The current explanation.

Back in 2000, the Clinton Administration held a conference to congratulate itself on its skillful economic management.[1]  The participants foresaw the opening of a new era of rapid economic growth.  Low inflation would run in tandem with stable growth in what some saw as a “Great Moderation.”  Markets behaved rationally most of the time.  Technological innovation increased labor productivity.  Increasing international trade through agreements like the North American Free Trade Agreement expanded high-end American exports while providing American consumers with low-cost imports and stimulating the shift of factors of production (capital, labor) out of low-end industries.  China, in particular, tantalized businessmen and economists alike.  More education and geographic mobility offered the best means for displaced workers to adapt.  Investors faced a host of “staggering high-quality investment opportunities.”  Central bankers could manage the economy with relatively small changes in interest rates.

Like many another rosy dawn, this one failed to arrive.   The host of “staggering high-quality investment opportunities” turned out to be the “tech bubble” that collapsed almost as soon as Bill Clinton handed the White House keys to George W. Bush.  “The China Market” turned out to be just as much of an illusion now as in the past.[2]  Indeed, China’s enormous labor force multiplied by rising productivity multiplied by low wages created an export giant unlike anything ever seen before.  (A 2016 paper by three economists calculated that between 1999 and 2011, Chinese competition ate up 2.4 million American jobs.)  The financial crisis at the end of the Bush administration showed that at least some markets were far from rational and self-correcting.  More education has not guaranteed a better adaptation to a changing economy, while fewer start-ups are creating new businesses and many displaced workers have been reluctant to relocate toward growth areas.  Technological innovation has destroyed far more jobs than it has created.  Indeed, one economist argues that there is a shortage of investment opportunities to provide either an outlet for savings or new jobs.

The rewards of economic change have flowed disproportionately to the upper levels of American society.  In 1990, the top 20 percent of families earned 44.3 percent of total income.  In 2014, the top 20 percent of families earned 48.9 percent of income.  In 2000, wages, salaries, and benefits accounted for 66 percent of Gross Domestic Product (GDP), while business profits accounted for 8 percent.  By 2010, wages, salaries, and benefits accounted for 61 percent of GDP, while business profits have now risen to 12 percent.  Between 2000 and 2015, median family income fell by 7 percent.  One recent poll reported that 91 percent of Bernie Sanders supporters and 61 percent of Donald Trump supporters think that the economy favors powerful interests.   (More likely it favors certain skills and behaviors, but no one is buying that line.)

Those job losses and income shifts now are having a political effect.  Of the 100 counties with industries worst hit by Chinese competition, 89 voted for Trump in the primaries.  Of the 100 counties with industries least hit by Chinese competition, only 28 went for Trump.   Faced with losing their own jobs, many Republican leaders are re-thinking their positions.  A former Treasury official in the Bush II administration reflected that “Washington and we in the establishment spent too much time celebrating the efficiency gains of trade and not enough time thinking about the people who were impacted.”

[1] John Hilsenrath and Bob Davis, “Unkept Economic Promises Drive Stormy Election,” WSJ, 8 July 2016.

[2] “If every Chinaman would add eight inches to the length of his shirt it would take all of the cotton cloth that we have in America, because they all wear them on the outside.”  Proceedings of the … Annual Convention of the Investment Bankers (1919), p. 71.


Good news and bad news on the economy.

The American economy is huge (producing $18 trillion worth of goods and services every year) and growing (GDP is projected to double over the next fifteen years).[1]  Business analysts had projected that the American economy would grow at a rate of 2.5 percent in the second quarter of 2016.[2]

What’s the good news?  If you leave out business inventories, then in the second quarter of 2016, the rest of the economy grew at 2.4 percent.  Also, consumer spending (which makes up roughly two-thirds of the economy) grew at a rate of 4.2 percent.  This reflects the belated rise in wages (by 2.5 percent over last year) and the fall in gasoline prices.  The United States International Trade Commission projects that the Trans-Pacific Partnership (TPP) trade deal could add 128,000 full-time jobs and $42.7 billion to the GDP by its fifteenth year.

What’s the bad news?  First, companies have been meeting the rising demand in part by drawing down their inventories, rather than by making new stuff to keep their inventories stocked.  If you include inventories, then the economy grew at a rate of only 1.2 percent.  This is half the rate calculated if inventories are excluded.

Second, the fall in energy prices has caused energy companies to shut down a lot of production rather than investing; in other sectors, the strong dollar is choking off a lot of sales, so companies aren’t investing as much.

Third, the TPP’s projected job creation and GDP growth projections are pretty small compared to the over-all economy.  In addition, it is projected to increase wages by only 0.19 percent over where they will be otherwise.

Fourth, the growth of labor productivity holds the key to economic progress.  Labor productivity is the amount of output (stuff) per hour of work.  If labor productivity increases, the employers get more stuff to sell at the same labor cost as before.  That allows for higher profits, or lower prices to buyers, or higher wages to workers, or—the trifecta—all three.[3]  Between 1870 and 2013, the American economy averaged 2.3 percent growth in productivity each year.   This made for a gigantic rise in living standards.[4]  However, that average disguises differences in productivity growth during the sub-periods.  From 1948 to 1973, the annual growth in productivity averaged 2.8 percent.  From 1973 to 1995, it averaged 1.4 percent.  From 1995 to 2010, it averaged 2.6 percent.  From 2010 to 2013, it averaged 0.7 percent.[5]

Apparently no one knows what caused the shifts.  No one knows why it suddenly dropped in 1973 or why it dragged along at a low level for two decades; no one knows why it shot up in 1995 and stayed at a high level for fifteen years; no one knows why it fell again in 2010 (after the end of the financial crisis); and no one knows what the poor performance of the last few years portends or when it will end.  However, in the first quarter of 2016, it fell by 0.6 percent.

The future is uncertain.  Over the short-run, will companies begin investing to meet rising consumer demand or will the investment decline undermine the growth of consumer spending?  Over the longer-run, will productivity growth begin rising or will it continue to limp?  Will rejection of the TPP leave world trade as it is or will it begin a downward spiral in trade?

[1] Eduardo Porter, “Uneasy Alternative to an Imperfect Trade Deal,” NYT, 27 July 2016.

[2] Neil Irwin, “What’s Right and Wrong With the Economy,” NYT, 2 August 2016.

[3] See: Henry Ford.

[4] Alan Blinder calculates this as a 25-fold increase.

[5] Alan S. Blinder, “The Unsettling Mystery of Productivity,” WSJ, 25 November 2014.

Trumputin 2.

Did Donald Trump encourage the Russkies to hack the email of Hillary Clinton?  Well, no.  It doesn’t matter what the New York Times[1] or the Public Broadcasting Service says.  The truth is different.

Hillary Clinton’s private e-mail server handled both her correspondence as Secretary of State and her “personal” e-mails.  In theory, these personal e-mails related to things like the place settings at the wedding of her daughter Chelsea Clinton.  However, some people (other than Ann Coulter) believe that some of the e-mails reveal the involvement of the Secretary of State with donations to the Clinton Foundation.

Hillary Clinton shut down her private e-mail server after she ended her term as Secretary of State in 2012.  All of the “personal” e-mails were deleted, although the State Department-related e-mails were subsequently turned over to the State Department.  The server cannot now be hacked because it hasn’t been operating for four years.  Thus, the EffaBeeEye could not recover the deleted e-mails.

Was it hacked in the past?  F.B.I. Director James Comey sharply criticized Hillary Clinton’s “reckless” behavior in handling e-mail while serving as Secretary of State.  Experts consulted by the New York Times concluded that her e-mail had “probably” (i.e. almost certainly) been hacked during visits to China and Russia.[2]  This raises the possibility that the Russkies accessed her e-mail before she ended her tenure as Secretary of State and before she wiped the 30,000 “personal” e-mails from the server.

The New York Times has been quick to engage in damage control.  In its view, the released e-mails from the DNC “portrayed some [DNC] officials as favoring Mrs. Clinton’s candidacy while denigrating her opponent, Senator Bernie Sanders.”  It pointed out that the DNC had been targeted, but “apparently not those of the Republican National Committee.”[3]  This farcical idea is used to introduce a reference to Watergate and, by implication, Richard Nixon.

Assuming that the Russians had hacked Clinton’s e-mail server, Donald Trump urged the Russians to release the now-deleted e-mails. “If Russia or any other country or person has Hillary Clinton’s illegally deleted emails, perhaps they should share them with the FBI.”

Nevertheless, the incident has become more of a problem for Republicans than for Democrats.[4]  For example, Paul Ryan’s spokesman responded by denouncing Russia and Vladimir Putin as “a global menace led by a devious thug.”  For their part, the Democrats quickly portrayed Trump as having invited the Russians to hack a server that had—in reality–been out of operation for four years.

Did the Russians hack the Clinton e-mail server while it still functioned?  Did they provide any information to the Obama Administration through the FBI legal attache in the Moscow embassy?[5]  How would revealing the contents of her personal e-mails harm Hillary Clinton’s chances to become president?  Should American voters anticipate an “October surprise”[6] based on these hacked e-mails?

[1] Ashley Parker and David E. Sanger, “Trump Eggs On Moscow In Hack of Clinton Email,” NYT, 28 July 2016.

[2] David Sanger, “Hillary Clinton’s Email Was Probably Hacked, Experts Say,” NYT, 6 July 2016.

[3] It would be odd if the Russians did not attack the computer systems o both major parties.  Perhaps we’re waiting on revelations about Republican plans to derail Donald Trump.

[4] Or perhaps I just read the wrong newspapers.

[5] Not likely.

[6] See on the origins of the term.


Most economists hold that “past major trade deals [NAFTA, Chinese entry to the WTO] have benefitted most Americans.”[1]  Now we’re facing the Trans-Pacific Partnership (TPP).  There is no doubt that this is true.  Still, lots of working people think that an open world economy has turned into a disaster.  Naturally, in an election year, all sorts of candidates—from Donald Trump to Hillary Clinton to Boris Johnson—are having road to Damascus experiences.  It’s how you get ahead in a competitive environment.

How is this possible?  On the one hand, there is a certain gap between quantitative-based reality and perception-based reality.  While economists calculate that “trade deals benefited most Americans,” most Americans (55 percent) calculate that they did not.[2]  Who is right?

On the other hand, Economics is the greatest of the “social sciences” that arose at the end of the 19th Century.  Those social sciences (Economics, Sociology, Psychology, Political Science, Marketing) all study the behavior of people in the aggregate to discover “laws” of human behavior.  The thing is, people don’t live their lives in the aggregate.  They live their lives individually and for themselves.  “Most” people can be doing really well, while a minority are doing badly.  The minority takes no consolation from the happy situation of the majority; apparently, the fortunate majority gives little thought to the hardships of the minority.

However, some research indicates that this is too simple an answer.  Lots of people who oppose free trade are not individually harmed by it, but they believe that the country as a whole is harmed by it.  It has been suggested that isolationism plays a role; that nationalist feelings of “cultural superiority” plays a role; and that racism (couched as “ethnocentrism”) plays a role.  People who have less education are more likely to be isolationist, nationalistic, and “ethnocentrist” than are the better educated.  Gregory Mankiw has a funny coda to this story: once people have more education, this nonsense will pass.[3]

There is another possible explanation.  Many people recognize that America is still a racially segregated society, but not many people recognize that America is still a class segregated society.  My father taught people to drive and eventually bought the business[4]; his brother had some experience in construction and some training as an engineer in the US Army, and then became a consulting engineer[5]; their brothers-in-law were a mill-hand at Weyerhauser, a ship-wright at Vic Foss Boatyard, and a salesman-turned-entrepreneur.  My beloved[6] in-laws graduated from Ivy League colleges, often went to grad school or law school, are “professionals,” and have lovely summer homes on the Eastern Shore, in New Jersey, and in Nova Scotia.  All the same, if the people losing from globalization mostly come from one social group, then maybe their extended families and friends intuitively or out of human sympathy push back.  Their own family and friends also suffer from economic change.  They recognize that they themselves may suffer in the future.  Class solidarity trumps [NPI] economic “rationality.”

Maybe, shock absorbers against the impact of trade deals are best?  Or maybe not.

[1] N. Gregory Mankiw, “Trade Is Good, But Voters Aren’t Buying It,” NYT, 31 July 2016.

[2] This may be an example of what Marxism terms “false consciousness.”  People think that they are something different from what people in authority tell them they are.  Alas.

[3] Arthur Koestler, Darkness at Noon, has a funny coda to Mankiw.  People always suffer from relative lack of development

[4] My Dad taught me how to tie a necktie and had a couple of suits, but he didn’t wear a jacket or tie to work.

[5] Basically a burr under the saddle of construction companies trying to cut corners on jobs that they had bid.

[6] I’m not being arch here.  They’re wonderful and incredibly generous human beings with a Hell of a lot more social conscience than I possess.