Trumped! A Nation on the Brink of Ruin... And How to Bring It Back

by David Stockman

  The mainstream pundits did not see this coming, of course, because they are beguiled by the false Keynesian consensus about the U.S. economy—whether they acknowledge it or not.

  To wit, Greenspan-era monetary policy has not rescued the American economy from crisis, recession and underperformance. To the contrary, it has actually hollowed it out by facilitating the vast off-shoring of goods production and supplanting it with a phony, unsustainable debt-based simulacrum of prosperity and growth.

  Indeed, the chart on the next page does not represent a miracle of capitalism owing to technology and automation, as the Cassandras of the establishment narrative contend. Instead, it reflects the betrayal of capitalism by the money printers, statists and gamblers who have hijacked national policy.

  Even then, the above dismal picture is rationalized by the Fed and its Wall Street megaphones as unimportant owing to mix change. These higher paying “old-economy” jobs have supposedly shifted to white-collar employment in finance, technology, entertainment and other domestic services.

  No they haven’t! As indicated earlier, there are still nearly 1.5 million fewer full-time, full-pay “breadwinner jobs” in the United States today than in January 2001.

  In fact, the 71.2 million jobs currently in this category—which, as enumerated above, includes all of the full-time, full-pay sectors in the service economy—account for just half of the establishment payroll jobs reported in the BLS monthly survey.

  As indicated, these are mostly year-around 40-hour-per-week jobs that pay an equivalent annual wage of $50,000 on average. More importantly, they account for upwards of two-thirds of the actual payroll dollar disbursements in the nonfarm economy.

  To be sure, even the average “breadwinner job” at $50,000 per year is not evidence of galloping affluence. But these jobs are the best of what we have, and the total has been going nowhere for the last decade and a half, even as the adult population (over 16 years) has risen from 212 million to 252 million.

  Yes, roughly 8 million of that adult-population gain represents baby boomers that have joined the Social Security rolls. But that leaves 32 million more potential workers and no net gain in breadwinner jobs at all.

  Stated differently, the Trump voters don’t watch CNBC. Or if they do, they are savvy enough to dismiss its specious celebration of America’s phony bicoastal prosperity and especially the monotonously stupid and profoundly misleading ritual of “Jobs Friday.”

  The voters know from experience that those millions of “new jobs” are mainly part-time gigs that come and go between the financial crashes. The latter, in turn, arise every seven years or so out of the machinations of Wall Street, Washington and the Fed.

  According to the Keynesian commentariat, of course, these low-quality, low-pay, bread-and-circuses jobs are no different than any others. Even if the generated only 10 or 20 hours per week of minimum-wage work, it’s all part of the jobs “print.”

  So they appear on bubblevision each month to urge the rubes to buy stocks because the Fed is making everything all better. But it’s a huge lie. The underlying reality is that the American jobs market continues to deteriorate at an alarming pace.

  The Trump voters presumably are not sufficiently educated to understand all this—or to recognize that most of the employment slots that the BLS guesstimates from its deeply flawed surveys and models are not remotely comparable.

  Whether the BLS headline is comprised of minimum-wage maids at the Plaza Hotel or $30-per-hour set-up men on the former Carrier air conditioner line in Indiana supposedly doesn’t matter. It’s all good, according to their Keynesian betters.

  In fact, of the paltry net gain of just 5.8 million new payroll jobs since the December 2007 precrisis peak nine years ago, nearly 2 million (or fully one-third) of the jobs have been in bars, restaurants, hotels, sports stadiums and amusement parks.

  These jobs average less than 27 hours per week and pay an average of less than $15 per hour. They would generate an annual wage of barely $20,000 per year if they were year-around jobs, which they most definitely are not.

  Nor is this just some temporary aberration from the Great Recession that is still being worked out. In fact, during this entire century to date, only 13.2 million net new payroll jobs have been created, but 5.4 million of them have been in the broader part-time economy. The latter includes the above leisure and hospitality jobs, as well as retail clerks, temp-agency workers and low-wage service labor.

  So not only is there a severe and growing jobs deficit, but 41% of all the net payroll jobs created since the year 2000 are low-wage gigs that come and go with the season and the cycle, not “jobs” as they word was once understood.

  The not-so-secret reality is that Trump voters have gotten stuck in these dead-end jobs or fear they will end up there or have friends and family who have no other options.

  Needless to say, America’s 40 million part-timers know they are not winning; they are barely staying above the water line of economic survival.

  Given these realities, the phony charade of Jobs Friday is especially galling to the Flyover America. It is an excuse for the casino gamblers to inflate stock prices even further, and for White House politicians like the current incumbent to brag about the purported success of their economic stewardship.

  But the Trump voters have not been fooled. They know the American economy is failing and that they have been left behind. And they also can clearly see that Washington’s massive borrowing and spending programs and the Fed’s monumental free-money gifts to Wall Street have done nothing at all to ameliorate their plight.

  Indeed, the ultimate measure of labor-market health in a globally integrated economy and gig-based employment system is total hours worked. Even setting aside the fact that the quality of these hours has deteriorated and real pay rates have declined, the actual trend is dismal.

  Since the turn of the century, labor hours in the nonfarm economy have advanced at an anemic rate of just 0.4% annually. That is only one-fourth of the 2.0% rate, which prevailed during the prior 16 years.

  Needless to say, that radical downshift is not due to demographics. As we have seen, the adult working age population has actually grown by 32 million since the year 2000.

  At the same time, it puts the lie to the alleged virtuous circle of Keynesian stimulus. There has been no effective pump priming of consumption, production, incomes and jobs.

  Indeed, the Fed’s balance sheet has grown by 900% during the last 16 years, while the cumulative rise in annual labor hours has been only 6.7%.

  That contrast is stunning, and even if it doesn’t fully grasp the technical facts, Flyover America has no doubt that the system is rigged in favor of the bicoastal elites. After all, when the production of money comes in at 135 times the amount of new work, you don’t need a PhD from the Princeton economics department to see that the economics game in America is no longer on the level.

  CHAPTER 7

  Falling Backwards in Flyover America—Why Real Household Income Is Down 21% Since 2000

  GIVEN THESE DISMAL REALITIES OF THE JOB MARKET IT IS NOT SURPRISING that median household incomes have been heading south for several decades.

  In fact, constant dollar median household income—based on an accurate measure of inflation—is down 21% since the turn of the century. Working Middle America has never before had such a deep and sustained setback—even during the Great Depression.

  The drastic deterioration of middle class living standards depicted below, of course, is heatedly denied by the ruling elites. Yet their disavowal is based on the flagrant manipulation of the inflation data by the BLS based on a pseudo-science called “hedonics.”

  Supposedly, this adjustment to the actual sticker price of goods and services takes account of “quality” improvements like airbags on autos, and higher speeds and functionality on computers. Then again, candy bars get smaller, fast food gets less nutritious, retail purchases—including online commerce—require more unpaid self-service labor a
nd Chinese-made toasters go to the junk heap far faster than such appliances did decades ago.

  Never mind. Hedonics was never meant to be scientific or balanced. In fact, it was a back door ruse to trim the cost of Social Security and other entitlement COLA’s concocted by Alan Greenspan and George H.W. Bush’s chief economists back in the 1990s. They accomplished by statistical stealth the Social Security cuts that Ronald Reagan failed to obtain in the open arena of legislative action during the 1980s.

  Consequently, the BLS’ inflation measuring stick has become increasingly inaccurate. This hedonics distortion has been further compounded by the underweighting and mismeasurement of the four horsemen of inflation—food, energy, housing and medical—that absorb the preponderant share of Main Street paychecks.

  As detailed below, those systemic errors have been remedied in what we call the Flyover CPI. When median household incomes are deflated by this more accurate cost-of-living index, the reason that Main Street feels it is being left behind becomes starkly evident.

  In a word, the purchasing power of its wages and savings is being eviscerated. What had been $68,000 in today’s purchasing power at the turn of the century is barely $55,000 today.

  So when Donald Trump tells voters that the system is rigged, they have solid reason to concur. When he proclaims that America isn’t winning anymore, they know he’s talking about them.

  And, yes, when he talks about the crooked establishment he strikes a chord, as well. Rigging the inflation rate with a sawed-off ruler may put lipstick on the official data, but it does not change the truth of steadily shrinking living standards on Main Street America.

  WHY INCOMES AND WAGES ARE FALLING IN FLYOVER AMERICA

  As we indicated, the persistent shrinkage of real wages and net worth in Flyover America is no accident or blemish of capitalism. It is a consequence of the Washington and Wall Street consensus in favor of printing press money, rock bottom interest rates and 2% inflation targeting. Together and at length, these misguided policies have buried Main Street households in inflation and debt.

  Neither of these millstones is even acknowledged by the mainstream narrative because they have been essentially defined away. By the lights of the Fed and its Wall Street acolytes, in fact, debt has been christened a growth tonic while inflation is held to be a special form of monetary goodness that levitates economic output, incomes and jobs.

  Alas, that’s just plain old tommyrot. There is no case for siding with more inflation as a matter of policy and there is much history to warn us of the dangers of rampant debt.

  With respect to the scourge of the ever escalating cost of living, the chart below tracks a modified CPI which includes the aforementioned heavier weights than the regular CPI for the four horsemen of inflation—food, energy, medical and housing. It also incorporates a more accurate measure of market-based medical costs and housing/shelter costs.

  This “Flyover CPI” is a far more honest indicator of the actual cost of living pressures faced by Main Street households, therefore, than the sawed-off measuring rod used by the Fed called the PCE deflator less food and energy.

  Needless to say, during the 29-year span since Alan Greenspan’s arrival at the Fed in August 1987 most people have needed food, heating, transportation, shelter and medical care. The Flyover CPI based on an accurate measuring of those necessities has risen by 3.1% per year during that period.

  That relentless rise in living costs has not slowed down since the turn of the century, as shown in the chart below. Yet compared to the 3.1% per annum gain in the actual cost of living in Flyover America since the year 2000, the Fed’s favorite measure has risen by just 1.7% annual.

  The wedge between these two inflation measures is not just a statistical curiosity; it’s a big deal and a commentary on why the Washington Beltway and Flyover America are two ships passing in the dark.

  In fact, just since the turn of the century the actual cost of living on Main Street has risen by 40% more than acknowledged by the nation’s purported guardians of price stability at the Federal Reserve. That the political class in Washington and the speculators on Wall Street, therefore, are clueless about the deep economic distress afflicting Main Street America is not at all surprising.

  Indeed, this relentlessly increasingly cost of living explains the rise of Donald Trump more than anything else. The fact is, when the purchasing power of hourly wages is deflated by this honest measure of inflation, their buying power is 5% lower than it was 30 years ago. Wage earners are not winning anymore, not by a long shot.

  This baleful condition is directly attributable to the Washington and Wall Street policy regime. That’s because the Keynesian central banking model adopted at the Fed after 1987 had it exactly upside down.

  At the time and ever since, the dominant new force in the world economy has been export mercantilism in Asia and elsewhere. As we demonstrated in Chapter 5, the eruption of vast new industrial capacity drained the Asian rice paddies of cheap labor, thereby emitting unprecedented deflationary pressures on global wage rates.

  In the face of the “China price” on goods and labor, what was needed in America, therefore, was the very opposite of what Washington’s Keynesian academics and policy apparatchiks delivered. As we explained in Chapter 5, under a regime of free markets and sound money there would have been high interest rates, domestic wage and price deflation, high savings rates and massive reinvestment in the nation’s aging capital stock.

  Especially after Mr. Deng opened China’s export drive by radically devaluing the yuan in 1994, the only way that real labor incomes could have risen in the US, in fact, is via a reduction in nominal wage rates offset by an even faster rate of annual decline in the CPI and other costs of production in the domestic economy.

  THE KEYNESIAN MYTH OF “STICKY” WAGE RATES

  Needless to say, the Keynesian academics who dominate the Fed and the monetary policy narrative cannot even fathom that possibility because they are enthrall to the ancient texts of JM Keynes, which proclaimed that nominal wages are inherently “sticky” and can’t adjust downward like other economic prices.

  That was pure claptrap during the 1930s and ever more so today. “Sticky” wages only happen when there are state enforced union monopolies and employers are precluded upon penalty of jail from offering lower nominal rates to any willing takers.

  Stated differently, the “sticky” wages hypothesis is a purely political proposition, not an economic truth. It was opportunistically embraced by statist redistributionists and the union movement alike.

  For the latter, it was a rationale for pure protectionism. For the former, it was a justification for workplace-originated income redistribution—and then for Washington- based monetary intervention to counteract the loss of jobs and production that is the inherent result of artificially high labor prices.

  In truth, there is endless evidence that wages aren’t sticky—notwithstanding the rearguard action of unions and labor law protectionism. For instance, the North American auto industry cut fully loaded auto plant wages from $60 per hour to $30 per hour when Toyota and the rest of the transplants established production in Kentucky, Alabama and other right-to-work states in the south.

  Indeed, in the absence of NLRB protectionism and labor practice harassment, and then the $85 billion taxpayer bailout of the UAW auto plants in 2008–9, the lion’s share of the U.S. auto industry would have moved from the Rust Belt to the South. Nominal wages would have been sharply reduced in the process.

  The same is true with high wage unionized grocery stores. A huge share of the grocery store business has now migrated to the far lower nonunion hourly rates at Wal-Mart. Ditto for the migration of construction work from building trades union dominated firms to nonunion competitors.

  At the end of the day, “sticky wages” is a euphemism for labor protectionism and the “sticky” allocation of production and resources. So from Greenspan forward, the Fed was busy fueling U.S. inflation and thereby undermining the comp
etitiveness of domestic production and jobs on a theory that belongs in the museum of academic crackpottery.

  As we indicated, the Fed’s deliberate accommodation of steadily rising nominal wages led to off-shoring of jobs, not an expansion of real worker incomes. That is the driven driving force behind Donald Trump’s apparent crude protectionism. So suffice to say that he is correct in insisting that Washington policy caused the hollowing out of the U.S. economy over the last 25 years.

  For the most part, however, that was not owing to bad trade deals made by Washington. Instead, it was the inherent result of inflationary monetary policies. Under the latter, the Fed enabled domestic households and businesses to borrow at deeply subsidized, uneconomic rates and spend the proceeds on imports that were not being earned by American exports.

  So the workers of Flyover America got the worst of both worlds. Taking the average nominal wage rate from $7 per hour to $22 per hour over the last 30 years resulted in a drastic loss of competitiveness and U.S. based goods-and-services production. At the same time, when nominal wage rates are deflated by the Flyover CPI, it is evident that their purchasing power has ended up 5% lower after 30 years of money printing at the Fed and massive Bubble Finance windfalls on Wall Street.

  In this context, there is another reason why the elites who make and communicate national policy couldn’t be more wrong. Their wrong-headed Keynesian model not only embodies a bogus theory about wage rates but actually postulates that domestic inflation is a good thing.

  We refer here to the Fed’s 2.00% inflation target and the spurious claim from the Eccles Building and its Wall Street megaphones that there is actually a deficiency of inflation. In a world of the China price that is just plain asinine.