Slowing economy complicates campaign messaging for Trump

[iguanaman]

1. Donald Trump has been in office since January 2016, so we're a little over three years into his presidency. If we define recessions as does the NBER, we're a little above 10 years into an expansion period. Obviously, that cannot be entirely attributed to the Trump administration;


4. I have never seen any credible study that link inequality to reduced economic growth. I'm not even sure how to think about it. You cannot neglect spillover effects and feedback effects at the macroeconomic level and the models that could eventually do this in a Kosher fashion are a very recent development. It's really complicated to think about macroeconomic dynamics when you don't limit yourself to an average household and explicitly introduce an entire distribution of households. In fact, it is getting sufficiently complicated that some mathematicians are beginning to be interested in solving these problems.

And without a model, it's hard to think about how a changing distribution can affect long term growth when you think that the distribution has to change in response to various factors, including long term growth. If you know if anyone who has made some inways in that direction, I would be interested to read about it.

There are plenty of models that show how income maldistribution hampers economic growth. But first let's address your claim that the bottom 50% have gained the most under Trump. It spurious at best.

Because America’s bottom 50% are starting from such a small base, given the enormous disparities in wealth in the United States, even large moves in their fortunes do little to dent the overall distribution. In dollar terms as of the end of September 2019, that latest data available from the Fed, the combined net worth of the poorest half of families was $1.67 trillion out of total U.S. household wealth of $107 trillion.

Here is what the Fed’s Distributional Financial Accounts have to say:

Historically, 17% growth in household wealth over 11 three-month “quarters,” or nearly three years, is pretty standard. There have been 110 such periods since the Fed’s data series begins in mid-1989, and the most recent ranks 55th, squarely in the middle.

On a quarterly basis, compound growth in household wealth since 1989 has averaged 1.39%. Under Trump it is slightly less, at 1.34%.

Blue collar boom? College grads, baby boomers big winners in Trump's economy - Reuters

This paper argues that a key lever for solving the problem of secular stagnation is halting, or even reversing, the root cause of rising inequality: the growing wedge between productivity and pay for typical American workers. Following are our key findings:

A stunningly large upward redistribution of income has characterized the American economy in recent decades. In 1979, the bottom 90 percent of American households claimed roughly 70 percent of total income in the U.S. economy. By 2016, this share had fallen to around 60 percent.
By far the most important driver of this upward redistribution is the growing wedge between economy-wide productivity growth (a measure of income generated in an average hour of work in the United States) and hourly pay of typical American workers since the mid-1970s. Had these two measures grown together the way they did in earlier eras, there would have been no possibility of upward income redistribution.
A strong and growing body of macroeconomic evidence shows that the U.S. economy needs lower and lower interest rates simply to provide the same growth of aggregate demand over time. In short, something is pushing down the growth rate of aggregate demand, and macroeconomic policies need to become more and more expansionary in each successive year simply to hold demand constant. This development has sometimes been labeled “secular stagnation.”
The rise in inequality has contributed significantly to the downward pressure on demand growth that is labeled secular stagnation. Inequality has transferred income from low- and middle-income households with relatively low savings rates towards higher-income households with higher savings rates. All else equal, this transfer drags on demand growth as consumption grows more slowly. This transfer will likely slow growth in aggregate demand by an estimated 2 to 4 percentage points of gross domestic product (GDP) every year going forward from today. 1

Inequality is slowing US economic growth: Faster wage growth for low- and middle-wage workers is the solution | Economic Policy Institute

 

[danielpalos]

Unemployment compensation for simply being unemployed can solve a host of market based problems including our homeless problem and engender a multiplier of Two or more.

 

[TheEconomist]

But first let's address your claim that the bottom 50% have gained the most under Trump. It spurious at best.

I said that the bottom 50% gained more in terms of income than the top 50% in the last 3 years. It might not have been clear that I was talking about income, in spite of the fact that I mentionned gains in real median household and personal income starting around 2014.

So, the first thing I have to say is that wealth and income aren't the same thing, so the comment is off the point even, if to be entirely fair, I probably wasn't sufficiently specific. The second thing I want to point out is that what I said concerns an empirical fact. I mentionned nothing about it being unusual, or exceptional, although I did point out that gains in real median income in the last 6 years were somewhat unusual by the standards of the last 20 years. You may argue that putting these facts in a broader context makes them seem relatively unimportant, but you cannot change the numbers themselves. More importantly, at least as far as real median income data is concerned, we're not talking about a very noisy indicator: it's pretty clear that some of the flattening out that plague the US for a long time got a correction, even if it is a small one.

There are plenty of models that show how income maldistribution hampers economic growth.

I would not be surprised that some models make this sort of prediction and, as I said, I have not dug into this literature. It shouldn't be too hard to work out a toy model that gives you some guidance, but toy models aren't suitable for policy analysis. You cannot fudge too much the details when you're busy trying to weigh different ways to address large scale issues. You need the real deal. I doubt that many models fit the bill. To begin addressing my concerns, you need nothing short of a DSGE model with 3 key features: endogenous growth, endogenous income distribution and endogenous wealth distribution. And, obviously, the model needs to be sufficiently sophisticated to replicate at least some key empirical patterns.

That's the kind of work that can allow to publish a long string of papers in top journals and land a tenure position at Harvard, Princeton, or MIT...

But, again, there might be steps taken in that direction that would nonetheless be interesting to take into account. I'll check your link.

 

[TheEconomist]

Inequality is slowing US economic growth: Faster wage growth for low- and middle-wage workers is the solution | Economic Policy Institute

I took a look at the repport you linked and it was very disappointing.

First of all, they present absolutely nothing new with regards to widely known empirical patterns.

Second of all, they make absolutely no mention of theoretical work done on the matter and do not bother introducing a DSGE model themselves. Consequently, in spite of the fact that they do a lot of hand waving about "aggregate demand," there is no effort made to establish the congruence of their argument with existing theoretical work or standard economic models, so you don't even know how much it makes sense in the first place for them to talk about aggregate demand. It's also the case that going around the need to build a proper DSGE model makes it impossible to know if spillover and feedback effects wouldn't counteract some of the effects they have in mind. In fact, all of their commentary is largely qualitative, so forget about putting numbers on the size of the effects they have in mind.

Third of all, although they apply an idea, they make no effort whatsoever to formally test their core hypotheses: you know what they think, but you don't know how well it fits the data. And they don't link to the work of anyone who did anything even remotely close to this. Their most serious reference is to a top economic journal, but it concerns establishing an empirical pattern they exploit. not testing their ideas.


If you think that this is serious economic research, you have never seen serious economic research. If I had to guess, I would say that this looks an awful lot like a policy document of think tank pushing a political agenda. To be clear, my problem isn't with the thesis, but the method. They may be right, partly right or wrong, but we don't know because too little of the important work has been done correctly. It's sufficiently vague and bad that it makes even talking about it difficult.

If you want an example of excellent research, you could take a look at this paper from Giglio and Kelly. It is closer to my research interest, but it's a good example of what I call science. They start with the simplest model of derivative pricing you can find, they show that it places restrictions on the relative volatility of prices of things like options over different maturities (written over the same underlying). Then, they test it and the model fails, even if you take into account measurement errors and in spite of the fact that it is a shockingly good model at capturing most of the patterns in the data. Then, they knock down potential explanations one by one, until they're left with their main conclusion. Now, that's good work, done properly with all i's dotted and all t's crossed -- that's why it landed in the QJE, which is properly the most widely read and cited journal in economics. And, yes, that could be vulgarized and made manageable for nonexperts. It would make a repport like the one you showed me, except everything would be done correctly.

 

[iguanaman]

I took a look at the repport you linked and it was very disappointing.

First of all, they present absolutely nothing new with regards to widely known empirical patterns.

Second of all, they make absolutely no mention of theoretical work done on the matter and do not bother introducing a DSGE model themselves. Consequently, in spite of the fact that they do a lot of hand waving about "aggregate demand," there is no effort made to establish the congruence of their argument with existing theoretical work or standard economic models, so you don't even know how much it makes sense in the first place for them to talk about aggregate demand. It's also the case that going around the need to build a proper DSGE model makes it impossible to know if spillover and feedback effects wouldn't counteract some of the effects they have in mind. In fact, all of their commentary is largely qualitative, so forget about putting numbers on the size of the effects they have in mind.

Third of all, although they apply an idea, they make no effort whatsoever to formally test their core hypotheses: you know what they think, but you don't know how well it fits the data. And they don't link to the work of anyone who did anything even remotely close to this. Their most serious reference is to a top economic journal, but it concerns establishing an empirical pattern they exploit. not testing their ideas.


If you think that this is serious economic research, you have never seen serious economic research. If I had to guess, I would say that this looks an awful lot like a policy document of think tank pushing a political agenda.

So when the conclusion is not to your liking you cast doubt on the methods. I see a pattern there. There is no way that aggregate demand is not reduced by income inequality. No amount of "studies" can change that fact.

Our starting point is a Bewley-Huggett-Aiyagari model featuring rich heterogeneity and earnings dynamics as well as downward nominal wage rigidities. A temporary rise in inequality, if not accommodated by monetary policy, has an immediate effect on output that can be quantified using the empirical covariance between income and marginal propensities to consume. A permanent rise in inequality can lead to a permanent Keynesian recession, which is not fully offset by monetary policy due to a lower bound on interest rates. We show that the magnitude of the real interest rate fall and the severity of the steady-state slump can be approximated by simple formulas involving quantifiable elasticities and shares, together with two parameters that summarize the effect of idiosyncratic uncertainty and real interest rates on aggregate savings. For plausible parametrizations the rise in inequality can push the economy into a liquidity trap and create a deep recession. Capital investment and deficit-financed fiscal policy mitigate the fall in real interest rates and the severity of the slump.

Economist's View: Inequality and Aggregate Demand

Institute for New Economic Thinking

 

[Casper]

Hmmm...

I wonder what would have happened to the economy if that Queen of the Trump haters...Pelosi...hadn't sat on the USMCA for a year?

I wonder what would have happened to the economy if the Fed had taken Trump's advice way back in 2017 and reduced interest rates?

I wonder what would have happened to the economy if the rest of the government had supported Trump?

The fact that Trump...in the face of constant opposition from the rest of the government...has managed to boost our economy as much as he has is undeniable evidence that he knows what he's doing...and what he wants to do.

He needs support instead of opposition.

I wonder where it would be if the Senate did their job and addressed the hundreds of Bills sent to the Senate from the House.

 

[Mycroft]

I wonder where it would be if the Senate did their job and addressed the hundreds of Bills sent to the Senate from the House.

They did address them.

They look at them and put them where they belong...in the trash.

 

[TheEconomist]

So when the conclusion is not to your liking you cast doubt on the methods. I see a pattern there.

What you have is a single observation: I rejected one repport. You have one point in a high dimensional space which can be fitted by an uncountable infinity of functions and, of all possible functions, you pick the one convenient function which says my rejection response is directly proportional to my political agreement. Perhaps more importantly, your argument relies on something I never said. My only comment about the relationship between inequality of wealth or income and long term growth is that I'm not sure how to think through this issue because I didn't read the relevant theoretical work.

Besides, you don't need to attack me personally: if you are correct, my objections shouldn't be valid. I don't think that asking people to test their claims properly before treating it as Gospel is too much to ask of scientific research. And, given their use of theoretical concepts, I think it is also fair to ask how what they say fit in the existing theoretical literature. Good luck arguing that I am being unreasonable...

It shouldn't be too hard to find a way to satisfy my standards, either. Economics is the most ideologically diverse field in all of social sciences, even though it has still a slight bias to the left on average. If you look at publications in top journals, you are looking at work that has been debated extensively and sometimes very fiercly for one or two years in multiple seminars, conferences and possibly went through multiple revisions before finally making it through. So, pick a top journal. On this topic, the QJE, the AER, the Journal of Monetary Economics or the Review of Economic Studies are all excellent journals. Or find someone who bothered looking through these articles and vulgarized the content. You can also find less mainstream sources, but you'd have to make sure they actually bother taking the possibility of being wrong seriously on your own.

There is no way that aggregate demand is not reduced by income inequality.

This is precisely why we use DSGE models in the first place: you cannot get around the pesky problems that all markets are related, that people form anticipations regarding the future and adjust their behavior accordingly, and that you have finite (thought presumably growing on average) production capacity at all points in time.

If you move to change the distribution of income, you affect the behavior of both people who receive the funds and of those who pay them and both reactions may work in the opposite direction of what you're trying to do. It's also fairly possible that the state of the economy in which you introduce your policy might be a key determinant. Or, you might only be able to make your argument work through mechanisms that achieve the right balance of forces with completely inplausible parameter values. Or, you might have some redistributive scheme that work more or less like you expect, others that have 100% the opposite effect, and others still that have no effect at all. Or you might have only a range of intervention where you get what you want and, taken too far, everything goes back in the other direction.

I don't know if you're right, partly right or wrong. What I do know is that you are very far from having enough information in your hands to reject any of these possibilities.

 

[danielpalos]

So when the conclusion is not to your liking you cast doubt on the methods. I see a pattern there. There is no way that aggregate demand is not reduced by income inequality. No amount of "studies" can change that fact.



Economist's View: Inequality and Aggregate Demand

Institute for New Economic Thinking

The relatively poor performance of our economy in spite of these being the Best of Tax Cut economics times, suggest that to be the case. All those people working and still not enough demand; it must be due to a lack of a fifteen dollar an hour minimum wage.

 

[iguanaman]

The relatively poor performance of our economy in spite of these being the Best of Tax Cut economics times, suggest that to be the case. All those people working and still not enough demand; it must be due to a lack of a fifteen dollar an hour minimum wage.

Yes American consumers are tapped out and cannot consume enough for higher growth.

 

[danielpalos]

Yes American consumers are tapped out and cannot consume enough for higher growth.

Solving simple poverty via unemployment compensation and a fifteen dollar an hour minimum wage will cause growth and engender consumer confidence.

 

[Casper]

They did address them.

They look at them and put them where they belong...in the trash.

Well then, i am sure that would be acceptable for a few, but Hundreds, nope. Their job is to review them then make their changes and work out something with the House. Seems our boys and girls in the Senate don't want to do their J O B.

 

[What if...?]

Hmmm...

I wonder what would have happened to the economy if that Queen of the Trump haters...Pelosi...hadn't sat on the USMCA for a year?

I wonder what would have happened to the economy if the Fed had taken Trump's advice way back in 2017 and reduced interest rates?

I wonder what would have happened to the economy if the rest of the government had supported Trump?

The fact that Trump...in the face of constant opposition from the rest of the government...has managed to boost our economy as much as he has is undeniable evidence that he knows what he's doing...and what he wants to do.

He needs support instead of opposition.

Finally!

Somebody has a graph with the "trump bump".

Please let us see it at last!

 

[What if...?]

I truly think it is counterproductive to keep insulting folks who support Trump. It probably makes some more entrenched in their thinking. It also allows for the disgrace that happened on CNN with Don Lemon. Did not see it but it seems he was laughing at insulting jokes.

Actions such as these probably makes many who don't consider themselves coastal elites oppose those arrogant enough to demean them.

I will atop when they start using critical thinking instead of parrotimg conservative media.

When their recent history cleaves closer to the rest of the world's consemsus reality and recent history.

When they stop crying "TDS!" everytime anyone points out the latest pile of **** trump just squeezed out on the constitution and the rule of law.

At this point they're all like family values preachers smoking Meth with male prostitutes.