Roosevelt Institute | Cornell University

The Forest and the AxeThe Betrayal of America’s Middle Class

By Dylan NezajPublished February 12, 2019

Image courtesy of Getty Images
There is fable popular throughout Eastern Mediterranean folklore that tells of a forest whose trees came to trust a woodcutter’s axe. Upon seeing that the axe’s handle was made of wood, the trees concluded, “it is one of us,” and eagerly welcomed the woodcutter into the forest. In so doing, the trees engineered their own demise, and were felled before they could realize that they had been deceived by their own enemy.

This story teaches us the danger of misplaced trust, and I recount it because it speaks volumes about the risk of a demagogue; someone who will appeal to ostensibly shared values; who will toss crumbs to the masses while invoking rhetoric that belies truly nefarious intentions; who will ultimately come to betray the very people whose faith elevated him to his throne. Does this sound familiar?

You might think this fable need not apply to our nation’s current circumstance. Indeed, if you were to take the President’s State of the Union address at face value, you’d conclude that the United States had been wise to entrust President Trump with the helm over two years ago. After all, according to the President, the stock market is booming, GDP growth is twice as high as it had been prior to his taking office, unemployment is at a 40-year low, and 5.3 million jobs were created over the past two years, 600,000 in manufacturing alone.

Inaccuracies in these figures notwithstanding, President Trump, though not a particularly skilled businessman, does one thing well: he sells himself. While middle- and working-class families continue to struggle with mounting healthcare and education costs, chronically low-wages, and the increasingly disastrous effects of climate change, the President continues to market his policy endeavors as having primarily benefited everyday Americans. The evidence, however, shows that they’ve primarily served to line the pockets of the extremely wealthy. If anything, the President’s temerity has so heavily warped market expectations that it has triggered a short-term growth bubble, which he has capitalized on for political expediency. This present economic growth spurt does little to help working families in the long-run and conceals the surreptitious affronts to middle-class America taking place every day. Let’s unravel the President’s biggest selling points: the stock market, GDP growth, and jobs.

The S&P 500, the Dow Jones Industrial average, Nasdaq Composite, and Wilshire 5000 indices all tell similar stories: stock value growth on par with or marginally faster than that under President Obama, peaking in 2018, and since then losing all of 2018’s gains while remaining the most volatile they’ve been since the Great Recession. To be fair, 2018 saw rapid GDP growth largely because of the Tax Cut and Jobs Act of 2017, the so-called “Republican Tax Law”. Inscribed within this tax law were numerous measures that helped working families, including the doubling of the Child Tax Credit. However, the vast majority of the benefits went to the wealthiest of the wealthy, and to large corporations. It is these benefits for the wealthy explain the stock market boom.

Congressional leadership sold these cuts to the American people on the premise that large companies would use foregone tax dollars to invest in capital upgrades, research, and increased pay for workers. Yet much to their chagrin, there is little evidence of any significant wage growth overall, that is, unless you are a corporate executive. As of August, 2018, S&P 500 companies spent upwards of $800 billion on stock buybacks so as to drive up the value of their own stock. This is because the compensation most CEOs and boards of trustees receive is contingent upon their company’s stock value. Because of this, corporate America forewent long-awaited wage increases during an ostensible economic boom, instead using money that could have lessened our federal deficit and paid for programs to assist working families to warp the stock market. Just to give you an idea of what working Americans missed out on, a report by the Roosevelt Institute suggests that Walmart could have used its $20 billion tax cut to increase wages of all workers to above $15 an hour.

The President also boasted of high annualized quarterly GDP growth rates last year, describing the United States as “the hottest economy in the world.” Annual growth in 2018, measuring 3.0 percent, was indeed higher than average, but not abnormally so, and it certainly was not more than twice what it was under President Obama as President Trump asserted. As I’ve mentioned, a good portion of this additional growth owed to the new tax law, whose effects are evidently petering out as we see much more modest growth on the horizon. However, the rest of this additional growth mostly owed to, of all things, the trade war. Why might this be?

 Think about it like this: suppose that when you go to sleep tonight, gasoline costs $3.00 per gallon. Upon waking up tomorrow, you find that gasoline costs $3.50 per gallon, and you have reason to believe that the following day, gasoline will cost $4.00 per gallon. What would you do? You would fill up your tank as soon as possible, of course. You may even fill up the snowblower and several spare containers while you’re at it. In other words, if you are fairly certain that it will cost you more to buy gasoline in the future, you will purchase more, perhaps to the point of excess, in the present.

The same is true of international trade. By incentivizing foreign nations to impose retaliatory tariffs against the United States, the President gave American producers and foreign consumers reason to believe that the sale of American goods abroad would become increasingly costly as the trade war waged on. The result: a tremendous short-term boost in sales of American goods, such as soybeans, into foreign markets. We now find ourselves in the aftermath of this export rush; the United States will likely begin to feel the effects of export lull due to the higher, yet stabilizing cost of trade. The pressure to export sooner rather than later is easing, which has hurt manufacturers across the country, cost us jobs, and slowed GDP growth.

Finally, job growth, even manufacturing job growth, is on par with pre-2018 trends, and has not seen an increase in its share of total jobs, debunking Trump’s claims. Also, most Americans have not seen any wage growth in real terms, and what little wage growth we’ve experienced owes primarily to growth in the service sector, not the manufacturing sector. To me, this indicates that overall costs are still too high for U.S. manufacturers, and that demand for factory labor is not high enough to warrant pay raises for the sector’s employees.

But let’s just assume all is well in the economy as the President would have us believe. Let’s assume that wages are significantly higher, and that the average worker brings home a slightly larger paycheck when adjusted for inflation. Despite this, our export growth is stagnating, and our farmers feel the pain of climate change ravaging crop yields and foreign states imposing heavier tariffs on our exports. The increase in healthcare costs will accelerate now that the individual mandate’s repeal imperils an already crippled ACA. The cost of higher education continues to rise inexorably, precluding many Americans’ ability to ever climb the economic ladder. Environmental regulations that keep our air and water clean are being rolled back daily, endangering our health in the short run, and our civilization as we know it in the long run. And the repeal of many regulations intended to prevent another economic calamity jeopardizes our progress since the Great Recession, and nothing has been done to ensure the long-term maintenance of the Social Security Trust Fund.

I am generally skeptical of directly attributing much economic growth, or the lack thereof, to the president’s policies, as the economy is the aggregate of billions of decisions made by millions of people every day. However, the president can influence the economy by distorting our confidence and expectations, and this president has done this by obfuscating the true extent of inequality in our society. He endeavors to convince us that he has delivered this nation from calamity while the same issues that loomed in 2016 continue to haunt us. That being said, credit is deserved where it is due, and I would be remiss if I did not give President Trump credit for the continuously-improving economy insofar as he has managed not to reverse the positive trends initiated during the Obama presidency. Yet, while I am also generally inclined to dismiss the State of the Union as political showmanship, the grandiose claims made a few nights ago are simply too misleading for me not to fact-check.

The status quo of federal policy making these past two years has been market by short-term gains for political expediency and Trickle-Down 101, which history has time and time again demonstrated not to be a formula for long-term growth. In fact, history has proven the primacy of pro-middle-class policy in fueling national prosperity. The trivial gains made by the middle class since Trump took office represent mere crumbs of the economic pie, and apart from a few tax provisions, little has been done in the past two years to suggest that the Republican leadership holds the middle-class’ best interests at heart. Indeed, the outcome of the 2018 midterms was a telling referendum of the current administration throughout the nation. 2019 is set out to be a year of slower growth, as our economic jolt wears off, and the President will likely look to blame someone for the economy’s downturn as quickly as he took credit for its upswing. Hopefully, the axe will not have felled too many trees by then. The axe is not brandished of the same wood as our forest, and if it is still sharp by 2020, we must not be so deluded by its handle as to ignore its blade once again.

 

Works Cited

https://www.cnn.com/2019/02/05/politics/donald-trump-state-of-the-union-2019-transcript/index.html

https://www.nytimes.com/2017/01/21/opinion/sunday/the-president-who-buried-humility.html

https://www.npr.org/sections/money/2018/12/18/677575622/happy-birthday-tax-cuts

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https://www.wsj.com/articles/the-economic-forecast-for-2019-less-growth-and-more-uncertainty-1543892700