The Economic Consequences of Mr. Trump


Somalilandsun-  With unemployment at a 50-year low, wages starting to pick up, and the stock market booming, the US economy has defied expectations since the 2016 election. Nobel laureates Angus Deaton and Edmund Phelps, along with Barry Eichengreen, Rana Foroohar, and Glenn Hubbard, ask why, and whether what looks like a robust recovery is masking another crisis in the making.

From this day forward, it’s going to be only, “America first, America first.”

Glenn Hubbard: It’s always hard to know with the economic legacy of a president is. You don’t know till the curtain falls. If you’ve had success early, but failed later, people remember that and vice versa.

Barry Eichengreen: Long-term regulatory legacy is to be determined, but fiscal policy doesn’t run in reverse.

Rana Foroohar: He will be seen as someone who poured kerosene on an already overblown corporate debt bubble, and possibly will be responsible for the next recession.

Edmund Phelps: Instead of beating the drum for innovation, he’s trying to protect people and preserve the kind of dull, boring, steady state. Stationary state.

Angus Deaton: I think the economic legacy is trivial compared with the assault on democracy.

Narrator: In 2016, the Nobel laureate economist Paul Krugman predicted that Donald Trump’s election would trigger the next global recession. He wasn’t the only one. Many economists, both before and after the 2016 election, feared Trump’s America First agenda of trade protectionism, immigration restrictions, and rejection of multilateralism would send the economy into a tailspin. So far, those fears haven’t been borne out. On the contrary, since President Trump’s inauguration in January 2017, the U.S. has enjoyed strong growth, a surging stock market, increases in consumer spending, and the lowest unemployment in a generation. But in the run-up to the midterm congressional elections, many are asking to what extent the Trump economy is really former President Barack Obama’s.

Foroohar: Is it Trump or is it Obama? I would actually raise a third possibility and say it was Janet Yellen and Jay Powell, now, although we’ll see what he does. But really, I would say that where we are has a lot to do with the central bankers of the world and in particular the Fed, which led the last ten years of quantitative easing, keeping interest rates low. I mean, that’s why I think most major economists agree we didn’t end up in a Great Depression.

Phelps: I look at things a little differently. I think that the recovery is over. We’ve recovered, fully recovered. Sure, there are some structural changes that have occurred that we don’t like to see, but it’s not something that Obama has anything to do with. I don’t think that Obama’s policies have opened up possibilities for Trump, nor closed possibilities. Trump is on his own.

Eichengreen: Trump can be credited with having some positive impact on business confidence, although I think analysis of that coming out of the White House recently has been exaggerated.

Hubbard: Almost immediately upon election, the stock market went up, it was supposed to have gone down, it actually went up substantially. It’s up substantially today. And more important, business leaders’ expectations shifted to the point where business people I talked to had a spring in their step they hadn’t had before. Of course, all of that requires actual policy and performance to continue. But growth has been good.

Eichengreen: But I think mainly what we’ve seen is a cyclical recovery. It takes time for economic policy to feed through to the economy. So, policies from one to two years ago are showing up in stronger economic growth now.

Narrator: If the first two years offered surprise and renewed confidence, concerns over the future are mounting.

Deaton: Also, one of the things that people talk about, the stock market has gone up a lot, but the stock market is in part a symptom of what I worry about. That if you redistribute income from workers to capital, the stock market is going to go up. So to some it’s a measure of great economic success, for some of us, it’s a measure of just the opposite.

Foroohar: This is not the time to do what President Trump has done, which is to give a huge tax cut to corporations. That is why we’re seeing this kind of turbo growth for the last few quarters. But to me that’s very much a saccharine sugar high that is eventually going to end in a collapse. Now, the only question that I think the president cares about is, is that before or after the midterms and 2020?

Phelps: There’s no basis for thinking that Trump has opened up a new decade of significantly more rapid growth. There’s no evidence so far of anything like that.

But I think the thing that worries me most about Trump is that he doesn’t understand that growth and good jobs are all about the dynamism of the economy.

We need a dynamic economy in order to have innovation, in order to have challenge and change. And Trump doesn’t understand that, and he’s done nothing in that direction. So, I’m afraid the economy is going to go on without any good direction. Without any good policy sense.

Video clip: So, while you’re making minimum wage, while you’re making not enough money, you’re paying taxes.

Narrator: The US economy may have recovered from the crisis a decade ago, but that recovery was anything but equal. A significant missing piece continues to be wage growth. The benefits of overall economic growth have gone overwhelmingly to shareholders and senior corporate managers, not to the poor and middle class.

Despite polls showing that more Americans feel confident about the economy, most households are simply not seeing a noticeable rise in their standard of living. In fact, average inflation adjusted wages are at roughly the same level they were 40 years ago. The Trump administration claims that its policies will benefit workers, not just the already wealthy. The tax bill Republicans passed at the end of 2017, for example, was sold as a benefit for the middle class. In the years since, however, proof of that is weak. Has the Trump administration sold a bill of goods to Americans, including many who were desperate to believe in the candidate in 2016?

Hubbard: Well, several points: One, I do think the corporate tax bill was good tax policy. I think it improved the climate for investment, for productivity, and wages, and we are seeing wages pick up. Part of that is, of course, a tight labor market, which is also very good for workers. But to my mind, the administration is missing an opportunity for low-skilled workers, many of whom may well have voted for President Trump. We need to do more in the country, first to help people prepare for and keep work, and second to support work. In the former, I’m thinking about much better support for community colleges and training programs. And second, much stronger Earned Income Tax Credit or wage supports. We need to, as my colleague Ned Phelps, often says, reward work.

Phelps: We need some new leadership. We need a bunch of people who want to encourage people to try to recapture and rekindle the era in the United States when there was a tremendous amount of innovation. People think, “Oh, new leadership, maybe something good is going to come out of this.” And so you see a more optimistic level of investment. But you don’t see any real effects of that in terms of productivity or real wage rates.

Hubbard: Part of the issue in productivity is less about tax policy and more about how long it takes general-purpose technologies to work through the economy. Nobel Prize winner Bob Solow once famously said, “You see productivity everywhere except the productivity statistics,” but then almost immediately upon his saying that, productivity soared for almost a decade. When you have general purpose technologies, it can take 25 to 40 years. We saw this with electrification, internal combustion engine, mainframe computing. Today, of course, we’re thinking artificial intelligence, big data, things like that. It’s always hard when economists say, “be patient,” but I’m going to say, “be patient.” It will show up in the productivity statistics. In the meantime, however, we have to do more as a country to help low wage work.

Deaton: The FT had an estimate that Apple got $59 billion out of the tax bill. It’s not clear to me why Apple, that doesn’t really employ anyone as far as I can see, is going to create jobs and raise wages because of this. Also, if you look at median wages or median incomes, you’re not looking at the people who have really been hurt. Median wages have stagnated for 50 years, depending on how you take the numbers. But if you look at the median wages of people who do not have a BA, for instance, those have been falling steadily for 15 years. So it’s not just stagnation. It’s actually losing stuff, and they’re worse off than their parents were, and they see their children possibly being worse off than they are. They see no redemption. Now I have no idea why the tax bill is going to help those people.

Eichengreen: I think a big question for wage growth is, “Are these policies sustainable? And will the expansion continue?” And it is clear that we don’t know.

Foroohar: If you look at what’s really driving wage compression, globalization, technology-based disruption, and bifurcation in the economy. So you have a lot of very big firms that are productive, producing fewer numbers of jobs. You have the most labor-heavy parts of the economy: manufacturing, healthcare, education, lagging behind in productivity gains. You don’t see the kind of real Main Street investments in education and worker training and in all the kinds of productive CapEx that would actually, over time, not immediately, but over time, allow those industries to become more competitive, and eventually wages to rise. We didn’t do that. We developed a very consumer-oriented, low-cost, outsource-the-jobs, reward-Wall-Street kind of approach and we’re now seeing the fruit of that.

Narrator: Presidents have historically had more influence on long-term economic trends than on short-term fluctuations. Many economists believe that the stimulus from last year’s tax cut was mistimed. That means that the higher demand stemming from the tax cut, as well as from increases in purchases ahead of import tariffs will not continue.

Focus has instead shifted to the administration’s drive to deregulate much of the U.S. economy. But will root-and-branch deregulation boost long term growth prospects, or merely set America up for another crash?

Eichengreen: What we want is not regulation or deregulation, but smart regulation. We want regulations that correct market failures and imperfections. If what you want is to encourage capital spending in the short run, then removing regulation wherever you find it might be the right thing to do. But if you want to create an economy that is resilient to crises, whether they be hurricanes or the failure of Lehman Brothers, if you want an economy where you have the equitable distribution of income and resources, then you’re going to want to have a tax policy that advances those goals. You’re going to want to have regulatory policies that do the same.

Deaton: I mean the thing that worries me most about Mr. Trump is that he’s the president for rent-seekers.

He promised to drain the swamp. But all he’s done is invited every swamp creature in. So if you’re a coal miner or a coal-mining president, obviously you like the deregulation, but these deregulations are going to kill people. They were not arbitrary regulations that were there to stop the economy growing. They were to stop people killing people. If you look at the pharmaceutical industry, which is killing people in droves, life expectancy is falling. It’s now fallen three years in a row for whites in America, life expectancy at birth. That’s not happened since the First World War and the flu epidemic. And that’s because of gross profit-seeking by drug corporations, especially places like Purdue Pharmaceutical. Trump is never going to stop that in a million years.

Faroohar: I think that the deregulation strategy is really dangerous. In part not just because I think, particularly in the financial sector, deregulation at the end of a long recovery cycle is exactly what you don’t want. Right? I mean a lot of financial institutions are looking for yield. You have growing concentration of power. You have monopoly issues that many economists feel is having a dampening effect on the economy. That’s not the time to deregulate. Okay, but let’s put that aside. Let’s say that you could make a case for some forms of deregulation. This administration has no 360-degree view. One of the things that I was actually somewhat bullish on when Trump came into power was the idea, “All right, are we going to have some kind of industrial strategy for the rust belt?”

There was some talk, if you remember, in the beginning about connecting education vocational training programs to factories. He had a manufacturing council. Well, of course that blew up.

And I have never in all my reporting gotten any sense that folks in Labor, Education, Treasury, any of the different departments are speaking to one another, or that anyone at the top that’s advising the president economically has a 360-degree view. This isn’t China. There is no industrial policy. There’s no plan. And so what we’re getting is a haphazard series of measures, some of which cancel each other out.

Video clip: We have to clean up the country. Our country is a mess.

Narrator: While it may be too soon to say what President Trump’s economic legacy will be, challenges await. Economic recovery cycles tend to last between eight and 11 years. And this cycle has been marked by a series of unprecedented monetary policies. Quantitative easing may have helped right a sinking ship in the immediate aftermath of the 2008 crisis, but breakneck growth in central banks’ balance sheets and years of ultra-low interest rates have left policymakers with few tools to counter a downturn. When the next recession hits, will we be ready?

Phelps: Another crisis, nothing like the 2008-2009 crisis, but certainly a cyclical downturn is in prospect. I think unemployment is at unsustainable levels and I think investment, after being buoyed up by a rush of confidence, I think that investment is at levels that will not be sustained.

Foroohar: A lot of people, myself included, are very worried about the Fed and other central banks being out of ammo. If you look at how much money globally the major central banks have been holding, about $15 trillion on their balance sheet. I mean, it is a money dump of unprecedented proportions and we’re already seeing the ripple effects of start to play out, with the trouble that we’ve had in the emerging markets recently. There’s a huge debt bubble in China. The political economy there may prevent it bursting in a sort of Lehman Brothers type way, but that’s going to have a dampening effect on growth no matter what. So I don’t think we’re getting out of this easy.

Deaton: It’s not the economy we’re worried about. It’s an assault on democracy. And that assault on democracy and the deregulation, turning over the legal system to pro-corporate interests, is going to make the people who voted for Trump way, way worse off. And I hate to think what they’ll be doing in ten years. They’re not going to go away.

Angus Deaton, the 2015 Nobel laureate in economics, is Professor of Economics and International Affairs Emeritus at Princeton University’s Woodrow Wilson School of Public and International Affairs.

Barry Eichengreen is a professor at the University of California, Berkeley. Rana Foroohar is Global Business Columnist and Associate Editor at the Financial Times.

Glenn Hubbard is Professor of Finance and Economics at Columbia University and Dean of Columbia Business School. Edmund S. Phelps, the 2006 Nobel laureate in Economics, is Director of the Center on Capitalism and Society at Columbia University.

watch: The Economic Consequences of Mr. Trump

Copyright: Project Syndicate, 2018.