Macro Roundup

Case that the "Trump Bump" was overstated relative the Euro Area and Obama's performance

Core findings, “…Five facts stand out. First, per capita GDP growth was only mildly stronger under Trump than under Obama or in the euro area (+0.2 percentage points on a yearly basis) - and the euro area is not usually considered a star performer during the Trump years. Second, in terms of gross fixed capital formation (investment before depreciation), Trump did worse than the euro area and only mildly better than Obama. Note that boosting private investment was perhaps the key argument made by Trump in support of his tax reform which favoured the very rich by reducing the taxation of profits. Third, private final consumption did worse under Trump than under Obama.Unfortunately, data on income distribution after taxes and transfers, which would be useful, inter alia, to understand if this difference can be attributed to redistribution favouring households with a lower propensity to consume, are not yet available. Fourth, the labour market did better under Obama and in the euro area than under Trump. The unemployment numbers - both the levels and relative to the labour force - are particularly striking in this respect.2 Fifth, and perhaps most interestingly, the last cell of each panel shows that compared to the euro area, Obama did better than Trump in all variables...."

Methodology, "…We take a purely macroeconomic perspective and a simple (perhaps simplistic) methodology. We compare the performance of macroeconomic variables such as GDP growth, gross fixed capital formation, private consumption, employment, and unemploymentover the first three years of the Trump administration (2017-2019; for obvious reasons we leave out 2020) and the last three years of the Obama administration (2014-2016).We also make the same comparison relative to the euro area - not usually considered a star performer over that period - during the first three Trump years.Finally, we compare the first difference with the second difference - a simple difference-in-differences exercise. The results are displayed in Table 1, which is organised as follows. The first row under each heading (GDP growth, gross fixed capital formation, etc.) displays the US both under Trump (first column) and under Obama (second column), while the second row displays the euro area over the same time periods. The difference between Trump and Obama is displayed in bold in the third column, and the difference between Trump and the euro area is displayed in bold in the third row. The last cell on the right-hand side of the third row, in italics, displays a difference-in-difference: (Trump less euro area) - (Obama less euro area). This is meant to partial out worldwide effects that might influence the difference between Trump and Obama. All the data come from the latest issue of the OECD Economic Outlook database…”

New Mian and Sufi paper building on their “savings glut of rich” paper (attached) on the self-reinforcing relationship between weak demand and rising debt. Their theory is one of "indebted demand" the idea that large debt burdens by households and governments thus lowering aggregate demand, and in turn natural interest rates.

They are presenting this tomorrow (the 16th, will plan on watching)

"....In this paper, we proposed a new theory connecting several recent secular trends: the increase in income inequality, financial liberalization, the decline in natural interest rates, and the rise in debt by households and governments. The central element in our theory are non-homothetic preferences, which lead toricher households having greater saving rates out of a permanent income transfer. This gives rise to the idea of indebted demand: greater debt levels mean a greater transfer of income in the form of debt service payments from borrowers to savers, and thus depress demand….the top 1% experienced a significant decline in their net debt position from 1982 onward, which reflects the accumulation of a significant amount of household debt held as a financial asset. In contrast, the bottom 90% experienced a large increase in their net debt position, as gross debt owed increased substantially but household debt held as a financial asset was relatively stable. Thus, to a large degree, the rise in saving of the top 1% has not been transformed into investment or capital account surpluses; instead, it has been absorbed by an increase in borrowing by the bottom 90%...The fact that businesses have not been responsible for the rise in borrowing is consistent with the fact that investment to GDP ratios have actually declined during this period of rising debt and low interest rates….The rise in debt has not been associated with a traditional channel through which businesses and the government borrow from the household sector to boost investment and productivity growth. Instead, rising debt levels appear to have been used to finance personal consumption and government outlays. That is, it appears that the expansion of credit has been used to increase aggregate demand rather than supply. This is a key motivating fact behind the model of indebted demand below…that large debt levels weigh negatively on aggregate demand: as borrowers reduce their spending to make debt payments to savers, the latter, having greater saving rates, only imperfectly offset the shortfall in borrowers’ spending. We refer to a situation in which demand is depressed due to elevated debt levels as indebted demand..... We identified three main implications of indebted demand. First, secular economic shifts that raise debt levels (e.g. income inequality or financial liberalization) also lower natural interest rates, which then itself has an amplified effect on debt. Second, monetary and fiscal policy, to the extent that they involve household or government debt creation, can persistently reduce future natural interest rates. This means that there is only a limited number of such policy interventions that can be used before economies approach the effective lower bound. Finally, when the lower bound is binding, the economy is in a debt-driven liquidity trap with depressed output. In this “debt trap”, debt-financed stimulus deepens the recession in the future, whereas redistributive policies and policies addressing the structural sources of inequality mitigate it.Our results suggest that economies face a sort of “budget constraint for aggregate demand”. They can stimulate aggregate demand through debt creation, but that reduces future demand (and thus natural interest rates). This logic suggests a new trade-off for debt-based stimulus policies. We view an exploration of this trade-off in an optimal policy setting as a promising avenue for future research…”.