Why the stock market likes Trump

If I think that Trump’s policies would be bad for the economy, then how do I explain the recent strength in the stock market?  My answer is that stock investors see signs that Trump will not enact his economic agenda, and instead will govern more like a Mitt Romney Republican.  I hope they are right.

Yahoo.com has an article that fleshes out this argument:

4 Ways Trump’s economic plan is already morphing

Fewer tax breaks for the wealthy. Trump’s tax plan during the campaign included a huge tax cut for the wealthy, on the supply-side principle that they’d spend more and help create more jobs. In October, the nonpartisan Tax Policy Center estimated that Trump’s plan would save the top 1% of earners an average of $215,000 per year, while middle earners would only save $1,000 or so. . . .

That no longer seems to be the plan. Steve Mnuchin, Trump’s nominee for Treasury Secretary, said recently there will be “no absolute tax cut for the wealthy.” What he means by “absolute” is that tax rates will still come down, perhaps according to Trump’s original plan, which would lower the top rate from 39.6% to 33%. But Trump would also put new limits on the amount of deductions filers can claim, and the wealthy tend to claim far more deductions than other filers . . .

A softer touch on trade. Trump talks tough about punishing trade partners if they don’t help create more American jobs, but Trump’s nominee for commerce secretary, Wilbur Ross, is far more diplomatic. He recently told Yahoo Finance, “there aren’t going to be trade wars,” . . .

A lower infrastructure target. The Trump campaign plan called for $1 trillion in new infrastructure spending. The target has now been cut to $550 billion, according to Trump’s transition web site. . . .

Janet Yellen is okay after all. Trump strongly suggested that if elected, he’d replace Yellen as chair of the Federal Reserve, arguing that she had politicized the central bank by favoring the policies of President Obama. But Mnuchin and Ross both praised Yellen after receiving their cabinet appointments, reflecting the view of much of the business community that she has been a steady hand on the economy during turbulent times. So expect no fireworks at the Fed. Trump has plenty of other battles to fight.

This last point is something I predicted a few weeks back.  The Trump people will have their hands full on other issues, and I doubt they’ll see any reason to take on the Fed.  In addition, if they did go after the Fed with legislation, the GOP Congress would come out with something hawkish.  It would not even get through the Senate.  More importantly, the Trump people don’t want a hawkish policy, as they are going all out for stimulus.  So why would they replace Yellen with John Taylor, or some other plausible choice.  And obviously Trump is not going to pick someone to the left of Yellen, like Christina Romer.  I suppose he might pick an obviously corrupt person, but there’s much more spotlight on the Fed than back when Arthur Burns was picked.  Someone transparently subservient to Trump would lead to a massive fight on Capital Hill.  I think we should expect about the same monetary policy under Trump as we had under Obama, give or take a bit due to incompetence.

BTW, the list above does not include deregulation expected under Trump, which is also a factor driving stocks higher.  Of course all of this remains to be seen.  And note that the sort of conventional policy mix described above will not bring back blue color jobs, or lead to sustained 4% GDP growth.  Trump’s also picking the same sort of foreign policy hawks that Marco Rubio would have picked, albeit a bit loonier.  So America was dragged into the gutter for 12 months, turned into a Philippine-style banana republic, to give us roughly what a Mitt Romney clone would have provided?

Off topic, Lorenzo from Oz always tends to leave some of the most thoughtful comments.  Here’s an excerpt from a couple of very interesting remarks that he left after the previous post:

If this is the new gilded age, then The Donald is leading us to a Republican Party that looks like its gilded age equivalent — the Party of the northern working class, protection and assimilation. The Democrats don’t seem to have noticed that their period of dominance (1930-1972) was based on a low migration period (1920-1965) when convergence of norms and expectations made Washington-based expansive programs look sensible. The more diverse the society gets, the less and less plausible trust-Washington-competence looks. (With its Northern charm and Southern efficiency, as JKF called it.)

The previous period of high migration (to 1920) was a period of Republican dominance. The more diverse the society gets, the more appeal the politics of national identity but central government reticence. (Austrian economics was born in the Danubian Monarchy, the most wildly ethnically diverse of the major Powers: not an accident methinks.)

Polls regularly show very low popular confidence in the US Federal Government and steadily trending downward trust therein. Yet the Democrats keep pushing that this increasingly distrusted level of government should do more and more and the society should become more and more diverse. Methinks there is some contradiction in their politics …

Innumeracy drives me nuts

One thing that frustrates me is that I have to go through life listening to tiresome arguments from the 99.9% of people who are innumerate.  Here are a few recent examples:

1.  “The polls were wrong about the election.”  That’s true of some of the state polls, but the national polls were roughly correct.  They predicted that Hillary would gain about 4.5 million more votes than Trump.  We still don’t know where it will end up (her margin widens daily), but it looks like she’ll end up nearly 3 million ahead. If you had told most pundits that Hillary would have won 3 million more votes than Trump, most would have assumed that she would win the election.  The mistake was not so much the polls, but rather the assumption that a comfortable margin in the popular vote would be enough.  That’s not an unreasonable mistake; in the past 120 years there was only one other split decision (in 2000), and in that case the popular vote was exceedingly close.  It’s like the housing price collapse of 2006-09; we all knew it was theoretically possible for someone with a multi-million popular vote margin to lose the electoral college, but didn’t expect it because we had not seen it in modern times.

2.  “If elections were determined by popular vote, Trump would have campaigned differently and most likely would have won the popular vote.” Of course that’s theoretically possible, but the odds are overwhelmingly against.  First, because the new strategy for both candidates would have involved more emphasis on getting out the vote in the non-swing states.  But the non-swing states went for Hillary by nearly 4%.  So if increased campaigning had boosted the turnout in places like California, then Hillary would have very likely won by even more.  Thus the big popular vote margin actually understates what that margin would have been in a direct election of the President.  And second, people don’t seem to understand how massive a popular vote margin of nearly 3 million actually is.  It would be extremely hard to generate another 3 million votes for Trump, or more precisely an amount of additional votes that’s 3 million more than the other campaign generated.  Face facts: Hillary didn’t lose because people didn’t like her; she was more popular than Trump on Election Day.  Trump won because the election was rigged by the Founding Fathers.

3.  “Neoliberal economists who promoted free trade are to blame for Trump.”  This is wrong for all sorts of reasons.  First of all, the direct loss of jobs due to imports is largely offset by jobs created in other sectors like exports and construction. Furthermore, automation costs far more jobs than trade.  And finally, the actual loss of jobs due to neoliberal policies like Nafta and GATT are only a tiny fraction of jobs lost to imports in general. Even if we had not liberalized trade in recent decades, we’d still be importing lots of cheap manufactured goods from East Asia and Mexico, and have a huge CA deficit.  If you take 10% of 10% of 10%, you end up with a really tiny number, and yet a commenter recently sent me an article by Notre Dame economist David Ruccio claiming that neoliberal economists were to blame for Trump:

Are mainstream economists responsible for electing Donald Trump?

I think they deserve at least part of the blame. So, as it turns out, does Dani Rodrick

My argument is that, when mainstream economists in the United States embraced and celebrated neoliberalism—both the conservative and “left” versions—they created the conditions for Trump’s victory in the U.S. presidential election.

We are 0.001% to blame, at most.  If economists don’t have a sense about what sort of numerical claims are plausible, who will?

4.  I could cite many other examples.  The claim that greater infrastructure spending would significantly boost US economic growth is absurd.  It might boost it, but the US economy is far too large and diverse for a $550 billion infrastructure package to make much difference, especially during a period of 4.6% unemployment and monetary offset.  Tax reform and deregulation are more promising, but even here the claims of 4% to 6% RGDP growth are ridiculous, at least over an extended period of time (I suppose one or two quarters are possible.) Trend RGDP growth during the 20th century averaged about 3%, under wildly different policy environments.  I’m not saying policy had no impact (I’m a moderate supply-sider), but people tend to overrate the impact.

To give a sense of how hard it is to dramatically impact the macro economy, consider that the Trump people (wrongly) claim their Carrier victory will directly save 1000 jobs.  Obama “created” about 6000 or 7000 jobs every single day over the past 7 years.  A thousand jobs is not a drop in a bucket, it’s a particle of water vapor in a bucket.  If Trump had that sort of “victory” every single day of his 8-year presidency, he’d still probably create far fewer jobs than Obama.  James Pethokoukis had this to say about the banana republic-like Carrier deal:

American Enterprise Institute scholar Jimmy Pethokoukis told CNBC on Thursday that President-elect Donald Trump’s speech about his deal to keep Carrier jobs in the United States was “absolutely the worst speech by an American politician since 1984 when Walter Mondale promised to reverse Reaganomics.”

“The idea that American corporations are going to have to make business decisions, not based on the fact that we’ve created an ideal environment for economic growth in the United States, but out of fear of punitive actions based on who knows what criteria exactly from a presidential administration. I think that’s absolutely chilling,” he said.

He continued: “[Companies should not make decisions] based on fear that there are going to be tariffs, that they are going to have contracts taken away from them, or the president will attack an American corporation for trying to create a valuable product.”

He also suggested that if the Democrats had done something similar, the GOP would have freaked out.  I can imagine Republicans complaining about this being a left-wing anti-business abuse of power, if Obama had done it.

Commenters often wrongly claim that I equated Trump and Hitler.  Now “analysts” are indirectly comparing Trump and Hitler:

A source who has advised Trump’s transition team on security policy told Reuters last week the president-elect would start a “clean slate” with Duterte, and analysts see some similarities in their blunt style. . . .

Sometimes called the “Trump of the East” because of his mercurial ways, Duterte has threatened repeatedly to sever U.S. defense ties, saying he “hates” having foreign soldiers in his country.

Here’s an example of Duterte’s blunt style:

Philippines President Rodrigo Duterte on Friday compared his campaign to kill criminals to the Holocaust, saying he would like to “slaughter” millions of addicts just like Adolf Hitler “massacred” millions of Jewish people.

“Hitler massacred three million Jews. Now, there are 3 million drug addicts. … I’d be happy to slaughter them,” he told reporters early Friday, according to GMA News.

“You know my victims, I would like to be, all criminals, to finish the problem of my country and save the next generation from perdition,” he said.

No wonder Trump is anxious for Duterte to be one of the first heads of state to visit the White House:

U.S. President-elect Donald Trump invited Philippines leader Rodrigo Duterte to the White House next year during a “very engaging, animated” phone conversation, a Duterte aide said on Friday, amid rocky relations between their two countries.

They have so much in common.  Trump likes reading books of Hitler’s speeches and says:

You know I’m proud to have that German blood, there’s no question about it. Great stuff.

And Duterte sees mass murder as the “final solution” to the drug problem.

PS.  But I’m not equating Trump and Hitler-loving dictators; I leave that to the “analysts”.

PPS.  Last time I mentioned the Duterte quotation, a commenter defended him by pointing to his high approval rating in polls.  And he didn’t seem to be kidding.

About those Supreme Court picks

One argument for Trump was that he’d promote Supreme Court choices that would do a better job protecting our liberties (compared to the sort of people that Hillary would have nominated.)  That remains to be seen.  But one thing is clear, if Trump’s Supreme Court picks are to protect our freedom, they will have to rule against Trump on many, many issues. Here’s a list of items from just the past two days:

1.  Trump proposes jailing flag burners.  (Yes, Hillary also voted for the idea, but probably had no interest in advocating it as president.)

2.  Trump made it very clear that business leaders in America are no longer free to locate production facilities in places that make the most sense from an efficiency perspective.  He will use the power of the presidency to punish those who defy him.

3.  Trump will make the already Orwellian NSA even worse:

The FBI, National Security Agency and CIA are likely to gain expanded surveillance powers under President-elect Donald Trump and a Republican-controlled Congress, a prospect that has privacy advocates and some lawmakers trying to mobilize opposition.

Trump’s first two choices to head law enforcement and intelligence agencies — Republican Senator Jeff Sessions for attorney general and Republican Representative Mike Pompeo for director of the Central Intelligence Agency — are leading advocates for domestic government spying at levels not seen since the aftermath of the Sept. 11, 2001, terrorist attacks.

I don’t want to oversell the importance of these three issues—the flag comments were probably just red meat for his base, and the other two items merely worsen the current governmental overreach in those areas.  But these are just a small indication of what will come next.  There will be dozens more such repressive initiatives, as Trump has never shown the slightest interest in classical liberal ideas, either before or during his campaign.

Will Trump nominate Supreme Court justices that will rule against him on a wide variety of issues?  I doubt it.

 

Mercatus interest rate colloquium

The Mercatus Center has a new colloquium on the issue of low interest rates. There will be a series of 12 essays discussing the causes and consequences of low rates, as well as the outlook for the future. The papers will be released one at a time between now and mid-December.  David Beckworth has the first post—here is an excerpt:

On the basis of regression of the two series in figure 5, the risk-free real interest rate should return to 1.65 percent once the output gap reaches zero. If one assumes that this estimated relationship holds up, then the only other drag on the 10-year Treasury is the term premium. As figure 2 shows, the term premium has plummeted since 2013. Why has it fallen so sharply?

There are several answers. New regulations requiring financial firms to hold a greater amount of safe assets have increased the demand for long-term Treasury bonds. The aging of populations in advanced economies has also increased the demand for long-term Treasury securities. Large-scale asset purchases by central banks may also be a factor. Additionally, both ongoing policy uncertainty caused by Brexit and the rise of populist political forces raise the demand for safe assets.

Read the whole thing.

Stay away from conspiracy theories

[Tuesday afternoon I will be in London on a panel at the NIESR, with Roger Farmer.]

My views are much more consistent than people assume.  I now have almost the exact same view of Trump, and Trump voters, as I had 6 months ago. Commenters often think they spot inconsistencies, because they read more into a post than is actually there. (No, I never said Trump = Hitler).

One area where I am especially consistent is in my skepticism of conspiracy theories, concocted by both the left and the right. I always thought that right wing conspiracy theories of Obama being born in Kenya, or secretly being a Muslim, were utter nonsense (in the latter case I’d add that it wouldn’t matter if he were a secret Muslim.)  I don’t believe that global warming is a Chinese conspiracy (as Trump claims–or used to claim).  Nor do I believe any of Trump’s other nutty conspiracy theories. BTW, a president with his finger on the nuclear trigger who believes bizarre conspiracy theories?  What could go wrong?

screen-shot-2016-11-24-at-10-55-55-pm

I am also skeptical of talk of widespread cheating in elections, which the right uses to justify tighter voting regulations (and which tend to reduce minority turnout.)

Unfortunately, now you have Paul Krugman engaging in the same sort of conspiracy theorizing as he used to mock:

screen-shot-2016-11-24-at-10-32-52-pmAnd this:

screen-shot-2016-11-24-at-10-33-21-pm

To his credit, he doesn’t say the conspiracy theories are necessarily true, but he gives them far more credence than they deserve.

Of course this stuff has a long history in American politics.  When I was young, people frequently claimed that Nixon lost in 1960 because Mayor Daley delivered lots of phony votes to Kennedy.  This is simply a lie. Not that there wasn’t cheating in Chicago, but rather the claim that this is why Nixon lost.  He would have lost the election even if he had carried Illinois.

Conspiracy theories almost always turn out to be false.  When conspiracies do occur (the 1972 break in at the Watergate Hotel, the 1991 Russian coup attempt, the recent Turkish coup attempt) they tend to be clumsy and ineffective.  All three ended up hurting the plotters.  It would be very foolish for one political party to try to steal a national election.  The conspiracy would have to involve lots of people, and when that occurs the secret almost always leaks out.  It would end up hurting the party that attempted to steal the election far more than the other party.

HT:  Caroline Baum