Joltin’ Joe

While we wait for Herr Doktor Professor to regain his focus after the election (as Lambert Strether noted today, he, like many, seems focused on events not under his control to the exclusion of things that were) I don’t want you to feel we’ve run out of real Economists (as opposed to Chicago School Shamen), Dean Baker and Bill Black spring instantly to mind.

Heck, we haven’t even run out of Nobel Prize winners, folks- I give you Joseph Stiglitz (2001).

Bad News for America’s Workers
by Joseph Stiglitz, Common Dreams
Tuesday, December 20, 2016

Trump’s promises and statements on economic policy have been inconsistent. While he routinely accuses others of lying, many of his economic assertions and promises – indeed, his entire view of governance – seem worthy of Nazi Germany’s “big lie” propagandists.

Trump will take charge of an economy on a strongly upward trend, with third-quarter GDP growing at an impressive annual rate of 3.2% and unemployment at 4.6% in November. By contrast, when President Barack Obama took over in 2009, he inherited from George W. Bush an economy sinking into a deep recession. And, like Bush, Trump is yet another Republican president who will assume office despite losing the popular vote, only to pretend that he has a mandate to undertake extremist policies.
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During the campaign, Trump promised to get tough on executives who outsource American jobs. He is now holding up the news that the home heating and air conditioning manufacturer Carrier will keep some 800 jobs in my home state of Indiana as proof that his approach works. Yet the deal will cost taxpayers $7 million, and still allow Carrier to outsource 1,300 jobs to Mexico. This is not a sound industrial or economic policy, and it will do nothing to help raise wages or create good jobs across the country. It is an open invitation for a shakedown of the government by corporate executives seeking handouts.

Similarly, the increase in infrastructure spending is likely to be accomplished through tax credits, which will help hedge funds, but not America’s balance sheet: such programs’ long track record shows that they deliver little value for money. The cost to the public will be especially high in an era when the government can borrow at near-zero interest rates. If these private-public partnerships are like those elsewhere, the government will assume the risks, and the hedge funds will assume the profits.
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The “good” news is that tax reform was inevitable, and was likely to be undertaken by Speaker of the House Paul Ryan and his staff – giving the rich the less progressive, more capital-friendly tax system that Republicans have long sought. With the abolition of the estate tax, the Republicans would finally realize their long-held ambition of creating a dynastic plutocracy – a far cry from the “equality of opportunity” maxim the party once trumpeted.

Large tax cuts and large expenditure increases inevitably lead to large deficits. Reconciling this with Trump’s promise to reduce the deficit will probably entail a return to Reagan-era magical thinking: despite decades of proof to the contrary, this time the stimulus to the economy brought by tax cuts for the rich will be so large that tax revenues will actually increase.

This story doesn’t end well for Trump’s angry, displaced Rust Belt voters. Unhinged budgetary policies will induce the US Federal Reserve to normalize interest rates faster. Some see incipient inflation (given the low unemployment rate); some believe the long period of ultra-low interest rates has distorted capital markets; and some want to “replenish their ammunition,” so that the Fed can lower interest rates should the economy slow down again.

Trump has argued that the Fed should raise interest rates. The Fed, which took the first step toward normalization in early December, will almost certainly deliver – and Trump will soon regret what he wished for. There’s a good chance that the monetary contraction will outweigh the fiscal stimulus, curbing the Obama growth spurt currently underway. Higher interest rates will undercut construction jobs and increase the value of the dollar, leading to larger trade deficits and fewer manufacturing jobs – just the opposite of what Trump promised. Meanwhile, his tax policies will be of limited benefit to middle-class and working families – and will be more than offset by cutbacks in health care, education, and social programs.
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To be sure, a few new jobs will be created, mainly in the lobbying shops along K Street in Washington, DC, as Trump refills the swamp that he promised to drain. Indeed, America’s bog of legal corruption is likely to reach a depth not seen since President Warren G. Harding’s administration in the 1920s.

And there really is no silver lining to the cloud that now hangs over the US and the world. As bad as his administration will be for America’s economy and workers, its policies on climate change, human rights, the media, and ensuring peace and security are likely to be no less damaging for everyone else.

To be sure I think Stiglitz gives Obama faaar too much credit for an economy that is, at best, tepid. As Dean Baker notes today-

We have numerous pieces raising serious questions about whether the labor market is really at full employment, noting for example the sharp drop in employment rates (for all groups) from pre-recession levels and the high rate of involuntary part-time employment.
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This issue is hugely important, since if the Fed prevents the labor market from tightening further it will be preventing millions of people from getting jobs. These people are disproportionately African American and Hispanic and also less-educated workers. The decision to tighten will also lessen the bargaining power of a much larger group of workers, making it more difficult for them to get pay increases.

The weak labor market of the Great Recession resulted in a large redistribution from wages to profits. The tightening of the labor market in the last two years has reversed part of this shift. If the Fed raises interest rates enough to prevent further tightening, then it will be locking in place this redistribution to profits. That would be bad news for tens of millions of workers.

Also Stiglitz seems a trifle approving of Deficit Reduction which is just wrong headed. To be fair he could simply be talking about Republicans’ hypocritical devotion to it, when they are in power there are no limits to how much can be wasted on, as he puts it- “weapons that don’t work to use against enemies that don’t exist” and Tax Cuts for the wealthiest .01% can never be too large. Republican Deficits don’t matter because of the magic of “Supply Side” (told you they were rattle shaking Shamen), but Democrats must roll up Surpluses (usually a very bad idea which is why I disagree with fetishizing it).

But he is quite right about the effect this will have on all members of the Working Class. The clear lesson of 2016 is that Democrats can not achieve electoral victory through Identity Politics alone. They must instead abandon their elitist Neo Liberal policies and rebuild their credibility with the 99%.