In response to an FT article by Martin Wolf on 8th November 2016, entitled ‘New President has an economic in-tray full of problems’
“In the second quarter of 2016, real GDP per head was still only 4 per cent above its pre-crisis peak, almost nine years before… US potential output is 7 percent below levels suggested by pre-crisis trends…
Real median household income increased by 5.2 per cent between 2014 and 2015. But it remains below pre-crisis levels. Indeed, it is below levels reached in 2000 and has even fallen relative to real GDP per head consistently since the mid 1970s…
Between 1980 and the most recent period, the share of the top 1 per cent in pre-tax income jumped from 10 per cent to 18 per cent. Even after tax, it rose by a third, from 8 to 12 per cent. The rise in compensation of chief executives, relative to that of workers, has been huge. The US has the highest inequality of any high-income country and has seen the fastest rise in inequality among the seven leading high-income economies…
(there has been a) steady rise in the proportion of men aged 25 to 54 neither in work nor seeking it from about 3 per cent in the 1950s to 12 per cent now…The rate of creation of new jobs has slowed markedly, as have rates of internal migration...
The rate of entry of new businesses into the marketplace has also been falling over an extended period, as has the share of ones less than five years old in both the total number of businesses and employment. Meanwhile, business fixed investment has been persistently weak. Evidence also suggests a rising variation in returns on capital. These are long-term trends, not just post-crisis events.
In addition to the trends identified above, deteriorating infrastructure, worsening relative educational performance and a terrible tax code are challenges. Halting immigrants and imports would be an act of self-harm. The US must build on its historic strengths of an open and dynamic economy, together with government provision of infrastructure, research, education, and balanced tax and regulatory policies. A new administration needs the right diagnosis and co-operation from Congress. Pigs may also fly – Martin Wolf
Good article Mr Wolf – thanks.
The next President will not solve the problems you’ve identified for one simple reason – the economic advisors he or she will draw from don’t understand the economy.
I recently read a superb piece by the economist John T Harvey, published at Forbes, which elaborates on this theme. The piece is entitled ‘Five Reasons You Should Blame The Economics Discipline For Today's Problems’
He starts by outlining the economic backdrop, a description not too dissimilar to your own Mr Wolf:
“There is no question that this has been one of the most divisive presidential campaigns on record. Hatred for each candidate runs deep and whoever becomes the new White House resident on January 20, 2017, many Americans will be bitterly disappointed — perhaps even angry.
And yet, despite all the vitriol and personal attacks, there is something about which both parties and candidates agree: a key problem facing our country is economic stagnation. The middle class is suffering, private-sector debt is weighing us down, government services are being starved of income (especially in education), and full-time jobs with a complete range of benefits are few and far between. What happened to the decades of post-war growth when each of us could safely assume that we’d have a better standard of living than our parents? That’s hard to do when you are living in their basement, trying to pay off your college debt.
The consequences of our current economic woes go well beyond our checkbooks and our borders. Many of our domestic political and social struggles are linked in some way to a lack of economic opportunity, as are a number of the conflicts and controversies around the globe. People who are not hungry, bewildered, and scared find it much easier to compromise and cooperate” - John T Harvey
Where he departs is in his analysis of where the fault lies, and by definition therefore, where the solution is to be found:
“Here’s something that may frighten you: the people responsible for national economic policy are economics professors. Donald Trump may develop a different plan than Hillary Clinton, but they both pick and choose from the same set whose contents is determined by that joker who stood in front of your introductory macro class–well, assuming you did so at Harvard, MIT, Chicago or the like. But make no mistake, it’s professors nevertheless. Just do a quick Google search to see who the current and past members of the Council of Economic Advisers or the Federal Reserve Board are. This means that whatever those college professors think is a good idea eventually affects whether or not you can find a decent job.
“But that should be good, right, since a major part of being a professor–especially at the most prestigious universities–is doing research? They spend untold hours reading others’ analyses, building models, running regressions, and writing and publishing articles of their own. Who better to tell us how we should be running the economy than those paid to study it?
Yeah, you’d think that, wouldn’t you? Except that…
1. Economists write to impress each other in a language only they can understand
2. As an economist, you are encouraged to think outside the box–except don’t!
3. Mainstream economists have next to no knowledge of the schools of thought that did the best job of forecasting the Financial Crisis
4. Academic inbreeding has led to dysfunctional theories.
5. There’s no incentive to fix those dysfunctional theories”
- John T Harvey
Each of these points is elaborated to great effect, before Mr Harvey arrives at his conclusion…here is a snippet of that:
“There was a very clever Saturday Night Live skit, “Black Jeopardy,” that played on the fact that some of the core concerns of both Donald Trump and Hillary Clinton supporters are really the same. They are poor, confused, and scared. They are also very mistrustful of a system where they don’t think they can get a fair break. Unfortunately, from my perspective, neither candidate is going to fix that. Until the ideas coming from the ivory towers are aimed at solving macro problems and not just getting another publication, we’re screwed. As John Maynard Keynes observed in the General Theory:
‘…the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else…But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.’ – Keynes
The longer I live, the more I realize how right he was. And the more scared I am because I don’t see it getting fixed' - John T Harvey
Mr Harvey’s full article can be found here:
Personally, when I look at the spreadsheet wizards who populate the Eccles Building, and the failed ‘pop stars’ being touted for Treasury, I don’t see it getting fixed either.
There is a saying that change in academic thought comes one funeral at a time. Perhaps, but on the other hand, I don’t think the paradigm we are in will survive the sovereign debt crisis that I believe is coming. Dotcom bust…real estate bust…global bond market bust…three strikes and you are out.