Trump makes Biden's mistake; misreads the economy

 

Gordon L. Weil

Donald Trump is making the same mistake as Joe Biden.  And, like Biden (and then Kamala Harris), he may pay the price.

He sees the national economic data as showing prosperity and believes he should reap a political reward for having made it happen.

It’s true that for both national job creation data was good, inflation was being reduced from Covid levels, and wages were beginning to increase. The stock market, which is supposed to embody the prospects for the future economy, climbed.

Biden and Trump had sharply different ways of keeping their versions of the good times rolling. 

Biden relied on traditional Democratic “pump priming” to restore the post-pandemic economy.  Added to that, he tried to boost income support programs.  These measures required government spending, but Biden saw national recovery emerging.  His support for greater government involvement in the economy led Trump to call him a radical socialist.

But Trump has turned out to like big government as well.  His unprecedented tariff moves are aimed to promote domestic manufacturing.  He has made the government a direct corporate investor.  He pushes the national debt to new records by big spending on the military and border security.

Both have believed that their actions promote a strong economy and cite the national statistics to prove their point.  They both have erred in believing that good national numbers translate into prosperity for all individuals.  Implicitly, they argue that national success will trickle down to working people.   That’s an old theory that has never worked. 

Both missed that many middle-income and poor families are struggling to pay for food, clothing and shelter.  A favorable national economy does not spread itself to all people.

This has been due partly to what people see as inflation.  They cannot keep up with rising prices, even if they receive modest pay increases.  Inflation was artificially low before the pandemic, and the Federal Reserve has successfully lowered it, but not fully to pre-Covid levels.  The long effort to restore a balanced, normal economy has led to problems for personal budgets.

Biden used government outlays to meet those problems, but they often missed the mark.  Trump sees great promise through the creation of manufacturing jobs, but that takes time and meanwhile, families struggle.  He also cuts federal benefit programs, compounding the effect as less federal money flows into the economy.

Trump sees the readings he gets from the stock market as a measure of economic health.  Yet the market reflects speculation, these days on AI, as well as short-term profitability.

Some see Trump’s prosperity, real or promised, as being like the U.S. during the 1920s.  Business and the stock market soared. The privileged few enjoyed lives of excess.  The government stepped back.   It couldn’t last and finally, there was an economic price to pay. 

The well-regarded monthly survey of consumer sentiment is a useful measure of how average people see the economy.  Right now, it is at a near-record low with only about half of the people being optimistic about the economic outlook.  Consumers are cutting down on discretionary spending.

The erratic course of Trump’s policy moves makes it difficult to forecast the economic outlook and it generates a sense of instability, which undermines chances for sustained growth.

A major cause of the disconnect between apparent national prosperity and the economic life of most Americans is the gap between the wealthy and average people.  With only a small segment of the population owning a commanding share of the nation’s wealth, views on the state of the national economy are skewed.

Average families don’t have to understand economics.  They can see the income gap. 

The East Wing of the White House is abruptly demolished to build a huge, lavish ballroom.   It is financed by some of the wealthiest Americans, many of whom gain profitable favors from the Trump administration.  At the same time, Trump withholds food stamps.

Elon Musk, whose mythical Department of Government Efficiency devastated government agencies, induces his Tesla investors to agree to pay him $1 trillion.

These actions don’t involve the direct expenditure of public funds.  But they send a readily understandable message about the two Americas – the wealthy and everybody else. 

Trump promises voters that the economy will be working well for them, as it does for the wealthiest, by the time of next year’s congressional elections.  He strongarms the Federal Reserve to lower interest rates even faster to aid that effort, risking greater inflation. 

He is an experienced sales person.  He asserts that the economy is booming, not because he truly believes it, but to imply that better times are on the way.  Biden learned that the people pay more attention to their current expenses than to national statistics or campaign promises.  Trump seems not to have learned from Biden’s hard-earned lesson.

 

 

"Big, bearuful bill' in trouble

Gordon L. Weil

It’s all about the Laffer Curve.

President Trump’s “One, big, beautiful bill” to cut taxes and spending has run right into it.

The Laffer Curve, an idea promoted by economist Arthur Laffer, has been around since Ronald Reagan was president.

It’s about the relationship between the level of taxes and economic growth.  If taxes are too low, the government puts too little money into the economy to promote growth.  If taxes are too high, the government takes too much money out of the economy, slowing growth. 

There’s a sweet spot when the tax rate is just right.  At that point, taxes allow government to play its proper role in the economy and individuals and companies the right amount of money to keep the economy growing.  Nobody knows where that sweet spot is; it’s a matter of opinion. 

The BBB would lower taxes and could be enacted with only loyal Trump GOP votes. The euphoria of the federal government under a single party and the resulting belief that it could easily enact the president’s proposal are now meeting the realism of American politics. 

The iron law seems to be that the people – even conservative Republicans – expect much from government but do not want to pay enough taxes to get it.  They reasonably add some debt to the mix, though they must avoid letting debt service feed on itself, always growing greater.

Here’s what the BBB would do.

First, it would extend major tax cuts for individuals that are set to expire and create new tax breaks, ranging from no tax on tips to lower rates for the wealthiest taxpayers.  These add up to huge tax breaks that Trump promised in his campaign.

Second, it would cut spending to pay for some of the tax reductions.  To even begin to raise enough money, it would require slashing Medicaid, green energy support and much else.

Third, it would inevitably increase the national debt to pay for the tax cut costs not covered by spending cuts. For that purpose, the debt ceiling, which is little more than a symbolic political gimmick, would have to be raised.

This combination is causing big trouble for Congress and may result in Trump’s BBB falling well short of his promises.

The individual tax cuts were set to expire after Trump’s second term, assuming he had been re-elected in 2020.  Because he skipped a term, they expire during his presidency.  He would make them permanent, but that is costly.  Added tax cuts, promised in the campaign, would massively increase the national debt.

The neutral Congressional Budget Office says the BBB could increase the national debt by $2.8 trillion over the next 10 years.

Traditional GOP conservatives reject increasing the national debt.  Even for their president, they cannot accept trillions more of new debt.  Some creative bookkeeping to disguise debt is supposed to satisfy them, but it is not working.

Debt service is now greater than either national defense spending or Medicaid, and conservatives are looking for debt reduction not a further increase. 

As for spending, the budget cannot be cut the way Trump and Elon Musk would like.  The budget deficit is not simply a matter of wild Democratic spending.  Instead, it results from members of Congress responding to the demands, needs and desires of the voters.

Constituencies composed of millions of voters favor Medicaid for the poor, health research, renewable energy development, farm payments and a myriad of other government programs. Members of Congress cater to their constituents to stay in office. They support most federal appropriations and protect each other’s priorities.

The worst is yet to come. Social Security will soon stop paying for itself.  Voters are likely to oppose massive cuts to it.  Congress will have to find funding.

Right now, Trump doesn’t have the votes for BBB.

While spending cannot be cut as Trump wants, there’s room for some reductions. Nothing should be automatic.  Each agency should have to justify regularly all its spending subject to line-item review, not a Musk meataxe. The president and GOP Congress can set their priorities, like killing foreign aid, but cannot achieve them all.

The Laffer Curve stands in the way of a tax increase.  Republicans see the U.S. as being past the sweet spot, suggesting that a tax cut would boost the economy, increase government revenues, and pay for itself.  There’s no historical evidence supporting such optimistic expectations.  The unforeseen economic effect of the Covid pandemic proves that.

The answer to finding a sound federal budget without endless debt increases must be a combination of setting spending priorities and tax increases.  Voters must accept the need to pay for the government services they want. 

It’s time to stop hiding behind the self-serving appeal of the Laffer Curve and recognize that tax increases on upper income people must come. 

Trump's economic moves hit real people

 

Gordon L. Weil

Since the day Donald Trump became president for the second time, the U.S. has been flooded with disruptive actions, just as he intended.

In reaction, experts and the media have issued dire warnings about the effects, intended or not, of his moves – inflation, immigration, employment, science, commerce and the future economy. Almost all these reactions have focused on the deep and long-lasting national harm his actions will cause.

While Trump’s policies must be taken seriously and the warnings should be heeded, they may seem to be happening at a far higher level than the everyday lives of most Americans.  The best the critics can muster is the observation that the effects will soon find their way down to average people.

If the effects seemed remote or even not likely to happen before they would be erased by renewed prosperity, then Trump can be reassuring and convince people that short-term pain will bring long-term gain.  His message has been that he is so brilliant that people can count on him producing the promised prosperity.

That message is still pending, but it seems increasingly possible that the pain won’t be short term, so the gain is more remote than had been originally implied. The immediate test is whether that situation will have a big enough impact on the 2026 elections to produce a Congress able to rein in Trump or even offer its own policies.

The impacts of his policies are already becoming evident in the daily lives of average citizens.  I take a look here at some of what’s happening in Maine.

The Maine license plate has for decades proclaimed the state as “Vacationland.” Tourism means a lot to the state’s economy, and a lot of the tourists come from eastern Canada.  Canadians feel at home in a familiar culture with appealing beaches and attractions.  But with Trump’s ridiculous but often repeated claim that Canada should become the 51st state, everything has changed.

This absurdity coupled with an overt effort to destroy the Canadian economy to the point that it will seek refuge in the U.S. has amazingly and quickly turned a natural friendship into hostility.  Many Canadians now dislike the U.S. and have cancelled plans to come to Maine this summer.  Maine did not give him all its electoral votes, so he likely doesn’t care about the hit to tourism.

Then, there’s inflation, a big issue for Mainers.  Under former President Biden, as the economy recovered from abnormally low inflation during Covid, inflation took off.  Though it had greatly diminished by the end of Biden’s term, the memory lingered on, and Trump continually reminded voters of it.  Kamala Harris’ response was laughably weak, so Trump scored his point.

Instead of inflation abating, especially for home prices, it began to increase.  Trump’s tariffs were not absorbed by exporters or American retailers, as he had promised.  The free market, favored by him, worked normally, and prices eventually reached consumers.  Walmart and Target prices in Maine rose sharply, as they did elsewhere.  Grocery prices remain high in a state that’s at the end of the supply line.   People noticed.

Housing is especially sensitive.  It is among the top three concerns in the state, along with inflation and immigration. Higher building costs, resulting partly from expected increased Canadian lumber prices, put homes out of reach for potential buyers. The ability of the private sector and government to push tiny homes to ease homelessness was undermined.

That happened in a special way in Maine.  The University of Maine has the world’s largest 3-D printer, and it produced a complete tiny house.  But it needs federal funding to move ahead. Because Trump dislikes Gov. Mills’ insistence on state control of trans athletic policy and the president’s aversion to academic research, the project has begun laying off workers.

Like tourism, a mainstay of the economy is lobster fishing.  Lobsters are a high-cost food whose sales track the health of the national economy.  Trump has managed to create so much uncertainty throughout the economy that consumers are holding back on many purchases and there’s concern about the impact on fishing in coming months.

Every state, every market has seen its own effects of Trump’s policies.  Just as the U.S. cannot be an economic island, neither can any state.  Broad-brush national policies have local effects that should not be ignored, especially by Congress.  Trump’s vision of American industrial greatness comes at immediate cost to the paycheck-to-paycheck population.

Trump’s popularity, though waning, survives because many people like his immigration policy and take comfort in his economic nationalism.  The ultimate judgment may come when Maine fishermen, supermarket shoppers, tourism operators and home buyers vote for their next U.S. senator just 17 months from now.

Covid’s ‘new normal’ is here to stay

 

Gordon L. Weil

Covid has affected everyone, whether or not you were vaccinated.

Not that Robert Kennedy, Jr. is right about shots.  Despite his claims, vaccinations can protect your health.  But they can’t shield you from the changes Covid has brought to the American economy.

The post-Covid world is often labeled negatively as the “new normal.”  Despite broad economic recovery, many people are unhappy and hope for conditions that are long gone. 

“Make America Rich Again” could be their slogan.  Polls suggest that people ignore the economic recovery and blame Joe Biden for not giving them the kind of personal prosperity that had supposedly boosted their purchasing power and assured their retirement.  

There probably never was an “old normal.”  Whatever the state of the economy in 2000, it was hit by the double whammy of the Great Recession of 2008 and the Covid pandemic in 2020.  Covid got us, and no president could provide a quick fix.

The Great Recession brought a massive slowdown and kept inflation low between 2009 and 2020.  People may have grown accustomed to low inflation, but it zoomed when Covid caused shortages and the government pumped recovery dollars into the economy.  To reverse inflation, the Federal Reserve has boosted interest rates.

The Fed’s anti-inflation efforts are working, but the higher interest rates have made some major costs, like buying a new home, much higher than they were.  The collapse of aggressive lending brought on the Great Recession and then the resulting slowdown kept housing costs well below traditional levels.  It will not again be as easy to buy a house.      

Covid changed almost everything.  Employment, retirement, remote work, and what we purchase and when we buy it were all affected.  Prices will not recede to the unusually low levels of a few years ago.  There’s no political magic that can change that.  The “new normal” is here to stay.

The good news is that unemployment caused by Covid has come down.  The bad news is that we are left with a shortage of workers.  Businesses cannot fill slots and low joblessness affects the economy in areas ranging from home building to restaurants. Wages are higher, but are not attracting the new workers that are needed. 

Why isn’t the labor supply better?  One major reason is that some people who might normally have been at work have decided to stay out of the labor force.  There’s been an increase in people who remain at home as caregivers and in people taking early retirement.

Some older workers lost their jobs during the pandemic and choose not to return to work or have not found jobs at their former pay level or requiring their skills.   More people accept reduced Social Security payments at age 62 rather than struggle to find suitable full-time work.  

Covid made remote work more common.  The pandemic’s spread required more people to evacuate the workspace. Though many have been required to return, the percentage of workers in remote locations has remained relatively high.  Downtown buildings have empty offices, permanently abandoned as the popularity of remote work has gained.

The limited labor force has meant that home builders are scarce.  Housing demand has grown faster than the available labor.  Less new housing has reduced sales and driven up home prices.  The construction labor shortage may partly be the result of the uncertain availability of workers thanks to a nonexistent immigration policy.

People have become more uncertain about their ability to finance their retirement. Added to worries about the future of Social Security, essential to many retirees, are concerns about their vulnerability when technology transforms the demand for skilled workers.  Their doubts can affect their spending and their purchasing decisions then flow back to promote more change.

People now hold on to their cars for 12 years.  Previously, frequent trading up to a new model was an American tradition. A pool of traded-in cars was created, and now they are in high demand.  Auto dealers continue to see service and parts grow, far surpassing their profits from sales of new and used cars. 

People worry about high inflation.  Some believe personal savings have increased, cutting into consumer buying.  Most think we’re in a recession. These beliefs are wrong.

The Fed is bringing inflation down.  Personal savings are not unusually high and, while personal consumption faltered, it is once again soaring.  The American economy grows steadily, ahead of most other countries.

Biden gets little credit for the good economic news and blame for the bad, whether real or imaginary.  Donald Trump left office before having to face most of the pandemic’s economic effects.

Biden does not deserve the blame nor does Trump deserve credit for the economy.  More powerful than any presidential policy, Covid’s unavoidable impact has left us all worried about our economic future.