Trump’s Economy Redux

My little post on the warnings by Paul Krugman and others that the US economy might be entering a period of stagflation, was prompted by my experience as young man who finished his education, started in his career and got married in the 1970’s when “stagflation” was the buzz word and politicians kept pointing fingers at each other over the economy. In reviewing the many erudite responses, I realized that I had fallen into the “old man” trap of seeing the world as it was rather than as it is and in the process ignored the absolutely critical role that expectations play in people’s economic decisions.

One of the commentators observed that we do not have to accept Samuelson’s definition of stagflation, that the important thing about the economy is whether it is improving the general welfare of people. If the economy is growing slowly, unemployment is edging up and inflation is persisting despite a somewhat restrictive monetary policy, that is not good for the average American. Whether called stagflation, stagnation or the “blahs”, it is a political liability for the party in power, and Krugman was calling out Trump and the GOP for its policies that are causing the economy they were handed to head south. Specific policies include Trump’s tariff madness, his deportation of a critical part of the labor force and his Administration’s handicapping our future economic growth by scuttling scientific research. Inflation does not have to hit or exceed 10% for bad results.

The second aspect that I overlooked is no less important and that is expectations. I thought the Biden economy was the best of my lifetime. There was significant growth in real GDP, he got the unemployment rate down to 4% and although there was inflation, real wages rose and by the time of the election both inflation and interest rates were coming down. Based on my experience, my expectations were that a golden era was at our doorstep if Harris was elected and the economic policies continued. Indeed with the expiration of Trump’s 2017 tax cuts, I expected that deficits would be minimal even if we did not draw down the debt as Clinton did.

Obviously, that was not the expectation of the electorate, because most of that electorate did not have my experience. The average annual US inflation rate was 2.3% during the 1960’s; 7.1% during my decade the 1970’s; 5.7% during the 1980’s; 3% during the 1990’s; 2.2% during the 2000’s; and 1.8% during the 2010’s. While I considered Biden’s average inflation rate of 4.95% acceptable based on my experience in the 1970’s and 1980’s, voters who came of age in the 1990’s , 2000’s and 2010’s had never seen anything like it. The good news of solid growth, low unemployment and rising real wages was drown out. Just as an old man like me missed this point, so did much of the sclerotic leadership of the Democrats. As good as the economy was under Biden, it disappointed the expectations of a large section of the electorate.

The question remains for the midterms and 2028 what the electorate’s expectations are for Trump’s economy. Unfortunately, a 3 or 4 % inflation rate is unlikely to be a killer, but a sharp uptick in unemployment should be. There is a reason that Trump put a lackey in charge of the BLS, but whether he can fudge the numbers so the public does not know what is going on remains to be seen. When you or a family member or friend lose their job, the official unemployment rate is irrelevant.

There were several other comments which touched on the broader ideological fight over government regulation of the economy and its effect on inequality which I believe is at the heart of our dysfunctional politics and society, but that is a topic for a different day.