Beyond Simple Slogans
The cost disease asserts that the costs of health care, education, the live performing arts, and a number of other economic activities known as the “personal services” are condemned to rise at a rate significantly greater than the economy’s rate of inflation, as indeed they have…
The Cost Disease, William Baumol, 2012
For the non-Maga base, the Trump vote rests on the assumption he should not be taken literally. But his early cabinet appointments indicate we should take him at his word. The key thread linking cabinet appointees Gaetz, Gabbard and Hegseth is they each are election deniers. I suspect they are smart, so they are knowingly mendacious to gain power. Trump’s effort to appoint them without having the Senate confirm is a further concern.
These data points directly relate to coming economic policy, which will be maximalist; big tariffs, aggressive deportations. That’s a clear buoy to aim for as we navigate the financial sea. To understand why these policies will upend financial markets and why Trump won in the first place, Baumol’s perspective (quoted above) helps. In short, Trump’s solutions—starving the government, deportations and tariffs—won’t work because it doesn’t address the core issue—the vastly different levels of productivity that are driving wealth differences.
We know we are in a productivity boom. The analyst that could do X before can now do X+ using Chat GPT with the same effort. That means the economy (measured in total output) grows.
For the person who owns the high productivity outputs (think someone who works at Google or owns Google stock), it is fantastic. Profits soar and costs don’t. However, this productivity boom only touches the parts of the economy that use technology. Large parts of the economy don’t use technology and won’t ever, the very parts of the economy Trump is targeting.
One example of an unproductive sector is classical music. It’s as hard to learn how to play violin now as it ever was. You don’t get any reward for playing Vivaldi’s Four Seasons even faster. Given the demand for classical music remains but the economy is growing the only way to continue to attract classical musicians is to have wages rise even though productivity is flat, as Baumol notes.
This tech vs. non-tech tension (Google vs violinist) is at the core of the wealth inequality in the US (and globally). Those people close to technology (mostly on the coasts) are living well, those people far from it (more in the middle of the country) are feeling squeezed. The idea that one man can make it all go away by making things great once again is appealing but false.
For instance, one way of solving the low wage problem is to have people do the lowest productivity work—framing houses, cleaning dishes—for a cheap price because they are fleeing far worse conditions elsewhere in the world. If you toss 20 million of them out of work, what will happen? Either wages go up a lot (inflation) or growth goes down a lot (recession), maybe both.
Tariffs similarly will boost the cost of what the US imports, which is inflationary and hurts the lowest income strata (that spend more on basics) the most. Similarly, reforming the government is hard because it isn’t a private company. Reagan and Gore tried and both failed. The more you starve government, the worse services become, which is one reason why places that pay bureaucrats well, like Singapore, feel very different from the US. It’s also why Seal Team 6 is more effective than the National Guard.
In short, when you have a massive productivity boom it creates wealth but also puts strains on a society because wealth differences widen. You can’t make the technology go away and don’t want to. It is magical and transformative. The easiest way to keep the social fabric tight is to raise taxes on the most productive and redistribute this money to those in less productive sectors, including government…but Americans hate that idea. It’s also tough to explain in a four word sentence, so it is terrible for a political slogan.
The new President has a mandate. He now controls the White House, Congress and, essentially, the Supreme Court. But markets can’t be controlled and if inflation goes up, bonds will go down and when they do, other markets will start to go down as well.