WHY TRUMP’S FAVOURITE STORY ON ECONOMIC RECOVERY DOESN’T MAKE SENSE
Given everything going wrong in the United States, the old
Bill Clinton campaign line “It’s the economy, stupid” might be less true today than it once was. Economic issues will play a role in November, of course. But they’ll also be competing with COVID -19, racial injustice and pressing existential questions about the basic functioning of our democracy, which feels awfully broken right now.
But economic conditions — or, more specifically, people’s perceptions and expectations about their living standards — will still be prominent. I think I see what’s coming: Trump will point at trends and ignore the levels. That is, he’s going to tell a story about things getting better to distract from the truth, which is that everything will still be much worse than it was or should have been.
As of this writing, we are in a downturn that, by some top-line metrics, like the unemployment rate, is as deep as the Great Depression. I was an economist in the Obama administration during the last recession, and I vividly recall being horrified by monthly job losses of 800,000 in March 2009 alone. Well, in April 2020, payroll employment fell by more than 20 million — in one month.
For those of us who track such numbers, that’s an unimaginable loss, but it also makes sense. In the interest of virus control, we largely shut down the economy. Unlike the last recession, when we were all trying to figure out how creatures like “synthetic collateralized debt obligations” blew up the economy, it’s crystal clear what happened this time around.
As we’re now seeing in real time, what was shut down can be started back up. That means all those variables that fell off a cliff just months ago — jobs, spending, GDP — will soon start climbing back. It’s impossible to say how quickly they’ll ascend, as the rate at which they’ll rise depends on how effectively the virus is contained, the extent of testing and tracing and what the economist John Maynard Keynes called “animal spirits” — by which he meant, people’s relative confidence or certainty about the future.
But for what they’re worth, which isn’t nothing (not a ringing endorsement, I admit), every forecast I’ve seen has the economy starting to bounce back by the second half of this year. And “bounce back” is no idle metaphor here: The models treat the economy like a ball. If you lightly drop a ball on the ground, it hardly bounces at all. If you slam it down, it bounces back hard.
All the forecasts reflect this dynamic, to different degrees. The case of payrolls, shown below, provides a good example. Goldman Sachs forecasts the biggest losses followed by the biggest gains; the rest show smaller losses and less of a bounce. But in each case, two notable observations prevail. First, at some point in the second half of this year, the forecasts predict historically large monthly gains. For example, in the last quarter of this year, the Congressional Budget Office predicts we’ll be adding
1.8 million jobs per month. For context, note that the average monthly job gain over the precrisis expansion (2010-19) was about 190,000 per month.
The second common feature across these forecasts is much less favourable for Trump: They all have him “underwater” on all the key variables — which is to say things look worse than they did before his election. In the quarter before Trump took office, the unemployment rate was 4.8 per cent. According to these four forecasts, the unemployment rate will be between nine and 12 per cent in the quarter when Trump seeks re-election. The level of forecast payrolls is an average 10 million jobs below the level when Trump took office. Labor market data back to the 1940s reveal that no president has been re-elected amid such losses.
Whether voters will respond positively to the trends or negatively to the levels will be a function of which narrative prevails. Trump, who is already framing the economic reopening as a “transition to greatness,” won’t be shy about his preferred story: Everything is getting better and he’s responsible — for the good stuff, at any rate. The story he’s already shaping and will be shouting from the rooftops as the campaign carries on, has a three-act structure. In the first, Trump had the economy humming. Then, in the second, China gave us the “very bad gift” of “coronavirus,” which temporarily interrupted the greatness. Now that he’s vanquished this enemy in the third act, we’ll quickly get back to where we were.
None of this bears any resemblance to reality. As economic commentator Steve Rattner points out, Trump inherited a recovery that failed to accelerate on GDP, jobs or real wages. His première economic policy — cutting US$2 trillion in taxes, mostly for the wealthy — had no visible impact on investment but did raise the public debt level such that it was more than twice its historical average going into a recession. His trade war has demonstrably hurt investment and growth.
Further, his feckless, chaotic and misleading response to the health crisis has costs thousands of lives and, according to international comparisons, made the recession much deeper than would otherwise have been the case. Germany, for example, implemented policies to keep workers connected to their jobs and thanks to those efforts, their jobless rate has hardly budged, while ours, properly measured, has gone from around four to around 20 per cent.
Finally, there’s simply no getting back quickly to where we were. Keynes-willing, we’re on the cusp of a gradual recovery, and if governors get their testing act together while the rest of us maintain safe practices, the predictions of big monthly job gains will come to fruition. But those months can only begin to recover what’s been lost. Full employment is years away.
There will be no “transition to greatness.” Trump and his team will continue to do nothing to control the virus or promote the recovery. They sat on the sidelines while the house was burning, and now, as people start to rebuild, they’ll remain on the sidelines, taking credit for the gains. If the virus flares up again, this damaging, depressing, and even fatal cycle will repeat.
Their only play is to use their prodigious manipulation skills to create an alternative reality. The costs to our nation of allowing that process to continue are finally coming due, and, to put in mildly, they are unacceptably high.