Millennics EP7 – In Plain English: The Economy and Trumponomics

EP7 offers a discussion of the economy and Trumponomics in plain english.  Millennics is a podcast discussing policy, politics, and law from the viewpoint of Millennials.

Host: Jonathan J. Cianfaglione (@jjcianfaglione)
Presented by:
Support from: VIG & Associates
Music: Crystal Clouds by Phantom Sage

Show Resources

China Wages: Approx. 12% increase a year, since 2001.

Reshoring Initiative, founded by an MIT Professor

Cato Daily Podcast

Manufacturing jobs chart 1939 - 2015
Manufacturing jobs chart 1939 – 2015

Show Notes

Millennics EP7 – In Plain English: The Economy and Trumponomics, March 11, 2016.

Welcome to another episode of Millennics—a podcast discussing policy, politics, and law from the viewpoint of Millennials.  I’m your host, Jonathan J. Cianfaglione, and today’s episode we’ll talk about the economy and Trumponomics in Plain English.

A big part of this campaign cycle has been the economy.  The sentiment has taken a different shift from the 2008 presidential race, where the concern was mitigating job loss, and the economy spiraling into disrepair.  Recall that the month President Obama took office, the economy shed 800k jobs that month.

This season’s presidential race has focused on a different aspect of the economy: free trade, and capitalism itself.  Here, the sentiment has become, that free trade has destroyed American jobs, and shut down some American cities.

Today’s episode of Millennics is geared toward talking about the economy and Trumponomics in Plain english to understand the facts of the economy, and the harm Trump’s economic proposals would bring.

First and Foremost: Protectionism or Isolationist

What is an Isolationist

What is Protectionism

Capitalism and Democracy: A Marriage

A main pillar of democracy is capitalism.  Capitalism means open and free market and trade.  Thus, capitalism is predicated on the notion of the most open market available, where the consumer and competition are the driving forces of the economy.

Thus, necessarily, capitalism requires little intervention by the government.  When the government interjects, it alters the rules of capitalism.  Put in another way, government’s must exercise governmental restraint to allow the economy to work in harmony, grow, and evolve according to consumer demand, and competitive pressures.

Growing in popularity, however, is government action.  We see this in a handful of industries.  Most notable, the U.S. government has subsidized U.S. agriculture for over half a century.  Another easy example is the bailout to particular automakers, mainly GM —footnote, the US still has not recovered the money used to bail out GM.  GM stock needs to hit in the 50s for the US government to break even.

Proposals of Trump and Bernie

Oddly, the principles of Trumponomics is shared by Bernie Sanders—a self-proclaimed social democrat.  I’m not sure how a conservative shares the same view as a social democrat, but that’s for a different episode.  Moving on, Trumponomics boils down to a couple of elements: (1) tariffs, especially on countries that we do the most trade with, i.e. China, Mexico, Canada etc., and; (2) ripping up free trade agreements, as they are considered the cancer on the American economy, and jobs.

On the Backs of the Working Class

Whereas a free and open economy helps drive down prices by filling the market with goods, thereby increasing competition, the elements of Trumponomics do the exact opposite.  Ripping up free trade agreements, and, subsequently, instituting tariffs, would begin to deplete the market of “choice” for your products, as well as competition.  Consequently, Trumponomics would have the effect of exponentially increasing prices, while at the same time reducing competition.  Further, the quality of products is inhibited by protectionism, thereby making some products that were desirable, either less, or undesirable.

Therefore, Trumponomics would have the effect of making Americans pay more for the goods they currently purchase.  In so doing, that means there would be less money for Americans to spend elsewhere, like eating out, going to the bar, traveling or vacationing, etc.  This may have the most negative consequence on the economy, because the American economy is 80% service oriented, and only about 10% manufacturing.

Thus, Trumponomics would be devastating to the very people it purports to help: working-class Americans in the lower and middle echelon.  Working-class Americans are the people most likely buying their products at stores offering the largest variety of products, at discounts.  Think Target, Walmart, Costco, etc. The effect of prices at these stores rising exponentially has serious consequences to working-class Americans, and unknown consequences to those companies itself, possibly putting at risk the jobs of workers at these companies.

Dispensing the with the Fallacy of a Recent Trend

Trump does a remarkable marketing job, though, at selling his perverted version of America’s economy.  Trump elicits emotions of Americans by citing free trade agreements, which have, supposedly, destroyed US jobs and manufacturing.  That is flatly false.

The loss of manufacturing jobs isn’t something that has happened since free trade agreements opened things up, like NAFTA.  Instead, manufacturing has seen a steady decline since 1979—almost 20 years prior to NAFTA.  Thus, the decline in manufacturing jobs is sustained, and began long before the notion of free trade agreements to address the growing global economy.

You can see a chart on showing the trend of Manufacturing jobs in the US from 1939 through 2015.  Perhaps one bright spot on that chart is the past 5 years, where manufacturing jobs have seen a steady increase.  This increase is partly due to the changing palate of consumers.

Here, consumers seem to have tapped into their desire for better quality, personalization, and uniqueness in their products.  This is evidenced by companies like the Detroit Watch Company, and Shinola, premium watch companies based in Detroit who have seen rocketing sales.

Questions Left Open

Even if these low-skill jobs came to the US, there is no indicator that Americans would even want these jobs.  Further, no one has even reached the hypothesis of what would come if companies were to develop tech systems to help reduce the cost, and decrease human labor should those jobs reach US shores.

A common example of that is the continued rise of technology on assembly lines, like the auto industry.  There, many jobs have simply been eliminated due in part to technology advances, and those advances helping human workers work more efficiently.  Again, things come down to efficiency in the economy, because efficiency drives up productivity, and productivity drives down cost.  Thus, in truth, American exceptionalism in the US economy is not what we have produced, but how companies and technology produce them.  That is, companies have routinely found a way to make the worker extremely efficient, churning more out of the employee every minute, and, thus, making productivity sky rocket.

Certainly, no one thinks that our assembly lines should go back to their efficiency of the early 1900s.  And, certainly, no one thinks that innovation is a destroyer to economy, instead of advancing the economy.

Another issue left open is the current role of US manufacturing.  Today, the US is the second largest exporter in the world.  Moreover, about half of what the US imports, carries something made here in the US.  So, yes, these products are imports; but, they are imports made with a combination of US made products, and other country’s products.  Therefore, these imports are made with the hand of US manufacturing.  As Derek Scissors @ the American Enterprise Institute stated: imports mean lost jobs, only if we pretend we can make here, all the things we import in the same way, and for the same price.”  Derek didn’t even take into consideration my point that, without doubt, companies would turn to innovation in their tech systems to drive up productivity, and elevate the costs of labor.

A final issue arising from Trumponomics is the likelihood a trade war.  In Cato’s podcast, they correctly mentioned how trade is often used as a way to turn enemies into friends.  Paradoxically, however, Trump seems to be taking issue with trade policies concerning our allies.  Consequently, Trumponomics might have the opposite effect of trade, by turning friends into foes.  Trump has yet to answer the question of trade wars, but economists and policy experts agree: Trumponomics would almost certainly guarantee a reciprocal tariff measure.

A reciprocal tariff measure would absolutely devastate the US economy, which, as previously mentioned, is the second largest exporter in the world.  Not only would the export of goods be severely reduced, but companies would be pushed out of the space altogether.  A company that compete, is a dead company, and a dead company, means more loss to the American job market.

The Economy Doesn’t Work in a Silo

Lastly, one of the most frequent arguments is to simply point at ghost towns, or towns that are losing steam as evidence that the current market is destroying US jobs.  These notions are misplaced, yet deeply rooted in the minds of voters.  Indeed, just the other day on the news, I watched a Trump supporter say that he backed Trump b/c of his economic principles.  As proof, the Trump supporter pointed to the town he was organizing at, saying this was a robust town in the 1940s.

Is this the framework to base our economic decisions off of?  Looking back at which towns and what economic systems were robust over a half century ago?  Cotton was once the staple economy in the South, and today, it is virtually nonexistent.  Did every city in the South become a Ghost town?  Of course not.  As the economy changed so too did the landscape of cities, and companies.

Lest us forget, the economy doesn’t work in a silo.  That is, when a certain industry gets uprooted, or dies, many other industries, including new industries begin to rise.  Let’s take Trump’s favorite scape goat, Ford, as a classic example.

Trump hammers Ford for wanting to put another assembly facility out of this country.  Specifically, in Mexico.  Here, he points out, is the sole reason of why we are loosing jobs.  Ah, but what Mr. Trump forgets is that is only one piece of the pie.

Ford has seen large growth in sales over the past two years.  The steep decline in gas over the past year as advanced the sale of cars, and, particularly, trucks.  So, even if Ford’s move to South of the border displaces workers at their assembly plant, it will certainly increase workers elsewhere.  Here’s how.  To be sold, those vehicles need to be in the US.  That means there will be an increase in the need of logistics to get the vehicles from Mexico, to dealers throughout the US.  In turn, that’s more trucks, which means more truckers, and more staff to help those truckers get the loads.

Alright, now that the vehicles are here, they don’t just sell themselves, do they?  Nope.  That means more salesmen at the dealers, and, perhaps, even more dealerships.  With more dealerships, or expanding a dealership, we are talking about construction.  Now we have new construction projects, and we need workers to do that.  Oh, don’t forget, you’ll need a loan for that brand new $35k Ford pickup.  But, we don’t need one loan, we need loans for everyone.  Cue the banking industry or Ford Financing.  We’ll need more loan processors, and the systems to dole out that money.

That was a lengthy way of saying: sure, we may loose some jobs here at x, but we’re going to gain jobs at a,b, and c.  Put another way, the economy doesn’t just work in some sort of silo, were every effect has no consequence.  Instead, the economy works exactly opposite of that; it must, where industries compensate for other industries.

In sum, the idea that jobs lost in one area, are jobs that are never balanced off by an increase elsewhere is absolutely nonsense.  Indeed, the industries work hand in hand to compensate for contraction or expansion.  If our economy didn’t work this way, then what was all the fuss in the 2008 financial meltdown all about?  Well, its b/c exactly what I’m talking about here.  One failing industry has the potential to bring down multiple industries.  Conversely, one booming industry, has the potential to grow multiple industries.

Evolving Economy

As a final note, I would be remiss if I didn’t mention that our economy is evolving, and the stance of Trumponomics is to stifle the evolution of our economy.  Not only is this flawed, it defies capitalism and democracy.

Today, we have seen the emergence of what is known as the sharing economy—think uber, and airbnb to name a few.  In addition, jobs, their titles, places people work—home as being the new place—and more continue to change and uproot traditional concepts.  Does that mean we should intervene to stifle and/or alter the course.  Absolutely not.

Instead, the evolving economy, as would be appropriate for capitalist system and democracy, should be allowed to take its course without the intervention of government.  Yet, many local and state government’s have chosen to adopt protectionism.  In NY, where the yellow cab industry is large has a strong political force, they were able to get the city to halt Uber for operating in the city.  Virginia enacted the same thing until eventually lifting the prohibition.

What this tells us is a few things: (1) the economy is evolving; (2) in the face of innovation, government’s exercise their power to restrict it, or otherwise limit it, and; (3) instead of using innovation to compete with startups and businesses that threaten their market share, businesses are turning to their political connections to halt, slow, or otherwise breakdown the competition.  In turn, the resulting effect is politicalizing the economy and gutting capitalism.  Oddly, the argument really being made is: I want my job, so we should eliminate this other person’s job.

As the economy continues to roll and evolve, the US will continue to see its middle and lower-class low-tech, skill workers being squeezed.  And, yes, that means a loss of jobs.  But, this should not be the determinative factor in deciding to manipulate, control, or stifle an evolving economy.  The US needs to retune their worker programs for those who loose their jobs.  This retuning should focus on providing valuable skills that are in demand.  This is easier said than done, however, as the real problem may be as the old saying goes: “can you teach an old dog, new tricks.”  If you never try, though, we’ll never know.  And, today, programs to get workers back on their feet are far from par, leaving them jobless, angry, and overwhelming resentment to a free market—something this country fought for almost 250 years ago.

That concludes this episode of Millennics—a podcast discussing policy, politics, and law from the viewpoint of Millennials.  I’m your host Jonathan J. Cianfaglione, and thanks for listening.  Millennics is presented by and support for this podcast comes from VIG & Associates.