Martin Wolf v. Trumponomics Whiffs Due to Fealty to Orthodoxy

There’s a lot not to like about what passes for Trump’s economic policy. But the
Financial Times Martin Wolf’s critique of it, in Donald Trump’s boom will prove to be hot air, leaves a lot to be desired. The fact that “boom” appears in the headline is a big tell.

It’s a reasonable surmise that Trump will be re-elected unless the economy falls out of bed. Despite his long and ever-growing list of offenses and crappy policies, Trump is a master at keeping the spotlight turned on him.

Democratic Party leaders, by contrast, seem to think that Trump is so obviously odious that Being Not Trump and other forms of virtue signaling will prove sufficient for them to retake the White House. Never mind that the party is doing as little as it possibly can to address issues that affect ordinary Americans, like stagnant real wages, ever-escalating medical costs, student debt, and the seeming impossibility of retiring on a diet better than cat food, except as required to neutralize Bernie Sanders and to a lesser degree, Elizabeth Warren.

However, Trump gets support from the business community, securities touts, and political leaders who benefit by peddling optimism, whether warranted or not. Most look at results over a comparatively short horizon . Even Wolf, who does make some key longer-term comparisons to cast doubt on what Trump presents as his accomplishments, fails to look at the bigger context.

The US is in the late stages of a shallow and long expansion by historical standards. Michal Kalecki described how that that would become the new normal in his seminal 1943 essay on the barriers to achieving full employment. If you haven’t read this lucid piece, please stop now and study it.

And par for the course, as we’ll address shortly, Kalecki predicts Wolf’s main critique of Trump, that he’s running supposedly bad for you deficits (note that the fact that Trump is running deficits at all is a no-no, made worse by the fact that the resulting stimulus was less effective by virtue of his tax cuts overwhelmingly benefiting the rich). From Kalecki (emphasis ours):

We shall deal first with the reluctance of the ‘captains of industry’ to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.

It is frustrating to see Wolf land only glancing blows Trump’s claims, such as taking credit for supposedly low unemployment. Wolf seems to content himself with looking at macro data, without considering underlying structural changes, such as the long-standing and highly successful attack on worker bargaining rights.

Wolf gives Trump credit for decent but not stellar GDP growth, attributing it to his fiscal stimulus:

The conclusion is that the economy has responded to a big fiscal stimulus roughly as the best forecasters predicted. That upsurge is unlikely to last. The big tax cuts have, as intended, hugely benefited owners of corporations. But they have certainly not paid for themselves. They have left the long-term fiscal position fragile…

It’s hard to accept even this qualified sunny view when the share of economic expansions going to workers as opposed to profits has been falling since the early 2000s. This site daily has evidence of how wobbly most American’s finances are, such as the fact that nearly 40% of Americans don’t have the cash to handle an unexpected $400 expense, or that car sales are at the level of 1999 despite the industry’s ever more lavish financing schemes, or deteriorating indictors of social well being, like falling life expectancy and more than half of all births happening outside marriages.

points out that the headline unemployment rate is at the lowest level since 1969, while failing to consider that high levels of involuntary part-time employment make that metric less valid as a barometer of the strength of the labor market. Wolf does cast doubts, but by looking at pay levels and the labor participation rate:

There has been a modest rise in the growth of average hourly earnings of private employees, from 2.4 per cent in the year to January 2017 to 3.1 per cent in the year to June 2019. But this rate has stabilised over the past year. In real terms, average weekly earnings rose just 1 per cent in the year to May 2019. If the tax cuts brought much to working people, it is certainly more via additional jobs than rising real earnings….

Yet participation in the labour market by men and women aged between 25 and 55 is still below past peaks. Prime-age male participation was 89 per cent in June 2019, against 96 per cent in early 1970. For women, it was 76 per cent in June 2019, against a peak of 77 per cent in April 2000. The decline in unemployment has to be put in this context. Labour force participation has fallen dramatically in the case of prime-age men. The secular rise in participation stopped two decades ago in the case of prime-aged women.

It is also frustrating to see Wolf dignify bad conventional wisdom:

The big economic justification for lower taxes on corporations is that it would raise investment. The ratio of real non-residential private fixed investment to GDP was 13.8 per cent in the first quarter of 2019. This is only 0.8 percentage points higher than in the last quarter of 2016. It is also well within the historic ratios. The paper by Profs Barro and Furman suggest that the changed tax treatment of corporations should have a modest upward effect on growth, largely through higher cumulative investment. But the impact would only be to raise GDP over 10 years by 0.2-0.4 percentage points.

For the most part, businesses do not invest because they have retained earnings sitting around (if the opportunity is attractive, they can raise funds by borrowing or selling equity). They invest because they see opportunity. That said, there would be some improvement in the expected free cash flow from investment projects at a lower tax rate and that could generate some additional investment. But why in this globalized world would one assume that would necessarily lead to investment that was significantly in the US? Virtually from when China joined the WTO, large companies in advanced economies have been net saving (which means dis-investing), as China has stepped into the role of being the world’s foundry.

Wolf doesn’t even acknowledge the degree to which the tax cuts funded yet more stock buybacks. From Forbes:

The Tax Cut and Jobs Act (TCJA) of December 2017 had two main provisions affecting corporate taxes. First, it reduced corporate taxes, changing them from a graduated structure with a maximum rate of 35% to a flat rate of 21%. Second, it changed taxation of foreign profits. Previously these profits weren’t taxed until repatriated, so companies kept their profits abroad….The underlying logic for the TCJA was that allowing companies to keep a greater share of profits, would stimulate investments in long term growth. Instead, the dominant company response to the TCJA was stock buybacks. For the first three quarters of 2018, buybacks were $583.4 billion (up up 52.6% from 2017). In contrast, aggregate capital investment increased 8.8% over 2017, while R&D investment growth at US public companies increased 12.5% over 2017 growth.

And there may be other Trump factors that contributed to the uptick in investment, staring with his big push for even more lax regulation. Most businesses equate lower regulation with higher profit potential, and that alone could have generated more investment at the margin.

Wolf makes deficit spending, as opposed to (say) starting trade wars, bullying the Fed, or government shutdowns as Trump’s economic original sin. It’s disheartening to see mainstream economists continue to decry spending by currency issuers, when the real hazard to economic health is private debt. And nowhere do we see any consideration of resource limits or the need to mitigate climate change.

Donald Trump’s main policy has been a regressive form of Keynesianism, masked as corporate tax reform. The latter delivered huge gains to shareholders. It has brought a strong short-term stimulus, which has had good effects on unemployment. Whether current unemployment rates are sustainable is unknown. But they cannot go on falling forever. The effects on long-term growth are likely to be modest, though running the economy this “hot” just might generate an upsurge in investment and so growth. Given the pressure on the Federal Reserve to keep pouring on petrol, this could end in tears, with higher inflation and interest rates and damaged fiscal and monetary credibility.

It is too soon to laud Trumponomics. But it is not too soon to note where the US is heading. It is hard to imagine anybody standing up for fiscal prudence. The choice is rather between rightwing and leftwing Keynesians. In the long run, that is likely to end badly. But that could be a very long run.

Threatening to put the brakes on Federal spending when many Americans are under stress is one way to help Trump win. But as we can see from Wolf’s own article, orthodox economists have abandoned real wage growth, meaning how ordinary people are doing, as the key metric of sound policy. And the lack of concern about real people is also why they stick their heads in the sand as far as species loss and climate change are concerned.

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  1. OpenThePodBayDoorsHAL

    How is the punditocracy from the FT to the Fed supposed to know where the hell we are when the sigmposts they use (GDP, the Dow, unemployment, inflation) are all verklempt?

    1. Foppe

      I’m sure this guy is paid pretty well, and he has quite a bit of experience. He might know better?

    2. skippy

      I smelled something about Debt to GDP having a release of gas …. coast is clear now …

  2. PlutoniumKun

    I really like Kalecki’s point that the key objective of fascism is to remove capitalist objections to full employment expansionary policies. Without getting into the argument over who or what is capitalist, this is something Republicans in the US have understood since the time of Reagan (Bush #I forgot the lesson, which is why he was a one termer). Of course, its not all capitalists who are on board – its specifically the defence and fossil fuel industries, plenty of other capitalists are horrified by his policies – but Trump knows he doesn’t need them all, he just needs enough of them on board. Maybe the Dems could learn from this *hollow laugh*.

    1. chewitup

      Pax Americana. When you’re the benevolent dictator of the rest of the world, defense and energy require full employment.
      In theory, it’s supposed to trickle down to the middle and then have the welfare state pick up the slack. You then need to supervise the capital/labor balance in the rest of the market so as to avoid blatant unfairness.
      Obama messed it up by hosing Main St. Trump is perceived to be helping Main St. to very mixed reviews. Whether you are enjoying the theater depends on where you sit.

      Martin Wolf has a decent seat but he only finds the show to be so-so.

    2. Susan the other`

      Those things are frustrating to watch because they don’t make sense. The defense and fossil fuel industries. Clearly those “industries” are running this country. It hasn’t been run by capitalists since at least Reagan. It’s all too ironic to swallow. And for Trump to deny the environmental crisis turns all the irony into absurdity. Everything Kalecki says seems to be accurate. MMT serves to help capitalism survive. So why the adamant opposition to the state spending to keep the society working to, in turn, maintain a sensible capitalism? I can’t believe people are that dumb. It isn’t just pundits like Wolf who keep talking their old familiar nonsense. I almost feel like we set ourselves a goal of controlling oil, therefore controlling the world, and therefore having to beef up the military – thinking it was all doable. Doable before the environment collapsed. But, in spite of all the ideological propaganda, things are not coming together. So until they do, nobody is going to admit how screwed up everything is. Not until they get control of oil. Just imo.

      1. Olga

        “So why the adamant opposition to the state spending to keep the society working to, in turn, maintain a sensible capitalism? I can’t believe people are that dumb.”
        Two things come to mind; on the “dumb” assessment – I don’t think they are dumb, but I do know (having interacted with some very rich people) that most of them live in a (close to 100%) hermetically sealed bubble. They simply have no notion of how the rest of society lives (and even if they’ve come from a modest background, sealing that bubble does not require much time – it is an amazing thing to witness). And having made it to the top, with all their needs and wishes easily fulfilled, they’ve no reason to care about anyone/anything else. Let’s face it, these guys/gals do not need the lower 80% (maybe just to keep their shoes polished).
        Two, “to keep society working” would require govt intervention (policies, programs, funding); otherwise it does not happen. But If that were implemented, people may get the wrong idea that govt can make things work (or better) and could (horror of horrors) demand more of it. In a perception of the world as a zero-sum game, this is simply unacceptable to our over-lords.

        1. Ignacio

          Good observation although It can be said that being so self centered is quite dumb. Isn’t it?

          As an aside, Yves comments put Wolf, together with most economists involved in policy making, in a well deserved position of extreme intelectual failure.

      2. False Solace

        > So why the adamant opposition to the state spending to keep the society working to, in turn, maintain a sensible capitalism?

        Kalecki explains it very well in the paper Yves linked. Capitalists hate anything that reduces their power. If the government automatically manages the business cycle, nobody needs to kowtow to capitalist “confidence” in business conditions. They don’t like being ignored.

        Besides that, some of them fundamentally don’t like to see their fellow citizens doing well. Anything workers have rightfully belongs to the ownership class. When workers had pensions, they took them for forced them into the stock market. When workers had health care, they took it or forced it onto for-profit insurers. When workers had houses, they flat out stole them. Any pot of money in the hands of the middle class is the next thing they’ll steal. They won’t pay taxes to educate anyone else’s kids, they won’t repair anyone else’s roads, they have their own airports and security forces and won’t pay for ours. As Trent Reznor put it:

        I’m sick of hearing ’bout the have and have-not’s
        Have some personal accountability
        The biggest problem with the way that we are doing things is
        The more we let you have the less that I’ll be keeping for me

        And if they are paying for something, you’d better believe it serves them and not us.

    3. JCC

      Somehow I missed this post in 2012, and just read it.

      Kalecki nailed it, almost 75 years ago in 1943, didn’t he!

      One, of many, things that caught my eye right off the bat was the statement, “If the government undertakes public investment (e.g. builds schools, hospitals, and highways)…”.

      I thought it was interesting that those U.S. style capitalist/Govt/economic leaders are probably are fully aware of this, too, and have done a pretty effective job of nearly closing off at least 2 of those 3 avenues (avenues – no pun intended) of Govt Investment so far… and why the fight against M4A is so important to The Powers That Be.

      The entire essay, as Yves points out, is worth reading a a couple of times, a full study for sure. Prescient is putting it mildly, every paragraph.

      Both this article and Kalecki’s essay are more than well worth the time it takes to read, and re-read.
      Another thought. Since I’m not familiar with Michal Kalecki (that will change) I immediately looked him up on the ‘net and of course ended up on his wikipedia page for the quick overview. I should say the quick “biased” overview.

      From the intro on wikipedia

      Being also a political economist and a person of leftist convictions, Kalecki emphasized the social aspects and consequences of economic policies.

      Since economics is basically a soft, not hard, social science, of course “social aspects and consequences of economic policies” are, and should be, emphasized!

      The concept of “the left” is much too slippery and its constant, too often, use what many in this country percieve as a pejorative is getting out of hand. Not to mention that throwing in a few undecipherable mathematical equations does not make Economics a hard science.

  3. GramSci

    It was a treat to read to the bottom of that 2012 NC post and relive the passion of the commentariat.

  4. Sound of the Suburbs

    The developed Eastern economies are now seeing the same thing as the West, with stagnating wages and off-shoring to places like Vietnam, Bangladesh and the Philippines as China isn’t that cheap anymore.

    The usual economic analysis refers back to a world where economies were quite tightly bound within nation states.

    The labour force is tightening and wages should rise.

    Becomes ……

    The global labour force has 2 billion in China and India alone, it’s not tightening.

    Demands for wage rises are now met with threats to off-shore to places where labour is cheaper. If those demands persist, employers carry out those threats.

    This is successful Germany.

    “Mr Mody said the bottom half of German society has not seen any increase in real incomes in a generation. The Hartz IV reforms in 2003 and 2004 made it easier to fire workers, leading to wage compression as companies threatened to move plants to Eastern Europe.”

    Richard Koo has discovered the assumption economists used when they said free trade would be a nett positive for any nation.

    Trade must be balanced, but the US runs a large trade deficit.
    The negative effects over a long period of time have brought Trump to power.

    Richard Koo wants the developed Eastern economies to band together to support the US which has been shooting itself in the foot for four decades. The developed Eastern economies have done really well by running a trade surplus against the US and they don’t want to see this system end.

    They actually worked out what was going on.

  5. Grant

    Kalecki was an amazing economist. I prefer him to Keynes. Another short article where he totally called it was “The Fascism of Our Times”. Well worth reading, focused on Goldwater and saw what was coming.

    Wolf is like Krugman in many ways. They were taught a particular way of analyzing the economy, they were taught models and tools that they use, and teach, and they would have a lot to answer to if they just came out and admitted how useless, and devoid of reality, most of it is. It isnt as if they going to read Sraffa and see the light.

  6. DHG

    Trump will only be re-elected if the oligarchs manage to maintain control, they may lose it with Epstein behind bars. He is liable to sell a lot of them out unless he can walk free. Trump has no ethics, economic plans, convictions or anything else. 4 more years of him and the country is finished.

  7. Lambert Strether

    “Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.

    Too long for a tattoo, I guess, but still.

    1. Parker Dooley

      Shorter tattoo?
      “obstinate ignorance is usually a manifestation of underlying political motives.”

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