Monday, September 11, 2017

Income Growth may have given rise to Populism

If you're wondering what gave rise to populism, look no further than the lack of real income growth. With purchasing power for most either flat or declining for more than a decade, voters rejected mainstream politicians in Western Europe and North America and turned to the fringes on the far right and far left.
Now, though, there is evidence that it is waning, or at least has peaked for the time being. Donald Trump’s popularity has plummeted in the early months of his presidency. In the U.K., after the initial post-Brexit euphoria, the cold, hard reality of separation from the European Union is setting in. Fringe parties in Western Europe have seen their popularity wane.

Why is populism fading? A number of reasons are apparent; some involve economics.

-Mainstream parties regroup and adapt. Most were oblivious to the rise of populism, but Trump’s surprise election and equally surprising Brexit got their attention. U.K. Prime Minister Theresa May and German Chancellor Angela Merkel have both responded to anti-EU, nationalist sentiments.

-Populism has failed to deliver instant results. It was unrealistic to believe Trump’s plans for speedy fiscal stimuli, tax reforms and replacement for Obamacare would be realized. Also, his personal attacks on both Democratic and Republican leaders mean there will be less cooperation in Congress to get his proposals enacted. Also, huge government spending, which all but the most ardent anti-deficit hawks desire, will take two to three years to be effective, even after the needed legislation is enacted. In the U.K., it’s evident that a clean, rapid Brexit is not possible. As with many major events, the devil is in the details.

-Populism’s approach has been flawed. It’s now obvious to most everyone that populists concentrate on what they’re against, not what they’re for. Sure, Trump emphasizes “America First,” but he concentrates on restricting immigration, reducing imports from Mexico, forcing China to abandon its mercantile policies, and compelling U.S. companies to hire Americans. His interest in positive changes such as improving education and training, opening America’s doors to skilled immigrants, and encouraging exports is much less apparent. In Europe, the emphasis is on containing the fallout from Brexit and keeping the extremists at bay. French President Emmanuel Macron’s plans for labor-market reform are viewed by workers as taking away their cherished 35-hour work week and essentially lifetime employment, not as creating conditions that will enlarge the economic pie so everyone gets a bigger slice.

-Economic conditions have improved, especially in the euro zone. Economic growth covers a multitude of sins. It is what reduced the federal government debt-to-GDP ratio from 106 percent in 1947 to 23 percent in 1975. For the first time in a decade, all 45 of the world’s major economies tracked by the Organization for Economic Cooperation and Development are growing, and in 33, the rate of advance is likely to be higher in 2017 than last year. The International Monetary Fund projects global economic growth at 3.5 percent this year, up from 3.2 percent in 2016, with a rise to 3.6 percent in 2018. Of more importance to the waning appeal of populism, the unemployment rate continues to fall in the euro zone as well as the U.S. and the U.K. It’s interesting to note that these developments abroad are occurring even with a weaker dollar, which aids U.S. exports but retards those of American trading partners, especially in the euro zone as the euro rises.

-Real wages are rising. Real, or inflation-adjusted, wages have been rising in G-7 countries. But that’s because of slower inflation, not an acceleration of nominal wages. That is not the way the Fed and other central banks want real wages to gain, since inflation is chronically undershooting the 2 percent target at which the Fed, the European Central Bank, the Bank of England, the Bank of Japan and other major credit authorities aim.

Despite recent events, though, populism is unlikely to disappear because the fundamental driving force -- the lack of real wage growth -- will likely persist. In my columns on July 31 and Aug. 1, I outlined reasons why sluggish wage growth is likely to continue -- including globalization, ample labor supply, cost-cutting by businesses that will affect labor, the bulk of new jobs being in low-paying sectors, the loss of high-paid union jobs, and poor productivity growth.
Populism may be down, but it isn’t out. If weak household purchasing power lingers, as it likely will for at least several years, populism will persist.

Thursday, September 7, 2017

The powers of Presidential Executive Orders

Remember when the teacher in high school civics class taught that the U.S. Congress makes laws and controls the purse while the president merely enforces them and spends the allocated money? That no longer reflects reality.

Federal spending has risen from 16 percent of gross domestic product in the early 1960's to 22 percent today. Regulatory bodies have mushroomed, including six new federal departments and numerous agencies. Every national crisis brings more federal involvement -- all of which has resulted in thousands of rules regardless of their costs or benefits. Recent presidents have taken it upon themselves to act unilaterally in regulating and deregulating countless aspects of the economy and business while issuing executive orders on items that on occasion have been stymied by Congress. 

Despite gridlock in Washington, Trump is moving ahead on his own on deregulation and foreign trade. The former is favorable for investors; the latter is problematic.

The Trump administration recently opened NAFTA renegotiations with Mexico and Canada. In line with Trump’s “Buy American” theme, it’s seeking greater flexibility in imposing or reinstating tariffs on Mexican and Canadian imports. Trump is also free to pursue his “America First” trade policies by taking a hard line against China and threatening to impose steep tariffs on Chinese exports.

Trump has also pressed for deregulation, but with little success. It’s not for lack of effort. Examples of deregulation under a Trump administration are legion and growing. Through the middle of the year, the federal government made 1,731 preliminary, proposed or final rules, down 40 percent from the 2011 peak under President Barack Obama and a 17-year low. And many actions taken under Trump are actually reversals of earlier rules made by the Obama administration. Of 66 completed actions at the Environmental Protection Agency, a third were rule withdrawals.

Trump’s Labor Department undid Obama’s expansion of eligibility for overtime pay while financial regulators dropped plans to tighten restrictions on banker pay. The Interior Department indicated it would rescind proposed rules on oil and gas fracking on federal land. The Federal Communications Commission is reversing the Obama-era decision to regulate internet service providers as utilities. The Food and Drug Administration has signaled faster approvals for new drugs.

The fiduciary rule governing retirement-savings accounts is being delayed by 18 months from the Jan. 1, 2018 compliance date to July 1, 2019, so significant revisions may be made. The Treasury Department is proposing the rollback of many restrictions on financial institutions that the Obama administration believed were necessary to curb excessive risk-taking and a repeat of the 2008 financial crisis. Many are part of the 2010 Dodd-Frank financial regulation law.

The Consumer Financial Protection Bureau is still led by an Obama-appointed director, but is shifting toward lenders’ interest than its previous exclusive focus on consumer borrowers. As its rushes to complete a regulation on payday lenders before a Trump appointee takes over, it is scaling back restrictions on them. Of course, the new leadership may simply not enforce whatever restrictions on payday lenders that survive.

The Department of Housing and Urban Development just announced a tightening of rules for reverse mortgages. By requiring bigger upfront fees paid to the Federal Housing Administration that insures the loans and by reducing loans for new borrowers, the government believes the program will be on a sounder footing with less exposure for taxpayers.

In another reversal of Obama-era regulations, the Equal Employment Opportunity Commission will stop the scheduled collection of data from employers on how much they pay workers of different genders, races and ethnic groups. The 2016 proposal was part of Obama's efforts to address pay disparity among different groups of employees. It would have applied to private firms with 100 or more employees and federal contractors with 50 or more.

The Occupational Safety and Health Administration is reducing its reporting of workplace fatalities and is rolling back a regulation that went into effect Jan. 1, at the end of Obama’s presidency, that requires employers to electronically file injury logs to the government.

Many of the regulations instituted by Obama were via executive orders, and Trump is using executive orders to rescind them. Within days of taking office, Trump signed two orders supporting the construction of two controversial oil pipelines -- Keystone XL and Dakota Access -- that Obama had refused to back, due mostly to environmental concerns. 

The Trump administration is also considering reducing the size of some national monuments but not eliminating them. They encompass vast areas of federal land, especially in the western part of the country. Removing acreage would free up land for ranching, hunting and fishing, mining and other commercial use. This, too, can be done without congressional involvement.

Trump ended the Deferred Action for Childhood Arrivals program that has offered a reprieve from deportation to 800,000 people -- “Dreamers” -- brought to the U.S. illegally as children. It was instituted by Obama’s executive order five years ago.

Interestingly, executive orders were originated out of thin air by Franklin D. Roosevelt. Congress did not prohibit them so the custom became established and has grown tremendously, especially in recent years. They are, in effect, presidential legislation and another vivid example of the awesome power of the president of the United States.