Trump's High-Pressure Economy

The Trump administration is abandoning conservative economic orthodoxy to create a tighter labor market.

Treasury Secretary Steve Mnuchin speaks during a discussion at the Milken Institute Global Conference.
Treasury Secretary Steve Mnuchin speaks during a discussion at the Milken Institute Global Conference on April 30, 2018. (Jae C. Hong / AP)

Steve Mnuchin is not exactly a tribune of the people. A wealthy financier with a taste for the high life, he is better known for his glamorous spouse than for his commitment to public service. One could argue that Mnuchin’s chief qualification as treasury secretary is simply that while other more distinguished Goldman Sachs veterans refused to back Donald Trump’s seemingly quixotic presidential campaign, he was an early and enthusiastic supporter, opening his wallet in service to a cause most of his peers found distasteful, if not loathsome in the extreme. And Mnuchin was an unlikely Trump supporter at that. The investment banker turned Hollywood impresario, far from being an enemy of America’s coastal elite, is practically its embodiment. Yet somehow it is Mnuchin who has divined the soundest economic strategy for a populist Trump White House to pursue: Let the economy run hot, and ignore self-serving cries of labor shortages from corporate CEOs.

I say “divined” because it’s not entirely clear that Mnuchin’s thoughts on these matters are carefully considered. At the recent Milken Global Conference in Los Angeles, a sort of mini-Davos, Mnuchin offered an insouciant reply to a question from the business journalist Maria Bartiromo about the dire labor shortages supposedly plaguing the country: “What do you say to managers when they say—and I’m sure you’ve heard it, I’ve heard it a lot—I can’t find the people to put in the jobs I have available? Is that about training?” In response, the secretary said, “I think some of it is about training, but I’m not hearing that from the companies I speak to.” Bartiromo was flummoxed by Mnuchin’s reply, so certain was she that labor shortages are indeed a pressing issue. Dan Primack and Steve LaVine of Axios took him to task for daring to suggest that labor shortages were not his concern, pointing to the fact that many U.S. employers claim otherwise. They pointed to his remarks as part of a larger pattern of willful blindness when it comes to America’s labor-market challenges, as evidenced by Mnuchin’s earlier expressions of skepticism about the job-destroying potential of advances in artifical intelligence. That there might be a slight tension between panicking about a shortage of labor today (there aren’t enough workers to fill the jobs!) and a superabundance of labor tomorrow (there won’t be enough jobs for all the workers!) was left unexamined. Of course we don’t have enough workers. Of course robots will take all the jobs. Who could possibly believe otherwise? Well, Steve Mnuchin, apparently. If he really is dismissing talk of labor shortages with the wave of a well-groomed hand, he is absolutely right to do so.

And Mnuchin’s instincts are very much in line with the president’s, as near as we can tell. In deed if not in word, the Trump administration has abandoned central tenets of conservative economic orthodoxy, a commitment to austerity and ulta-low inflation foremost among them. The passage of the Tax Cuts and Jobs Act was followed not by deep cuts in safety-net spending, as partisans of small government might have hoped, but rather by an omnibus spending bill that dynamited the sequestration caps dreamed up by self-professed GOP deficit hawks. Yes, Mick Mulvaney, the president’s budget director, still claims to want to shrink government, and the White House is touting its absurdly modest rescissions package, which would trim $15 billion from a bill expected to cost $1.3 trillion, to woo conservatives alarmed by ballooning deficits. Jerome Powell, Trump’s pick for Fed chair, is careful to allay the concerns of those who fear the bogeyman of galloping inflation, even as he pursues an accommodative approach. Overall, though, Trump’s domestic-policy agenda seems likely to create a “high-pressure economy,” fueled by loose fiscal and monetary policies, that will benefit his base.

In the 1970s, Arthur Okun, one of the founding fathers of modern macroeconomics, popularized the term “high-pressure economy” to refer to a state of affairs in which unemployment is low and overall economic growth is high. Workers who might struggle to find remunerative employment in a low-pressure economy, where the opposite conditions prevail, thrive in a high-pressure one, when employers have little choice but to invest in improving their production techniques and providing all of their workers with the capital they need to increase output. Eventually, employers might have no choice but to invest more in training low-skill workers, in the hopes of boosting their productivity levels. Judging by past experience, they’ll invest in training only as a last resort. But they’ll get there.

Consider the case of the construction sector, where employers insist they’ve been crippled by the shrinking size of the construction workforce. Between 2010, when the aftermath of the housing bust meant that the sector was close to its nadir, and 2016, when its recovery was well underway, the number of construction workers actually fell from 10.6 million to 10.5 million, as reported in the Wall Street Journal. Is this not incontrovertible evidence of a shortage? Not quite. As Matthew C. Klein has observed, economists at the Bureau of Labor Statistics estimate that output per hour in single-family homebuilding actually fell between 1987 and 2011, at an average rate of 2 percent each year. Merely getting back to the productivity levels of 1987, when Lethal Weapon and Dirty Dancing dominated the box office, would go a long way toward addressing the construction sector’s woes. Matching the productivity of Japan’s construction sector, meanwhile, would likely mean that the overall cost of construction would plummet, even if the size of the construction workforce were to fall further.

Why has productivity growth in the construction sector been so sluggish? One explanation is that, with the brief exception of the late 1990s, the U.S. has for decades had a low-pressure economy, which in turn accounts for lackluster wage growth among low-skill workers. More controversially, one could point to the fact that the construction workforce has long been augmented by low-skill migrants, many of them unauthorized. It is entirely predictable that employers would make use of this labor force, and exploit its vulnerability, rather than rely on well-paid workers with the wherewithal to defend their interests. Indeed, the president himself famously has some experience in this regard. It is easy to see why construction employers are so quick to raise alarm bells about labor shortages. Raising productivity would require significant changes in how the U.S. construction sector does business: For one, wages and working conditions would have to improve, which would no doubt prove difficult for poorly run firms that have long embraced low-wage, low-productivity business models to manage—to which the right response is to say good riddance.

Over time, a high-pressure economy tends to accelerate technological progress. It is only when low-wage workers start quitting their jobs to take better jobs offering higher pay that their employers will break a sweat trying to replace them. In California, a shortage of low-wage workers in the agricultural sector has set off a mad scramble among entrepreneurs and technologists to devise new labor-saving technologies, and it has led farmers to shift from labor-intensive crops such as grapes and asparagus to almonds, which are easier to harvest by machine—a scramble reminiscent of the one that followed the end of the bracero program, when agricultural employers responded to a steep decline in their low-wage labor force by adopting existing mechanical-harvest technologies they had long eschewed.

And that is why fears of a robopocalypse are so misplaced, as Robert Atkinson and John Wu of the Information Technology and Innovation Foundation have argued. The productivity-boosting effects of automation generate new wealth that in turn translates into increased consumer demand. Depending on the state of labor market, this increased consumer demand can be met either with increased employment, as there are still workers willing and able to increase their hours, or higher wages than then spur further rounds of automation and business model innovation. If this strikes you as a nightmarish future, you must have found the postwar Golden Age, when exactly these dynamics were at work, positively terrifying.

Which is not to say a high-pressure economy won’t be bad news for some. Legacy businesses that can’t adapt to the new dispensation—those that refuse to countenance higher wages, that fail to embrace business models better suited to new conditions—will of course declare that all is lost, and that what they need most is a new tax cut, a new subsidy, or a new guest-worker program to tide them over. The owners of these businesses, often Republicans in good standing, can be very persuasive. But they must be recognized for what they are: special pleaders, not public-spirited guardians of the commonwealth.

Mnuchin is, admittedly, an unlikely champion of a high-pressure economy. But at a time when the Trump presidency risks sinking under the weight of an endless series of scandals and pseudo-scandals, he may have provided it with an economic formula that will allow the president to keep building popular support.