October 30, 2017 Patrick Oliver-Kelley


University of Chicago Professor Richard Thaler was awarded the Nobel Prize for Economics for challenging the traditional idea that free markets reflect self-interests of rational individuals. They do things contrary to their own good. He created a new field called ‘Behavioral Economics’ which looks for ways governments or companies ‘nudge’ people to take actions for their long-term interests. Society relies on traits of character in a society. And in America we are experiencing less crime, but people are more scared. Contrary to Trump’s portrayal of ‘American Carnage,’ we are experiencing the paradox of fear. From ’93 to 2014, Americans became 62% less likely to become the victim of a violent crime. Persons aged 12 and older, per 1000 persons, victimhood dropped from 29.3 to just 11.1 in that period. So far for 2017, we are on track for the second lowest rate of victims any year since 1990. The paradox, it that in spite of the facts of safety, many Americans are convinced that crime is growing…Thank you Mr. Trump and for your rhetoric. Is increased domestic manufacturing a possible answer? If we could find properly trained workers manufacturing might prosper. However, studies show that the majority of past factory jobs losses were the result of investment in automation, which continue to pay off. American manufacturing has more than doubled output in real terms since the Reagan era, to $2trn today. Productivity is soaring. Output per labor hour rose by 47% between 2002 and 2915. American manufacturing activity hit a 13 year high in September. Our biggest problem is manufacturing cannot find enough skilled laborer! It is estimated that in the next ten years, there will be 3.5 million manufacturing jobs will go unfilled as a result. Public-Private partnerships aim to speed up the development of advanced techniques such as 3-D printing and digital manufacturing and to help train workers in these areas.

It will take more than a few of these partnerships to tackle America’s yawning skills gap. Initiatives, policy makers and manufacturers can judge what best works and copy successes. Continued technological progress will keep manufacturing employment from returning to past heights. But if skilled workers could be found, they could guide machines and the sector’s output could really take off.

The Tea Party prepared the way for Trump’s insurgency. A serious effort at the deficit would have involved entitlement reform, moderated defense spending or rises and a shutdown of government when they were not forthcoming. The 40-odd congressmen demanded highly partisan, selective cuts that were proxy for antipathy to public spending, for redistribution, and to immigration. This also implied more defense spending and no cuts to social security. What we truly need is a center-right party committed to prudent fiscal restraint, without rancor.
Candidate Donald Trump made aggressive claims about growing the U.S. economy by his plan would raise GDP more than 4%. Then, he stepped up that claim during the third presidential debate saying: “And I actually think we can go higher than 4 percent. I think you can go to 5 percent or 6 percent.” The United States has not seen consistent economic growth of 5-6 percent since the 1940s, or 4 percent since the 1950s and 1960s. Growth in the 1970s, 1980s and 1990s was only slightly above 3 percent. Since 2000, it has been less than that, at 1.6 percent. For the next decade, the nonpartisan Congressional Budget Office (CBO) has projected U.S. GDP growth of approximately 2 percent per year.

Trump’s proposed fiscal policy of tax cuts and increased government spending are not likely to result in a sustained increase in GDP expansion. We think real growth will be short of the 50-200 percent increase over CBO projections that have been promised. We would like to be wrong on this point, but to date we evaluate Trump’s fiscal proposals as unlikely to overcome major headwinds of high debt, low productivity growth and stagnant workforce growth. The latter two have not generally been negative headwinds, but rather have been strong tailwinds for growth for most of U.S. history — so strong that the pernicious negatives of debt were masked when debt-to-income levels were lower than exist today.

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