Why Was Trumponomics a Flop?

Neither tax cuts nor tariffs are working.

Donald Trump has pursued two main economic policies. On taxes, he has been an orthodox Republican, pushing through big tax cuts for corporations and the wealthy, which his administration promised would lead to a huge surge in business investment. On trade, he has broken with his party’s free(ish) trade policies, imposing large tariffs that he promised would lead to a revival of U.S. manufacturing.

On Wednesday, the Federal Reserve cut interest rates, even though the unemployment rate is low and overall economic growth remains decent, though not great. According to Jay Powell, the Fed’s chairman, the goal was to take out some insurance against worrying hints of a future slowdown — in particular, weakness in business investment, which fell in the most recent quarter, and manufacturing, which has been declining since the beginning of the year.

Obviously Powell couldn’t say in so many words that Trumponomics has been a big flop, but that was the subtext of his remarks. And Trump’s frantic efforts to bully the Fed into bigger cuts are an implicit admission of the same thing.

To be fair, the economy remains pretty strong, which isn’t really a surprise given the G.O.P.’s willingness to run huge budget deficits as long as Democrats don’t hold the White House. As I wrote three days after the 2016 election — after the shock had worn off — “It’s at least possible that bigger budget deficits will, if anything, strengthen the economy briefly.” And that’s pretty much what happened: There was a bit of a bump in 2018, but at this point we’ve basically returned to pre-Trump rates of growth.

Republican faith in the magic of tax cuts — and, correspondingly, belief that tax increases will doom the economy — is the ultimate policy zombie, a view that should have been killed by evidence decades ago but keeps shambling along, eating G.O.P. brains.

The record is actually awesomely consistent.

  • Bill Clinton’s tax hike didn’t cause a depression,
  • George W. Bush’s tax cuts didn’t deliver a boom,
  • Jerry Brown’s California tax increase wasn’t “economic suicide,”
  • Sam Brownback’s Kansas tax-cut “experiment” (his term) was a failure.

Nevertheless, Republicans persist. This time around, the centerpiece of the tax cut was a huge break for corporations, which was supposed to induce companies to bring back the money they’ve invested overseas and put the money to work here. Instead, they basically used the tax savings to buy back their own stock.

What went wrong? Business investment depends on many factors, with tax rates way down the list. While a casual look at the facts might suggest that corporations invest a lot in countries with low taxes, like Ireland, this is mainly an illusion: Companies use accounting tricks to report huge profits and hence big investments in tax havens, but these don’t correspond to anything real.

What about the trade war? The evidence is overwhelming: Tariffs don’t have much effect on the overall trade balance. At most they just shift the deficit around: We’re importing less from China, but we’re importing more from other places, like Vietnam.

And there’s a good case to be made that Trump’s tariffs have actually hurt U.S. manufacturing. For one thing, many of them have hit “intermediate goods,” that is, stuff American companies use in their production processes, so the tariffs have raised costs.

Beyond that, the uncertainty created by Trump’s policy by whim — nobody knows what he’ll hit next — has surely deterred investment. Why build a manufacturing plant when, for all you know, next week a tweet will destroy your market, your supply chain, or both?

Now, none of this has led to economic catastrophe. As Adam Smith once wrote, “There is a great deal of ruin in a nation.” Except in times of crisis, presidents matter much less for the economy than most people think, and while Trumponomics has utterly failed to deliver on its promises, it’s not bad enough to do enormous damage.

On the other hand, think of the missed opportunities. Imagine how much better shape we’d be in if the hundreds of billions squandered on tax cuts for corporations had been used to rebuild our crumbling infrastructure. Imagine what we could have done with policies promoting jobs of the future in things like renewable energy, instead of trade wars that vainly attempt to recreate the manufacturing economy of the past.

And since everything is political these days, let me say that pundits who think that Trump will be able to win by touting a strong economy are almost surely wrong. He most likely won’t face a recession (although who knows?), but he definitely hasn’t made the economy great again.

So he’s probably going to have to do what he’s already doing, and clearly wants to do: run on racism instead.

The ‘Rotten Equilibrium’ of Republican Politics

the 20 most prosperous districts are now held by Democrats, while Republicans represent 16 of the 20 least prosperous, measured by share of G.D.P. The accompanying chart illustrates their analysis.

.. The authors’ calculation of the contribution to the G.D.P. of every congressional district showed that Democratic districts produce $10.2 trillion of the nation’s goods and services and Republican districts $6.2 trillion.

This trend creates a significant dilemma for Trump and the Republican Party. Candidates on the right do best during hard times and in recent elections, they have gained the most politically in regions experiencing the sharpest downturn. Electorally speaking, in other words, Republicans profit from economic stagnation and decline.

Let’s return to John Austin of the Michigan Economic Center. In an email he describes this unusual situation succinctly: “A rising economic tide tends to sink the Trump tugboat,” adding

“Certainly more people and communities that are feeling abandoned, not part of a vibrant economy means more fertile ground for the resentment politics and ‘blaming others’ for people’s woes (like immigrants and people of color) that fuel Trump’s supporters.”

The small- and medium-sized factory towns that dot the highways and byways of Michigan, Indiana, Ohio and Wisconsin have lost their anchor employers and are struggling to fill the void. Many of these communities, including once solidly Democratic-voting, union-heavy, blue collar strongholds, flipped to Trump in 2016.

This pattern is not limited to the United States. There are numerous studies demonstrating that European and British voters who are falling behind in the global economy, and who were hurt by the 2008 recession and the subsequent cuts to the welfare state, drove Brexit as well as the rise of right-wing populist parties.

..In a July 2018 paper, “Did Austerity Cause Brexit?” Thiemo Fetzer, an economist at the University of Warwick in Coventry, England, argues that austerity policies adopted in the wake of the 2008 financial collapse were crucial both to voter support for the right-wing populist party UKIP in Britain and to voter approval of Brexit.

the EU referendum (Brexit) could have resulted in a Remain victory had it not been for a range of austerity-induced welfare reforms. These reforms activated existing economic grievances. Further, auxiliary results suggest that the underlying economic grievances have broader origins than what the current literature on Brexit suggests. Up until 2010, the UK’s welfare state evened out growing income differences across the skill divide through transfer payments. This pattern markedly stops from 2010 onward as austerity started to bite

.. The results here and in England reinforce the conclusion that the worse things get, the better the right does.

As a rule, as economic conditions improve and voters begin to feel more secure, they become more generous and more liberal. In the United States, this means that voters move to the left; in Britain, it means voters are stronger in their support for staying in the European Union.

Was the Rise of Neoliberalism the Root Cause of Extreme Inequality?

So pervasive has neoliberalism become that we seldom even recognise it as an ideology. We appear to accept the proposition that this utopian, millenarian faith describes a neutral force; a kind of biological law, like Darwin’s theory of evolution. But the philosophy arose as a conscious attempt to reshape human life and shift the locus of power.

 .. Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that “the market” delivers benefits that could never be achieved by planning.
.. The term neoliberalism was coined at a meeting in Paris in 1938. Among the delegates were two men who came to define the ideology, Ludwig von Mises and Friedrich Hayek.
..  The movement’s rich backers funded a series of think tanks which would refine and promote the ideology. Among them were the American Enterprise Institute,the Heritage Foundation, the Cato Institute, the Institute of Economic Affairs,the Centre for Policy Studies and the Adam Smith Institute. They also financed academic positions and departments, particularly at the universities of Chicago and Virginia.
.. But in the 1970s, when Keynesian policies began to fall apart and economic crises struck on both sides of the Atlantic, neoliberal ideas began to enter the mainstream.
.. But in the 1970s, when Keynesian policies began to fall apart and economic crises struck on both sides of the Atlantic, neoliberal ideas began to enter the mainstream.
.. But, as Hayek remarked on a visit to Pinochet’s Chile – one of the first nations in which the programme was comprehensively applied – “my personal preference leans toward a liberal dictatorship rather than toward a democratic government devoid of liberalism”.
.. The doctrine that Von Mises proposed would free us from the bureaucratic nightmare of central planning has instead created one.
Neoliberalism was not conceived as a self-serving racket, but it rapidly became one.
.. The totalitarianism Hayek feared is more likely to emerge when governments, having lost the moral authority that arises from the delivery of public services, are reduced to “cajoling, threatening and ultimately coercing people to obey them”.
..  We find that the Institute of Economic Affairs, which has argued forcefully in the media against the further regulation of the tobacco industry, has been secretly funded by British American Tobacco since 1963.
.. tend to reject the term, maintaining – with some justice – that it is used today only pejoratively. But they offer us no substitute.
.. Some describe themselves as classical liberals or libertarians, but these descriptions are both misleading and curiously self-effacing, as they suggest that there is nothing novel about The Road to Serfdom, Bureaucracyor Friedman’s classic work, Capitalism and Freedom.
.. When Keynesian demand management hit the buffers in the 70s, there was an alternative ready. But when neoliberalism fell apart in 2008 there was … nothing. This is why the zombie walks.  The left and centre have produced no new general framework of economic thought for 80 years.
.. most importantly, they have nothing to say about our gravest predicament: the environmental crisis. Keynesianism works by stimulating consumer demand to promote economic growth. Consumer demand and economic growth are the motors of environmental destruction.

Zombies of 2016

Start with Mr. Christie, who thought he was being smart and brave by proposing that we raise the age of eligibility for both Social Security and Medicare to 69. Doesn’t this make sense now that Americans are living longer?