The GOP is lost, efforts to push a different center-right party to prominence must begin.

A center-right party which nominates Donald Trump is not a serious party. While this statement would be true regardless of who Trump was running against, it's especially true given his competition.

There was Rubio, who was in the unique position of being able to unite virtually all factions in the party, while simultaneously broadening its appeal to demographics the GOP desperately needs to bolster its support from. To top it all off, he is from a crucial swing state, and brought truly innovative policy agenda proposals forward. These would include his reformation of the tax code to effectively be a progressive consumption tax (which economists have been clamoring over for ages), the conversation of the EITC to a wage subsidy; and pushing for a modernized role of education, a flexible one that allows constant and affordable skills retraining that are necessary for an ever-changing and constantly innovating economy. Yet his momentum died down after Iowa and never seemed to pick up again.

There was Gov. Kasich, one of the most experienced and qualified candidates out there, having been a state senator, and later a representative of the house on the budget committee the house budget committee during the Clinton Presidency (which would come in real handy as we know Hillary is going to try to use the economic success of the '90s as a talking point), and is currently Governor of Ohio (another important swing state) with incredible favorability ratings. He got obliterated.

There was Scott Walker, who managed to win a solidly blue state twice (and beat a recall attempt) on a very conservative platform, especially when it came to taking on public unions, promoting right to work laws, cutting taxes, and lowering the budget shortfalls substantially. He was liked by both the establishment and the Tea Party. It took him about a month after his campaign launch to not even be able to poll a single percentage point.

There were also candidates who were much more ideological than those listed (although by no means are those men unprincipled). Rand Paul was more or less the embodiment of the "limited goverment" ideal the GOP claims to be for. Granted, the GOP only seems interested in economic freedom, but nonetheless we had Ted Cruz for that position.

The wings of the party were definitely well represented this time around, with plenty of qualified candidates representing their respective fractions (and sometimes multiple ones). They were more conservative than W., but many still could have broadened the parties appeal and won the election.

Yet we ended up with a know-nothing, narcissistic xenophobe, who is all around an anti-small government, anti-freedom candidate, who's policies are resoundly anti-free market and would be disastrous if implemented. The party was so utterly incompetent by the time they made any effort to stop him (and it was pitiful) he had effectively had the nomination in his grasp. Now the party is being overrun by white nationalists, neo-nazis, and delusional nutjobs who think there is an ongoing "white genocide."

The party already has a major demographics issue, given the rise of minority populations. This situation is made worse because the GOP has been losing ever higher percentages of minorities with each passing election. The GOP's favorables have been abysmal, and young people are staying as far away from the party as possible. The media has successfully branded conservatism as the ideology of irrational fear, hatred of "subversives," and a deep dislike of the poor. With Donald Trump as the standard bearer, these already near insurmountable problems will be growing exponentially. By nominating a liberal strawman caricature of a conservative, the damage has already been done.

For those looking for some scenario in which the election ends up reversing some of the damage done, I see no reason for hope. There are three ways this can play out, none of which bode well for the GOP.

If Trump wins, he will alienate our allies and make us globally hated. He will ruin the lives of millions, whether through gestapo-esque deportation schemes to tariffs that cause American consumers to see the value of their dollars plummet while the Chinese sweatshop worker gets his job cut and he's forced to return to subsidence farming. We'd rack up mountains of debt and destroy our economy. W. damaged the Republican Party greatly, but it pales in comparison to what Trump would do.


Our second scenario is that Trump loses by a small margin. His supporters will blame #NeverTrump, and just pushes through Trump or someone like him in 2020.

The third is that Trump outcome loses in a landslide, and this is certainly the most favorable outcome, but would also likely be quite chaotic. There would still be a sizable Trump-esque faction, as well as a rabid tea party one. And since a landslide loss would be indicative that Trump was a terrible, brand-tarnishing candidate, the party would be essentially left in chaos and would have virtually no chance of winning the presidency in 2020.

So this is effectively it for the GOP. They do have some things going for them, such as their leads in state legislatures, governorships, and Congress, their name recognition, funding, and infrastructure, but the long term trends are going to be too strong to deal with now that Trump has irrevocably damaged the GOP brand. The GOP has maybe two more goes at the White House before the blue wall surpasses 270 electoral votes. And since we're talking Trump here, it's effectively one more shot, because there's no way he'd be a two term president.

The right needs a fresh start. A complete rebranding to separate itself from the toxicity of the GOP brand (and its insane leadership), Trump, fear-based economic populism, and all the alt-right neo- nazis.

The most obvious choice for this is the Libertarian Party. It's got the most registered voters of any party outside of our two established ones. It has access to the ballot in all 50 states and is the only third party to do so. Their current presumptive nominee is a former Republican. The label libertarian is much less toxic than conservative has become. It's much more popular amongst young people, and a sizable number of Republicans and independents describe themselves as libertarians or hold libertarian views. And libertarians have actually been fighting for the GOP's supposed principles: free markets and small government. The LP is certainly flawed - one can simply look at some of their nominees for 2016, but we have not seen how things would play out if they became the mainstream center-right party. Certainly, if they could not purge or at least reduce the influence of their crazies, I would be in favor of just establishing a new party entirely. For now, though, they deserve a chance.

Now, the Libertarian Party would certainly have to make some concessions. The party leadership and base would have to be more willing to accept pragmatic and moderate candidates. They would have to concede some flexibility in terms of foreign policy, as there is simply no way to bring in conservatives without allowing for other foreign policy stances besides complete isolationism. They would have to be more willing to accept pro-life candidates, and those who are concerned with border security.

Those who wished to run on the LP platform would need to make some concessions as well. They should be willing to adhere to the LP's core message of social and economic freedom. That means giving up on the war on drugs, the will to criminalize gay marriage, and other positions that are held by many conservative politicians. A simple way for conservatives to reconcile these views with their principles is to take a 10th amendment stance on these types of issues, as this would be acceptable to libertarians and conservatives alike.

It's time to give the Libertarian Party a chance.

Have incomes really stagnated for 4 decades?

A popular claim in the media, and with liberal think tanks and politicians, is that median income has essentially been stagnant since about 1973. If true this would certainly be incredibly newsworthy, and potentially even suggest we need a radical overhaul of capitalism, if not an entirely different economic system.


Luckily, this claim is completely incorrect, and quite frankly, doesn't even pass the smell test.  The idea that the median household is no better off then in the 1970s is utterly absurd. We have massive televisions, large houses, cell phones, powerful computers, studio quality headphones, etc. Clearly our standard of living is substantially better. And it shows in the statistics; if one knows which to look at, and which to avoid.


Median household income, the statistic generally used to show this supposed stagnation in incomes, is flawed in several ways. Household sizes have declined dramatically. That means more divorces, and less teens/young adults working per household, both of which put downward pressure on real income statistics, even though the real material standard of living per capita may have increased.

Even worse is the measurement of inflation, the CPI, which is widely believed to overstate inflation by up to an entire percentage point a year. Compound that over four decades, and add in the fact it overstates price growth for the poor and middle class even more than it does for the rich, and it's surprising we aren't seeing a "decline" in real incomes.


Of course income itself is not a good metric to use, nonwage compensation has increased overtime, both in real terms and as a percentage of total earnings. It also helps to understand that rising healthcare costs eat up a lot of these gains, these would be passed on as higher wages or other forms of compensation if we could get healthcare costs and spending under control. This means the problem, which itself is overstated; as it is more the case of lower than usual compensation growth than no growth at all, would be much less severe if we could overhaul our healthcare system (may I suggest looking at Singapore for some guidance?). It's not a failure of capitalism as a whole, in other words.


The Federal Reserve's real compensation per hour metric (which uses their preferred PCE-deflator), is a much better way of measuring income gains. Even better is mean GDP-deflator adjusted income, as the productivity statistics one often sees coupled with the "stagnant wage" statistics use those same metrics. And while inequality has risen, the middle class has in fact seen a sizeable increase in its earnings as well.


The other, serious issue that needs attention, is that productivity growth is slowing. This is preventing incomes from rising at a similar pace to their past trend. While diminishing returns plays a role in this, there are certainly reforms that we can make to boost productivity, and encourage innovation.

We should be concerned about slow income growth, but we should not exaggerate the issue, and we must avoid misdiagnosing the problem, as it will lead to non-optimal solutions.

No, We Don't Live in Consumer-Driven Economy

The idea that consumption is the driver of growth is a pervasive one, and one that is quite intuitive. After all, your spending equals someone else income, and more spending at businesses should increase the demand for labor and profitability. It is backed by the commonly cited statistic that 70% of our GDP is consumption, which many misinterpret to mean 70% of our GDP is generated by consumption.


This is not the case. It is crucial to keep in mind that GDP is an accounting identity, not a growth model. How we decide to allocate the spoils of our productive capacity is the result of growth, not the cause of it. If consumption did drive growth, Singapore wouldn't be one of the wealthiest nations on the planet, and the Chinese wouldn't have such rapid growth rates (just to be clear, I'm not saying we could grow as fast as them if we had their level of savings, I don't think growth that high is possible for an economic frontier nation like the U.S.). The fact is that during normal times (near or at full employment), higher savings results in higher growth, not consumption. The reason is simple; savings = investment. More savings results in more capital goods, which increase the productive capacity of the economy (see figure 1.3 and comments). And since in this scenario most or all of our resources are being utilized, any spending on consumption necessarily translates to less savings (in most cases, anyway, obviously an increase from 99% savings to 100% savings would reduce GDP, and GDP maximization is not the goal, the optimal rate is the based on the Golden Rule). This is one of the reasons why economists consider the Long Run Aggregate Supply Curve to be vertical, and why increased savings, not consumption, boosts the level path of GDP. in the Solow Growth Model.


Other reasons include the fact that outside of recessions, more consumption generates higher inflation. This wipes out any GDP gains, so that real growth is at best growing at a similar rate (often, such as the case in Zimbabwe or the U.S. in the '70s, real growth slows or even declines). One might object to both those cases, given that there was a lot of money printing going on, but printing money itself is not the cause of inflation. We can observe that by looking at QE; trillions were injected into the economy but had limited effects on inflation because the vast majority of the dollars were saved in the banks as excess reserves, and not loaned out. If one looks to the equation of exchange, MV=PY, one can see that the increase in inflation is caused by an increase in overall demand. If the monetary base increases but velocity falls, the impact on inflation (and demand) is uncertain (depends on how much each changed by). The same goes for the opposite. It is only when there is more demand available than supply that inflation starts to rise. Therefore, when there's a lack of an output gap, increased demand simply translates to more inflation, not higher real output. That is if one can even increase demand at one point, keep in mind most centrals banks target inflation and thus will try to reduce demand should inflation get too high.


The final point to understand is that the value of the money itself is tied to what we produce. Say's Law may not hold in all circumstances, but in the long run it is more or less correct. This is why we cannot print/spend our way to prosperity, and why recessions are short run. The price level will adjust to the amount of demand in the economy in the medium run.


If one is wondering why this doesn't apply in the short run, it's because of sticky wages and prices.  If a 10% decrease in demand was responded to by an immediate corresponding reduction in wages and prices, there would be no actual change in any factors other than transactions would be dealt with in lower nominal terms. This isn't the case, however. People often have difficulty distinguishing between nominal and real, so they refuse to take pay cuts when a demand-driven recession begins. This boosts their real wage at a time when businesses become less profitable, often pushing them above their marginal productivity. This results in a surge in unemployment. One can see some confirmation of this by looking at the results of FDR's mandated wage hikes in the Great Depression. If it was just consumption that drove growth, increasing wages should boost production. If the sticky wage theory is correct, than they should have lowered growth, which is what happened.  So making sure the demand side of the economy remains on a stable path (like the market monetarists have suggested) is important for macroeconomic stability, but we cannot spend our way to prosperity.

Minimum Wage Misconeptions

I'm turning the "misconceptions" posts into a series, in which I will point out the follies in both sides of the argument. One of the most controversial issues in the public eye today is the minimum wage, and there is a lot of faulty reasoning and factual errors behind most of the discussion.


Starting with the right, the idea that supply and demand dictates that higher minimum wages will result in substantially higher unemployment is not true. The standard supply and demand model is based off perfect competition. There are a variety of different models in which one would get different results. There are many reasons to suspect perfect competition doesn't apply here. There are search costs for employees when it comes to finding new work, both in time and in lost income if they are not searching and working simultaneously (they also likely don't have much savings or assets they can sell of in order to do this).  This also has the effect of encouraging workers to specialize, which reduces the amount of job opportunities they'd have when compared to what job would be available had they developed a more broad skillset.  This can increase search costs. The number of firms employing low-skilled labor is greatly outnumbered by the number of low skilled workers. It's also worth noting that the fact they have little savings or assets means they have to accept a job to be able to live (welfare aside which one is not allowed to be on indefinitely), which also reduces bargaining power.




Perhaps the most convincing reason not to believe that a perfect competition model is applicable, is the economic literature on the subject. Prior to famous Card and Krueger (1993) study, the minimum wage literature overwhelmingly showed a correlation between higher minimum wages and higher unemployment. Afterwards, the relationship is much less clear, with most studies seeming to show a small (often significantly insignificant) negative impact. While many will point out Neumark and Wascher (2007) as a rebuttal, it is important to note that in this analysis the studies are taken from many different countries and weighted based off the authors' personal views as to what consists of more solid methodology. The most recent meta analysis, which does not make such subjective judgments, finds no disemployment effects of the current minimum wage. So, is it settled then? Let's all join the #FightFor15, or an even higher minimum wage? Not so fast.


If you go back to the link about the different models of the minimum wage that I shared earlier, it is evident that to when pushed above some degree, the minimum wage will kill significant amounts of jobs. The exception being the demand shock model, but the LRAS is vertical, so we can discard that one as a model of anything outside of recessions (I'll explain why this is in another post, and why in recessions raising the minimum wage is a bad idea as well). Dube, who is at the forefront of minimum wage research and is certainly significantly more optimistic towards the minimum wage than the average economist, has found that the optimal minimum wage is roughly 50% of the median wage. This would mean a $15 minimum wage wouldn't be fit anywhere, let alone in places like rural Alabama and other areas where $15 is close to, or above, the median wage. A clear cut example of a minimum wage causing massive unemployment effect is the unfortunate case of Puerto Rico, which the Federal Minimum wage used to not apply to. The reasoning is simple; push the minimum wage above the marginal value added by the average low skilled worker, and they will be laid off. In other words, if the employee is only able to add $10 an hour in value, and the minimum wage is $12 an hour, they will be laid off. Another way to think of this is through a hypothetical; imagine a minimum wage of $1000/hr. Obviously, this would cause mass unemployment.


In summary, a minimum wage can be a useful tool to mitigate the advantage the employers of low skilled labor have in bargaining power. However, it can be a risky tool, as pushing it above the marginal productivity of low skilled labor can cause mass unemployment. The optimal minimum wage also differs greatly by area, based off the productivity and cost of living of those areas. So both sides have solid points on the issue, and in a later post of my own I'll make some recommendations on how to go about designing minimum wage policy.

The Relationship Between Taxes and GDP is Precisely What Supply Side Economics Would Predict

A recent Jared Bernstein (who I'm a fan of) column in the Washington Post supposedly demolishes supply side economics. I've argued against this position before, pointing out that nations usually enact tax cuts when growth is slowing, and that when comparing GDP levels between lower tax nations, tax cutting nations, and high tax nations there appears to be a negative relationship between higher taxes and GDP Per Capita.

There is an even more important point to emphasize though, and one that supply siders rarely do. Once one accounts for the fact that tax cuts predominantly effect levels (roughly a ten year adjustment period), not the long-term growth path, and diminishing returns, a positive relationship between tax rates and growth is exactly what one would predict. To make a quick explanation as to why it effects levels, it takes time to adjust to new tax incentives (with regards to income taxes this is mainly effected by increases in labor supply), but labor supply isn't going to permanently increase unless taxes are permanently falling. So when we cut taxes to a new level, labor supply increases to a new level, but does not increase further. 

Let me explain. Say the top tax rate starts at 90%, and every 10 years it is cut by 20 points. So it goes from 90, to 70, to 50, etc, (stopping at 10%). When would the most growth occur, according to the supply side position? According to Bernstein, the years following it hitting 10%. Yet the correct answer is 70%. Why? Because the marginal income one earns triples when the rate is cut from 90% to 70%. With each further decrease of taxes, the percentage increase in take-home earnings gets smaller and smaller. So yes, one would expect higher taxes to be associated with higher growth, provided that they were cut from an even higher rate. It's worth noting too that this fits the data - the decade after the JFK tax cuts (which the top rate was cut from 91% to 70%) saw the fastest growth of the post-war period. Directly after the 10-year level path adjustment ended, we had stagflation (yes the RGDP numbers look solid, but that's only because the boomers and women were entering the workforce. Productivity was terrible). 

So one doesn't even have to do the cross-country comparison as Sumner did to make the case for supply side. One just has to understand levels and diminishing returns.

PS. My last post was pretty harsh towards DeLong, so I'll point out this excellent smackdown of Cochrane.