With the Republicans taking both houses of Congress as well as the Presidency, the potential for Trump to reshape the party in his image is immense. The question now regarding the Trump economic platform is how much he will bend to the will of the Republican establishment and how much will Trump remain focused on his blue-collar and middle class base of support.
I see Trump as a sort of nativist and populist version of the Rockefeller Republicans. This group was last represented by libertarian VP candidate Bill Weld and the gubernatorial incarnation of Mitt Romney, who lurched right in his 2012 bid, losing the race as a result. If Trump wants to be successful, he will need to tend to his base and not the Republican establishment. And that means reincorporating New York Rockefeller Republicanism into the party.
Now, yesterday, I wrote that while the US economy is doing much better than it was seven years ago, it is not firing on all cylinders. We are not at or near full employment as many economists will tell you. With the U-6 level of unemployment at 9.5%, it is at the top end of the range of unemployment for the last twenty years outside of the Great Recession. We would need to see U-6 fall to 7.5 to 8.0% at a minimum to even think about this economy being near full employment. And even then, you would have to ask yourself if 8% unemployment, whether broad or narrow, could realistically ever be said to represent full employment in a true sense of the term.
You would never hear anyone in Switzerland or Japan saying that 9.5% unemployment was near full employment. But you do hear Americans saying this. And the reason is they have given up on displaced middle class and blue collar workers. They think of these people as now being part of a permanent cadre of structurally unemployed people and write them off as targets for economic policy. Well, these happen to be the people who helped put Donald Trump into the White House. In fact a majority of white women voted for Donald Trump, despite his sexist remarks and female presidential opponent Hillary Clinton. That speaks to the distress in working class America as much as to the weakness of Hillary Clinton’s candidacy. The concept that half of Trump’s voters are ‘deplorable’ racists must be galling to people who thought they were doing everything right as good god-fearing, flag waving Americans, only to have their economic future darken in uncertainty.
Rockefeller Republicans or New York Republicans refer to the wing of the Republican party led by Nelson Rockefeller that started to fade into oblivion due to Barry Goldwater’s and Ronald Reagan’s rise to ascendancy. The electoral map in the 1976 race – with the entire west colored Republican red and most of the east colored Democrat blue – gives you a snapshot in time linking the rise of western Republicans Barry Goldwater and Ronald Reagan with the decline of New York Republicans Nelson Rockefeller and former New York City mayor John Lindsay. After 1976, the south shifted to Republican control and the Rockefeller Republicans faded into oblivion in the party. Lindsay himself even switched to the Democratic Party in 1971 as a result.
Reagan and Goldwater preached a free market ideology championed by economists like Milton Friedman. They preached that as Reagan put it at his 1981 inaugural address, “Government is not the solution to our problem; government is the problem.” The inaugural quote can be seen in context here. Reagan talked of government rule by an ‘elite’, meaning that centralized government power had oppressed common people and that he would unshackle these people from that oppression by allowing free markets and deregulation to give the power back to the people. This is the revolution started by Goldwater in 1964 and only made real after Reagan’s election in 1980.
Around the time the Republicans switched to Reagan and his free market ideology, the Fed switched to a pre-emptive labor “inflation” view of entrenched inflation. This was due to the so-called cost-push inflation of the 1970s that saw rising wages and rising inflation being handmaidens. Here’s how David McWilliams described the Fed’s transformation in his retrospective on Trump’s ascendancy today:
Beginning with Paul Volcker in 1981 and for two decades thereafter, the Fed fought a campaign against inflation called “opportunistic disinflation”.
The Fed welcomed recessions when they inevitably happened, because the downturn would compress wages and prices through unemployment. A corollary of this thesis was that the Fed should pre-emptively tighten in recoveries, prompted by leading indicators of rising inflation, rather than rising inflation itself.
Such pre-emptive strikes would ‘lock in’ the cyclical disinflationary gains wrought by the preceding recession. Each recession squeezed relative wages downwards, so that when workers finally got back up following a recession, they started each new upswing at lower wages. Therefore, each recession was seen by the Fed as an opportunity to squeeze a little bit more inflation out of the system.
All the while, the working man lost out as wages fell and the corporate man gained as profits rose. Such a massive switch from labour to capital, underpinned the massive bull-run we have seen in asset prices over the past 25-odd years.
The cyclical disinflation process was boosted by two huge secular events that drove inflation permanently lower and stocks higher: the emergence of China and Nafta (the North American Free Trade Agreement) – the two bête noirs of the Trump campaign.
Both the emergence of China and the implementation of Nafta pitted the American worker not against the American capitalist but against third-world workers as US companies outsourced. The political cost of these developments has been the gradual erosion of the working man’s wages and the marked amplification of inequality.
Trump is the political beneficiary of these events. The free market ideology of Reagan and pre-emptive strikes of the Fed have combined to give a new corporate elite supremacy, while suppressing the wages of the working man, displacing him from good paying jobs and making his future volatile and uncertain. As corruption has seeped in, I have called this toxic brew Corporatism masquerading as liberty.
What Trump has promised to do is ‘drain the swamp’ and stamp out this corporatism while returning some semblance of certainty and dignity to working class people. He hasn’t said exactly how he intends to do that. But he won the Presidency on this promise.
I would suggest that to do as he wants, he will have to force the Republican Party out of one of its default economic positions. There are four:
- Less government is good
- Deficits are bad
- Lower taxes are better than higher taxes
- Free trade is good
The circle that has to be squared is the one that involves the inherent contradictions of the first three planks of Republican orthodoxy as much as if not more than the fourth, where Trump has concentrated his election speeches. You can’t lower taxes and reduce deficits at the same time unless you dramatically reduce the size of government. And you can’t reduce the size of government without harming the beneficiaries of government – the famous 47% that Mitt Romney talked about. The fact is that everyone in the middle class depends on the government. And if you want to be a reformer that gives something tangible to the people, going about it by slashing government spending is like walking through a minefield. One false step in slashing the wrong government program without sufficient offset from the tax base or job growth and you’ve blown yourself up.
This is the problem with establishment Republicanism. Reagan ran into these contradictions in 1981 during a double dip recession and facing a Democratic Congress. He turned into Ronald Reagan the Keynesian and ran up a massive deficit as a result. And that’s why the 80s were so good, by the way. Trump doesn’t have to face a Democratic Congress. Instead, he has to face the inherent contradictions of establishment Republicanism, which is what got hm elected in the first place. if Trump wants to be successful, he needs to focus on tax cuts and less government first and not on deficits.
A successful Trump who keeps his campaign promises would work with McConnell, Ryan, Sanders, and Pelosi to get an infrastructure bill through Congress. Meanwhile he would force US allies to increase their military spending and purchase of US weaponry while the US pares back its own defense spending. And finally, a successful Trump would cut the FICA tax that supposedly ‘funds’ social security, something that is both a cost for employers and for employees and therefore a highly regressive tax. Cutting business taxes or lowering the top tax bracket won’t get that job done. But those kinds of tax cuts will increase income inequality. Remember, the longer this economic cycle expands, the higher quality the jobs that are on offer will be. And that will be good for the middle class.
A failed Trump who bought lock, stock and barrel into Republican orthodoxy would go back on his pledge to leave social security and medicare alone and focus on privatizing or cutting social security as a way of lowering the deficit. And he would focus on killing TTIP and TPP or extracting the US from NAFTA. You could make ideological arguments on these issues after robust growth and lower broad unemployment have returned. But, by then we would see whether economic and job growth had changed the path of debt and deficits and unemployment demonstrably. Moreover, none of these goals would immediately stimulate growth in the short term. They could mean recession and doom his presidency, if they became his signature economic goals.
What I heard in Trump’s acceptance speech was that he understands this. He talked of having as little as two years before he was judged by the people. He steered away from divisive issues like immigration and trade and focused on the one issue that can get bipartisan support, infrastructure spending. He didn’t talk about tax cuts or deficits either. Instead he asked for help and guidance from his Republican brethren, suggesting he will take a wait and see attitude, judging his course of action based on their response to his overtures.
So I am hopeful. And I think the markets are hopeful too. The drastic reversals in the stock market, bond prices, the US dollar and gold tell you that Trump no longer represents the economic uncertainty he did before the election. All it took was one Presidential-quality acceptance speech to change that. Now we will have to see who he picks to help him govern and what ideas they press forward. Trump has one chance to make his mark. If he misses, recession could loom and in two years’ time, voters will make him pay.
Here was my view as I put it a few days ago about the market implications of the election