The Economic Consequences of Donald Trump

By Pavlina R. Tcherneva

Cross-posted at New Economic Perspectives

Economic consequences

A lot has been said already. For me, this was the culmination of a decades-long process where the Democrats sold out their progressive agenda and happily embraced the Republican’s neoliberal economic policies. For some of the best analysis, see here, here, here and here.

My own view is that the Democrats have not had an economic policy of their own for nearly half a century, just an ‘inferior’ version of what Republicans usually champion—tax cuts on the wealthy, dismantling the public safety-net, ‘fighting’ inflation by creating unemployment, market liberalization and deregulation across the board, which among other things brought us a colossal financial sector that has cannibalized the productive economy.

Democrats need to grapple with the reality that Bill Clinton completed the Reagan revolution, and what we got from both parties is rabid financialization, extreme inequality, corporate welfare, joblessness, and economic insecurity: precisely the conditions that fan the flames of social antagonism and deep-seated racism and bigotry. There are many ways to tell this story but, just think, the real incomes of the vast majority of US households have barely moved in the last two decades. Most of us live in stagnation (at best) and many communities are mired in an ongoing recession (even depression), while the economy is ‘officially’ growing.

Neo-liberalism on steroids

As vile as Trump’s campaign was, many of his supporters have legitimate gripes about the state of the economy and about big money in politics. Of course, the notion that Trump is the ‘man of the people’ who will deliver the kind of change they (we) need is preposterous. In fact, his entire economic platform is basically the one I already described above. Nothing has changed. It is the same old plain vanilla “trickle-down economics” we know too well.

And all of us, but especially poor working folk, will hurt even more if Trump repeals Obamacare and the Dodd-Frank Act, gives more tax cuts to the ultra-rich, cuts the budgets of the Department of Education and the EPA, and continues to weaken labor bargaining, to name just a few of his to-do items. All of this is a continuation of neo-liberal policies but on steroids.

The long-term prospects for the economy are dismal. While I do not foresee the economic Armageddon many are predicting in the immediate future, what we will see is another sequel of the structural forces that have brought us the economic ills, which produced this election result–outsized corporate power, unbearable inequality, and increased financial instability. The one bright spot could be his plan for over $Trillion in infrastructure investment. That is something we surely need. But remember, if it does not translate into genuine deficit spending, and Congress tries to ‘pay’ for these expenditures by slashing other Federal programs, there will be no ‘stimulus’. What one hand gives, the other will take away. And Mitch McConnel is already on record that infrastructure is not a priority. But if the deficit expenditure is there and Trump ends up “reviving our inner cities” and restoring infrastructure so “it’s second to none” (as per his acceptance speech), that will benefit the economy and create jobs (though it might come with a giant neon TRUMP sign on every new bridge).

But no one should have any illusions. America elected someone very much from the wealthy elite, a privileged member of the establishment, who happened to be a better salesperson.

A social plague

Unfortunately, it is impossible to discuss the ‘economic consequences of Trump’ in an objective way because he has unleashed a plague on our society, from which we will suffer for many years. Trump has brought white supremacy out of the shadows and has normalized bigotry, misogyny, and hate in ways we hadn’t seen in decades. He has now given permission for the resurgence of overt racism. And while this may well have been already underway, racism and economic anxiety are deeply intertwined, and both seem to be reaching a new fever pitch.

This cancer will stay with us for years to come and must be fought every step of the way. Whatever our gripes and differences about the economy, we must together collectively stand against acts of hate. Nothing will erode the social fabric more and undermine our ability to make progress on economic matters than this poison. Fear sells.

As FDR warned us long ago:

“We have come to a clear realization that true individual freedom cannot exist without economic security and independence. People who are hungry and out of a job are the stuff of which dictatorships are made.” (FDR)

Democracy didn’t fail. It did exactly what it was supposed to do. But:

“The liberty of a democracy is not safe if the people tolerated the growth of private power to a point where it becomes stronger than the democratic state itself. That in its essence is fascism: ownership of government by an individual, by a group, or any controlling private power.” (FDR)

Looking ahead

So while the mainstream pundits are burning their batteries trying to sort out what went wrong, we need to get to work—do something useful, say something inclusive, stand up to a bully, be safe and keep advocating and working for social justice.

That’s what I intend to do. On Monday I will present at James Galbraith’s conference of the Economists for Peace and Security in Washington, D.C. (Register here). Peace and Security. Two things many of us do not feel right now. I cannot think of a better place to be, discussing more important topics, given these election results. I will be talking about youth unemployment. The election has exposed further our desperate need to design genuinely inclusive social policies.

What we have here is a crucial moment to mobilize, to start drafting a Democratic progressive agenda from scratch, to shed the destructive neoliberal policies so wonderfully championed by Democrats and Republicans alike.

An Economic Bill of Rights

What might that look like? My preference would be to take inspiration from Franklin Delano Roosevelt and design policies around the Economic Bill of Rights – policies that create jobs for all, boost incomes, usher in a Green New Deal, transform our energy system, complete the safety-net with paid family leave, universal child allowance, strengthened social security, guarantee healthcare for all, invest in public education, provide debt relief for families, renew anti-trust policies and aggressive financial regulation, to name a few.  And save the environment.  Because if we don’t, none of the above will matter.

Never let a good crisis go to waste.

Paul Krugman Crosses the Line

By Gerald Epstein

Cross-posted at our sister blog Triple Crisis

In his recent New York Times opinion column, “Sanders Over the Edge” (4/8/16), economist Paul Krugman offers his readers a basketful of misinformation on important economic matters about which he should – and probably does – know better. The column contains a large number of snipes and a great deal of innuendo against Bernie Sanders and his supporters, but here I focus on his claims about “Too Big To Fail” (TBTF) banks, their role – non-role, according to Krugman –  in the financial crisis, and Sanders’ understanding of the policy tools available to deal with them. Krugman’s claims about these issues are misleading, almost certainly wrong, and, in my view, call into question the credibility of his New York Times column as a source of economic information and analysis.

Krugman starts here:

“Bernie is becoming a Bernie Bro.”

I’ll leave it to others to dissect this one. Moving on:
“Let me illustrate the point … by talking about bank reform.

“The easy slogan here is ‘Break up the big banks.’ It’s obvious why this slogan is appealing from a political point of view: Wall Street supplies an excellent cast of villains. But were big banks really at the heart of the financial crisis, and would breaking them up protect us from future crises? Many analysts concluded years ago that the answers to both questions were no.”

As you can see by following Krugman’s link here, this is not, what Krugman suggests it is: it is not a link to an article quoting multiple analysts presenting strong arguments with evidence that large banks were not responsible for the crisis. It is a link to an opinion piece by Paul Krugman himself. Period.

And, moreover, in this linked piece, Krugman is far more circumspect and uncertain of the answers than is implied in his statement “that many analysts concluded years ago.” So, who are these “many analysts”? On what basis did they reach their conclusions?

Certainly, we can find some analysts who argue (“conclude” is a word that suggests an answer based on a comprehensive analysis of the facts) that the financial crisis was the result of government mismanagement, or was simply a textbook example of a bank run and not due to the actions of large financial institutions per se, or were the result of the decisions of a bunch of sub-prime mortgage providers – like Angelo Mozilo Countrywide Financial that operated more or less independently, and were outside of strict government regulation, that is they were in the “shadows.”

Krugman opts for this explanation: “Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial.” But, you don’t have to have seen “The Big Short” to know that the sub-prime lenders like Countrywide Financial were just one set of  players along a powerful supply-chain that contained  multiple links. This chain was geared toward creating and selling structured, securitized financial products like collateralized debt obligation (CDOs) and CDO-squared’s, mostly produced, financed and sold by the largest (now former) investment banks, J.P. Morgan, Goldman Sachs, Lehman Brothers and commercial banks including Bank of America, Citibank. Contrary to Krugman, the U.S. government authorized Financial Crisis Inquiry Commission (FCIC) reports:

“We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions (italic added) were a key cause of this crisis .… They took on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repackaging, and selling trillions of dollars in mortgage-related securities, including synthetic financial products. Like Icarus, they never feared flying ever closer to the sun.” (pp. XVIII-XIX).”

The FCIC, thus, puts a central part of the blame squarely on the, so-called “systemically important financial institutions”, which Federal Reserve Bank President Neel Kashkari and former Goldman Sachs banker calls “Too Big to Fail Banks,” and which economist Bill Black, more appropriately calls “systemically dangerous banks.” I have read much of the academic literature on the financial causes of the great financial crisis and I think it is safe to argue that most experts agree with the FCIC and not Paul Krugman.

Paul Krugman, of course, is entitled to his views. But the point here is that it is highly misleading for Krugman to imply that the consensus among economists is quite the opposite of what it is in fact.

Who does Krugman blame in addition to the sub-prime lenders?

“… the crisis itself was centered not on big banks but on “shadow banks” like Lehman Brothers that weren’t necessarily that big.”

This again is highly misleading. First of all, Lehman Brothers was very big indeed. More important, this statement implies that there were “shadow banks” that were involved in the sub-prime debacle that were somehow distinct from the household name Wall Street banks like Citibank, Bank of America, Goldman Sachs, and J.P. Morgan, that Bernie Sanders, Elizabeth Warren and everyone else who talks about TBTF mean.

If these banks were not at the center of the crisis, then why, according the Congressional Oversight Panel , did the massive and “non-shadowy” Citibank get a tax payer bail-out in the amount of  $476.2 billion in cash and guarantees. Why did similarly placed Bank of America get $336.1 billion? “Little Lehman” didn’t bring these behemoths down. Their central role, and those of other TBTF banks – in financing, buying and selling toxic mortgage products put them – and the economy – into free-fall.

Paul Krugman didn’t inform his readers that important economists who study shadow banking do not exclude these massive banks from key aspects of this shadow banking system. Far from it: these TBTF banks are increasingly seen by experts to be at the center of this global shadow finance eco-system.

Krugman similarly misinforms his readers in discussing Bernie Sanders’ command over the details of the Dodd-Frank law and what it has to say about dealing with too-big-to-fail-banks. In a widely reported – and misreported – interview with the Daily News, Sanders was asked how he would break up the big banks. Krugman was only slightly more polite than Vanity Fair magazine which proclaimed that the interview proved that “Sanders Doesn’t Know Diddly Squat About Wall Street”. Krugman referred to the “recent interview of Mr. Sanders by The Daily News, in which he repeatedly seemed unable to respond when pressed to go beyond his usual slogans.”

To sort this out, let’s look at the relevant part of the transcript:

Daily News: Okay. Well, let’s assume that you’re correct on that point. How do you go about doing it?” (That is: break up the big banks.)

Sanders: How you go about doing it is having legislation passed, or giving the authority to the secretary of treasury to determine, under Dodd-Frank, that these banks are a danger to the economy over the problem of too-big-to-fail.

Daily News: But do you think that the Fed, now, has that authority?

Sanders: Well, I don’t know if the Fed has it. But I think the administration can have it.

Daily News: How? How does a President turn to JPMorgan Chase, or have the Treasury turn to any of those banks and say, “Now you must do X, Y and Z?”

Sanders: Well, you do have authority under the Dodd-Frank legislation to do that, make that determination.

Daily News: You do, just by Federal Reserve fiat, you do?

Sanders: Yeah. Well, I believe you do.”

The relevant facts are these: Under Section 121 of the Dodd-Frank Act the  Board of the Governors of the Federal Reserve has the authority, subject to a 2/3 vote of the Financial Stability Oversight Council (FSOC) to take a range of actions, including (as a last resort) to “require the company to sell or otherwise transfer assets of off-balance-sheet-items to unaffiliated entities”, that is, to shrink the size of the bank in question. Note that the Chair of the FSOC is the Secretary of the Treasury. So, Sanders is correct that the Federal Reserve and the Secretary of the Treasury are the key players here. To be sure, Sanders’ last statement above, that Federal Reserve could break up the banks just by fiat – whatever that means – is not true under section 121.

Still, the Federal Reserve has more tools under its control through Dodd-Frank. For example, under section 619 (one of the key sections outlining the so-called Volcker Rule that tries to ban proprietary trading), states that for these financial institutions “no transaction, class of transaction, or activity may be deemed a permitted activity……(iv) would pose a threat to the financial stability of the United States.” The Federal Reserve would have significant power to issue regulations in this situation.

More generally, the goal of Dodd-Frank, as stated in Section 112 in describing the mission of the newly created Financial Stability Oversight Council (FSOC) is “eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure.” That is, end too big to fail.

In the end, Dodd-Frank does provide tools and responsibilities to the Fed and to the Secretary of the Treasury, along with other financial regulators, that can be used to break up the banks. Sanders’ answer was inelegant, to be sure, but, in reality, his answer reflects the fact that the law is on unchartered territory and in places is vague and would certainly be contested by the banks. So Bernie’s first answer is also the cleanest. “How you go about doing it is having legislation passed …”

In short, Sanders’ answers are way beyond “his usual slogans” as Krugman claims.

Is it possible that Krugman doesn’t understand these points. Seems very unlikely. I cannot begin to imagine his motives, but that is not the main issue here.

What it brings into question is Paul Krugman’s credibility as a New York Times commentator on these issue. Krugman’s credibility does not stem from his political analysis. Krugman is not a Political Scientist. Krugman’s “brand” is that he is a “brilliant, Nobel Prize winning economist.” In fact, much of his early research was brilliant; and, to be sure, Krugman did win the Nobel Prize. BUT, the misleading discussion of economics contained in his piece, “Sanders Over the Edge” does raise this question in my mind: Is Paul Krugman still qualified to write an economics opinion column for the New York Times?