economic policy

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And Now For Something Completely Different …

My summer of research is almost over.  The season here in Vermont is changing and the view from our window will soon be dominated by the brilliant autumnal colors our region is famous for.  All is both regular and well.

Sort of.

Perhaps there’s something in the water down there in New York.  There are rumblings of life in economics.  The long sclerosis inhibiting the emergence of theories that explain rather than re-invent reality might just be close to loosening its grip.

I hope so.

In case you are unaware, there has been a paper published that has emerged as something of a viral hit.  We all need to add to its fame.  It begins thus:

“Mainstream economics is replete with ideas that “everyone knows” to be true, but that are actu- ally arrant nonsense. For example, “everyone knows” that:

  • Aggregate production functions (and aggregate measures of the capital stock) provide a good way to characterize the economy’s supply side;
  • Over a sufficiently long span—specifically, one that allows necessary price adjustments to be made—the economy will return to a state of full market clearing; and,
  • The theory of household choice provides a solid justification for downward-sloping market demand curves.

    None of these propositions has any sort of empirical foundation; moreover, each one turns out to be seriously deficient on theoretical grounds.  Nevertheless, economists continue to rely on these and similar ideas to organize their thinking about real-world economic phenomena. No doubt, one reason why this situation arises is because the economy is a complicated system that is inherently difficult to understand, so propositions like these—even though wrong—are all that saves us from intellectual nihilism. Another, more prosaic reason is Stigler’s (1982) equally nihilistic observation that “it takes a theory to beat a theory.”

    Is this state of affairs ever harmful or dangerous? One natural source of concern is if dubious but widely held ideas serve as the basis for consequential policy decisions.  In this note, I examine one such idea, namely, that expected inflation is a key determinant of actual inflation. Many economists view expectations as central to the inflation process; similarly, many central banks consider “anchoring” or “managing” the public’s inflation expectations to be an important policy goal or instrument.  Here, I argue that using inflation expectations to explain observed inflation dynamics is unnecessary and unsound: unnecessary because an alternative explanation exists that is equally if not more plausible, and unsound because invoking an expectations channel has no compelling theoretical or empirical basis and could potentially result in serious policy errors.”

So starts Jeremy Rudd an economist at the Federal Reserve Board in his discussion of inflationary expectations and their role in determining inflation.  He seems to think they aren’t as important as some theorists might imagine.  Oh dear.

The entire paper is designed to puncture the delusions that surround central bank policy making.  Which is, of course, an excellent and worthy goal.  The problem is that, at the end of the day, central bankers need to be able to attach their policy decisions to some theory or another in order to provide themselves with intellectual rigor.  Otherwise they would be reduced to telling the public that the recession they just induced in order to eliminate expectations of inflation was simply based on guesswork or reading the tea leaves.

Which is, perhaps, what they’ve been doing anyway given that most of the edifice of economics is simply jargon infested language describing just that.  Well, maybe not guesswork.  More like ideology.

I can’t resist.  Here’s the final few paragraphs:

“Say you had never heard of Phelps or Friedman, and only knew that the stochastic trend for in- flation (and labor costs) last shifted noticeably following a recession that occurred after a period when actual inflation had been running at four percent. You then came across some survey mea- sures of long-run expected inflation that roughly showed the same one-time level shift. Would you be convinced enough by this evidence to conclude that long-run inflation expectations were an important factor driving inflation dynamics? Or would you be skeptical of this conclusion because it is basically derived from a single observation (with later observations providing no evidence at all), and because one could just as easily explain these facts with an appeal to the notion that agents were simply making forecasts of inflation that were roughly correct on aver- age? How would you also explain that a recession permanently reduced trend inflation when actual inflation was four percent, but never did so thereafter?

Or would you justify the view that expectations “matter” by pointing to the inflation experience of the 1960s and 1970s, even though that period provides no actual evidence that workers or firms tried to boost their wages or raise their prices in anticipation of future price or cost changes? After all, history really only tells us that lags of actual inflation seem to enter inflation equations to a greater or lesser degree over time, not that expectations do or did; thinking that these lags of inflation are present because they are a proxy for some kind of forecast is more a habit of mind than anything solidly grounded in fact.

Alternatively, if you view the theoretical arguments as dispositive, exactly how would you explain to a fellow economist why it is that you see an important role for expected inflation in inflation dynamics? Would you make a halfhearted appeal to Phelps and Friedman? Would you feel a little guilty doing so, knowing that these authors either assumed such a role for expectations (Phelps) or motivated it with a theoretical mechanism whose basic predictions are clearly wrong (Friedman)? If not, then how would you explain that, in reality, only long-run inflation expectations seem even vaguely related to actual inflation? And if you tied your explanation to some sort of “wage bargaining” mechanism, what existing institutional feature of the economy would you point to in order to justify it? Would you instead try to fall back on the new-Keynesian Phillips curve, whose theoretical derivation is even harder to take seriously and whose empirical justification is close to nonexistent?

And would you feel the slightest bit nervous (or chagrined) about any of it?”

Go on.  Read the whole paper.  I know you want to.

 

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Pandemic Musings

I have been digging around a fair bit lately trying to understand the role of economics in the extent of the inequality being laid bare by the pandemic — more on that later.  A few interesting nuggets worthy of a quick note popped out along the way.

Thomas Phillipon opens chapter one of his recent book this way:

“The big debates in economics are about growth and inequality.  As economists, we seek to understand how and why countries grow and how they divide income among their citizens.  In other words, we are concerned with two fundamental issues.  The first is how to make the pie as large as possible.  The second is how to divide the pie.”

Presumably his approach ignores the ugly dismissal of inequality by the likes of Lucas who said it was of no enduring interest.  Or words to that effect.  Distribution is one thing.  Inequality is another.  Sliding back and forth between the two words elides the moral centerpiece of the discussion: what level of inequality is acceptable?  Economics, once it adopted the marginal method, has avoided such a discussion and has, instead, hidden behind the “it’s the way the world works” argument.  In other words it took an ideological stance under the guise of scientific discovery.  Even today we can easily find economists blithely arguing that people get paid equivalent to their contribution.  As if calculating said contribution is that simple.  As if that’s the only factor in determining pay.  As if  … well you get the picture.

Economists are fond of playing neat tricks like this.

They stumble on something pretty useful, marginalism being one example, they elevate it to become a universal truth impervious to attack, and then they assume they know something about the world that others just don’t “get”.

They also, conveniently, sanitize their subject from the rather nasty need to ponder or take into account factors like power relations.  Not that they ignore such things entirely.  Look hard enough and you can find dark references to horrible things like monopoly and monopsony tucked safely away in marginal notes.  We are assured in those notes that these murky issues ought not divert us from applauding the truths of “free” markets.  That the real world is more characterized by the exceptions economists shove into those margin notes than by the pristine centerpiece of their thought is left for the assiduous reader to divine.

Which is why most people come away from a study of elementary economics with a thoroughly distorted view of economic “truths”.  When the average student takes a single economics class, the odds are that they emerge thinking that free markets are wonderful and that government intervention stinks.  After all, that’s the ideological thrust inherent in most economics and the way it’s most often taught.

If Philippon is correct and growth and inequality are the two big issues, why don’t the elementary books focus on them more?  Why do we waste precious time in setting up the perfect and decidedly unreal model of market workings first?  Why not relegate that silliness to the appendix where it belongs?   Wouldn’t it be more productive for the average student to engage in discussion of the real world rather than in the fantasy of perfect markets etc?

Anyway, Phillipon has written a good book.  He helps the interested reader learn precisely why economics has contributed to the growth of inequality.  He doesn’t say it quite that way, of course, but by describing the drift away from “free” markets — the subtitle of his book is “How America Gave Up on Free Markets” — he implies that there were, or are such, things and that much of the present awfulness is due to the aforementioned drift.  Economic theory gave vital intellectual heft to the drift away from freedom.  All in the name of freedom, of course.

Another book I have been tackling is “Unequal Gains” by Lindert and Williamson.  This is also an excellent read.  Some of you might be surprised to find this as one of their findings:

“There is no fundamental law driving the history of income inequality.  Inequality movements are driven not by any fundamental law of capitalist development but instead by episodic shifts in six basic forces: politics, demography, education policy, trade competition, finance, and labor-saving technological change.  These forces appear to be exogenous with respect to inequality.  If they are indeed exogenous and hard to predict, then four centuries of American inequality can hardly be driven by some capitalist law of motion.”

It has, of course, become axiomatic on the left that capitalism, whatever that is, is to blame for pretty much everything we find horrible.  And inequality certainly sits high up that list.  The problem is, from my point of view, is that leaves too much unanswered.  It leaves very difficult questions on the table.  My right wing friends all chatter on about liberty and how the modern existence of that concept set the stage for the fantastic growth in prosperity most nations have experienced at different ages over the past two hundred years or so.  “Ideas matter”  or “bourgeois values” are rallying cries for the right as they seek to defend capitalism from the onslaught of criticism it well earns.

And I agree to an extent.

Which is why I see the co-evolution of modern democracy as essential to the mitigation of all the manifest errors that excessive liberty [aka capitalism] generates.

I am always drawn back to the work of Balibar in this respect.  His notion of “equaliberty” still fascinates me.  It is a strikingly simple idea.  At the dawn of the modern era, when the word liberty was being tossed about within the elite sector of society that craved more space for itself, it had many meanings.  It became refined and narrowed as the elite sought and secured more power and eventually excluded some of its original content.  It did not, for instance, extend to equality for minorities or women.  And it certainly did not include any notion of self-government for the masses.  Battles had to be fought to re-generate the other meanings of liberty that had been cut away as the modern elite entrenched itself.

But they have been fought.  What we sometimes forget, and this I think is where economists go wrong, is that those battles must be fought continuously.  The context for the emergence of that we now call economics is the social battleground on top of which relatively free people can execute exchanges without arbitrary occlusion by the state.  Ignoring the socio-political implications of growth and distribution undermine the efficacy of the results of study.

Which brings me to my next snippet.

Hayek has always been a source of interest to me.  His ideas on knowledge are intriguing.  Yet he is a great example of the myopia modern economics developed when it took its ideological turn in the mid twentieth century.  Hayek inspired people like Thatcher and Reagan to adopt a severe anti-social political stance because he was unable to distinguish between the “state” as arbitrary autocratic power, and the “state” as modern democratic government.  Economists still struggle along those lines.

He said in 1979, and I paraphrase, that the word “social” is a weasel world because nobody knows what it means.  Perhaps this is true.  But by that standard no one knows what a market is either.  Come to think of it, what does the word “free” as in “free markets” mean?  Can everyone join in?  Are we all free to participate?  Or are some people more “free” than others?

Economics has been encumbered by this muddy sort of definition of its terms as long as it has existed.  Even the most rigorous axiomatic constructions seem to leave the barn door open to question. Or, rather, they are designed to remove all the awkward bits from the subsequent analysis in order to render an elegant result rather than one that might be a tad opaque, but which might also reflect the complexity of life.

Hayek had a habit of tossing around what appeared to be wonderful insights: his notion that an economy contains too much information to be processed by a central body remains a classic assault on centrally panned economies.  But if there is too much information for that, how can we possibly “know” anything about the economy?  We cannot, for example, ever “know” whether a market has aggregated all the relevant information.   To know that it has, we would need to know the full extent of the information, in which case we would be in a good position to execute a central plan.

But we will let that slide.

Let me end with Paul Romer.

I recently read  one of his blog entries in which he expressed surprise that economists could be blamed for much of what is wrong in our contemporary economy.

Earth to Paul!

Perhaps nothing more summarizes the state of the discipline than this.  The relentless anti-social message inherent in most modern economics is stark.  Silly results such as the fact that there is no such thing as involuntary unemployment ought to be sufficient for any reasonable person to conclude that economics is manifestly detached from reality.  The reliance on marginal productivity as the sole determinant of wages is another.  Or the entire edifice of modern business school thought around shareholder value, which is a simple derivative of right wing economics, and along with its pernicious add-ons like agency theory and “core competency” became the driver of outsourcing, globalization, and the suppression of wages.  Romer might shunt that error onto the laps of business school professors, but the intellectual lineage is clear: economics claimed certain truths and consequently spread the contagion into related subjects.

Economists might shun the blame for shareholder value, but the rest of us ought not allow them to.  Pull on the thread and you quickly follow the idea back to its ancestral home alongside non-existent involuntary unemployment.

Now I agree whole heartedly with Romer that economics has produced some really socially useful ideas.  He references counter-cyclical fiscal and monetary policies as a good example.  I agree.  But those ideas date back a way.  It’s the clutter and anti-social ideology that post-dates them that caused the modern antipathy towards economics.

Ultimately economics is a very difficult discipline to imagine ever being wholly socially responsible.  It is an ongoing conversation that attracts people who prefer to exclude complexity in order to distill truths about reality.  They love the counterintuitive nature of some of its main results.  It is excessively mathematical, and so it allows those people to express themselves and elide the full murkiness of reality.  It applauds elegance and thinks it encourages efficiency.  But it has gone too far away from its origins.  It is  no longer trying to explain the world.  It is trying to explain itself.

It rewards the wrong things.  Instead of seeing Arrow/Debreu as an amazing disproof of the existence of general equilibrium, it is awed at the technical achievement of cobbling together such a fantastic assemblage of make-believe.  General equilibrium was not a discovery.  It was an invention.  It began as a search for the infamous invisible hand and ended with the creation of a ghost that haunts us still.

Arrow, I think, would agree.  Economies are a bit like nature.  They create themselves.  The illusion of design is what draws us in.  But there is no design.  An economy just is.  It self-organizes within socially and politically established boundaries.  Which means that any distribution of resources is as legitimate as any other because politics and social relations pre-exist the economic transacting.  These relations give legitimacy to the economics.  Indeed, they define it.

So Phillipon is correct: there are two big issues.  How to grow the pie so we all prosper and how to divide it so we all prosper.  The solutions are not, however, the unique domain of economics.  They are social questions which involve all the elements that Lindert and Williamson list, and more.  They defy Hayek’s anti-social agenda, and they require a lot more sensitivity to the real world than many economists are willing to show.  Which is what Paul Romer has discovered.

But enough!

My pandemic induced seclusion has allowed me to meander too far.

Stay safe everyone, and remember that economists don’t know a much as they appear to claim.  Which means they’re just like the rest of us.

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Political Economy?

“American economics harbors fierce political debates over theory, methodology, and policy.  In practice and in comparative perspective, however, the main trend over the course of the twentieth century has been the standardization of training as well as a homogenization of evaluation criteria that has marginalized nonorthodox approaches.  After institutionalism was dethroned by the rise of mathematical economics and more politically challenging forms of intellectual heresy (such as Marxism) were relegated to peripheral institutions and sometimes to other disciplines, American economists installed themselves confidently within the neoclassical paradigm.  It is within this paradigm that the major intellectual debates have taken place. … In other words, the dominant conversations within the discipline have centered around which hypotheses in the neoclassical framework may be modified or tweaked to account for observed empirical patterns.  But American economists implicitly agree to keep disturbances to a minimum; as a result the framework is almost never questioned as a whole.”

That’s a long quote from Marion Fourcade’s excellent study of the discipline of economics “Economists and Societies” published in 2009.  I think it helps us wrap our minds around why it has taken so long for any discernible change in the profession’s thinking to have seeped into the open.

The discipline of economics is a closed society with unwritten but deeply rooted rules.  It is easy to be cast out.  If you are, you cannot easily find your way back in.  And, given the excessive prominence of economics in policy making during the middle and later years of the twentieth century, the profession placed an acute premium on not breaking ranks.

That prominence was ill-founded, economists don’t really have a good grasp of actual economies — the complexity of the subject matter and its infernal intertwining with society as a whole make the supposed rigor of what became the mainstream an illusion.  But it was a convenient illusion.  It fit well with the appeal of rational construction of policy.  It was a short skip from such appeal to the imposter of rational decision-making that supports the edifice of market superiority over other forms of resource allocation and distribution.  Instead of accepting that all forms of human activity are equally flawed and/or rational, economists mistakenly imagined people to be rational within the hallowed halls of a market, but insufferably irrational everywhere else.

One of the dominant themes of the last century was this general assumption that human activities can be studied through an ever increasingly rational lens.  That may be, but economists then went too far: they projected rationality into the subject of study.  Instead of using the tools of reason to tease out regularities of interest, they made the subject matter itself entirely rational.  So the regularities they thought they saw were simply echoes, or mirrors, of their own thought processes.  People in markets suddenly became economists, which made studying them more easy.  The entire enterprise became a massive “if only” exercise.  If only people behaved like economists it would so much easier for economists to study them!  So that’s what happened.  Entire Nobel winning careers were built around what was nothing more than a gigantic bout of self-absorption.

No wonder the discipline rapidly became so sterile.

And irrelevant.

Now, however, there are feint signs of hope.

A younger generation is breaking free of the constraints of  theory dependent upon rational behavior within market spaces entirely cut off from the rest of society.  The messiness of life is slowly being recognized as a real thing worthy of attention.

I am happy about this.  I am even hopeful that we might eventually arrive at a day when beginning economics is based upon the realities of asymmetries of information, uncertainty, path dependencies, inequality, power relationships, institutional and cultural limitations, and even geography, rather than having all these sorts of things introduced as “imperfections” later on.

 

The way in which economics came to be taught was backwards.  The perfect alternative was posited and described before the imperfect reality was introduced.  The problem being that most students never got to that real part.   They left with a false image.  Which was the ideological intent of some of the founders of the modern discipline.  The homogeneity that Forucade refers to above meant that even those who were not ideologically inclined were trapped into spreading the ideas of those who were.  They became unwitting propagandists for what was, essentially, an anti-government political agenda.

But times are changing.  Here we are a decade after the enormous embarrassment of the discipline caused by its blindness to the possibility of the Great Recession, and books are appearing that suggest markets are not quite what was once thought, that governments are important if not essential, and that all sorts of things muddy the pristine waters of the neoclassical world.  Some of these books have the temerity to ponder the effects of distribution and question whether markets are very good at it.  Especially since markets can be infected with diseases such as power relations and so on.

I expect our libertarian friends will mount a stout rearguard action and belabor the importance of individual liberties in the construction of modern highly productive economies.  I would agree with them were they then to acknowledge the reality of the inequalities that unfettered liberty always produces.  We need a balance which implies something more than just markets to be involved in the economy.

In this regard one of the most important books written in recent years about inequality talks about exactly this.  Walter Scheidel’s “The Great Leveler” is a glittering tour through history with one simple message: inequality is the norm, not the exception.  More to the point history tells us that elites will always capture economies and create what economists call rents.  To rely on markets to provide equitable distributions is foolhardy.

The problem is well known to economists, so they say, but in their effort to eliminate the taint of politics from economics they had to pretend otherwise.  So we ended up with a ridiculously lopsided and unreal version of economics purged of politics unable to explain reality where politics is everyday.

Economics with politics is a real thing.  Economics swithout politics is not.

A resurgence of political economy?

An emphasis on policy rather than sterile internecine spats over theory?

Progress is possible after all these years.

Congratulations to all these who kept the fires of plurality burning through the dark ages of neoclassical dominance.  Now is the time to switch gears to writing the new political economy.

Well, I can hope can’t I?

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Budget Fog and Budget Clarity

On a clear day we can dream of being free from the farce and incompetence that is Trump. Meanhwile back in reality …

The Trump budget released this week is both indescribably foggy and clear as a bright spring day. It is a perfect statement of ‘Trumpism’ from its devastation of the poor, through its privilege for the rich, and its arrogance towards and ignorance of process. Let’s not get carried away though: this budget, like all presidential budgets is symbolic. It has no meaning other than as an indication of Trump’s personal priorities, which, apparently, are entirely plutocratic in tenor. The American budgetary process is convoluted and ultimate authority resides in Congress. So while a future Federal budget might ultimately embody many of Trump’s ideas, the document released this week is simply a starting point.

Further, given the arcane bureaucracy that is Congress, the budget will be subject to obscure procedural rules, particularly in the Senate where the much discussed reconciliation process will come into play. The Republicans are in a rush to slash taxes for the rich, and they want to destroy health care for the poor, both of which efforts are using up slots in the reconciliation calendar. This means that Congress will be very slow to take up a budget debate and will have to wait for the Congressional Budget Office to score those other efforts before it can start in earnest on budget matters.

With that all said, let’s take a look at Trump’s wish list.

First the clarity.

He wants to slash spending on the poor. And I mean slash. His budget aims at eliminating the deficit in ten years. To do that he takes sharp aim at Medicaid, which he wants to halve; he hammers the Supplemental Nutrition Assistance Program (aka Food Stamps); and, contrary to his campaign promises, he reduces parts of Medicare. These programs combine to be the backbone of support for tens of millions of low income Americans. Attacking them in this way will heighten poverty, increase insecurity, and cost the lives of many who no longer will receive health care of any kind. This part of his program is pure right wing callousness unadorned and direct.

He also wants to slash government. He proposes cuts in the departmental budgets of most, if not all, government departments. Some, like the Environmental Protection Agency, will be cut by upwards of 30%. The State Department, too, gets gutted. Neither of these is a surprise. Two of Trump’s major supporters have been lobbying hard for the cuts. The big oil and coal producers want to gut environmental laws, and Russia simply hates the State Department and all that ‘soft power’ money it slops around the world to entice nations into falling for the allure of democracy. At least Trump is being honest about how much in thrall to Putin he is.

Then, this being a pretty straightforward Republican budget, comes the obligatory increase in offense spending and in national security generally. This includes a big dollop of money for Trump’s wall along the Mexican border. There is no indication as yet about how he intends to get Mexico to pay for this. I guess we will have to wait on that.

That’s the clarity: you will notice that the goal for a balanced budget has no reference to the part the rich will play. Presumably they will benefit but not have to sacrifice. As I said: pure plutocracy.

Next comes the fog:

Given that the Republicans want to cut taxes for the rich, even theses draconian cuts in social programs don’t balance the budget in the desired timeframe. So Trump’s budget assumes a 3% annual growth rate in the economy. This is absurd. In an era of slowing population growth, weak productivity growth, and demographic shifts such as the massive wave of baby-boomer retirement, annual growth of 3% is a pipe dream. It is a fantasy. To add to the stupidity of the assumption is the realization that the Trump team began with it as a foundation for their budget process. It wasn’t an outcome of their budget priorities, it was an input from the very beginning. So the minions putting the budget together had to take the fantasy into account no matter how ridiculous it is.

Now for the good bit: the budget includes the impact of the tax reform Trump has already announced. In the budget those tax cuts, which cut a swathe out of Federal revenues, are treated as revenue neutral. In other words whilst they cut revenues because they are tax cuts, they are assumed to ‘pay for themselves’ by stimulating growth sufficiently for the government to earn extra tax revenues. The government, Trump argues, will make the loss up in volume. This is laughable, but is accepted amongst Republican policy makers who all want to deny blowing the deficit wide open.

Wait for it …

Then, when these tax cuts are included in the budget they are assumed to work this miracle all over again. Yes, you read that correctly. The tax cuts not only ‘pay for themselves’ as tax cuts, but they then repeat the process and stimulate growth to allow the budget to arrive at a balance ten years out.

I have never seen anything so brazenly stupid. Nor as plain dumb. This isn’t the sort of double entry bookkeeping I was taught way back in my accounting days. This is way more imaginativetive. It is a triple entry at a minimum, with more entries to come as the Trump administration flounders about in a mess of its own making.

Trump is inventing growth to cover the brutal insanity of his budget. Even the Republicans are repulsed at his plans. Not that they are much better.

Just as a brief indicator of how the Republican’s various policy goals are contradictory, think about the impact of population growth on the budget. Trump is virulently anti-immigrant. By slowing down the influx of immigrants he is, coincidentally, reducing the increase in the working age population. That acts as a significant drag on growth. Yet this is ignored by the Republican hierarchy. Where is the workforce needed to get growth up to 3% to come from? Are they building a time machine to go back to the 1990’s and boost the birthrate?

As I said fog!

One last thing: normal presidents have decent enough relationships with Congress that their budget proposals conform closely with Congressional political possibilities. This is especially true when the president is lucky enough to have a Congress dominated by his (or her?) own party. In Trump’s case he seems not to care. He has simply dumped this budget without any fanfare in the lap of Congress and walked away. Doubtless he will brag about it when he returns from abroad, but his total disregard for the niceties of political relationship building could not be on more public display. He simply doesn’t give a damn about Congress. Like most want-to-be autocrats he has nothing but disdain for the democratic process. But democracy is a pain. It bites back.

Which is why Trump’s budget will go nowhere.

Fortunately. Because it’s horrendous.

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Economy Base Level

We are, no doubt, about to be barraged by a torrent of alternative facts concerning the economy and economic growth under our new leader. So let’s get a few facts on the table in order to set a base level for future reference. Let’s start with growth during the past six presidencies:

So, no, Obama was not the disaster Trump and the Republicans are trying to paint him as. The economy during Obama’s term outperformed that of his predecessor. This includes the enormous difficulty of digging out of the Great Recession without much help from Congress.

Average growth through all that last six presidencies is around 2.8% a year, so boosting it to, and then maintaining it at, the 4.0% promised by Trump will take some extraordinary efforts, not to mention a defiance of history and is thus unlikely to occur.

More likely Trump will benefit from the current relatively good pace of growth, and then be able to add a little to it by introducing some deficit spending related to infrastructure. We must, though, be cautious about making that forecast: as of now we have no idea what team Trump has in store for us. We do know that the Republicans have, since Reagan, opposed infrastructure spending financed by increasing the Federal deficit. They had no problem blowing a hole in the Federal budget under Reagan — we all recall Dick Cheney telling us that, in his words:  “deficits don’t matter” — but since the rise of the Tea Party the GOP has been dominated by a austerity hawk policy bias that has stymied any attempt to boost growth using government spending.

Given this, I imagine growth will accelerate this year — the economy has healed well even if the distribution of all this newfound prosperity is appallingly distributed — so look for GDP growth of about 3%. Next year it could be higher if Trump gets some sort of deficit spending through Congress. But after that I doubt this higher pace could be maintained, and I would expect GDOP to slide back towards the slower pattern of recent years.

I am only mentioning any of this so we can be clear about the facts and the base from which we are about to start. Presidents have remarkably little direct impact on the course of the economy so I am leery of associating growth with presidencies in principle. The policies of earlier presidents have a nasty habit of echoing in unexpected ways through time. Reagan, for instance, is responsible for the rapid uptake of the anti-social policy making that was carried on by Clinton. And the awful switch in corporate activity towards the pre-eminence of shareholder value as a key metric of management success was clearly a product of the neoliberal shift Reagan’s election heralded. He did not advocate such corporate behavior, but he undoubtedly set the stage for it. And history has shown that his administration marks the beginning of the slide in standards for the middle class and especially for workers in the lower income strata. Reagan himself, in terms of policies, may not have been responsible for that slide, but there is no doubt his ideological leadership was.

The question for us is, then, does Trump’s election mark the beginning of a new era and the rejection of the past forty years? Or is it simply an interlude dominated by a series of futile and short lived injections of energy that will rapidly dissipate and leave the economy basically unchanged? Will he tackle inequality? I doubt it. Will he introduce institutional changes to deal with the asymmetries of risk piled upon the shoulders of workers by the corporate led changes in the nature of work? Maybe, but that assumes he understands those changes. The evidence for that is thin: he looks very much like an old fashioned pro-business trickle down plutocrat. So don’t expect much other than  lot of hoopla, fanfare, and then not much else.

Let’s hope I am wrong, our workers need all the help they can get, but there’s no sign of Trump being their savior. His administration is packed with other plutocrats whose basic understanding of the how we arrived where we are is, to put it politely, next to zero. The next few years are more likely to be a cloud of dust than a step forward. And the bigger risks — such as mismanagement — are on the downside not the upside.

Caveat emptor.

 

 

 

 

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