Trump's onto something

From time to time, the field of economics is filled with arguments without definite conclusion.  No one seems to explain the current malaise.  Now is one of those eras with low interest, pitiful growth and low productivity gains. What gives?

            Clinton economist, Larry Summers, postulates that there is no international demand for borrowing.  Our new digital technologies aren’t supporting productivity gains like the old discoveries did—cars, steam, electricity, jet planes, computers.  Therefore we must stimulate, stimulate, stimulate!  Dems love this oldie melody. They groove when Janet Yellin sings and interest goes lower and Businesses (Wall Street) enjoys low rates. Big government spending! Fed stimulus by lowering interest rates and buying back bonds (QE’s)!  Alas, all the palliative stimuli have led us to this almost non-existent interest rate and still no growth.  Zero interest (Or even negative interest) destroys the economy.  Seniors with savings have no earnings. When citizens with savings see no return on their money, they stop depositing and put it in their safe—or gold.  Then banks who turn savings into loans have no money to lend to businesses. 

            And the Summer’s “secular stagnation” explanation now takes another arrow.  A study of all cycles since the 1930s by San Diego UCal, James Hamilton, et. al.shows that lowered short term rates (that is what the Fed does when it stimulates) hardly helps.  Back in 1936 when John Maynard Keynes came up with his notion that people were too saving and thus the Fed should stimulate, it was all the politicians of the time wanted to hear.  Today, we realize that choking tariffs and wasteful government spending actually prolonged the Depression.  But the pols sold us the snakeoil, nonetheless. 

            So what gives?  Here’s a rundown on causes for low interest rates. 1.  Demographics—much of the rich world is getting older.  But the average working lifetime doesn’t change much. Social Security is insolvent. So people have to save like crazy to have enough.  This gives an overabundance of savings chasing too little gain.  2. China.  China and the eastern tigers have no social security.  When Chinese get old the big extended family is supposed to take care.  But now with one-child policy, that’s a faint insurance.  So people save 40% of income—so much it is splashing over onto our shores.  3. Income inequality results from things like QE which benefit the rich, hence creating a glut of savings at the upper end. 4. Fear.  People saw what happened to the housing boom and the crash of 2007-2008.  So they pile up savings for a rainy day. 

            Democrats/progressives/fascists are stumped because they only accept big government interference.  Establishment R’s think that the high tech world creates jobs for thinkers while lower level jobs are going away.  But this is not what’s happening.  The thinking jobs are expanding at the upper end but so are servant jobs for housekeepers and landscapers for the rich.  The middle is losing.  And since R’s appeal to the middle, the Trump line is growing with the middle’s anger.  Trump proposes we fix immigration, education, and kill harmful regulations.  He wants lower taxes and rule of law.  (Imprimus, Sept. 2016, Frank Buckley) Given that public schools produce students in the lower half of OECD countries, few trust governments any more, immigrants are uneducated and do little to help our economy in the aggregate, his prescriptions seem to fit the malaise. 

            But will he be able to close the sale? We’ll know more on Nov. 9. It takes someone who can persuade.   I recall a certain candidate with dubious background in Hollywood who came on the scene in the 70’s.  What no one seemed to notice was that he had a college degree in economics from a small unimportant school in Illinois.  But Reagan noticed the  landmark research of Arthur Laffer, who pointed out that when Scandinavian countries taxed at a lower rate, they actually collected more revenue. Government was taxing so heavily that people were hiding income. “Get the government off the people’s backs” was Reagan’s cure.  And so Ronald “Ray gun”, the Cowboy, the Bedtime for Bonzo guy stunned the world by rescuing a country with 1.5% growth and making it grow at 4.5% for a decade.

People are not stupid.  They sense problems and even when powerless to change a situation, can recognize a solution readily.  With 73% of Americans thinking we are on the wrong track today, whoever comes forward with such a resonating solution will surely bring a lot of change.