This AMs papers: stocks, bonds, and the budget parity principle

February 27th, 2017 at 9:30 am

I’ve got a piece in WaPo this AM on the Trump stock market rally and what it tells you about the current dynamic, where the markets are just shaking off the fact that DC is pretty much in chaos. While I stress the skewed distributional implications of what’s going on…

But broadly speaking, to answer the question I posed at the top, yes, the markets know something, and it’s this: For all the chaos, gridlock, ethics violations, security breaches, and even threats to democracy from media suppression, the top few percent remain firmly insulated. Most of the economy’s pretax growth will continue to flow their way, and the forthcoming tax changes will probably see them doing even better in the after-tax distribution.

…I didn’t include this picture of the who owns stock market wealth by income class, from Ed Wolff and EPI (it’s a bit out of date but I couldn’t find an update–if anyone has a more current version, please say so in comments).

Source: State of Working America, EPI

Nothing you didn’t expect, but it certainly links up to my thesis that at least one factor behind the Trump rally is a “sigh of distributional relief” as he increasingly makes clear that the anti-establishment stuff was faux populism for the election.


Sticking with markets, the WSJ weighs in on the Trump rally this AM with the observation that the bond market appears to be betting against the rally, and this is flashing a “warning signal.” That may be right. As I argue, investors are probably getting a tax cut and some dereg, but less and later than they probably think–but as always, there’s other interpretations for this pattern of rising stock and bond prices: investors like the US right now.

Our macro fundamentals are better than those in other advanced economies. Safe-asset investors like our high-grade bond yields which, as low as they are, are above those in Europe, and our central bank is (slowly) raising rates, while theirs are holding at zero. Equity investors like our stock market, even if PEs are a bit above average.

This scenario implies a rising dollar, which has generally been the pattern over the rally, though not in recent days, as the WSJ notes. Probably, what we’re seeing is a mixture of betting on US equities and bonds, with a side-dish of insuring against the fading of the animal spirits behind the Trump rally.


There are numerous budget articles out today on the Trump admin’s budget, which the president will presumably get into tomorrow night in his speech tomorrow night to Congress.

Though it’s admittedly very wonky, a key point in these articles from my perspective is the president’s plan to ignore the parity principle in the 2011 budget act. This says that cuts or additions to discretionary spending must be equal on both the defense and non-defense sides of the ledger. But Trump is proposing–and it’s important to recognize that this is but an opening bid that will likely change a lot as the process unfolds–to seriously boost defense spending while paying for that by cutting non-defense discretionary (NDD).

CBPP has many informative papers on the importance of NDD spending to moderate and low-income households–training, child care, housing, education, college assistance–as well as the economy–infrastructure–and veterans. NDD is also already at historical lows relative to GDP.

Believe me, I’m not defending the 2011 budget act which gave us “sequestration,” a really mindless fiscal management policy. But the parity principle is really important, and worth a very big fight.

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One comment in reply to "This AMs papers: stocks, bonds, and the budget parity principle"

  1. Robert Salzberg says:

    Yo JB, as you must know, the parity principle has long been discarded as Congress has already used various ’emergency’ measures and budget gimmicks to shift more funding to the military.

    The parity principle is a lost cause with this Congress and President. We’re going to get more military and less social services. While I’m all for Democrats fighting that kind of budget tooth and nail, the parity principle is nearly as bad as sequestration so if both go with the next budget, all the better. Or do you really think the military budget being economically tied to NDD is a good thing? (And not just a convenient political ploy for getting crumbs for social services.) If so, please explain.