Trumponomics, or, the Danger of Oversimplifying Economic Policy

July 25, 2016

When you acknowledge that issues are complex, the need for complex solutions also becomes clear. The field of economics has shifted in recent decades toward the use of empirical statistical study to understand how humans and societies actually behave, not just how theories predict they will behave. This shift, as economist Eric Beinhocker has documented, is rooted in the desire to ensure that how we think the economy works actually reflects what happens.

This complexity and nuance were noticeably missing from last week’s Republican National Convention, with Republican presidential candidate Donald J. Trump doubling down on his belief that trade is the main threat—except perhaps for immigration—to American workers. Earlier this year, he proposed a 45 percent tariff on Chinese exports to the United States.

There is possibly no topic more widely debated by economists than the factors that expand growth and employment. Despite an unemployment rate of 4.9 percent, there still remain 2 million long-term unemployed Americans, who constitute 25.8 percent of the total unemployed—higher than pre-recession levels. While competition from foreign workers has certainly led to displacement in some industries, Trump’s focus on tariffs and trade agreements leaves out the role of currency manipulation in giving other countries unfair advantages. Rising Chinese labor costs have also meant that more American companies are already “reshoring” jobs back home. And even these arguments ignore that the vast majority of American jobs would be improbable—or even impossible—to outsource.

Trump’s sole focus on trade also leads him to ignore many debates on other factors that have reduced demand for labor. Technology could rapidly disrupt roles previously held by workers, or could be used to make work more productive and expand time for leisure. Short-termism in corporate governance could continue rewarding shareholders and executives for temporary decisions that boost stock prices, or corporations could instead be encouraged to make long-term investment in their workers and their companies. Stagnant household incomes could continue to limit our consumption-based economy, or higher wages could create more demand for domestic goods and services, and thus for labor.

Trump’s limited focus also avoids most current discussion of challenges on the labor supply side. In the face of the changing nature of work, some have argued that workforce development programs and community colleges have not helped enough workers build soft and hard skills, while others point out that stagnant wages have not responded to a growingly-educated workforce. Mass incarceration, as well as high work-related costs of transportation and childcare, have also kept both men and women out of the labor market altogether.

Trump is right to identify unemployment as an important issue that must continue to be discussed – but simplistic solutions do not take into account the complexities of the challenges the American economy faces. Beinhocker agrees, saying in his article, “we seem to prefer politicians who tell us the world is simple and predictable, even though we know it to be complex and unpredictable.”

Given the many interpretations of the main challenges facing the American economy, Beinhocker argues that “rather than thinking of policy as a fixed set of rules or institutions engineered to address a particular set of issues, we should think of policy as an adapting portfolio of experiments that helps shape the evolution of the economy and society over time.” We do this by identifying policies, programs, and market strategies on the local level that have successfully met outcomes, and then work to scale them up, adapting for local context and views of residents.

One such policy package based on successful local efforts is Community Advocates Public Policy Institute’s Working Our Way Out of Poverty. From 1994 to 1997, the New Hope Project in Milwaukee established a transitional jobs program for chronically unemployed and high-poverty working individuals, which included the creation of subsidized jobs combined with earnings supplements, childcare assistance, and health care. Building demand for labor by directly creating jobs, while also addressing challenges on the labor supply side that may have affected workers’ ability to work, proved to be successful. Compared to a randomized control group, participants with those jobs had higher employment rates, earnings, and income, even after the program ended.

CAPPI is now seeking to scale up this “transitional jobs with earnings supplements” approach with the Stronger Way Act, recently introduced by Senators Tammy Baldwin (D-WI) and Cory Booker (D-NJ), which was influenced by the model. Under the assumption that more jobs are needed and that the jobs created must also provide poverty-alleviating earnings and benefits, the legislation creates federal grants for the creation of a transitional jobs programs at the state and local level while also expanding the Earned Income Tax Credit and Child Tax Credit. Both the creation of a jobs program for disinvested communities and the expansion of the EITC were advocated for in the Roosevelt Institute’s Next Generation Blueprint for 2016, created by the network’s young members earlier this year.

Modeling by the Urban Institute on a similar proposal by CAPPI, which included a minimum wage increase to $10.10, found that this approach would cut poverty by 50 percent.  Temporarily placing individuals in industries projected to grow at the local level—such as health care and construction—combined with on-the-job training and the right incentives for program practitioners could also ensure that individuals who benefit have an even better chance of gaining private sector employment, without the need for subsidies, after the program ends.

This legislation, of course, should not substitute for macroeconomic policy to continue building the capacity of the economy to create more jobs. It can, however, ensure that the long-term unemployed are both better connected to employment and also receiving wages that can help them climb out of poverty.

Economic policy is complex and demands complex solutions. The presidential candidates should not only embrace comprehensive national strategies to build the economy, but also look at what is working on the ground. Hopefully, we will see more far-reaching, forward-looking proposals to these challenges at this week’s Democratic convention.

David Riemer, Senior Fellow at Community Advocates Public Policy Institute, contributed to this editorial.