The new administration has only been in office for a little over a week but they have started with a bang. There is no doubt that the rantings of an ex-reality TV host are going to become very real policies. Disturbingly, many of the policy initiatives appear to be based, not on “alternative facts” as immortalized by a Trumpeter last weekend, but rather on “selected facts”.
It is fascinating how individual facts can distort reality and be used to create a pleasing narrative that conveniently justify actions. With respect to the economy, there is factually no doubt that factories have closed, that 5 million manufacturing jobs have been lost since 2000 and that there has been human suffering in the rust belt. I believe the word to describe this in the inauguration address was “carnage”. But it is just as factual to note that the economy is growing, inflation is low and total unemployment in the US is well below 5%. It is also factual that all citizens have benefited from globalization. Every time an American, even one without a job, goes shopping for food, clothing, appliances and electronics they have been able to walk away from the store with more for their dollar due to globalization. But these facts do not resonate. They do not align with the reality many people see around them as many have not seen any fruits of the gains in the aggregate. Even those who have not been directly negatively affected, claim to see others who have been. To explain their predicament of unemployment and/or a reduced standard of living, the only thing to do is turn to blaming immigration, free trade and the government.
This group of voters has high expectations of “their man” and he is determined to fulfill his promises that they believe will address the impediments that have stymied America. His administration is responding by building walls, bullying companies, becoming more protectionist and promising tax reform and infrastructure spending. The administration seems to have adopted a strategy where they will very forcefully take action for one select section of the economy, manufacturing. A component of the economy that employs one in ten Americans and frankly has not been a significant driver of growth for the economy in years.
The administration is putting a monkey wrench into creative destruction. I know Trump has said he will be the greatest creator of work for the US since the invention of pick-up-sticks. But so far, through his tweets, he seems entirely focused on bringing back the high-paying manufacturing jobs found in the auto industry that in the 1970’s brought us such unreliable disasters as the Ford Pinto and Chevy Vega (back when America was great, but I digress). They seem to be concentrating on an American industry that is easily identifiable to their voters, but one that could unfortunately be on a longer term downward trajectory with respect to jobs given robotics, climate change and the growth of ride sharing.
All this verbiage to set the scene for the Fed. The Fed claims that the aggregate economy is nearing or is at full employment. The leadership suggests that additional measures from the administration are not needed to stimulate growth at this point in the cycle. The looming challenge is that the current government has vowed that more labor resources need to be allocated to manufacturing, no matter how inefficient this may be for the total economy. So by Trump’s standards and given where he is focused, his economy is not at his definition of full employment. The mandate of the Fed, as written, and the apparent mandate of the new administration are not aligned.
This could get interesting very quickly, especially if the real economic and price data forces the Fed to accelerate their tightening program in order to achieve their inflation goal for the aggregate economy. Neither higher rates nor a stronger US dollar are in the best interest of achieving Trump’s employment nirvana on the manufacturing side.
Given this president’s style, open conflict between the White House and the Fed is a strong possibility in the near future. It will be interesting to see if Trump’s new appointees to the Fed will feel any obligation to the administration when the going gets tough.
No comments:
Post a Comment