Investors have, on balance, concluded that the combination of a shift to very expansionary fiscal policy and major reductions in regulation in sectors ranging from energy to finance to drug pricing will raise demand and reflate the U.S. economy.
.. over the medium- and long-term they were catastrophic for the working class in whose name they were launched. This could be the fate of the Trump program given its design errors, implausible assumptions and reckless disregard for global economics.
.. an approach based on tax credits for equity investment and total private-sector participation that will not cover the most important projects, not reach many of the most important investors and involve substantial mis-targeting of public resources.
.. Many of the highest-return infrastructure investments — such as improving roads, repairing 60,000 structurally deficient bridges, upgrading schools or modernizing the air traffic control system — do not generate a commercial return and so are excluded from his plan. Nor can the non-taxable pension funds, endowments and sovereign wealth funds that are the most promising sources of capital for infrastructure take advantage of the program.
.. I am optimistic regarding the efficacy of fiscal expansion. But any responsible economist has to recognize that, past a point, it can lead to some combination of excessive foreign borrowing, inflation and even financial crisis.
.. Many, such as the proposed abolition of the estate tax, will benefit only the high-saving wealthy.
.. The same cannot be said of Trump’s global plan, which rests on a misunderstanding of how the world economy operates.
Consider the immediate effects of Trump’s victory. The Mexican peso has depreciated about 10 percent relative to the dollar over fears of new protectionist policies, and many other emerging market currencies have also fallen sharply. The impact of this change is to raise the cost of anything the U.S. exports to Mexico and to lower the cost of anything Mexico exports to the United States.
.. The plan seems to assume that we can pressure countries not to let their currencies depreciate
In Thrall to Scarcity
(open source, or whatever you want to call it): the economics of it, like anything else, are rooted in scarcity, and if you don’t have a bit of that scarcity yourself, you have a lot less leverage
.. Market economies work via the exchange of scarce goods and services. If you have nothing to trade, you have nothing. Now, free software is worth something. Worth a great deal – that is beyond the shadow of a doubt. But since anyone can make a copy, there is no scarcity – once it’s out there, you can’t trade for it.
.. If you’re writing free code that will simply become a cog in their proprietary system, the actual money comes from the scarcity they have created, so while you may be writing free software, in one sense, you’re simply offloading the burden of creating scarcity to someone else, who is then able to pay you for your time. The other possibility is that your client works in the “real world” of scarcity directly – they sell books or beer or cars or something else where the product is, by its nature inherently scarse.
.. to make money at something in the long run, you are going to have to find and sell a product that people cannot effortlessly get for free.
Getting Radical Might Be the Most Practical Way to Fix Inequality
If you look back at the story of advanced economies over the 20 years before 2007, you see an interesting pattern. During that period, the total value of national income — what economists call “nominal GDP,” meaning income unadjusted for inflation —grew at about 5 percent per year in a reasonably steady fashion. The central banks patted themselves on the back and said: This is great! Things are running smoothly. We’ve got the “Great Moderation.” Why we need more radical policies so that we don’t just repeat the debt-fueled booms all over again
Yet during all of that time, the value of all credit, unadjusted for inflation, grew at about 10 to15 percent per year. At the time, it seemed like we needed that pace of credit growth, but when you think about it, if your credit is going to grow at 10-15 percent per year in order to get your 5 percent GDP growth per year, eventually you’re going to have a problem. This isn’t a stable system. In my view, one of the reasons that it seemed that credit had to grow faster than total income was rising inequality.
.. The richer people, when they get another $100,000, or another million, or 10 million, don’t tend to spend it as much as the poorer people would if they got another $100 or $1,000 or $5,000. All the empirical evidence suggests that the rich tend to consume a lower proportion of income than middle and lower-income people. So rising inequality can lead to a major problem with the demand for goods and services. The rich aren’t spending their additional money, so overall, more money gets taken out of the economy. Unless the richer people decide to invest their money, there would be a slowdown in the economy.
.. If you look at the bottom 20 or 25 percent of the population, their real wages haven’t gone up for about 35 years! Meanwhile, the incomes of the top 1 percent have gone up 200 percent. This is a dramatic increase.
.. We need more radical policies so that we don’t just repeat the debt-fueled booms all over again and do another blow-up in 2025 or 2035.
.. Now if you print that, many people in Germany will just sort of explode over their morning coffee! But I have argued this in Germany and I have very good relationships with many German economists. Lots of them share my analysis of how we got it into this mess but they are very wary of agreeing to my proposal for how we get out.
.. the Eurozone will have to progress to a much greater degree of federalization with an element of a federal budget, federal taxation, and federal expenditure. If it can’t agree to that, it would be better to break up.
.. Then something very odd happens in the 1960s and 70s — economists stopped talking about the banking system and the credit system. We then develop a set of modern monetary economics—whether New Keynesian Economics or New Classical Economics — where we imagine that we can think about the dynamics of the macroeconomy without a rich understanding of the banking system and without understanding that the banking system creates credit, money and purchasing power.
.. Piketty describes very significant increases in the ratio of wealth to national income, rising in many advanced economies from about 2 to 3 in 1950 to about 4 to 6 today, and he develops a theory of why that occurred. But what is striking, when you look at Piketty’s own figures, is that in countries like the U.K. and France and in several others, though not quite to the same extent, the majority of all wealth resides in the value of urban real estate. And the vast majority of the increase in the wealth-to-income ratio, which Piketty describes, comes from the increase in the value of urban real estate. The majority of that increase derives, in turn, not from new construction investment but from the increase in the value of land.
..
Instability mostly comes from the interface between the fact that the banks (or shadow banks) can create credit, money, and purchasing power in infinite quantities if we don’t constrain them, and the fact that credit is primarily created to fund the purchase of urban real estate and land, which is somewhat fixed in supply. In economics, when you put together a highly elastic thing and a highly inelastic thing, you create extraordinary potential for turbulence, volatility, and for unstable prices. Both of those issues are largely absent from the way we have taught economics over the last 50 years.
Global Trade War, Trump Edition
Legions of Trump supporters have legitimate grounds for discontent. As my colleague Peter Goodman wrote last week:
Trade comes with no assurances that the spoils will be shared equitably. Across much of the industrialized world, an outsize share of the winnings has been harvested by people with advanced degrees, stock options and the need for accountants. Ordinary laborers have borne the costs and suffered from joblessness and deepening economic anxiety.
.. The story of Trump’s amazingly successful movement is also the story of how Democrats turned their backs on their working-class roots and sided with the elites on the crucial economic question of our times: Who would win from globalization, and who would lose?
.. Trump’s strategy is essentially one of withdrawal from the world economy. He wants less trade and less outward foreign investment. He offers no plans for how to improve our export performance. This is protectionism, pure and simple.
Erik Brynjolfsson, an economist at M.I.T.’s Sloan School of Management, was more forceful:
No nation can succeed by trying to protect the past from the future. We will succeed by having the confidence to embrace competition, and leveraging our comparative strengths, which are numerous. We have the largest, most productive and most technologically advanced economy that’s ever existed on this planet. The more open the world economy is, the more we have an opportunity to leverage our many strengths.
Looked at this way, Trump’s stance is an implicit admission that he and his followers do not “believe in America” — an argument that the United States cannot compete successfully in the world arena unless protected by the imposition of high tariffs and punitive taxes on foreign production and foreign competitors.
.. Trump’s trade proposals, Reich argues,
assume the U.S. can’t compete and must erect trade barriers lest other countries flood America with better and cheaper products. That’s the opposite of believing in America.
.. Free trade is not surrender, and not something that only suckers do. In fact, just the opposite. Closing our borders would be surrender to a nonexistent enemy. It would make us poorer without bringing back the jobs.
.. Many economists share the view that Trump’s trade proposals would beruinous to the American economy, but in order to retain union support, Hillary Clinton has not been able to directly challenge Trump on these grounds.
.. “Withdrawing from global competition is a particularly terrible idea for the United States right now, since we are on the verge of introducing much more capable robots into the manufacturing process,” Daron Acemoglu, the lead author of the research paper “The Race Between Machine and Machine” and an economist at M.I.T., wrote by email.
Once the advances in robotics are achieved, Acemoglu wrote,
many of the tasks now offshored to China or other low-wage economies can be performed even more economically by robots in the United States. This won’t bring back the semi-skilled jobs that have left (and gone for good whatever Trump says he will do) but might just ensure that a whole slew of non-production jobs and supporting production jobs surrounding these tasks locate back to the United States.
.. Trump has a vastly exaggerated sense of the contribution of trade and trade policy to the decline of manufacturing in the U.S. In terms of real manufacturing output, the U.S. has actually done pretty well.
.. If the United States were to impose a 35 percent tax on Mexican imports, according to Summers, the economies of both countries would suffer:
It would be one of the best things that ever happened for Asian and European competitors.
.. Trump’s trade proposals reflect his bullying style and his technologically uninformed approach to tackling America’s competitive vulnerabilities