President Donald Trump has promised to create 25 million jobs in the United States by boosting growth and also by bringing jobs back from overseas, particularly from Mexico. Our new president certainly thinks big. He made lots of campaign promises and started to deliver on some of them during the first two frenzied weeks of his administration. On Friday, he took credit for the better-than-expected 227,000 rise in January’s payroll employment. So he only has to create 24,773,000 more jobs to meet his goal. While January’s increase occurred during Obama’s last month as president, Trump claims that optimism about his policies boosted hiring.
Trump’s goal is not only startlingly ambitious but also a stretch. Debbie and I have already bought into Trump’s pro-growth policy agenda. We raised our real GDP forecast from 2.5% to 3.0% for this year. We think he will succeed in cutting taxes and regulations. We even think that his pivot away from multilateral trade agreements to bilateral ones makes sense, and might actually save, rather than kill, globalization. Fair trade is not at all inconsistent with free trade and could also improve income equality.
Of course, all presidential candidates promise that their policies will create jobs. Almost all of them have done so, though some more than others (Fig. 1). However, in our opinion, presidents don’t “create” jobs; employers create jobs, especially small and medium-sized businesses. Fiscal and monetary policies can make it either easier or harder for them to do so. Even during the Great Depression, when the government actually did create government jobs related to building infrastructure, the overall jobless rate remained extremely high because the New Deal included a deluge of bad-deal regulations on business (Fig. 2).
The notion that the government can create jobs, boosting economic growth and prosperity, was first introduced by none other than John Maynard Keynes, of course. In The General Theory of Employment, Interest, and Money, he famously wrote:
“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”
Actually, there is another alternative that is “better than nothing” and far better than Keynes’ if-all-else-fails solution. The government could adopt a policy of do-no-harm to small businesses. Successful small companies become medium-sized companies and sometimes even large companies. Along the way, they tend to hire lots of people. The ADP data for private-sector payrolls is available since 2005 and includes series for small (1-49 employees), medium-sized (50-499), and large (over 500) companies. During January, they accounted for 40.5%, 37.7%, and 21.8% of payrolls, respectively (Fig. 3). Since the start of the data, they’ve added 5.9 million, 5.0 million, and 1.2 million to their payrolls (Fig. 4).
To help small and medium-sized companies grow so that they will hire more workers, the government must sever its crony ties with large companies that all too often promote, lobby, and pay for government policies that create barriers for their smaller competitors. In other words, small businesses are run by entrepreneurial capitalists, who want to grow their businesses, while large companies are all too often run by crony capitalists, who want to protect their businesses, not only from foreign competitors but also from domestic ones. To do so, they become cronies of politicians who can use the government’s power to do that for them.
So far, Trump has said all the right things about helping small businesses to succeed, pledging to cut their taxes and regulations. The National Federation of Independent Business (NFIB) conducts a monthly survey of small business owners. Over the past four years, more of them have been saying that their biggest problem is either taxes or regulation as fewer said it was poor sales (Fig. 5). No wonder that their “animal spirits” were energized by Trump’s election and promises to cut taxes and deregulate, as evidenced by the 10.9-point jump in the NFIB Small Business Optimism Index during the last two months of 2016 to 105.8, the highest since December 2004 (Fig. 6).
So what are we to make of all the billionaires that Trump has put in his administration? Are they all populists now? Most of them have said they want to give something back to the country that has been so good to them by serving in the government. I’ll give them the benefit of the doubt for now. However, keep in mind that they will certainly benefit immediately from the legal tax maneuver offered since 1989 to executive-branch appointees and employees. It was designed to help ease the tax consequences of being forced to suddenly sell investments. The federal program is encoded in Section 2634 of federal ethics laws and known as a “certificate of divestiture.” According to a 12/2 WaPo article on this subject, “The tax advantage will allow Trump officials, forced by ethics laws to sell certain assets, to defer the weighty tax bills they would otherwise owe on the profits from selling stock and other holdings.” More specifically:
“While officials who are forced to sell will be able to avoid capital-gains taxes, they will have to pay them at a later date if they sell the new securities, such as Treasury bonds and mutual funds, approved by federal ethics officials. Still, the benefit offers strong advantages for the officials, including allowing them to cheaply rebalance their holdings and delay their tax burden on any investment gains. That delay could also permit them to pay a lower capital-gains tax rate in the future, as many Republicans favor.”
On Friday, one of our favorite S&P 500 sectors had a very good day indeed, thanks to the announcement by Gary Cohn, the director of Trump’s National Economic Council, that the administration would move quickly to gut Dodd-Frank regulations on financial institutions. As a result, the S&P 500 Financials was the best-performing sector on Friday, rising 2.0%, led by a 4.2% increase in the Investment Banking & Brokerage industry (Table 1). Also among the top 10 outperforming industries in the S&P 500 were Diversified Banks (2.7%), Consumer Finance (2.2), Asset Management & Custody Banks (2.1), and Regional Banks (2.1).
Goldman Sachs shares jumped 4.6% on Friday. Just before he joined Trump’s team, Cohn served as president and chief operating officer of Goldman. Upon his departure, Goldman handed him his severance pay of $285 million, and he certainly showed his appreciation. That sure smells of crony capitalism to me. I’ve never agreed with Elizabeth Warren about anything, but I do agree with the letter sent by the Democrat from Massachusetts to Cohn on Friday questioning the “astonishing windfall,” and its impact on the former Goldman Sachs exec’s ability not to “play favorites” when he makes decisions about the economy. The letter, signed by Warren and Senator Tammy Baldwin (D-WI), asks Cohn to recuse himself from decisions directly or indirectly related to Goldman.
By the way, Keynes’ buried-bottles theory doesn’t hold water when you consider the unseen ripple effects of burying money, highlighted by Frédéric Bastiat’s parable of the broken window, which was introduced in his 1850 essay Ce qu’on voit et ce qu’on ne voit pas (That Which Is Seen and That Which Is Not Seen). Bastiat’s essay explains why the Keynesian idea would not actually be a net benefit to society. Specifically, recovering buried money and returning it to circulation is seen as an economic boom by Keynes, but unseen is what economic effect it would have had if not buried in the first place.
Furthermore, it was Keynes who popularized the concept of “animal spirits,” but he viewed them more as a driving force behind speculation than entrepreneurial capitalism, about which he was remarkably clueless.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
© 2022 Newsmax Finance. All rights reserved.