Tuesday, February 16, 2016

Economic Pain driving Trump’s Base

Blue collar workers’ income and employment cut by Obama policies driving them to Trump.

“Thousands of Muslims had cheered the collapse of the World Trade Center.”  Almost no one in a focus group organized by republican consultant Frank Luntz doubted Trump.  After 3 hours of pointing out the misstatements, Trump’s support was unshaken.  Why do Trump supporters stick with him despite his foolish statements?  Because they are mad as hell and they want a politically incorrect fighter.  Chuck Todd, commenting on coverage of a Trump rally where the media were booed, spoke for most when he said, that Trump’s followers are concerned by social, not economic issues.  But social issues do not generate such passion and the majority of Trump supporters were originally Democrats.  What is not understood, is how badly lower income working whites have been hurt by Obama.  The feelings of his audience are incoherent, but their pain is very real.

Obamacare Costs
Obama promised that under his health plan:

1.       If you like your health care you can keep it.
2.       Unaffordable health care inflation will stop.
3.       This plan will not exceed a trillion dollars over the 10 year budget period.
4.       The top income individuals get too much.  I will fight for the middle class.

The first three statements were false.  The last is only implies that the middle class will be better off under the plan.  Brookings economists Henry Aaron and Gary Burtless show those in the lowest 20% increase their income by 5 to 7 percent while working families in the next 20% range lose 1% of income.  Greg Mankiw described Obamacare as “motivated as much by the desire to redistribute income as it was to reform the health care system”.

This is not the outcome that Obama wanted.  He wanted a bigger increase for the bottom 20% at the expense of the lower middle class by expanding Medicaid.  But, the Supreme Court limited this by giving the states the power to reject Medicaid expansion.

Loss of Private Jobs
 “A crisis is a terrible thing to waste.” Ram Emanuel said.  Obama sold his social programs as job creation while sacrificing activities that would have saved private jobs.  Martin Feldstein pointed out that in a recession government programs to aid the economy included funds to encourage business to spend and stay in business, but the stimulus had only 7% for troubled businesses, a record low, while social programs got 93%.

John Taylor compared the growth in the percent of the population working in the Reagan recovery to Obama’s.  Despite a seven trillion dollar increase in the national debt, the portion of the population working did not increase significantly from the depths of the recession.  Under Reagan workforce participation grew by 5 percentage points.

At the start of the recession, the workforce participation rate was 62.7%, while by January of 2015 it declined to 59.5% -a loss from the workforce of 4.7 million people

On the fifth anniversary of the stimulus, White House economists issued a report proclaiming that it was a great success.  This was favorably reviewed in the media.  But report was based on their model projecting a large increase in the economy and jobs, not on evidence that the increase happened.  The above chart demonstrates that it clearly did not. 

A comparison of seven forecast models demonstrated that six were very close except for the model used by the White House  This model  projected 4 times greater GDP growth than the  models used by the Federal Reserve Board and other organizations.  The biggest difference in the White House model described by Christina Romer and Jared Bernstein is that it assumed that government spending would produce a huge increase in the economy that justified Obama’s policies.

Manufacturing employment fell of the cliff and yet to come back.  It fell by 2.7 million jobs from 2006, as the economy slowed, to 2010 when the Democrats lost control of the house.  In 2015, manufacturing job are 1.8 million less than 2006.  Manufacturing jobs generate 4 to 6 jobs in the economy so with a multiple of 5 that is 9 million lost jobs.  

Source: Bureau of Labor Statistics – Recession period is shaded

How can this be right?  Paul Krugman praises the “Obama Boom”.  Millions of new jobs have been created.  Unemployment is down to 5.0% - 2.5%for college graduates and most large cities are doing well.  However jobs lost in manufacturing and in supporting firms ended the work careers of millions who are no longer in the work force so they no longer count in the unemployment calculation.  They are on disability, working off the books, or retired.  Their skills, which gave then a good income, have atrophied as manufacturing disappeared.  This is why employment in 93% of the counties has not returned to pre-crisis levels. 

Free trade is essential in the long run.  But it is a complicated issue that is poorly understood.  If the deals are not realistic they can be disastrous.  When Clinton opened up the US market to the Chinese in 1999 the Yuan was at 8.3 - 43% weaker than ten years earlier.  US manufacturing was badly hurt and the many of the survivors in fragile condition.  All of this made Obama’s decision not to aid private business especially destructive.  Incentives would not have saved all the manufacturing jobs that were lost.  They may have saved half of them.  If the factories survived the recession, they would have begun hiring creating even more jobs.  The democrats say that they saved General Motors, but GM would have survived a bankruptcy and continued on, but with most of the UAW pension fund gone.  Labor is part of Obama’s base and he used the bailout to help the UAW.

Lower Job Creation
Obama described lower income whites stating …"they cling to guns or religion or antipathy toward people who aren't like them.”  Is that one reason he did not support private sector jobs?  The jobs lost in manufacturing are permanent.  As much as Obama dislikes lower income white workers, he appears to loath business owners.  He said of them, “If you’ve got a business - you didn’t build that, somebody else made that happen.”  A corollary to that is you are not going to build as many under my regulatory and tax policies.  The chart below illustrates the decreasing formation of new business jobs. In the Obama years it has been falling sharply. Steve Davis of the University of Chicago determined that the proportion of jobs in businesses less than 5 years old from 2008 to 2012 fell 20%.
University of Chicago economist Steve Davis.

Despite the, trillions spending to raise the income of the lowest segment of the population, the loss of good paying manufacturing jobs has increased income inequality.  Also, many lower middle class people have saved for retirement.  The Federal Reserve’s policy of low interest rates has cut their income while increasing the price of stocks and real estate owned by higher income people.  Thus income inequality has surged under Obama.  However, this inequality will be partially corrected by higher interest rates which will lower the value of stocks and real estate in the coming years.  Statistically, high income groups will lose more and lower the index of inequality, but of course, most of the pain will be felt by the middle class.

In David Weigel’s Washington Post article, Lantz “Asked whether the president was a Christian, only three of the 29 participants raised their hands. Asked whether he was born in the United States, eight said no.  When Luntz returned to policy, mistrust of the president informed the exclamations of trust in Trump”.  Absurd of course, but how else can they explain Obama attack of the workers and businesses?  I’m sure you can come up with a more coherent explanation.  In Europe socialistic parties are hawks on defending the business because they know from hard experience that once gone it can’t be replaced. Ideological goals take a back seat to jobs. 

Trump’s supporters blame the Democrats for stabbing them in the back and the Republican establishment for not shutting down the government.  They do not believe the establishment’s view that a government shutdown is counterproductive.  Obama promised to both unite and radically change the country- two mutually exclusive objectives.  But unity requires negotiation and compromises, tasks he was never capable of.  His obsession was to move the country left at all cost.  Obamacare’s impact on lower income workers and the neglect of business job creation were products of his mind with no serious debate in a congress controlled by zealous Democrats demanding party line votes.  If Obama had work with congress then the lower income workers would not have suffered as badly as they did.  Without Obama there would be no Trump leading the Republican race.