Biden's Trip: A Success, but the War is Ongoing

Joe Biden's trip to Europe was the best he could hope for. The G-7 and NATO meeting went well for him and the West and NATO are completely unified against Russia. The sanctions are working (see below). He's happy, right? Probably, but the war in Ukraine is still going on and will continue until Russia decides to end it.

Biden ended his trip in Poland by talking to refugees and making a speech in front of a historic castle there. He warned Russian President Vladimir Putin by saying: "Don't even think about moving on a single inch [2.54 cm] of NATO territory." But he also said "For God's sake, this man [Putin] cannot remain in power." That kind of sounds like he is calling for regime change. Biden is known for making gaffes, but undoubtedly this time he meant every word he said. Only in retrospect, maybe he shouldn't have said the quiet part out loud.

Putin has long feared that the CIA would try to depose him and now that he has heard those words from an American president, he is surely going to become even more paranoid. The Kremlin response was quick: "That's not for Biden to decide. The president of Russia is elected by Russians." Secretary of State Anthony Blinken responded by saying: "As you know, and as you've heard us say repeatedly, we do not have a strategy of regime change in Russia or anywhere else, for that matter." Was Blinken simply mopping up the mess Biden made or were the two just playing good cop, bad cop? Who knows? Putin has to assume Biden meant it, though, especially since Biden previously called him a butcher and a war criminal. We think the chances that Biden slipped up and really likes Putin and wants to keep him in power are rather low, though. Donald Trump maybe, but Biden no.

The war itself has not gone well for Putin. The plan was to take Kyiv in 2 days and install a puppet government. It's been a month now and Volodymyr Zelenskyy is still in charge and making video calls to every head of government who will listen to him. And his message is the same: We will not yield a centimeter [0.39 inch] of territory, so send more weapons and ammo.

On Friday, a top Russian commander announced plan B: taking complete control of the Donbas region. But that sounds and awful lot like: "Plan A didn't work so this is the backup plan." The head of Ukraine's military intelligence unit has said that Russia wants to split Ukraine, like North Korea and South Korea (or North Dakota and South Dakota). Of course, this requires the Russian military to conquer half the country by force, something it might not be able to pull off. It is also possible that Russia will just continue lobbing missiles to attack civilians in Kyiv, Lviv, and other cities since that doesn't endanger Russian troops.

If just getting the Donbas and the southern part of the country is now the Russian goal, it puts Zelenskyy and Biden in a bind. That might be a way to end the war and have Putin save face but would mean aggression paid off for Putin. He might decide what is needed is to beef up the Russian army and then try again in a year or so. It is far from clear that Zelenskyy and Biden would accept that deal. Both of them also have to keep domestic political considerations in mind. If Mexico, with Chinese backing, were to invade the U.S. and after a month of shelling cities were to offer deal like "just give us back Arizona, which was historically ours, and we'll stop," would President Biden take it? We doubt it. They could probably have Alabama, if they wanted it, but Alabama was never part of Mexico, so that won't fly. (V)

Biden's Sanctions Are Working

One thing that Joe Biden did that has worked very well so far is putting sanctions on Russia. Inflation is running at 20% (compared to a paltry 6% in the U.S.). The Russian Central Bank has already set interest rates at 20%, which will greatly and negatively affect consumer and business borrowing. Russian GDP is projected to drop 10% this year leading to a huge recession with the corresponding unemployment. It will continue contracting into 2023. The ruble has collapsed to the point that it is worth a penny, making it difficult for Russia to import needed Western products (think: spare parts for oil wells). Europe has plans to drastically cut imports of oil and gas in both the short term and long term. In short, the Russian economy has been set back at least 15 years, with no plausible fix in sight.

This doesn't mean that Russia will abandon the war in Ukraine, just that it will become a much weaker country going forward. Other countries, notably North Korea, spend an inordinate amount of their GDP on the military, so it is doable, at least in the short run. But Russians have been used to a better standard of living than North Koreans and have much more exposure to the West on account of the Internet. There is plenty of Internet censorship in Russia, but it is mostly aimed at websites that have "subversive" material. A site streaming sitcoms like "I Love Lucy" from the 1950s can probably get through since they are not overtly political, but they show Russians that Americans have (or at least, had) a standard of living they can only dream of. Knowing that something is possible in other countries is surely going to make some of them ask why it isn't possible in Russia, which is never good for the government in the long run. Also, 2023 Russia will be a lot poorer than 2021 Russia, so even without looking at the outside world, Russians know something is wrong and will ask "How come?" and "Whose fault is it?"

There are now unsubstantiated rumors floating around the Internet that the FSB (the successor to the KGB, where Putin was once a Lt. Colonel) wants Putin removed from power. We have no idea if there is any truth in them, but it is very likely that the FSB is not happy with the Russian army being shown up as incompetent, with the Russian economy in freefall, and with NATO united like it never has been before.

Biden ought to get a lot of credit for this situation, but politics being what it is, Republicans are never going to say: "Congratulations Joe, you did a fine job messing up our enemy." Still, depending on how things are in November, he might get some credit for his foreign policy, especially if the war is over and Ukraine "won." (V)

What Would Happen If Russia Launched a Cyberwar?

Vladimir Putin knows that the ground war in Ukraine is not going well and Russia is hurting from all the sanctions. One thing he could do to try to get the upper hand is launch a cyberwar against the U.S. to force Joe Biden to stop the sanctions. The ₽64,000,000 (or ₽0011110100001001000000000000) question is whether the U.S. could defend all the sectors that might come under attack, including energy, finance, food, fuel, pharmaceuticals, and defense contractors, as well as federal, state, and local government. Many companies have little to no protection against a serious, focused attack led by the GRU (Russian military intelligence).

On a 3-hour call last week, Jen Easterly, director of the Cybersecurity and Infrastructure Security Agency warned the 13,000 participants that they should assume there will be attacks and prepare to block them. She was especially worried about the energy, communications, transportation, water, and financial sectors. But especially energy. If the electric power went out, that would take most of the other sectors with it. Sen. Mark Warner (D-VA), chairman of the Senate Intelligence Committee is also worried. He said: "If a nation-state brings its A-Team, the ability to be 100 percent effective on defense is not always there." Joe Biden has also told companies to be prepared, but has not gone into specifics about what he knows.

Russian hacking could take various forms. It could possibly take down electric power plants, leaving millions in the cold and darkness for an indeterminate amount of time. It would also have a drastic effect on industry and other sectors of the economy. If the Russians got into a major bank, they could pick two accounts at random and swap the amounts in the two accounts. Then repeat this 100,000 more times. The bank's books would balance but half the customers would be very happy with the other half, not so much. Trying to sort this out would be a nightmare. Or imagine ransomware attacks that encrypted the disks at the biggest defense contractors so they couldn't produce any more javelins or stingers until they sent 100 kg. of bitcoins to the GRU's wallet (and bitcoins don't weigh much). Some companies have hardened defenses and make backups every day but many do not. And with some sectors, like energy, the issue is not protecting the data (as it is with banking), but continuing to provide service.

The food, water, and health care sectors are also vulnerable. JBS Foods, the largest meatpacker in the world. was attacked last year and ended up paying $11 million to (probably amateur) Russian hackers. This contributed to a spike in meat prices later. A hack on a Florida water treatment plant was caught just before it was going to inject a deadly amount of lye into the drinking water. Hospitals are still reeling from COVID-19 and have hardly any money for cyberdefense. If hundreds of hospitals were suddenly shut down by ransomware attacks and each told to pay $20 million to get the key, they might each do it figuring that was cheaper than getting sued by the families of all the people who would die if they didn't.

What could the U.S. do in the face of such attacks? It could go on the counterattack. The CIA probably has detailed plans for attacking Russian infrastructure and has the advantage that some Russian companies and government organizations use U.S. software, like Windows and Oracle. It is even possible that the makers of that software have built in special backdoors at the CIA's request to let it get in easily. Then the CIA could hit Russia with comparable attacks. But what if Putin refused to budge and power was off for an extended time in both New York and Moscow? Backups of the disk made last night might not help much if the attacking virus was planted weeks ago and was only just activated and could easily be reactivated. Who would blink first? It could get really nasty as both sides escalated. (V)

Biden Proposes New Tax on Billionaires

The 2023 federal budget will be presented today and it will contain a new provision to tax people with a net worth of over $100 million at a minimum rate of 20%. This will excite progressives for the moment, but could easily backfire in multiple ways.

First, it is a virtual certainty that no Republican senator will vote for it, so it will have to be passed using the budget reconciliation process with every Democrat on board. Sen. Joe Manchin (D-WV), might not be a problem, depending on the details, as he is on record for taxing the rich more. He is also a deficit hawk and the proposal is expected to raise $360 billion over the next 10 years, so that is another reason he might vote for it.

A bigger problem is Sen. Kyrsten Sinema (D-AZ), who has said she is against new taxes on the rich. If she can't be talked into it, the provision will have to be struck from the budget and progressives will be beyond furious, especially if Manchin is with them this time. It is also possible that other moderate Democrats might balk for some of the reasons given below.

• To whom does it apply?: Biden said it will only apply to people with net assets of $100 million or more. How will that be determined? If someone owns publicly traded stocks worth $101 million on Jan. 1 of the tax year, they've been nabbed. But what if someone's wealth is mostly in a privately owned company whose true value is very difficult to determine? Suppose they make titanium widgets and experts differ on the future market for titanium widgets? Or: Who gets to determine the value of used megayachts and Ming Dynasty vases? A tax like this will push multimillionaires and billionaires into investments whose value is very hard to determine. And what happens when the billionaire goes to court with five appraisals saying there is a little scratch on his Ming vase so it is woth only $100,000, not the $40 million the government says it is worth?
  
  
• Is this a wealth tax?: Because the tax is triggered by a certain level of wealth—not a certain level of income—the Supreme Court could rule that the tax is an unconstitutional wealth tax and strike the whole section of the IRS code down. Some lawyers may disagree with that, but all it takes is five justices to say "we think it is a wealth tax" and there it goes.
  
  
• Taxing unrealized gains: One area where the proposal breaks new ground is taxing unrealized capital gains. Normally, capital assets are taxed when they are sold, not annually. The government's power to tax income is derived from the Sixteenth Amendment, which reads:

  The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

  The fun part of this is the definition of "income." Dictionary.com defines "income" as "revenue received for goods or services, or from other sources, as rents or investments." Billionaires are going to argue that they haven't received anything so they don't have any income covered by the Sixteenth Amendment. The Supreme Court might just agree with them. Definitions matter. During last week's confirmation hearings, Sen. Marsha Blackburn (R-TN) asked Judge Ketanji Brown Jackson: "What is the definition of a "woman?" She very smartly said she didn't know. Blackburn was hoping Jackson would say: "It is an adult human being with XX chromosomes." If she had, Blackburn would have said: "So you agree that a person lacking XX chromosomes is not a woman and may not participate in activities or go to places reserved for women?" Jackson knew what was coming and evaded it. But if Biden's tax provision passes, lawyers, accountants, historians, and linguists will be called as expert witnesses to explain what "income" means in the Sixteenth Amendment, and they are sure to disagree.
  
  
• Will unrealized losses be deductible?: In most of tax law, if something is taxed when it goes up, it is deductible when it goes down. So if the stock market is down one year and Bill Gates' holdings drop by $1 billion, will the government have to cut him a check for $200 million? That is a likely consequence of this provision, but it won't be popular with progressives the first time it happens (or the second time).

Politically this may proposal may be unwise because it gets progressives' hopes up and they are likely to dashed later due to the various problems and potential court rulings. It is part two of Build Back Better, where Biden promised $3.5 trillion of social spending and so far has delivered $0 of it. Overpromising something to a group of people who are paying close attention is not a good political strategy.

This is especially bad since there are much simpler and unambiguously constitutional ways to tax the rich. During the administration of conservative Republican Dwight Eisenhower, the top tax rate was a wee bit higher than the 37% it is now. In 1954, at an income of $100,000 (equivalent to $991,000 now), the marginal rate hit 75%; at $200,000 ($1.982 million now) it hit 89%; at $400,000 ($3.963 million now) it hit 91%. Eisenhower used all that tax money to invest in America; for example, building the Interstate Highway System which cost over half a trillion current dollars. If Biden were to propose a marginal tax rate of 85% on realized income above $5 million that would be lower than during a conservative Republican administration, would be guaranteed to be constitutional, and would be easy to enforce.

A second thing Biden could do is eliminate a specific provision in the estate tax law called the "stepped-up basis." If someone bought 10,000 shares of Amazon stock at $1.54/share back in 1997 and now dies, the $20 million capital gain is not taxed. The law could be changed to require the estate to first pay the full capital gains tax due before putting the asset in the estate. This would eliminate an escape hatch for very wealthy people: buy stock and then die. Also, for a married couple, the first $24 million of their estate is not taxed at all upon death. That could be scaled back to, say, $2 million, potentially with a special exclusion of $10 million for farmland that has been in the family for at least 40 years. Taxing large estates heavily has the advantage that the people likely to grouse about it (the billionaire's kids) didn't earn the money themselves and aren't going to get much sympathy from anyone for not getting money they didn't earn. There are also other ways to tax the very rich in straightforward and clearly constitutional ways.

But the course Biden has chosen is fraught with difficulties and is likely to end up being a big disappointment for the very progressives he is trying to please. (V)

Biden Defaults on Student Loan Promise

During his campaign, Joe Biden promised to cancel $10,000 on each of the 43 million outstanding student loans. He hasn't done it, angering some people who voted for him specifically in hopes of getting rid of some debt. What he has done is eliminate some student loan debt for specific categories of borrowers—for example, people who work in the public sector, people who were defrauded by for-profit colleges, and people who are now permanently disabled. This has affected 700,000 people and canceled $17 billion in debt. Clearly this is but a small fraction of what he promised, though it is much more than any previous president canceled.

Some Democrats are beating on him to cancel up to $50,000 in debt per borrower. This puts Biden in a tough spot because there was a moratorium on repayments on student loans for the past 2 years, but the moratorium will end in May. Then payments must begin again.

Canceling student debt is controversial. Some blue-collar workers who didn't go to college have other forms of debt and don't see why student debt should be canceled but debt to buy a truck in order to work as a trucker is not canceled. Other people who went to college and held down one or more jobs then while studying in order to avoid getting into debt feel that students who took the easy road and just borrowed money would be favored over students who worked hard and paid their own way. Most Republicans are against canceling any debt at all. Their view is centered on personal responsibility: If you borrowed money, you knew you would have to pay it back some day so why should you get a free ride now?

Still others remember than in the 2008 crisis, the government bailed out numerous companies and ask why the government thinks it is OK to bail out companies but not former students? Other people look at this situation from a racial perspective. On the average, more minority students took out loans than white students and the loans were bigger. So paying off student debt would help close the racial wealth gap. Finally, canceling existing student debt is of no use to current high school students who can't afford to go to college. What would help them is free college, something that was in the Build Back Better bill that is now dead and gone. It's complicated material and there is no way to please everyone. (V)

Judge Throws Out Maryland Map

Courts have been throwing out Republican gerrymanders left and right, but it turns out Democrats also gerrymander when they have the chance and the courts also frown on these. Case in point is Maryland, where Anne Arundel County Senior Judge Lynne Battaglia (a Democratic appointee) tossed the state's congressional map. She ruled that state law requires districts to be compact and take into account political subdivisions (e.g., county lines) and the map didn't do that. The map was approved by the state legislature, vetoed by Gov. Larry Hogan (R-MD), and passed by a two-thirds majority in each chamber of the legislature over Hogan's veto. Now, one judge has vetoed the whole legislature.

The current Maryland House delegation is 7D, 1R but the legislature wanted an 8D, 0R shutout by making the MD-01 district of Rep. Andy Harris (R-MD), which is currently R+14, a competitive district. Joe Biden carried the new district by less than one point. The judge said: "Nope!" She also told the legislature to try again. However, the legislature is first appealing her decision to the Maryland Court of Appeals, the state's highest court. As a consequence, the primary has been moved from June 28 to July 19 since candidates can't file if they don't know where the districts are.

Hogan said: "This ruling is a monumental victory for every Marylander who cares about protecting our democracy, bringing fairness to our elections, and putting the people back in charge. One could argue that making one seat competitive is perhaps not a monumental victory, but since Republicans are being called out by the courts for gerrymandering, it is only fair that Democrats get called out when they do the same thing.

Currently, five states do not yet have congressional maps: Florida, Louisiana, Maryland, Missouri, and New Hampshire. Starting in May, the primaries are ramping up, so forward progress is called for. (V)

Trump May Be Sorry He Dumped Brooks...

In order to increase his batting average, last week Donald Trump disendorsed (de-endorsed? unendorsed? devorsed?) Rep. Mo Brooks (R-AL), who is running for the Senate and polling poorly. In return, Brooks disendorsed Trump, so to speak. Brooks said: "President Trump asked me to rescind the 2020 elections, immediately remove Joe Biden from the White House, immediately put President Trump back in the White House, and hold a new special election for the presidency." In other words, Trump has been pressuring Brooks to help remove Biden from office long after his inauguration on Jan. 20, 2021. We're not sure of the U.S. code section, but we are fairly confident that actively trying to remove the president from office and replace him with someone not elected to that office is in there somewhere. Now the Select Committee has another potential witness, and one who has direct personal knowledge of Trump's trying to undo the election.

The Dept. of Justice might also be interested in this, eventually. It is the first time a Trump insider has accused the former president of illegally trying to overthrow the government of the United States. Brooks claims that he told Trump multiple times that there is no provision in the Constitution or federal law for a special election for president. If, for whatever reason, the presidency becomes vacant, then the vice president takes over, or if need be, the speaker of the House. The cabinet is next in line. But no matter what, there are no special elections, as there are for vacant House seats.

When asked if the Select Committee was going to interview Brooks, A spokesman for the Committee declined to answer. That is neither a "yes" or a "no." It could yet decide to ask Brooks to go on the record with his accusations. A firsthand witness saying that Trump continued plotting to regain power for months after it was all over would certainly strengthen its case that Trump broke the law. (V)

... And He May Also Be Sorry He Hasn't Dumped David Perdue

Donald Trump hates Gov. Brian Kemp (R-GA) because Kemp signed the certificate of ascertainment that gave Joe Biden Georgia's 16 electoral votes. So he talked former senator David Perdue (R) into challenging Kemp. Like Mo Brooks, Perdue isn't doing very well and it looks like Kemp will beat Perdue easily. There goes Trump's batting average.

But rather than switch horses in midstream in the gubernatorial race, Trump is doubling down on Perdue. On Saturday, Trump went to Commerce, GA, a thriving metropolis of 7,387 souls roughly in the middle of nowhere, to pitch Perdue to an anemic crowd.

Most observers think that a governor's reelection campaign is a referendum on the governor and how well he governed during the past 4 years. It is not about who won the 2020 presidential election, as Trump seems to think it is. Kemp has done many things conservatives like. He was one of the first governors to end COVID-19 restrictions, he signed a new law that will make it more difficult to vote, he backed a law allowing concealed carry of guns, and he banned people getting abortion pills by mail. Kemp is running on these "accomplishments."

Not only is Perdue flailing in the polls, but he is being crushed in fundraising. He has raised $1.1 million, compared to Kemp's $12.7 million.

Also at the rally in Georgia, Trump continued to praise Vladimir Putin. He said that putting 200,000 soldiers on the Ukrainian border was a great way to negotiate. Then he called the attacks "heinous attacks on a proud and sovereign nation." After that, he praised Kim Jong-Un, Xi Jinping, and Putin for their intelligence. Is the Republican base gung-ho on foreign dictators? We don't fully get it.

Many Republicans believe that Trump's encouraging and supporting Perdue is simply distracting from the Republicans' real problem: beating Stacey Abrams (D). No one, especially not Trump, knows what Trump will do in the general election if it is Kemp vs. Abrams, as seems likely. Will he tell his supporters to write in Perdue? If he does that, it will practically guarantee an Abrams win. But from Trump's point of view, that might be better than Kemp winning. After all, Trump cares most about punishing people he hates. He has no loyalty to the Republican Party, so telling people to write someone in or not vote would do the most to punish Kemp.

There is another race in Georgia where Trump also backs a candidate. That candidate is Herschel Walker, who is running against Sen. Raphael Warnock (D-GA). Walker is a first-time candidate and tends to put his foot in his mouth every time he opens it. So he is lying low and letting his campaign team do what they want, mostly without the candidate. If either Kemp or Abrams wins the governorship and Warnock is reelected senator, Trump will have two black eyes in very high-profile races. His influence will take a huge hit in 2023 when all Republicans see that his blessing is more the kiss of death than anything else. (V)

Fortenberry Quits

It was predictable and it happened. Convicted felon Rep. Jeff Fortenberry (R-NE) resigned from Congress on Saturday. He told his constituents: "Due to the difficulties of my current circumstances, I can no longer serve you effectively." Minority Leader Kevin McCarthy (R-CA) even found enough nerve to say: "I think when someone's convicted, it's time to resign." Speaker Nancy Pelosi (D-CA) was much stronger in her demand that Fortenberry resign immediately. If he had not done so, he would most likely have been expelled from the House within a few days.

In January, Fortenberry announced his plans to run for reelection. However, state Sen. Mike Flood (R) was planning to challenge him no matter what, and now has the support of most of the local Republicans. The district includes most of eastern Nebraska and is very rural and conservative except for the city of Lincoln. The PVI was R+11, but redistricting made it slightly more liberal. Democrat Patty Pansing Brooks is the favorite to win the Democratic nomination. However, having a special election in the early summer rather than simply a normal general election in November could complicate both Flood's plans and Brooks' plans. If neither candidate has much time to prepare for the special election, the PVI of the district means that when voters see a ballot with:

• Unknown candidate (R)
• Unknown candidate (D)

the former is the heavy favorite.

Also noteworthy on the House resignation front is a report that Rep. Filemon Vela (D-TX) who represents TX-34 will resign shortly to take a job as a lobbyist for Akin Gump Strauss Hauer & Feld, the second biggest lobbying firm in D.C. Among its clients are Amazon, Gila River Indian Community, the U.S. Chamber of Commerce, and the Oneida Indian Nation. Something of a mixed bag.

TX-34 is along the Mexican border and was D+10 before redistricting. The new district is even more Democratic. Joe Biden would have carried it by 16 points. Consequently, in the special election, probably this summer, some other Democrat will replace Vela. Rep. Vicente Gonzalez (D-TX), who represents TX-15, has already won the primary for TX-34 for 2022-23. He could resign his current seat and run in the special election, or he could sit back and let someone get elected for a 6-month term.

A complication for the Democrats is that TX-15 is the most competitive district in Texas and a Republican could easily win it. If Gonzalez had stayed in TX-15, as the incumbent he would have probably won and some other Democrat would easily won the very blue TX-34. But because Gonzalez decided to run in an easier district he doesn't live it, the Democrats could lose a House seat. A team player he is not. (V)

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