Capitalism Gave us Trump. Is Not a Bug, is an Orange Feature.
Inequality's Cycle of Destruction is an Opportunity to Eat the Rich Soon!
700 years of Western inequality, in one chart
We tend to think of rising income inequality as a 21st-century problem. A more equal distribution of wealth is normal, and the growing clout of the 1 percent is an anomaly.
The problem is that in the long arc of history, none of that is really true. For centuries, rising inequality has been the norm in the West - and it’s the relative equality of the post-World War era that is the anomaly.
To see why, check out this chart from Italian economist Guido Alfani. Alfani led a project to compile original data on economic inequality in six European countries - Britain, France, Italy, Spain, the Netherlands, and Belgium - between 1300 and 1800. He then combined original data with Thomas Piketty’s Europe-wide data on inequality between 1800 and today - and made a chart, published on VoxEU (the publication of the Center for Economic Policy Research think tank), showing the percentage of wealth owned by Europe’s top 10 percent over the past 700 years. It’s pretty stunning:
The chart shows the rich getting richer at a basically unbroken pace between 1500, when they controlled about 50 percent of society’s wealth, and 1914, when they controlled about 90 percent. That’s nearly 400 unbroken years of rising inequality.
In the whole chart, in fact, there are only two time periods where inequality declines - both of which coincide with major catastrophes.
“The Black Death, the most terrible epidemic in human history, affected Europe in 1347-51,” Alfani writes. “Afterwards the richest 10% lost their grip on between 15% and 20% of overall wealth. This was a long-lasting decline in inequality. The richest 10% recovered their pre-Black Death quota only in the second half of the 17th century.”
The other, sharper decline in inequality happened between roughly 1914 and 1950 - when World Wars I and II killed tens of millions of Europeans and destroyed dozens of cities and manufacturing hubs.
The upshot, if Alfani’s data is right, is that we need to start worrying even more about growing inequality. It suggests that there’s something about the deep structure of Western economies that tends to concentrate wealth in the hands of a small number of people. Alfani isn’t sure what that is, as his project is still in very preliminary stages. But his data strongly suggests that something is going on.
Now, it’s possible that democracy and the welfare state, relatively recent innovations, would redistribute enough wealth to counter whatever was going prior to 1914. But Piketty’s data suggests this isn’t so - that we’ve returned to the pre-world wars pattern of rising inequality even in countries like France with extremely robust welfare states.
Extreme inequality is bad in and of itself, in that it privileges the luxury of a handful over the welfare of the many. But we also know, from fairly solid empirical research, that it can seriously destabilize democratic political systems. People don’t like it when 10 percent of the people control 90 percent of a society’s wealth, and sometimes they choose to do something about it like - think, for example, of the 1917 Russian Revolution. Hyper-inequality can also cause the rich to destroy democracy - think about the 1973 military coup in Chile against President Salvador Allende, motivated in large part by opposition to Allende’s redistributionist policies.
Now, our current political turmoil - the rise of Donald Trump and the European far right - doesn’t really fit that pattern. Data suggests that supporters of these factions are more motivated by concerns over immigration and cultural change than inequality per se.
But that doesn’t mean we can dismiss the political risk caused by growing inequality. We have every reason to believe, looking at the long run, that inequality will continue to grow in the coming years - and the risks it pose will grow accordingly. The risks that poses, combined with those created by a white backlash to multiculturalism, are great indeed.
700 years of Western inequality, in one chart
The Goldman Sachs Effect
How a Bank Conquered Washington
Irony isn’t a concept with which President Donald J. Trump is familiar. In his Inaugural Address, having nominated the wealthiest cabinet in American history, he proclaimed, “For too long, a small group in our nation's capital has reaped the rewards of government while the people have borne the cost. Washington flourished -- but the people did not share in its wealth.” Under Trump, an even smaller group will flourish -- in particular, a cadre of former Goldman Sachs executives. To put the matter bluntly, two of them (along with the Federal Reserve) are likely to control our economy and financial system in the years to come.
Infusing Washington with Goldman alums isn’t exactly an original idea. Three of the last four presidents, including The Donald, have handed the wheel of the U.S. economy to ex-Goldmanites. But in true Trumpian style, after attacking Hillary Clinton for her Goldman ties, he wasn’t satisfied to do just that. He had to do it bigger and better. Unlike Bill Clinton and George W. Bush, just a sole Goldman figure lording it over economic policy wasn’t enough for him. Only two would do.
The Great Vampire Squid Revisited
Whether you voted for or against Donald Trump, whether you’re gearing up for the revolution or waiting for his next tweet to drop, rest assured that, in the years to come, the ideology that matters most won’t be that of the “forgotten” Americans of his Inaugural Address. It will be that of Goldman Sachs and it will dominate the domestic economy and, by extension, the global one.
At the dawn of the twentieth century, when President Teddy Roosevelt governed the country on a platform of trust busting aimed at reducing corporate power, even he could not bring himself to bust up the banks. That was a mistake born of his collaboration with the financier J.P. Morgan to mitigate the effects of the Bank Panic of 1907. Roosevelt feared that if he didn’t enlist the influence of the country’s major banker, the crisis would be even longer and more disastrous. It’s an error he might not have made had he foreseen the effect that one particular investment bank would have on America’s economy and political system.
There have been hundreds of articles written about the “world’s most powerful investment bank,” or as journalist Matt Taibbi famously called it back in 2010, the “great vampire squid.” That squid is now about to wrap its tentacles around our world in a way previously not imagined by Bill Clinton or George W. Bush.
No less than six Trump administration appointments already hail from that single banking outfit. Of those, two will impact your life strikingly: former Goldman partner and soon-to-be Treasury Secretary Steven Mnuchin and incoming top economic adviser and National Economic Council Chair Gary Cohn, former president and “number two” at Goldman. (The Council he will head has been responsible for “policy-making for domestic and international economic issues.”)
Now, let’s take a step into history to get the full Monty on why this matters more than you might imagine. In New York, circa 1932, then-Governor Franklin Delano Roosevelt announced his bid for the presidency. At the time, our nation was in the throes of the Great Depression. Goldman Sachs had, in fact, been one of the banks at the core of the infamous crash of 1929 that crippled the financial system and nearly destroyed the economy. It was then run by a dynamic figure, Sidney Weinberg, dubbed “the Politician” by Roosevelt because of his smooth tongue and “Mr. Wall Street” by the New York Times because of his range of connections there. Weinberg quickly grasped that, to have a chance of redeeming his firm’s reputation from the ashes of public opinion, he would need to aim high indeed. So he made himself indispensable to Roosevelt’s campaign for the presidency, soon embedding himself on the Democratic National Campaign Executive Committee.
After victory, he was not forgotten. FDR named him to the Business Advisory Council of the Department of Commerce, even as he continued to run Goldman Sachs. He would, in fact, go on to serve as an advisor to five more presidents, while Goldman would be transformed from a boutique banking operation into a global leviathan with a direct phone line to whichever president held office and a permanent seat at the table in political and financial Washington.
Now, let’s jump forward to the 1990s when Robert Rubin, co-chairman of Goldman Sachs, took a page from Weinberg’s playbook. He recognized the potential in a young, charismatic governor from Arkansas with a favorable attitude toward banks. Since Bill Clinton was far less well known than FDR had been, Rubin didn’t actually cozy up to him from the get-go. It was another Goldman Sachs executive, Ken Brody, who introduced them, but Rubin would eventually help Clinton gain Wall Street cred and the kind of funding that would make his successful 1992 run for the presidency possible. Those were favors that the new president wouldn’t forget. As a reward, and because he felt comfortable with Rubin’s economic philosophy, Clinton created a special post just for him: first chair of the new National Economic Council.
It was then only a matter of time until he was elevated to Treasury Secretary. In that position, he would accomplish something Ronald Reagan -- the first president to appoint a Treasury Secretary directly from Wall Street (former CEO of Merrill Lynch Donald Regan) -- and George H.W. Bush failed to do. He would get the Glass-Steagall Act of 1933 repealed by hustling President Clinton into backing such a move. FDR had signed the act in order to separate investment banks from commercial banks, ensuring that risky and speculative banking practices would not be funded with the deposits of hard-working Americans. The act did what it was intended to do. It inoculated the nation against the previously reckless behavior of its biggest banks
Rubin, who had left government service six months earlier, wasn’t even in Washington when, on November 12, 1999, Clinton signed the Gramm-Leach-Bliley Act that repealed Glass-Steagall. He had, however, become a board member of Citigroup, one of the key beneficiaries of that repeal, about two weeks earlier.
As Treasury Secretary, Rubin also helped craft the North American Free Trade Agreement (NAFTA). He subsequently convinced both President Clinton and Congress to raid U.S. taxpayer coffers to “help” Mexico when its banking system and peso crashed thanks to NAFTA. In reality, of course, he was lending a hand to American banks with exposure in Mexico. The subsequent $25 billion bailout would protect Goldman Sachs, as well as other big Wall Street banks, from losing boatloads of money. Think of it as a test run for the great bailout of 2008.
A World Made by and for Goldman Sachs
Moving on to more recent history, consider a moment when yet another Goldmanite was at the helm of the economy. From 1970 to 1973, Henry (“Hank”) Paulson had worked in various positions in the Nixon administration. In 1974, he joined Goldman Sachs, becoming its chairman and CEO in 1999. I was at Goldman at the time. (I left in 2002.) I remember the constant internal chatter about whether an investment bank like Goldman could continue to compete against the super banks that the Glass-Steagall repeal had created. The buzz was that if Goldman and similar investment banks were allowed to borrow more against their assets (“leverage themselves” in banking-speak), they wouldn’t need to use individual deposits as collateral for their riskier deals.
In 2004, Paulson helped convince the Securities and Exchange Commission (SEC) to change its regulations so that investment banks could operate as if they had the kind of collateral or backing for their trades that goliaths like Citigroup and JPMorgan Chase had. As a result, Goldman Sachs, Lehman Brothers, and Bear Stearns, to name three that would become notorious in the economic meltdown only four years later (and all ones for which I once worked) promptly leveraged themselves to the hilt. As they were doing so, George W. Bush made Paulson his third and final Treasury Secretary. In that capacity, Paulson managed to completely ignore the crisis brewing as a direct result of the repeal of Glass-Steagall, the one I predicted was coming in Other People’s Money, the book I wrote when I left Goldman.
In 2006, Paulson was questioned on his obvious conflicts of interest and responded, “Conflicts are a fact of life in many, if not most, institutions, ranging from the political arena and government to media and industry. The key is how we manage them.” At the time, I wrote, “The question isn’t how it’s a conflict of interest for Paulson to preside over our country’s economy but how it’s not?” For men like Paulson, after all, such conflicts don’t just involve their business holdings. They also involve the ideology associated with those holdings, which for him at that time came down to a deep belief in pursuing the full-scale deregulation of banking.
Paulson was, of course, Treasury Secretary for the period in which the 2008 financial crisis was brewing and then erupted. When it happened, he was the one who got to decide which banks survived and which died. Under his ministrations, Lehman Brothers died; Bear Stearns was given to JPMorgan Chase (along with plenty of government financial support); and you won’t be surprised to learn that Goldman Sachs thrived. While designing that outcome under the pressure of the moment, Paulson pled with Nancy Pelosi to press the Democrats in the House of Representatives to support a staggering $700 billion bailout. All those taxpayer dollars went with the 2008 Emergency Financial Stability Act that would save the banking system (under the auspices of saving the economy) and leave it resplendently triumphant, bonuses included), even as foreclosures rose by 21% the following year.
Once again, it was a world made by and for Goldman Sachs.
Goldman Back in the (White) House
Running for office as an outsider is one thing. Instantly inviting Wall Street into that office once you arrive is another. Now, it seems that Donald Trump is bringing us the newest chapter in the long-running White House-Goldman Sachs saga. And count on Steven Mnuchin and Gary Cohn to offer a few fresh wrinkles on that old alliance.
Cohn was one of the partners who ran the Fixed Income, Currency and Commodity (FICC) division of Goldman. It was the one that benefited the most from leverage, trading, and the complexity of Wall Street’s financial concoctions like collateralized debt obligations (CDOs) stuffed with derivatives attached to subprime mortgages. You could say, it was leverage that helped propel Cohn up the Goldman food chain.
Steven Mnuchin has proven particularly adept at understanding such concoctions. He left Goldman in 2002. In 2004, with two other ex-Goldman partners, he formed the hedge fund Dune Capital Management. In the wake of the 2008 financial crisis, Dune went shopping, as Wall Street likes to do, for cheap buys it could convert into big profits. Mnuchin and his pals found the perfect prey in a Pasadena-based bank, IndyMac, that had failed in July 2008 before the financial crisis kicked into high gear, and had been seized by the Federal Deposit Insurance Corporation (FDIC). They would pick up its assets on the cheap.
At his confirmation hearings, Mnuchin downplayed his role in throwing homeowners (including members of the military) out of their heavily mortgaged homes as a result of that purchase. He cast himself instead as a genuine hero, the guy who convened a cadre of financial sharks to help, not harm, the bank’s customers who, without their benevolence, would have fared so much worse. He looked deeply earnest as he spoke of his role as the savior of the common -- or perhaps in the age of Trump “forgotten” -- man and woman. Maybe he even believed it.
But the philosophy of swooping in, attacking an IndyMac-like target of opportunity and converting it into a fortune for himself (and problems for everyone else), has been a hallmark of his career. To transfer this version of over-amped 1% opportunism to the halls of political power is certainly a new definition of, in Trumpian terms, giving the government back to “the people.” Perhaps what our new president meant was “the people at Goldman Sachs.” Think of it, in any case, as the supercharging of a vulture mentality in a designer suit, the very attitude that once fueled the rise to power of Goldman Sachs.
Mnuchin repeatedly blamed the FDIC and other government agencies for not helping him help homeowners. “In the press it has been said that I ran a ‘foreclosure machine,’” he said, “On the contrary, I was committed to loan modifications intended to stop foreclosures. I ran a ‘Loan Modification Machine.’ Whenever we could do loan modifications we did them, but many times, the FDIC, FNMA, FHLMC, and bank trustees imposed strict rules governing the processing of these loans.” Nothing, that is, was or ever is his fault -- reflecting his inability to take the slightest responsibility for his undeniable role in kicking people out of their homes when they could have remained. It’s undoubtedly the perfect trait for a Treasury secretary in a government of the 1% of the 1%.
Mnuchin also blamed the Federal Reserve for suggesting that the Volcker Rule -- part of the Dodd-Frank Act of 2010 designed to limit risky trading activities -- was harming bank liquidity and could be a problem. The way he did that was typically slick. He claimed to support the Volcker Rule, even as he underscored the Fed’s concern with it. In this way, he managed both to make himself look squeaky clean and very publicly open the door to a possible Trumpian “revision” of that rule that would be aimed at weakening its intent and once again deregulating bank trading activities.
Similarly, at those confirmation hearings he said (as Trump had previously) that we needed to help community banks compete against the bigger ones through less onerous regulations. Even though this may indeed be true, it is also guaranteed to be another bait-and-switch move likely to lead to the deregulation of the big banks, too, ultimately rendering them even bigger and more dangerous not just to those community banks but to all of us.
Indeed, any proposition to reduce the size of big banks was sidestepped. Although Mnuchin did say that four monster banks shouldn't run the country, he didn’t say that they should be broken up. He won’t. Nor will Cohn. In response to a question from Democratic Senator Maria Cantwell, he added, “No, I don’t support going back to Glass-Steagall as is. What we’ve talked about with the president-elect is that perhaps we need a twenty-first-century Glass-Steagall. But, no I don’t support taking a very old law and saying we should adhere to it as is.”
So, although the reinstatement of Glass-Steagall was part of the 2016 Republican election platform, it’s likely to prove just another of Trump’s many tactics to gain votes -- in this case, from Bernie Sanders supporters and libertarians who see too-big-to-fail institutions and a big-bank bailout policy as wrong and dangerous. Rest assured, though, Mnuchin and his Goldman Sachs pals will allow the largest Wall Street players to remain as virulent and parasitic as they are now, if not more so.
Goldman itself just announced that it was the world’s top merger and acquisitions adviser for the sixth consecutive year. In other words, the real deal-maker isn’t the former ruler of The Celebrity Apprentice, but Goldman Sachs. The government might change, but Goldman stays the same. And the traffic pile up of Goldman personalities in Trump’s corner made their fortunes doing deals -- and not the kind that benefited the public either.
A former Goldman colleague recently asked me whether it was just possible that Mnuchin was a good person. I can’t answer that. It’s something only he knows for sure. But no matter how earnest or sympathetic to the little guy he tried to be before that Senate confirmation committee, I do know one thing: he’s also a shark. And sharks do what they’re best at and what’s best for them. They smell blood in the water and go in for the kill. Think of it as the Goldman Sachs effect. In the waters of the Trump-Goldman era, don’t doubt for a second that the blood will be our own.
The Goldman Sachs Effect
Trumping Capitalism?
Donald Trump’s inauguration as the 45th president of the United States is widely seen as the beginning of the end of the post-1945 capitalist order that became globally dominant after the Cold War’s end. But is it possible that Trumpism is actually the end of the beginning? Could Trump’s victory mark the end of a period of post-crisis confusion, when the economic model that failed in 2008 was finally recognized as irretrievably broken, and the start of a new phase of global capitalism, when a new approach to economic management gradually evolves?
If history is any guide, the near-collapse of the global financial system in 2008 was always likely to be reflected - after a lag of five years or so - in challenges to existing political institutions and prevailing economic ideology. As I have recently explained - and described in greater detail in my 2010 book Capitalism 4.0- this was the sequence of events that followed previous systemic crises of global capitalism: liberal imperialism followed the 1840s revolutions; Keynesianism followed the Great Depression of the 1930s; and Thatcher-Reagan market fundamentalism followed the Great Inflation of the 1970s. Could Trumpism - understood as a lagged response to the 2008 crisis - herald the emergence of a new capitalist regime?
This question can be divided into three parts: Can Trump’s economic policies work? Will his administration’s economic program be politically sustainable? And what impact might Trumpism have on economic thinking and attitudes to capitalism around the world?
Trickle-Down Redux
On the first of these issues, a few Project Syndicate commentators see some grounds for hope, but most are deeply pessimistic, a stance epitomized by Nobel laureate Joseph Stiglitz. “There really is no silver lining to the cloud that now hangs over the US and the world,” he argues. “The only way Trump will square his promises of higher infrastructure and defense spending with large tax cuts and deficit reduction is a heavy dose of what used to be called voodoo economics.” For Stiglitz, Trump represents a re-enactment of the Reagan era’s socially regressive trickle-down economics, but with the addition of two further lethal ingredients - a trade war with China and a loss of access to health care for millions.
The political consequences, Stiglitz believes, will be disastrous. Experience shows that this trickle-down “story does not end well for Trump’s angry, displaced Rust Belt voters,” who will be tempted to seek even more aggressively for scapegoats once they realize how profoundly Trump has betrayed their interests.
Simon Johnson of MIT Sloan and the Peterson Institute for International Economics reaches a similar conclusion. Trump’s economic-policy priorities are reflected in his proposed cabinet, which represents a dramatic shift to outright “oligarchy: direct control of the state by people with substantial private economic power,” says Johnson. “Trump seems determined to lower income taxes for high-income Americans, as well as to reduce capital-gains tax (mostly paid by the well-off) and nearly eliminate corporate taxes (again, disproportionately benefiting the richest).”
Focusing on the politics of the new administration’s plans, Johnson, a former International Monetary Fund chief economist, notes that Trump leads “a coalition of businesspeople who wrongly believe that protectionism is a good way to help the economy” and “market fundamentalists” who are determined to cut taxes. To consolidate this coalition, the market fundamentalists are embracing protectionism, justifying Trump’s proposed import tariffs as a way to pay for slashing corporate taxes. Tariffs, however, are equivalent to increasing the sales tax. Thus, the result will be to “deflect attention from the essentials of their policy: lower taxes for the oligarchs,” paid for by “higher taxes - not to mention significant losses of high-paying jobs” (as a result of protectionism) - “for almost everyone else.”
Unlike Johnson, Harvard University’s Martin Feldstein, who served as Chairman of President Ronald Reagan’s Council of Economic Advisers, welcomes the prospect of a reduction in top marginal tax rates. President Barack Obama’s policies, Feldstein argues, continued an unhealthy “shift in the tax burden to those with the highest income levels” since the Reagan era.
But while Feldstein favors broadening the tax base away from the richest Americans in a “revenue-neutral way,” he is skeptical about Trump’s signature promises of higher wages, more “middle class” jobs, and stronger economic growth. The “economy has essentially reached full employment, with the unemployment rate at 4.9% in October,” he notes. The tighter labor market has in turn caused consumer prices to “rise 2.2% over the past year, up from 1.9% a year earlier,” while “production workers’ wages rose 2.4%.” Given real wage growth and rising inflation, he sees “no reason to seek an increase in aggregate demand at this time.”
Strange Hopes
As Feldstein’s skepticism demonstrates, Project Syndicate commentators’ views of Trumponomics do not fall neatly along ideological lines. Indeed, the Harvard development economist Dani Rodrik, certainly no market fundamentalist, finds reason for hope in Trump’s opposition to “free trade” deals laden with provisions that have nothing to do with trade. As he puts it, “Adam Smith and David Ricardo would turn over in their graves if they read the Trans-Pacific Partnership,” with the special preferences it offers specific industries and vested interests, and other newer trade agreements that Trump has denounced. All of them “incorporate rules on intellectual property, capital flows, and investment protections that are mainly designed to generate and preserve profits for financial institutions and multinational enterprises at the expense of other legitimate policy goals.”
Thus, while Rodrik deplores Trump’s demagogic politics and his “nonsensical” claims about many of his policies, he hopes that Trump’s election will arrest a trend of hyper-globalization that has been moving faster than can be economically justified. “Economists have long known that market failures - including poorly functioning labor markets, credit market imperfections, knowledge or environmental externalities, and monopolies - can interfere with reaping gains from trade,” he points out. And yet they “have consistently minimized” globalization’s capacity to “deepen societal cleavages, exacerbate distributional problems, and undermine domestic social bargains” - all outcomes that “directly affected communities in the United States.”
The Keynesian economic historian Robert Skidelsky sees other positive features in Trump’s policy ideas - and even in his economic philosophy. “Trump’s protectionism harks back to an older American tradition of a high-wage, job-rich manufacturing [economy that] has foundered with globalization,” Skidelsky says, and even “Trump’s isolationism is a populist way of saying that the US needs to withdraw from commitments which it has neither the power nor the will to honor.”
Most important of all, says Skidelsky, Trump’s proposal of an “$800 billion-$1 trillion program of infrastructure investment,” a “massive corporate-tax cut,” and “a pledge to maintain welfare entitlements” adds up to “a modern form of Keynesian fiscal policy.” As such, Trumpism amounts to a “head-on challenge to the neoliberal obsession with deficits and debt reduction, and to reliance on quantitative easing as the sole - and now exhausted - demand-management tool.”
By reopening debate on such previously taboo issues, Skidelsky concludes, “Trumpism could be a solution to the crisis of liberalism, not a portent of its disintegration.” If so, “liberals should not turn away in disgust and despair, but rather engage with Trumpism’s positive potential.” Trump’s “proposals need to be interrogated and refined,” according to Skidelsky, “not dismissed as ignorant ravings.”
In a similar vein, Kenneth Rogoff cautions against letting disapproval of Trump’s politics overwhelm economic judgment. Trump’s fiscal stimulus and emphasis on deregulation will boost demand in the classic Keynesian manner and are already making some business leaders “ecstatic.” While deregulation will not necessarily “improve the average American’s wellbeing,” and his tax proposals will “disproportionately benefit the rich,” they could make the US economy “move significantly faster, at least for a while.” That’s why “it’s wise to remember that you don’t have to be a nice guy to get the economy going,” Rogoff concludes. “In many ways, Germany was as successful as America at using stimulus to lift the economy out of the Great Depression.”
In my own initial reaction to Trump’s victory, I identified five possible economic benefits that could partly offset the obvious risks of higher interest rates, trade wars, an over-valued dollar, and the regressive distributional effects justifiably criticized by Stiglitz, Johnson, and Rogoff. The most important are the promise of a strong Keynesian growth stimulus, an easing of over-zealous financial regulations that locked many households out of mortgage markets, and some sensible tax reforms, particularly those aimed at encouraging profit repatriation by US companies and broadening the tax base.
Born to Lose
Trump’s success or failure as President may depend less on the evolution of macroeconomic variables such as growth, employment, wages, and tax rates than on the underlying socioeconomic forces that powered his campaign. In considering such forces, some Project Syndicate commentators focus on income inequality, while others emphasize cultural and demographic factors. But all conclude that, as a political program, Trumpism is unlikely to be a viable creation.
If widening inequality and declining middle-class incomes were the main causes of America’s populist revolt, Trumpism will ultimately aggravate, not ameliorate, these grievances. “Real (inflation-adjusted) wages at the bottom of the income distribution are roughly where they were 60 years ago,” Stiglitz noted shortly before the election. “So it is no surprise that Trump finds a large, receptive audience when he says the state of the economy is rotten.”
And yet, for two generations, Stiglitz continues, Democrats and Republicans alike insisted that “trade and financial liberalization” - the key reforms underpinning globalization - “would ensure prosperity for all.” Little wonder, then, that voters “whose standard of living has stagnated or declined” concluded that “America’s political leaders either didn’t know what they were talking about or were lying (or both).”
The dilemma for Trump, Stiglitz maintains, is that while he clearly benefited from “the widespread anger stemming from that loss of trust in government,” his policies will not assuage it. “Surely, another dose of trickle-down economics of the kind he promises, with tax cuts aimed almost entirely at rich Americans and corporations, would produce results no better than the last time they were tried.”
Robert Johnson, President of the Institute for New Economic Thinking, offers another reason why Trump voters aggrieved by widening inequalities of wealth and power are in for a rude awakening. It was no accident, Johnson observes, that during the party primaries, only Trump and Senator Bernie Sanders on the Democratic side “set their sights squarely on what mattered most to voters: a political economy in which elected officials strongly promoted a broad-based prosperity that included them.”
The other candidates, “constrained by a system that makes it extremely difficult to fund a credible political campaign without catering slavishly to the wealthiest sliver of American society,” simply couldn’t go there. “That system invited rebellion,” Johnson argues, “and Trump and Sanders - by self-financing and grassroots fundraising, respectively - were ideally positioned to lead one.”
Now Trump “will need to devise remedies to the social, economic, and political problems that he has described,” Johnson continues. “But to do that, he will have to work within the same ‘rigged’ system that he ran against, and he will have to craft policies that are actually feasible and will have a positive effect on Americans’ lives.” And, because Trump’s fiscal expansion will “again disproportionately benefit the wealthy, without trickling down to the rest of Americans,” disillusionment will set in.
But what if income inequality is not the main reason why swaths of middle-class voters rejected traditional party politics and turned to Trump? What if, as Michael Sandel, the Harvard political philosopher, argues, voters’ “grievances are about social esteem, not only about wages and jobs”?
Edmund Phelps, another Nobel laureate economist, cites data supporting Sandel’s hypothesis. “In fact, since 1970, aggregate labor compensation (wages plus fringe benefits) has grown only a little more slowly than aggregate profits have,” Phelps notes, while “average wage growth at the bottom of the income scale has not slowed relative to the ‘middle class.’” On the other hand, “the average hourly compensation of private-sector workers (production and non-supervisory employees) has grown far more slowly than that of everyone else.” Middle-income white, working-class men in non-supervisory production jobs have suffered the biggest losses.
These are also the workers who have dropped out of the labor force most rapidly, and are most likely to succumb to poor health, suicide, and drug dependence. “These men,” as Phelps puts it, “have lost the opportunity to do meaningful work, and to feel a sense of agency; and they have been deprived of a space where they can prosper, by gaining the satisfaction of succeeding at something, and grow in a self-fulfilling vocation.”
This is, of course, precisely the demographic group that secured Trump’s victory in the battleground industrial states of Iowa, Michigan, Ohio, Pennsylvania, and Wisconsin. Phelps believes that economic opportunities for manual workers in such regions can be restored only if productivity growth is boosted in manufacturing industries by “opening up competition, not just cutting back regulations.” He notes, however, that Trump’s policies of trade protectionism, political “bullying” to preserve existing employment, and tax cuts geared to large corporations are more likely to stifle innovation than to promote it.
The French economist Jean Pisani-Ferry reaches a similar conclusion from a different perspective. Noting that “the past suddenly seems to have much more appeal than the future,” not just in the US, but also in Britain, France, and many other advanced and emerging countries, Pisani-Ferry proposes four explanations: weak economic growth, widening income inequality, technological change that eliminates manual employment, plus a fourth, less familiar factor:
The new inequality has a politically salient spatial dimension. Educated, professionally successful people increasingly marry and live close to one another, mostly in large, prosperous metropolitan areas. Those left out also marry and live close to one another, mostly in depressed areas or small towns. [As a result], US counties won by Trump account for just 36% of GDP, whereas those won by Hillary Clinton account for 64%. Massive spatial inequality creates large communities of people with no future, where the prevailing aspiration can only be to turn back the clock.
In the face of these multifaceted socioeconomic problems, Pisani-Ferry believes that “a sensible agenda must simultaneously address its macroeconomic, educational, distributional, and spatial dimensions.” There is no evidence that Trump’s policy proposals can achieve anything of this kind. On the contrary, whereas Skidelsky cites Trump’s promise not to cut welfare entitlements, congressional Republicans are intent on doing just that. With Trump’s support and encouragement, they have already begun dismantling Obama’s signature health-care reform, the Affordable Care Act, with nothing to replace it - a move that the Congressional Budget Office recently estimated will cause the number of uninsured to rise by 18 million in the first year alone.
Capitalism 4.1?
All of this leads, finally, to the question of how Trump’s presidency is likely to shape global economic thinking and the future of capitalism. Phelps offers a grim prognosis. “American innovation first began declining or narrowing as far back as the late 1960s,” he notes, owing to “a corporatist ideology that permeated all levels of government.” True, “Silicon Valley created new industries and improved the pace of innovation for a short time”; but now “it, too, has run up against diminishing returns.”
Phelps sees the solution in a restoration of the “individualist ideology upon which capitalism thrives” and a revival of America’s “innovative spirit - the love of imagining, exploring, experimenting and creating.” But this, he believes, is not Trump’s agenda. Trump “has rarely mentioned innovation,” Phelps observes, “and his team is considering a dangerous approach that could actually undermine it”: an increase in government intervention, curbs on trade and competition, and “an expansion of corporatist policy the likes of which have not been seen since the fascist German and Italian economies of the 1930s.” But any policy serving to “protect incumbents and block newcomers” will most likely “drive a silver spike into the heart of the innovation process.”
I am more optimistic about the outlook, at least in the very long term. As I wrote last March: “Capitalism is an evolutionary system that responds to crises by radically transforming both economic relations and political institutions. The message of today’s populist revolts is that politicians must tear up their pre-crisis rulebooks and encourage a revolution in economic thinking.”
Trump represents a comprehensive rejection of the economic thinking that has dominated the world for a generation. Shaping the new economic thinking will be the most important challenge for both economists and politicians in the years ahead. In my view, the defining feature of each successive transformation of global capitalism has been a shift in the boundary between economics and politics, and between faith in market forces and reliance on government intervention.
Yoon Young-kwan, a former South Korean foreign minister, makes a similar point. “We are at an interregnum,” Yoon writes. “Populism, nationalism, and xenophobia float on the surface of a larger sea change: a fundamental shift worldwide in the relationship between the state and the market.” Reconciling these two domains of activity “is the central concern of political economy today, just as it was for Adam Smith in the eighteenth century, Friedrich List and Karl Marx in the nineteenth century, and John Maynard Keynes and Friedrich von Hayek in their long debate on the topic through the middle decades of the twentieth century.”
And, indeed, Trump is merely the most acute symptom of a global phenomenon. “Social and political discontent,” Yoon rightly notes, “will continue to bubble up around the world until we return the state-market relationship to a healthy equilibrium.”
The Trump presidency, like anti-establishment upheavals in Europe and elsewhere, will force the entire world to start asking fundamental questions about how the relationship between markets and governments in the next phase of global capitalism should evolve. Under Trump, US economic policies in the next four years are very unlikely to provide the right answer; but his administration may at least show the world what not to do.
Trumping Capitalism?
700 years of Western inequality, in one chart
We tend to think of rising income inequality as a 21st-century problem. A more equal distribution of wealth is normal, and the growing clout of the 1 percent is an anomaly.
The problem is that in the long arc of history, none of that is really true. For centuries, rising inequality has been the norm in the West - and it’s the relative equality of the post-World War era that is the anomaly.
To see why, check out this chart from Italian economist Guido Alfani. Alfani led a project to compile original data on economic inequality in six European countries - Britain, France, Italy, Spain, the Netherlands, and Belgium - between 1300 and 1800. He then combined original data with Thomas Piketty’s Europe-wide data on inequality between 1800 and today - and made a chart, published on VoxEU (the publication of the Center for Economic Policy Research think tank), showing the percentage of wealth owned by Europe’s top 10 percent over the past 700 years. It’s pretty stunning:
The chart shows the rich getting richer at a basically unbroken pace between 1500, when they controlled about 50 percent of society’s wealth, and 1914, when they controlled about 90 percent. That’s nearly 400 unbroken years of rising inequality.
In the whole chart, in fact, there are only two time periods where inequality declines - both of which coincide with major catastrophes.
“The Black Death, the most terrible epidemic in human history, affected Europe in 1347-51,” Alfani writes. “Afterwards the richest 10% lost their grip on between 15% and 20% of overall wealth. This was a long-lasting decline in inequality. The richest 10% recovered their pre-Black Death quota only in the second half of the 17th century.”
The other, sharper decline in inequality happened between roughly 1914 and 1950 - when World Wars I and II killed tens of millions of Europeans and destroyed dozens of cities and manufacturing hubs.
The upshot, if Alfani’s data is right, is that we need to start worrying even more about growing inequality. It suggests that there’s something about the deep structure of Western economies that tends to concentrate wealth in the hands of a small number of people. Alfani isn’t sure what that is, as his project is still in very preliminary stages. But his data strongly suggests that something is going on.
Now, it’s possible that democracy and the welfare state, relatively recent innovations, would redistribute enough wealth to counter whatever was going prior to 1914. But Piketty’s data suggests this isn’t so - that we’ve returned to the pre-world wars pattern of rising inequality even in countries like France with extremely robust welfare states.
Extreme inequality is bad in and of itself, in that it privileges the luxury of a handful over the welfare of the many. But we also know, from fairly solid empirical research, that it can seriously destabilize democratic political systems. People don’t like it when 10 percent of the people control 90 percent of a society’s wealth, and sometimes they choose to do something about it like - think, for example, of the 1917 Russian Revolution. Hyper-inequality can also cause the rich to destroy democracy - think about the 1973 military coup in Chile against President Salvador Allende, motivated in large part by opposition to Allende’s redistributionist policies.
Now, our current political turmoil - the rise of Donald Trump and the European far right - doesn’t really fit that pattern. Data suggests that supporters of these factions are more motivated by concerns over immigration and cultural change than inequality per se.
But that doesn’t mean we can dismiss the political risk caused by growing inequality. We have every reason to believe, looking at the long run, that inequality will continue to grow in the coming years - and the risks it pose will grow accordingly. The risks that poses, combined with those created by a white backlash to multiculturalism, are great indeed.
700 years of Western inequality, in one chart
Click to viewThe Goldman Sachs Effect
How a Bank Conquered Washington
Irony isn’t a concept with which President Donald J. Trump is familiar. In his Inaugural Address, having nominated the wealthiest cabinet in American history, he proclaimed, “For too long, a small group in our nation's capital has reaped the rewards of government while the people have borne the cost. Washington flourished -- but the people did not share in its wealth.” Under Trump, an even smaller group will flourish -- in particular, a cadre of former Goldman Sachs executives. To put the matter bluntly, two of them (along with the Federal Reserve) are likely to control our economy and financial system in the years to come.
Infusing Washington with Goldman alums isn’t exactly an original idea. Three of the last four presidents, including The Donald, have handed the wheel of the U.S. economy to ex-Goldmanites. But in true Trumpian style, after attacking Hillary Clinton for her Goldman ties, he wasn’t satisfied to do just that. He had to do it bigger and better. Unlike Bill Clinton and George W. Bush, just a sole Goldman figure lording it over economic policy wasn’t enough for him. Only two would do.
The Great Vampire Squid Revisited
Whether you voted for or against Donald Trump, whether you’re gearing up for the revolution or waiting for his next tweet to drop, rest assured that, in the years to come, the ideology that matters most won’t be that of the “forgotten” Americans of his Inaugural Address. It will be that of Goldman Sachs and it will dominate the domestic economy and, by extension, the global one.
At the dawn of the twentieth century, when President Teddy Roosevelt governed the country on a platform of trust busting aimed at reducing corporate power, even he could not bring himself to bust up the banks. That was a mistake born of his collaboration with the financier J.P. Morgan to mitigate the effects of the Bank Panic of 1907. Roosevelt feared that if he didn’t enlist the influence of the country’s major banker, the crisis would be even longer and more disastrous. It’s an error he might not have made had he foreseen the effect that one particular investment bank would have on America’s economy and political system.
There have been hundreds of articles written about the “world’s most powerful investment bank,” or as journalist Matt Taibbi famously called it back in 2010, the “great vampire squid.” That squid is now about to wrap its tentacles around our world in a way previously not imagined by Bill Clinton or George W. Bush.
No less than six Trump administration appointments already hail from that single banking outfit. Of those, two will impact your life strikingly: former Goldman partner and soon-to-be Treasury Secretary Steven Mnuchin and incoming top economic adviser and National Economic Council Chair Gary Cohn, former president and “number two” at Goldman. (The Council he will head has been responsible for “policy-making for domestic and international economic issues.”)
Now, let’s take a step into history to get the full Monty on why this matters more than you might imagine. In New York, circa 1932, then-Governor Franklin Delano Roosevelt announced his bid for the presidency. At the time, our nation was in the throes of the Great Depression. Goldman Sachs had, in fact, been one of the banks at the core of the infamous crash of 1929 that crippled the financial system and nearly destroyed the economy. It was then run by a dynamic figure, Sidney Weinberg, dubbed “the Politician” by Roosevelt because of his smooth tongue and “Mr. Wall Street” by the New York Times because of his range of connections there. Weinberg quickly grasped that, to have a chance of redeeming his firm’s reputation from the ashes of public opinion, he would need to aim high indeed. So he made himself indispensable to Roosevelt’s campaign for the presidency, soon embedding himself on the Democratic National Campaign Executive Committee.
After victory, he was not forgotten. FDR named him to the Business Advisory Council of the Department of Commerce, even as he continued to run Goldman Sachs. He would, in fact, go on to serve as an advisor to five more presidents, while Goldman would be transformed from a boutique banking operation into a global leviathan with a direct phone line to whichever president held office and a permanent seat at the table in political and financial Washington.
Now, let’s jump forward to the 1990s when Robert Rubin, co-chairman of Goldman Sachs, took a page from Weinberg’s playbook. He recognized the potential in a young, charismatic governor from Arkansas with a favorable attitude toward banks. Since Bill Clinton was far less well known than FDR had been, Rubin didn’t actually cozy up to him from the get-go. It was another Goldman Sachs executive, Ken Brody, who introduced them, but Rubin would eventually help Clinton gain Wall Street cred and the kind of funding that would make his successful 1992 run for the presidency possible. Those were favors that the new president wouldn’t forget. As a reward, and because he felt comfortable with Rubin’s economic philosophy, Clinton created a special post just for him: first chair of the new National Economic Council.
It was then only a matter of time until he was elevated to Treasury Secretary. In that position, he would accomplish something Ronald Reagan -- the first president to appoint a Treasury Secretary directly from Wall Street (former CEO of Merrill Lynch Donald Regan) -- and George H.W. Bush failed to do. He would get the Glass-Steagall Act of 1933 repealed by hustling President Clinton into backing such a move. FDR had signed the act in order to separate investment banks from commercial banks, ensuring that risky and speculative banking practices would not be funded with the deposits of hard-working Americans. The act did what it was intended to do. It inoculated the nation against the previously reckless behavior of its biggest banks
Rubin, who had left government service six months earlier, wasn’t even in Washington when, on November 12, 1999, Clinton signed the Gramm-Leach-Bliley Act that repealed Glass-Steagall. He had, however, become a board member of Citigroup, one of the key beneficiaries of that repeal, about two weeks earlier.
As Treasury Secretary, Rubin also helped craft the North American Free Trade Agreement (NAFTA). He subsequently convinced both President Clinton and Congress to raid U.S. taxpayer coffers to “help” Mexico when its banking system and peso crashed thanks to NAFTA. In reality, of course, he was lending a hand to American banks with exposure in Mexico. The subsequent $25 billion bailout would protect Goldman Sachs, as well as other big Wall Street banks, from losing boatloads of money. Think of it as a test run for the great bailout of 2008.
A World Made by and for Goldman Sachs
Moving on to more recent history, consider a moment when yet another Goldmanite was at the helm of the economy. From 1970 to 1973, Henry (“Hank”) Paulson had worked in various positions in the Nixon administration. In 1974, he joined Goldman Sachs, becoming its chairman and CEO in 1999. I was at Goldman at the time. (I left in 2002.) I remember the constant internal chatter about whether an investment bank like Goldman could continue to compete against the super banks that the Glass-Steagall repeal had created. The buzz was that if Goldman and similar investment banks were allowed to borrow more against their assets (“leverage themselves” in banking-speak), they wouldn’t need to use individual deposits as collateral for their riskier deals.
In 2004, Paulson helped convince the Securities and Exchange Commission (SEC) to change its regulations so that investment banks could operate as if they had the kind of collateral or backing for their trades that goliaths like Citigroup and JPMorgan Chase had. As a result, Goldman Sachs, Lehman Brothers, and Bear Stearns, to name three that would become notorious in the economic meltdown only four years later (and all ones for which I once worked) promptly leveraged themselves to the hilt. As they were doing so, George W. Bush made Paulson his third and final Treasury Secretary. In that capacity, Paulson managed to completely ignore the crisis brewing as a direct result of the repeal of Glass-Steagall, the one I predicted was coming in Other People’s Money, the book I wrote when I left Goldman.
In 2006, Paulson was questioned on his obvious conflicts of interest and responded, “Conflicts are a fact of life in many, if not most, institutions, ranging from the political arena and government to media and industry. The key is how we manage them.” At the time, I wrote, “The question isn’t how it’s a conflict of interest for Paulson to preside over our country’s economy but how it’s not?” For men like Paulson, after all, such conflicts don’t just involve their business holdings. They also involve the ideology associated with those holdings, which for him at that time came down to a deep belief in pursuing the full-scale deregulation of banking.
Paulson was, of course, Treasury Secretary for the period in which the 2008 financial crisis was brewing and then erupted. When it happened, he was the one who got to decide which banks survived and which died. Under his ministrations, Lehman Brothers died; Bear Stearns was given to JPMorgan Chase (along with plenty of government financial support); and you won’t be surprised to learn that Goldman Sachs thrived. While designing that outcome under the pressure of the moment, Paulson pled with Nancy Pelosi to press the Democrats in the House of Representatives to support a staggering $700 billion bailout. All those taxpayer dollars went with the 2008 Emergency Financial Stability Act that would save the banking system (under the auspices of saving the economy) and leave it resplendently triumphant, bonuses included), even as foreclosures rose by 21% the following year.
Once again, it was a world made by and for Goldman Sachs.
Goldman Back in the (White) House
Running for office as an outsider is one thing. Instantly inviting Wall Street into that office once you arrive is another. Now, it seems that Donald Trump is bringing us the newest chapter in the long-running White House-Goldman Sachs saga. And count on Steven Mnuchin and Gary Cohn to offer a few fresh wrinkles on that old alliance.
Cohn was one of the partners who ran the Fixed Income, Currency and Commodity (FICC) division of Goldman. It was the one that benefited the most from leverage, trading, and the complexity of Wall Street’s financial concoctions like collateralized debt obligations (CDOs) stuffed with derivatives attached to subprime mortgages. You could say, it was leverage that helped propel Cohn up the Goldman food chain.
Steven Mnuchin has proven particularly adept at understanding such concoctions. He left Goldman in 2002. In 2004, with two other ex-Goldman partners, he formed the hedge fund Dune Capital Management. In the wake of the 2008 financial crisis, Dune went shopping, as Wall Street likes to do, for cheap buys it could convert into big profits. Mnuchin and his pals found the perfect prey in a Pasadena-based bank, IndyMac, that had failed in July 2008 before the financial crisis kicked into high gear, and had been seized by the Federal Deposit Insurance Corporation (FDIC). They would pick up its assets on the cheap.
At his confirmation hearings, Mnuchin downplayed his role in throwing homeowners (including members of the military) out of their heavily mortgaged homes as a result of that purchase. He cast himself instead as a genuine hero, the guy who convened a cadre of financial sharks to help, not harm, the bank’s customers who, without their benevolence, would have fared so much worse. He looked deeply earnest as he spoke of his role as the savior of the common -- or perhaps in the age of Trump “forgotten” -- man and woman. Maybe he even believed it.
But the philosophy of swooping in, attacking an IndyMac-like target of opportunity and converting it into a fortune for himself (and problems for everyone else), has been a hallmark of his career. To transfer this version of over-amped 1% opportunism to the halls of political power is certainly a new definition of, in Trumpian terms, giving the government back to “the people.” Perhaps what our new president meant was “the people at Goldman Sachs.” Think of it, in any case, as the supercharging of a vulture mentality in a designer suit, the very attitude that once fueled the rise to power of Goldman Sachs.
Mnuchin repeatedly blamed the FDIC and other government agencies for not helping him help homeowners. “In the press it has been said that I ran a ‘foreclosure machine,’” he said, “On the contrary, I was committed to loan modifications intended to stop foreclosures. I ran a ‘Loan Modification Machine.’ Whenever we could do loan modifications we did them, but many times, the FDIC, FNMA, FHLMC, and bank trustees imposed strict rules governing the processing of these loans.” Nothing, that is, was or ever is his fault -- reflecting his inability to take the slightest responsibility for his undeniable role in kicking people out of their homes when they could have remained. It’s undoubtedly the perfect trait for a Treasury secretary in a government of the 1% of the 1%.
Mnuchin also blamed the Federal Reserve for suggesting that the Volcker Rule -- part of the Dodd-Frank Act of 2010 designed to limit risky trading activities -- was harming bank liquidity and could be a problem. The way he did that was typically slick. He claimed to support the Volcker Rule, even as he underscored the Fed’s concern with it. In this way, he managed both to make himself look squeaky clean and very publicly open the door to a possible Trumpian “revision” of that rule that would be aimed at weakening its intent and once again deregulating bank trading activities.
Similarly, at those confirmation hearings he said (as Trump had previously) that we needed to help community banks compete against the bigger ones through less onerous regulations. Even though this may indeed be true, it is also guaranteed to be another bait-and-switch move likely to lead to the deregulation of the big banks, too, ultimately rendering them even bigger and more dangerous not just to those community banks but to all of us.
Indeed, any proposition to reduce the size of big banks was sidestepped. Although Mnuchin did say that four monster banks shouldn't run the country, he didn’t say that they should be broken up. He won’t. Nor will Cohn. In response to a question from Democratic Senator Maria Cantwell, he added, “No, I don’t support going back to Glass-Steagall as is. What we’ve talked about with the president-elect is that perhaps we need a twenty-first-century Glass-Steagall. But, no I don’t support taking a very old law and saying we should adhere to it as is.”
So, although the reinstatement of Glass-Steagall was part of the 2016 Republican election platform, it’s likely to prove just another of Trump’s many tactics to gain votes -- in this case, from Bernie Sanders supporters and libertarians who see too-big-to-fail institutions and a big-bank bailout policy as wrong and dangerous. Rest assured, though, Mnuchin and his Goldman Sachs pals will allow the largest Wall Street players to remain as virulent and parasitic as they are now, if not more so.
Goldman itself just announced that it was the world’s top merger and acquisitions adviser for the sixth consecutive year. In other words, the real deal-maker isn’t the former ruler of The Celebrity Apprentice, but Goldman Sachs. The government might change, but Goldman stays the same. And the traffic pile up of Goldman personalities in Trump’s corner made their fortunes doing deals -- and not the kind that benefited the public either.
A former Goldman colleague recently asked me whether it was just possible that Mnuchin was a good person. I can’t answer that. It’s something only he knows for sure. But no matter how earnest or sympathetic to the little guy he tried to be before that Senate confirmation committee, I do know one thing: he’s also a shark. And sharks do what they’re best at and what’s best for them. They smell blood in the water and go in for the kill. Think of it as the Goldman Sachs effect. In the waters of the Trump-Goldman era, don’t doubt for a second that the blood will be our own.
The Goldman Sachs Effect
Trumping Capitalism?
Donald Trump’s inauguration as the 45th president of the United States is widely seen as the beginning of the end of the post-1945 capitalist order that became globally dominant after the Cold War’s end. But is it possible that Trumpism is actually the end of the beginning? Could Trump’s victory mark the end of a period of post-crisis confusion, when the economic model that failed in 2008 was finally recognized as irretrievably broken, and the start of a new phase of global capitalism, when a new approach to economic management gradually evolves?
If history is any guide, the near-collapse of the global financial system in 2008 was always likely to be reflected - after a lag of five years or so - in challenges to existing political institutions and prevailing economic ideology. As I have recently explained - and described in greater detail in my 2010 book Capitalism 4.0- this was the sequence of events that followed previous systemic crises of global capitalism: liberal imperialism followed the 1840s revolutions; Keynesianism followed the Great Depression of the 1930s; and Thatcher-Reagan market fundamentalism followed the Great Inflation of the 1970s. Could Trumpism - understood as a lagged response to the 2008 crisis - herald the emergence of a new capitalist regime?
This question can be divided into three parts: Can Trump’s economic policies work? Will his administration’s economic program be politically sustainable? And what impact might Trumpism have on economic thinking and attitudes to capitalism around the world?
Trickle-Down Redux
On the first of these issues, a few Project Syndicate commentators see some grounds for hope, but most are deeply pessimistic, a stance epitomized by Nobel laureate Joseph Stiglitz. “There really is no silver lining to the cloud that now hangs over the US and the world,” he argues. “The only way Trump will square his promises of higher infrastructure and defense spending with large tax cuts and deficit reduction is a heavy dose of what used to be called voodoo economics.” For Stiglitz, Trump represents a re-enactment of the Reagan era’s socially regressive trickle-down economics, but with the addition of two further lethal ingredients - a trade war with China and a loss of access to health care for millions.
The political consequences, Stiglitz believes, will be disastrous. Experience shows that this trickle-down “story does not end well for Trump’s angry, displaced Rust Belt voters,” who will be tempted to seek even more aggressively for scapegoats once they realize how profoundly Trump has betrayed their interests.
Simon Johnson of MIT Sloan and the Peterson Institute for International Economics reaches a similar conclusion. Trump’s economic-policy priorities are reflected in his proposed cabinet, which represents a dramatic shift to outright “oligarchy: direct control of the state by people with substantial private economic power,” says Johnson. “Trump seems determined to lower income taxes for high-income Americans, as well as to reduce capital-gains tax (mostly paid by the well-off) and nearly eliminate corporate taxes (again, disproportionately benefiting the richest).”
Focusing on the politics of the new administration’s plans, Johnson, a former International Monetary Fund chief economist, notes that Trump leads “a coalition of businesspeople who wrongly believe that protectionism is a good way to help the economy” and “market fundamentalists” who are determined to cut taxes. To consolidate this coalition, the market fundamentalists are embracing protectionism, justifying Trump’s proposed import tariffs as a way to pay for slashing corporate taxes. Tariffs, however, are equivalent to increasing the sales tax. Thus, the result will be to “deflect attention from the essentials of their policy: lower taxes for the oligarchs,” paid for by “higher taxes - not to mention significant losses of high-paying jobs” (as a result of protectionism) - “for almost everyone else.”
Unlike Johnson, Harvard University’s Martin Feldstein, who served as Chairman of President Ronald Reagan’s Council of Economic Advisers, welcomes the prospect of a reduction in top marginal tax rates. President Barack Obama’s policies, Feldstein argues, continued an unhealthy “shift in the tax burden to those with the highest income levels” since the Reagan era.
But while Feldstein favors broadening the tax base away from the richest Americans in a “revenue-neutral way,” he is skeptical about Trump’s signature promises of higher wages, more “middle class” jobs, and stronger economic growth. The “economy has essentially reached full employment, with the unemployment rate at 4.9% in October,” he notes. The tighter labor market has in turn caused consumer prices to “rise 2.2% over the past year, up from 1.9% a year earlier,” while “production workers’ wages rose 2.4%.” Given real wage growth and rising inflation, he sees “no reason to seek an increase in aggregate demand at this time.”
Strange Hopes
As Feldstein’s skepticism demonstrates, Project Syndicate commentators’ views of Trumponomics do not fall neatly along ideological lines. Indeed, the Harvard development economist Dani Rodrik, certainly no market fundamentalist, finds reason for hope in Trump’s opposition to “free trade” deals laden with provisions that have nothing to do with trade. As he puts it, “Adam Smith and David Ricardo would turn over in their graves if they read the Trans-Pacific Partnership,” with the special preferences it offers specific industries and vested interests, and other newer trade agreements that Trump has denounced. All of them “incorporate rules on intellectual property, capital flows, and investment protections that are mainly designed to generate and preserve profits for financial institutions and multinational enterprises at the expense of other legitimate policy goals.”
Thus, while Rodrik deplores Trump’s demagogic politics and his “nonsensical” claims about many of his policies, he hopes that Trump’s election will arrest a trend of hyper-globalization that has been moving faster than can be economically justified. “Economists have long known that market failures - including poorly functioning labor markets, credit market imperfections, knowledge or environmental externalities, and monopolies - can interfere with reaping gains from trade,” he points out. And yet they “have consistently minimized” globalization’s capacity to “deepen societal cleavages, exacerbate distributional problems, and undermine domestic social bargains” - all outcomes that “directly affected communities in the United States.”
The Keynesian economic historian Robert Skidelsky sees other positive features in Trump’s policy ideas - and even in his economic philosophy. “Trump’s protectionism harks back to an older American tradition of a high-wage, job-rich manufacturing [economy that] has foundered with globalization,” Skidelsky says, and even “Trump’s isolationism is a populist way of saying that the US needs to withdraw from commitments which it has neither the power nor the will to honor.”
Most important of all, says Skidelsky, Trump’s proposal of an “$800 billion-$1 trillion program of infrastructure investment,” a “massive corporate-tax cut,” and “a pledge to maintain welfare entitlements” adds up to “a modern form of Keynesian fiscal policy.” As such, Trumpism amounts to a “head-on challenge to the neoliberal obsession with deficits and debt reduction, and to reliance on quantitative easing as the sole - and now exhausted - demand-management tool.”
By reopening debate on such previously taboo issues, Skidelsky concludes, “Trumpism could be a solution to the crisis of liberalism, not a portent of its disintegration.” If so, “liberals should not turn away in disgust and despair, but rather engage with Trumpism’s positive potential.” Trump’s “proposals need to be interrogated and refined,” according to Skidelsky, “not dismissed as ignorant ravings.”
In a similar vein, Kenneth Rogoff cautions against letting disapproval of Trump’s politics overwhelm economic judgment. Trump’s fiscal stimulus and emphasis on deregulation will boost demand in the classic Keynesian manner and are already making some business leaders “ecstatic.” While deregulation will not necessarily “improve the average American’s wellbeing,” and his tax proposals will “disproportionately benefit the rich,” they could make the US economy “move significantly faster, at least for a while.” That’s why “it’s wise to remember that you don’t have to be a nice guy to get the economy going,” Rogoff concludes. “In many ways, Germany was as successful as America at using stimulus to lift the economy out of the Great Depression.”
In my own initial reaction to Trump’s victory, I identified five possible economic benefits that could partly offset the obvious risks of higher interest rates, trade wars, an over-valued dollar, and the regressive distributional effects justifiably criticized by Stiglitz, Johnson, and Rogoff. The most important are the promise of a strong Keynesian growth stimulus, an easing of over-zealous financial regulations that locked many households out of mortgage markets, and some sensible tax reforms, particularly those aimed at encouraging profit repatriation by US companies and broadening the tax base.
Born to Lose
Trump’s success or failure as President may depend less on the evolution of macroeconomic variables such as growth, employment, wages, and tax rates than on the underlying socioeconomic forces that powered his campaign. In considering such forces, some Project Syndicate commentators focus on income inequality, while others emphasize cultural and demographic factors. But all conclude that, as a political program, Trumpism is unlikely to be a viable creation.
If widening inequality and declining middle-class incomes were the main causes of America’s populist revolt, Trumpism will ultimately aggravate, not ameliorate, these grievances. “Real (inflation-adjusted) wages at the bottom of the income distribution are roughly where they were 60 years ago,” Stiglitz noted shortly before the election. “So it is no surprise that Trump finds a large, receptive audience when he says the state of the economy is rotten.”
And yet, for two generations, Stiglitz continues, Democrats and Republicans alike insisted that “trade and financial liberalization” - the key reforms underpinning globalization - “would ensure prosperity for all.” Little wonder, then, that voters “whose standard of living has stagnated or declined” concluded that “America’s political leaders either didn’t know what they were talking about or were lying (or both).”
The dilemma for Trump, Stiglitz maintains, is that while he clearly benefited from “the widespread anger stemming from that loss of trust in government,” his policies will not assuage it. “Surely, another dose of trickle-down economics of the kind he promises, with tax cuts aimed almost entirely at rich Americans and corporations, would produce results no better than the last time they were tried.”
Robert Johnson, President of the Institute for New Economic Thinking, offers another reason why Trump voters aggrieved by widening inequalities of wealth and power are in for a rude awakening. It was no accident, Johnson observes, that during the party primaries, only Trump and Senator Bernie Sanders on the Democratic side “set their sights squarely on what mattered most to voters: a political economy in which elected officials strongly promoted a broad-based prosperity that included them.”
The other candidates, “constrained by a system that makes it extremely difficult to fund a credible political campaign without catering slavishly to the wealthiest sliver of American society,” simply couldn’t go there. “That system invited rebellion,” Johnson argues, “and Trump and Sanders - by self-financing and grassroots fundraising, respectively - were ideally positioned to lead one.”
Now Trump “will need to devise remedies to the social, economic, and political problems that he has described,” Johnson continues. “But to do that, he will have to work within the same ‘rigged’ system that he ran against, and he will have to craft policies that are actually feasible and will have a positive effect on Americans’ lives.” And, because Trump’s fiscal expansion will “again disproportionately benefit the wealthy, without trickling down to the rest of Americans,” disillusionment will set in.
But what if income inequality is not the main reason why swaths of middle-class voters rejected traditional party politics and turned to Trump? What if, as Michael Sandel, the Harvard political philosopher, argues, voters’ “grievances are about social esteem, not only about wages and jobs”?
Edmund Phelps, another Nobel laureate economist, cites data supporting Sandel’s hypothesis. “In fact, since 1970, aggregate labor compensation (wages plus fringe benefits) has grown only a little more slowly than aggregate profits have,” Phelps notes, while “average wage growth at the bottom of the income scale has not slowed relative to the ‘middle class.’” On the other hand, “the average hourly compensation of private-sector workers (production and non-supervisory employees) has grown far more slowly than that of everyone else.” Middle-income white, working-class men in non-supervisory production jobs have suffered the biggest losses.
These are also the workers who have dropped out of the labor force most rapidly, and are most likely to succumb to poor health, suicide, and drug dependence. “These men,” as Phelps puts it, “have lost the opportunity to do meaningful work, and to feel a sense of agency; and they have been deprived of a space where they can prosper, by gaining the satisfaction of succeeding at something, and grow in a self-fulfilling vocation.”
This is, of course, precisely the demographic group that secured Trump’s victory in the battleground industrial states of Iowa, Michigan, Ohio, Pennsylvania, and Wisconsin. Phelps believes that economic opportunities for manual workers in such regions can be restored only if productivity growth is boosted in manufacturing industries by “opening up competition, not just cutting back regulations.” He notes, however, that Trump’s policies of trade protectionism, political “bullying” to preserve existing employment, and tax cuts geared to large corporations are more likely to stifle innovation than to promote it.
The French economist Jean Pisani-Ferry reaches a similar conclusion from a different perspective. Noting that “the past suddenly seems to have much more appeal than the future,” not just in the US, but also in Britain, France, and many other advanced and emerging countries, Pisani-Ferry proposes four explanations: weak economic growth, widening income inequality, technological change that eliminates manual employment, plus a fourth, less familiar factor:
The new inequality has a politically salient spatial dimension. Educated, professionally successful people increasingly marry and live close to one another, mostly in large, prosperous metropolitan areas. Those left out also marry and live close to one another, mostly in depressed areas or small towns. [As a result], US counties won by Trump account for just 36% of GDP, whereas those won by Hillary Clinton account for 64%. Massive spatial inequality creates large communities of people with no future, where the prevailing aspiration can only be to turn back the clock.
In the face of these multifaceted socioeconomic problems, Pisani-Ferry believes that “a sensible agenda must simultaneously address its macroeconomic, educational, distributional, and spatial dimensions.” There is no evidence that Trump’s policy proposals can achieve anything of this kind. On the contrary, whereas Skidelsky cites Trump’s promise not to cut welfare entitlements, congressional Republicans are intent on doing just that. With Trump’s support and encouragement, they have already begun dismantling Obama’s signature health-care reform, the Affordable Care Act, with nothing to replace it - a move that the Congressional Budget Office recently estimated will cause the number of uninsured to rise by 18 million in the first year alone.
Capitalism 4.1?
All of this leads, finally, to the question of how Trump’s presidency is likely to shape global economic thinking and the future of capitalism. Phelps offers a grim prognosis. “American innovation first began declining or narrowing as far back as the late 1960s,” he notes, owing to “a corporatist ideology that permeated all levels of government.” True, “Silicon Valley created new industries and improved the pace of innovation for a short time”; but now “it, too, has run up against diminishing returns.”
Phelps sees the solution in a restoration of the “individualist ideology upon which capitalism thrives” and a revival of America’s “innovative spirit - the love of imagining, exploring, experimenting and creating.” But this, he believes, is not Trump’s agenda. Trump “has rarely mentioned innovation,” Phelps observes, “and his team is considering a dangerous approach that could actually undermine it”: an increase in government intervention, curbs on trade and competition, and “an expansion of corporatist policy the likes of which have not been seen since the fascist German and Italian economies of the 1930s.” But any policy serving to “protect incumbents and block newcomers” will most likely “drive a silver spike into the heart of the innovation process.”
I am more optimistic about the outlook, at least in the very long term. As I wrote last March: “Capitalism is an evolutionary system that responds to crises by radically transforming both economic relations and political institutions. The message of today’s populist revolts is that politicians must tear up their pre-crisis rulebooks and encourage a revolution in economic thinking.”
Trump represents a comprehensive rejection of the economic thinking that has dominated the world for a generation. Shaping the new economic thinking will be the most important challenge for both economists and politicians in the years ahead. In my view, the defining feature of each successive transformation of global capitalism has been a shift in the boundary between economics and politics, and between faith in market forces and reliance on government intervention.
Yoon Young-kwan, a former South Korean foreign minister, makes a similar point. “We are at an interregnum,” Yoon writes. “Populism, nationalism, and xenophobia float on the surface of a larger sea change: a fundamental shift worldwide in the relationship between the state and the market.” Reconciling these two domains of activity “is the central concern of political economy today, just as it was for Adam Smith in the eighteenth century, Friedrich List and Karl Marx in the nineteenth century, and John Maynard Keynes and Friedrich von Hayek in their long debate on the topic through the middle decades of the twentieth century.”
And, indeed, Trump is merely the most acute symptom of a global phenomenon. “Social and political discontent,” Yoon rightly notes, “will continue to bubble up around the world until we return the state-market relationship to a healthy equilibrium.”
The Trump presidency, like anti-establishment upheavals in Europe and elsewhere, will force the entire world to start asking fundamental questions about how the relationship between markets and governments in the next phase of global capitalism should evolve. Under Trump, US economic policies in the next four years are very unlikely to provide the right answer; but his administration may at least show the world what not to do.
Trumping Capitalism?