What's Brewing in Milwaukee

And, a case of Coin-Flip Capital capitulation...

Donald Trump’s choice of vice presidential nominee will be the Day One headline, and it’s especially consequential this time around for a few reasons. Trump can only serve one more term, which puts his choice instantly to the front of discussions about the 2028 nomination and the future leadership of the GOP. Trump and his inner circle are also much less focused on ideology and policy than a typical top of the ticket, which gives the VP and his staff greater than usual opportunity to shape administration policy and personnel.

As Politico’s Zachary Warmbrodt wrote in May, about the prospect of Senator Rubio, Vance, or Cotton being the choice, “the senators would bring focus to the issues while Trump might not be as concentrated on policy. They would also bring along their networks of staff and policymakers (plus American Compass).”

Two other things I will be paying particular attention to:

1.     The tax debate.

Major portions of the 2017 Tax Cuts and Jobs Act are set to expire, and their extension will inevitably be central to a wide range of policy debates for the next year. The ten-year price tag for extending them or making them permanent in full: nearly $5 trillion. Trump and his team have spoken colloquially about their commitment to the cuts, and anti-tax activist Grover Norquist has called upon all Republicans running for office to “let voters know they stand with the GOP and Trump in a commitment to make the 2017 GOP/Trump tax cuts permanent for all Americans.”

But it’s not clear who is prepared to take him up on that offer. To the contrary, a range of Republicans have begun making noises about raising even the corporate tax rate (“House Republican support grows for corporate tax increase, threatening key part of Trump’s economic legacy”). Senator Josh Hawley, in remarks last week, criticized “all that worshipful talk about corporate tax cuts.” And then, somewhat stunningly, the 2024 GOP Platform released last week declined to call for extending all of TCJA, instead saying: “Republicans will make permanent the provisions of the Trump Tax Cuts and Jobs Act that doubled the standard deduction, expanded the Child Tax Credit, and spurred Economic Growth for all Americans.”

But doubling the standard deduction and expanding the Child Tax Credit (along with the offsetting repeal of the deduction for personal expenditures) is only one part of TCJA, and not an expensive one. Are the marginal rate cuts, AMT adjustments, qualified business deduction, and immediate expensing provisions not comparable priorities? Is there a recognition, at least, that the cost of those items is prohibitive, and extension would require pay-for? Or is this just sloppy platform drafting? Inquiring minds want to know, inquiring journalists should be asking!

Indeed, more generally, the question of whether and how to pay for any TCJA extensions has gone largely overlooked in coverage thus far. When passed in 2017, the tax cuts were almost entirely unpaid-for, which was apparently fine with Republicans (so much for Speaker Paul Ryan’s fiscal conservatism). No one seems eager to repeat that mistake, especially with a price tag that has now doubled and a fiscal context that has worsened dramatically.

“Extend TCJA and drive up the deficit” and “Extend TCJA but actually pay for it” are entirely different policies that would indicate entirely different postures for the party and create entirely different contexts for negotiations. Yet reporters have been entirely uninterested in determining what the politicians mean, and the politicians have been delighted not to have to specify. Even Grover, in his unrequited demand for new pledges of loyalty, avoided saying what he actually wanted. Platform language that suggests a major shift, and a gathering of the party for a week of on-the-record festivities, should be a good occasion to find out.

2.     Conservative labor stands its butt up.

Apologies for such an off-color heading. If you haven’t seen the confrontation between Senator Markwayne Mullin and Teamsters President Sean O’Brien at a November hearing, well, click on over there now. We’ll wait. OK, as I was saying… O’Brien will be addressing the Republican National Convention this week, representing a major inflection point for the GOP’s relationship with organized labor.

Supporting worker power and building conservative interest in the labor movement have been priorities for American Compass since our founding, and four years ago we published groundbreaking statement, “Conservatives Should Ensure Workers a Seat at the Table.” Among the signatories, funnily enough, were Senator Marco Rubio and a young author named J.D. Vance. Literally no one was talking about this concept at the time. But as I argued in an accompanying Wall Street Journal essay, citing everyone from Adam Smith and John Stuart Mill to Robert Nisbet and St. John Paul II, “American Needs a Conservative Labor Movement”:

Rising corporate profits don’t lift workers’ boats on their own, nor will workers patiently take on water forever. The response favored by the left is to create more and larger programs of government redistribution and regulation. A better alternative would be to revitalize an institution capable of helping workers claim for themselves a genuine seat at the table and a larger share of the economy’s gains. Seen from this wider angle, the idea of a conservative labor movement doesn’t seem so crazy.

And so, here we are four years later, with Republican senators walking picket lines and the Teamsters president addressing the RNC. In my experience, labor leaders don’t pull punches in their remarks. This has been Senator Mullin’s experience as well! It’s safe to assume that O’Brien will confront those elements in the GOP that continue to wage war on organized labor and that he will make a full-throated case for worker power. Much harder to predict is how the audience will respond.

COIN-FLIP CAPITAL CAPITULATION

One of my favorite hobby-horses is the obviously dysfunctional private equity industry, which thrives by extracting value from enterprises built by others and collecting enormous fees from investors, while still failing to perform better than a simple index fund. “It’s been more than a decade since LPs saw better returns than they would have achieved by just putting money in a basic public index fund,” I wrote in American Compass’s Guide to Private Equity in 2021:

PE firms eager to justify their existence are placing ever-riskier bets at ever-higher prices. More often than not, they now sell their companies to each other, or even to themselves. This is unlikely to end well, either for their investors (often the taxpayers behind public pension funds) or workers at the targeted companies. The PE firms, of course, will still collect their fees.

“Experts” have not cared for such analysis. When we first released our Coin-Flip Capitalism project in 2020, University of Chicago Professors Todd Henderson and Steven Kaplan argued in a Wall Street Journal op-ed, “Populists Don’t Know Much About Private Equity”:

The U.S., which has the oldest and largest private-equity market in the world, is home of the world’s best-managed companies. It’s worth scrutinizing the costs and benefits of various investment strategies or questions about how a society deploys talent. It matters where society allocates scarce resources, but it also matters that analysis of these questions is based on the facts.

Well, we were right, they were wrong. Now comes Allison Schrager, economist at the Manhattan Institute, acknowledging in Bloomberg that us populists maybe did know a thing or two: “The Private Equity Bubble Is About to Deflate.” She begins reluctantly:

As a believer in efficient-ish markets, I am uncomfortable calling anything a bubble. Recognizing a bubble requires spotting an asset or asset class that is objectively overvalued before everyone else does. Making this determination is almost always impossible in real time, even if it’s screamingly obvious in hindsight…

But as American Compass showed, it was not even a little bit impossible in real time. Now, a few years later, Schrager is prepared to conclude:

Over the past decade or more, private equity has grown too big too fast. That increases the chances it will cause economic damage that the country will have to deal with for years.

It also increases the need for policymakers to comprehend the many ways that financial markets fail, the many reasons to be suspicious of the massive profits generated as a result, and the opportunities for public policy to address the problem. Hopefully the Manhattan Institute will begin helping to spread this message.

Oren