Professors Flail To Fail Trump

A formidable group of 370 economists, including eight Nobel laureates, in a scathing denunciation of Donald Trump, co-signed a letter calling him a “dangerous, destructive choice” for the country. They accused the Republican nominee of promoting “magical thinking and conspiracy theories over sober assessments of feasible economic policy options.”

The full text of that letter is available here.

The Wall Street Journal described the letter as notable because “it is less partisan or ideological than such quadrennial exercises, and instead takes issue with Mr. Trump’s history of promoting debunked falsehoods.” However, a closer analysis of the letter points to disappointing obfuscations, sloppy arguments and unsubstantiated allegations made by the economists. The American voting public deserve better.

Here is a response to the many key points raised by the economists.

1. He (Donald Trump) degrades trust in vital public institutions that collect and disseminate information about the economy, such as the Bureau of Labor Statistics, by spreading disinformation about the integrity of their work.

There has been a history of employment data being misrepresented. Woodrow Wilson did it. But, it is a mistake to do so, without proof. Proofs are hard to obtain. Statistics are malleable. Hard to pin motivation, even if prima facie grounds exist.

For example, the recent reporting by Census Bureau of a 5.2 per cent increase in median household income in 2015 raised eyebrows, for it did not square well with other statistics such as the increase in ‘wages and salaries’ or overall compensation growth. (See chart below.)

Real Median household income has posted the highest gains in the 30 years for which data are available in FRED database. That is an interesting coincidence. Even in those years when compensation of employees posted far higher (nominal) gains, household income did not rise as much as it did in 2015.

Nor do the reported gains in real median household income appear realistic when compared against the annual increase in Real Gross Domestic Income.

2. He has misled voters in states like Ohio and Michigan by asserting that the renegotiation of NAFTA or the imposition of tariffs on China would substantially increase employment in manufacturing. In fact, manufacturing’s share of employment has been declining since the 1970s and is mostly related to automation, not trade.

Now, that is an assertion, or an opinion ,  that it is related to automation and not trade. That is not being backed by facts. Federal Reserve Board discussion papers actually counter this assertion by the learned economists.

The following four papers are useful reads in this context.

(i) ‘The China Syndrome: Local Labor Market Effects of Import’ Competition in the United States†- By David H Autor, David Dorn, and Gordon H Hanson*, American Economic Review 2013, 103(6): 2121–2168

(ii) Justin R Pierce and Peter K Schott (July 2016): ‘The surprisingly swift decline of U.S. Manufacturing Employment’

(iii) Justin R Pierce and Peter K Schott (August 2016): ‘Trade liberalization and mortality: Evidence from U.S. Counties’.

Sample these lines from the last paper cited above:

(iv) Christopher L Smith (Dec. 2009): ‘The Impact of Low-Skilled Immigration on the Youth Labor Market’, Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, DC, Federal Reserve Board of Governors.

Here are his depressing conclusions that the signatories might be in denial about:

Aggregating these counterfactual employment rates in 2005 up to the national level implies that the fraction of teens employed in the previous week would have been about 6.5 (males) and 7.1 (females) percentage points higher in 2005 had immigration remained at its 1990 levels. Of course, this calculation is derived from average immigration effects estimated over five-to-10-year intervals, so it’s possible that the true contribution of immigration to declining youth employment between 1990 and 2005 may be somewhat larger or smaller.

Growth in immigration appears to have reduced youth employment-population ratios over the past few decades. Though the slight increase in enrolment rates in response to immigration suggests that some youth are induced to substitute their time from work to schooling, I find little support for the hypothesis that an immigration‐induced decline in employment has large positive effects on employment 10 years later.

As a whole, these findings constitute suggestive evidence that the recent decline in youth employment is not entirely driven by an increased emphasis on educational and extracurricular activities and that at least part of the decline reflects increased labour market competition from substitutable labour. More work is needed to fully account for the recent employment trends and to explore the welfare consequences of employment declines for which immigration is not directly responsible.

This paper also highlights the variation in the effects of immigration by age, echoing recent papers in the immigration literature which characterise the heterogeneity of immigration effects throughout the native population. By focusing only on adults, earlier research may have ignored the subset of the population that appears to be most affected by recent immigration growth. Future immigration studies may wish to take into account the effects on younger individuals as well.

It is not a surprise that none of the authors of these papers are signatories to the statement against Trump.

3. He claims to champion former manufacturing workers, but has no plan to assist their transition to well-compensated service sector positions. Instead, he has diverted the policy discussion to options that ignore both the reality of technological progress and the benefits of international trade.

We would like to know if the learned economists have any answer to the technological progress reflected in the advances made in artificial intelligence, Big Data and robotics, besides the highly dubious universal basic income (UBI), whose fiscal feasibility has never adequately been established.

Many have not even bothered to try establishing that. Martin Ford’s The Rise of the Robots, despite its brilliant analysis of the problem, ends with a lame prescription of UBI while being mostly silent or weak on how it would be funded.

We would also like to know if they have ‘plans to assist their transition to well-compensated service sector positions’. If so, it must surely be one of the best-kept secrets the world has ever known.

As for the benefits of international trade, see the references cited above. Plus, in theory, trade is beneficial provided the losers are compensated by winners. The learned economists must train their ire at the winners of trade liberalisation who conspicuously chose to omit the compensation part and adopted a ‘winner takes all’ approach to the benefits from trade liberalisation.

Policymakers and economists are guilty of direct or indirect association. They are still attacking the consequent fallout without taking aim at those who caused the fallout. Had they done so with a sense of fairness, the Trump phenomenon may not have arisen at all.

4. He has misled the public by asserting that U.S. manufacturing has declined. The location and product composition of manufacturing has changed, but the level of output has more than doubled in the U.S. since the 1980s.

Employment in manufacturing has declined. Manufacturing share of real GDP appears to remain constant over the last 50+ years in the United States. At the same time, data from the FRED (unfortunately, it goes back only ten years) shows that ‘Value added by private industries: Manufacturing as a % of GDP’ had declined from over 13 per cent in 2006 to 11.8 per cent by the end of 1Q 2016.

Further, the learned economists are being clever about manufacturing. They are finessing. Here are some telling conclusions from two of their own:

5. He has falsely suggested that trade is zero-sum and that the “toughness” of negotiators primarily drives trade deficits.

Already addressed above. It may not be a zero-sum game in their textbooks. Unfortunately, reality is that it has been zero-sum in practice.

6. He has misled the public with false statements about trade agreements eroding national income and wealth. Although the gains have not been equally distributed — and this is an important discussion in itself — both mean income and mean wealth have risen substantially in the U.S. since the 1980s.

It is somewhat risible that these economists should suddenly decide to focus on mean income and wealth whereas all discussions of inequality have been based on median real family household income. That has declined in the last forty years in the United States. Wealth has increased indeed, and so has debt. Both are due, in no small measure, to monetary policies that encouraged debt accumulation and wealth creation based on leverage-induced asset price bubbles. Both have proven to be unsustainable, and will be so in the future as well. All future presidents have been left a massive clean-up job by the presidents of the last three-and-half decades.

7. He has lowered the seriousness of the national dialogue by suggesting that the elimination of the Environmental Protection Agency or the Department of Education would significantly reduce the fiscal deficit. A credible solution will require an increase in tax revenue and/or a reduction in spending on Social Security, Medicare, Medicaid, or Defense.

He claims he will eliminate the fiscal deficit, but has proposed a plan that would decrease tax revenue by $2.6 to $5.9 trillion over the next decade according to the non-partisan Tax Foundation.

Most of these calculations regarding how the future would pan out have been wrong. The fiscal surpluses of the 1995-2000 were boosted by taxes on stock market gain that people paid on dot.com bubble stocks and IPOs. If one excluded the taxes that were paid on stock market gains, there was a significant deficit. Also, (Bill) Clinton and the US Congress did kick the can down the road with regard to many expenses.

Further, the aggressive geo-political postures adopted by many of the supporters of the rival candidate to Trump may necessitate an unwarranted and unnecessary increase in defence spending.

If Trump delivered on his promise to boost infrastructure spending, he might actually boost America’s potential and actual GDP and, hence, tax revenues as well. In any case, there are far too many assumptions to make any credible futuristic statements that would be borne out by reality.

8. He claims that he will reduce the trade deficit, but has proposed a reduction in public saving that is likely to increase it.

If the learned economists had any credible plan to reduce the trade deficit, Americans will be happy to hear it.

9. He uses immigration as a red herring to mislead voters about issues of economic importance, such as the stagnation of wages for households with low levels of education. Several forces are responsible for this, but immigration appears to play only a modest role. Focusing the dialogue on this channel, rather than more substantive channels, such as automation, diverts the public debate to unproductive policy options.

That immigration plays a modest role is their assertion or belief. Facts may speak otherwise. Policy choices and decisions need not be mutually exclusive. In other words, a president can and should adopt a multi-dimensional approach to the issues of wages, employment, health and mortality for people with low education levels.

10. He has misled the electorate by asserting that the U.S. is one of the most heavily taxed countries. While the U.S. has a high top statutory corporate tax rate, the average effective rate is much lower, and taxes on income and consumption are relatively low. Overall, the U.S. has one of the lowest ratios of tax revenue to GDP in the OECD.

Well. The economists are clearly taking many liberties with the truth here. If US tax rates are so low, why have American corporations parked cash over $2 trillion overseas?

See this Reuters story published in October 2015:

“The 500 largest American companies hold more than $2.1 trillion in accumulated profits offshore to avoid U.S. taxes and would collectively owe an estimated $620 billion in U.S. taxes if they repatriated the funds, according to a study released on Tuesday.

“The study, by two left-leaning non-profit groups, found that nearly three-quarters of the firms on the Fortune 500 list of biggest American companies by gross revenue operate tax haven subsidiaries in countries like Bermuda, Ireland, Luxembourg and the Netherlands.

“Citizens for Tax Justice and the U.S. Public Interest Research Group Education Fund used the companies’ own financial filings with the Securities and Exchange Commission to reach their conclusions.”

Source: ‘Big U.S. firms hold $2.1 trillion overseas to avoid taxes: study’, Reuters, 6 October 2015.

Further, there are many taxes other than federal income taxes. Every month, the National Federation of Independent Businesses moans about the tax burdens they face. A table of tax rates around the world shows that the US does not have one of the lowest tax rates. See here.

Having ‘one of the lowest ratios of tax revenue to GDP in the OECD’ might be proof that the rates are too high rather than too low. Many are evading and avoiding paying taxes and parking their revenues outside the jurisdiction of IRS perhaps.

11. His statements reveal a deep ignorance of economics and an inability to listen to credible experts. He repeats fake and misleading economic statistics, and pushes fallacies about the VAT and trade competitiveness.

He promotes magical thinking and conspiracy theories over sober assessments of feasible economic policy options.

By now, a reasonable reader must be at least persuaded to entertain the possibility that the shoe is on the other foot.

12. Donald Trump is a dangerous, destructive choice for the country. He misinforms the electorate, degrades trust in public institutions with conspiracy theories, and promotes willful delusion over engagement with reality. If elected, he poses a unique danger to the functioning of democratic and economic institutions, and to the prosperity of the country. For these reasons, we strongly recommend that you do not vote for Donald Trump.

These ad hominem statements ill-behoove men and women of higher learning. Indeed, they would have done themselves proud and their country (adopted or natural) a favour had they provided a dispassionate and objective analysis of the positions, assertions and impact of policy proposals of the leading candidates in this election.

Indeed, their excessive and exaggerated scrutiny of Trump’s proposals is, in itself, a strong argument in his favour. He would be so heavily under observation and scrutiny that democracy would be most ably served if he were elected President of the United States of America.