The Economic Future Under Trump

The myth of Donald Trump's surprisingly election victory is that he alone understood the travails of the white working class and that was what catapulted him to victory. The reality is that there was a large swath of Democrats, Bernie supporters and even Clinton supporters, who have been complaining for years about the wage stagnation, at best, and wage loss, at worst, for middle class Americans and workers. It is not that Trump alone understood working class issues but that he was more effective at tapping into their angst. Of course, he had an enormous assist from a media that was obsessed with Hillary's emails and virtually ignored her policy prescriptions for the very troubles Trump was bemoaning as well as James Comey's illegal intervention in the election, which was clearly decisive.

Trump's inaugural address was basically another campaign speech that harped on what desperate shape the country is in and how he would put America first in all that he did. The real question, just as it should have been in a tragedy of a campaign, is whether Trump's policies to restore the American middle and working class will actually work.

Jim Tankersley over at Vox details the rationale behind what he describes as a potential "Trump boom". He points to the (finally) rising median wage in the last year which is an indicator that we may be getting near full employment. That will help increase productivity and even higher wage growth in a kind of virtuous circle. In Tankersley's mind, Trump really doesn't have to do too much in order to get around 3% growth and higher wages, both of which will accrue to his benefit. Slashing corporate and personal taxes, renegotiating trade deals, and pressuring firms to bring and keep jobs in the US will further enhance growth and investment. Tankersley does admit there are certain dangers. An economy growing too fast could create that dreaded inflation, forcing the Fed to raise rates and slow the economy down. In addition, a ballooning federal deficit and a trade war brought on by Trump's beloved tariffs could derail the economy. And Tankersley offers this caveat, that this all "depends on whether his team is correct that high and complicated taxes, burdensome federal regulations, and misguided trade policies are holding America are holding companies back from spending and hiring more in the United States". Dear God. Haven't we tried this gambit before, slashing taxes and regulations, and it did nothing for the middle or working class. It just increased inequality and led to the greatest financial disaster since the Great Depression. Apparently, despite three decades worth of evidence to the contrary, Tankersley thinks it will work this time. It should also be noted that if Tankersley thinks we are close to full employment now, we were also probably close to full employment six months ago. The unemployment numbers (even though Trump and Mnuchin apparently don't believe them) have shown steady growth over those six months, certainly not any kind of hiring explosion. If the working and middle class were dissatisfied six months ago, what makes Tankersley think they will be that much happier now.

Larry Summers takes a more sober view of the potential of Trump's presidency and tells us to prepare for the worst. He notes that "animal spirits" are high as business, like Tankersley, believes that lower taxes and less regulation will set off that virtuous circle of increased investment, hiring, and confidence. He's not buying it. Besides Trump's low approval ratings and potential for crippling ethics problems, Trump will simply be unable to make much headway on his promises. According to Summers, "it is not possible to repeal Obamacare without taking health insurance away from millions of Americans and placing new burdens on those with preexisting conditions. If Trump follows through on proposed increases in tariffs, the result will be lower real wages and incomes as prices rise faster than wages. All in Congress agree that tax reform will not happen in a few months, and it is impossible to reconcile the president-elect’s stated goals of major reductions in corporate and top rates, a fair distribution of the benefits of tax cuts and preventing a huge increase in federal debt." The Republican Congress is really fixated on two issues, repealing Obamacare and a massive tax cut for the rich. Neither of these will help Trump's popularity or address the problems he has promised to fix. And renegotiating tax deals will take far longer than his supporters have patience for. Perhaps Summers most prescient line is that "History is replete with examples of populist authoritarian policies that produced short-run benefits but poor long-run outcomes."

An open question is whether Trump will offer any pushback against the GOP Congress. He has already demanded a simultaneous replacement for Obamacare but Republicans have no plan that doesn't strip away real, affordable health insurance from millions. He dissed the GOP's plan for a "border adjustment tax" that essentially taxed imports while exempting businesses exporting from corporate tax, describing that plan as "too complicated". That could be because there would be some clear winners and losers with a plan that was so favorable to exporters and punitive to importers. He seems to prefer a straight tariff which would simply create a trade war that would make everyone poorer and would still create those same winners and losers. Perhaps Trump really does believe he is the great negotiator and that the simple threat of tariffs will get our trading partners to fall in line. On the other hand, perhaps he doesn't really know what he is doing. But it is hard to see how any of these actions address the real problems of wage stagnation and rampant inequality. Yes, they will provide plenty of great PR tweets but really not accomplish very much that won't be swamped by broader economic trends.

The reality is that there is very little in Trump's stated plans, or in his cabinet, that would give any confidence that the rampant inequality will be reduced. Under the current tax plans, that inequality will only be exacerbated. Globalization and technological change may be responsible for stagnating and declining wages in the working and middle class throughout the industrialized world, but the idea that restricting immigration or imposing tariffs is really going to change that is a fiction. Globalization and technology have actually made us as a whole much richer. The problem is that, for the last thirty years, all those extra riches have been taken by the elites. In the US, the powers that be, primarily Republicans, have made sure that those riches are not shared with those who have been displaced by the changes that made the top 1% so rich. Just look at the idea of repealing Obamacare. What kind of miserliness and greed will rip away health care from millions of Americans in order to give 400 households a tax cut that would pay for the health care subsidies for 21 states. What kind of person thinks that a system where eight people own more than half of the rest of the world is not only sane but a system that can survive. Mark Thoma hit the nail on the head when he said the elites "must get over their greed and their lack of compassion for those who’ve paid the price for their fortunes." Does anyone really think that Trump and the current GOP is capable of that.