The Most Important Take-Away from the US Election
Much will be written about the bitter US election pitting two unpopular candidates against one another. In my view, who won is of secondary significance. For the most part, lobbies control most of what happens in DC: the US has lousy health and education systems, the banks are still dangerous, and the defense lobbyists continue to find reasons for the US to be at war.
What really hits home is the Democratic Party’s loss of blue collar workers’ support. Below, I discuss why and how this happened.
Changing Political Coalitions
Changing coalitions are not new. The Democrats used to have the support of Southern conservatives. This all ended when Johnson used his political muscle to get the Civil Rights bill through Congress. And going back in time, you can see numerous other examples of changes. But in recent history, the Republicans have been the party of the wealthy while the Democrats have been the party of the working class and the poor.
Trump (and Sanders) Support Base
Trump, at least for now, has the support of the relatively uneducated, disenfranchised American workers. The working class was formerly represented by the Democratic Party. How did this all happen?
As Table 1 indicates, employment in manufacturing has fallen by almost 28%. And on top of this, the union share of private sector workers has plummeted. It appears that only in the public sector has the union share grown. What are the reasons for these changes? In manufacturing, was it attributable to jobs going overseas? No. As the McKinsey Global Institute and I have documented, only 20% of the manufacturing jobs lost were the result of jobs going overseas. And these losses were largely offset by foreign direct investment creating jobs in the US.
Table 1. – US Employment, Union Share, 1973-2015
1Starting date 1983
Source: US Bureau of Labor Statistics
As I have written, the vast majority of jobs lost in manufacturing and all other sectors resulted from labor-saving automation. Huge numbers of middle class and lower jobs in services as well as production sectors have disappeared. Trump’s win was a plea for help from the displaced workers. And the Fed’s policy of keeping interest rates so low contributed to Trump’s victory. The low rates wiped out the bond income many retirees had hoped to live on.
Will Trump’s Economic Policies Work?
Consider first how Trump views the economic problem. He started by talking about all those jobs lost overseas (to China and Mexico). Wrong diagnosis. His solution? Tax US imports from China and Mexico heavily, actions that would be in violation of World Trade Organization rules. Perhaps more importantly, such actions would probably start a global trade war, reducing incomes worldwide.
Next, Trump said he would reduce taxes to spur growth. He claims the economic growth generated will make up the revenues lost by the tax cut. Most hardheaded analysis — including from those sympathetic ideologically — suggests this is nonsense. The conservative-leaning Tax Foundation, for example, estimates that Mr. Trump’s tax plan would reduce federal revenue by about $12 trillion over the next decade, and faster growth would offset only about $2 trillion of that.
Mark Zandi, chief economist at Moody’s Analytics, said that Mr. Trump’s policies would increase the deficit from 3.5 percent of G.D.P. this year to more than 10 percent by the end of Mr. Trump’s term. He said this would cause the Federal Reserve to raise interest rates above 6 percent in 2018 to prevent inflation.
One also has to wonder if such tax cuts could get through Congress. There are many Republicans (and Democrats) who feel the government deficit should be reduced and not raised.
Trump has promised to bring jobs back to make America great again. Nothing he has said makes me think he can deliver on this promise. In fairness to Trump, I have not seen anything said or written yet to deal comprehensively with labor-saving automation. The Democrats suggested making education cheaper. This would certainly help. But labor-saving automation is a global problem and nobody knows just how far the automation will go.