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Trump, AOC and Jerome Powell are all in agreement



This article is part of TPM Cafe, the TPM Opinion and Information Center.

We now know too well that in the run-up to the Great Recession, policymakers failed to predict what would happen. Central banks around the world – including the US Federal Reserve, the UK Monetary Policy Committee and the European Central Bank of the euro area – have missed the big project in their own country but have not found either that the crisis was global; one down, all the way down. In October 2008, members of the Federal Reserve's Federal Open Market Committee predicted that real GDP growth in the United States in 2009 would be between -1.0% and 1.8%. We have -2.54%.

Such calculation errors have real consequences. We now know that the United States went into recession in December 2007, as determined by the dating committee of the development cycle of the National Bureau of Economic Research, while almost every advanced country has a business cycle. did in April 2008. My new book, "Do not work: where did they go? The Good Jobs Gone? Explains in detail how the decision makers missed this disaster, even if it had occurred.

In my opinion, the Fed wrongly raised its rates nine times between 2015 and 2018 because of its mistaken belief that the United States was at full employment. During this period, other measures, including weak wage growth, suggested that full employment was still far away. Trump felt that and was right to claim rate cuts.

Two years after the Great Crash of 1929, economist John Maynard Keynes warned in advance that the financial crisis was particularly difficult to overcome and that growth would inevitably be slow. "It's possible that the recession will last much longer than most people expect, and many things will change in both our ideas and our methods before we go out," he said. -he declares. He did not speak, he said, of "the duration of the acute phase of the crisis", but of "the long and difficult situation of semi-deep, or at least sub-normal, prosperity likely to succeed the crisis phase. "

Today, more than ten years after the beginning of the Great Recession, we are still immersed in these "long semi-collapse conditions". Donald Trump was perfectly able to notice during the election campaign. The global recovery was held back in the years following the 2008-2009 recession and the population is suffering, even after ten years of growth, in what is now the longest recovery in the United States. Pain, anxiety, depression and a general feeling of helplessness are at the rendezvous. Happiness is down. Trump has exploited these feelings.

The increase in the number of deaths due to despair – due to drug overdose, liver failure due to high alcohol consumption and suicide – in rural America and the city center, especially among the least educated whites, it quickly became a scourge. Americans are suffering more and more and are not relieved by the huge increase in the number of opioid prescriptions. Life expectancy in the United States is falling.

The votes for Trump – and, as I show in "Do not work", for Brexit as well – were a reflection of the insecurity, despair and isolation that people felt, particularly those who had been left behind. The old cities of coal and steel were suffering. People voted for Trump because they thought he could make a change.

There was of course another force at play: history tells us that people who suffer from a lasting recession tend to look for who is to blame. When people are suffering, scapegoats are easy to find and immigrants are often the target of their actions. In the 2016 presidential election, Donald Trump has held 26 of the 30 states in which the proportion of foreign-born residents is the smallest, according to five-year (2011-2015) estimates of the number of foreign-born residents. American Community Census Census Bureau. The native-born residents account for 91% of the population in the states that Trump won, compared to 81% in the states he lost. Trump ran on an anti-immigrant platform. Most US voters see immigrants positively, but most Trump voters do not. Residents of London, Paris, and New York, who have many immigrants, had more in common than they had with people outside major cities in their own country.

Trump voters also tended to live in the most troubled areas. Good jobs had disappeared for many, and Trump has positioned himself as the champion of America's overflights. He saw the pain that was happening – and the dissatisfaction with the exam courses, which were going very well, thank you, while many, especially the less qualified ones, were not there.

Trump, during the election campaign, repeatedly reiterated that, despite claims by the Obama administration that full employment was approaching, the number of unemployed "is totally a fiction" and that there is just had too few decent jobs available for those who wanted it. He was clearly on something. In the November 2016 elections, the unemployment rate was 4.7%, but other labor market measures told another story. Employment was then 60% of the adult population, compared to 63% at the beginning of the recession in 2008. The rate of underemployment, which measures the number of hours worked by the workers, was also much higher. at its starting levels. Trump had noticed that the American labor market was not close to full employment.

Between 2015 and 2018, relying heavily on the FOMC view that the US labor market was close to full employment, the Fed, to my mind wrongly, raised rates nine times; once in 2015 and 2016; three times in 2017 and four times in 2018. By the end of 2018, the Fed was anticipating further rate increases in 2019 and 2020. It relied on models dating back to the 1970s, when the economy was very different. Crucially, the unions were much more powerful than today. In 2019, these models are long overdue, but economists have continued to use them and wonder why there is neither inflation nor expected wage growth.

As a result, Trump turned to the Fed and argued that rates were too high and that there should in fact be cuts. He even attacked Fed Chairman Jay Powell, threatening to fire him or even demote him. In my book, I argue that "the Fed has announced further increases ahead; President Trump directed his anger towards them, and they changed pace in 2019. I must say that I agree with him. I always do it.

During her interrogation by Representative Alexandria Ocasio-Cortez (DN.Y.) before the Financial Services Committee of the House of Representatives yesterday, Mr. Powell essentially acknowledged that the Fed had raised rates erroneously, thinking that the States United States were almost at full employment in his day.

"Do you think it's possible that the Fed's estimates of the lowest sustainable estimates for the unemployment rate were too high?" Asked Ocasio-Cortez at Powell.

"Absolutely," he replied.

"So we have exceeded our long-term unemployment rate?" She continued.

"I think we have learned that it is lower, significantly lower than we thought," responded the Fed chairman.

Ocasio Cortez then asked Powell about the Phillips curve, an economic model that assumes that the low unemployment rate drives the rate of wage growth and hence inflation. This is the key to the Fed's business models. But this theory, she said, "no longer describes what is happening in today's economy," Powell said.

The next day, the director of the National Council of the Economy, Larry Kudlow, congratulated Ms. AOC for her questions, saying that she had "perfectly succeeded". Trump and the AOC are in agreement on the need to cut rates just like me. by the elites.

"Not Working" shows that wage growth is now driven not by unemployment, but by underemployment, which has not yet recovered to the pre-recession level. This explains the low wage growth we are seeing today and why the United States has not yet achieved full employment.

Nevertheless, the markets suggest that investors are expecting three Fed rate cuts by the end of 2019 and probably even more in 2020, as the US economy is expected to slow down or even fall into recession. Trump was right, perhaps for the wrong reasons: he worries about the influence of the economy and the Fed on his chances of reelection for 2020.

I disagree with Trump on a lot of things, including the trade war. But on jobs, below-normal prosperity and interest rates, it has been justified.


David G. Blanchflower is Professor of Economics Bruce V. Rauner at Dartmouth College, Professor of Economics at Stirling University and Research Associate at the National Bureau of Economic Research. He is co-author of "The Wage Curve" and "Do not Work: Where Did All Good Jobs Go?". He lives in Canaan, New Hampshire. Follow him on Twitter: @D_Blanchflower.

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