Weekend Reading: Alexander Hamilton: Protecting the Choice of President from Sinister Foreign Interference

Any Hopes for Inclusive Growth in the Age of Trump?

Any Hopes for Inclusive Growth in the Age of Trump?:

Technocracy, Imperial Court Politics, Federalism, and Partisan Equilibrium

J. Bradford DeLong :: U.C. Berkeley, NBER, and WCEG :: November 17, 2016 :: PIIE



Inclusive growth?

We are highly unlikely to have any—not for the next two years, and probably not for the next four years. Thus the talk I had prepared and the powerpoint I had drawn up two weeks ago are now totally irrelevant.

Any growth we have will be "exclusive"--that is, producing very large income and wealth gains at the very top, some of which will trickle down, with a very large chance of at best continued income stagnation for Americans below the 80%-ile mark.

And there may well not be growth.

The modal expectation for whom Trump will be like is former Italian prime minister Silvio Berlusconi. Bunga-bunga governance.


It is not true that we should lay all responsibility for Italy's past two lost decades of economic growth at the feet of Silvio Berlusconi. But it is true that he deserves what is probably the lion's share of the "credit" for this "accomplishment".

Let us hope for the country's sake that Trump surpasses the very low mark set by Berlusconi. But I cannot find many people either here or abroad who are holding their breath, or willing to bet that that will be so.

At the federal government policy level: Trump’s big initial initiative will be a mammoth tax cut for billionaires and multi-millionaires. Perhaps it will be coupled with Paul Ryan’s elimination of Medicare as we know it. There will be some sort of infrastructure program. These are probably the initiatives we will see.


Surely there will be additional waves of austerity directed against social insurance programs that can be characterized as flowing to “losers” and “cheaters”. For some reason official Washington still looks at debt quantities without looking at debt prices. Thus official Washington still thinks that it is 1990. It is not. The exploding Reagan deficits are no longer the big problem that demands urgent action. Today the real resource cost of financing the U.S. national debt is painfully high--rather than, as it is now in truth, less than zero, for with interest rates at their current levels the national debt is a profit center for rather than a drain on the U.S. Treasury.

In this misapprehension your benefactor whom you have honored in your name here at the Peterson Institute for International Economics has not played a constructive role. Now is not 1990. Serious technocratic analyses suggest that right now the U.S. national debt is not too high but too low--that the United States has enormous fiscal space available and, as the IMF says, "countries that have fiscal space should use it." But that is a digression here today that I do not have time for.

These Trump initiatives--the billionaire tax cut, infrastructure, some form of the Ryan budget, and so forth--will shape national economic policy. The federal government is the big enchilada here.

The big upper-income tax credit will do very little in Keynesian terms to boost the economy in the short run: the money will flow to those whose marginal propensity to consume is indistinguishable from zero. The current state of the Trump infrastructure program smells bad: It looks very Berlusconi-like--moderate amount of infrastructure built on the government’s dime, and then given away to private friends of the régime who charge monopoly prices for access to what ought to be public goods. Medicare privatization and further austerity applied to social insurance will be destructive of America's health and well-being. That is not the way to boost potential output. In addition, trade wars are not our friends. Plus there is the possibility of a large upward leap in global risk aversion--and thus in spreads, and thus in the cost of capital--that will significantly depress private investment. "Political risk" has now been boosted to 11.


Never before in America has a losing presidential candidate been threatened with imprisonment. Now one has. Investors who might have been thinking hard about assessing business risks associated with expanding investment spending may well spend the next four years thinking about political risk and the necessity of diversification: diversification across national boundaries of their operations, of the jurisdictions that they are subject to, and of the residence of different fractions of their lineage. This is not an environment conducive to taking on additional business risks associated with increases in investment spending.

The relevant question now is: what can be done to curb the damage--to make sure that the rise in income and wealth inequality over the next two and probably four years is not too large, and that there is at least some "growth", even if it is "exclusive"? I will try to provide some hasty, unfocused, unfinished, badly thought out--and thus probably wrong--thoughts on this question.

I am going to divide my talk into three parts. First I will focus on technocracy--where could good policies, realistically, be implemented? Second, I will focus on imperial court politics--how could a decision be made to try to implement policies that are technocratically good? Third, I will focus on how other levels of government could take steps to try to neutralize at least some of the damage.

I will, if I have time, end my talk with a historical reminiscence to put everyone in a hopeful and positive mood. But I firmly expect to overrun my time here today, and thus to be cut off by Adam Posen before I can do that.


What can be done on the level of technocracy to try to minimize and perhaps repair some of the economic damage that we are about to incur? I see two doors that may be opening. The first door--the opportunity for technocrats to try to neutralize damage and perhaps do good--is to attempt to push for a sensible non Berlusconi-like infrastructure-based expansionary fiscal stimulus. The technocratic case for this is overwhelming, so I will skip over the arguments here. I believe that we have won the intellectual battle that more expansionary fiscal policy is strongly advisable here in the Global North. Whether this intellectual victory will translate into policy is something we will have to wait to see.

Combine this with our new president-elect, Donald Trump, whose ambitions are, I believe, best characterized as “Pharaohnic”: he wants to build things, and he wants to build successful things--walls, perhaps pyramids, and make sure that the things he builds are things that work.

At the moment it is fair to say that there are no Trump plans for the infrastructure program. There are, however, plans to have plans. And the plans to have plans are what you would expect to come from a real estate developer. The plan is to develop a plan to build more infrastructure more-or-less entirely on the government's dime via tax credits, and then give it away to private agents who will then charge monopoly prices for a generation or so for access to infrastructure projects that ought to be provided freely as public goods.

Thus Larry Summers, for one, is strongly in opposition to the Trump infrastructure plan, or rather to the expected value and shape of the Trump infrastructure plan as it is currently forecast to be, whenever the administration moves beyond the "plan to have a plan" stage to the "plan" stage.

But since there are no plans, there is now an opportunity to prevent Donald Trump with a real, technocratic infrastructure plan that would be preferable to the plan his people plan to produce along three dimensions:

  1. It would actually work--it would boost American economic growth, and make people happy.
  2. It would be even more Pharaohnic in its size and impact than what might currently be on the table.
  3. It would make Trump's presidency both be and appear to be a success from the perspective of helping to make America greater than ever.

The second door that may be opening is the opportunity to push for a high-pressure economy. Donald Trump has people who will be pushing him to audit the Fed, to impose a rigid Taylor Rule on monetary policy, to perhaps return to the gold standard--a thing that I heard Ken Rogoff on Tuesday denounce as an even worse mistake than the creation of the eurozone. But Donald Trump is also a strong believer that the natural course of monetary policy is to keep interest rates low so that real estate developers can borrow cheaply and easily and build--and then have the demand for space high enough that they can rent out what they have built. That Donald Trump is a friend of lower interest rates. If the past half century has taught us anything, it is that a high-pressure economy is the best policy move for both growth and equity. Only when demand is tight will investment be high and "hysteresis" be our friend rather than our enemy. Only when demand is tight do the working and even the upper salaried classes have the market power to dare to ask for wages--and do bosses have the incentive to accede to such demands rather than seeking replacement workers from the reserve army of the unemployed.

These are two doors opened by the fact that the interests of the real estate developer and the interests of those seeking inclusive, equitable growth align. Thus there is created an opportunity for technocratic inclusive and equitable growth policy in the Trump admnistration.


But how can this alignment of interests between the president-elect on the one hand and technocratic policy advocates on the other be recognized, realized, and implemented? That is a problem that needs to be addressed, in this administration at least, not at the level of technocracy but at the level of imperial court politics.

First, Donald Trump has no friends. The old adage in politics is: "if you want a friend, get a dog"--and it is allusion to that adage that "House of Cards" begins by shooting the dog. The people who both wish Donald Trump well and are farsighted enough to see the situation he is in number two: Ivanka Trump and Jared Kushner.

Second, the reality of the situation is that being elected president does not "win" you anything. It simply gives you the opportunity to become a loser on a continental-scale level. Consider George W. Bush. George W. Bush would have been a happier man if he had never sent James Baker to Florida in November 2000, and if he had never given the green light to lobby Rehnquist, Kennedy, O'Connor, Scalia, and Thomas. If Al Gore had assumed the presidency in January 2001 with a substantial popular vote margin and some confused hanky-panky around Florida's electoral votes, then George W. Bush would now be a respected former governor of Texas who had made a very good run for the presidency in 2000. His advice and counsel would be sought. He would be a name one would seek to have associated with one's cause. He could appear at the quadrennial Republican National Convention. And he would be applauded.

None of those are true today..

Thus from Donald Trump's perspective as somebody who has set himself the lifetime task of winning the game of Celebrity, Donald Trump has not "won". Donald Trump has not "won" anything. Donald Trump has merely "leveled up". He is now playing the game of celebrity at a much more difficult and formidable level, where the reputational penalties for losing are immense. His odds are not good: Nixon, Carter, and George W. Bush lost; George H.W. Bush and Ford are neutral; and Reagan, Clinton, and Obama won. Trump's odds would be only 3-in-8 if he were well-prepared for the job. And he isn't.

Ivanka Trump and Jared Kushner are smart enough to recognize this, intelligent enough to understand the stakes, farsighted enough to foresee the consequences, and pretty much the only people who care. Their task is to use their influence to try to make sure that policies are adopted that work, so that their father and father-in-law both is and is broadly perceived to have made a success of his time as president--so that he spends his old age being told that he is like Obama, Clinton, and Reagan; not like Nixon or Carter.


Let me now recognize that the federal government is not the only level of government. Whatever disfunction the federal government is exhibiting, good policy can still be made at the state and local level. And good policy can be made no matter whether the ruling party in a state is Democratic or Republican--as long as the principal goal of whoever holds power in the state is to try to increase the chances that the president of the other party is perceived as a failure, because that is poisonous and destructive.

Mike Pence was not averse to striking a deal with Obama's HHS for the Medicaid expansion money. Mike Pence should not be averse to block-granting the Medicaid expansion money. Mitt Romney should not be averse to states running their own health exchanges. Technocratic arguments that have been ignored at the state level over the past eight years about how to make the people of a state better off may now—may—be listened to. Thus not just in Blue but in Red states there is now the opportunity--only an opportunity, but a real opportunity--to make the technocratic argument for:

  • The family-friendly labor policy agenda.
  • Minimum wages, family leave, unionization, etc.--all the arguments for countervailing power in a world that seems increasingly characterized by powerful monopsony in the labor market a la Card and Krueger.
  • Effective state level anti-product market monopoly antitrust policy.
  • The argument for state-level infrastructure spending--both physical and human infrastructure.
  • Convincing realistic Republicans that if ObamaCare fails at the state level, the next turn of the cycle will bring single payer: ObamaCare is the last chance at making a market-based health financing system work in America.
  • Last, but not least, the war against destructive development-hobbling NIMBYism.

The sovereign equal dignity of the states is our friend, whatever happens at the national level. There is plenty of room at the state level to wiggle. And the wiggling does not need to be confined to Blue states now that policy successes at the state level are no longer feared because they might somehow redound to the credit of the Kenyan Muslim Socialist in the White House.

Most important of all, I believe, will be pushing for what would have been the HRC social and economic labor policy agenda at the state level to create identifying variance. Then we will get to build the grass-roots argument for technocratic inclusive growth policies by tracking the different state-level trajectories of economic growth and societal well-being that result. And if the state-level trajectories do not come out as we think we ought to? Well, then, perhaps we then need to rethink what are the best policies to produce inclusive growth, don't we?


Now to the historical reminiscence:

Four times since World War II the Republicans have held the House, the Senate, and the Presidency: 2016, 2000, 1980, and 1952. After the 1952 election, Truman Secretary of State Dean Acheson gave pep talks to the young New Dealers, all of whom were shell-shocked as they had never seen anything remotely similar before. Acheson told them that partisan equilibrium and alternation was not purely destructive, and that it was in fact an essential part of what made America great and the key to making America even greater.

Acheson told them that the Democratic Party was the party of all those interests that needed to be included--all those for whom market capitalism did not work well when you set it up fresh out of the box. The different segments of the party did not have to agree, or have much in common. Yet the racist Georgia cracker and the Harlem ghetto-dweller would vote for the same presidential candidate because the mission of the Democratic Party was one of inclusion: the system needed to be tweaked so that no group was left out of American prosperity. It was the Party of Inclusion.

And Acheson told them that the Republican Party was the party of growth, and did those things necessary to support rapid growth via private entrepreneurship and enterprise. It was the party of those who thought they were going to ride the wave of growth and become rich (or richer). It was the Party of Enterprise

Both had a role in keeping America great and making it greater.

That was how things stood in 1952, at the advent of the Age of Eisenhower.

Now that Republican Party is long gone, destroyed by Barry Goldwater's decision to turn his back on Honest Abe and go hunting where the ducks were, by the curse of Richard Nixon, by Lee Atwater and Trent Lott and Jeff Sessions and many, many others. The Republican Party today is not the party of enterprise and creative destruction and of those who have something and think they have a great deal to gain from the free operation of market capitalism. It is, rather, the party of those who think that they have something and that it is something that they might lose or have lost from social and economic change. It is the Party of Fear.

Thus certainly since the advent of the Clinton administration, and perhaps before, Republicans when in power have turned out to have no clue either how to include Americans in growth or how to make the American economy grow. The transformation from the Party of Enterprise to the Party of Fear has robbed them of any ability to support and nurture growth. The only pro-growth policy they ever have to offer is more tax cuts for the rich. That makes their donor class happy. That does little for America.

Most of this talk so far has been addressed to technocrats and those leaning Democratic: those who want good policies that enhance America's societal well-being, and those who believe that the "inclusive" part of "inclusive growth" has been neglected in an unbalanced way over the past two generations. And, indeed, it has been neglected in an unbalanced way.

But now I want to address those leaning Republican. While those leaning Democratic have the task of making the technocratic arguments for inclusive growth policies in order to minimize the damage of the next two to four years, those of us leaning Republican have not only that task but another. Those of us leaning Democratic have to do our part of the Achesonian job--giving voice to all those who are excluded. But we know how to do that, and are pretty good at it. But those of us leaning Republican have a harder task as well. We have to figure out how to recreate the Eisenhower-era Republican Party: how to reverse the change of the past two-thirds of a century, and reverse the transformation of the Party of Enterprise into the Party of Fear.

That door may now be open: whatever Donald Trump turns out to be, he is not a "normal" Party-of-Fear Republican. A chance to restore the soul of the Republican Party and remake the Party of Enterprise. Those of us leaning Democratic will try to help in this task, and wish those undertaking it well. And my greatest regret today is that I do not have good advice or guidance to offer, other than that it is more than usually true that in this task: the labourer is worthy of their hire.

PIIE: Conference on Income Inequality and Inclusive Growth: "Keynote Speaker: Paul Krugman (Graduate Center, City University of New York)

November 17, 2016 8:30 AM to 2:00 PMADD TO

The Peterson Institute for International Economics (PIIE) and the McKinsey Global Institute (MGI) will cohost a conference on income inequality and inclusive growth on November 17, 2016. Paul Krugman, Nobel laureate and Distinguished Professor of Economics at the Graduate Center of the City University of New York, will conclude the conference with a keynote address, titled "After the Elephant Diagram," at 12:15 pm.

The conference morning will consist of two panel discussions. The first panel (8:45–10:15 am) will focus on global inequality and begin with a presentation by MGI partner Anu Madgavkar on MGI’s new report, Poorer than their parents: A new perspective on income inequality. (link is external) Sandra Black, member of the US Council of Economic Advisers, will offer her remarks drawing on the CEA’s recent research on the topic. Paolo Mauro, assistant director of the African department at the International Monetary Fund, will share his insights from his PIIE Working Paper, The Future of Worldwide Income Distribution.

The second panel (10:30 am–12:00 pm) will focus on inclusive growth policy ideas for the next US administration. The panelists include Brad DeLong, professor of economics at the University of California, Berkeley; William Spriggs, chief economist at the AFL-CIO; Jonathan Woetzel, McKinsey & Company senior partner and MGI director; and Jeromin Zettelmeyer, senior fellow at PIIE since September and previously director-general for economic policy at the German Federal Ministry for Economic Affairs and Energy.