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We now know very well that in the run-up to the Great Recession, policymakers could not detect what was coming. Central banks around the world, including the Federal Reserve in the US The Monetary Policy Committee in the United Kingdom and the European Central Bank in the Eurozone missed the big one in their own countries, but they also did not see that the crisis was global; One down, all down. In October 2008, members of the Federal Open Market Committee of the Federal Reserve predicted that real GDP growth in the United States in 2009 would be in the range of -1.0% to + 1.8%. We have -2.54%.
Errors of calculation like this have real consequences. We now know that the United States went into recession in December 2007, as determined by the Business Cycle Appointment Committee of the National Bureau of Economic Research, while almost all other advanced countries did so in April 2008. My new book, "It does not work: Where do I have everyone?" Did the good jobs end? "It explains in detail how policymakers forgot about this catastrophe, even when it was about them.
The Fed, in my opinion, raised rates nine times between 2015 and 2018 due to its erroneous belief that the US. UU They were in full employment. During that time, other measures, especially the weak wage growth, suggested that full employment was still far away. Trump felt that and, rightly so, has been pushing for rate cuts.
Two years after the Great Fall of 1929, the economist John Maynard Keynes warned precariously that a financial crisis is especially difficult to recover and that growth would inevitably be slow. "It is possible that the duration of depression is much longer than most people expect, and much will change both in our ideas and in our methods before we emerge," he said. He was not talking, he said, about "the duration of the acute phase of depression," but about "the long and dragging conditions of semi-depression, or at least subnormal prosperity, which can be expected to succeed the acute phase. "
Today, more than a decade after the Great Recession began, we are still immersed in those "long and dragging conditions of semi-recession." In the election campaign, Donald Trump discovered it intelligently. The global recovery has been muted in the years after the 2008-2009 recession and people are suffering even after ten years of growth in what is now the longest recovery in the US. UU Pain, anxiety, depression and a general feeling of helplessness increase. Happiness is below. Trump took advantage of those feelings.
The increase in deaths due to desperation (due to drug overdoses, liver failure due to excessive consumption of alcohol and suicide) in rural America and in the urban heart, especially among less educated whites, was rapidly becoming a plague. Americans are increasingly in pain, not relieved by the huge increase in opioid prescriptions. Life expectancy in the United States is falling.
The votes for Trump, and, as I show in "It does not work", also for Brexit, were reflections of the insecurity, despair and isolation that people were feeling, especially those who had lagged behind in the recovery. The old cities of coal and steel were suffering. People voted for Trump because they thought he could make a change.
There was also, of course, another force at play: history tells us that people who suffer a prolonged recession tend to look for someone to blame. When people are suffering, it is easy to find scapegoats, and immigrants are often objective. In the 2016 presidential election, Donald Trump led 26 of the 30 states in which the percentage of foreign-born residents is the smallest, according to the five-year (2011-15) calculations of the American Community Survey from the Census Bureau. Native residents represent 91 percent of the population in the states that Trump won compared to 81 percent in the states he lost. Trump ran on an anti-immigrant platform. The majority of the voters of the EE. UU They see immigrants positively, but most Trump voters do not. Residents of London, Paris and New York, which contain large numbers of immigrants, had more in common with each other than with residents outside the large cities of their own countries.
Trump voters also tended to live in the areas that fought the most. Good jobs went to many, and Trump was positioned as the belligerent champion of the United States. He saw the pain that was happening, and the discontent with the clbades to take exams, which were doing well, thank you, while many, especially the less skilled, were not.
Trump on the campaign trail argued repeatedly that despite the Obama administration's claims that full employment was approaching, the unemployment number "is totally fictitious" and that there were very few decent jobs available to those who wanted them. He was clearly in something. In the November 2016 elections, the unemployment rate was 4.7%, but other labor market measures told another story. Employment as a proportion of the adult population was then 60%, compared to 63% at the beginning of the recession in 2008. The underemployment rate, which measures how many hours workers would like to work, was also well above its initial levels. Trump had discovered that the labor market in the United States was not close to full employment.
Between 2015 and 2018, based largely on the FOMC's view that the US labor market was close to full employment, the Fed, wrongly in my opinion, raised rates nine times; once in 2015 and 2016; three times in 2017 and four times in 2018. At the end of 2018, the Fed forecast that interest rates will increase in 2019 and 2020. In doing so, it relied on models dating back to the 1970s, when the economy was quite different . Fundamentally, the unions were much more powerful than the current ones. In 2019, these models are very outdated, but economists have continued to trust them, and they wonder why there is no inflation or the wage growth they expect to accompany.
As a result, Trump turned to the Federal Reserve and argued that the rates were too high and that, in fact, there should be cuts. He even persecuted Federal Reserve Chairman Jay Powell, threatening to fire him or even degrade him. In my book, I argue that "the Fed had been signaling more hikes to come; President Trump directed his anger towards them, and they changed their tone in 2019. I have to say that I agree with him. "I still do it.
During the interrogation of Rep. Alexandria Ocasio-Cortez (DN.Y.) In the House Financial Services Committee yesterday, Powell essentially admitted that the Fed had raised rates erroneously because it thought the United States was close to the full employment when it was not.
"Do you think it is possible that the Federal Reserve's estimates of the lowest sustainable estimates for the unemployment rate were too high?" Ocasio-Cortez asked Powell.
"Absolutely," he replied.
"So, do we overcome our long-term unemployment rate?" He continued.
"I think we have learned that it is lower, substantially lower than we thought," the Fed president responded.
Ocasio Cortez questioned Powell on the Phillips curve, an economic model that badumes that a low unemployment rate boosts the growth rate of wages and, with it, inflation. It is key to the Fed's economic models. But that theory, he said, "no longer describes what is happening in today's economy." Powell agreed.
The next day, the director of the National Economic Council, Larry Kudlow, responded "congratulations to Ms. AOC" for her questions, and said "that's something like that". Trump and AOC agree on the need to reduce rates and me too. More policy errors by the elites.
"It does not work" shows that, now, wage growth is not due to unemployment but to underemployment, which has not yet returned to pre-recession levels. That explains the weak wage growth we see today, and why the US. UU They are not yet in full employment.
However, the markets suggest that investors expect three rate cuts by the Federal Reserve by the end of 2019 and probably even more in 2020, since the US economy is likely to slow down or even turn into a recession. Trump was right, although perhaps for the wrong reasons: he is concerned about the influence of the economy and the Fed on his chances of reelection for 2020.
I do not agree with Trump on many things, including the commercial war. But in jobs, below-normal prosperity and interest rates have been vindicated.
David G. Blanchflower is the economics professor Bruce V. Rauner at Dartmouth College, professor of economics at the University of Stirling and badociate researcher at the National Office of Economic Research. He is the co-author of "The Wage Curve" and the author of "Not Working: Where have all the good jobs gone?". Lives in Canaan, New Hampshire. Follow him on Twitter: @D_Blanchflower.