Home > Uncategorized > Pushing to full employment: a Trump dividend?

Pushing to full employment: a Trump dividend?

from Dean Baker

Economists are not very good at economics. We repeatedly get reminded of this fact when we see the economy act in ways that catch the bulk of the profession by complete surprise.

The most obvious example is the housing bubble, whose collapse gave us the financial crisis and the Great Recession. Almost no economists saw the bubble or the potential hazards posed by its bursting. But this is just the beginning of what economists got wrong in recent years.

Not only did the bubble and its collapse catch them by surprise, the recovery turned out to be much weaker than almost anyone predicted. Part of this was due to the austerity policies demanded by Congress, but even accounting for these policies, we didn’t see the rapid growth projected by the Congressional Budget Office (CBO) and other forecasters. In 2010, CBO projected average GDP growth of 4.4 percent for the years from 2012 to 2014. The actual number was less than half this amount.

The housing bubble wasn’t the first bubble CBO and other forecasters failed to see. The collapse of the stock bubble, which gave us the 2001 recession, also caught almost all economic forecasters by surprise. In short, the ability of economists to predict the future state of the economy, or understand the present state, is really poor.

This history is relevant in assessing Donald Trump’s plans for infrastructure and tax cuts because much of what economists say about these plans is likely to be wrong. Just to be clear, from what we have heard to date, both the infrastructure and tax plans seem like they are primarily designed to make Trump’s wealthy friends richer.  
An infrastructure plan centered on an 82 percent tax credit sounds like a polite way of saying “steal from the taxpayers.” The tax cut plan, which will give the overwhelming majority of the benefits to the richest people in the country, will make inequality much worse. These are not well-designed policies if the purpose is to promote economic growth and help those who have not shared in the economic growth of the last four decades.

But one argument that we are likely to hear against these plans is not true: that we can’t afford them. While the size of the tax breaks and additional spending may actually push the economy beyond its full employment level of output, we need not worry that it will push the government to the brink of bankruptcy.

The result of excessive deficits would be somewhat higher inflation, which will presumably prompt the Fed to raise interest rates. Higher inflation and higher interest rates are undesirable, but this risk is well worth taking.

In spite of the fact that the unemployment rate is a relatively low 4.6 percent, the employment- to-population rate (EPOP) of prime-age workers is still down by more than two full percentage points from its pre-recession peaks. It is down by almost four percentage points from the peaks hit in 2000.

This corresponds to more than 2.5 million fewer people working today than if we had the same EPOP as we did at the 2007 peaks and almost 5 million fewer when compared with the 2000 peaks. These additional workers would be disproportionately Black and Latino, as well as people with less education. Furthermore, the tightening of the labor market would hugely increase the bargaining power of these relatively disadvantaged groups, allowing large segments of the labor force to see real wage gains.

Most economists have, for some reason, accepted that the drops in EPOPs seen since 2007, and especially since 2000, are irreversible. Even though almost no one had expected prime-age EPOPs to drop at the time (none of the official forecasts projected these drops), economists are mostly happy to ratify these drops after the fact and say that nothing can be done. This means, for example, that the Federal Reserve Board would raise interest rates, as it will do this week, to slow the economy and keep the EPOP from rising further.

Since economic arguments are determined primarily by authority rather than evidence, it would be virtually impossible to win an argument with the mainstream of the profession that the economy should be allowed to grow rapidly enough to make the EPOP rise further.

However if the boost to demand from an infrastructure program allows for a further rise in EPOPs, then we will have facts on the ground that will be undeniable. If the prime-age EPOP does actually rise by one-to-two percentage points, or even better, by three-to-four percentage points, then it will be impossible to deny that we could in fact return to the pre-recession or 2000 levels of the EPOP. This could set a new benchmark for policy for a decade or longer.

We saw exactly this process at work in the 1990s. At that time, almost every serious economist insisted that we could not get below six percent unemployment without triggering an inflationary spiral. Fortunately, then Federal Reserve Chair Alan Greenspan was not a conventional economist. He did not accept this argument.

Rather than raising interest rates and choking off the recovery, he allowed the unemployment rate to fall to 4 percent as a year-round average in 2000. This gave millions of workers jobs and pay increases to tens of millions. It also permanently lowered the unemployment targets used for setting fiscal and monetary policy.

Trump may accomplish the same trick with his policies. Republicans are terrified by deficits when a Democrat is in the White House, but they are fine with them when we have a Republican as president. While we must fight many horrible policies on Trump’s agenda, there may actually be a huge dividend if he succeeds in pushing the economy to full employment. This may benefit workers, and especially the least advantaged workers, for many years to come.

See article on original site

  1. December 15, 2016 at 6:10 pm

    We are dealing with a fundamentally flawed economic system prone to racing or choking, much like an engine running on a lean fuel/air mixture. Right now, we are on course to repeat the mistakes of the Great Depression with trade barriers going up, led by the Trump administration in the US. Everybody will try to export their way out of trouble and throw up trade barriers to protect internal production and employment. Study history and you know what the next step is.

  2. David Chester
    December 16, 2016 at 9:24 am

    To stimulate the economy one should introduce a different tax to replace the present tax regime. My essay about this is presented below.

    Socially Just Taxation, and Its 17 Effects On: Government, Land Owners, Communities and Ethics

    Our present complicated system for taxation is unfair and has many faults. The biggest problem is to arrange it on a socially just basis. Many companies employ their workers in various ways and pay them diversely. Since these companies are registered in different countries for a number of categories, the determination the criterion for a just tax system becomes impossible, particularly if based on a fair measure of human work-activity. So why try when there is a better means available, which is really a true and socially just method?
    Adam Smith (“Wealth of Nations”, 1776 REF. 1) says that land is one of the 3 factors of production (the other 2 being labor and durable capital goods). The usefulness of land is in the price that tenants pay as rent, for access rights to the particular site in question. Land is often considered as being a form of capital, since it is traded similarly to other durable capital goods items. However it is not actually man-made, so rightly it does not fall within this category. The land was originally a gift of nature (if not of God) for which all people should be free to share in its use. But its site-value greatly depends on location and is related to the community density in that region, as well as the natural resources such as rivers, minerals, animals or plants of specific use or beauty, when or after it is possible to reach them. Consequently, most of the land value is created by man within his society and therefore its advantage should logically and ethically be returned to the community for its general use, as explained by Martin Adams (in “LAND”, 2015, REF 2.).

    However, due to our existing laws, land is owned and formally registered and its value is traded, even though it can’t be moved to another place, like other kinds of capital goods. This right of ownership gives the landlord a big advantage over the rest of the community because he determines how it may be used, or if it is to be held out of use, until the city grows and the site becomes more valuable. Thus speculation in land values is encouraged by the law, in treating a site of land as personal or private property—as if it were an item of capital goods, although it is not (Prof. Mason Gaffney and Fred Harrison: “The Corruption of Economics”, 2005 REF. 3).

    Regarding taxation and local community spending, the municipal taxes we pay are partly used for improving the infrastructure. This means that the land becomes more useful and valuable without the landlord doing anything—he/she will always benefit from our present tax regime. This also applies when the status of unused land is upgraded and it becomes fit for community development. Then when this news is leaked, after landlords and banks corruptly pay for this information, speculation in land values is rife. There are many advantages if the land values were taxed instead of the many different kinds of production-based activities such as earnings, purchases, capital gains, home and foreign company investments, etc., (with all their regulations, complications and loop-holes). The only people due to lose from this are those who exploit the growing values of the land over the past years, when “mere” land ownership confers a financial benefit, without the owner doing a scrap of work. Consequently, for a truly socially just kind of taxation to apply there can only be one method–Land-Value Taxation.

    Consider how land becomes valuable. New settlers in a region begin to specialize and this improves their efficiency in producing specific goods. The central land is the most valuable due to easy availability and least transport needed. This distribution in land values is created by the community and (after an initial start), not by the natural resources. As the city expands, speculators in land values will deliberately hold potentially useful sites out of use, until planning and development have permitted their values to grow. Meanwhile there is fierce competition for access to the most suitable sites for housing, agriculture and manufacturing industries. The limited availability of useful land means that the high rents paid by tenants make their residence more costly and the provision of goods and services more expensive. It also creates unemployment, causing wages to be lowered by the monopolists, who control the big producing organizations, and whose land was already obtained when it was cheap. Consequently this basic structure of our current macroeconomics system, works to limit opportunity and to create poverty, see above reference.

    The most basic cause of our continuing poverty is the lack of properly paid work and the reason for this is the lack of opportunity of access to the land on which the work must be done. The useful land is monopolized by a landlord who either holds it out of use (for speculation in its rising value), or charges the tenant heavily for its right of access. In the case when the landlord is also the producer, he/she has a monopolistic control of the land and of the produce too, and can charge more for this access right than what an entrepreneur, who seeks greater opportunity, normally would be able to afford.

    A wise and sensible government would recognize that this problem derives from lack of opportunity to work and earn. It can be solved by the use of a tax system which encourages the proper use of land and which stops penalizing everything and everybody else. Such a tax system was proposed 136 years ago by Henry George, a (North) American economist, but somehow most macro-economists seem never to have heard of him, in common with a whole lot of other experts. (I would guess that they don’t want to know, which is worse!) In “Progress and Poverty” 1879, REF. 4, Henry George proposed a single tax on land values without other kinds of tax on produce, services, capital gains etc. This regime of land value tax (LVT) has 17 features which benefit almost everyone in the economy, except for landlords and banks, who/which do nothing productive and find that land dominance has its own reward.

    17 Aspects of LVT Affecting Government, Land Owners, Communities and Ethics

    Four Aspects for Better Government:

    1. LVT, adds to the national income as do other taxation systems, but it should replace them.
    2. The cost of collecting the LVT is less than for all of the production-related taxes–tax avoidance becomes impossible because the sites are visible to all and who owns each is public knowledge.
    3. Consumers pay less for their purchases due to lower production costs (see below). This creates greater satisfaction with the management of national affairs.
    4. The national economy stabilizes—it no longer experiences the 18 year business boom/bust cycle, due to periodic speculation in land values (see below). The speculation in and withholding of unused land is eliminated, see item 7.

    Six Aspects Affecting Land Owners:

    5. LVT is progressive–owners of the most potentially productive sites pay the most tax. Urban sites provide the most usefulness and resulting tax. Big rural sites have less value and can be farmed appropriately to their ability to provide useful produce.
    6. The land owner pays his LVT regardless of how his site is used. A large proportion of the present ground-rent from tenants becomes the LVT, with the result that land has less sales-value but a significant “rental”-value (even when it is not used).
    7. LVT stops speculation in land prices because the withholding of land from proper use is not worthwhile.
    8. The introduction of LVT initially reduces the sales price of sites, even though their rental value can still grow over a longer term. As more sites become available, the competition for them is less fierce.
    9. With LVT, land owners are unable to pass the tax on to their tenants as rent hikes, due to the reduced competition for access to the additional sites that come into use.
    10. With LVT, land prices will initially drop. Speculators in land values will want to foreclose on their mortgages and withdraw their money for reinvestment. Therefore LVT should be introduced gradually, to allow these speculators sufficient time to transfer their money to company-shares etc., and simultaneously to meet the increased demand for produce (see below, items 12 and 13).

    Three Aspects Regarding Improved Communities:

    11. With LVT, there is an incentive to use land for production or residence, rather than it being unused.
    12. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper too, because entrepreneurs have less difficulty in starting-up their businesses and because they pay less ground-rent–demand grows, unemployment decreases.
    13. Investment money is withdrawn from land and placed in durable capital goods. This means more advances in technology and cheaper goods too.

    Four Aspects About Kinder Ethics:

    14. The collection of taxes from productive effort and commerce is socially unjust. LVT replaces this national extortion by gathering the surplus rental income, which comes without any exertion from the land owner or by the banks– LVT is a natural system of national income-gathering.
    15. The previous bribery and corruption for gaining privileged information about land cease. Before, this was due to the leaking of news of municipal plans for housing and industrial development, causing shock-waves in local land prices (and municipal workers’ and lawyers’ bank balances).
    16. The improved use of the more central land of cities reduces the environmental damage due to a) unused sites being dumping-grounds, and b) the smaller amount of fossil-fuel use, when traveling between home and workplace.
    17. Because the LVT eliminates the advantage that landlords currently hold over our society, LVT provides a greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural way– to provide more jobs because their production costs are reduced. Then untaxed earnings will correspond to the value that the labor puts into the product or service. Consequently, after LVT has been properly and fully introduced as a single tax, it will eliminate poverty and improve business ethics.


    1. Adam Smith: “The Wealth of Nations”, 1776.
    2. Martin Adams: “LAND– A New Paradigm for a Thriving World”, North Atlantic Books, California, 2015.
    3. Mason Gaffney and Fred Harrison: “The Corruption of Economics”, Shepheard-Walyn, London, 2005.
    4. Henry George: “Progress and Poverty” 1897, reprinted by Schalkenbach Foundation, NY, 1978.


  3. Hepion
    December 23, 2016 at 4:39 pm

    Japan should be a place of interest

    Unemployment has dropped to 3%:


    Job offers per applicant ratio has risen to 2.11:


    Still, inflation is non-existent as core inflation drops to 3-year low:


    How can mainstream economist still claim that there is this straightforward link between unemployment ratio and inflation, and that the threshold unemployment rate is 6%?

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