The Great American Con

It must be conceded that some Trump supporters are not only sincerely convinced Trump's beliefs and positions are based on true American values but believe these positions, if enacted, will improve their lot and their countrymen’s to “Make America Great Again.” Otherwise a Trump supporter is either a self-serving cynic or a willfully ill-informed disaffected protestatarian with anarchic tendencies. While these two latter characterizations do indeed define important groups of Trump supporters, these segments cannot to be reasoned with; and all of the three major groups, the American value based, the self-serving cynics and the anarchists, attract their share of morally reprehensible racists, xenophobes and nativists which are also beyond reasoning with.

Yet, it is within the first group, the one embracing their interpretation of American values, that we must seek to understand the appeal of the economic case Trump claims to have. This is a group of Americans that should be listened to, understood, and be afforded empathy, to start a conversation of reason. Not to do so is not only politically unwise, it seeds the possibility of a “better Trump” in the future: someone with the same divisive discourse but better disguised and better scripted. So, how does Trump then embody the emotional needs of these followers?

American Values

American values are set forth in several origin documents of the nation. The Declaration of Independence, establishing the right to representation and the foundation of inalienable rights; the Constitution establishing the separate powers of government, a united federation in pursuit of a common goal and the Bill of Rights; and the Gettysburg Address establishing American democracy as an experiment in progress. The Federalist Papers could be added, as they illuminate the thoughts and interpretation of our founding fathers on the first two documents and the role and promise of the union.

A common thread in these documents is faith and optimism in the future and role this grand experiment will have in the world. This has become a core value of America: a belief that the best is yet to come, that this is the land of opportunity, that there exists an inalienable right to the pursuit of happiness. This is at the root of what is commonly called American Exceptionalism. Trump makes a primal call to that core belief. He vociferously denounces America as a land that has lost its way and promises to rectify and restore that faith in America and its people. 

But Trump distorts the essence of American Exceptionalism and has deceived a large portion of the values group. He has done so by making up some facts unabashedly and distorting others, starting by his vague claim but catchy slogan “Make America Great Again.” By the numbers, this claim is spurious. Just a few gross indicators tells us that:

• From 1947 to 2016 GDP per Capita (constant) steadily climbed from $13,407.01 to $51,276.06.
• Infant mortality rates for full term births decreased from 15.2 per 1000 in 1960 to 2.6 in 2006.
• High school graduation rates increased from 74% in 1990 to 82% in 2013.
• The economy is currently in its longest streak of monthly job creation on record.

Civil rights have unquestionably expanded over the last 100 years and such expansion has accelerated at an increasing pace in the last 50. More Americans than ever can fully participate in the civil, social, political and economic life of their own country. Social nets have spread, nearly eliminating destitute elderly, protecting children and assisting low or no income Americans in their plight.

Those Jobs are Not Coming Back

Emotionally, however, the case to “Make America Great Again” rings true.  The flip side to the listed achievements attained is a sense of unfairness and abandonment from the technological and social displacement such progress has wrought. That is the raw nerve that Trump touches. Trump argues that American workers have lost their jobs to overseas cheaters, stoking xenophobia and false expectations simultaneously, promising (as do some Democratic politicians) to bring back “good manufacturing jobs” to America, typically meaning by that heavy industry and manufacturing jobs.

The reality is quite different, as technology is more to blame for such job losses. Silicon Valley technology thinkers are so aware of this issue that talk of “Universal Basic Income” is commonplace (along with speculation on the Singularity) among them. The UBI would be a way to ensure the welfare of everyone when all jobs are lost to automation and robots. But that is a whole other discussion and argument.

What is beyond argument is that technology disrupts the labor force, and that there is no turning back to a glorious past of a different (and “greater”) labor market structure. Productivity and output increases have been taking place in America and affecting the labor market structure. Suffice these examples:

Agro Industry:

• From 1900 to 2000 farm employment fell from 41% to 1.9% of the total workforce
• From 1948 to 1996 agricultural productivity increased 250%
• From 1955 to 2000 agricultural and farm exports increased approximately 800%

Automobile industry:

• 1980: 8,011,000 vehicles manufactured in the US by 725,000 workers – 11 veh/worker
• 2014: 11,661,000 vehicles manufactured in the US by 714,000 workers – 16.4 veh/worker
• The US accumulated Auto worker productivity increase from 1950 to 2013: 243%
• Estimated growth 2014-2018 - Employment: 2.1% / Productivity: 2.4%

Steel Industry:

• 1980: 101,455,000 Metric Tons shipped – employment: 398,829 – 254.38 MT per employee
• 2014: 95,400,000 Metric Tons shipped – employment: 149,800 – 636.85 MT per employee
• Overcapacity of the industry is estimated around 25 to 30% while steel imports estimated at 20 to 30% of the US market.

Electricity Generation:

• 2006 Generation: 4,060 TWh / By coal: 2,000 TWh (49.26%) / coal used: 1,030,556 K Tons
• 2014 Generation: 4,255 TWh / By coal: 1,600 TWh (37.60%) / coal used: 853,634 K Tons

Each of these industries has its own set of issues and problems, some of their own making, some related to unfair trade practices and some structural, but all indicate a substantial increase in output while reducing total employment or shifting resources. In fact, manufacturing jobs as a percentage of the total labor force has decreased from above 30% in 1960 to less than 8% in 2014 while manufacturing as a % of GDP has remained constant. No investor, businessman, entrepreneur or factory will give back the productivity gains attained to “Make America Great Again.”

Job Creation Blues

It is the reality and nature of a developing and growing economy that there will be labor force displacement, but no one expects or wants to return the economy to a country where 41% of the labor force worked in farms. The political promise of returning to an imagined better past is a pipe dream; in fact it is the original Marxist dream of Social Utopia. It also has striking visual imagery. The closed factories of old technologies create urban wastelands. Populists stand in a blighted area and decry such closings, making for a great image. It is not as striking to stand month after month in front of a hospital, a technology information park, or a construction site and say that in the last month more jobs were created than all existing jobs in the steel industry. If it bleeds it leads and that is red bleeding meat eaten up by voters of all persuasions.

According to labor economists it takes a little less than 150,000 jobs created monthly to keep the unemployment rate steady. Since 2010 this number has been exceeded repeatedly, decreasing unemployment from its peak of 10% in October 2009 to 4.9 % in August 2016. To compare, the highest unemployment rate since 1948 was 10.8% in Nov. 1982, and its lowest 2.5% in June 1953. Still, why does a steady stream of jobs created at a greater rate needed than by natural growth does not to quell the malaise that is touched upon by the slogan “Make America great Again”? When did this malaise begin?

Recessions strike employment as a lagging indicator, meaning unemployment peaks at the end of the recession once GDP starts growing again and impacts the labor market. The graph from the Federal Reserve clearly illustrates it well (shaded areas are recession periods). But this graph can also help us understand somewhat the underlying malaise tapped by Trump’s economic speech. The labor participation rate, i.e. the amount of people working and wanting to work, increased steadily at a rapid rate from around 1962, at 58% of the population, to 1990 at 67%. The participation growth curve slope starts to taper off in 1990 and peaks at 67.3 % in April 2000, climbing steadily down ever since to its July 2016 level of 62.8%.

Social changes have an impact, of course. The incorporation of women to the labor force likely explains part of the steep climb in labor participation rates between 1960 and 1990, while the growing peaks of recession-end unemployment rates in that period correlates to the desire of people to work during those years.  That growing participation curve can be interpreted as an optimistic outlook by the labor market. People expected the labor market to grow and have a good paying job waiting for them. Even in recessions, America was The Land of Opportunity. This may be, perhaps, the period to which Trump beckons when he says “Make America Great Again.”

The late 80’s and early 90’s changed the game. The biggest hoax perpetrated on the American people is the hoax of Supply Side economics. Begun with Reagan and synthesized in the phrases “trickle-down economics” and “a rising sea lifts all boats” but better described by Reagan’s own primary rival George H. Bush as "voodoo economics,” Supply Side economics transformed the economic landscape of the American worker.

The American labor market was under strain already. Technological disruptions (as described above) were driving down the manufacturing sector’s labor participation, and light industry, such as clothing and small goods, were feeling the beginning of globalization’s impact.  Starting in the mid 70’s the disconnect between productivity growth and wage growth became the norm. While many explanations for this disconnect have been put forward (including methodology problems measuring factors in the transit from a manufacturing to a service economy) undoubtedly the gap exists, resulting in owners of capital accumulating a greater share of the productivity gains than owners of labor.

The graph illustrating the disconnect between productivity and compensation (Lawrence Mishel, 2012) also indicates a sharp uptick in the slope of productivity gains in the advent of voodoo economics, while not as much in the hourly compensation curve, albeit it stopped declining.

In addition to these structural shift trends, income inequality has steadily increased in the US since 1969. Mercantilist policies, pushed by political “protectors” of business, created subsidies, tax loopholes and protective regulations resulting in increasingly non-competitive markets for goods and services benefitting the owners of capital. The GINI coefficient (indicator for income inequality) tells us that between 1969 and 2009 such inequality has increased an astounding 122%. This means that the increase in GDP per capita noted before has been distributed disproportionally at an increasing rate.

Increased income inequality has been directly correlated with increased divorce rates, increased personal bankruptcies and increased commute times, all associated with a lower quality of life. The increased income inequality pattern in America is a fundamental cause of the anger of the electorate with the political establishment as it fails to deliver the promised opportunity for a better life.

Hope and Greatness: Is There an Economic Case for Trump?

Reexamining the Unemployment/Participation chart from the Federal Reserve, 1990 onwards can now be understood as a period in which factors affecting the labor market structure and the remuneration of labor have come to a head. It is from that time that a trend of disillusionment begins for the American worker: a feeling that the American Dream is out of reach. It is no wonder that by 2008 the message of “Hope” resonated in the electorate enough to choose as president its purveyor, Barack Obama.  

Because the built-in structures (tax code) driving income inequality remain mostly unchanged, the faithful of voodoo economics hang on to the levers of economic policy and discourse, and the labor market structure is still buffeted by globalization and technology with no clear answer, it is no wonder that Hope gave way to Revolution in the 2016 election cycle. The “Rage Against the Machine” is understandable. And Trump preaches rage.

Yet, the answers Trump offers to quench this anti-establishment mood created by the disenfranchisement from the American Dream do not address the nature, origins or bases of this condition. His “recipe” includes more of the supply side economics that have been demonstrated time and time again to stifle growth and drive up inequality (supply-side faithful devotees are as blind to the failures of their economic ideology from the right as Marxist socialists are to theirs from the left). He promotes trade barriers potentially increasing by thousands of dollars per household prices for consumer goods from cars to TVs to toasters. Other agenda points in his recently announced master plan: weaken the social net and generally make the tax code more regressive for individuals and more generous for corporations, accelerating income inequality.

Trump’s answers are not the ones that will solve America’s woes. His answers do not even address the problems he highlights in his economic speech: job creation, fair trade and America’s “greatness.” It may be probable that by the way he posits the problems—with his knack for finding the raw nerve—and the way he parrots solutions from his supply side economic advisors, it may be just probable that he truly does not know how to link problems with solutions; and it is possible that at least some of those supporters that believed Trump could embody their aspiration of restoring America as the Great Land of Opportunity will soon see in Trump what Michael Bloomberg saw in him: A loud mouthed New York City conman.

Trump’s answers are not new, they have been tested before. Supply side economics has been tried throughout the world and failed—and brought us the Great Recession. His stance on trade has been tried before—and brought us the deepening of the Great Depression. And, beyond economics, his tribal stance of Country First has been done before—and brought us at its best ethnic cleansing and at its worst World War II. Trump is not the answer to America or is what America stands for. The grand experiment must go on, but different results should not be expected from trying the same solutions over and over again, no matter how loudly those solutions are pitched. His sales pitch is the Great American Con.

 Auto Industry in the 1980’s: A Decade in Transition; Christopher Singleton, Monthly Labor Review Feb 1992 (Accessed 8/7/2016)

Decline and Resurgence of the US Auto Industry (EPI) (Accessed 8/7/2016)

Economic Policy Institute, Surging Steel Imports Put Up To Half a Million U.S. Jobs at Risk, Briefing Paper #376 (Accessed 8/7/2016)

The US Steel Industry, Where we Have Been, Where we are Going, Keith Buse Feb 2005, Citing statistics from the American Institute of Iron and Steel (accessed 8/7/2016)

The 20th Century Transformation of U.S. Agriculture and Farm Policy, Carolyn Dimitri, Anne Effland, and Neilson Conklin, USDA Economic Research Service, June 2005 (Accessed 8/7/2016)

Coal Usage for Electricity Generation (Accessed 8/7/2016)

Manufacturing and the GDP (Accessed 8/7/2016)

Total Electricity Generation (Accessed 8/7/2016)

Manufacturing Labor Participation Federal Reserve Blog (Accessed 8/7/2016)

Labor participation rate/employment Federal Reserve Blog (Accessed 8/7/2016)

US GDP per Capita (Accessed 8/7/2016)

Infant mortality (Accessed 8/7/2016)

GINI in the US: Income Inequality and its Costs (Accessed 8/7/2016)

The wedges between productivity and median compensation growth, Lawrence Mishel,  April 26, 2012, EPI Issue Brief #330 (Accessed 8/7/2016)

The Economics of Inequality - A Healthy Economy is Healthy for Everyone.

The climbing stock market of the last few years as well as the anemic GDP growth are correlated to growing income inequality. Income inequality is a poorly understood economic issue that feeds speculative behavior and undermines economic growth. On the face of it, income inequality means there are people that earn a hell of a lot more than other people. It is about income not wealth, easily confused terms, although often one begets the other.

Growth is negatively impacted when financial assets and rents are accumulated by a small minority of higher level executives and majority owners who have a limited amount of capacity to spend it all. Said a different way: there is only so much stuff you can buy. So most of the money accumulated through inequality does not go into growth-generating consumer spending.

Typically that excess money ends up in financial markets of some sort: stock market and other financial games that do not contribute to economic growth, per se, when transformed into speculative bubbles. Of course, not all the climb of the market of financial instruments is speculative, as corporate assets, expected profitability and dividends are (or should be) the real drivers of the underlying value of a stock.

A major purpose of issuing stock is raising capital to invest in assets and company growth. If the human resources of a company are not considered assets but rather, easily tradable commodities, then maximization of profits (the fiduciary duty of business executives) logically dictates a policy of wage suppression. When wages can be maintained low, profitability increases and higher dividends are paid out. Increasing and steady dividends make for higher stock prices. And with a higher stock price, executive compensation climbs, and so on and so forth in a self perpetuating cycle. This falls under the classic category of market failure, i.e. a condition in which an imperfect structural allocation of resources creates inefficiencies and negative social outcomes—such as stagnant national economic growth. A structural situation like this typically requires third party intervention and direction, hence minimum wage laws.

But avoiding speculative financial market bubbles and decreased consumer spending are not the only reasons to intervene in the natural tendency for wage suppression by free enterprise. As Nick Hanauer has said, by maintaining the price of labor below the threshold of “living wages” many individuals and families, even when working much more than 40 hours a week, are forced to rely on public assistance for various basic needs, including housing, food and health. In other words, wage suppression shifts the true price of labor to the taxpayers. This is an egregious example of corporate welfare.

There is no substitute for money as a social program, as Daniel Patrick Moynihan famously argued. All instances of public assistance such as Medicaid, food stamps and public housing tend to erode the value of wages. In a counterintuitive and contradictory way, large businesses suppressing wages at a level under “livable income” are taking advantage of welfare and “socialist” programs, while groups and personalities pushing for a higher minimum wage are in fact advocating capitalist economics by defending the basic mechanism for distributing rents under such economic model: the salary.

The slowing pace of productivity has been blamed by many as the culprit of anemic GDP growth over the last few years. But income inequality is as culpable if not more, and the good news is that policy can change that, both materially and in expectations. This is not a case where the boss threatens the employee to fire him when said employee asks for a raise. This is leveling the floor and giving a raise to America, in order to give the economy a boost.

Metrics and indicators can be confusing and are open to interpretation. Mark Twain was famously eloquent about that: Lies, damned lies and statistics—the three ways to obfuscate the truth. Yet some probable consequences of raising the minimum wage can be inferred. Inflation will increase and stock market indices will be impacted adversely and naysayers will read these metrics as negative. Thinking it through, though, gives us a more mixed analysis. Negative interest rates and deflationary pressures are creating havoc in Europe and Japan. Experiments in cities around the country have not found that a rise in the minimum wage leads to sustained unemployment. Increased inflation will be more prevalent in the service sector, as manufacturing in the US is a relatively small portion of the economy. Interest rates on treasuries will increase, benefitting retirees and boosting the value of the dollar even more. This in turn will put downward pressure on the cost of imported goods, counterbalancing service sector inflation, but affecting exports. And finally, as disposable income in the less affluent sectors of society and the middle class increases, GDP growth will expand and pressure on social welfare programs will decrease. 

Depending on which noisy or quiet metric is focused upon at any given moment, the “economy” will be viewed, written about or politicized as prosperous or in the tank. But the growing level of income inequality is unequivocally unsustainable and certainly needs to be addressed. Not to do so most definitely will eventually bite the economy in its xxx even harder. America is not a household, and its budget accounts are different. America is not a business, and its operations work differently. America is a nation with a national economy; and America needs a raise.