Trump’s Pre-Covid Economic Miracle is a Myth

The Wall Street Journal Editorial Board’s Portrayal of Trump’s Economic Track Record before Covid-19 is Fake News

All the opinion polls show the same thing: the single issue on which Trump is perceived as better than Biden is the economy.  Not law and order, not judges, not abortion.  Trump’s pre-Covid economy is widely believed to have been miraculous and this may be the sole remaining support post for many otherwise Trump-queasy Republicans.  I hear it all the time, a veritable laundry list of noxious Trump stuff that “country club” Republicans hate about Donald Trump.  And they all end with, “but the economy!”  “He did it before, he can do it again.”  This is apparently so powerful an allure for Republicans with chunky brokerage accounts that no matter how many other appalling things he does, their faith in his economic omnipotence offsets them all.  That and the fact that they’re dead certain the Dems will hike capital gains taxes and lead a communist revolution (not sure of the order).  I can’t help with paranoid fantasies about Chuck Schumer and Karl Marx — but Trump’s economy was not spectacular.  He did not do it before.  This is a myth, nothing more.  Even before Covid-19, the US economy was not the greatest in history, it was not the greatest in American history, and it wasn’t the greatest in any context whatsoever.

What explains the durability of this myth?  And why is Trump’s ever worsening behavior so easily shrugged off?  For many Republicans it would have been impossible without the Editorial Board (EB) of the Wall Street Journal (WSJ).  The morning after the latest Trump abomination, there it appears, as predictable as the tides: the Editorial Board’s “explanation”.  The Journal advertises itself as “essential reading” and indeed, so it’s become for well-off but morally uneasy conservatives.  The EB is the fix which excuses bad behavior, burnishes the myth, and let’s Republicans get back to golf, boating, and speculating on vaccine stocks.  The successors of Robert Bartley sell opiates to the business class.

Their methods are simple.  The Journal’s opinion pieces are as formulaic as a North Korean newscast.  These “easy bake” editorials all follow the same simple template the day after the latest Trump slander, crime, or imbecility:

When Donald Trump won the Presidency four years ago, half of America gnashed its teeth or cried…

Note the distinctive use of what rhetoricians call the pre-emptive gaslight.  The first recorded use of this technique was by Pope Pius VII in 1804 in Paris when the Catholic Church “endorsed” Napoleon Bonaparte (“stop being hysterical, think of the judges!”).  In their pitch for a second term, before the EB mentions a single word about Trump’s behavior, they tell us that anti-Trump voters, “gnashed (their) teeth or cried” when he won.  So people who dislike Trump are disturbed emotional wrecks who grind their teeth, got it.  Then, after carefully and thoroughly applying a pre-emptive coat of slime to those who dislike Trump, then and only then do they get around to dismissing the actual arguments against him.  The corollary would be if I wrote the following:

The Wall Street Journal Editorial Board, noted for its stunning overnight abdication of 50 years of principled conservatism in favor of a plastic orange El Hefe, made the following points in Trump’s favor…

In the following pages, I’ll explain why Trump’s pre-Covid economy was the worst miracle in history and why, in a second term, the risk to the long term economic prosperity of the US is far too great to justify the microscopic chance he might do better the second time.  I will use as my starting point the Wall Street Journal Editorial Board’s two endorsement-type editorials published in late August.  I offer this essay not as ready-to-tweet talking points but as a comprehensive (i.e., endless) review which others may find useful as a reference source when rebutting similar propaganda.  I would apologize for how ridiculously long it is but the myth of the miracle economy is so completely ridiculous and has so many different ridiculous parts to it and the EB made so many supremely ridiculous points that I feel obligated to shred every last ridiculous one, down to its last sad ridiculous punctuation point.

Lastly, readers may be unaware but the official Journal policy is not to formally endorse political candidates.  This is a difference without a distinction.  An editorial published two months before an election with ten reasons to support the incumbent and ten ways the challenger is a communist is an endorsement.  Whether de facto or de jure, The Wall Street Journal Editorial Board argues each and every day that Donald J. Trump should be re-elected President. 

Why should anyone care what I have to say about this?  Well, I’ve been a professional money manager for about the last 30 years before retiring in June. I managed so-called “institutional money”, e.g. multi-billion dollar pension fund, endowment, and sovereign wealth fund assets.  After graduating from Columbia and NYU (undergrad and MBA), I spent 18 years as a portfolio manager at J.P. Morgan (half of that overseas in London, Singapore, and Tokyo) where I left as a Managing Director.  After that I worked for almost ten years as an investment director at the Alfred P. Sloan Foundation in New York City, part of a small team tasked with managing their ~ $1.5 billion endowment.  Most recently, I was the Chief Investment Officer, based in New York, of the Lafayette College endowment.  As my CV makes worryingly clear, I’m one of those shadowy “global elitists”:  Ivy league, J.P. Morgan, Sloan.  And if that isn’t bad enough, I actually live (gasp) in Manhattan!  We are, I am told, plotting to destroy the world so we can dine on roast toddlers and Malbec.  Or something.  Q to you, too. 

My purpose in outing myself is simply to establish that I know something about macroeconomics and have actively followed economic trends in all major economies as a professional investor for almost three decades.  And I followed macro trends not as an ideological partisan (like the EB) but as a professional investor.  I have biases like every human being but throughout the Trump administration, I fought hard against my personal revulsion to attempt to objectively assess the possible impact of his policies.  My paycheck literally depended on it.  That being said, I won’t hide my politics.  I’m one of the lifelong Republicans to whom our experience of Donald Trump is negative, immediate, and visceral — like food poisoning.  So I never boarded the MAGA cruise ship.

Lastly, some may argue I’m not an economist or academic or CEO or a former government official.  You won’t find a list of articles or books I’ve written since there aren’t any.  In the public world, I don’t exist, I’m nobody.  To them, I say the following: the essential “insight” of Trump’s election is that someone who knows nothing can easily run the Federal government and lead the free world.  It’s a celebration of ignorance.  Well, I’m just as ignorant as the next man.  For the last four years we’ve listened to a parade of frauds, fools and sycophants, it can damn well listen to me for a few minutes.

The WSJ Editorial Board’s description of Trump’s economic policies and track record before Covid-19 is propaganda

Two recent pro-Trump editorials promoting his economic track record are all you need to read to see the EB’s easy bake template in action.  The WSJ editorials of August 25^th, “Remember Trump’s Economy?” and August 28^th, “The Trump Disruption” compare economic policies and conditions during Obama’s and Trump’s terms and try to make the case that Trump’s were vastly superior.  Given the durability of this myth, the actual evidence is shockingly thin.  Please note, other than these two pieces, I’ve read little the EB has written about Trump or Biden over the last five years.  Let me stipulate in the interests of balance and fairness, that it is conceivable that all those I did not read were well-researched, thoughtful, sensible, fair-minded, compelling, and fact-based appraisals and that the two pieces of stinking drivel I chose to read are the exception.  Yes, there’s a chance.

In the following section, I’ll review the EB’s view of Obama’s policies and purported effects, then tell you what actually happened.  Then I’ll review their commentary on Trump’s pre-covid economy and why I believe it’s largely false. 

Obama-Biden Economic Track Record

View from WSJ EB:

The Obama-Biden recovery was hampered by tax increases and “hyperregulation”.  It was, “the slowest in decades, and by the second half of 2015 it was losing steam and came close to a recession in 2016.”

View from Earth:

Balance sheet recessions

The economic recovery which began in 2009 was indeed slower than that seen in a typical post-war recovery.  But the Great Recession was not a typical recession, it was what economists call a “balance sheet recession” where excessive levels of debt built up during the previous economic expansion in one or more sectors (household, business, or government) are written off and massive amounts of equity are destroyed.  When this happens, households spend less and save more over a period of years, in an attempt to rebuild equity.  Because of this, balance sheet recessions are much tougher to recover from.  Think of someone who couldn’t pay their mortgage in 2008 and lost their home.  Even if now employed, this person’s spending was constrained for years as they tried to rebuild savings and “heal” their credit score.  A total of more than 6 million homes went into foreclosure during and after the Great Recession, impacting as many as 25 million Americans.  Tens of millions of other homeowners were able to hang on to their homes but big declines in prices wiped out equity values built up over a decade.  Financial analysts call this deleveraging which simply means a family or a business is either reducing the absolute dollar value of their debts or reducing the amount of debt per dollar of annual income.  The effect of broad deleveraging by households on a recovering economy is like making a patient recovering from heart surgery wear heavy ankle weights when walking – it will take longer.

The three charts nearby show this quite clearly.  Chart A shows total debt for households as a percent of GDP (as a proxy for income).  You can see that household “leverage” declined continuously from 2009 when it was 98% of GDP, all the way until 2019 when it bottomed at ~ 75%. 

Chart B shows the year over year percent growth in the dollar value of total debt for US households (blue line) compared to nominal GDP growth (green dotted line).  You can see that the absolute value of household debt declined year/year from 2009 to 2012. 

Even when debt began to grow again in 2013, it still grew slower than nominal GDP (i.e., still deleveraging) through the end of 2019! 

Chart C shows the same two variables going back to 1952. 

Here you can see that the blue line (consumer debt growth) is above the dotted green line most of the time going back to when the Federal Reserve first started collecting this information in 1952.  This is a critical point: the ten year continuous reduction in household leverage which occurred after the Great Recession, had never happened before during post-war economic expansions.  And since consumer spending makes up about 70% of total GDP, unprecedented and prolonged deleveraging by consumers obviously had a substantial prolonged drag on GDP growth during Obama’s first and second term.  The economy under Obama grew in spite of this fierce headwind while Trump benefitted from the reversal of this trend. 

Economist Carmen Reinhart perfectly summarized this in August 2011:

Debt deleveraging takes about seven years … And in the decade following severe financial crises, you tend to grow by 1 to 1.5 percentage points less than in the decade before, because the decade before was fueled by a boom in private borrowing, and not all of that growth was real.

So if we compare the Obama recovery to other recoveries from balance sheet recessions, was it notably slower?  I don’t have the data to answer that question definitively but it’s not necessary.  The Editorial Board is comparing an apple (a normal recovery) to an orange (recovery from balance sheet recession) and saying, “look at how different they are!”.  To dismiss their argument one need only know that an apple is not an orange.  

Another data point to support the view that the Great Recession was atypical is the lesson that economists, the Fed, and even Republican politicians took from it when facing a recession of a similar magnitude which was also atypical: the 2020 “Covid-19 Recession”.  The peak to trough decline in real GDP during the Great Recession was 4.3%, almost as bad as the 5% peak to trough decline in GDP expected this year.  The lesson from the Great Recession taken by most economists was that the $900 billion recovery package passed in 2009 was puny and undersized relative to the degree of damage sustained and hence, in 2020, Republicans have supported fiscal stimulus now approaching $3 trillion and are open to doing another $1.5 trillion!

“Obama’s tax hikes” and the great fiscal tightening of 2009 to 2015

If most economists believe the mistake in 2008 was that far too little fiscal stimulus was done, do we therefore blame Obama for not doing more?  We do not, we blame Republicans in Congress who for most of his two terms had the votes to block all spending bills and whipped up a national hysteria about looming national bankruptcy.  The GOP forced drastic fiscal tightening on a fragile recovery. 

For those of you who think “fiscal tightening” is what happens to your friend’s posture when the check comes, it simply means a reduction in the annual government budget deficit.  So when the budget deficit goes from 5% of GDP to 4% of GDP, that is fiscal tightening.  It means that Uncle Sam is tightening his belt.  And because Uncle Sam’s annual spending is equal to about 1/3 of the US economy, fiscal tightening has a substantial negative impact on GDP growth.  There are two ways to reduce a budget deficit: tax increases or spending cuts (or some combination of both).  Both accomplish the same thing and both are a drag on economic growth. 

For years, the EB has enjoyed confusing its readers by pretending that cutting the budget deficit by raising taxes has a massive negative impact on growth while spending cuts of exactly the same size will have a negligible effect on growth.  The truth is that when the government tightens its belt, how they do it, whether through tax hikes or spending cuts, the resulting economic effect will be broadly similar. And my goodness was there fiscal tightening!  Chart D shows the annual budget deficit as a percent of GDP.  It shows truly epic fiscal tightening under Obama thanks to GOP deficit hawks (now extinct).  As you can see the deficit went from nearly 10% of GDP in 2009, to ~ 2.5% in 2015. 

In other words, at the same time that households were deleveraging, Republicans forced massive government (i.e., fiscal) deleveraging at the same time.  Close your eyes and think back and you can almost hear them again, wailing and shrieking about “billion dollar deficits as far as the eye can see”, moaning and (why not) gnashing their teeth about the fiscal profligacy that would inevitably ruin us.  So for the EB to accuse Obama of overseeing a slow recovery that was slow because of actions the EB and GOP demanded he take is like kicking your dog then complaining when he limps.  The Obama recovery took place under constant attack from hostile Tea Party snipers who were happy to kneecap Democrats and even insufficiently deficit-panicked Republicans (Speaker Boehner, RIP) in order to “restore fiscal sanity”.    

Now, about those tax increases: there were two pieces of major legislation signed by Obama which increased taxes – Obamacare (in 2010) and a bill that dealt with expiring Bush tax cuts (in 2012).  Again, as explained above, whether Obama reduced the budget deficit with tax hikes or spending cuts would not have made a big difference to the economic outcome.  That being said, there are three main things to take away about “Obama’s tax hikes”.  One, they were entirely on wealthy Americans.  Two, in aggregate they weren’t large.  Compared to Trump’s tax cuts, they were puny.  Third, the 2012 law made Bush’s whopping big personal income tax cuts permanent for all families except those making over $250 thousand.  If forced to reduce the budget deficit, what would the EB prefer Obama to have done?  Make big cuts in food stamps, education and Medicaid?

Obamacare taxes:

• On personal income over $250 thousand (married couple), pay an additional 0.9%
• When salary plus “investment income” is over $250 thousand, pay an additional 3.8% on all investment income (capital gains plus dividends and interest)
• New excise taxes on certain healthcare plans and on imported medical equipment and drugs (tariffs!)
• All of these taxes combined raised a grand total of just over $26 billion in fiscal 2018 according to the Tax Policy Center.  Is this a big number?  No, it’s 0.1% of GDP, it’s a rounding error.

2012 American Taxpayer Relief Act:

• Bill had substantial support from Republicans: 40 GOP Senators and 85 House members voted for it
• The need for this bill came about because the personal tax cuts in Bush’s 2001 and 2003 laws were set to expire on January 1^st, 2013
• The 2012 law made all of Bush’s tax cuts permanent except for those making over $450 thousand (married couple).  For those making over this amount:
  • The top marginal income tax rate reverted to 39.6% (what it was in 2000) up from 35% (where it was from 2001 – 2012)
  • The long-term capital gains rate and the dividend rate reverted to 20% from 15%
• The estate tax (Death Tax for Fox viewers), was set at 40%, up from 35%, but only on estates worth over $5 million.  The tax is zero for lesser amounts.
• Fix to AMT which the WSJ applauded, “After years of failed efforts, the bill permanently keeps the middle class from being hit by the alternative minimum tax, a 1960s edifice intended only for America’s wealthiest.”
• When it was signed, the CBO estimated the bill would raise an incremental $600 billion over ten years or about 0.3% of GDP per year.

View from WSJ EB:

• “The Obama-Biden policy mix of easy monetary policy, higher taxes and hyperregulation skewed economic gains toward” highly educated vs less educated workers, toward shareholders at the expense of workers, and toward large versus small companies. “These inequities began to unwind under the Trump Administration.”

View from Earth:

First, let’s dispense with the silly lie that the Obama Administration had an easy monetary policy – or any monetary policy at all.  The Federal Reserve sets monetary policy and the Fed is statutorily, and for the last four decades in practice, independent from the Administration.  Obama’s only “policy” with respect to the Fed was to respect its independence and continue with Bush’s Fed Chair instead of switching horses in the midst of a global financial panic.  Whatever indirect “jawboning” influence Obama may have had over the Bernanke/Yellen Fed in support of zero rates and quantitative easing, Trump has continued to support the very same ultra-easy monetary policy!   So even if you accept the ridiculous fiction that the President runs monetary policy, “Trump’s monetary policy” turned about to be identical to “Obama’s monetary policy”. 

But the most head-scratching, did-hell-just-freeze-over part of the paragraph above reads that Obama’s policies were bad because they increased “inequities” which “skewed economic gains” to:

• Highly educated workers versus less educated workers
• Owners versus workers
• Large versus small companies

It is beyond my powers of analysis or comprehension to make sense of the Wall Street Journal’s (newly discovered? Just remembered? Something Tucker Carlson said?) concern with the excesses of shareholder capitalism, spiking wage inequality and declining union power, and a playing field structurally tilted towards large multi-national corporations.  I will simply note that I agree wholeheartedly with such concerns, regardless of the dizzying intellectual incoherence of the source and as a result, I will follow the EB’s lead and use inequality as a metric to evaluate the economic policies of Trump and Biden.

So, was Obama bad for inequality?  How about inequity, was he better on that?  Well, first we have to recognize that inequality, inequity, unfairness, has been rising in America across multiple dimensions for forty years or more and yes, sadly, Obama did not single-handedly reverse it.  However, Obama did three main things which lessened inequality or at least prevented it from worsening.  One, the auto industry bailouts, with hindsight, were a good thing.  The EB argued at the time that GM and Chrysler should have gone through the normal Chapter 11 bankruptcy process so that they could fire all their workers and eliminate their costly union healthcare benefits, then rehire two-thirds or three-quarters of their former employees at half their previous wages.  With the benefit of hindsight, taking this approach would have had a significant dampening effect on US blue collar wages (which the EB is now apparently worried about).  Second, Obamacare, with all its many flaws, increased health insurance coverage for ~ 15 million poor people by expanding Medicaid.  It’s not great coverage and the providers are often low quality but, with 200,000 dead and many survivors suffering long-term effects (87% of Italian hospital patients had major symptoms two months after discharge in one study), without Obamacare, a horrible situation would be a good deal worse.  Last, Obama presided over an economic recovery which continued for seven years until Trump took office.  It was sluggish but if it had ended, a recession would have worsened inequality as typically happens in recessions.  These are not huge wins by any means but, as we shall see in the next section, the EB’s claim that Trump has been and will continue to be the champion of the downtrodden is as credible as an epidemiologist from Trump University.

View from WSJ EB:

The Obama-Biden recovery was hampered by tax increases and “hyperregulation”.  It was “the slowest in decades, and by the second half of 2015 it was losing steam and came close to a recession in 2016.”

View from Earth:

The Obama near-recession of 2016

The last bit of slander by the EB of Obama’s record is the implication that his economic policies very nearly caused a recession in 2016.  “The Obama-Biden recovery… the second half of 2015… was losing steam and came close to a recession in 2016.”  Why, inquiring minds may wonder, was the economy “losing steam” in 2015?  What policy errors did Obama make which led to this near recession?  Well, you have to read a different newspaper to find out.  The truth is that the economy was hammered by what economists refer to as exogenous events.  The definition of exogenous in this context is “not a damn thing to do with Obama”.  What were the exogenous events?  A rapid slowdown in China (engineered by Beijing to reduce excessive leverage) which reduced US exports and caused a crash in commodity prices, particularly oil which went from $107 in June 2014 to a low of $26 by early 2016.  The US shale industry had become a significant driver of US investment spending, so when oil prices collapsed, shale investment spending plummeted.  The combination of the sharp slowdown in China and the sudden stop of shale capex plus multiple second order effects of both, nearly halted the expansion in the US economy in 2016.  An IMF report dated July 2016 summarizes what happened:

The U.S. is in its seventh consecutive year of expansion. The unemployment rate has fallen to 4.9 percent and household net worth is close to pre-crisis peaks. Nonetheless, the economy has gone through a temporary growth dip in the last two quarters. Lower oil prices led to a further contraction in energy sector investment and a strong dollar and weak global demand have weighed on net exports.

None of this had much of anything to do with Obama’s economic policies.  Now, on to the arguments the EB puts forward in their case for Miracle Man Trump and why Trump’s pre-Covid economy was manna from heaven for Americans.

 

Other posts on why Donald Trump was (and remains and will always be) unfit to serve as President:

• The One Reason I Need to Vote Against Trump (the lies)

• It’s Not “his tweets”, his “unfiltered style”, or “brusque persona”.  It’s Trump’s Loathsome CHARACTER that made him a disastrous President.

 

Trump’s Pre-Covid Economy

View from the EB:

Trump’s 2017 tax law (corporate tax rate from 35% to 21% plus immediate 100% expensing of all business investment) plus deregulation of shale frackers and banks caused:

A “burst of (GDP) growth” and a “capex (business investment) surge”, the unemployment rate declining to record lows, and an acceleration in wage growth, particularly for Blacks and Latinos.

The Journal says Trump was “less effective” when he

launched a global trade war and ordered legal immigration reduced

And these contributed to a slowdown and the end of the Orange Spring in late 2018.

View from Earth:

I. Trump’s Pre-Covid Economy: GDP growth, Obama versus Trump

Covid-19 wasn’t Trump’s fault even though he’s botched the response so to be fair, I will compare Obama’s full term (Jan 09 – Dec 16) to only the first three years of Trump’s term (Jan 2017 – Dec 2019).  All of the charts in this essay will show data only through the end of 2019 because this essay is focused solely on the myth of that Trump’s pre-Covid economy was miraculous and not on the myth that he’s done a bang-up job “managing” during the pandemic.  The latter claim draws howls of laughter while the former is still accepted as true.

I’ll begin with the most commonly used metric to proclaim Trump’s fiscal divinity, real GDP growth.  Chart E-1 shows quarterly real GDP growth (over the prior year) from the beginning of Obama’s term to December 2019.  Looking at the four quarter annual growth rate smooths out big quarterly swings in order to show underlying trends more clearly and this is how Wall Street typically looks at financial data.   This is an exceptionally easy graph to find and create online using the indispensable Fed charting tool, FRED.  Try it yourself.  See if you can spot the miracle period.  The red hot torrid growth period should be easy to see compared to the “slowest in decades” Obama economy.

Having trouble?  You may not be able to spot it right away.  The Trump economic miracle, like most religious miracles (vision of Jesus in a grapefruit, e.g.), requires one to hold the graph at a certain angle and in a certain light and in a certain malleable frame of mind.

Give up?  Okay, let’s look at Chart E-2 which is identical to Chart E-1 only it has labels.  Trump’s three pre-Covid years are divided into two: the shaded green area is 2017 – 2018 (miracle) and the gray shaded area is 2019 (non-miracle).  If you follow instructions from the EB, you will gaze in wonder and awe at 2017-2018 (shaded green to denote burgeoning national wealth) then carefully shield your eyes from the completely irrelevant 2019 (shaded gray to denote that it didn’t happen – or it did but it didn’t matter) when Trump destroyed the miracle twelve months after creating it.

Looking closer, in the lush green part, you can see that the fastest four quarter growth rate achieved during Trump’s term was 3.3%, achieved in the third quarter of 2018.  3.3% is the percentage increase in real GDP from Q3 of 2017 to Q3 of 2018.  During the first two years of Trump’s term, 2017 and 2018, fueled by a $2 trillion tax cut (fiscal stimulus), GDP growth did indeed accelerate.  Then, as Trump’s global trade war ramped up towards the end of 2018, business investment tanked and growth slowed sharply.  By Q4 2019, real GDP had grown just 2.3% over the prior year.  The average annualized growth rate during Obama’s (post-recession) Administration was 2.3%.  For Trump (pre-Covid) it was 2.5%.

The EB writes without apparent irony that, “From the end of 2017 through September 2018 the economy grew by more than 3%.”  So not only are we supposed to exclude the current horrific Covid recession, we’re supposed to exclude 2019 because Trumps trade war is somehow… what?  An anomaly?  Not his fault?  An unorthodox style?  The Democrats are MUCH WORSE…?  I’m confused.  This is the case for Trump, right?

Okay, let’s turn on the lights.  Trump’s economic stewardship comes complete with global trade wars, no assembly required.  You cannot get one without the other.  Tariff Man is one of the few actual convictions he has.  Protectionism (and anti-immigration) is core to his nationalist paranoia.  His public comments over four decades on the evils of free trade are frequent and clear.  If you support Trump over Biden because you think he’s better on the economy, you must make the case that the damage to American businesses and consumers from a continued ad hoc global trade war will be minimal.

To conclude this section, when we look at real GDP growth, the single metric that best encapsulates economic performance, looking at Trump’s first three years in office, pre-Covid, there is no clear sustained acceleration of growth from that of Obama’s two terms.  Trump’s pre-Covid economy wasn’t the best ever, wasn’t the best US economy ever, wasn’t the best of anything.  On four separate times under Obama the economy grew as fast or faster than the 3.3% maximum rate under Trump.  The annualized post-recession growth rate during Obama’s term of 2.3% is slightly less than Trump’s pre-Covid 2.5% but given that the 2.3% was achieved in the teeth of drastic, historic, unprecedented, prolonged consumer and fiscal deleveraging, and given that the 2.5% was achieved with a massive debt-funded tax cut, the only miracle is Trump’s PR.

II. Trump’s Pre-Covid Economy: Short-Term Stimulus from Tax Cut Was Wasted; Long-Term Benefit — But Only If Trump Loses!

The 2017 tax law is praised by the EB primarily for two provisions related to corporate taxation: lowering the corporate tax rate from 35% (one of the developed world’s highest) to 21% (one of the lowest) and giving businesses the right to “expense” (i.e., write-off) 100% of capital investments in the year the investment is made.  Conceptually, this has the effect of substantially increasing the potential after-tax rate of return on new investments which, all else being equal, should lead to increased business investment.  There are two main possible effects of the 2017 law.  One, if a tax cut isn’t “paid for” by reducing government spending (and this tax cut was not paid for), then the tax cut is equivalent to fiscal stimulus (i.e., an increase in the annual budget deficit) which is a short term boost to GDP growth.  Two, sustained increases in business investment over longer time periods are likely to have a positive impact on productivity and hence lead to a faster sustainable long term GDP growth rate (what economists call “potential growth”).  So what do we make of Trump’s tax cut?

Fiscal stimulus: it’s not a miracle, it’s borrowing to pay bills

First, as stated above, if the Federal budget deficit grows – whether through a tax cut or increased government spending, it doesn’t matter why — the net effect is fiscal stimulus.  Yes, the outcome will be somewhat different depending on the specifics of which taxes are cut or what the government spends money on but the main effect is simple and straightforward: a stimulus to economic growth.  There is nothing clever or new or complicated about this.  It’s not the Laffer Curve and it’s not American exceptionalism.  If I borrow $100 and spend it, my personal GDP will rise by $100, not because I’m suddenly richer but because GDP equals spending, not wealth.  When Uncle Sam borrows more money – either to give to companies to spend or to spend itself, unless they cut government spending by the same amount, the net effect will be, shock and surprise, GDP goes up about as much as the amount borrowed.

Okay, but we did get a “burst” of growth and “capex surge”.  If we bring back manufacturing jobs, it might be worth adding to the debt.  Yes, possibly, but only if the newly improved conditions for business investment are sustained.  They were not.  A global trade war will always cause a massive increase in uncertainty.  Businesses don’t know what Trump will do because Trump doesn’t know what Trump will do.  Trump and the GOP borrowed to pay for a business tax cut and then completely wasted the short term stimulus with the trade war.  As can be seen in Chart F, by December of 2019, business investment had slowed to almost 1%, far slower than during most of Obama’s term!

Ah, but won’t the corporate tax cuts act as turbochargers to GDP growth in the long term (once we win the global trade war, LOL) by stimulating investment and productivity?  The correct answer as to whether the corporate tax cut will be, over the long term, “worth it” is that it depends.  On whether A. the cost of the debt incurred to pay for the tax cut is less than B. the incremental benefit of increased business activity and capital investment over what it would have been without the tax cut.  The EB focuses solely on the benefit and ignores the cost.  The bottom line is that no one can say for certain today if it will be worth it over the long term because we don’t know the long term cost of the debt and we don’t know the long term marginal increase in business activity and investment.

$2 trillion fiscal stimulus during a peacetime expansion

If we look one more time at Chart D showing the yearly federal government deficit/GDP, we can see that when Trump took over the deficit was 3.1% of GDP but it grew to 4.6% in 2019.  Although not a huge increase in absolute terms, it is the opposite of what folks like Mick Mulvaney and Mark Meadows preached non-stop, ad nauseam, during Obama’s term.  They were adamant that “fiscal sanity” must be restored (though we note there was a fair bit of deficit insanity during Reagan and Bush 2).  The principle is that we should save when times are good so that there’s money to spend (or borrowing capacity) during big national emergencies like wars or pandemics.  This is no more complicated to understand then the fable of the grasshopper and the ant where the ant.  We elected a grasshopper as President and the GOP, formerly conservative ants to a person, was enraptured.

As a result, even though Trump wasted the stimulus with his trade war, he did succeed in making US government finances less secure and in reducing our potential borrowing capacity for possible upcoming emergencies.  And, doh!  Wouldn’t you know it, that’s what happened!  Because of the coronavirus and the lockdowns, the federal government is spending trillions of dollars in an attempt to avoid a second Great Recession or worse – but our fiscal position at the beginning of the emergency was notably weaker because we blew $2 trillion during the “good times”.  I have an email in to Mick and Mark, asking how juicing growth from deficit spending during an expansion was key to ensuring American’s long term economic growth and prosperity.

Longer term benefit unlikely if Trump re-elected

As mentioned above, the longer term benefit of increased business investment is faster productivity and hence faster potential GDP growth, all else being equal.  But all else isn’t equal.  With Trump, you get tariffs.  You get tariffs, impeachment, saber-rattling, extortion, dog whistles, and sex scandals.  In short, you get uncertainty out the wazoo.  We saw in Chart F, whatever boost the tax cut gave to business investment in 2018 was completely reversed in 2019 because of Trump’s erratic, confusing, ad hoc, trade war.  Chaos Monkey Trump beats Club for Growth Trump any day.  He made the US tax and regulatory environment among the most attractive in the world 😊.  Then began to routinely and publicly threaten American and foreign businesses and CEOs with punishment if they didn’t open a plant or move production or grovel with enough alacrity.  And suddenly shifting half your supply chain back to the Midwest looks less like a no-brainer ☹.  Although we can’t say with certainty the tax cut will be a net benefit over the long term, the early evidence is that there will be little benefit as long as Trump himself is in office! 

Donaldnomics

The next point to make is that Trump’s tax cuts weren’t really Trump’s.  As discussed, Trump has not spent a lifetime talking about lowering tax rates.  He never actually made any money until The Apprentice so the rate was obviously not a central concern.  Trump latched on to the tax cut idea as a way to get elected.  The rest had little to do with Trump except two things.  Trump told Mitch it had to be “thiiiiiiiiiiiis big” and then he used his special magic marker to sign it.  By all accounts the details were agreed on by Republicans in Congress plus Mnuchin and Cohn.  And the EB agrees.  When assessing the 2017 bill after it passed, they wrote that Trump, “contracted out tax reform to Congress, especially Paul Ryan in the House and Pat Toomey in the Senate, and they delivered.”

Is it possible Trump will raise taxes on corporations (or anyone) if he has the slightest political reason to do so?  In a second Trump term, Mnuchin will come to Trump with a colorful graph showing Quarter Pounder-sized deficits from here to the second Second Coming.  Republicans in Congress will, zombie-like, arms outstretched, start to moan about deficit reduction and suddenly a “tax reform” bill that just happens to raise revenue will be on the table.  Impossible?  Really?

III. Trump’s Pre-Covid Economy: Federal Debt and Deficits

Government debt: do Republicans care anymore?

I’ve touched on the debt and deficit in the preceding sections but when we turn to the future and consider whether Trump or Biden will be better for economic growth and prosperity in the next four years and beyond, we really do have to address head-on the Elephant in the room: do Republicans care anymore about rising national indebtedness?  Many Republicans have spent much of their adult life really truly agonizing about the national debt.  They viewed running a large deficit after the deepest recession since 1930 as immoral and said so approximately eleven trillion times. 

So… now what?  Trump increased debt/GDP by 5% during a peacetime expansion and the GOP loved it.  Mickey and Markey now compete to be champion Trump bootlicker.  Because of Covid-19, the Feds have borrowed and spent close to $3 trillion while tax receipts are plummeting and so the CBO estimates Federal debt held by the public will cross 100% of GDP next year.  Ten years ago during the Euro Crisis, Italian government debt of over 100% of GDP was viewed as a looming systemic risk.  Dude, what happened?  Was it all a bad dream?  Or is this the bad dream?

To be fair, many economists and financial market observers have changed their views about what levels of government leverage are sustainable since the Great Recession.  Much of the shift is due to the remarkable disappearance of goods and services inflation in most large countries since 2008.  If inflation is quiescent, interest rates can remain low or zero for extended periods, prolonging economic cycles without risking a spike in inflation and borrowing costs (albeit at the cost of asset price bubbles and jaw-dropping inequality). 

When Quantitative Easing (QE) and Zero Interest Rate Policy (ZIRP), were first unveiled by the Federal Reserve and then adopted by most other developed market central banks during and after the Global Financial Crisis and the Euro Crisis, many observers were convinced they would cause much higher inflation and, eventually, currency debasement.  It didn’t happen, not yet anyway.  As a result, most private sector economists have substantially increased (explicitly or implicitly) their estimate of what level of debt/GDP is manageable.  The consensus used to be that debt over 100% would meaningfully increase systemic risk whereas now the view seems to be that the US (because the Dollar remains the world’s reserve currency and all our debt is Dollar-denominated) can sustain debt levels of up to 125% or even 150%.  Which is good, because we’ll be there soon!  But none of this changes the basic question.  Whether 75% or 150%, does the GOP care or not?  As it happens, either way, Trump is a bad bet.

If we still care about the debt, well, Trump doesn’t.  He’s made it absolutely clear he will not touch entitlement spending.  And as we all remember from those adorable PowerPoints by Paul Ryan (who?), any significant and sustainable debt reduction is impossible without cutting – er, reforming entitlements.  But Trump was listening that one time in 2016 when Steve Bannon told him that Americans not only will never vote for that, they will dismember anyone who mentions it.  Four years later and the only thing we know for sure about Trump’s economic policy is that it is implacably hostile to free trade, immigrants from poor countries, and entitlement cuts.  So if you care about the debt, Trump is not your man.

If you don’t care about the debt, then there is no earthly reason to support anyone but the Democrats.  They’re the experts!  And they won’t blow it on tax breaks for Wilber Ross and Jeff Bezos!  If Republicans no longer care about debt/GDP then most of the pre-Trump GOP economic platform turns to dust.  It simply isn’t relevant.  Virtually all GOP attacks on Democrats are about spending “too much” or “more than we can afford”.  If we can safely get to 150% debt to GDP, every Republican attack on Democratic economic policy for the last 40 years becomes instantly moot. 

IV. Trump’s Pre-Covid Economy: Record Low Unemployment, Accelerating Wage Growth for Blacks, Latinos

The EB argues that Trump’s pre-Covid economy caused all-time low unemployment rates, accelerating wage gains for people of color, and an increase in labor force participation.  But bragging about the record low unemployment rate without factoring in where the rate was when he took office is like giving the gold medal to the guy running the last leg of a four-man relay race and ignoring the other three runners.  Under Obama, the unemployment rate fell by more than 5% (see Chart G-1) while under Trump it fell by just over 1% (from 4.7% to 3.5%). 

In Chart G-2, I show the change in the unemployment rate from the end of one year to the end of another.  You can see that in 2010, the change in the unemployment rate was -0.6%.  The average annual decline in the unemployment rate under Obama was 0.7% while under Trump it averaged 0.4%.  On what planet is Trump the winner here?

In addition, giving Trump credit for the all-time low unemployment rate is in a sense double-counting.  I give Trump credit for continuing an economic expansion at a 2.5% rate for three years through December 2019.  Well, GDP growth of 2.5% will, with a very high probability, cause monthly job gains on average of ~ 150-200k per month.  Growing economies create jobs, that’s what they ALWAYS do, under Republican and Democratic presidents alike.  Even GDP growth of 2% will cause monthly job gains on average of over 150k a month.  Giving Trump credit for A. a growing economy and B. an all-time low unemployment rate is like a doctor telling his patient, not only did I cure your illness but I also kept you alive!  If you do one, you get the other.  It would have been impossible to have GDP growth of 2.5% and not have the unemployment rate reach a record low as long as the expansion continued.  Was it a good thing?  Yes.  Was it another great thing that Trump did?  No.

GDP growth and accelerating wage growth (and increased participation rate)

The EB cites an acceleration in Black wage growth of 19% during Trump’s pre-Covid term and compares that to 11% growth under Obama — and they show a chart as their proof statement to convince readers of Trump’s economic awesomeness:

Wage growth, adjusted for inflation, accelerated after years of stagnation. The improvement was especially pronounced among low-skilled and minority workers left behind by the Obama economy. Median weekly full-time earnings for blacks increased 19% in Mr. Trump’s first three years, to $806. That followed a period of 11% growth during Mr. Obama’s seven post-recession years in office. (See the nearby chart.)

There are just three problems with this:

1. The numbers cited by the Editorial Board are wrong.
2. The graph is wrong.
3. The argument is nonsense.

But otherwise, it’s quite convincing.  Let’s take each of these in order.

The EB writes that “wage growth, adjusted for inflation…” but the $806 figure they cite (median weekly wages for Blacks) is not in real terms, it’s in nominal terms.  In addition, median nominal weekly wages for Blacks did not increase 19% in Trump’s first three years.  The 19% figure is the percent increase in nominal weekly median wages for Blacks during Trump’s entire 3 ½ years, including the first two quarters of 2020.  Median nominal weekly wages for Blacks ended 2019 at $756 and did not reach $805 until the end of the 2^nd quarter this year.  Why is this significant?  Because the wage numbers in the first and second quarter of 2020 are not regarded as representative of anything other than the mass cull of low wage jobs during the pandemic.  How do we know this?  Well, one, because it’s obvious, and two, because BLS tells us!  In its Q2 Current Population Survey (CPS), BLS data showed Latino median weekly wages grew 13% over the prior year while Black wages grew 11%.  In a single year!  While 22 million jobs were lost!!  Does anyone with half a brain think that wages in aggregate are growing rapidly during Covid-19?  In the news release which accompanies the CPS report, in the middle of the very first page the BLS added a special section (clearly marked with a box around it) which reads:

Coronavirus (COVID-19) Impact on Second Quarter 2020 Household Survey Data

Usual weekly earnings data for the second quarter of 2020 continue to reflect the impact on the labor market of the coronavirus (COVID-19) pandemic and efforts to contain it.  Changes in weekly earnings in recent quarters must be interpreted with caution.  The unusually large increase in median weekly earnings in the second quarter reflects the fact that employment declined more for lower-paid workers than for higher-paid workers. www.bls.gov/cps/employment-situation-covid19-faq-june-2020.pdf

It’s become clear the EB staff can’t write but can they read?  Instead of 19%, the actual growth in median weekly wages (nominal) for Blacks during Trump’s first three years was 12%. 

I would also note that the minimum wage has been raised in 27 states since 2014 with most of those increases happening in 2016-2019 (including in New York, New Jersey, and California).  I haven’t seen a calculation of the impact of these increases on national median wages but if we look just at New York State, the minimum wage went from $9.70 at the beginning of Trump’s term to $11.80 as of the end of 2019.  That’s a 22% increase.  It seems very likely that state and local minimum wage hikes had a noticeable positive impact on wage growth for lower income workers during Trump’s pre-Covid years.  As a result, the fact that Black median wages rose 12% during Trump’s first three years (not 19%) is even less impressive because it’s been boosted by minimum wage hikes.  Adding to the fun, every single proposed minimum wage increase, national, state, or local, was adamantly opposed by the Editorial Board and 99% of Republican officials.

Second point, the graph is wrong. Social media is getting all the attention as the world’s most potent weapon of mass stupidity, but graphs have been an effective tool to mislead for centuries.  The graph in the Journal piece is described as showing inflation-adjusted numbers but it actually shows nominal data.  They compare the last seven years of Obama’s term in office and the first three years of Trump’s term through the 4^th quarter of 2019 but the graph shows the last 20 years through the 2^nd quarter of 2020 (presumably in order to show the fake 2020 spike).  Although the EB’s main point was acceleration in wage growth for Blacks and Latinos, what really jumps out on the chart is the sharp acceleration in wages of Asians and Whites.  When the graph is drawn without White and Asian wages, the acceleration in wage growth of Blacks and Latinos appears much less pronounced.  This picture is worth a thousand corrections.  Chart H correctly displays the information discussed in the Journal.

 Lastly, their argument that Trump deserves praise for faster wage growth does not make sense.  First, what the EB is attempting to address is the relationship between the degree of tightness in labor markets and wage growth.  Economists describe this relationship as the Philipps Curve which is actually a quite simple and intuitive idea.  It says that wage growth is a function of the degree of tightness in the labor market.  Stronger/hotter/tighter labor markets lead to faster wage growth and vice versa.   Let’s look at these relationships over three discrete periods using the actual (nominal) figures from the BLS as shown in Table 1.

After the recession, in Obama’s first term, unemployment averaged 9% and partly as a result, wages actually fell.  But in his second term, when unemployment averaged 6% (i.e., getting tighter), wages grew 10%.  Then, in Trump’s first three years, unemployment averaged an extremely low 4% and wages grew even faster.  Rarely does real life conform to theory so perfectly!  As economic growth continues, the unemployment rate declines.  As the unemployment rate declines, wages grow faster.  This is exactly what decades of economics textbooks and hundreds of years of empirical data say is supposed to happen.  When the unemployment rate is 9%, bosses are stingy with raises because workers have fewer options to get a new higher paying job.  When the unemployment rate is 4%, there are far fewer people looking for work whom bosses could hire to replace current workers and so they are less stingy and more fearful of losing workers, who now have more options to switch jobs and make more money.  Hence on average bosses feel they have to pay more.

Now there are innumerable academic debates about the slope and shape of the Phillips Curve and the level of the “natural rate of unemployment” and many other related questions.  None of this matters for our question: is this a “point for Trump” or is it simply one more derivative of healthy GDP growth?  And of course, it’s the latter.  To look at the 10% growth in Obama’s second term and the 12% for Trump and say that Trump was better for Blacks is, once again, giving Trump double (or triple or quadruple) credit for ONE THING: maintaining GDP growth in a 2-3% range.  In January of 2017, all Trump had to do was keep the car running.  That’s it.  Everything else is the direct result of continued GDP growth.  The declining unemployment rate, the all-time low unemployment rate, the job growth, the accelerating wage growth and the increase in the participation rate – all of these are a direct and highly predictable result of simply keeping the car moving forward at trend or slightly better GDP growth.

Let me try one more time to make this perfectly clear because Trump’s statements about what he has done for Blacks exhibit a degree of hyperbole and that may never again be exceeded for its delusional grandiosity.  Giving Trump credit for “doing more” or “doing great things” for Blacks is not only false, not only dumb, it is offensive.  Trumpsters, could you please lie about something less idiotic that doesn’t treat African Americans as campaign props?  To help a guy who is the most overtly racist Presidential candidate since George Wallace?

Trump’s pre-Covid economy was good for Blacks but entirely consistent with what we should expect from any economy growing at 2.5% in the latter stages of an economic cycle. The correct wage growth numbers for all the time periods that the Journal could have possibly been referring to with respect to wages is shown in Table 2. 

V. Trump’s Pre-Covid Economy: Deregulation of Shale and Wall Street

The EB writes that Trump’s two big successful economic policies were the corporate tax cut and deregulation.  On deregulation, they write:

The Trump Administration also freed banks of the more pointless elements of post-2008 regulation, such as investigations into racial discrimination in auto lending based solely on borrowers’ last names.

I’ll address each of these in turn.  First, the shale industry.

The EB writes that “The Administration eased restrictions” and took other pro-industry deregulatory actions which “spurred a boom in oil and gas production.”  This is flat out false.  Trump did not create, did not cause, did not lead, did not begin the shale boom.  Trump’s only role was to become President shortly before the boom turned to a bust.  The shale boom kicked off in a small way in the mid-2000s, then really took off in the years immediately after the Great Recession as oil prices remained at or above $100/barrel.  A staggering amount of capital was invested during these years which led, with a lag of a couple of years, to a sharp increase in production.  Then in late 2014 when oil prices collapsed, the capital started to dry up.  In another post, I’ll tell the story of how so much money was torched in an investment opportunity that’s produced total industry profits of zilch.

It is true that oil and gas production continued to increase during Trump’s term.  But the reason it increased had almost nothing to do with Trump.  It increased because of the several hundred billion dollars in capital that was invested in new companies, acquiring leases, drilling wells, and building pipelines – all before the man was even elected.  Giving Trump credit for the shale oil boom is like giving credit to a new CEO for a jump in sales which occurred during his first year on the job because his predecessor spent three years building a new plant and expanding capacity.

When thinking about the pros and cons of shale, you have to decide what you think about global warming.  If you dismiss the risk as fake news, Trump is your guy, drill baby drill.  If you think this is one of the most urgent geopolitical risks facing the world, then of course you want tougher, not looser constraints on shale drillers flaring off methane (a greenhouse gas that’s 30x more potent than carbon dioxide).  But what if you’re in the middle?  I’d guess many Republicans are.  They want sensible measures taken to lessen a possibly existential risk but at a cost that won’t destroy the economy in the meantime.  Well, you’re out of luck Mr. Moderate Republican, there doesn’t happen to be a sensible, prudent, climate change agnostic Republican candidate.  Your choice is the Green Biden New Deal or Fred Flintstone. 

Second, the banks.  The Journal writes that,

The Trump Administration also freed banks of the more pointless elements of post-2008 regulation, such as investigations into racial discrimination in auto lending based solely on borrowers’ last names.

What?  The single example of unnecessary financial regulations you have to tell us about is investigating racial bias?  Which you describe as “pointless”?  With no explanation or supporting evidence?

There is a very long, very well documented history of widespread and pervasive racial bias in lending by every large American financial institution over much of American history.  This is something every educated person should know but the writers at the Editorial Board of the Wall Street Journal apparently do not.  Banks were essential partners in redlining (which was not limited to the Jim Crow south, it occurred throughout the country including, most notoriously, New York City) and the practice continued well into the 1970s.  And at least to some extent it still exists.  Philadelphia and Sacramento sued Wells Fargo in 2017 and 2018 respectively for pervasive racial bias in home mortgage lending:

The city said that four anonymous former mortgage employees at Wells Fargo confirm that the bank “intentionally steered minority borrowers into higher cost loans because of their race or ethnicity.”

Black Wells Fargo borrowers in Sacramento with credit scores above 660 are 2.8 times more likely to receive a high-cost or high-risk loan than comparable white borrowers, the lawsuit said. Latino borrowers were 1.8 times more likely, the suit said.

Wells Fargo loan officers were likely to charge a higher rate to borrowers with Mexican names, another former bank employee said in the lawsuit.

The lawsuit also claimed that Wells Fargo took advantage of the language barrier with Spanish-speaking borrowers. It quoted a former employee who said that while Wells Fargo advertised for mortgages in Spanish, it did not produce translated paperwork to sign — even when the transaction was handled in Spanish.

“Wells Fargo deliberately created an incentive program that induced minority borrowers to take higher cost loans under terms that they did not understand,” the lawsuit said.

The city also accused Wells Fargo of “refusing to extend credit to minority borrowers” who wanted to refinance their more expensive mortgages.

This is the same bank that in February agreed to pay a $3 billion fine after admitting to bank-wide systemic lawbreaking from top to bottom for the last two decades so it isn’t particularly difficult to believe there’s rot and bias elsewhere at the bank.

A number of times in my career when the issue of racism came up, a colleague, after looking around to make sure that no Black people could hear (unlikely as this was Wall Street), explained to me how puzzled they were about the mysterious inability of Blacks in American to succeed financially.  With hindsight, it’s not surprising that regular readers of the WSJ EB would be ignorant on this subject.   Apparently, reading the WSJ EB on the subject of race expecting to find insight, fairness, or facts is, well, pointless.

On the topic of deregulation of our financial system and financial firms, I have much to say but if I don’t end this soon the election will be over, so a longer post on the topic will have to wait for another time. 

Briefly, having worked on or next to Wall Street for almost 30 years, I believe it’s too big, too complex, too opaque, too fragile, too difficult to properly manage, has too many inherent unresolvable conflicts of interest, poorly serves anyone who isn’t well-off, and has too much control over our political system.  Less than two weeks ago, J.P. Morgan, my former firm, admitted that for at least eight years the firm’s traders, including the heads of two trading desks, manipulated the Treasury Bond futures and precious metals futures markets and agreed to pay a nearly $1 billion fine to the CFTC.  Even though there were, according to the CFTC, “numerous red flags” and a whistleblower, J.P. Morgan, supposedly the best managed mega-bank in the world, was unaware of the illegal activity by its employees that went on year after year after year.

In 2013, we had the Forex scandal where multiple banks were found to be rigging and front-running foreign exchange clients for at least ten years.  In 2014 we had the Libor scandal where multiple banks were found to be routinely rigging the benchmark interest rate for $1.2 trillion of US home mortgages.  In 2007 and 2008, the senior managements of most large banks were completely ignorant of the gigantic risks they were taking in their structured products businesses (at the same time that some of their own prop traders were shorting that risk) and it almost blew up the global financial system.  Last week’s settlement cost J.P. Morgan just 2.5% of one year’s earnings.  Companies and people respond to incentives.  JPM, Wells Fargo and the rest have no incentive to change.  Only a fool keeps doing the same thing over and over and expecting a different result.  Scandals and market manipulation is, quite clearly, a regular feature of the American financial system in 2020.

The Wall Street Journal EB isn’t fussed.  Implicit in the EB’s endorsement of Trump and their critique of Dodd Frank is the idea that although they believe the financial system is too heavily regulated, it’s otherwise fine!  This is depressingly consistent (for once) with their position for the last 40 years.  But Trump was supposed to be different.  Before he was elected, Trump promised to “crack down” on Wall Street:

While it is hard to remember now, Trump was the most anti–Wall Street presidential candidate since FDR in the 1930s. He attacked Wall Street relentlessly, directly, and explicitly throughout the campaign and attacked his opponent, Hillary Clinton, nonstop for being in the pocket of Wall Street.

Well, so much for that.  Like a long line of Republican and Democrat Presidents, Trump was seduced and then played by Wall Street.  Apparently, anyone who is either richer or more powerful than Trump can flatter and manipulate him with ease.  So it is with Xi Jinping, so it is with Steve Schwartzman.  If you think Wall Street suffers from too much regulation, Trump is your guy.  If all of this makes you nauseous, nervous, angry or depressed, if you suspect that the significant rise in inequality in America over the last 40 years has something to do with the rise in laissez faire financial regulation, well, don’t get your hopes up with Biden.  He’s unlikely to do much to change things given all the other fires to be put out and given that he’s part of the establishment that sold out to Wall Street in the 1990s.  But he still gets the edge here because there is a reasonable chance that he understands some of the issues whereas it is clear as a bell that Trump and the GOP will do what they’ve always done: exactly what Wall Street tells them to do.

VI. Trump’s Pre-Covid Economy: Decoupling from China

I will give Trump credit for one thing.  However he got there, he was correct in saying that US policy towards China over the last 25 years has been naïve and overly passive with respect to the growth of the Chinese economic juggernaut, the neo-mercantilist development strategy, the state-led theft of IP, and the corresponding growth in the CCP’s power and the nation’s military strength.  I’ve visited China on many occasions for business and holidays over more than 20 years and I greatly admire the Chinese people and the truly astonishing accomplishments since Deng embraced market reforms almost 40 years ago.  But today, China is not liberalizing politically or economically, quite the opposite.  Long term, China (or more properly, the Chinese state) is a competitor, not a friend and there really shouldn’t be the slightest question about that.  Over a hundred year-plus time frame, the CCP is playing to win. 

However… Trump’s execution of a “get tough” strategy towards China has been inept and hopelessly handicapped by his obsession with bilateral trade deficits and by his hostility to allies.  Hence, his “achievements” are hard to detect:

• The Transpacific Partnership trade deal was negotiated over many years, approved by just about every Republican (Ryan and Hatch were co-sponsors), ratified by most of the countries involved, and was sitting on Trump’s desk for his signature when he took office.  A free trade agreement with just about every Asian nation except China, it could have been the pillar of an Asia strategy whereby we build closer ties across the region and, in concert with our Asian allies, offer a credible counterweight to Beijing.  Instead, Trump pulled the US out within his first few days in office.  Since then, Beijing’s used the vacuum this created to nuzzle ever closer to our would-be allies like Vietnam, The Philippines, Indonesia, and Malaysia, with a menu of sticks and carrots.
• Trump won a promise by China to increase imports from the US by $200 billion over what they were in 2017.  The debate about whether bilateral trade deficits matter is not one I’m prepared to engage in here.  Suffice it to say I’m skeptical this is something we need to obsess over.  Australia ran a trade deficit for over 25 years without a single recession.  All this deal does is move things around.  China will buy more soybeans from the US and less from Brazil.  Other countries (perhaps the ones that’d been buying from the US) will shift and buy them from Brazil.  And US farmers are now closer than ever to being wards of the state.
• Trump won promises from Beijing that they’ll stop state-led theft of intellectual property and won’t force US companies operating in China from transferring technology to local partners.  If you believe that, I have a bridge over the Yellow River to sell you.
• Trump alienated all our allies by attacking them harshly, publicly, and, often, mistakenly, thus preventing a united front against China which would give us more leverage over Beijing.

The US must do a better job of protecting its long term interests, so our relationship with China has to be reset across trade, foreign investment, cybersecurity, IP protection, national security and many other areas.  We need to develop a new comprehensive strategy with respect to China and then we need to execute this strategy over the coming decades.  Do we need to decouple?  What would that actually mean?  This is a management challenge of staggering complexity and enormous scope.  It requires a long term focus and a steady hand.  Clearly, Trump is perfect for the job!

Seriously, while I agree with the assessment of Biden as one of “the guys who were asleep at the switch” (along with most of the GOP and the WSJ EB and yours truly), the idea that Trump is capable of this is preposterous.  And again, Trump has already been successful in shifting the terms of the debate.  All of the Democrat foreign policy types appear to agree that we need a fundamental change based on a clear-eyed recognition that longer term our interests are in conflict.  Dopey political ads aside, Biden is actually quite likely to continue the Trump approach directionally but do it in a more thoughtful, organized, and strategic way: less bombastic, more multi-lateral, less focus on managed trade and tariffs, more comprehensive/holistic, with a longer term, more strategic focus.  In other words, more effectively.

Lastly, I have to point out one of the more amusing tidbits in the Phase I China trade deal announced in January: opening up China’s financial sector to US firms.  Didn’t we all celebrate when we heard the news?  I’m sure every American feels a deep sense of satisfaction knowing that finally, finally, J.P. Morgan can underwrite Chinese bond issues and sell mutual funds from a wholly owned Chinese subsidiary.  American coal miners, steel workers, and auto worker will rejoice at the mighty blow struck for the American worker!

VII. Covid-19 Response and Recovery

In the next four years, in addition to addressing the coronavirus, the challenge for the next Administration will be to support a strong and durable recovery whose fruits are more broadly shared.  Although the peak to trough decline in GDP of ~ 5% for the 2020 Covid recession makes it appear “no worse than” 2008, it may be even more difficult to recover from.  We are in the midst of a horrifying mass failure of American small businesses.  About 20% have already closed for good according to one estimate and many more may not last until sales recover.  This will meaningfully worsen inequality and increase the share of large corporations in our economy.  We’ve all gotten used to seeing fewer independent restaurants and retail shops and more and more chains in recent decades; expect to see that trend accelerate.  Foreclosures and evictions have been severely limited since March, helping renters and homeowners but stiffing property owners and lenders; this stand-off will end in the coming months and many people will end up losing their homes.  Stimulus from the Treasury and a neutron bomb of Fed stimulus caused a tentative/partial recovery but to some extent just postponed the day of reckoning.  Many corporations are now liquid but massively levered.  Called zombies by Wall Street, they’ll be weighed down with huge interest costs for years so reducing debt will take priority over investing or hiring for growth.  Companies worst hit by the pandemic, like airlines, theatres, and cruise lines are beginning to move job losses from the “temporary” to the “permanent” column.  Hopefully the recovery will continue but most economists don’t expect GDP to fully recover until the end of next year.  

Imagine you’re a high school senior who will graduate next spring from a so-so public school without the grades or money to go to college.  What future could you imagine for yourself?  The economic challenge in 2021 will be as daunting as at any time since 1930.  For all the reasons previously discussed, it would be hard to come up with a candidate less qualified for the task than Donald Trump.

I don’t know if it’s true but many people are saying that WSJ editorial staff attend weekly study sessions on Donald Trump Thought where they confess to wrong thoughts about Eric and secret mask parties.  I don’t know if it’s true but I heard that many smart people are saying it…