Thursday, July 21, 2016

Marginal Analysis and Diminishing Returns

I'm getting closer to understanding the appeal of Mr. Trump (as well as the result of the UK's EU referendum and a host of other first-world political maladies) and here's my attempt at explaining the problem through which we're living. I'm not a political scientist. I'm a historian who is now teaching macroeconomics. These facts mean that my political analysis is shaded toward looking at a long-run perspective that emphasizes opportunity costs.

Propelling Trump's rise is a sense that things aren't good in America right now. Among the reasons why things allegedly aren't good are foreign trade trends, illegal immigration, and free-loading allies who are bleeding us of our wealth.

Looking at surface statistics allows partisans to find evidence to justify their point of view. Unemployment is lower than it's been since 2008, but the labor force participation rate is low, too. And unemployment is affecting some regions more than others. The stock market is doing well, but interest rates and inflation remain low. Our economy is growing (and doing so more robustly than most of the other rich nations), but it's growing below the historical trend. China's economy is slowing down, but not so much so to avert the reality that their GDP will eclipse ours before too long.

In other words, things aren't that bad right now. You could even argue that they're good. But they're not as good as they were 20, 30, or 60 years ago. And therein lies the political problem. Sixty years ago our economy was buoyed by a recently won world war, a war that depressed many of our exhausted economic rivals, gave us unparalleled opportunity to profit by rebuilding war-torn Europe, and an epochal demographic boom. Thirty years ago, those baby boomers were entering their prime earning years. Twenty years ago, our economy benefited from a perfect storm of the Iron Curtain's fall, liberalization of trade agreements, and the cresting of the baby boomers' earning years.

Our temptation now, as a democracy, is to not overreact to a present-day in which things are better than they seem, even though they're not as good as they were in our recent memory. In others words, we need patience and perspective. We're not getting that this week. Here's hoping we get it next week.

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