What Will the Trump Presidency Look Like?

We unexpectedly find ourselves in uncharted territory, in so many ways. The United States has never before had a president with no political or military experience. And Donald Trump is especially unpredictable: he has so often said things that conflict with other things he has said. So it is hard to know what he will do.

But a possible precedent for what the Trump presidency may look like sits in plain sight: the George W. Bush presidency. To be fair, the Bush family clearly did not support Trump’s campaign. But a number of parallels suggest themselves:

  • The candidate won the presidency while losing the popular vote.
  • The new president nonetheless believes he has a mandate for sweeping change.
  • The direction of the change and the results it produces will not necessarily be what those who “voted for change” will like.
  • Observers are assuming that Mr. Trump will oppose the Fed’s easy monetary policy, because he attacked it during the campaign; but I predict that when he gets into office he will turn dovish, opposing interest rate increases.
  • Of his economic policy proposals, the ones that are most likely to be put into law are big tax cuts for the rich and increased spending on the military and on some other items. The result will probably be the same as when Bush enacted similar fiscal policies: a worsening of the income distribution and huge budget deficits.
  • A Trump return to the post-1980 trend of increasing income inequality would follow a temporary reversal of that trend that occurred toward the end of the Obama Administration (by such measures as median family income, real wages, and the poverty rate). This is the same thing that happened in the transition from the Clinton Administration to Bush.
  • The new president won’t be able to deliver his 4% GDP growth rate.
  • He is unlikely to be able to increase the role of exports in the economy.
  • He certainly won’t be able to make good on his promise to bring back the manufacturing jobs that have disappeared since the 1950s.
  • Most worrisome of all are possible foreign policy disasters. We should fear miscalculations leading to tragedies (analogous to Bush mistakes regarding the 9/11/2001 terrorist attack, the failure to apprehend Osama bin Laden, and the subsequent invasion of Iraq). A loss of US global leadership is likely, especially loss of “soft power,” in the sense that those who live in other countries have in the past looked to the United States as a leader of the international order and as a model domestically of what they hope their own countries could be like. Finally, Trump’s cluelessness on the international stage will likely embolden some traditional adversaries, such as Russia, Syria, and North Korea.

If I had to guess, we are not likely to see some of the more outrageous proposals from Mr. Trump’s campaign enacted.

  • He will not build a big beautiful new wall along the length of the border, and Mexico certainly wouldn’t pay for it if he did.
  • We won’t see a ban on Muslim immigrants, which would violate longstanding bedrock American principles.
  • We won’t see deportation of eleven million undocumented immigrants. But he will likely end Obama’s Deferred Action for Childhood Arrivals program, which granted temporary work permits to many “dreamers.”
  • My best guess is that he won’t in fact tear up NAFTA or raise tariffs as widely as he has said. I hope this is not just wishful thinking.
  • Similarly, I don’t think he will tear up NATO or our other alliances, as he seemed at times during the campaign to suggest. Nor the Geneva Convention. Even Mr. Trump has to confront at some point how drastic would be the consequences or this sort of destruction of the global order.

But it is likely that he and the Republican Congress will, as he promised, take some steps to roll back the biggest accomplishments of the first part of the Obama Administration. Number one is a rolling back of Obamacare (going beyond the damage that Republicans have done since the beginning by chipping away at the legislation). It will be interesting to see people’s political reaction when they start losing their health insurance.

Number two is a rolling back of Dodd-Frank financial regulation, which was enacted after the financial crisis of 2007-09. The Republicans will give banks and other financial institutions a freer hand.

They will also roll back competition policy and environmental regulation, especially regarding emissions of greenhouse gases.

And of course they will seek to appoint conservative justices to the Supreme Court. Logically, the Democrats could try to block such appointments in the same way that the Republicans in Congress refused to hold hearings on Barack Obama’s nominee for the Court (and otherwise blocked almost everything that the President tried to do). But they probably won’t.

We are about to see what life is like when the Republicans hold all branches of government. It will be interesting to see if working Americans will blame them for setbacks.


Posted in 2016 Presidential Campaign, Financial Regulation, Fiscal Stimulus, Monetary Policy | Leave a comment

Economists Sign Letter Opposing Trump

370 of us economists have signed a new letter opposing Donald Trump:  Economists Lay Out List of Reasons to Vote Against Trump.   Here is the text of the letter, which the Wall Street Journal has reported on .

The WSJ earlier surveyed all previous members of the President’s Council of Economic Advisers, spanning eight presidential administrations, Republican and Democrat.  Not a single one supported Trump, including the Republicans!

Also 19 Nobel Laureates have signed a letter endorsing Hillary Clinton.

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The Gold Standard and Trump

My preceding post, “The Fed and Inequality,” observed that populists have historically favored easy money and low interest rates.  I mentioned William Jennings Bryan’s campaigns for the presidency in the 1890s as well as the supply-siders in the early 1980s who blamed the failure of Reaganomics to produce sufficient growth on Paul Volcker’s efforts to fight inflation with tight monetary policy.

An interesting dimension concerns gold.  Bryan’s proposed reform for allowing easy money was to take the US off of the gold standard, most famously in his 1896 “cross of gold” speech.  He vowed to lead the people as they confronted “the idle holders of idle capital,” declaring “You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold.”

In the 1980s, the supply siders’ proposal for easier money was to put the US back onto the gold standard.  Some proponents of this viewpoint included Jack Kemp, Lewis Lehrman, Ron Paul, Alan Reynolds and Jude Wanniski.  The Reaganites’ pressure on the Fed for monetary stimulus is typical of Republican presidents since Richard Nixon.

In this election year Donald Trump, following Ted Cruz and other Republican presidential candidates, has said he too would like to go back to the gold standard.  But when Trump and other Republican politicians express admiration for the gold standard these days, they say they want tougher monetary policy.  It is the opposite position from the 19th century populists and the opposite motivation from the Reaganites.

If inflation were high today and had been low in the 1980s, one could reconcile the support for the gold standard then and now by trying to argue that it would bring more price stability.  But inflation was too high in the 1980s (above 4%) and has been very low recently (below 1%).  I can’t see how to reconcile the Republican positions then and now, other than observing that they seem to seek monetary stimulus when they are in the White House and monetary contraction when they are out of office.

Posted in 2016 Presidential Campaign, Monetary Policy, Populism, Supply-siders | Leave a comment

The Fed and Inequality

Populist politicians, among others, have claimed in recent years that monetary policy is too easy and that it is hurting ordinary workers.   But raising interest rates is not the way to address income inequality.

It is a strange claim for anyone to make, but especially for populists.  Low interest rates are good for debtors, of course, and bad for creditors. Throughout most of US history, populists have supported easy monetary policy and low interest rates, to help the little guy, against bankers, who had hard hearts and believed in hard money.  That was the argument when William Jennings Bryan ran for president in 1896 on a platform of easier money, with the support of Midwestern farmers who were suffering from high interest rates and declining commodity prices.  It was the argument when supply-siders opposed Paul Volcker’s high interest rates, leading Ronald Reagan in 1985 to appoint two Federal Reserve governors who would challenge the Chairman.

The truth is, monetary policy is not a very appropriate lever with which to address income inequality.  That is not to say that inequality is not important.  It is.  Most of the increases in GDP have gone to those at the top since the 1970s.  But the right tools to address the inequality problem are progressivity in taxes, universal health insurance, financial reform, and so on.  To draw an analogy, global climate change is an important problem, but monetary policy is not the right tool for that job either.

The job of monetary policy is to promote growth in the overall economy while maintaining price stability and financial stability.  This is not at odds with helping those in the lower rungs of the income ladder.  To the contrary, a “high-pressure economy” (to invoke a phrase recently revived by Fed Chairman Janet Yellen), that is, an economy running hot enough to create jobs at a rapid rate, will eventually lead to higher real wages for workers and higher real incomes for the typical worker.   This describes the results, for example, in the high-pressure economy of the late 1990s which eventually pushed the unemployment rate below 4%.

Some may then react: Why has that not happened in the current expansion?  The answer is that it has.

The economy has added more than 15 million private sector jobs since early 2010.  Employment growth has been running well in excess of the natural rate of increase in the labor force.  The longest continuous series of monthly increases on record had brought the unemployment rate down to 5% by last year (from above 9% in 2009-10) and is now pulling previously-discouraged workers back into the labor force.  The increased demand for labor has in turn led to rising real wages for workers (up 2 ½ % last year), at the fastest rate in this business cycle than any since the early 1970s.

Until recently, the labor market gains puzzlingly did not seem to be show up in the reported real income of the typical American household.  But last month, when the Census Bureau released its annual economic statistics, they showed that median household income had increased by 5.2 percent [$2,800] in 2015, the biggest rise on record.  Furthermore, every part of the income distribution benefited, with the biggest percentage gains going to those in the bottom tier and the smallest gains going to those at the top. These are big changes and offer important confirmation that lower-income families are finally sharing in the economic recovery.

What about those who think that easy monetary policy is bad for income inequality? What are they thinking?   Not all of them are fringe populists.  For example, British Prime Minister Theresa May said earlier this month that low interest rates were hurting ordinary working class people while benefiting the rich.

A fall in interest rates contributes to a rise in securities prices, both stocks and bonds.  Needless to say, the rich hold more stocks and bonds than the less fortunate.   “People with assets have gotten richer. People without them have suffered,” aid PM May.  And indeed, stock prices are high now, near all-time highs in the case of the United States.

The Fed reductions in the policy interest rate occurred quite a while ago, virtually to zero in 2008.  That monetary stimulus together with the associated recovery of the economy no doubt contributed to the turnaround and strong rebound in the stock market that began in early 2009. But it is harder to use the low level of interest rate to explain the continued rise in the stock market from 2012 to 2015, a period when the Fed announced an end to quantitative easing and markets began to anticipate that it would soon start to raise interest rates.

One can think of other distributional implications of easy monetary policy as well.   Inflation is good for debtors and bad for creditors.  That is one reason why good populists have historically favored easy money.

The unconventional monetary policies of recent years [UMP] may have some new effects of their own.  One is the effect on banks, whose profits have been severely squeezed of late.  Low interest rates are a major reason for this compression of bank profits, especially in Europe where the interest rates that banks earn are actually negative but where it is hard for them to cut the rates they pay to their depositors below zero.  Any self-respecting populist should like this squeeze on banks, especially if he or she is still angry about the global financial crisis.

The net effect of easy money is probably more to reduce inequality than to exacerbate it, according to econometric estimates.  But the effect on income distribution is much less reliable than the effects of other policies targeted for that purpose.  In any case, the Fed and other central banks are not balancing rapid growth against equality, but rather are balancing rapid growth against dangers of future overheating and financial instability. They view their jobs as managing the overall economy.  They are right to do so.

[A shorter version appeared at Project Syndicate, Oct. 25, 2016.]


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Why Vote? Follow-up

My preceding blogpost — “A Radical Solution to the Fundamental Flaws in US Politics: Vote!” — received several objections from readers to the effect that I had failed to address the paradox of voting, or “Downs Paradox” (particularly at the Econbrowser site).

That was a deliberate choice on my part.  I suspect that most people understand this issue instinctively, even the non-academic public who are not familiar with the phrase.

Yes, it is true that it is not rational to take the time to vote… if you are a homo economicusnarrowly defined as someone whose utility function includes solely his or her own economic consumption, i.e., you neither care about the welfare of your neighbors nor derive utility from civic participation.  (If that’s you, then by all means, you are welcome to stay home from the polls.  Please do.)  But most of us are not like this.  If you take the time to write a blog-post or to comment on one, for example, you probably derive utility from civic participation.  Personally, I think that maximization of a function that puts some weight on the welfare of others is perfectly rational, a more realistic description of most people’s behavior, and worthy of an economist’s analysis.

If you are focused on the idea that your vote has only a millionth of a chance of changing the outcome of the presidential contest, I would suggest you consider multiplying that probability by the importance of the outcome, which is a million times more important than the time it takes you to vote.

By the way, if you read my column, you will see that I did not use the language of addressing the concerns of a hypothetical reader who is concerned that “my vote [by itself] doesn’t matter.” Rather I said “Let’s consider only those citizens who are as informed and civic-minded as the rest of us, but are alienated by the system and think that ‘votes of people like them’ don’t make a difference.”   In the aggregate, their votes make a huge difference.  No paradox there.

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A Radical Solution to the Fundamental Flaws in US Politics: Vote!

The train of American electoral politics has gone further and further “off the rails” in recent decades.  A number of suspected culprits have been identified as the specific fundamental flaw in the system that needs to be fixed.  Gerrymandering.   Campaign finance.  Economic inequality.  “False balance” in the media.  It is strange that the public debate gives so much attention to these four explanations — and a few others like them. Those diagnoses don’t offer a ready remedy that is in the hands of the people.

There is one remedy that is directly in the hands of the people and that if applied can also fix the other flaws over time.  That is voter turnout.

Many young people are disillusioned with the political system and feel that they have no power to affect political outcomes, being up against the rich and powerful.  So they don’t register or don’t show up at the polls. The same is true of members of particular socioeconomic groups.  Hispanics and Asian-Americans have particularly low voter turnout rates. [48 and 47% in the 2012 election, respectively, as compared to 64% for whites and 67% for blacks.]

Diagnoses of the fundamental flaw in American politics

One of the most common diagnoses of where American politics has gone wrong is the belief that too much money now goes to people in the upper 1% of wealth and that too much money in turn flows into politics.   Actually, these two factors are distinct.  Plenty of powerful interest groups use donations to get their way on individual issues of particular interest to them, without the concurrence of the upper 1%.  The NRA is one example.

There is a lot of validity to concerns about money in politics.  But it is worth noting that in US politics, money overwhelmingly goes – not into the pockets of corrupt officials – but rather into the advertising and get-out-the-vote drives of election campaigns.  A citizen who stays home rather than vote his preference of the two major candidates has the same effect on the outcome as a fat-cat who gives money to the opposing candidate’s campaign.

What is to be done?  We need a more equal distribution of income and a reversal of the Supreme Court’s decision on Citizens United, which opened the floodgates for political contributions by corporations.   But the people can’t enact such policies directly.  This year, as usual, the Democratic candidate favors policies that will promote economic equality alongside growth: a more progressive tax system, higher wages, universal health care insurance, and many more.   With enough support in Congress, a second President Clinton would enact these policies.  As usual, the Republican candidate is on record favoring the opposite positions: tax cuts for the rich, lower wages, and abolition of Obamacare.  Similarly, the Democrats would like to reverse Citizens United. As usual, the Republicans are opposed.  It is likely that Hillary Clinton would appoint Supreme Court justices likely to help eventually overturn the decision. And so on.

Other diagnoses have to do with the observation that so few congressional districts are in play in the general election, with most locked up by one political party or the other, giving incumbents an incentive to go to the extremes, since only the primary contest is a threat.  In that case, the fundamental problem may be gerrymandering, the deliberate drawing of congressional district boundaries to maximize political advantage for one party or the other, rather than according to geographical sense.   Electing more Democrats, at the state level, is an achievable pre-requisite to redistricting reform, more than the other way around.

If those citizens who think that people like them have no effect do exercise the ballot box, they can not only have an effect in this election but change the system for the future.  If, on the other hand, they simply gripe to their friends or write angry blog posts (“the system is rigged”), rather than voting for a major-party candidate, they will indeed have no effect.

Voter turnout in other countries

The problem of low voter turnout does not apply to the US alone.  Consider last June’s vote in the United Kingdom on whether to leave the EU.  Most young folks were unhappy that the referendum came out in favor of Brexit.  Almost 75% of voters aged 18-24 wanted Britain to stay in.  They had come to see themselves as cosmopolitan citizens of Europe to a far greater extent than older voters had.  Suddenly the English Channel has become much wider, and is likely to remain so for the rest of their lives.  Who to blame?   Only a third of that 18-24 age group turned out to vote, as compared to more than 80% of those over 65.  The implication is  that if the voter participation rate among the young had been even fractionally closer to the rate among the old, the outcome would have been in favor of Remain instead of Leave.

It is true that many other countries have figured out how to achieve higher electoral participation.  Voting is mandatory, for example, in Australia and some other countries. The fine for noncompliance is very small.  But Australia achieves 94% voter turnout, compared to an estimated 57% in the 2012 US presidential election. And the US is almost the only country to follow the anachronistic and inconvenient habit of scheduling Election Day on Tuesdays. Most countries vote on the weekend.

One might argue, however, that if any citizen is too lazy or uninformed or self-involved or uninterested in politics to take the trouble to vote, so be it.  Why drag them to the polls?   Perhaps it is just as well if the views of the uninformed or self-involved don’t carry as much weight as others!  I am not going to take a position on this question one way or the other.  Let’s consider only those citizens who are as informed and civic-minded as the rest of us, but are alienated by the system and think that “votes of people like them” don’t make a difference.  There are, by far, enough of these people for their votes in fact to make the difference to the outcome.

Protest votes

By way of illustration, consider those who do go to the polls but feel alienated with America’s two-party system and so choose a protest vote for a third-party or write-in candidate, thus having the same effect on the outcome as if they had not voted at all.  Ralph Nader, the Green Party candidate in the 2000 election, received 2.9 million votes.  If a tiny fraction of them had gone to Al Gore it would have changed the outcome.  The Democratic candidate officially lost Florida by 537 certified votes. Nader received 97,421 votes in Florida [1%].  Thus 1 % of his votes [974] would have made easily the difference. Not all Nader voters would have preferred Gore to Bush; but if one takes into account the evidence (which is that they would have favored him by almost two-to-one over the Republican candidate), the implication is that eliminating the Nader option in Florida would have given Gore a net boost of 17,548, more than 30 times what he needed to win!

Thus Gore would have received not only a majority of the vote among voters, as he did, but also a majority on the Supreme Court as well.  It would have saved us eight years of George W. Bush and everything that flowed from his policies.   What if one is suspicious enough to assume that those in power in Florida would have figured out a way not to count the additional votes in that state?  The Nader vote In New Hampshire alone would also have been enough to give Gore a clear majority in the Electoral College.

Yes, I know, Nader argued that he was building a grass-roots movement for the longer term.  In other words, causing Bush to become president by taking votes away from Gore in 2000 was worth the cost because now the Green Party survives …to elect Donald Trump president in 2016 by taking votes away from Hillary Clinton, and so on every four years!

Obama said it at the Democratic National Convention in July, when a few delegates booed the mention of Trump’s name: “Don’t boo. Vote!”  It’s trite, but true.  Voting is the solution to what ails America.

Posted in 2016 Presidential Campaign, Hillary, Presidential, Republicans | Leave a comment

Column by Trump Adviser is Not Economically Literate

One can’t blame the Financial Times for publishing an opinion piece by Wilbur Ross, if he is indeed a senior policy adviser to Donald Trump (“Trump campaign benefits from criticism of trade imbalances,” 29 August).   It is hard to judge the Republican candidate’s positions from his own words, because of his famous “shoot from the lip” style.   Does Trump really believe, for example, that American workers’ wages are too high, as he said in the Republican debates?   Many had been waiting to see who his economic advisers would be, in part so that we could have clear and precise language by which to judge what are the candidate’s positions. The written statement in the FT is the first by any of them that I have seen.

So what does Ross say?  The column is not economically literate or coherent.  This judgement is not based on economic theories, but rather definitions and facts.  For example, he says three or four times that American productivity has fallen. It has not; it continues to rise.

Okay, what he means is the rate of productivity growth, which has indeed fallen since the turn of the century, and is indeed a problem.  But what numbers does he choose to cite to measure the productivity slowdown?  “During the 1970s growth in US unit labour costs was 6.8 per cent a year but it dropped…to 1.2 per cent so far this century.”  What a bizarre thing to say!   Growth in unit labor costs (ULC) equals the rate of wage increase minus the rate of productivity growth.  Other things equal, the productivity slowdown would show up as a higher rate of increase in ULC, not lower.  Does he know that higher ULC is usually considered a bad thing (by hurting competitiveness)?   Is he trying to say something about wages, and if so, what?  Is he agreeing with Trump’s statement about wages being too high or not?  It is impossible to tell.

There are other mistakes as well.  For example, the continent of Europe does not “run massive and chronic trade deficits.”  To the contrary.  He seems to imply  manufacturing employment shares in Germany and Japan have not declined.  They have.   And so on.
It appears that definitions, logic and facts are no more important to Trump’s adviser than to the candidate himself.

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Trump’s Fiscal Brainstorm: Cut Taxes for the Rich


This year’s US presidential election campaign differs radically from past patterns, including in the departure of the Republican nominee from many of the policy positions traditionally taken by his party.  Examples are his lack of support for international trade, military alliances, or the institution of marriage.   But when Donald Trump released some positions on tax policy recently, the differences with Hillary Clinton’s proposals fell very much along usual party lines.  His is the kind of tax policy that has long been favored by Republican presidential candidates and congressmen:  tax cuts that overwhelmingly benefit the rich and that are not accompanied with any plans to pay for them.

Should we pay attention to campaign platforms?

Of course there are reasons for hesitating to judge presidential candidates by their platforms.  Plans announced in the campaign are often a poor guide to what the president will actually do once in office.  Candidate George W. Bush, for example, promised in 2000 to renounce nation-building adventures abroad, to maintain fiscal responsibility, and to treat greenhouses gases as pollutants under the Clean Air Act.  Needless to say, his administration rocketed off 180 degrees in the opposite direction on these issues.

Mr. Trump, in particular, changes his positions with head-spinning frequency, denying that he said things that he is on record as having said a short time before.   A common tactic is to accuse the media of making up the earlier statements, even when the earlier statements are on tape.  Another tactic is to say that he was only being sarcastic.

Are we supposed to take seriously, for example, his statements during the primary debates that American workers’ wages are too high?   Or that he could and would happily contemplate negotiating the terms of the national debt with creditors, otherwise known as defaulting?   Are we supposed to overlook such reckless statements, and ascribe them to an earlier period when he was “young and irresponsible”?

Compare the zig-zags that Trump has pulled off with the minor shifts that have been sufficient in the past to get other politicians tarred with “flip-flopping”.  Remember, for example, the reaction when John Kerry in 2004 said “I actually did vote for the $87 billion before I voted against it.”   (The earlier Democratic measure that he supported would have paid for the $87 billion in Iraq war funding by reducing Bush’s tax cuts, whereas  the version that he voted against instead irresponsibly added the cost to the national debt.)

In any case, we policy wonks are obliged to try to evaluate the policy plans that the candidates offer.  The alternative is to leave the national discussion focused entirely on the current week’s poll results, reporting unedifyingly whether the candidates are rising or falling among voters classified by various combinations of gender, ethnicity, and socioeconomic status.

How the parties differ

Some positions that a candidate may truly hold don’t deserve the attention they receive because in practice he or she stands little or no chance of being able to bring them about if elected. An obvious case is when their proposals are blocked by the other party if it has a majority in congress.  Another case is international constraints.  Although there is a lot of attention to trade agreements this year, promises by presidential candidates to negotiate a new improved trade agreement are seldom if ever implementable once they get to office.  (The truth is, in international negotiations such as TPP, the US has already gotten about the best deal it can get, one that is much better than most people realize.)

The difference between the two parties lies not in some fantasized ability to reverse the rise in inequality by turning the clock back 50 years on trade, or even on somehow reversing the long-term shift from manufacturing to services.  Rather the difference lies in some very practical live policy issues, particularly some that would reverse the trend that leaves many workers behind.  Examples include universal health care (extending the ACA, i.e., Obamacare, rather than abolishing it), infrastructure spending ($275 billion cumulative, in Secretary Clinton’s campaign proposal), compensation for those who lose jobs due to trade (or other forces beyond their control), and a more progressive tax structure (including expansion of the Earned Income Tax Credit).

Trump’s tax plan

Trump made his most serious attempt at a fiscal plan on August 8.   The tax proposal has four salient features, fairly described as tax cuts for the rich.  There is no indication how the tax cuts will be paid for and every indication that they will sharply expand the budget deficit, as happened when Reagan and Bush enacted record budget-busting policies.   All of this is very much in line with proposals from Republican politicians over the last four decades, all the while attacking Democrats for running deficits.

  • Trump proposes to abolish the estate tax entirely. Bush and congressional Republicans tried hard to do this, and got close, but didn’t quite make it.  Trump, like his predecessors, tries to hide the fact that only the very rich would benefit because the current estate exemptions are so high:  $10.9 million for the estate of a married couple (and half that for an individual).  In the most recent year available, only 4,700 estates in the entire country, out of 6 million deaths, required the reporting of some estate tax liability.  Trump repeated the old fairy tale of farms or small businesses that have to be sold by heirs to pay the estate tax; but Republicans after all these years are still unable to come up with specific instances of this actually happening.
  • He proposes to cut corporate income taxes very sharply, to 15%. It is true that the US corporate income tax rate is among the highest in the world, at 35%, and that this probably contributes to companies keeping profits overseas, rather than repatriating them to the US.  But as most tax policy experts will tell you, a reduction in the overall rate should be accompanied by base-broadening.  In particular, we should abolish corporate tax deductions such as those designed to encourage corporate debt and oil drilling.  We could thereby reduce harmful distortions in the economy while simultaneously making up revenue.
  • Trump’s proposals to cut personal income taxes have now changed a bit.
    • Before the primaries, his fiscal proposals included cutting the top marginal income tax rate from 39.6 %, the current level, to 25%. Independent analysts pointed out that his tax policies would lose about $10 trillion in revenue over the first decade, a mind-bogglingly big number.  They would rapidly drive to record levels the national debt as a share of GDP, which has been coming down over the last five years.  His most recent proposal is to cut the marginal tax rate for high earners by about half as much, to 33%.
    • A new proposal, apparently added at the urging of daughter Ivanka Trump: Allow tax deductions for the entirety of average child care costs.  Any such deductions benefit only those in high enough tax brackets to itemize deductions (like mortgage interest), which is mostly those who earn more than $75,000.   That is well above US median household income of $54,462 in 2015.

The Democrats would love to be able to accuse Trump of designing his tax cuts so as directly to benefit him, his family, and people like them.   It is harder to make this accusation because the candidate still refuses to release his own income tax records (unlike all previous candidates since Richard Nixon).  There is no shortage of guesses as to what it is that Trump must be trying to hide.  One good guess is that in some years he has paid no taxes at all, by taking advantage of loopholes already available to big real estate developers.  If so, his annual tax bill can’t be cut further.  But he would still gain from the elimination of the estate tax.

How to pretend that tax cuts = fiscal discipline

Basic arithmetic says “government outlays minus tax receipts equals the budget deficit.”  Republican presidential candidates have seemingly had trouble understanding this equation since 1980.  They propose large specific tax cuts without specific spending cuts, and yet claim they are going to reduce the deficit.  The outcome was the record increases in budget deficits during the terms of Ronald Reagan and George W. Bush.

Trump’s tax cut proposals follow in this tradition of fiscal irresponsibility. The budget plans are still too vague — particularly with respect to discretionary government spending, social security and Medicare – to allow an informed estimate of their impact on the federal deficit and national debt.  But the candidate may be subjected to pressure to become more specific as the date of the election draws near.

Trump may look to his predecessors’ strategies for guidance.  It is worth recalling the four magic tricks that politicians calling themselves fiscal conservatives have been using for 35 years, evasions to facilitate making fiscal promises with a straight face.  These tricks are often deployed in sequence, one succeeding another as they fail to work.

(1) The “Magic Asterisk.”   The candidate promises to balance the budget at the same time as cutting taxes by spending cuts that are not specified but supposedly will be in the future (“future savings to be identified”).

(2) “Rosy Scenario.”  One can forecast an increase in tax receipts if one forecasts an increase in the national rate of growth of income.  One PhD economist has finally signed on as an adviser to the Trump campaign (though he has apparently yet to talk to the candidate); he has suggested that under a Trump presidency the American GDP growth rate will magically double.  This is the same tactic adopted by Jeb Bush during the primaries, and many other politicians before.

(3) The Laffer hypothesis.  But why should growth double?   Reagan, Bush, McCain, and other candidates signed on to the proposition that their proposed cuts in tax rates will spur economic activity so much that total tax revenue (the tax rate times the economic base) will go up rather than down.   Although this “Laffer proposition” has been disproved many times, and the economic advisers to those three candidates clearly disavowed it, the temptation to square the budgetary circle by making this claim is too strong to resist.  Watch for Trump to come out with it.

(4) The “Starve the Beast” hypothesis.  Finally, after the other justifications for big tax cuts turned out wrong, Presidents Reagan and Bush fell back on the theory that, even though tax revenue had in fact fallen rather than rising, this was a good thing after all: it would politically force congress to approve spending cuts.  But these are cuts that the president himself never gets around to proposing.

Perhaps it is inevitable that candidates at the platform-making stage wish away such real-world constraints as congressional politics or international realities, leaving voters disappointed after taking office by failed “promises”.  But politicians shouldn’t be able to wish away the constraints of arithmetic — not when the promises reflect the same failed sleight of hand that has been tried and exposed so many times before.

Posted in 2016 Presidential Campaign, Fiscal, Tax | Tagged , | Leave a comment

Trump Jr.’s Pants-on-Fire Allegation of Manipulated Jobs Numbers

When asked July 24 about US unemployment numbers, which have fallen steadily since 2010, Donald Trump Jr., replied “These are artificial numbers. These are numbers that are massaged to make the existing economy look good, to make this administration look good when, in fact, it’s a total disaster.”  His father has made similar statements.

PolitiFact asked a variety of experts about the quote.   Their bottom line:  the quote from the younger Trump was a “Pants on Fire” lie.  The truth is that presidents don’t and can’t manipulate the jobs numbers.  No White House has even tried — at least not since Richard Nixon made a heavy-handed attempt in 1971 to interfere with BLS staffing.  After that, extra firewalls were put in place.

Here is my own full response to PolitiFact’s question regarding the Trump claim:

The statement is 100% false. The employment numbers come from the Bureau of Labor Statistics (part of the Labor Department).  In this administration, like every administration, those who produce the employment statistics are long-time nonpolitical professionals. The Secretary of Labor does not even know what the numbers are going to be when they are announced every month (the morning of the first Friday of the month).

Allegations that the official government numbers understate unemployment are sometimes based on a claim that some higher measure (which, for example, includes discouraged workers who have given up looking for a job, or part-time workers), should be used in place of the ones that get the most attention in the press.  But these other measures are also made publicly available by the BLS and the press is free to write about them as much as they want.

The important thing, of course, is to be consistent across time in which measure you use.  It wouldn’t be right to switch from looking at the conventional rate to a measure that includes discouraged workers just because you don’t like the incumbent president and want to make things look bad for him.

Posted in 2016 Presidential Campaign, Employment, Fact-check, Labor Markets & Jobs, Obama Administration | Tagged , , , , , | Leave a comment

Brexit, Trump, and Workers Left Behind

Observers have pointed out many parallels between the June referendum on Brexit in the United Kingdom and Donald Trump’s presidential campaign in the US.  One parallel is that both the British movement to leave the EU and the Trump campaign for the American Republican nomination achieved success that few had expected, particularly not the various elites.  In both cases, the general interpretation is that the elites underestimated the anger of working class voters who feel they have been left behind by economic forces in a fast-changing world, and in particular by globalization.

Another parallel is the centrality to both campaigns of promises that are close to logically impossible, and the consequent inevitability with which supporters will feel betrayed when the promises do not come true.  In the United Kingdom, one of the promises that cannot be kept is that if Britain left the EU it could somehow still keep the same trade access to its members, while yet reducing immigration by curtailing free mobility of persons.  Another promise that cannot be kept is that the £350 million ($465 million) supposedly sent to the EU each week would be reallocated to the cash-strapped National Health Service.  On my side of the Atlantic, Trump says that he will bring back the manufacturing jobs that have disappeared. Secondly, as most Republican candidates do, he promises to enact big tax cuts while simultaneously reducing the budget deficit or even the national debt.

It is true that, for some years, most national income gains have been going to those at the very top, with many workers having fallen behind.  Apparently this inequality and globalization, and the perceived connection between the two, play a large role in the anger among many workers that we see in the Brexit and Trump campaigns.  It is far from clear that either trade or migration is in fact among the top reasons for widening inequality. But that is the way many see it.

It is certainly true that globalization produces both winners and losers.  How can the concerns of angry workers be addressed?

A fundamental proposition in economics holds that when individuals are free to engage in trade, the size of the economic pie increases enough that the winners could in theory compensate the losers, in which case everyone would be better off. Formally it is a case of what economists call the Second Fundamental Welfare Theorem.   (The proposition requires that there be no market failures like monopolies or pollution externalities.)

Skeptics of globalization may understand this theorem and yet, quite reasonably, point out that the compensation in practice tends to remain hypothetical.   Some of the skeptics suggest that we should recognize political reality, take the failure to compensate losers as given, and so work on trying to slow down or roll back globalization.   But an alternative would be the reverse strategy: to take globalization as given and instead work on trying to help those who are in danger of being left behind.

The second strategy is the sensible one, not the first.  For one thing, it would be difficult to roll back globalization even if we wanted to.  Presumably the policies would include attempting to renegotiate NAFTA or TPP (or, for Britain, the EU), or dropping out of the World Trade Organization, or else unilaterally imposing tariffs and quotas even though they violate existing international agreements.  Even leaving aside the negative effects of trade wars on economic growth, anything that a president does would be very unlikely to bring trade back down to the levels of 50 years ago, and still less likely to bring the number of steel jobs back up to the levels of 50 years ago.   Globalization is a reality.

That we can’t turn back the clock on globalization is understood fairly widely.  But a second point is less often made.  In the context of US presidential elections, the choice between the two parties is less a referendum on globalization than it is a choice whether to adopt the specific policies that would help those who are in danger of being left behind.   Much is new and different in the 2016 election, but not that.

Policies to help those who are left behind [or, in clinical theoretical terms, to compensate the losers] are precisely where the two parties disagree.  They most effective measures, as I see it, are ones that Hillary Clinton and Barack Obama, like his predecessors, try to push and that the Republicans try to block.

The main program to help specifically those who have lost their jobs due to trade is Trade Adjustment Assistance.  But why help only the small number of workers who have identifiably lost their jobs due to trade agreements?  Wouldn’t it be better to help those who have been left behind regardless if the cause is trade, technology, or something else?  Sensible policies to do that include wage insurance, an expanded Earned Income Tax Credit and universal health insurance, among others.  Also: a more progressive payroll tax structure, universal quality pre-school, and infrastructure investment spending.  These are all policies favored by Democrats.  Most have been opposed by Republicans. [Still, one hopes that even if a second President Clinton once again had to deal with a Republican Congress, the two might be able to find common ground in the EITC and infrastructure investment.]

Not long ago, it was possible to admire the sort of political equilibrium achieved by the British electoral system.  The two largest parties tended to be led by relatively competent and consistent leaders who represented relatively well-demarcated stances on the issues: right-of-center in the case of the Conservatives and left-of-center on the part of Labor.  Voters could make their choices based on the policy issues.  Under a parliamentary system, the victorious prime minister could work to carry out the policies that he or she had campaigned on.  It compared favorably to the ever-worsening gridlock of the American system, where presidential initiatives could and would be blocked by congressmen from the opposite party, even when the initiatives were consistent with philosophies that they themselves had espoused in the past.

To state the obvious, the British system has broken down.   Some of those competent leaders eventually made fatefully ill-advised decisions: Margaret Thatcher’s poll tax, Tony Blair’s support for the US invasion of Iraq, and David Cameron’s decision to hold the Brexit referendum. What is now left is a mess.  It is hard to discern much clarity or consistency in the new crop of English politicians.  When the next election is eventually held, the voters could well be asked to choose between parties that do not correspond in any clear way to the relevant policy decisions that Britain must make, mainly whether to seek to negotiate a relatively close association with the EU or to cut off completely.

In some familiar ways the American political system has also deteriorated in this election cycle, bringing past trends to a reductio ad absurdum.  But the American political situation at the moment has an advantage that the Brits lack: ability for voters to choose what is to be the national policy orientation. The Democrats still favor policies like wage insurance and universal health insurance and the Republicans still oppose them. So American voters in 2016 are still able to make the relevant choice, either for or against policies that deal with the reality of globalization by helping those who are left behind.

Posted in 2016 Presidential Campaign, Europe, International Trade, Trade | Leave a comment