Once again, into the fray. Neil Irwin takes on Trumpnomics, and
finds much that he likes. I don't like it so much. Here's what Irwin either doesn't get (in which case he should shut up and find something less taxing to do) or chooses to ignore.
The essence of the article is that Trump, being ignorant of economics, particularly macro, is either an idiot savant or very dumb lucky.
To start, it's simply
a lie that the bottom of the pyramid was the big winner under Trump.
"This is a blue collar boom," Trump also said Tuesday. That's less apparent. The biggest winners on a dollar basis were a familiar group - whites, college graduates, and people born during the "baby boom" between 1946 and 1964.
The issue, as always, is that touting percentage increase is subject to base magnitude bias, e.g. 1 more unit on a base of 10 is a higher percentage growth than a 10 unit increase on a base of 101. Those in the second group have more of more, as always. So
The bottom half of households saw their net worth rise by 54% under Trump, from $1.08 trillion to $1.67 trillion. That's compared to an 18% rise for the top 1%, who control roughly a third of the total household wealth in America, or around $34.5 trillion.
Second, Irwin seems puzzled by the 'orthodoxy' of Philips Curve seemingly not working. But he ignores
that the rich have driven significant inflation in asset markets.
If effective corporate rates were cut in half, and firms had new access to $664 billion in overseas income, yet they didn't spend that extra cash on wages or investment, where did it go?
CRS confirms what was well-reported at the time: Much of it went to $1 trillion in stock buybacks.
What remains unexplained by Irwin: why do Treasuries still hover near or below 1%, still? As any econ 101 student finds out in the first week or two, more moolah chasing output leads to increase in price of output. With income and wealth inequality growing, not denied by anyone except the Radical Right, we need only refer to the still true
tyranny of the marginal propensity to consume and the ever present risk aversion. As more moolah, from the 1% or so who remain risk averse (either inherently or because they're already chock-a-block with stocks), chases Treasuries their price goes up. Or to be blunt, the market rate of Treasuries can only rise with greater demand and that's not likely coming from Joe Sixpack who's mopping the fifth floor of Trump Tower. And since Treasuries
aren't sold with a fixed interest rate but a fixed coupon, as the unit price goes up with that fixed coupon, the rate drops. Recall from econ 101: the Fed isn't a real Central Bank, it doesn't control any interest rates at all. The closest it gets is jawboning the
Overnight Bank Funding Rate. That's it. Rates on instruments are set by the auction and the secondary market.
The FOMC cannot force banks to charge the exact federal funds rate. Rather, the FOMC sets a target rate as a guidepost.
And, once again, one cannot ignore the strict relation between interest rate, P/E (arithmetically, E/P of course), and opportunity cost. In simple terms, as the risk-free return drops in lock-step with bond prices, this action forces holders of assets to bid up the prices of other assets and force those returns up to the risk-adjusted (whatever it really is) P/E. Opportunity knocks many times. What may be unknowable in the data, is which is the chicken and which is the egg. Standard micro-theory always, always, always blames the Damn Gummint for stealing investment from the private sector. But that's just false, since bidders for assets always have to weigh opportunity cost (of which perceived risk is a part). If the future of technological progress, i.e. shocks of innovation, looks bleak, then they'll take the sure small beans. On the other hand, when technological progress is running in the lead, that's who to be on. That's always been true.
In sum then:
- the nether regions of the income and wealth pyramid only look like winners by arithmetic sleight of hand
- the rich got richer and the poor had kids
- the rich don't spend windfalls on CPI tracked units
- global interest rates, driven by risk averse holders of more moolah than they know what to do with, have been driven down by the tsunami of 1%-ers moolah
There is another, more speculative, motivation for the denial of the Philips Curve. With much of technology running up against the Laws of Mother Nature, there's less truly innovative activity to be had. As mentioned in these missives with some frequency, the spurt of new stuff in the 19
th and 20
th centuries was driven by the expanding knowledge of the periodic table and the Bohr atom. Now that we have all the elements, and don't count the fake ones cooked up in high energy labs, and how they combine, we're limited in what whiz band new shit we can make. What has happened, though, is that labor's share of cost of stuff has been falling for some time. Thus, labor costs have less impact on average cost than when the Philips Curve was proposed (1958).
One consequence of the forgoing is right in front of our eyes: 5G mobile phone service. It barely exists, and the Laws of Mother Nature ensure that it'll be infeasible, both as an engineering problem and an economic problem, forever. Not to say NO to a profit opportunity, the carriers are exploiting a loophole
they created by flogging an LTE increment that the rules allow them to call 5G. It ain't, but will likely be the most 5G most of us ever get; most prominent use today of real 5G is being able to
watch the football game on your phone while you sit in your stadium seat (pre and post Covid, of course). By the way, you should read the entire piece, if only because it documents what's been blindingly obvious to me for years. You can't fool Mother Nature.
