Trumponomics is in fact novel, we neglect it at our peril

by on December 5, 2017 at 8:05 am in Current Affairs, Economics, Law, Political Science, Uncategorized | Permalink

That is the topic of my latest Bloomberg column, here is the opening bit:

I’ve seen hundreds of articles on President Donald Trump and trade, but the real significance of the Trump economic revolution — for better or worse — is a focus on investment. There is no coordinating mastermind, but if you consider the intersection between what the Trumpian nationalists want and what a Republican Congress will deliver, it’s this: wanting to make the U.S. a new and dominant center for investment, including at the expense of other nations.

And:

In essence, a new kind of supply-side economics has been invented. The theory of the 1980s focused mainly on individuals, and lowering the tax rates they faced on labor income and capital gains. Cutting these rates was supposed to mobilize the power of those individuals, through more work or more investment. The idea today is that the real power of mobilization comes through corporate associations. Assuming the tax bill passes, that theory is about to get a major test.

Strikingly, the tax bill and the trade policies of the Trump administration can be viewed as having a similar underlying philosophy, whether entirely intended or not. One of the president’s first official acts was to withdrawal from the Trans-Pacific Partnership. Although I favored that agreement, as did most other economists, it’s worth considering what the most intelligent nationalist case against the TPP looks like. It’s not about trade, because the deal wouldn’t have affected tariff rates faced by Americans very much (exports of beef to Japan aside). Rather, the TPP would have given American certification to Vietnam, Malaysia and eventually other emerging economies as stable repositories of foreign investment from multinationals. That could in turn draw investment away from the U.S.

Do read the whole thing, it is my favorite recent piece by me.

1 Reed E Hundt December 5, 2017 at 8:09 am

Was ARRA in 2009 demand side or supply side? Was it aimed at increasing demand or increasing investment? The tragedy of that move was that it did almost nothing to increase investment.

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2 Sam the Sham December 5, 2017 at 8:51 am

As a civil engineer, one of the supposed beneficiaries of ARRA, it got bogged down in committee to the point of being useless. I mean that in terms of actual infrastructure investment, because money certainly did change hands. Many ARRA projects I was on used a single geotech borehole to make the geotech report. That’s a bit like making a data trend line using only one point. I’m a big fan of infrastructure investment (still a civil engineer), but ARRA did not seem to be effective in my neck of the woods.

When there’s that much money at stake, everyone has to get their finger in the pie. http://www.weeklystandard.com/article/17737 (warning: links to Christina Hoff Summers)

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3 A Truth Seeker December 5, 2017 at 8:55 am

So it comes to that: sharing the loot…

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4 Mulp December 5, 2017 at 12:06 pm

I know of real investment, but to get GOP votes, too much was in job killing tax cuts. Combine the federal tax cuts with state tax cuts and investment in infrastructure and education slowed and killed jobs.

The people benefitting from arra tax cuts all had jobs, but did not invest their tax cuts, tho they might have inflated asset prices which leads to killing jobs to boost profits to match inflated asset prices.

Arra did help triple the number of high demand machine tool education jobs in my area, but it took the state legislature adding funds to get the money, which required local industry support.

Trump took credit for it, part of arra, in one of his rallies last summer at a community college in another state.

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5 A Truth Seeker December 5, 2017 at 8:14 am

“There is no coordinating mastermind, but if you consider the intersection between what the Trumpian nationalists want and what a Republican Congress will deliver, it’s this: wanting to make the U.S. a new and dominant center for investment, including at the expense of other nations.”

So that is what America has become: a nation controlled by a shadowy, all-powerful bureaucracy, a cabal, if you will, just like Egypt under Joseph (“And Pharaoh said unto Joseph, I am Pharaoh, and without thee shall no man lift up his hand or foot in all the land of Egypt. And Pharaoh called Joseph’s name Zaphnathpaaneah; and he gave him to wife Asenath the daughter of Potipherah priest of On. And Joseph went out over all the land of Egypt.”), the Soviet Union under the GOSPLAN and Japan under the MITI. Free market is dead.

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6 dearieme December 5, 2017 at 9:09 am

But Joseph didn’t exist. It seems all too likely that Trump does.

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7 Sam Haysom December 5, 2017 at 9:32 am

You just can’t shake that shabby Non-Comformist upbringing can you.

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8 A Truth Seeker December 5, 2017 at 9:42 am

“But Joseph didn’t exist.”
How can you be sure?

“It seems all too likely that Trump does.”
How can you be sure? Maybe he is like Big Brother, and an Inner Party Cabal twitts in his name? If he is real, why is his hair orange?

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9 GoneWithTheWind December 5, 2017 at 9:55 am

If you want to understand Trump and his policies it is as easy as MAGA. Or Put America First. Trump is the first president in modern history who doesn’t want to give away the store. He is a business man and understands the art of the deal not a politicians who only understand taxing and giving it away in return for power.

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10 A Truth Seeker December 5, 2017 at 10:20 am

When modern history started? The 1940s, the 1970s, the 1980s?
Will Republicans betray Reagan’s legacy? If not free markets, what was the Reagan Revolution about? Invading Grenada?!

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11 CorvusB December 5, 2017 at 10:33 am

Which Reagan legacy? The 11 tax hikes? The national debt at levels multiples of anything seen historically? Or maybe it was the onerous interest rates and tight money that interest created? Those interest levels nearly created a recession that could have beat the Great Recession hands down.

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12 A Truth Seeker December 5, 2017 at 10:43 am

Those, too, but GOP does not advertise them. I was thinking about commitment to free market policies.

13 TMC December 5, 2017 at 11:49 am

Those interest rates (brought to you by Volcker*) saved us from continued stagflation. Like your reasonable home loans? or you prefer the 15% rates of the 70s?

*was appointed by Carter, but Carter didn’t have the balls to let him run with the rate hike. Reagan did, and it led to 20 years of pretty good prosperity.

14 A Truth Seeker December 5, 2017 at 12:51 pm

“it led to 20 years of pretty good prosperity.”
Except for Bush I’s government.

15 TMC December 5, 2017 at 1:11 pm

Bush I had a mild recession and got out of it quickly. Not bad compared to what we’ve had more recently.

16 msgkings December 5, 2017 at 5:01 pm

Bush didn’t ‘have’ a recession nor did he ‘get out of it’. A recession happened while he was president, and the recovery also started while he was president. It had very very little to do with him, this is true of all presidents.

17 GoneWithTheWind December 5, 2017 at 5:15 pm

I hope you are not under the impression that the president can raise taxes. Congress did that, look up the votes and you will find 100% democrats voting yes.

The interest rates were generated during the Carter administration not Reagan’s.

“nearly created a recession” as in none at all, LOL

18 A Truth Seeker December 5, 2017 at 5:17 pm

It lasted enough to cost him his re-election. Reagan could spend six years with the gears turning fast, Bush could them working even two years.

19 TMC December 5, 2017 at 6:43 pm

msgkings +1 Presidents take credit and get blamed for the economy, but have only a little real influence over it.

20 rayward December 5, 2017 at 8:14 am

My comment at Bloomberg: If the cut in the corporate tax rate does attract foreign capital to the U.S, that in turn will increase the value of the dollar, hurting exports. Cowen says that the cut in the corporate tax rate will make America the next Ireland. Ireland attracts lots of corporate earnings because it’s a tax haven. But the corporate earnings attributable to Ireland are far larger than what is produced in Ireland. In other words, the cut in the corporate tax rate here won’t result in a splurge in the investment in productive capital (plant and equipment) in America, the type of investment that produces jobs and economic growth. It will be great for bankers and investors, but not for workers. Cowen refers to an “investment drought” in America. What he means is an investment drought in productive capital. The Trump tax cut will do little if anything about that investment drought, while attracting foreign capital to America to be invested, not in productive capital, but in financial assets of corporations domiciled in America but with much of their production (and jobs) located elsewhere. What investors must realize, what Cowen realizes, is that adding $1.5 trillion to America’s debt won’t produce long-term economic growth for America. Instead, it will produce short-term profits for investors, likely followed by another financial and economic crisis. This isn’t Cowen’s idea of tax reform, so don’t blame him. But he needs to offer a more sober and honest assessment of what’s likely in store for working Americans and the American economy as the result of the Trump tax bill.

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21 We live in interesting times December 5, 2017 at 9:35 am

I thought I read that Trump is negotiating an $83 billion petrochemical deal with China and West Virginia is a state which will benefit?

OTOH is this an evolution or a progression of our economy? We’ve gone from ag to hard manufacturing to a service economy.

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22 Boonton December 7, 2017 at 11:19 am

In other words it’s like when a corporation is incorporated in Delaware. It doesn’t mean there’s any building or office they have in Delaware. It doesn’t mean they make or sell anything in Delaware. It may mean, though, Delaware collects a $100 filing fee to put a stamp on a paper saying some billion dollar company is ‘incorporated’ in Delaware.

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23 Benny Lava December 5, 2017 at 8:33 am

“is my favorite recent piece by me.”

This is a genuinely interesting and orthogonal take I’ll grant you that

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24 Heatonj December 5, 2017 at 9:32 am

“Trumponomics is in fact novel” … “…but the real significance of the Trump economic revolution — for better or worse — is a focus on investment.”

…easing the accumulation & application (investment) of capital hardly seems a ‘novel’ or ‘revolutionary’ economic concept. …empty hype

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25 TMC December 5, 2017 at 10:09 am

For the US it is.

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26 Al December 5, 2017 at 10:53 am

+1

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27 apoptosis December 5, 2017 at 4:44 pm

+1 I did LOL.

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28 Jack. Pq December 5, 2017 at 8:35 am

Wait, the capital account surplus was already at a five year record. Doesn’t that mean the USA is already a dominant Center for investment? Or do you mean US capital invested in the US? I’m confused.

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29 tjamesjones December 5, 2017 at 1:49 pm

because you think you can have too much of a good thing?

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30 ʕ•ᴥ•ʔ December 5, 2017 at 8:37 am

Another commenter described the new(?) Cowen formula. That is, argue something and then touch bases with reason toward the end. In this case the close is:

“That said, these Republican policies are not selecting the best paths to attract investment. More investment in human capital and the deregulation of building in America’s major economic regions, such as the San Francisco Bay Area, would likely do the most to boost investment, but those plans are not on the table. Furthermore, the U.S. might attract more investment as a member of a healthy and thriving Nafta, rather than belonging to a limping regional trade agreement. Although I favor cutting the rate of corporate tax, it should be accompanied by a good plan for fiscal sustainability.

Most of all, I still believe in the postwar project of building a mutually advantageous global trading order, led by the U.S. but benefiting most nations, with the U.S. reaping reciprocal advantage in turn. The Trump administration has been moving away from that vision.”

I can’t argue with that, but I can be disappointed that it was not the lead.

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31 dearieme December 5, 2017 at 9:11 am

“the deregulation of building in America’s major economic regions”: is that really the business of the Federal government?

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32 ʕ•ᴥ•ʔ December 5, 2017 at 9:25 am

There are plenty of ways for the federal government to research best practices and to lead.

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33 Erik December 5, 2017 at 1:40 pm

How? By removing land use restrictions on Indian reservations?

I mean I guess maybe you could use the interstate commerce clause to excuse reaching into states to impede certain land use prohibitions, but that’ll never happen.

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34 ʕ•ᴥ•ʔ December 5, 2017 at 2:35 pm

How about a review of building codes, looking for outdated or unnecessary requirements? Simply publishing such studies would have value.

Or a study of transit systems and return on investment?

35 ItMe December 5, 2017 at 6:51 pm

Most big transportation projects (and many small ones) rely on Federal dollars for a huge portion of their budget, even when they’re entirely within a single state. Federal dollars are subject to Federal regulations, so adjusting those regulations can have big effects on state transit and development projects.

36 We live in interesting times December 5, 2017 at 9:43 am

ITA with you. Also, just because the Feds might deregulate, that doesn’t mean the local populace will choose to act on it and take advantage. SF likes being that way. I read an article a couple of years ago that what they wanted to do and had local meetings about, well, in effect it was destruction of personal/private property rights. Everybody and his brother got to decide what you did with your property, I think for the common good. If your neighbor didn’t like you….what was even better, on the survey, there wasn’t even an option to say no, this is a stupid idea, go back to the drawing board.

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37 ʕ•ᴥ•ʔ December 5, 2017 at 9:46 am

SF, the city, is a pretty small place.

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38 ʕ•ᴥ•ʔ December 5, 2017 at 9:45 am

By the way, whatever happened to the Research Triangle? Cheap housing. Why don’t we expect a generation of innovation coming out of the southeast?

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39 Jeff R December 5, 2017 at 11:08 am

Because it’s doing fine but it’s somewhat narrowly focused on medicine and you’re probably not aware of it because you don’t read the NEJM on a regular basis?

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40 ʕ•ᴥ•ʔ December 5, 2017 at 11:12 am

Perhaps, but I think I am still onto something with this “we hate California, more people need to move to California” stuff.

If California is doing everything wrong, shouldn’t someone else show them up, by doing it right?

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41 Jeff R December 5, 2017 at 11:24 am

People on the right can certainly be over the top in their denunciations of California’s deep blue state policies. You could try ignoring the unreasonable stuff, though, and answering their substantive criticisms instead of pretending every other part of the country is some stagnant backwater. Up to you, of course.

42 ʕ•ᴥ•ʔ December 5, 2017 at 11:38 am
43 Jeff R December 5, 2017 at 11:48 am

Most venture capital investments do not pay off, so I’m not sure that’s the best measure of actual economic growth, but don’t let that slow down your express train to confirmation bias station.

44 ʕ•ᴥ•ʔ December 5, 2017 at 11:57 am

Huh?

It seems to me that the three national maps I have shown, for high rents, for population density, and for venture capital, all match each other pretty well.

We might at this point have a productive conversation about cumulative advantage.

Or we can wave away the data.

45 aMichael December 5, 2017 at 12:01 pm

Here’s an alternative view on the matter that also applies to New York City and Chicago. At some point in history, something happen that set these big cities on the path to becoming massive economic hubs — maybe it was good government policy. Maybe it was the combination of that and a lot of luck. Who knows. But this doesn’t mean their current or even their past governments were competent. Rather, their governments, at the state and local levels, are stationary bandits that are taking advantage of the fact that under their control is a group of highly productive and profitable businesses and individuals that face a huge coordination problem and set of transaction costs that make it hard to leave. These governments just have to make sure that they don’t kill the goose that lays the golden eggs, but given the amount of wealth produced by these highly productive and profitable businesses and individuals, they have a lot of leeway in creating bad policies.

There you go. The paradox is resolved.

46 ʕ•ᴥ•ʔ December 5, 2017 at 12:07 pm

I like that aMichael, except that investment in higher ed is clearly more than “cost.”

One of the better discussions right now is what kind of college can help what kind of community bootstrap.

But regardless, San Francisco and Boston are in an enviable position.

47 Jeff R December 5, 2017 at 12:25 pm

Now you’re just being deliberately obtuse.

48 ʕ•ᴥ•ʔ December 5, 2017 at 12:31 pm

I know what page Michael and I are on Jeff, but I can’t tell where we lost you.

Cumulative advantage made the top 5, or 10, cities by density what they are. And cumulative advantage allowed them to reinvest their wealth in ways that poorer, less dense, states are skeptical of.

Related:

http://thehill.com/homenews/news/341305-poll-most-republicans-say-colleges-have-negative-impact-on-us

49 Jeff R December 5, 2017 at 1:35 pm

Okay, maybe not so deliberately.

50 ʕ•ᴥ•ʔ December 5, 2017 at 2:15 pm

When you think about it, we haven’t really wandered from the Trumponomics of the tax bill.

It is about cutting tax on capital while applying tax (in more than one way) on higher ed.

A novel approach, but I think one that will favor another generation of blue state graduates.

51 Boonton December 7, 2017 at 11:29 am

to aMichael’s ‘alternative take’….

So you’re saying something like at some point in history CA/NY/Chicago did things right and with the luck of random geographic/historical accidents somehow secured a ‘goose that lays golden eggs’. Cities stuffed with profitable businesses. So these jurisdictions might in fact have bad policies but as long as they don’t take too much from their geese, they can continue their bad policies and be better off than their peers who are doing things right but nonetheless are not doing as well. Kind of like a guy who inherits a huge trust fund and lives an empty life of partying but is not so reckless as to deplete the fund faster than it can earn investment income. He will always do better than his peer who went to college, pays his bill, works hard etc. but he isn’t ‘doing it right’ despite the fact that he gets the reward as long as his doesn’t get too carried away in his debauchery.

Here’s the problem with this thesis: The West coast really sprung up after WWII from almost nothing. Do census of all of the major businesses in these liberal economic hubs, I suspect most of them are not even a decade old. How much momentum could possibly be squeezed out of some hazy, fuzy, era of the distant past when these areas benefited from good policies or economic luck? This model might make sense of an oil rich state like Saudi Arabia or it’s minor brothers in the middle east but just doesn’t seem all that plausible. Lots of businesses have moved out of NYC, Chicago, LA, etc. The only reason these regions remain huge economic hubs is because they are still generating sufficient new business to replace the ones leaving.

52 Anonymous December 5, 2017 at 10:53 am

The troll’s got some concerns!

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53 Al December 5, 2017 at 10:55 am

I know! I’m sure that they are really interesting and well thought out. Sad I didn’t read them.

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54 ʕ•ᴥ•ʔ December 5, 2017 at 10:58 am

lol, at some point you will realize passive aggression is a loser’s strategy.

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55 Brian Donohue December 5, 2017 at 11:17 am

“touch bases”? No American should screw up this sports metaphor.

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56 ʕ•ᴥ•ʔ December 5, 2017 at 11:22 am

I learned something! While “bases” is a recognized usage:

http://www.yourdictionary.com/touch-bases

“base” is more common and correct.

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57 Hoosier December 5, 2017 at 8:42 am

This is basically the Florida model- low taxes, and low spending on public services. It’ll attract business and create jobs, but the safety net will be cut, and you’ll have to fend for yourself in finding schools, health care, etc.

Most people will be materially better off in this system, but there is a minority that will be much worse. That’s the bargain our society is making (at least here in Florida).

Also, does this imply that we will be going back to the system during the first half of the 20th century where the corporation was king and it provided most of the jobs, stability, etc?

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58 Slocum December 5, 2017 at 9:07 am

“Most people will be materially better off in this system, but there is a minority that will be much worse.”

When you adjust poverty rates by cost-of-living, Florida’s rate is high, but it’s lower than high-tax California and only marginally higher than in New York. High housing prices and high cost of living seems to hurt the poor as much or more than high public spending helps them. If you look at the 4 largest states (California and New York vs Florida and Texas), the poor seem to do a bit better in the latter than the former. A big part of the reason seems to be that while California, for example, does spend a lot, it doesn’t get much bang for the buck — CA is in the top 5 for teacher salaries and in the bottom 5 for student outcomes. Surprisingly, the poor really don’t seem to benefit from public employees enjoying high salaries and lavish retirement packages. Go figure.

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59 ʕ•ᴥ•ʔ December 5, 2017 at 9:16 am

You need much finer scale data to understand California. In California there are 560 Elementary districts, 87 High School districts, 330 Unified districts.

There is not one salary scheme, nor teaching philosophy, across those.

This map was rent, but use it as a proxy for wealth. A great graphic of locations which are desirable. Education in red zones is going to be more expensive, and not average very well by state:

https://twitter.com/gboeing/status/936655229893844992

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60 ʕ•ᴥ•ʔ December 5, 2017 at 9:31 am

It is important to understand that it wasn’t “zoning” that made those red zones. It was desire. We only hope that looser zoning will help builders keep pace, a bit, but probably never completely.

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61 Slocum December 5, 2017 at 10:04 am

“…it wasn’t “zoning” that made those red zones. It was desire.”

Nonsense. Population densities in coastal California could and would be much higher without zoning and other building restrictions.

62 ʕ•ᴥ•ʔ December 5, 2017 at 10:10 am

You did that thing. You agreed while saying “nonsense.”

Population densities are already much higher than the national average. (Look at the Midwest on my map.) You only want them even higher to satisfy foreign desire.

Try making Ohio attractive.

63 ʕ•ᴥ•ʔ December 5, 2017 at 10:18 am
64 Anonymous December 5, 2017 at 11:00 am

“Try making Ohio attractive.”

And yet in the past few decades ~3 million net domestic migrants have left California. California is making itself attractive to the very wealthy, and no one else.

65 ʕ•ᴥ•ʔ December 5, 2017 at 11:05 am

“California is making itself attractive to the very wealthy, and no one else.”

What are you, a commie?

A capitalist would use those red zones to identify winners.

66 Slocum December 5, 2017 at 12:38 pm

“Population densities are already much higher than the national average”

Big deal — the U.S. is a very low-density country overall. The density along the California coast is not impressive. But, on the other hand, we’re actually in agreement to an extent. I’m OK with California maintaining its restrictions and other forms of dysfunction and thereby refocusing population and economic development elsewhere. And it’s looking increasingly likely to me that the entertainment and tech industries are both past their peaks (I’m not sure which is more boring, the latest superhero movie or the latest smartphone, both of which are nearly indistinguishable from previous models)

67 A Truth Seeker December 5, 2017 at 12:54 pm

” And it’s looking increasingly likely to me that the entertainment and tech industries are both past their peaks.”
I just want to say one word to you. Just one word. Plastics.

68 IVV December 5, 2017 at 1:18 pm

“(I’m not sure which is more boring, the latest superhero movie or the latest smartphone, both of which are nearly indistinguishable from previous models)”

I know! The last gallon of gas I purchased is so much more exciting than what I had in the past.

69 Hoosier December 5, 2017 at 9:55 am

I agree that New York and California both would be tough places to raise a family unless you’re making big bucks. But isn’t there a middle ground in there between that model and the Florida one? A state like Minnesota always seemed to strike the right balance to me.

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70 Hoosier December 5, 2017 at 9:57 am

And in both those states its true that it’s difficult if you’re poor (although they do have a pretty strong safety net to prevent you from going completely down the toilet if things get bad in your life and you don’t have relatives to support you).

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71 ʕ•ᴥ•ʔ December 5, 2017 at 10:06 am

Colorado? I think Denver is fairly affordable, and still close to all the fun stuff.

72 ʕ•ᴥ•ʔ December 5, 2017 at 10:30 am

Basically, it is f’d up that you all depend on California for your innovation, while slagging on California.

If you can do better, maybe you should?

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73 Erick December 5, 2017 at 11:01 am

California doesn’t do any innovation. Companies located there do, and that is not even remotely the same thing. Especially since the major reason they’re there and not another state is the weather, and not amazing business or intellectual climate that California alone could create.

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74 ʕ•ᴥ•ʔ December 5, 2017 at 11:16 am

Well, if it is just “weather” an economist might say that should be rationed by price.

Just like drinking water in a hurricane.

75 ItMe December 5, 2017 at 6:46 pm

Why not do better in California? It has so many non-replicable status quo advantages. Investing another dollar or rolling back another bad regulation in CA is probably higher return than almost anywhere else. Improving Missouri isn’t going to move many needles.

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76 Boonton December 7, 2017 at 11:40 am

A big part of the reason seems to be that while California, for example, does spend a lot, it doesn’t get much bang for the buck — CA is in the top 5 for teacher salaries and in the bottom 5 for student outcomes

What exactly are the ‘bottom outcomes’? Are we talking the average score on some standardized test? If so what test, why is that an ‘outcome’ anyone should care about?

Average pay in CA is $59K per year. That makes it in the top 5 in terms of pay. How is that possible if ‘student outcomes’ are horrible? Do people who graduate CA schools leave the state to take low paying jobs elsewhere while the state imports graduates from other states in order to pay them more? Probably not, you’re looking at a market based judgement for CA education. How do you explain it?

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77 Ohioan December 5, 2017 at 11:16 am

Florida: the US’ biggest trailer park.

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78 Floridian December 5, 2017 at 6:48 pm

Ohio: the US’ biggest Brazilian nationalist community.

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79 Californian December 6, 2017 at 2:21 am

+1 to both of you

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80 Borjigid December 5, 2017 at 8:43 am

I also liked the article. However, unless you consider investment an end in of itself, this isn’t going to do much good for the US. Lowering corporate tax rates, etc doesn’t increase productivity, it just increases the profitability of anything that was already profitable. Its not like there is a capital shortage holding the economy back at the moment. The most likely outcome is just a much stronger dollar, which will offset any domestic gains by crippling exports.

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81 charlie December 5, 2017 at 9:03 am

Is the continuing refusal to run fiber to the home an example of capital shortage? At a certain cost of capital, it might make sense.

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82 Borjigid December 5, 2017 at 10:27 am

A capital shortage is usually diagnosed by high interest rates. The logic being that if people are willing to pay a high price to borrow money, then demand must be larger than supply.

If the cable company thinks that the cost of running fiber to your home would be higher than the expected fees it could charge, that is not an example of a capital shortage, just a business rejecting an unprofitable transaction.

If the cable company thinks that the cost of running fiber to your home would be lower than the expected fees it could charge, but can’t arrange financing, and if similarly profitable transactions are being passed up for similar reasons across the economy, that would be an example of a capital shortage.

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83 dearieme December 5, 2017 at 9:08 am

“dominant center for investment, including at the expense of other nations”: well, it’s other nations or Mars I expect. Or maybe people will cut consumption and invest more: then the investment needn’t be at any other nation’s expense. Will people feel like investing more in an era when consumption is being cut? Nobody knows. At least non-economists know they don’t know.

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84 Cliff Styles December 5, 2017 at 11:35 am

re ‘At least non-economists know they don’t know’. I have yet to meet a non-economist who does not fervently believe a dozen bits of the most errant nonsense about economic policy. It’s true that there are some non-economists who have the good sense to avoid having an opinion on such matters but this is a vanishingly small number of individuals, and they are silent and invisible because of their good sense. Seems to me that the preponderance of Professor Cowen’s methods of arguing are intended to address this problem.

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85 DanC December 5, 2017 at 9:13 am

Not sure about this but a few questions.

Will American companies be better at finding and financing investment opportunities outside the United States because of these tax cuts? I.E. will international investments funnel through the United States?

Will US firms expand domestic production or will financial intermediation, Wall Street firms, grow as they manage risk of international investment? Will increased competition in internatonal finance, Chinese banks, reduce potential profits?

Is the lack of investment opportunities in the United States a function of high corporate taxes or the potentially even higher stealth taxes of regulation and control from the State and legal system? Which create greater barriers: complex tax codes or mandated regulations? Which are easier to avoid through outsourcing and foreign production?

What is the rate of return on human capital investments in the United States? Education expenses seem to increase rapidly but the gains seem minimal.

My fear is that the tax cuts will encourage US firms to grow, but much of that growth will occur in areas that can minimize stealth taxes (corruption, regulation etc.). The US as a growing center for financial intermediation (Wall Street, acquisition of foreign firms, investment in foreign subsidiaries etc.)

The swamp maybe financed with taxes, but it’s greatest destructive power is increasing regulatory control.

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86 Viking December 5, 2017 at 2:12 pm

+3

When I read the Bloomberg column a few hours ago, my first thought was questioning the requirement to invest more in human capital:

“More investment in human capital and the deregulation of building in America’s major economic regions, such as the San Francisco Bay Area, would likely do the most to boost investment, but those plans are not on the table.”

Given the high educational inflation, but low wage growth, where is the evidence that spending more on education is good for society?

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87 ʕ•ᴥ•ʔ December 5, 2017 at 2:40 pm

What are “Berkeley sockets” and how did they shape the late 20th century? How did a generation coming out of Berkeley knowing how to use them shape California business?

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88 DanC December 5, 2017 at 4:40 pm

Now we know how to solve the growth issue. Teach everyone the latest cutting-edge technology, that will be outdated in ten years, and we will achieve rapid growth. Our inner cities will flourish and our poor will be tech geniuses. Or does our education system have structural problems? Is it a lack of resources?

Do we need so many grad students? Are too many students geared towards college and debt? Why are so many of the tech sector leaders college dropouts? What is the German return on human capital investment?

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89 ʕ•ᴥ•ʔ December 5, 2017 at 4:56 pm

It wasn’t teaching the future so much as inventing it.

90 ItMe December 5, 2017 at 6:38 pm

I think all these questions can be attributed to a category error. “Education” and “grad students” don’t have “problems”, but education and grad students in low-productivity or low-demand fields might. No amount of investment in gender studies will increase the return on gender studies education. Return on investment in technical fields is a totally different question, and even varies widely across fields considered “technical”, even if you’re educated in Germany!

91 ItMe December 5, 2017 at 6:20 pm

Educational inflation and low wage growth affect low-demand fields but not high-demand fields. You don’t see many of newly graduated electrical engineers taking low-paying non-EE jobs. It’s the psychology and sociology and ethnic studies majors who see low return on educational investment.

Seems like it follows that spending more on education in *valuable* fields might be great for society.

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92 Dots December 5, 2017 at 9:39 am

lots of Krugman-types seem to me to say that investment correlates very heavily with marginal demand / NGDP growth more than with marginal profitability

I think I will miss the investment in infant (or deadbeat 20something? i hope not) electricity-generation technologies and affordable housing tax credits that the pre-reform tax code compels, as well as the money splashed on universities. it feels like the tech solutions to global warming will b very socially valuable, but so easy to commoditize (if wind / solar) or compete against (if nuclear / wind / solar) that early-stage investment is a kind of a money-losing kamikaze that can´t outperform bets on existing urban housing, or in junk food in the developing world. there r some crumby public choices fed pork thru the tax code, but there r also some important things that r not necessarily so profitable to do, that may be more important to do than r most of the more profitable things that r enabled by elimination of the tax

I like the Trump/Bannon interest in investment. in American Affairs or American Greatness I read an article by an old hand from one of RCA´s late corporate labs who helped invent some cool techs. he writes about how the old US monopolies were both agile and strong, with lots of resources but dexterous internal control of their projects and workers. unis and govs may have less control over their workers and may respond more sluggishly to information that arises from their projects. it made me think that state coercion of highly profitable biz via antitrust or the tax code might boost innovation if tech progress were stipulated as an permissibile shelter from penalties. I don´t know much industrial history, really, but I have taken at face value a leftist claim that Bell Labs was nurtured in large part as an alibi of good citizenship to appease a suspicious gov. Peter Thiel claims that the driverless car mission at Google and VR and satellite internet transmission investments at FB may be coverups for their respective rentier statuses. keep on covering, I say, and make Coke, Pepsi, and Comcasts put their respective smartypantses to work more explicitly for the greater good. more intensity and footprint for this activity seems very precious, especially in light of the Chetty claims u linked today

I like your article, Mr. Cowen, and I like the rational kernels in Trumpism

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93 Yes December 5, 2017 at 9:52 am

Agree with Mr. Cowen on this article. The corporate tax rate needed to be fixed, whether or not the economy is growing or in a recession. The rate was uncompetitive and putting the US at a disadvantage. Moreover, while it may be true that many large corporations do not pay the full rate, small and middle market businesses that do pay the full rate will get a tax cut, which can be used for numerous items. For example, wages are often cited as not rising fast enough or at all. Cutting taxes will give corporations more cash flow to fund capital expenditures while simultaneously paying out bonuses/raises.

Of course, some of the tax cut will be used for stock buybacks / dividend increases, but that will put more money in American investment/retirement accounts, which increases wealth. When individuals feel more wealthy, they spend more, bringing economic growth. Heck, increasing dividends and stock buybacks could inadvertently lower dependency on social security for Americans, which is greatly needed.

With regards to zoning/housing reform, much of that is decided at the state / municipal level. Changing the mindset of the elected officials is the remedy to that situation.

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94 Shazam December 5, 2017 at 11:12 am

>Agree with Mr. Cowen on this article.

Do you mean the first part where he says Trump’s actions are new and promising, or the second part where he makes it clear that Trump is still doing all the wrong things?

I’m sure you’re on board with the grand conclusion that neglecting Trump is perilous. Lots of peril there. So don’t do it.

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95 Hoosier December 5, 2017 at 10:07 am

“Heck, increasing dividends and stock buybacks could inadvertently lower dependency on social security for Americans, which is greatly needed.”

Has there ever been a time in history, or a country in the world today, in which society didn’t depend on social security to a great extent? (and didn’t just leave people out in the cold of course). I’m all ears.

My understanding is that most countries that don’t have a strong strong social security system, people rely on family and friends to help support the poor/elderly. That’s pretty much the model in China (to the best of my understanding). I love my family, and will do everything I can for them, but there’s a limit to that, and I worry if that’s the model for the future for the US.

I remember a friend of mine in Japan who was saying you need to take care of the ‘dekinai’ people- which means those that are just not talented or smart (literally, ‘they can’t do anything”). Otherwise, what’s going to happen to them?

I guess you just provide low level jobs, and then assure a low cost environment. That is the Florida model to a great extent. It works…. but outside of the weather I don’t know how many people are that happy here. It takes a certain type for sure. But I suppose you could say that about California too.

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96 Yes December 5, 2017 at 11:05 am

My statement about reducing dependency on social security revolved around more individual responsibility. If individuals have more excess cash from increased dividends, higher capital gains on stocks, greater wage income, etc.. hopefully they would save some of that excess cash for the future. Putting that money aside could lower the need for social security, which would help government spending. Of course, there will always be a need for some type of social security, but lowering the dependency for everyday people would go along way for the fiscal health of this country. However, how do we change spending habits in this country?

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97 collin December 5, 2017 at 10:13 am

I’ve seen hundreds of articles on President Donald Trump and trade, but the real significance of the Trump economic revolution — for better or worse — is a focus on investment. There is no coordinating mastermind, but if you consider the intersection between what the Trumpian nationalists want and what a Republican Congress will deliver, it’s this: wanting to make the U.S. a new and dominant center for investment, including at the expense of other nations.

Um, Doesn’t this describe the 1970s – 1990s Japanese economy? Was there ever an economy that focused on investment? (Although it was almost all internal mercantilism economy.) And now where is the Japanese economy?

1) It really does seem the number births makes a significant impact to the economy 25 years later and the stagnation of real wages is making an impact to family formation in the US. Considering the productivity is increasing in Japan with a stagnant GDP, that leads me to believe it is impossible for Japan to increase GDP long term with current demographics.
2) With a strong dollar and strong foreign investment, where will the opportunities be in the US? We had that situation in 2001 – 2002 and the housing bubble really took off. We had that in 1985 and the S&L crisis occurred the next 5 years.
3) How does this help the WWC in semi-rural America whose is probably the most economically struggling area today?

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98 Todd K December 5, 2017 at 11:17 am

“Considering the productivity is increasing in Japan with a stagnant GDP, that leads me to believe it is impossible for Japan to increase GDP long term with current demographics.”

Just as a reminder, Japan’s GDP per capita has been growing at about the same rate .8% as the U.S. since 2000. (The US slightly higher; Japan slightly lower.) The real growth difference bettween the two countries from 1990 was in the late 90s when the U.S. had strong growth while Japan had zero growth those five years.

As we shall soon see in the 2020s and especially in the 2030s is that demographics will have almost nothing to do with growth as health and A.I. keeps getting better and better.

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99 A Truth Seeker December 5, 2017 at 12:56 pm

“Considering the productivity is increasing in Japan with a stagnant GDP, that leads me to believe it is impossible for Japan to increase GDP long term with current demographics.”

Then why am I reading Japan as Number One?

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100 collin December 5, 2017 at 1:39 pm

Isn’t Japan GDP growth rates closer to 1 – 1.5% and the US ~2.5% per year the last several years? My guess Japan has higher GDP percent per capita but lower total.

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101 collin December 5, 2017 at 10:17 am

I’ve seen hundreds of articles on President Donald Trump and trade

In case you forgot the 2016 election, Trump’s two biggest rallying cries were Illegal Immigration and anti-free trade against the neo-liberal Clinton. He campaigned on large tax cuts but he did not say this will only benefit rich taxpayers long term and raise on middle class families.

So he is risking both some of his WWC supporters by not going after trade deals and risking losing more of the middle class in 2020. (And realize he beat HRC with households over $75K.)

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102 Todd K December 5, 2017 at 11:10 am

“Has there ever been a time in history, or a country in the world today, in which society didn’t depend on social security to a great extent? (and didn’t just leave people out in the cold of course). I’m all ears.”

A long time ago in Japan, before the 80s, the elderly were sometimes taken to a mountain side or other remote place left to die if resources started to dry up during a famine.

姥捨て ubasute – throwing away an old woman

https://en.wikipedia.org/wiki/Ubasute

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103 clockwork_prior December 5, 2017 at 10:29 am

Well, the U.S. could use some investment in this particular area, considering the data – ‘The US imported more than 60 percent of its machine tool consumption, totalling approximately €7.5 billion (USD $8 billion), in 2015. With a share of 16 percent, Germany ranks second among the major supplier nations, after Japan.’ http://marginalrevolution.com/

The funny thing is that a lot of those imported machine tools probably went to manufacturing facilities owned by car companies. Particularly Japanese and German car companies. Though luckily for American economic statistical ranking, those cars were American cars, made by Americans. With the profits flowing back to Japan and Germany, along with the fact that a lot of the higher value work (design and engines/transmissions, for example) is done outside of the U.S. Most likely in Japan and Germany, ever so coincidentally. (In this regard, it might be interesting to compare two countries – South Korea and the UK, both of whom produce a lot of cars for export. Want to guess who is a net importer and who isn’tt? If it helps, machine tool exporter number 7 South Korea exports around a fifth more machine tools than number 8 USA – https://www.statista.com/statistics/264221/leading-countries-for-machine-tool-exports/ )

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104 Bob from Ohio December 5, 2017 at 1:59 pm

Pity the Morgenthau Plan was not implemented.

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105 Anon December 5, 2017 at 5:31 pm

Yes Germany, due to path dependency, still exports machine tools.

However it is rapidly shifting to China.

The carbide factories are in China and quality has improved dramatically over the last 10 years.

Dramatically. Improved.

Germans think they can maintain their market share due to legacy. We’ll see. Chinese machine tools are near par in quality and even if you had to throw 10% away you save millions.

The industry Germany will hold on to is designing the machines. But within 25 years they won’t be built there.

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106 Tom Warner December 5, 2017 at 2:39 pm

This is also my favorite recent piece by you. I would just quibble that the foreign investment impact of 20% corporate income tax is a bit less straightforward to predict. There are a lot of moving parts involved – exchange rates and foreign investment into the US in non-corporate assets being two of the biggest.

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107 Tom Warner December 5, 2017 at 2:46 pm

Also, especially if this type of thinking continues to prevail, then we need to watch out for policies that encourage corporations to overinvest without real results, ie pro-investment tends to usher in pro-bubble.

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108 jorod December 5, 2017 at 6:47 pm

Certainly not wanted by the progressives. Dividends, which they consider evil, will mostly go to pension plans, benefiting workers and companies that pay for pensions.

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109 Matthew Young December 5, 2017 at 8:23 pm

Try something simple.
It is New York’s turn at the wheel.
Hillary was fake Yorktown dandy, that left Trump.
Texas put up a lousy candidate, and California is utterly rejected.
New York is in decline and we are obliterating their financial industry with Fintech. They needed a break.

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