The second coming of Trumponomics

Donald Trump will be the first president since Grover Cleveland, also a New Yorker, to have two non consecutive terms in the presidency. The reasons for this are beyond my abilities to analyze, but it is clear that he did get the votes of people in the lower levels of income, that had voted for Biden in 2020 (but not for Hillary in 2016) and went decisively for Trump. One may say that the populist vote in favor of tariffs, often associated with working class interests, was part of the explanation. But Bidenomics (on that see this and this) had incorporated that and more.

I do think that economic factors were central for the outcome of the election. However, I think there is a simplification in suggesting it was inflation. Many people have suggested that, including many progressives, like, for example, Doug Henwood, which is correct in emphasizing the mistake of the Harris campaign in veering right (and that perhaps Dems will mistakenly veer even more to the right).

However, I tend to think that when people say that inflation is one of their main concerns, and that should be taken seriously, what they mean is that their wages are low. Nobody would care if inflation was even a bit higher if their wages increased significantly above inflation. And sure enough the minimum wage that has not increased since 2009 has been at historical lows. However, once we look at the earnings from those at the bottom, as shown below, we that while they did fall from May 2020, even before inflation accelerated, until June 2022, they have recovered and are higher than before the acceleration of inflation. However, they are essentially barely above the levels of the early 1970s.

In other words, real wages recovered, and have been growing more or less since the second Clinton administration, but they have been essentially stagnant, and there are many reasons for the working class to be angry. You could use other variables to show the same (without the issue of inflation), like the share of wages and salaries in Gross Domestic Income (below) that fell from about 50 to close to 42%. Bernie's insurgency on the left was no mere accident, and its interdiction within the Democratic Party has made it possible for a Era of Trumponomics, as it is now clear.

What working class people, that flocked to Trump in 2016 and now, and had voted for Biden in 2020 (and Obama in 2008, and also in 2012 when the candidate was Romney), are saying is our incomes are insufficient. Not that inflation is high. The working class is not Monetarist, even if some of their intellectuals are. Why my caution on inflation, you may ask. Because the main lesson from mainstream Dems will be that inflation caused the defeat (echoed by many progressives), rather than economic hardship and inequality, and that this, in turn, was caused by excessive fiscal expansion, and that balanced budgets are needed. Exactly the wrong lesson.

Inflation was not caused by the fiscal packages, it did not cause the defeat, and it actually is back down and, for the most part, excepting supply-side shocks, will remain low, since the bargaining power of the working class is weak (soon to be weaker), and there is NO significant distributive conflict (all stuff I said on my piece in Catalyst at the beginning of the inflationary bout in the summer of 2022).

In fact, the anti-labor stance (so much for his populist credentials) is the defining characteristic of Trumponomics. The tax cuts for the wealthy are recycled supply-side economics. The tariffs, which everyone sees as his hallmark, and something that he introduced in his first presidency, and in some ways has been maintained by Biden, are less relevant in some ways. First, contrary to some hyperventilating the tariffs will not reignite inflation, but would at worst increase the price level. Second, and more importantly, it is unclear that this is not like the infamous wall, that he would have built, and Mexico would have paid for, in his first term, more imaginary than real. His possible Treasury Secretary has already said in the Financial Times that: "Trump’s pledge to impose sweeping tariffs on imports as a 'maximalist' threat that could be altered during talks with trading partners." In his words: "It’s escalate to de-escalate."

Tariffs are just a tactic to deal with China. The anti-labor stance will be seen soon at full display in the National Labor Relations Board, that during Biden has been the most pro-labor since the 1960s, perhaps. Where we should expect a tremendous backlash, other than labor issues, is on health, and immigration, and these again have significant impact on the working class. His government will make things worse for workers, and will open the opportunity for left wing populism. If the Dems learn the lesson. A big if. Hope springs eternal.

A primer on the economics of immigration: a surplus approach perspective

This is definitely not my topic of research. So you may very well ask why would I venture to write about it, beyond the obvious reason that it is probably one of the most debated issues these days in the US, with the government shutdown being related to the now infamous wall. I am myself twice an immigrant, I descend from immigrants (my parents returned to their country of origin, but had emigrated, and on my mother side my grandfather was also an immigrant, and the same goes on my father's side a few generations before), I might add. But that is not the whole, or the most relevant, reason.

Most debates about immigration center on labor market issues, and discuss the issue analytically with the tools of marginalism. The conclusions, by definition, are the logical consequence of the assumptions in that model, and the reading of the evidence is biased by those theoretical concepts. Here is a place were the capital debates (go read this very old post) might be important for a policy issue that is in the news constantly and that should concern economists. Being in favor of a return to the old and forgotten method of classical political economy, or the surplus approach, and not having seen any discussion of the issue along those lines is what led me to write this brief post.

Let me start with a very simple representation of the conventional argument. In the conventional story, you have a market for factors of production (labor in this case), and equilibrium is obtained when the marginal productivity of labor equals the marginal disutility of labor, where firms maximizing profits and individual workers maximizing utility find the optimal solution, shown in point C in the figure below (with variables with their traditional meanings; note I use N for labor, since I leave L, for liquidity; yep, I still teach the ISLM with that pesky L in there).

In this case, the effects of immigration are relatively simple to understand. Mainstream economics suggests that immigrants would add to the labor force, increase the labor supply, reduce the real wage, and lead to firms hiring more workers and increasing production. Output and employment should go up, while real wages would go down. The effect on the wage bill (W/p * N) depends on certain assumptions, but certainly native workers lose to the extent that their real wages go down. Hence, a backlash against immigration by working class native groups should be expected.

This simple analysis abstracts lots of things, of course. Differences in the quality (skills) of workers, and immigrants, and what would happen in the presence of capital mobility (with profits going up, with lower real wages, and capital mobility, then new factories should move into the country to take advantage of lower wages and increase the demand for labor, eliminating any initial effects on real wages). A lot of the academic debate has been based on arguments along these lines (see, for example, the Card and Borjas debate on the effects of the Marielitos Cuban immigrants in Miami real wages in this nice Vox post). Note, also, that the evidence suggests that the effects of immigration on real wages of unskilled workers are relatively small (if you believe Card).

In this view, then, there are some acceptable reasons for workers to be concerned with immigration. Note that this says nothing about fiscal issues, which many conservatives also use against immigration, suggesting incorrectly that they do not pay taxes (they certainly pay sales taxes, and other local taxes, and given the low incomes of most unskilled workers, would not qualify for income tax anyway), and take advantage of public goods. However, there are many analytical problems with the assumptions of the model above.

Note that the basis of the marginalist (or neoclassical) model presented above is the principle of substitution. In other words, as labor becomes cheaper than capital, that is by assumption fully utilized, then firms hire more labor. So the lower wages guarantee the full utilization of labor. The intensity of labor increases as its remuneration falls, and the price of labor, as any other price in marginalist theories (Austrian too, although they sometimes confuse this) reflects the relative scarcity of the factor of production. Note that for classical political economy authors (including Adam Smith) real wages resulted from historical and institutional factors, and supply and demand were only one of the factors affecting them. Under the conditions they analyzed the economies of their time they assumed that real wages were essentially at subsistence level.

The capital debates become relevant because they essentially show that the substitution principle has logical problems, and they open the possibility to a return of the sort of historical and institutional analysis of the labor market of classical political economics. I will not discuss the whole issue here again (check that post linked above), but the essence of the argument is that sometimes when real wages go down instead of leading to firms hiring more workers, the opposite might occur. Think of a situation in which real wages fall, and as a result, there is less demand for the goods produced by the firm. Perhaps the firms goods are bought by workers themselves.  Even though labor is cheaper, there is no reason for the firm to hire more workers if they cannot sell their goods, and the income effect overwhelms the substitution effect (the capital debates suggest that the substitution effect may go in the wrong direction, on top of that). That's essentially what Keynes said on chapter 19 of the General Theory (in chapter 2 he basically accepts the marginalist demand curve above, which is problematic, and shows the limitations of the supply curve; my paper on reading Keynes after Sraffa, the key author of the capital controversy, here).

The point is that it cannot be guaranteed that immigration would lead to a reduction of real wages, at least not on the basis of the logic of the model above. The actual result is ambiguous. Classical political economy provides an alternative framework to look at the labor market effects of immigration. It is clear that an increase of the labor supply might affect negatively the bargaining power of the established workers. But note that this is not always necessarily the case. Arguably, in the case of many immigrants in the so-called first globalization (late 19th to early 20th century), in which significant amounts of Socialists and Anarchists from Eastern and Southern Europe came to the US (and other parts of the Americas), the effect was to raise the class consciousness and the combativeness of the working class, helping strengthen some unions.

And the reverse is true, a country that experiences emigration might actually lose key workers, and unionization rates might decrease. In the last 30 years or so, the US has experienced an increase in the population of immigrants, many came from Mexico of course, and yet both countries have experienced a decrease in unionization rates (see here for Mexico). This suggests that other forces are in action, and that wage stagnation might be related to those policies, and not just, or not even fundamentally, as a result of the flows of workers from one country to the other.

Note also that classical political economy authors assumed that output was given in their discussion of distribution, and that separation of the theories of output and employment (dominated by Ricardian Say's Law, that was not a necessary feature of classical thinking, and that can be superseded by the Keynesian Principle of Effective Demand) allows us to understand other aspects of immigration. In other words, the level of output and employment would depend on autonomous spending (demand), and immigrants can easily be accommodated in society without displacing the native workers. Of course that would depend to a great extent on the government macroeconomic policies (not just fiscal and monetary policy, but also the setting of minimum wages, industrial and trade policy and so on).

In this view, it is less the effects of immigration on the labor market (along neoclassical lines of reducing real wages and increasing employment) that matter. It has been the policies that actually led to lower growth, lower union participation, trade policies that favored the loss of manufacturing jobs that have created the conditions for real wage stagnation. In that sense, it is those policies that are responsible for the backlash against immigrants among large groups of resident (native) workers, that could be exploited politically by right-wing populists, often with fascistic and authoritarian tendencies (not just in the US). Immigrants are actually escaping from similar neoliberal policies in their countries of origin.

And all of these points are just about the most direct economic consequences of immigration. There are other issues that are as relevant beyond economics. And it goes without saying that both immigrants and refugees (in particular those that result from US direct or indirect intervention abroad) deserve humane treatment, even if the conventional mainstream story was correct and immigration did cause inequality.

Undocumented Immigrants pay a lot of taxes

I have discussed this before. I explicitly argued that this was one the GOP myths about taxes, and I lumped it together with the notion that poor people don't pay taxes (Myth #3: 50% don't pay taxes, including immigrants).  Now a report from the Institute on Taxation and Economic Policy (ITEP) seems to confirm this view.

The report claims that undocumented immigrants living in the United States collectively pay an estimated $11.6 billion dollars each year in state and local taxes. And if their situation was regularized, they would pay even more. Add that to the fact that it does not seem that immigrants reduce wages, and the whole anti-immigration position seems more like what it really is. Xenophobia exploited by a demagogues preying on people that have had a hard time and are willing to find someone to blame. A dangerous mix.

Immigration and wages

A short op-ed in the Wall Street Journal, of all places, suggests that David Card's famous work (subscription required) on the effects of Cuban immigrants on real wages in Miami was probably correct, meaning immigration does NOT depress wages or lead to higher unemployment. Peri and Yasenov's actual paper is available here (subscription is also required, I'm afraid).

I do have problems with the mainstream interpretation that real wages and employment are determined in the labor market for sure. Employment is determined by aggregate demand, as we still teach in most macroeconomic manuals, since Keynes at least lives in the short run. And real wages are not determined  by supply and demand, or by productivity and intertemporal decisions of workers. Or at least not just by that. The old classical political economy tradition suggested that supply and demand were one of the many factors that affected the bargaining power of the labor class.

At any rate, worth checking the results, in particular, in these times, in which saying that immigrants (the undocumented ones; btw, Cubans have special status in the US, I guess that's why you can have two Cuban-Americans in the GOP primaries, one particularly harsh on immigrants) are the source of all problems has become acceptable.