3.5 percent in the current fiscal year.[2] The budget “included tax cuts for lower income taxpayers and small business, even as it came close to sticking with the country’s target for reducing the budget deficit.”[3] In a democratic system, in which popular pressure is even in theory for increased government spending and lower taxes, increasing discretionary spending need not come at the expense of fiscal discipline. “The economy needs the spending to give consumption a boost, but the government is also giving weight to fiscal prudence,” said Dharmakirti Joshi, chief economist at Crisil, an Indian credit-rating agency.[4] The proposal even adds spending on infrastructure such as roads in rural areas—an investment favorable to attracting foreign direct investment as the stated aim is to increase “efficiency and access to markets while providing jobs.”[5]

Modi’s action against currency on which taxes are not paid in banning the largest currency notes in November, 2016 had led the I.M.F. to cut its predicted growth rate for India by one percentage point for 2017 to 6.6 percent, so Modi must have been facing popular pressure to spur economic growth by distending fiscal policy beyond what prudence would allow. Even as five states prepared to go to the polls beginning on February 4^th, the prime minister prudently wanted to demonstrate “strength in advance of national elections in 2019.”[6] Put another way, the pressure to allow the projected deficits to increase as a percent of GDP must have been enormous, yet fiscal discipline prevailed and even allowed for targeted priorities that would take due account of the value of fiscal stimulus. 

Democracy can be strong, meaning self-disciplined, yet there is no guarantee. As Thomas Jefferson and John Adams agreed when they were exchanging letters in retirement, an educated and virtuous citizenry is essential to the continuance of a viable republic whose house is in order. A $20 trillion government debt is indicative that at least one house is not in order, and the case of India demonstrates that the problem is not democracy itself.

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[1] Getta Anand, “Arun Jaitley, India’s Finance Chief, Aims to Spur Economy Hit by Cash Shortage,” The New York Times, February 1, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

On the U.S. Government’s Fiscal Imbalance: Federalism to the Rescue?

At the outset of the Trump administration in the U.S., real economic output was projected to grow at an annual rate of 1.9 percent over the next decade.[1] The new federal president was hoping his proposals of tax cuts and $1 trillion in additional infrastructure spending over a decade would bump up the annual growth to 4 percent. I submit, however, that just over 2 percent more in the growth rate would not alter the stark “budget reality” facing the new president and the American people.

The complete essay is at Essays on Two Federal Empires.

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[1] Alan Rappeport, “Federal Debt Projected to Grow by Nearly $10 Trillion Over Next Decade,” The New York Times, January 24, 2017.