A wounded Trump is an especially dangerous Trump: Thoughts on his proposed economic pivot.

March 24th, 2020 at 11:44 am

When I first heard that Trump and some other conservatives were making the case for punting on containment of the virus in the interest of reflating the economy, I ignored it because it made no sense to me. It still doesn’t, but from what I’m seeing, the idea seems potentially serious enough to warrant a response.

There are at least three reasons this pivot idea is nonsensical.

First, Trump may admire and aspire to emulate authoritarian leaders, but he has no such powers. He did not close my workplace and he cannot reopen it. To be sure, I’m not discounting his bully pulpit and he surely has the capacity to undermine containment efforts with deadly consequences by telling people to get back to work and go out to restaurants, etc. But especially if many more people get sick—the predictable result of his pivot—and if other authorities, including governors, the CDC, school systems, etc. tell people to continue to distance, his admonitions won’t matter as much as he thinks they will. To put it succinctly, I ain’t going back to normal until Dr. Fauci says so, and I’m sure I’m not alone.

Second, he can’t stop a deep recession because it’s already here. The key indicators, like GDP and unemployment, are lagging but they will soon reveal that the U.S., if not the global economy, has already begun to contract. More timely indicators confirm this dire forecast. For example, claims for Unemployment Insurance are expected to reveal 3 million layoffs in the past week. At the worst of the last recession, we lost 2.3 million jobs in the worst quarter (2009q1). True, the length of the downturn is not yet known, but as the next point explains…

Third, any pivot would likely backfire and exacerbate the length and depth of the recession. A significant reduction of containment efforts that resulted in spiking cases of Covid-19 would lead us right back to where we are now, with people distancing to protect themselves, but this time, with an overwhelmed health care system and far more deaths than would otherwise occur. Not incidentally, from Trump’s skewed perspective, if I’m correct about this scenario, the markets would tank even further. The essential principle, and the sad truth, is that putting the economy in deep freeze is necessary to have an economy capable of rebounding once containment is achieved.

So, summarizing: Trump couldn’t enforce a return to normality even if he wanted to, it’s too late to stave off a recession, and any attempt to do so would likely lead to a longer and deeper downturn.

Of course, such logic, which appears to be shared by the majority talking about this, may not prevail. Trump’s populism has long been driven by his remarkable ability to identify and exploit this space where elites (e.g., the health professionals he’s now inveighing against) tell the masses to do something that’s costly to them. Trump then goes after these elites on behalf of the people, arguing that the elites think they’re better than the rest of us and we shouldn’t have to suffer because of their agenda. This has proven to be a powerful force in his ascendancy, and I hear it as a clear subtext in his tweets and statements advocating for the pivot. His alleged loss of patience with Dr. Fauci is an example of this dynamic.

But even more pointedly, Trump recognizes his reelection bid is at serious risk. He may be free of the virus, but it has wounded him politically, and a wounded Trump is an especially dangerous Trump. He’s clearly especially rankled by his inability to move the stock market around, something he’s done far more than any president. Right out of the gate, he made the rookie mistake of making the stock market his report card, and the massive selloff, wiping out all the gains over his presidency, has be driving him nuts.

Despite the faulty logic of the pivot, which is far more likely to backfire than enhance Trump’s fortunes, is it conceivable that he and his coterie would trade hundreds of thousands, if not millions, of lives to get re-elected?

Of course it is.

Yes, this is an emergency. No, that doesn’t justify a $500 billion Trump/Mnuchin slush fund.

March 22nd, 2020 at 6:39 pm

By Jared Bernstein and Dean Baker

While the indicators are lagging, the U.S. economy is in a recession that will very likely be extremely deep. It’s likely that real GDP falls at double-digit pace in the quarter that begins next month and the unemployment rate more than doubles. If that sounds implausible, history shows that in sharp downturns, the unemployment rate takes the elevator up and the stairs down.

To their credit, after a slow start Congress appears to have grasped this urgency and is working around the clock on what may turn out to be the largest stimulus package in our history, with a price tag of $1-2 trillion, or 5-10 percent of GDP (the Recovery Act was $800 billion over two years, roughly 2 percent of GDP). Given that fighting the virus essentially calls for putting the U.S. economy in deep freeze for an unknown period, we vigorously support going big.

But even as Congress must speed toward completion and passage of this legislation, there is time to avoid wasting resources, and there is one, large part of the bill—$500 billion, according to the Washington Post—that threatens to create a “slush fund” for businesses with virtually no oversight, no benefits for workers, and far too much discretion for President Trump to dole out goodies to himself and his cronies.

The lending mechanism in question allocates $500 billion to backstop (i.e., repayment is guaranteed by the government) private-sector loans to the tune of $50 billion to airlines, $8 billion for cargo carriers, $17 billion for businesses “critical to national security,” and $425 billion for businesses, states, and cities.

To be clear, there’s nothing wrong and a lot right with providing resources of these magnitudes for businesses. The bill also proposes $350 billion for small business with a smart, built-in incentive to help workers: if employers use a portion of the loan to maintain their payrolls, that portion is forgiven.

But the $500 billion carries no such incentives (there is a requirement that CEO can’t raise their pay over last year’s level, but that could mean just “restricting” a CEO to a $15 million paycheck, an extremely mild condition). Nor does there appear to be adequate oversight or “underwriting,” the process by which banks determine credit worthiness, leading Sen. Warren to tweet that it “sounds like Trump hotel properties like Mar-a-Largo could receive huge bags of cash – and then fire their workers – if Steve Mnuchin decides to do a solid for his boss with taxpayer dollars.”

We know for a fact that Democrats want to complete this stimulus package as quickly as possible to get money out the door to people and small businesses that are a few paychecks away from personal despair and possible failure or bankruptcy. But the bill won’t pass without the support of Democrats in both chambers (the stimulus will require 60 votes in the Senate).

Yes, time is of the essence, but Democrats must use their leverage to remove this Trump/Mnuchin slush fund while they quickly negotiate the attaching of pro-worker conditionality to it. The main thing for this moment is to get the help to families (direct cash) and small businesses out the door.

There is no obvious reason that we can’t do something similar for larger firms by making loans available for purposes of meeting their payrolls.* If the airlines and other especially hard hit businesses need additional assistance to get through the crisis, we can work through a well-designed package that ensures both that shareholders and top executives share the pain and that President Trump can’t use the money to help himself and his friends.

But let’s train our water hoses on where the immediate fire is—low, moderate income households and small businesses with a week or two of cash reserves and little access to credit markets. No question, this is an emergency, but that doesn’t excuse opportunistic, potentially wasteful spending with no oversight. We have important work to do, none of which includes setting up a half-a-trillion-dollar slush fund.

*Technical note: Supporters of this part of the bill argue that because the liquidity for the $500 billion is provided by the Federal Reserve (though one of the “lending facilities” the Fed’s been setting up), it cannot include the same forgiveness feature for maintaining payroll that’s part of small business loan package. The reason given is that the under the Fed’s charter, this would invoke credit risk the Fed cannot undertake. We do not find this at all convincing. First, as with all such lending programs, the Treasury must backstop the Fed’s credit risk. Once they do so, given that the fiscal authorities guarantee the full loan, it is unclear to us why the forgiveness feature is problematic. Other conditions, such as no buybacks, dividends, any payroll maintenance, or even just some oversight should not invoke Fed risk and are thus no-brainers in this context.


Jobs report: Calm before storm as the virus hasn’t hit the job market…yet

March 6th, 2020 at 9:22 am

In yet another upside surprise to the U.S. labor market, payrolls grew strongly last month, up 273,000, well above expectations. Upward revisions to earlier months show that contrary to what many have expected, the monthly pace of job gains has accelerated in recent months. The unemployment rate held steady at 3.5 percent, but wage growth, which has been remarkably unresponsive to strong labor demand, remains a soft spot, stuck at 3 percent, year-over-year, just slightly ahead of consumer inflation which is running at around 2.5 percent.

Calm before the storm

As our smoother shows, averaging monthly payroll gains over various time spans, over the past 3 months, payrolls are up 243,000 per month. Over the past year, they’re up less than that: 201,000. Given that most labor market analysts expected employment gains to slow as we closed in on full capacity in the job market, this acceleration is quite remarkable.

However, there are two counterpoints to this positive development. First, wage growth is also remarkable, but not in a good way: at 3 percent over the past year, it’s surprisingly soft given these job gains and persistently low unemployment rate. Second, as regards the impact of the coronavirus on today’s numbers, it’s important to recognize that jobs reports are coincident, if not lagging, indicators. As of today, clear disruptions to both the global and US economy are growing increasingly clear in the data, from sharply reduced airline traffic, to supply chain disruptions, to falling consumer confidence. Forecasts are even more uncertain than usual in this climate–we still don’t know how many people and places will be hit by quarantines, closed workplaces and schools, or even by Covid-19, the illness caused by the virus.

But that said, my guess is that GDP growth sharply decelerates in at least the first half of this year. In that regard, I view this jobs report as the calm before the storm. There was a slight bump up in involuntary part-timers last month, which could be a harbinger of what’s to come, as labor demand gets hit by virus-induced decreased consumer demand, but it is a distinct possibility that in a few months, we’ll longingly look back on this report.

What’s not up with wage growth?!?

Both figures–the first for all private-sector workers, the second for middle-wage workers–show a deceleration in trend wage growth. How does that square with such a strong job market on the jobs side? One explanation is that this particularly series is weaker than others, but in fact, most series roughly agree that wage growth is, if not slowing down, not speeding up. Another is that workers just don’t have the bargaining clout needed to press for the types of gains we’d expect in such tight conditions. This is surely part of the explanation, though it’s tricky then to puzzle out why wages were growing at a good clip a relatively short while back.

Not at full employment

Another explanation, one consistent with econ 101, is that increased labor supply is meeting strong labor demand. The surfeit of available jobs is pulling new workers in off the sidelines and allowing incumbent workers to increase their hours. Some indicators, especially the fact that employment rates have increased over the past year, suggest there’s something to this explanation. The critical implication is that there’s still “room-to-run” in the U.S. job market. It is not at full employment.

This next figure underscores that case using price data, both the price of goods and labor (i.e., wage growth). The unemployment rate has been below the Fed’s estimate of the lowest rate consistent with stable inflation–their so-called “natural rate”–for about two years! But not only has inflation consistently missed the Fed’s 2 percent target from the downside; we now observe wage deceleration. Based on these relationships, I simply do not think there’s a coherent argument that the U.S. labor market is at full capacity.



Rockefeller Foundation launches an equity/opportunity investment targeting low-income people/places.

February 25th, 2020 at 10:39 am

It’s takes a village–a robust suite of policies and institutional supports–to reconnect a lot of people and places who’ve long been left behind to overall economic growth.

There are roles for government at all levels, with the federal gov’t poised at the top, both in terms of setting policy precedents and financing sub-national initiatives (remember, states can’t run deficits). There are roles for market-oriented, or pre-tax and transfer policies, like persistently tight labor markets and minding the impact of imbalances in credit markets and trade accounts. There are roles for tax and transfer programs, and not just counter-cyclical roles, but investment roles as well. And there are roles for philanthropic foundations, roles that are especially important in ensuring that existing programs both reach eligible recipients and have their intended effects.

In that spirit, the Rockefeller Foundation (RF) just announced a $65 million economic policy and place-based investment in low-income, working families through two major channels: refundable tax credits and Opportunity Zones.

Re the former, RF “will reach at least 4.6 million people at the state level by promoting awareness about the impact of expanding and modernizing the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC).” These are, of course, policies we at CBPP have long championed, showing, for example, that they lifted almost 11 million people out of poverty in 2018. Earlier efforts by RF helped make sure eligible households in California and Maine had their earnings boosted through receiving credits for which they were eligible, and the new initiative announced today extends those efforts to eight more states.

The EITC/CTC are, to state the obvious, solidly already up-and-running. That’s not the case with Opportunity Zones, a tax incentive from the 2017 tax cut designed to incentivize patient capital investment in neighborhoods that have long suffered disinvestment. If you’ve paid any attention to this program, you know it’s been highly controversial. My own view is that the program has the potential to lastingly help some places that really need it…or, to become a wasteful tax shelter. The outcome depends on the oversight.

Thus far, the Treasury Dept has failed to promulgate the types of guidelines needed to ensure OZs are getting the most bang for their buck, but it’s still early days. Breathless reports about how the program is already a wasteful failure are totally overblown and premature (though see my colleague Samantha Jacoby’s critiques re too-low tax guardrails).

A key attribute about OZs are the extent of local control they allow and it’s here where the RF’s initiative is targeted. They’re supporting community direct involvement and engagement in 13 cities from the beginning of projects, to make sure jobs and other social and financial benefits go to the people who need them; to pushback on displacement/gentrification, and to derive/track impact metrics.

This is a welcome role for foundations to play in this space. I’m pretty sure OZs are here to stay. The question is whether they’ll realize their potential to offset decades of disinvestment in left-behind places, and one of the best ways to make that happen is to implement as much local control as possible by those who will fight to make sure these investments help the people they’re intended to help.


Another solid jobs report, with lots of evidence that there’s still room-to-run in this labor market.

February 7th, 2020 at 9:47 am

Employers added 225,00 jobs last month as the unemployment rate ticked up slightly to 3.6 percent, largely due to more people entering the job market, yet another sign that there’s still room-to-run in this long labor-market expansion. Wage growth, a perennial soft spot in recent jobs reports, ticked up slightly to a yearly rate of 3.1 percent, around where it has been for much of the past year. That’s ahead of inflation, last seen running at 2.3 percent, but the fact that the wages have not accelerated suggests some degree of slack remains in the job market (other wage and compensation series show roughly similar stability).

Our monthly smoother pulls out trends in job growth by averaging monthly gains over 3, 6, and 12 months. The pattern it shows is interesting and revealing. Over the past 12 months, job gains average 171,000 per month. Yet that average has accelerated over the past 3 months. Typically, as the job market closes in on full capacity, job gains tend to decelerate, much the way you have to pour more slowly as you reach the brim of a glass to avoid spillage (which, in this analogy, is inflation). Instead, we’re seeing no such deceleration, another sign of room-to-run.

In a similar vein, the closely watched employment rate for prime-age workers (25-54) continues to rise, and at 80.6 percent now stands above its 2007 peak of 80.3 percent. However, that’s more of function of job gains for women than for men. Prime-age men’s employment rate is still 1.4 percentage points short of its 2007 peak, while women have surpass their peak by almost 2 points. This partially reflects job gains is services versus recent job losses in manufacturing.

Factory employment fell again last month, down 12,000. Over the past 12 months, factory jobs are up just 26,000, one-tenth their gains over the prior 12 months (267,000). This clearly relates to Trump’s trade war, and while the recent “phase one” agreement with China may improve conditions in the sector–though I doubt it will have much impact–it will take time for trade flows to recover. Note also that blue-collar weekly earnings in the sector are up just 1.3 percent over the past year, a full point below inflation, meaning weekly paychecks for blue-collar factory workers are falling in real terms.

Today’s report includes the BLS’s annual benchmark revision to the payroll jobs data. In order to adjust the jobs data to more closely reflect a true census of the underlying jobs count, once a year the Bureau adjusts the level of jobs in the previous March up or down by factor based on more complete data. That factor this year was -514,000, a larger than average downward revision (the average revision, without regard to its sign, is 0.2% of payrolls; this one was 0.3%). The revision is “wedged” into the jobs data at a rate of -43,000 per month between April 2018 and March 2019. The negative revision for retail trade was particularly large, at -159,000, or 1 percent, likely a symptom of the accelerating loss of brick-and-mortar retail outlets at the hands of online competition.

The figure shows the difference between the level of payrolls before and after the revision. The new results do not change the fact that the historically long jobs recovery has been solid in terms of job quantity (job quality remains a significant problem). But the new trend is notably less robust than was previously recognized.

The wage-growth story remains much the same as it has been in recent months: stable gains but, despite the tight job market, no acceleration. The figures show annual, nominal wage gains for all and middle-wage private sector workers (the dark lines are 6-month trends). In both cases, we see clear evidence of slowing gains. Both series are beating inflation, so hourly wages are growing in real terms, but the pause in their upward trajectory is evidence that there’s still slack in the job market. Other wage series show similar, though less stark, stabilization in recent months.

Another critique of recent wage trends is that while they’re clearly being nudged up by the tight labor market, the trends are not as positive as you’d expect given the lowest unemployment rate in 50 years. One way to investigate this claim is to construct a statistical model, including labor market slack, to predict wage growth. If the predictions map closely onto the actual series, then perhaps wage growth is about where you’d expect, i.e., not too low, even given the tight job market.

Source: BLS, see text

The “full smpl” line in the figure below shows the results of such a model for mid-wage workers. The line cuts right through the actual trend in hourly wage growth, suggesting there’s no gap between expected and actual wage gains.

However, this isn’t quite the right way to do test this question. If the relationship between unemployment and wage gains has diminished over time, that change gets built into model estimates like this one. The way to account for that potential problem is to run the model through an earlier year and predict “out-of-sample.” The “smpl thru 2010” line shows the result from this approach. Sure enough, it predicts wage growth closer to 4 percent than the current growth rate of X percent. In other words, at least by this simple model, it’s not unreasonable to expect faster wage gains than we’re seeing.

See the data note below for details and caveats.

Summing up, labor demand remains admirably strong in the US job market, which shows few signs of age. And equally importantly, labor supply is responding to the demand, as the job market continues to pull people in. On the down side, the trade war has clearly damaged export-oriented sectors, especially manufacturing, both on the job and wage side. Moreover, even with unemployment persistently near a 50-year low, wage growth, at least in these data, has stopped climbing. This, along with low, steady inflation data, clearly implies there’s still slack left in the job market, with no rationale at all for the central bank to tap the brakes on growth.

Data note on wage model: The model’s dependent variable is year-over-year quarterly hourly wage growth for production, non-supervisory workers. Regressors include a constant, the unemployment rate minus the CBO estimate of the natural rate, two lags of the DV, and “expected trend wage growth” taken from a recent Goldman-Sachs analysis. They define this variable as follows: “Trend wage growth is estimated as the sum of the Fed’s measure of inflation expectations and a simple average of the backward-looking productivity growth trend and the Survey of Professional Forecasters’ estimate of productivity growth over the next 10 years.” The full sample goes for 1992q1 through 2019q4. The “out-of-sample” model runs through 2010.

Some analysts have correctly noted that unemployment doesn’t capture slack as well as the prime-age employment rate, especially when it comes to correlating with wage growth. If I substitute the prime-age employment rate into the model, the difference between the two predictions is negligible. My point here is simply that those who think wage growth should be faster at 3.5 percent unemployment are not necessarily wrong.