Trump is at it again — ranting about one of his own appointees. When things go well, it’s all Trump, “the greatest ever,” he reminds us. When things go awry, it’s always someone else.
Trump sees financial markets as the chief measure of the economy, never mind that some 84 percent of stocks are held by the nation’s richest 10 percent, and that the largest share of the stock market increases since the Great Recession was under Obama. Financial markets recently took a minor hit. Trump went into a rage; how dare his recently appointed Fed Chief Jerome Powell raise interest rates, throwing Wall Street into a tizzy.
Recall that when Trump was campaigning, he was livid that Fed Chair Janet Yellen kept interest rates at record lows. He accused her of stacking the deck in favor of Democrats. She should raise rates, he insisted. As the economy continued to improve, the Fed did begin to raise rates as Yellen’s tenure came to a close.
Along comes Trump in 2017, replacing Yellen with his own Fed appointee Powell. The economy, including financial markets, continued to improve, “due to Trump’s genius,” of course. With continued economic expansion, the Fed under Powell’s chairmanship continued to gradually raise short-term interest rates. With each small increase, Trump goes into another rant as Powell fails to obey his orders. To Trump’s dismay, the Fed is designed to be independent of presidential orders.
Ironically, Powell is one of Trump’s more competent appointees — granted that’s a low bar. Previous Chair Yellen’s keeping rates low, and Powell’s raising rates with an economy that is by some measures strong, were appropriate — standard stuff, as would be recommended by a college sophomore economics student gunning for at least a C in an introductory macroeconomics course. The main point of contention here is whether rates could have been raised just a tad faster — some critics recommended slower — in order to give the Fed some arrows in its quiver should that be needed in case of a slowing economy.
Meanwhile, the Republican-engineered Trump tax cuts — cuts, not reform — were at work, producing a sugar high. Wall Street money managers and Fortune 500 CEOs respond like Pavlov’s dogs to tax cuts. That, along with historically low interest rates and good corporate profits, continued to boost financial markets.
The tax cuts were sold on the assurance that corporations would repatriate huge sums sitting in foreign accounts. This would generate investment in plant and equipment that would increase productivity necessary to increases wages for working people. Furthermore, according to the snake oil peddlers, increased prosperity would generate increased tax revenues sufficient to reduce federal deficits, and reduce, or even eliminate, the public debt.
Of course, that was all eyewash. The smaller than promised repatriated funds have been used for stock buybacks that increase the value of remaining outstanding stocks. And, as economist Paul Krugman reminds us in a recent NY Times op-ed piece, tax policy is not the major factor determining investment in plant and equipment. Major factors are anticipated returns on investment, depending in turn on costs of production, anticipated demand for product and resulting profits.
Enter Trump’s tariffs with their effect on costs of production in key industries. Fears of a potential trade war along with rising interest rates — never mind that rising rates are in line with a reasonably strong economy — make money managers as nervous as a cat in a room full of rocking chairs. Markets soften a bit, sending Trump into his rage. It’s the “uncooperative Fed” responsible for wiping out the 2018 gains, he rants.
But wait — as this is written, financial markets have experienced a slight bounce. This initial bounce was attributed to a statement by Powell that interest rates are now “near neutral.” This rather curious language is “Powell-speak,” interpreted as the additional rate hike that was forecast for December may not occur. Or, in any case, that the Fed would be “cautious” with further rate hikes.
But there was — actually is — that other fly in the ointment. Jim Cramer, the entertainer hosting “Mad Money,” reminds us that before we can count on rising financial markets, there has to be some resolution to the potential trade war. Only then can financial markets calm down and resume.
Our proverbial sophomore economics student, along with any observer following this stuff, has already figured this out. But Cramer makes big dough for waving his arms, shouting at the mic with inane observations and hedged platitudes that pass for “analysis.” But hey, this is capitalism. There is a lucrative market for suede shoe artists delivering more in the way of entertainment than useful information.
Sure enough, Trump’s kicking the can down the road on the China trade imbroglio created a temporary bump in the Dow and S&P, as our student and Cramer would have predicted. But a pall remains over irresolution of trade issues.
Then we have the electronic media nitwits asking another ridiculous question: “Why didn’t the Republicans tout the economy and the tax bill during the recent campaign?”
Even Trump’s supporters have by now realized that promised results of the tax bill were disingenuous. The broader working class has seen nothing of substance from that ill-advised bill. Else why would Trump have promised another bit of fiction — a “middle class tax cut” prior to the election, another promise clearly impossible to have been fulfilled?
The Trump/Republican tax bill has proven not something on which to campaign, and with good reason. Republicans are already observing that entitlements — Social Security and Medicare benefits — must be addressed, and cut, to address the increasing federal deficits and public debt — the very deficits and public debt that were promised by the snake oil peddlers to vanish with the tax bill.
In economics, there is always something to worry about. Trump worries about his Fed Chair. For the rest of us, the Fed Chair is the least of our worries.
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net.
