Public Policy, Profits, and Populism
- The recent decades-long public policy focus on economic stability has resulted in the unintended consequences of a profits bubble, collapse in securities yields, and wage stagnation.
- In response to labor’s diminishing income share, a swell of populism suggests change is coming, and the form that change takes—reform or revolt—will either gently deflate or abruptly burst the profits bubble.
- A refocusing of policy priorities away from stability would facilitate the process of healthy creative destruction, aiding the formation of new businesses and jobs, and increasing the size of the economic pie.
Public policy prioritization of economic stability has coincided with slower new business formation, fewer and larger publically traded companies, increased monopoly pricing power, ballooning corporate profits, a sharp decline in the cost of capital, and stagnating wages. Refocusing policy away from inhibiting change and toward fostering growth through creative destruction would reduce bloated monopoly profits, raise wages, and increase yields on investment securities. Because highly organized special interests who profit handsomely from today’s status quo stand in the way, implementation of such healthy reform may fail. A virulent populist reaction could dramatically increase the cost of capital and thereby raise the labor share, causing significant collateral damage.
Reformer or Swamp Monster?
“Lavish parties. Committee chairmanships for sale. Pay-to-play corruption. Backroom arm-twisting. Votes on major legislation going to the highest bidder. Welcome to Washington, D.C., the swamp that President Donald Trump was elected to drain.” This is the Amazon blurb touting the book Drain the Swamp by Republican Congressman Ken Buck, who portrays President Trump as an independent Republican reformer in the mold of Teddy Roosevelt.
Dana Milbank writes in the Washington Post (April 17, 2017):
Last year, Mark Meckler, one of the founders of the tea party movement, had concerns about Donald Trump but gave the Republican nominee the benefit of the doubt, because Trump “at least says he’s going to attack” the crony-capitalist system. Now the conservative activist has revised his opinion. Trump “said he was going to D.C. to drain the swamp,” Meckler said in a recent Fox Business interview, but “now it looks like we’ve got the Creature from the Black Lagoon in the White House.” For everybody else who believed Trump’s populist talk about tackling a rigged system, it’s time to recognize you’ve been had. The president of the United States is a swamp monster.
The Trump bump shows that the US stock market assesses the President as more swamp monster than reformer. Stock prices are hitting record highs and corporate profits are projected to grow briskly because the market anticipates a tightening of the grip of crony capitalists. In contrast, draining the swamp would mean pairing back the monopoly and pricing power of the entrenched and politically connected interests that impede creative destruction and economic dynamism.
To better understand the stock market’s reaction to the populist wave that propelled Trump into office, we pose a couple of questions: Why has the share of income granted to workers been shrinking while corporate profits have soared? What policies might reverse this trend? Exploring these questions offers lessons not just to policy makers, voters, and workers, but also to savers and investors.