Economics
Beware of following Trump
Irrational exuberance and MAGA infatuation are driving US capital markets. We should keep our head when Americans are losing theirs.
On Wednesday this week the Australian and US stock markets fell from their recent record highs. That was a response to rumours that lower-court bans on Trump’s tariffs may be upheld as those bans are tested in higher courts.
How can this be? Didn’t our economic teachers convince us that tariffs are bad for business? Why do the capital markets react negatively to the possibility that tariffs won’t be raised?
There is an explanation that depends more on sentiment – exuberance in the finance sector – rather than on the hard logic of economics. Their man, Donald Trump, is in office: he’s unleashing capitalism’s animal spirits, and getting government out of the way. It’s a new day in America. (Don’t try too hard to analyze the logic or reality of this explanation, or you will get a bad headache.)
In a more expansive way Alan Kohler explains this irrational exuberance in a warning: Donald Trump is taking over the US Federal Reserve and financial markets have missed the point. Kohler understands the financial markets – the markets that drive the prices of shares, gold and bitcoin – and he understands the real economy, where houses are built, cars are made, and children are taught. As he often explains, the two often run according to different rules.
His post is centred on Trump’s statement “I have the right to do anything I want to do. I'm the President of the United States", and more specifically on his announcement that he was removing one of the seven governors from the Federal Reserve. Imagine if Albanese, in a fit of pique, were to try to sack a board member of our Reserve Bank. But the MAGA mob stand behind their man.
Kohler is concerned by Trump’s move towards authoritarianism, and also by the possibility that even once Trump is out of office future administrations will retain his powers to override institutions and to bypass democratic checks and balances.
We get more insight into the dynamics of Trumpian economics in a post by Gareth Hutchens: Australia keeps pumping house prices, while Trump pursues “state-run capitalism”. Hutchens alerts us to comments by Ben Picton of Rabobank, who makes insightful comments on Australian economic structural weaknesses, particularly our illusion that increases in housing prices represent an increase in wealth, while indicators of real wealth, such as business investment, are falling. Picton criticises what he sees as our policy approach of trying to use financial instruments (e.g. incentives to first-home buyers), rather than more direct interventions (e.g building more houses) to achieve policy ends. You can read similar criticism, without Picton’s smugly judgmental overlay, in David James’ Eureka Street contribution The mirage of Australian prosperity.
That’s all reasonable comment, in line with the views of most independent economists. But Picton goes on to suggest that now Trump has broken the old rules of economics, we should follow a similar policy path, including imposition of tariffs and public investment in key industries. Hutchens quotes from Picton whose original statements you can read in two of his market comments: MAGA and the silent blob (the “blob” referring to “the fiction of central organs of government being political silent blobs”), and Cooked by state capitalism. Hutchens notes particularly the following statement from Picton in relation to monetary policy:
The unabashed politicization of the supposedly independent and technocratic process of setting the price of money once again confirms that it is no longer the 1990s and that old ideas about optimal policy transmission, central bank credibility and the need to insulate important decisions from the influence of the popular will offers little protection against the new paradigm of raw power politics. Just as the interpretation of law is inherently political, the price of money is inherently political, and all aspects of national policy are being co-opted to support the MAGA vision of the United States and its place in the world.
That’s a neat description of Trump’s approach to economics. But as we read through Picton’s statements, we get the message that we’re mugs if we try to abide by the old rules.
It's apparent from Kohler’s and Hutchens’ articles that many Americans have tasted Trump’s MAGA Kool-Aid and found it good. Forget all that stuff about the opportunity cost of tariff protection and economic isolationism, forget about Marx’s and Henry Ford’s warnings about what happens to capitalism when all the purchasing power is in the hands of an oligarchy, forget about what Adam Smith said about the government’s economic role in complementing the private sector’s role, forget about the consequences of massive fiscal deficits.
The idea that we should follow down this path is ideological idiocy.
That is not to say Picton is entirely wrong, however. There is a case for a strong industry policy, but the Albanese government doesn’t seem to need convincing of that, as elements of its Future Made in Australia are rolled out. These are based mainly on compensating for market inadequacies, such as first mover disadvantages facing renewable energy investors, rather than on restricting imports. We don’t need to follow Trump’s madness of arbitrary tariff protection, further distribution of wealth to oligarchs, deep cuts to government services, and high deficits. As for the stock exchange: it lost touch with reality years ago, and in the short term share prices will probably go on rising, as stock markets are fuelled by the easy money that slops around in the early stages of a bout of stagflation.
National accounts – unexciting but in the right direction
The June quarter national accounts confirm that the Australian economy is on a slow path to recovery after the Morrison government’s mismagement and the Covid shock.
Most indicators in the National Accounts for the June Quarter released on Wednesday were in the direction favoured by economists. Over the quarter GDP rose by 0.6 percent in real terms, driven mainly by a growth in private demand, including household consumption. Economist Stella Humphries of the University of Sydney, writing in The Conversation, calls the results the economy’s best in two years.
The ABC’s Michael Janda, commenting on these figures, suggests that this rise in household consumption may discourage the Reserve Bank from lowering interest rates. But this growth in spending seems to have been driven in large part by households drawing down their savings. After rising strongly for the previous three quarters, household disposable income per capita was actually down a little in the June quarter.
These roundups have been regularly presenting graphs of two GDP series, relating to productivity and income.
The first covers two key indicators – GDP per capita, and GDP per hour worked, an indicator of labour productivity. Both have picked up in the latest quarter. We can see in the graph how GDP per capita (red line) has moved through the pandemic and its recovery, and is now settling down. Since its low point last September GDP per capita has risen by only 0.2 percent, meaning it has essentially flatlined. An optimist would observe that it’s 3.8 percent up on its 2018 pre-pandemic level, but 3.8 percent growth over 7 years is only around 0.5 percent a year.
From the same 2018 base GDP per hour worked (blue line) is up by only 0.6 percent, but at least its positive.
The other regular series in these roundups covers the wage and profit share of factor income. There is continuing evidence of a movement back to wages, recovering after its historical lows in 2021 and 2022. Some of this fall in the profit share is probably due to lower profits in the mining sector as reported in the national accounts.
One notable aspect of the national accounts is a sharp fall in public investment, which the ABS attributes to the completion of some transport and hospital infrastructure projects. Although fiscal hawks who regard all public expenditure as wasteful may see this as a good sign, it possibly indicates that state governments have been tardy in completing the planning for new and necessary projects.