Mitchell's Musings

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  • 19 Apr 2017 4:29 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 4-24-17: Lessons from Collective Bargaining for the North Korean Dispute


    Daniel J.B. Mitchell


    Mike Pence's warning to North Korea: 'The sword stands ready''[1]


    Donald Trump was elected president in part due to a promise to negotiate better deals in areas such as international trade and foreign policy. For many years, less so now than in the past, union-management negotiations were very much in the public spotlight and served as a model of the bargaining process. The U.S. is currently engaged in de facto bargaining with North Korea. Is there anything that can be learned from collective bargaining that carries over into the North Korean situation?


    Union-management negotiations are what economists call “repeat games.” That is, unlike a buyer and a seller haggling over the terms of a one-time sale of a used car, the parties to a labor negotiation meet repeatedly over the years as one contract expires and a new one has to be negotiated. In the context of a repeat game, what either party does in a particular negotiation will have ramifications for what happens in subsequent contract negotiations. An added complication in the labor negotiation case is that the same union or the same employer may be negotiating other contracts with different parties at the same time. So what a party does in one situation may simultaneously influence the other negotiations.


    One thing is clear from collective bargaining. In any negotiation, there are potential gains that can be obtained and costs that can be inflicted. Credibility is thus very important. Neither side can be 100% sure about what the other party is prepared to do in terms of making concessions or inflicting pain. But both sides can look for clues from past negotiations. What you say in any one negotiation and what you ultimately do is going to matter in other negotiations.


    For example, if you threatened to do something in the past, or if you promised something, did you follow through? If you accepted a deal in the past containing terms that you previously had said you would never accept, that action suggests that any such a statement in the future has to be received with skepticism. If you offered something that you had previously said would never be on offer, such a statement in the future also has to be received skeptically. If you were a soft touch in the past, and now want to change to Mr. Tough-Guy, that shift could be costly. Your opposite number may assume you are bluffing when you aren’t, and you both may stumble into a conflict as a result.


    These considerations bring us to the current impasse, if that is what it is, with North Korea and its periodic testing of atomic bombs and missiles. A recent headline in the Los Angeles Times read:


    Pence warns North Korea not to 'test' Trump, says the 'era of strategic patience is over''[2]


    How seriously is North Korea likely to take such a warning? Presumably, the powers-that-be there (which may come down mainly to one man) are aware of President Trump’s recent flip-flops on such matters as Chinese currency manipulation, the utility of NATO, the moving of the U.S. embassy to Jerusalem, etc. Even on domestic matters, the record of presidential backing down isn’t likely to suggest to the North Koreans that “testing” Trump would lead to bad consequences.


    There was going to be a repeal and replacement of Obamacare, for example, but it didn’t happen after the president couldn’t get a deal within his own party. He seems unable to obtain any party consensus on tax policy, let alone force a tax deal. If you think the North Koreans – because of their isolation – are unaware of these U.S. domestic matters, think again. Recall the Sony computer hacking in which the North Koreans were apparently up to date on who was who in Hollywood and on what could embarrass who in Hollywood.


    What about recent U.S.-related military events in areas other than North Korea? What lessons might the North Koreans draw from those events? There was a U.S. missile attack on an airfield in Syria said to have been a target because of the use of chemical weapons by the Assad regime. The missile attack appeared to be aimed at differentiating the Trump administration from the Obama administration and the latter’s infamous unenforced “red line” statement about the use of poison gas. And there was the “Mother of All Bombs” dropped on ISIS tunnels in Afghanistan.


    But both U.S. attacks were delivered in ways in which there could be no shooting back from the enemy. So the attacks, while dramatic when shown on TV, posed little risk to Americans. As numerous pundits have pointed out, any U.S. attack on North Korea would, in contrast, involve considerable risks, particularly to civilians and U.S. military personnel in Seoul and elsewhere in South Korea.


    When you look to the labor relations analogy, the missing ingredient in the U.S. position at this time is credibility. Flip flops in other spheres – foreign and domestic - and painless military attacks suggest the opposite of what is intended. They suggest that the president will back off when there might be real costs. If he doesn’t intend to back off this time, that switch may not be evident to the North Koreans.


    One interpretation of Trump’s fluidity with regard to domestic and foreign issues is that perhaps it could be an inadvertent test of President Nixon’s so-called “Madman Theory.”[3] That theory suggested that if the president acted unpredictably, uncertainty over what he might do would deter adversaries. In the Nixon era, the adversaries were North Vietnam and the Soviet Union.


    There is some deterrent effect to uncertainty. Indeed, although I have no knowledge about where the Madman concept originated within the Nixon administration, it, too, has a labor relations analogy. There was a wave of strikes in the Nixon period. As a result, the president at one point toyed with idea of pushing legislation to allow dealing with major labor disputes through something called the “choice of procedures” approach. Nixon’s secretary of labor, George P. Shultz, viewed choice of procedures positively, based on its use under a Massachusetts state law.[4] Choice of procedures can be seen as a cousin of the Madman idea.


    Under the existing federal Taft-Hartley Act (covering most of the private sector) and the Railway Labor Act (railroads and airlines), the president can invoke a temporary injunction (cooling off period) to halt national emergency disputes for durations designated in the two laws. There was an argument that the parties to labor disputes that were likely to be considered as national emergencies would simply build the injunction delay into their strategic planning. However, if the president had several alternatives available (a choice of procedures rather than just the fixed-duration injunction), the resulting uncertainty would make such strategizing more difficult. The parties – not knowing for sure what the president would do - might be induced to settle their dispute on their own.


    In a national emergency labor dispute, however, the president is acting as a third party. So the uncertainty in such disputes is about his intervention in someone else’s conflict. In the North Korean situation, however, the U.S. is an active party to the dispute. If anything, China is the third party in the Korean case. And there is danger in the fact that so far, President Trump has conveyed an image of flip flopping on various issues and of unwillingness to risk pain militarily.


    If his intent in North Korea is to deviate from his past record and now be tough and unyielding, there is – as noted earlier - an increased risk of stumbling into a confrontation. What reason do the North Koreans have for believing that this time it’s different? That’s why in labor disputes, a good negotiator avoids saying “never” when the true position is “maybe.”


    The bottom line here is that if American policy toward North Korea has really shifted to a hard line, it will require something more than just saying so to convince the North Koreans of that fact. In a labor dispute, if the parties have misguided views of each other’s true positions and responses, an unnecessary strike can result. The result is lost wages and profits and some public inconvenience. In the North Korean case, however, we are talking about the potential for mass casualties and even use of nuclear weapons as the consequences of blundering.


    Let’s hope we don’t blunder into some catastrophe this time. Suppose at this point, the president – despite the no-more-mister-nice-guy rhetoric – ultimately lets China defuse the immediate conflict with some face-saving solution. At that point, the North Koreans will have learned that tough rhetoric from this president should not be taken literally; that the rhetoric is for domestic political consumption only. Should the president at some future date actually mean it when he issues a tough ultimatum, the declaration will likely lack credibility. And the next conflict will have a still higher risk of blundering into disaster. Too bad there is no one like George Shultz in the White House today who can inform the president of the escalating risks involved.

    ---

    [1] http://www.latimes.com/politics/washington/la-na-essential-washington-updates-mike-pence-s-warning-to-north-korea-1492605388-htmlstory.html.

    [2] http://www.latimes.com/world/la-fg-south-korea-pence-20170417-story.html.

    [3] http://www.slate.com/articles/news_and_politics/war_stories/2017/04/trump_is_inadvertently_putting_nixon_s_madman_theory_to_the_test.html

    [4] George P. Shultz, “The Massachusetts Choice of Procedures Approach to Emergency Disputes,” Industrial and Labor Relations Review, Vol. 10, No. 3, April 1957, pp. 359-374. 

  • 14 Apr 2017 7:51 AM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 4-17-17: Coal, Seriously


    Daniel J.B. Mitchell


    One byproduct of the 2016 presidential campaign was the attention paid to the plight of coal miners. During the campaign, then-candidate Trump promised to bring back employment in coal by lifting federal regulations, pulling out of agreements to limit greenhouse gas emissions, etc. So what are the prospects for bringing back jobs in coal, now that he is in office?


    Below is a chart showing the trend in employment in the coal mining industry (NAICS 2121). The numbers include all jobs in that sector, not just coal miners, through March 2017. As can be seen, the trend over the long term is down, but with an interim period of stabilization or actual increase from about 2000 to 2012. After that point, jobs generally declined and now seem at a plateau of around 50,000 reached in 2016 and into 2017. U.S. coal production peaked at about 1.2 billion tons in 2008. It declined precipitously in recent years and was down to 739 million tons in 2016.

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    Coal Employment, 000s


    Source: U.S. Bureau of Labor Statistics

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    Of course, another well-known pledge of candidate Trump was to build a 2,000 mile wall along the US-Mexico border. Although no funds have been appropriated for such a wall, the federal government has solicited preliminary bids. In keeping with the spirit of wall building and solicitations, I made a humorous Modest Proposal on Twitter a couple of weeks ago that two objectives – bringing back coal mining jobs and building the wall - could be achieved IF the wall were to be built from coal.[1] Note additionally that even though the current administration doesn’t care much about greenhouse gas, my proposal would not involve burning the coal and thus emissions from the coal needed for the wall would be limited. The only emissions would be the indirect consequences of mining and transporting the coal.


    As it turns out, however, my facetious proposal has a use. It is illustrative of why it would be difficult to produce a lot of new jobs in the coal mining industry. Let’s do a little calculation. Apparently, the wall is supposed to be 30 feet high. So let’s suppose we piled up coal in a triangular form on a 30-foot base. A cross section of the triangular coal pile would have a square area of 450 square feet (30x30/2). The wall is 2,000 miles long, so to convert its length into feet, we multiply 2,000 miles by 5,280 feet per mile and get 10,560,000 feet. When we multiply 10,560,000 feet by 450 square feet, we get a wall containing 4,752,000,000 cubic feet of coal.


    Now we need to know how many cubic feet a ton of coal occupies. Coal varies in type and density. One number that seemed to repeat on the web, however, was that a ton of coal requires something like 40 cubic feet, so let’s go with that estimate. Dividing 4,752,000,000 cubic feet by 40 gives us 118,800,000 tons of coal needed for the wall. Total U.S. production last year, as noted earlier, was 739,000,000 tons. So if we bought all the coal needed for the wall in one year, it would raise that year’s coal demand by 16%. If coal jobs rose proportionately to output, we are talking about a one-time jump of 8,000 coal jobs.


    OK. Let’s make it clear that I am not advocating a wall of coal. But what I am doing is pointing to the fact that even a giant wall of coal running along the U.S.-Mexico border from the Pacific Ocean to the Gulf of Mexico wouldn’t produce a lot of coal jobs. Coal employment fell from 2015 to 2016 by over 13,000 jobs. So the temporary boost of 8,000 coal jobs would be less than that one-year drop. In short, trends in coal prices (and of the prices of other energy commodities) and world demand are more likely to dictate what happens to coal employment than any change in federal policy.

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    [1] https://twitter.com/CalPolicy/status/847229569916575745

  • 07 Apr 2017 8:39 AM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 4-10-17: Klaatu Barada Nikto or This Time It’s Different


    Daniel J.B. Mitchell


    Usually, the phrase “this time it’s different” shows up when there are signs of irrational exuberance, as former Fed chair Alan Greenspan once put it, in the stock market. (We’ll get to “Klaatu barada nikto” later.) Someone comes along and says that today’s exuberance may seemingly look like past bubbles, but because of special explanation X, there is a rationale for the surge in market prices this time. There was a great deal of that type of thinking during the dot-com boom (which then proved to be a run-of-the-mill bubble when it burst). Similarly, the subsequent housing boom was rationalized as a new thing under the Sun until it disappeared into the Great Recession.


    There usually is a market for both the rationalizing of excessive optimism and of gloom and doom. Basically, there is often money to be made out of both ends of the spectrum. There are folks ready to sell you on the latest investment fad. And there are folks ready to sell you gold and survivalist supplies to prepare for the supposed coming Dark Age. In either case, startling headlines sell. In contrast, there isn’t a lot of money to be made by saying that we really don’t know for sure what the future holds, but that past experience suggests that extreme predictions based on perceived current trends are generally wrong.


    In downtown Los Angeles, you will find the Bradbury Building, said to be inspired when it was built in the early 1890s by the popular book, “Looking Backwards,” a Rip Van Winkle-type story about someone who wakes up in 2000 and beholds a utopian future. Suffice it to say that such a utopia did not turn out to arrive by 2000. And the Bradbury Building looks like the latest thing of the 1890s.

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    LA’s Bradbury Building

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    But we don’t have to go back to the 1890s to find misguided predictions. In the 1930 film “Just Imagine” – a comic view of what the world would be like in fifty years - folks seem to get around in flying cars in distant 1980. The city in which they get around has skyscrapers that look remarkably like those being built in the 1920s and 1930s.


    Flying cars seem also to be common in “Blade Runner,” a film made in the early 1980s which takes place in the Los Angeles of 2019 (just two years from now). Folks in 2019 travel to distant planets and biotech has advanced to the point where sentient biological beings are manufactured. On the other hand, no one in 2019 has a cellphone. About the only thing “Blade Runner” has right is that the Bradbury Building – where the film’s climax takes place - is still around. (I think we can safely predict at this point that since the Bradbury Building is still standing in 2017, it will be standing in 2019, particularly since the building has been seismically retrofitted.)

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    Flying car in “Just Imagine”

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    Flying car in “Blade Runner”

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    One could go on with such examples. In the film “2001,” made in the late 1960s, travel to the Moon on Pan Am seems to be routine. The manufactured sentient beings in the year 2001, however, are 1960s-style mainframe computers. But as in “Blade Runner,” there are no cellphones. When you want to make a call, you step into a phone booth and use the Bell System.

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    Phone call in “2001”

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    Despite this poor track record at technological forecasting, we are now being told that robots and computers are about to displace everyone. All jobs are at risk. No less than Bill Gates says we will need to figure out how to divvy up the income derived from a robot tax as we sit back and let robots do the work.[1] Or, if you don’t like that remedy, how about job quotas for humans so that some work that robots could do is nevertheless kept open for people.[2] We’ll need affirmative action for human beings.


    Of course, the idea of scary robots has been around for a long time. The early 1950s film “The Day the Earth Stood Still” featured a robot named Gort who arrived in Washington, DC with a spaceman from another planet. Unless someone said the magic words Klaatu barada nikto to Gort, it would destroy the world. Luckily, Patricia Neal said them in the nick (nikto?) of time, thus saving the Earth.


    The problem with the current robot panic is that we have been there before. In the 1950s, there was a similar “automation scare,” this one based on the entry of mainframe computers into the business world. And that scare, too, appeared in popular culture. The 1957 film “Desk Set” featured a room-size computer operated by Spencer Tracy – complete with tape drives, flashing lights, and printouts from an electric typewriter – that threatened to take the job of librarian Katharine Hepburn. Up to that point, automation had been thought of as something that only threatened blue collar types. But the 1950s automation scare suggested that white collar occupations were the next victims.

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    Klaatu barada nikto

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    The computers are coming! 

    "Desk Set”

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    The problem with the current automation/robot scare is not that technology doesn’t sometimes – even often – cause job displacement. The problem is the taking of a current perceived trend and projecting it to excess. And, moreover, there are various motivations at this time for doing so. The Trump election created a debate as to whether job loss in manufacturing was due to technological change or foreign competition and globalism. (The answer seems to be that both factors were involved but that the technology story predominates.) However, if you are a free trader, you want to emphasize automation and robots to head off “protectionism.” No point in renegotiating NAFTA if it’s all robots.


    Moreover, particularly among the chattering classes, cellphones, laptops, etc., are especially visible and are popularized as “disrupters.” So there is also a market for learned discussions and popular news items forecasting that everything is about to change – and soon. Disruption, disruption, disruption. Displacement, displacement, displacement. The fact that the latest unemployment rate is down to 4.5% is disregarded. Also neglected is the evidence from our measures of labor productivity which don’t show any recent uptick in output-per-hour.

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    Yes, I know. The productivity measures may be wrong. But when you look at the history of adjustments made to the output side of output-per-hour, the fact is that they get more and more aggressive over time. So if anything, when you look at current trends versus those recorded earlier, the relative growth in productivity is biased toward showing an uptick – and yet it doesn’t.


    So let’s all calm down about disruption and displacement. And if a robot threatens, you know the magic words to say: Klaatu barada nikto.

    ---

    [1] https://www.fastcompany.com/40400920/one-san-francisco-politician-is-exploring-a-tax-on-robots 

    [2] https://www.theguardian.com/technology/2017/apr/04/innovation-in-ai-could-see-governments-introduce-human-quotas-study-says  

  • 28 Mar 2017 5:21 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 4-3-17: Making Borderline Policy


    Daniel J.B. Mitchell


    Note: We resume our weekly musings with this edition. Our practice is to omit the winter quarter due to teaching obligations.


    Much has happened since our last musing in late December. Some would say too much has happened. However, of particular note recently was the failure of Congressional Republicans to pass a “repeal and replace” bill for the Affordable Care Act. As numerous commentators have observed, the failure was due to an inability among House GOP members to decide on what should be the. That inability, combined with a seeming presidential indifference to the details of what the bill contained, doomed the effort. We can come back to the whys of that failure in a future musing. But, supposedly, the next big agenda item in Congress is to be tax “reform.” And, as in the case of health care, there seems to be no consensus among the Republic majority on what such reform should entail.


    One version of reform, sometimes said to be under consideration and sometimes said to be off the table, is a so-called border adjustment tax. So let’s look at what such a tax might entail. “Might” is the right word, since there is no explicit proposal. The idea seems to be that a tax (tariff) would be imposed on imports of, say, 20%, and a symmetrical subsidy would be given to exports at the same 20% rate.


    Note first that this tariff-subsidy arrangement bears some similarity to the (Warren) Buffett voucher plan about which I have written in the past.[1] Under the Buffett plan (of the 1980s), exporters would be given a $1 voucher for each dollar of exports. The voucher would entitle the bearer to import $1 worth of goods and services. A voucher could be used directly by the recipient or sold in the open market. Under the Buffett plan, exports and imports would thus necessarily balance. The net effect on the combined actual exchange rate and market price of the voucher would be equivalent to the devaluation of the dollar needed to produce balanced trade.


    Under the Buffett plan, the cost of the voucher to purchase imports is analogous to a tax (tariff) on imports and the value exporters obtain by selling the voucher is analogous to a subsidy of the same rate. Whether the border adjustment tax is being proposed – if it is – because of its similarity to the Buffett plan is unknown. But let’s point to an obvious feature of the Buffett plan. Although the government distributes the vouchers given to exporters, there is no revenue for the government from the plan. Essentially, there is a direct monetary transfer from importers to exporters.


    If the tax version were enacted rather than the voucher scheme, and if it led to a zero trade balance, there would also be no net revenue for the government because the tax collected from importers would go entirely to the subsidy collected by exporters. If the purpose of a border adjustment tax is to improve the US trade balance and bring it to zero, the tax cannot be used to generate net revenue that would replace other taxes that the GOP wishes to eliminate or reduce. More generally, the more the border adjustment tax improves the trade balance, the less revenue it produces.


    Another way to put this point is that if the purpose of the border adjustment tax is to improve the trade balance and thus create more jobs – especially in manufacturing – it can’t be a good revenue generator. If the purpose of the tax is to generate a lot of revenue to replace other taxes, then it can’t be a good job creator. In effect, the two goals, jobs and revenue, are in opposition.[2]


    There is a further wrinkle here. Some argue that if a border adjustment tax were imposed, it would actually not have any real effect because the dollar exchange rate would adjust to offset the impact. Such a conclusion might seem surprising. As noted, effectively what is being taxed NET is the trade imbalance. The tax only produces net revenue if the trade balance is negative (exports < imports). And we generally believe that if you tax something, you tend to get less of it. Getting less of the trade imbalance is a real effect, equivalent to the type of effect we associate with devaluations.


    Currency devaluations “work” by changing (raising) the price of tradeable goods relative to non-tradeables. The ultimate non-tradeable is labor, so another way of looking at what is happening is that wage costs of production are lowered relative to world prices. The result is a greater incentive (due to greater profitability) for producing export goods and import-competing goods domestically. A border adjustment tax raises domestic import prices relative to labor costs due to the tariff effect. The domestic price of exportables rises relative to labor costs because exporters divert production toward world markets due to the subsidy.


    So why would anyone think that a border adjustment tax would have no real effect? Note that in the case of a devaluation, there would be no real effect if domestic prices (including non-tradeables – essentially labor costs) rose to offset the devaluation effect. That is, if for every 1% the currency sank, domestic prices and wages rose by the same 1%, there would be no real effect. Those who argue that a border adjustment tax would have no real effect are assuming either that domestic prices rise to offset its devaluation-like effect or the currency rises in value in to offset the tax/subsidy impact. Were either of those offsets to occur, the trade imbalance would be unchanged and the tax would generate revenue without affecting (creating) jobs.


    But why would someone think that there would be a total offset of the tax? The answer seems to be based on identities from the national income accounts. In the national income accounts, the trade balance (exports minus imports) equals by definition the gap between private and public saving and investment. So if the devaluation has no effect on saving behavior and no effect on investment behavior, then it can’t affect the trade balance. But the very same analysis tells you that if saving rises relative to investment as a result of the devaluation (or as a result of the imposition of a border adjustment tax), the trade balance must improve.


    There are two main reasons why we would expect saving to rise relative to investment, whether from devaluation or a border adjustment tax. The first is the general property of money illusion and wage stickiness. Wages are unlikely to move upward on Day 1 of the imposition to offset the price effect. Put another way, real wages will decline either way.


    The second reason is that we have a central bank, the Federal Reserve, which has as part of its mandatory objective function the maintenance of price stability. So if domestic prices of tradeable goods rise by, say, 20%, it is unlikely that the Fed would accommodate an offsetting 20% rise in wages. It would “tighten” monetary policy to prevent such a rise. Interest rates would rise, investment would be tamped down, and folks would consume less (save more). How smoothly such an adjustment would go would “depend.” But something like that scenario would occur, producing the real effect on the trade balance. Indeed, the less “smooth” the adjustment, the more likely you would see a quick improvement in the trade balance. There is nothing like a big recession to cause imports to drop relative to exports.


    Of course, all of this analysis of a possible border adjustment tax is in the abstract. There may never be such a tax. It may never get beyond the talking stage. There is said to be an internal White House conflict between those who don’t want to monkey around with trade and those who do.[3] So whatever tax proposals come along may never include the border adjustment tax, precisely because those who don’t want to do anything on the trade side know the tax would have a real effect.

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    [1] http://www.zocalopublicsquare.org/2017/01/09/cap-trade-solution-trade-dispute-china/ideas/nexus/

    [2] Economists might note that this contradiction of objectives is a case of Tinbergen’s law, which states that generally the number of policy instruments should match the number of policy goals. Here we have a case of one instrument and two goals.

    [3] http://www.latimes.com/business/la-na-pol-trump-trade-conflict-20170328-story.html

  • 21 Dec 2016 6:52 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 12-26-16: Wrap Up for 2016


    Daniel J.B. Mitchell


    This musing will be the last for 2016. As we did last year, we will discontinue musing during the coming winter quarter due to teaching obligations. Unless something that requires a special musing occurs, we will resume in April 2017. So here is some wrapping up for the year related to the presidential election.


    First, in last week’s musing (of December 19, 2016), we asked who might play the role that George Shultz – with his academic/research background - did during the Nixon administration. Nixon had fantasies about cabals that were tinkering with official statistics to make him look bad. He also wanted to manipulate data in his favor. But Shultz played a calming role.[1] We know that President-elect Donald Trump doesn’t take kindly to anything that contradicts his views of how things are or should be. But, as of last week, there were no academics in major roles that might protect official data from harm when the figures do not display supportive results. We did note that the one academic who prominently supported “Trumponomics” was Peter Navarro, a professor at UC-Irvine, but that he had not been appointed to any official position. According to the latest news, however, he has been appointed to oversee a new trade office in the White House.[2] So let’s hope that Navarro serves as a voice for honest official data production.


    Second, in a musing of three weeks ago, we suggested that when it came to explaining Trump’s narrow win Electoral College win, any simple unicausal story – e.g., it was all angry displaced white males – was inadequate. So let’s elaborate a little more on that notion. Suppose you want to tell a story that is some variant of “it’s the economy, stupid.” Economic models of election outcomes tend to focus on where the economy was moving before the election. In Appendix A to this musing, we show the percent change in nonfarm employment by state, divided up between “Clintonland” – the states which Hillary Clinton won – and “Trumpland” – the states that went to Donald Trump. Was it the case the Clintonland was prosperous and Trumpland was depressed?


    There was in fact little difference between Trumpland and Clintonland. According to the latest (preliminary) data, employment in the former rose by 1.5% over November 2015-November 2016. In Clintonland, the rate over that period was 1.6%. Moreover, both areas showed a mix of results with some states in each doing notably better or worse than others. Trumpland did contain some states adversely affected by low energy prices, states that experienced employment declines. (West Virginia – with its much-discussed depressed coal industry – actually grew in jobs at a 1.4% rate.)


    The three states that went for Trump that weren’t “supposed to,” and in which Green Party candidate Jill Stein pushed for recounts, showed mixed results. Michigan actually outpaced the national average. Pennsylvania was very sluggish (but not negative); Wisconsin had slower than average job growth. The Ray Fair economic model predicted early on that Trump would win – but that model referred to the popular vote (not the electoral vote) so it was wrong.[3] However, we can simply take that prediction to mean simply that a generic Republican should have beaten (in popular votes) a generic Democrat. Trump didn’t win the popular vote and squeaked by narrowly in certain swing states – presumably because of his high negatives. Clinton did better than “expected” in popular votes, but apparently did not overcome her own high negatives in states that mattered.


    The chart below has some further information that is part of the 2016 story. It shows November-to-November annual changes in nonfarm employment going back to 1940. (The November month selection matches our Appendix’s state-level data and, in any case, an official estimate for December 2016 is not available at this writing.) When you look at the chart, you should focus on the line at 2.5% growth. All recessions until 2000, regardless of their cause, showed significant “snap backs” of rapid growth (above 2.5%) at some point in the post-recession expansions. But the two recessions after 2000 never attained 2.5%. So there were two downturns and then an extended period of sluggishness, even though the unemployment rate came down to something like a full employment number eventually.

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    Given the macro picture, a generic Republican was predicted to win by a purely economic model rather handily against a non-incumbent in the popular vote. And that win didn’t happen. Moreover, lots of unusual events occurred: an FBI announcement, Russian hacking, recordings of nasty language, a hostile takeover of a major political party, a more extended primary season than expected for the other party, etc. Each event tilted a few votes one way or another. That is the story of the 2016 presidential election.


    By April 2017, when these musings resume, we’ll know more about the consequences.

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    Appendix A: Employment Change in Clintonland and Trumpland


    Clintonland

    % Nonfarm Employment change

    Nov 2015-Nov 2016

    Clinton States

    California

    2.3

    Colorado

    2.1

    Connecticut

    0.1

    Delaware

    1.2

    District of Columbia

    1.9

    Hawaii

    2.4

    Illinois

    0.7

    Maine

    0.4

    Maryland

    1.1

    Massachusetts

    2.0

    Minnesota

    1.1

    Nevada

    2.7

    New Hampshire

    2.1

    New Jersey

    0.5

    New Mexico

    -0.3

    New York

    1.1

    Oregon

    2.9

    Rhode Island

    1.2

    Vermont

    0.0

    Virginia

    1.0

    Washington

    3.1

    Total

    1.6

    ----


    ------------------------------

    [1] http://employmentpolicy.org/page-1775968/4462237#sthash.RU4m6oJi.dpbs. See also the musing of two weeks ago (December 12, 2016): http://employmentpolicy.org/page-1775968/4451466#sthash.wMLdjWoS.dpbs.  

    [2] http://www.cnbc.com/2016/12/21/trump-picks-china-hawk-peter-navarro-for-new-trade-post.html.  

    [3] Fair comments on his error: Why such a large error? While this is not possible to test, most people would probably say that it is due to Trump's personality. Had the Republicans nominated a more main stream candidate, they may have done much better---much closer to what the equation was predicting. The prediction from the equation from the beginning in November 2014 was that the Republicans were heavily favored. The election was theirs to lose because of the economy and the duration effect, and they almost lost it! See https://fairmodel.econ.yale.edu/vote2016/index2.htm.  

  • 15 Dec 2016 4:31 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 12-19-16: Who Will Play George Shultz?


    Daniel J.B. Mitchell


    Last week’s musing dealt with economic data and possible dangers to the integrity of the federal data collection and distribution system in the event of a rogue president. In that musing we noted the episode in which former President Richard Nixon believed that a conspiracy among federal data analysts was presenting economic news unfavorable to him.


    Although we tend to think of newsworthy economic data as a fairly narrow group of series - inflation numbers from the CPI and other indexes, the unemployment rate, and real GDP growth – the federal data agencies turn out a very large array of numbers regularly. Even if these figures don’t make the news, they do influence the perceptions of forecasters and others who then interpret them in ways which filter into the larger public understanding of how well or poorly the economy is progressing.


    There are various aspects of economic data that are involved. Many series – such as the Big 3 mentioned earlier (inflation, unemployment, real growth) – are represented by specific series that are linked to concepts that have to be defined for measurement. For example, while inflation is generally defined as broad-based price increases, in practice there are detailed methodologies of data collection and data combination that are meant to reflect that concept as a specific index. Changes in methodology can produce variation in the series. There are in fact several versions of the CPI, to take an example, which differ in the “headline” number they produce due to variations in weighting and other factors.


    Another important element is the timing of data releases. It is the practice of the major statistical agencies to release data on an announced-in-advance schedule.[1] This practice has been in use at least since the 1960s. The notion is that with pre-announced timing, there won’t be charges that particular numbers were either withheld for a time (perhaps bad news for an incumbent) or rushed out (good news) to influence elections or other political decisions.


    In fact, during the Nixon administration – even apart from the President’s conspiracy views – there was controversy about how fast the numbers should be released. Should the numbers just appear when ready? Should statistical officials say something about them once released, i.e., provide some interpretation? Or should commentary be left to political appointees and outside analysts?[2] That issue had also arisen in the Lyndon Johnson administration after an episode in which the President had commented on what-he-viewed-as favorable statistical news before the official release date.[3]


    There are often important policy decisions that are linked to economic data. The Federal Reserve, for example, looks at the general macro condition of the economy before making its monetary decisions. Social Security payments are indexed to the CPI. It is inevitable, therefore, that key data series will be in danger of politicization and ultimately their protection will depend on key high officials.


    In the Nixon case, the protector role was played by George Shultz who was first Secretary of Labor and then Secretary of the Treasury.[4] Back in a Mitchell’s Musing of October 22, 2012, I noted Shultz’s role as a stabilizer of Nixon when the latter wanted to do something that he shouldn’t.[5] In the case described in that Musing, Nixon wanted to leak in advance certain Department of Commerce figures which he thought were favorable.[6] Shultz, however, after a phone conversation with Nixon, effectively ensured that the numbers were released appropriately.


    Shultz had a background as a professional economist and academic researcher. I suspect that most persons with that background would have the same inclinations as Shultz regarding data integrity. We have only limited information at this time as to who will be Trump’s key economic advisors. Gary Cohn, Trump’s designee as chair of the National Economic Council, is President and Chief Operating Officer of Goldman Sachs. Trump’s Secretary of the Treasury designee is Steve Mnuchin, also a person with a Goldman Sachs background (and other financial ventures). His Secretary of Labor designee is Andrew Puzder, a fast-food chief executive. (Within Labor is the Bureau of Labor Statistics.) And his Secretary of Commerce is Wilbur Ross, an investor who is said to be a turn-around specialist. (Within Commerce is the Bureau of Economic Analysis – producer of the national income accounts – and the Bureau of the Census.)


    The only person with an academic/research background connected with Trump is Professor Peter Navarro of the University of California, Irvine. However, it is unclear what that connection is – Navarro seemed to have attached himself to Trump during the election campaign initially rather than having been first invited. In any case, Navarro has so far not been named to any position in the Trump administration. Lawrence Kudlow, a former Reagan appointee with a background in the financial world and CNBC, is reported to be in line for chair of the President’s Council of Economic Advisors (CEA).[7] The CEA has traditionally been a location of academic researchers, but it will apparently not be this time, at least at the top.


    In short, there does not seem to be anyone at this point who could play the role in the forthcoming Trump administration that Shultz did with Nixon. There could thus be trouble ahead, particularly if any official data series shows an unfavorable result.

    ---

    [1] For example, the release data in 2017 for the U.S. Bureau of Labor Statistics are listed at https://www.bls.gov/schedule/2017/home.htm

    [2] Joseph P. Goldberg and William T. Moye, The First Hundred Years of the Bureau of Labor Statistics, 1985, pp. 221-226. Available at http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1699&context=key_workplace.

    [3] Ibid, p. 188.

    [4] It’s also important to note that Shultz in 1968 was president of LERA (the host site of EPRN and thus of this Musing); LERA was then known as the Industrial Relations Research Association.

    [5] http://employmentpolicy.org/Resources/Documents/MitchellMusings%2010-22-12_0.pdf

    [6] https://www.youtube.com/watch?v=1qV84JmgwVE

    [7] http://www.adweek.com/tvnewser/larry-kudlow-to-chair-trumps-council-of-economic-advisers/314496.  

  • 10 Dec 2016 10:37 AM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 12-12-16: Looking Ahead


    Daniel J.B. Mitchell


    I attended the December 2016 conference of the quarterly UCLA Anderson Forecast last Tuesday. The Forecast had originally been predicated on an assumption of a Hillary Clinton presidency. (In fairness, the UCLA event is an exercise in economic forecasting, not a political prediction.) So assumed macroeconomic policies were based on the Clinton-as-president assumption. When the win went to Trump, the Forecast – which had originally been slated to focus on real estate developments – was hastily redone to look at the economic outlook under Trump presidency.


    The UCLA forecasters did not present their original Clinton prediction with a comparison to the Trump version. But the difference can be loosely seen by comparing the Forecast’s predictions made last September with the December edition. Of course, some of the difference between September and December is due to an addition three months of economic data, not to a change in the political outlook. But since drastic changes in the U.S. economy did not occur over that three-month period, the comparison is good enough to obtain a general picture of the Clinton vs. Trump impact – at least as the forecasters saw it. The table below summarizes the September-vs.-December differences.


                                    2017         2018  

    Forecast of Sept/Dec 2016     Sept/Dec     Sept/Dec

    ------------------------------------------------------------

    Real GDP Growth                   2.4%/2.4%      2.3%/3.0%

    Core CPI                          2.5%/2.3%      2.4%/2.5%

    90-Day T-Bill Yield               0.9%/1.2%      1.7%/2.6%

    30-Year T-Bond Yield              3.3%/3.3%      3.8%/4.4%

    Total Compensation Change         3.8%/3.9%      4.1%/4.2%

    Unemployment Rate                 4.8%/4.7%      5.1%/4.5%

    Federal Budget Deficit

     FY, % of GDP                   -3.5%/-4.6%    -3.9%/-6.0%

    Real Net Exports

     $ Billion (2009$)             -$640.9/-$634  -$688.0/-$758

    -----------------------------------------------------------


    So what was the message of the revision? Essentially, the new forecast assumes that Congress goes along with a fiscal stimulus through a tax decrease, but not necessarily through spending on infrastructure. However, the economy already appears to be close to full employment so the Fed reacts to the fiscal stimulus by a partial offset through monetary policy - a rise in interest rates. Inflation (wage and price) rises a bit – net – but the main effect by 2018 is a faster rate of real GDP growth. The tax cut worsens the federal budget deficit and, despite Trump’s concerns about the trade deficit, worsens it, too, as consumption demand spills over into more imports.


    Note that this forecast revision is conventional and linear. Just add some tax cuts to a semi-Keynesian forecasting model and let the computer grind out the predicted adjustment. Whatever the model, you will get something along the lines of what UCLA predicted. The conference forecasters did say that if the U.S. winds up in a trade war with China, their estimates would need to be further revised. Of course, trade wars are not the kind of events that economic forecasting models even purport to predict.


    And that is the problem. As noted in a musing two weeks ago, there could easily be other such consequences such as an oddball monetary policy if oddball candidates are appointed to the Fed. If China chose to retaliate against U.S. policy, instead of a trade war, it could dump its large holdings of U.S. dollar reserves. Such a step would in principle depreciate the dollar, something China doesn’t want to happen, taken by itself. But if China wanted to send a message, can such a response be ruled out? And if that response by China occurred, the actual short-term financial reaction could be very unsettling.


    Other world events – some kind of blow-up in the Middle East (on top of what is already occurring) -could also be destabilizing. No one knows what the Trump policy on Syria, for example, is going to be. Domestic immigration policy could also change dramatically. The current wisdom – based on little hard evidence – is that in reality mass deportations are not likely, despite earlier campaign rhetoric. But does anyone really know?


    Although the UCLA forecasters were aware of the kind of unpredictable events that might occur in a Trump presidency – and acknowledged that such events could upset their predictions - there was one possibility that they did not consider (or, at least, did not discuss at the conference event).


    It was implicitly assumed that whatever happens, there will be honest official statistics reporting the consequences of whatever economic and other policies that might ensue. But economic statistics don’t always deliver messages that presidents want to hear. And we do know from the tweeting and other campaign tactics of the president-elect that he doesn’t enjoy criticism from anyone. He seems unlikely to enjoy unfavorable news from his own government. So is the U.S. statistical apparatus immune from pressure to avoid presenting bad news (such as the rise in the international trade deficit and the federal budget deficit that the UCLA forecast currently projects)?


    The idea that a president might decide that unfavorable news from official federal economic statistics was the result of some kind of cabal – and then decide to do something about it – is not a fantasy. It occurred during the Nixon administration and, in fact, was caught on tape. From the Washington Post:


    As first recounted by Bob Woodward and Carl Bernstein in their 1976 book "Final Days," the frequently paranoid president — who had a history of anti-Semitic outbursts — became obsessed with the idea that a "Jewish cabal" at BLS was undermining him by issuing negative labor numbers. Nixon ordered his subordinates to tally up the number of Democrats and Jews in the agency.


    "There's a Jewish cabal, you know, running through this," Nixon fumed in July 1971 to his chief of staff, H.R. "Bob" Haldeman, according to White House tapes. "...And they all — they all only talk to Jews. Now, but there it is. But there's the BLS staff. Now how the hell do you ever expect us to get anything from that staff, the raw data, let alone what the poor guys have to say [inaudible] that isn't gonna be loaded against us? You understand?"


    According to journalistic accounts and documents, the task fell to Nixon aide Fred Malek, who first counted high-ranking Democrats at BLS using voter registration lists and then identified employees with "Jewish-sounding" names. He reported the resulting statistics to Nixon in a 1971 letter that became known as the "Jew-counting" memo, identifying 25 Democrats and 13 employees who "fit the other demographic criterion that was discussed."[1]


    The UCLA forecasters didn’t discuss the possibility that future data on which they rely might be subject to political pressure from the White House. They probably didn’t consider it. But unlike the hypothetical trade war with China they did mention (and which we have never had), it’s hard to deny that pressure on statistical agencies couldn’t happen with the advent of a vindictive president. It once did.

    ----

    [1] Dan Eggan, “There was one president who tried to manipulate BLS,” Washington Post, October 5, 2012. Available at https://www.washingtonpost.com/news/post-politics/wp/2012/10/05/there-was-one-president-who-tried-to-manipulate-bls/.  See also https://www.youtube.com/watch?v=pQjiSQKIpS8. In this excerpt (starting at minute 4:28), Nixon and his aide Charles Colson discuss a phantom conspiracy in the U.S. Bureau of Labor Statistics (BLS) to adjust unemployment data in ways unfavorable to Nixon. Supposedly, the incoming Secretary of Labor Peter Brennan was going to fix the BLS problem.

  • 02 Dec 2016 1:26 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 12-4-16: Everything Mattered (Somewhat)


    Daniel J.B. Mitchell


    Given the poor performance of political polls in the recent presidential election, one is reluctant to cite poll data to analyze what voters were trying to say. But here goes. The Kaiser Family Foundation did a post-election poll asking voters what motivated them in their choice of candidate. The results suggest that those analysts who are theorizing and explaining really don’t have a good answer, particularly if they are trying to find some single cause. It isn’t just a case of Midwestern manufacturing workers disgruntled about international trade. That issue was clearly present, of course, and back in the day those on the left would have seized on it as the “real” issue (since economics was supposed to be the underlying cause of all things).


    Nor is it just loss of “white privilege” due to changing demographics, although that factor is there, too, for at least some voters. But blaming the outcome on racism – which seems to be the trend among some in academia – isn’t THE story, either. The problem is that there is no “THE” story.

    ---


    ---

    Voters, according to the Kaiser poll, were upset about “the direction the country is headed,” – see the chart above - but no one factor in that nebulous concept seemed to dominate what it meant. Separating out the results by those who voted for Hillary Clinton vs. those who voted for Donald Trump doesn’t reveal some mysterious key to the election’s outcome, as the chart below shows.

    ---


    ---

    Separation of the results shows that Hillary voters were more concerned about the personality of Donald Trump than about the direction the country was seen to be headed. Trump voters were more concerned about the direction than about the personality of Hillary Clinton. (The fact that 31% said the main reason they voted for Hillary Clinton was that she wasn’t Trump suggests she wasn’t a strong candidate in her own right.) Note that “immigration” might be seen as a racism proxy. But few Trump or Clinton voters saw it as the major factor in their choices.


    The fact that the election was close and revolved around margins of relatively few votes in a limited number of “swing” states suggests that a search for a grand cause is misplaced. Right now, the Democrats are doing what the Republicans were supposed to do after the projected Clinton win, i.e., falling into factions and finger pointing. But in a close election, a marginally better candidate on the Democratic side could have reversed the actual result.


    Finally, the focus on those in the workforce with less than a college degree needs some elaboration. The standard tale seems to be that THE story was that the jobs for those less than a college degree are drying up due to technology. So it might be worth looking at a new survey released by the U.S. Bureau of Labor Statistics which characterizes jobs by minimum educational requirements. (The survey excludes jobs in the federal government and self-employment.) 

    ---


    ---

    Over 30% of jobs require less than a high school diploma, as can be seen on the chart above.[1] Another 45% require a high school diploma. So that’s about 3 out of 4 jobs. Another 4% require an associate’s (community college) degree. So we are now up to about 4 out of 5 jobs that don’t require a college degree. Of course, there are some folks in those jobs with more education than is required. And there are other forms of training that may be required apart from formal education. But still, we have not run out of less-than-college jobs. There is more to be said on that issue, of course, but – again – the search for THE cause of the 2016 election result is likely to be fruitless. Everything mattered somewhat. And almost anything that might have occurred, but didn’t, to favor Clinton might have reversed the outcome.

    ---

    [1] http://www.bls.gov/news.release/pdf/ors.pdf. The numbers underlying the chart can be found at http://www.bls.gov/ors/#data and searching for educational requirements.

  • 25 Nov 2016 1:27 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 11-28-16: What Could Possibly Go Wrong?


    Daniel J.B. Mitchell


    There has been much commentary and controversy about various picks of the incoming Trump administration for top cabinet and other positions. No, I’m not going to offer more comments on those. Nor am I going to rehearse the numerous after-the-fact explanations and criticisms related to the election, polling (mis-)predictions, news media coverage, etc.


    There are some things an incoming administration – whatever its ideological leanings – can change quickly and others which take time. Things like Supreme Court appointments take time to go through the Senate approval process. Supreme Court appointments, even when justices are finally seated, take time to have an effect; it takes a while before cases come to them that can alter past judicial directions.


    But there is one area in which there can be important impacts quickly and that is at the Federal Reserve. Once approved (there is a Senate vetting process), appointees can quickly change monetary policy (or decide not to change it). Fiscal policy, in contrast, requires legislative approval which generally is an involved process. Thus, in the 2008 financial crisis and its aftermath, the Fed became the prime mover. Congress meanwhile debated whether fiscal stimulus should be applied through tax cuts or through spending (or how much of each) and which taxes or spending projects should be considered. When it came to spending, moreover, it turned out – as it generally does – that the “shovel-ready” projects put forward really weren’t shovel ready but could only gradually (too late?) came into force.


    The Fed, as the nation’s central bank, has long been a target of conspiracy theories both of the left and the right. It is, after all, a “bank,” right? Actually, although central banks such as the Bank of England emerged gradually out of commercial banks, in their modern guise, “bank” is a misleading term for central banks.[1] They can’t be appraised on a commercial basis, i.e., are they at risk of bankruptcy? Modern central banks create money. Repeat, modern central banks create money. (See the chart below showing the Fed’s response to the 2008 crisis.) So – absent some artificial legal constraint – they can’t be at risk. The cries to “audit the Fed,” therefore, are at best ambiguous. Audit it for what?




    People have trouble wrapping their heads around the idea that the Fed creates money out of nothing. Isn’t money based on something “real”? (No.) Are you saying it’s just a social convention? (Yes.) But don’t people work hard to get it, sometimes cheat or steal or even murder to get it? (Yes.) So how can it not be “real”? (Sorry, but is an “inch” real? It, like the “dollar” is a social convention.)

    Put bluntly, there are a lot of wacko ideas about the Fed and putting someone with wacko ideas in positions of authority at the Fed could have very bad consequences. Right now, there are two vacant positions at the Fed and more to come in a year or so including the Fed chair. The wrong folks could do a lot of damage in relatively short order.[2]


    It’s true that there are other presidential decisions – particularly in the foreign policy/military area – that could do a lot of damage quickly. But if you are making a list of things that could possibly go wrong, think about putting appointments to the Fed up towards the top.

    ---

    [1] Note that the central banks in countries which adopted the euro are no longer central banks in any meaningful sense of that word. They are at best legacy monetary institutions.

    [2] http://www.bloomberg.com/politics/articles/2016-11-22/trump-looks-to-put-stamp-on-fed-in-first-months-of-presidency.  


  • 18 Nov 2016 5:15 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 11-21-16: One Out of Five - What Might Have Been


    Daniel J.B. Mitchell


    In early January 2013, shortly before President Obama was about to take the Oath of Office for his second term, I spoke at a LERA meeting in which the panelists gave their advice to the new president. Of course, he wasn’t there to hear the wisdom of the session. So the fact that I presented five

    recommendations and only one of them actually was implemented shouldn’t be a disappointment. However, it is of interest to ponder what might have happened if the various recommendations that were not followed instead had been.


    By the way, dear reader, the LERA presentation of advice from 2013 – along with all of the informative and engaging PowerPoint slides – is available for viewing and listening on the web! Just click and on:

    https://archive.org/details/MusingOnAdviceForTheNewAdministrationFiveSuggestions

    and use the player on that link. It will take about 21 minutes to hear and see the full presentation.


    The first piece of advice presented was tactical and was based on collective bargaining, an institution with which LERA members are naturally familiar. I pointed out that collective bargaining is a repeat game and therefore any single negotiation will influence subsequent negotiations. In particular, if you get rolled in one negotiation (if you were too soft), you will have a hard time convincing your opposite number in the future that you will hang tough. You will have to invest in teaching the other side that there is a new you.


    At the time – in my view – President Obama had been rolled in his dealings with Congress on government budgets (and shutdowns), debt ceilings, etc. Changing that stance would be difficult because of that past history, but it was worth an investment, I suggested. You can decide if that investment was made. My sense is that it wasn’t and that the deficiency showed up in other areas, too. Remember the line in the sand on chemical weapons use in Syria that was ignored when it was crossed? Remember Putin coming to the rescue by producing a face-saving deal with the Syrian government? Enough said.


    Recommendation number 2 was to avoid over-reliance on opinion polling. Given the political polling meltdown in the recent presidential election, my observation about the fallibility of polling doesn’t seem – in hindsight – to be at all off base. Perhaps less reliance on pollsters and more information from the field would have suggested that the Hillary Clinton candidacy was a more tenuous proposition than the White House evidently thought. Had that information arrived, actions might have been undertaken that could have produced a different election result. Clinton’s loss is also Obama’s, since his legacy “Obamacare” program is likely to be dismembered.


    Recommendation number 3 was to re-examine the entire federal economic data-gathering apparatus. My sense was that too many resources were going into theoretical manipulation of key indicators such as real GDP and the Consumer Price Index (CPI). No such re-examination occurred, however. Perhaps if it had occurred, better indicators might have been developed that would have highlighted the economic distress that had something to do with the Trump vote. For example, if the product quality improvement adjustments being built into the CPI and, thus, into “real” wages are excessive – maybe displaced workers don’t enjoy improvements in computers quite as much as someone thinks – perhaps the rustbelt’s labor market problems might have been better understood.


    The fourth recommendation – the only one that clearly was followed (not due to my LERA presentation, of course!) - dealt with the Federal Reserve. To avoid being an issue in the 2012 election, Fed Chair Ben Bernanke announced that he did not want to be reappointed when his term expired. My recommendation was to find a pragmatist in the Bernanke mold and avoid appointing a monetarist. (Monetarists were convinced that the Fed’s responses to the earlier Great Recession were about to cause a roaring inflation – something that was implausible in 2012-2013 and never occurred during Obama’s second term.) The President subsequently appointed Janet Yellen, a pragmatist in the Bernanke mold.


    Finally, the fifth observation dealt with the slow recovery from the Great Recession. I noted that while it is true empirically that recoveries from financial crises have tended to be slow and prolonged, that fact had built into it how economic policies responded to such crises in the past. Put another way, the past did not have to be prologue.


    However, the idea that the slow recovery was just the way the natural law of the universe worked seemed to become the general opinion in Washington. Given Congressional gridlock, conventional fiscal stimulus was not on the table. My suggestion was, therefore, that dealing with the U.S. international trade imbalance would - as a byproduct - produce far more stimulus than the official stimulus program provided. And I provided a mechanism for bringing the trade balance to zero. I don’t have to tell you that nothing of the sort happened.


    In view of the last election’s result, it is worth looking into the trade issue with political hindsight. When you look at the sectors of the economy that tend to employ blue collar workers – mining, construction, manufacturing, transportation, and utilities – you can see on the chart below that employment in these sectors has declined over a long period as a fraction of the total workforce.[1] It is also true that within these sectors, the decline occurred largely in the two sectors most exposed to international trade (mining and manufacturing).

    ---


    ---

    As I have pointed out in prior musings, given the level of the trade imbalance and the now relatively small job base provided by the blue collar trade sector, a return to balanced trade would not produce a return to anything like the roughly one third of the workforce seen on the chart in the early 1970s. If that is someone’s standard of when America was great, we are not going back there. Maybe you might get employment in the blue collar sectors up to 20% (from the current 17%).


    Such an increase in jobs isn’t nothing. But Trump supporters thinking that more could occur from renegotiated “great” trade deals are likely to be disappointed. Still, the chart also makes it obvious why trade is associated with rustbelt problems in the minds of those who now have less opportunity than they had in the past. The correlation is there, even if a one-to-one causation is not.

    On the other hand, the fact is that even though dealing with the trade issue would not restore some Golden Age of blue collar employment, nothing of significance was being done to address trade directly. In particular, nothing of significance was being done about currency issues and the related Japanese and later Chinese mercantilism.


    The 2016 election was close and the loser in fact got more popular votes than the winner. But might the results have been enough different if the trade issue in particular had been targeted as suggested? It would have provided more stimulus than the official stimulus program did and produced a faster recovery. And it would have responded to concerns about trade in “swing” states that in fact went unaddressed.


    For all sad words of tongue and pen, the saddest are these, 'It might have been.’”

    ---

    [1] Data are for the month of October of each year, seasonally adjusted. 


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4/22/13 4/16/12 3/28/11
4/13/15

4/15/13 4/9/12 3/21/11
4/6/15

4/8/13 4/2/12 3/14/11
3/30/15

4/1/13 3/26/12 3/7/11
3/23/15

3/25/13 3/19/12 2/28/11
3/16/15

3/18/13 3/12/12 2/21/11
3/9/15

3/11/13 3/5/12 2/14/11
3/2/15

3/4/13 2/27/12 2/7/11
2/23/15

2/25/13 2/20/12 1/31/11
 2/16/152/17/14 2/18/13 2/13/12 1/24/11
2/9/15
2/10/14 2/11/13 2/6/12 12/15/10
2/2/15
2/3/14 2/4/13 1/30/12 12/9/10
1/26/15
1/27/14 1/28/13 1/23/12
1/19/15
1/20/14 1/21/13 1/16/12
1/12/15
1/13/14 1/14/13 1/9/12
1/5/15
1/6/14 1/7/13 1/2/12
Employment Policy Research Network (A member-driven project of the Labor and Employment Relations Association)

121 Labor and Employment Relations Bldg.

 

121 LER Building

504 East Armory Ave.

Champaign, IL 61820

 

The EPRN began with generous grants from the Rockefeller, Russell Sage, and Ewing Marion Kauffman Foundations

 

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