Dean Baker
The Hankyoreh, July 22, 2018
At the NATO summit earlier this month, Jens Stoltenberg, the secretary general of NATO, was forced to publicly praise Donald Trump's leadership. Mr. Stoltenberg is almost certainly a very intelligent hardworking man. That is virtually a prerequisite for a person in his position. By contrast, Donald Trump is the most ignorant ill-prepared person ever to sit in the White House.
Nonetheless, when Stoltenberg noted the increases in military spending by NATO members, Trump asked him why the increases were happening. Stoltenberg meekly responded, "because of your leadership." (Actually, the increases were part of a deal negotiated with President Obama in 2014.)
Trump obviously loves this game of forcing powerful people to sing his praises. Like Stoltenberg, most don't seem to feel they have any choice.
But, there is an issue here that goes far beyond Donald Trump's unpleasant personality. Tens of millions of people cast their votes for Trump in 2016 (although less than a majority and in fact fewer than his main opponent, Hillary Clinton).
This was in large part because they wanted someone in the White House who would insult people like Stoltenberg. They wanted someone who would be a thumb in the eye of the people they viewed as the elite, and Donald Trump certainly fits the bill.
The United States did not always have so many people who saw trashing the established authorities as an end in itself. The same applies to Europe, where people in the United Kingdom voted to leave the European Union and countries across Central and Eastern Europe elected right-wing populist governments.
Racism and xenophobia are important factors in these movements, but the question is why are these forces so important in national politics today? After all, racism and xenophobia are hardly new to either the United States or Europe.
Part of the story is that our elites have been consciously pursuing policies that redistribute income upward. This is more the case in the United States, but it is pretty much true everywhere.
These policies of upward redistribution cover almost all areas of economic activity. Starting with the most important, maintaining a near zero rate of inflation has become an obsession of central banks , even at the cost of slower economic growth and higher unemployment.
When the unemployment rate rises, it disproportionately strikes those at the middle and bottom of the income distribution who lose their jobs. Furthermore, higher levels of unemployment reduce the bargaining power of those who still have jobs.
This pattern is very clear in data from the United States. The only times in the last four decades when most workers sustained real wage growth was the period of low unemployment in the late 1990s and again in the last four years as the unemployment rate slipped below 5.0 percent, and eventually to 4.0 percent.
These redistributive policies are found in other areas as well. The United States has been making patent and copyright monopolies stronger and longer for the last four decades with the rationale that they are needed to give incentives for innovation and creative work.
Incredibly, many economists then turn around and blame "technology" for inequality. It should be fairly obvious to anyone with clear eyes that it is not technology that creates the inequality, it is the laws created to govern technology.
We have also regulated finance in a way that ensures large paychecks for the big players at the expense of everyone else. While the pattern of regulation that allows a small number to get incredibly wealthy is often referred to as "deregulation," no one actually wants to end government guarantees for bank deposits or a government backstop in a financial crisis, like the events in 2008. The big players just want free rein to run the financial sector for their advantage.
Lastly, just about everywhere governments have consciously tried to weaken the power of unions. The steps have taken a variety of forms, including restrictions on strikes and rules making it harder for workers to organize unions. When unions are less powerful, workers at the middle and bottom get a smaller piece of the pie.
The result of these policies has been to redistribute the bulk of the gains from growth over the last four decades to a tiny share of the population. This is especially true in the United States, where the wage of a typical worker has barely risen when adjusted for inflation, but it is a story that describes most of the wealthy countries.
While the angry voters who cast their ballots for Donald Trump, or Brexit, or one of the right-wing populists in Central or Eastern Europe may have little understanding of the specific policies that have led to the upward redistribution, they do know that they have not been seeing big improvements in their living standards. But, they undoubtedly see a substantial class of people at the top who are doing quite well.
If Mr. Stoltenberg and his colleagues don't want to be in the business of kowtowing to Trumpian buffoons, they should start thinking about policies that ensure the benefits of growth are broadly shared. It's not hard to develop such policies, although the beneficiaries of upward redistribution will be reluctant to give up their gains.
Of course, there is no guarantee that working-class voters may not still vote for racist and xenophobic politicians. But, having economic policies that benefit everyone, and not just a small elite, is the right thing to do in any case.
And, at the most basic level, policies that offer more opportunities for advancement mean fewer working-class voters. If the United States had continued to increase college enrollment at the same rate as it did from 1959 to 1979, there would have been another 10 million college-educated voters in 2016. Given the difference in the Clinton-Trump margins for college-educated and non-college-educated voters, this would have added more than 1.8 million votes to Clinton's margin, virtually guaranteeing her the presidency.
In short, the future is a choice between policies designed to benefit the bulk of the population and policies that continue upward redistribution. If we continue the latter, we better get used to praising Donald Trump.Have you noticed the irritating spate of articles in the mainstream press expressing alarm that the Democratic Party may be moving too far to the left? This has become a trope among commentators.
The lead piece in Sunday's New York Times, for instance, was headlined, "Democrats Brace As Storm Brews to Their Left." Right from the top, the progressive energy that is bringing new people into politics and challenging Republican incumbents is condemned as some kind of threat to "Democrats."
The reporter, Alexander Burns, goes on to quote party leaders warning of the possible ill effects: "'There are a lot of moderate and even conservative Democrats in Michigan,' Mr. Brewer (the former state party chair) cautioned." Note the use of the loaded verb, cautioned.
This is a classic sort of piece in which the writer has a point of view that he wants to get across, but as a reporter on a supposed news story he can't come right out and say it. So he fishes for quotes to get sources to provide the script for him.
Burns also reports, eyebrow raised, that in Maryland, "Democrats passed over several respected local officials to select Ben Jealous, a former NAACP president and an ally of Mr. [Bernie] Sanders who backs single-payer health care, as their nominee for governor."
Dear God, not single-payer! And respected by whom? Reading Burns' overheated prose, you can almost see the barricades in the streets.
The trouble with this kind of story, sloppy and all too familiar, is that it conflates two kinds of left. After 40 years of declining economic prospects for ordinary Americans and two years of fake populism by Trump, the Democrats need nothing so much as candidates who are progressive on pocketbook issues. These are the kind of candidates who can win back seats in Trump country.
There may be lots of moderate Democrats in Michigan. But moderate on what? Surely not moderate on losing their jobs and their homes.
Deft Democratic candidates promise hard-pressed voters a better deal on economics, but reflect the views of their districts on hot button social issues. Conor Lamb managed this brilliantly when he won his special election to Congress in Pennsylvania's 18th district last March, carrying a district so ostensibly red that Trump carried it by nearly 20 points and the Democrats did not even bother to field a candidate for the seat in 2016 and 2014.
In a seat like New York's 14th, where rising progressive star Alexandria Ocasio-Cortez knocked off an entrenched incumbent, Joe Crowley, it's fine to go left on both economic and social issues. In some of heartland America, economics is the main ticket.
Nobody is a better role model for how to make pocketbook populism work in Trump country than Ohio's Sherrod Brown. He is currently up between 13 and 17 points in the polls in his Senate re-election campaign, in a state that Donald Trump carried by more than 350,000 votes. It's not that Brown is a moderate on social issues, either. He was the Senate's lead sponsor on a resolution designating June as a month to celebrate and advance LGBTQ rights, and his position on all the social issues from immigration to abortion is progressive. But he leads with populist economics, so socially conservative working-class voters know that Brown is on their side, and they cut him some slack on other issues they may not support.
In West Virginia, the leader of that state's teacher strike, Richard Ojeda, is waging a strong campaign to take an open House seat long held by Republicans. Ojeda, a Democratic state senator who voted for Trump himself, is running as an out and out progressive populist.
Ojeda is so good that he manages to redefine social issues as class issues. Speaking at a pro-choice rally in Charleston, Ojeda told the crowd that he didn't really like abortion, but that if it were outlawed, rich women would still get abortions.
West Virginians knew exactly what he meant. Indeed, many other supposed social issues, such as pay equity and parental leave, are really class issues if narrated well.
Only in a handful of swing, Republican-held suburban districts, where voters, especially Republican women, are disgusted with Trump, does it make any sense for a Democrat to run as more of a moderate on economics. And even in those districts, there are less affluent people who would turn out if a candidate gave them a good reason to vote.
So asking whether Democrats are running too far to the left in general is precisely the wrong question. The right question is how they blend economic issues ― where they need to run to the left almost everywhere ― with social issues like immigration rights, gun rights and abortion rights that can be divisive in the more socially conservative parts of the country.
The most ineffective combination of all, as Hillary Clinton painfully demonstrated in 2016, is left on identity issues and pro-Wall Street on economics. Kirsten Gillibrand and Cory Booker, take note.
In 2018, we can trust most Democrats candidates to get this balance of the economic and the social right, if they pay attention to their districts and they lead with progressive economics. The press should start getting it right, too.
Robert Kuttner is co-editor of The American Prospect and a professor at Brandeis University's Heller School. His new book is Can Democracy Survive Global Capitalism?
This Friday morning at 8:30, we'll see the first estimate of GDP for 2018Q2. Various trackers have it coming in at or above 4% (that's the real, annualized quarterly growth rate). It's that ballpark correct, as I expect it is—the trackers use much of the same incoming data as BEA—it will be a big political football, but that's not the purpose of this post. Here, I'd like to think about the best way to pull out the underlying trend of real GDP growth.
While team Trump will be going bananas for any number with a handle of 4 on it (as would, to be fair, even a normal administration), it's widely agreed upon by long-time GDP watchers that any single quarter should be down-weighted, and even more so if it's an outlier (i.e., well above or below trend). But the concept of outlier implies the existence of a known trend, and that's where things get a bit more confusing these days.
The first thing you want to do when hunting the trend is to get away from the noisy, annualized quarterly growth series. Figure 1 shows, for example, how the year-over-year change cuts through the volatile annualized quarterly data (for all of these figures I've plugged in 4.5%, as per the Atlanta Fed's GDPNow, for 2018Q2).
Source: BEA
The end of the yr/yr series, juiced in part by my plug-in, shows a nice acceleration to around 3%, but it also shows rates of 3% achieved pretty recently, around 2014-15. Yet, most non-thumb-on-the-scale analysts estimate trend GDP growth to be closer to 2 than 3. I agree, meaning there is still be too much noise in the yr/yr series to pull out a reliable signal of the underlying trend.
If you didn't know better, you'd use a simple HP filter to pull out the signal and call it a day, as in the next figure (most such examples apply the filter to log GDP, not to its annual change, as I do here, but the reasons to not use this filter pertain here as well). But as Jim Hamilton recently wrote, this approach risks bringing "all kinds of patterns into the HP-filtered series that have nothing to do with the original data-generating process and are solely an artifact of having applied the filter."
Source: BEA, my analysis
The HP filter can be especially misleading at the end of series as its construction leads it to hew too close to the actual data. And that's the part in which we're often most interested.
Hamilton has his own recommended approach (follow the link above), and sure enough, if you run both the HP and Hamilton filters on log real GDP, the Hamilton trend is well below the actual data at the end of the series (remember, all these figures plug 4.5% in for Q2). The Hamilton filter, to its credit, is a tougher customer and requires more convincing than HP before it accepts a more persistent shift in the series, i.e., a change in the trend. The implied recent growth rate of the Hamilton series, btw, is around 2%, which, as noted, many of us still think of as real GDPs trend.
Source: BEA, my analysis
There is, however, the matter of the stimulus, which is clearly pushing growth above that trend rate as fiscal injections of more than $200 billion a year both this and next year are prone to do. Goldman Sachs researchers report a fiscal boost to real GDP growth of a bit north of 0.5 ppt in both 2018 and 2019.
But that's Keynes, not Laffer, meaning once the fiscal impulse fades, it's back down to trend (more precisely, negative fiscal impulse might will take GDP below trend for a few quarters).
So, beyond a wild card I'll note in a moment, GDP is probably growing at a long-term trend around 2%, though near-term quarters will be above trend. And we should get no more elated by the 4.5% on Friday, if that's the print, than we should be disappointed by the 2% final estimate for Q1.
The wild card is this: Though we could use more empirical evidence, I'm increasingly moved by reverse hysteresis arguments, where positive demand shocks can boost the economy's supply side (here's a nice empirical paper with some evidence from Coibion et al written for CBPP's Full Employment Project). To the extent, for example, that the tight job market pulls in more labor market sideliners, there's the potential for faster labor force growth. Also, as Bivens argues: "A 'high-pressure economy' that eliminates the remaining demand shortfall in the U.S. economy and leads to low rates of unemployment and rapid wage growth would likely induce faster productivity growth."
The logic is that firms, in order to maintain profit margins in periods of high labor costs, must find efficiencies they can ignore in slack markets. [What's that? This can't be right because any firm not operating at the edge of their PPF will be forced out of businesses by more productive competitors? Yeah…no.]
Especially given relatively tame (core) price and wage inflation, what's the downside of seeing if he's right?!
At any rate, if BEA delivers unto us a GDP growth rate for Q2 that starts with a 4, go ahead and applaud. Then sit down and back out the trend.
Note 1: I'll rerun some of these figures with the actual estimate on Friday, time permitting.
Note 2: I didn't get into it here, but there are good arguments for gleaning real GDPs trend from sub-measures that leave out volatile components. One popular entry is real final sales to private domestic purchasers, which is C + I – inventories + imports. BEA itself says this series tracks "the more persistent movements in spending by consumers and businesses."
This last figure plots real GDP and real final sales to domestic purchasers, yr/yr. There is less of an acceleration in final sales toward the end of the series, and I like that it's smoother than GDP growth. But since 2010, they seem to telling a similar story.
Note 3: For others who play in this sandbox, what's your preferred method for GDP trend extraction? I only ask that it's a technique we can all try at home, i.e., nothing too esoteric.
