Trump's war on economists, a battle from both sides

Trump's war on economists, a battle from both sides
Trump's war on economists, a battle from both sides

President Donald Trump has so far shown himself to be not much of a fan of economists.

And the feeling appears to be mutual.

Not only has Trump rejected economic data, raising questions about its veracity with no evidence, he has also repeatedly misstated it. And he recently decided to demote the Council of Economic Advisers from his Cabinet while failing, to this point, to appoint a chairman.

But economists from both sides of the political aisle have similarly rejected much of Trump's economic worldview, ranging from his assessment of the current state of the economy, his diagnosis of what's wrong with it and many of his prescriptions to fix it.

"The Trump administration is threatening to drive a silver-spike into the heart of the innovation process,'' Ned Phelps, a Nobel prize-winning economist from Columbia University, said at a recent conference. Phelps, known as a conservative economist who favors deregulation, was speaking about Trump's penchant for intervening directly with companies. He says such policies favor existing companies at the expense of new ones and likened it to the German and Italian "corporatist" economies of the 1930s.

"By expanding protection and interference in the business sector, the Trump administration may very well block the innovation of outsiders and newcomers more than it will stimulate the output of insiders," Phelps said.

To be sure, there are ideas at the heart of the president's economic agenda many economists embrace. Lower taxes and a simpler tax system are often preferred by most economists because they reduce distortions in decision-making and can boost growth. And many agree the U.S. corporate tax rate needs to be more globally competitive.

"Corporate tax cuts could deliver a sustained increase in wage growth by stimulating business spending and thus raising productivity growth," wrote Deutsche Bank economist Joseph LaVorgna.

And deregulation is seen as a winner for boosting economic growth, though economists tend to place value on the benefits of regulation along with counting its costs.

All told, several surveys have suggested that the positive side of Trump administration policies add up perhaps to half or a full percentage point at most of gross domestic product, not the many full points touted by the president and his advisors.

At his wide-ranging press conference on Thursday, Trump said: "I inherited a mess.'' But many economists suggest nothing could be further from the truth.

In testimony this week before Congress, Federal Reserve ChairJanet Yellen said the economy was at or near its potential growth rate and close to full employment. The unemployment rate of 4.8 percent is just a 0.1 point above what the nonpartisan Congressional Budget Office judges to be the natural rate of unemployment. However, the broader measure of under and unemployment, the so-called U-6 that accounts for those who have dropped out of the workforce and those working part time for economic reasons, is as much as a full percentage point above its prerecession level.

That suggests room to improve on jobs numbers and bring Americans who have dropped out of the workforce back into the fold. Yet, when it comes to job losses, and how to put people back to work, many economists vastly disagree with the Trump administration. Trump has blamed unfair trade practices, but many economists don't see trade or efforts to reduce trade deficits as helping U.S. employment much.

That's the view, interestingly enough, of Goldman Sachs economists, among others. It's ironic because the two highest ranking economic officials in the Trump administration are Goldman alums — National Economic Director Gary Cohn and Treasury Secretary Steve Mnuchin. Neither has an economics degree or appears to have much experience with public policy.

But a recent Goldman Sachs research paper concluded that "offshoring and reshoring account for a modest share of job losses and gains, and any policy-driven changes would have a limited effect on total employment."

A recent report from Ball State University's Center for Business and Economic Research found that 87 percent of manufacturing job losses "are due to productivity gains, including better supply chains, more capital investment and advanced technology (robots)." It went on to note that, nevertheless, since the end of the recession, the U.S. has added 750,000 manufacturing jobs.

Economists don't generally dispute the idea that manufacturing job losses and even losses due to international trade have resulted in economic pain to a part of the population. And many have suggested greater use of job retraining programs to alleviate the economic fallout.

But they see the labor force generally adjusting. It's worth noting that Trump made a big deal about saving jobs when he traveled to the Carrier manufacturing plant inIndiana. But he failed to note that manufacturing employment in Indiana has risen by 18 percent since the nadir of the recession in 2009, although it has remained below its prerecession level. The unemployment rate where the Carrier plant is based, Huntington, Indiana, is one of the lowest in the country at just 3.5 percent.

Perhaps the biggest area of disagreement is the Trump administration's claim that it can boost economic growth to 4 percent. Yellen has called growth "disappointing" but suggested that the real problem with the economy is productivity and labor force growth. The reason labor force growth is so slow, Yellen and others have said, is mostly the result of an aging population. Older people retire and participate less in the workforce. And the pace of innovation, at least as measured in productivity statistics, looks to have slowed as well.

It is possible that a combination of tax cuts and government spending could ratchet up GDP. But economists worry about a sugar high and instead urge Washington to focus on changing what they call potential growth, which is akin to the economy's speed limit.

Because both labor force gains and productivity have slowed, many economists don't see the GDP potential as much greater than 2 percent right now, which is about the current growth rate of the economy. So, contrary to a president who sees the economy as a mess, economists would judge the United States as meeting its lower potential. Most studies, including a recent one from the Organization for Economic Cooperation and Development, predict lower global growth in both emerging and advanced economies in the years ahead.

Few doubt the president's sincerity in wanting to improve the U.S. economy. But many worry that his policies could be counterproductive. For example, there is real concern the president could reduce immigration into the U.S. But Yellen noted that doing so could reduce both employment growth and overall growth since immigrants are major contributors to the already slow population increases in the US.

"The immigration ban affects only around 0.1% of arrivals in the U.S., but its symbolic nature resonates beyond its magnitude," noted Oxford Economics. "The contributions of immigration to the U.S. economy via labor, education and tourism should not be underestimated."

CNBC

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