“Mister, we could use a man like Herbert Hoover again.” – Lyrics to Those Were the Days; theme song to All in the Family.
Some of the best investment thinkers around believe that the presidency of Donald J. Trump will increase income inequality in the United States. That’s ironic because Trump’s successful campaign is widely viewed as the product; or side effect of income inequality.
“His tenure will be a short four years but is likely to be a damaging one for jobless and low-wage American voters,” legendary bond manager Bill Gross wrote of Trump in his blog. “But while the Fox (Gross’s nickname for the Donald) promised jobs and to make America great again, his policies of greater defense and infrastructure spending combined with lower corporate taxes to invigorate the private sector continue to favor capital versus labor, markets versus wages, and is a continuation of the status quo.”
Gross is absolutely right; Trumpism is an attempt to preserve the status quo and protect the wealth and power of the existing elites, not a paradigm shift to more equality. What Trump is doing is using populist anger to build up a political machine to protect what he sees as the interests of his class. The interests of that class being government investment in the economy to stimulate growth; low taxes, limited regulation and strong law enforcement to protect the property of the elites.
This amounts to class warfare but it is class warfare on the workers and the poor. Trump hopes to divide the lower classes and turn them against each other with a cynical use of racism, anti-intellectualism and anti-immigrant hysteria. Whether that will successfully distract the folk on Main Street from Trump’s ineffectual policies remains to be seen.
How Trump Could Cause a Depression
Gross makes no predictions of what comes next but portfolio manager Dylan Grice of Aeris Capital made a frightening prediction. The kind of policies and thinking Trump promotes would lead to depression.
Two years ago Grice predicted a rise of tribalism and protectionism that would stifle international trade and the free market, Business Insider writer Linette Lopez noted. With Trump’s election and Brexit that seems to be coming true with disastrous results.
The result of Grice’s scenario would be a long period of very slow economic growth with a high risk of inflation. Inflation would increase because companies would have to raise prices to make up for higher wages and production costs if they were forced to bring jobs back to America. In other words the world would go back to the 1970s nightmare of stagflation.
“If multinational corporations were forced to re-onshore production on the basis of prohibitive trade barriers, the likely rise in wage costs as well as in producer import prices would likely be passed on to consumer prices,” Deutsche Bank analysts wrote in a recent note.
That’s the best case scenario, but there’s another possibility. Instead of returning the jobs would simply disappear because there would not be enough economic activity to generate money to pay for the items produced.
That actually happened in the early 1930s after the Smoot-Hawley Tariff raised 900 US import duties in an attempt to alleviate the Great Depression. Instead of increased demand the Tariff led to 25% unemployment and breadlines. Many economists blame the Tariff for making the Great Depression worse.
We Have a Man like Herbert Hoover Again
This brings us to the man who signed that law into law, Herbert Hoover. Hoover was a great deal like Trump he was a self-made man; an engineer who had made a fortune in mining. He was also something of an outsider who came to politics late in life; the Presidency was the only elected office Hoover ever held.
Similar stories aren’t all that Hoover and Trump have in common; their prescriptions for the nation’s economic ills were eerily similar. Hoover was a staunch protectionist and an opponent of immigration. Like Trump, he was elected during a time of rising income inequality with a mandate to protect White America from what were seen as destructive cultural and economic forces.
Back in 1931 Hoover began what he called reparation programs. That meant local authorities deported legal and aliens under federal auspices. Around 121,000 people were deported; or forced out the country, during Hoover’s administration, according to Factcheck.org. The idea was to open jobs for out of work U.S. citizens.
Inflation and Income Inequality
If Trump’s presidency is anything like Hoover’s it will make income inequality far worse and lead to more political extremism. Like Hoover, Trump will make income inequality worse with policies designed to alleviate it.
Increased inflation in particular would drive more income inequality because inflation benefits the rich and speculators; who have the ability to shield their assets from it, at the expense of the middle and working classes. The wealthy can buy bonds; or put their money into real estate; while the middle class sees its’ savings destroyed and workers see their wages become worthless.
Hoover’s presidency led to the greatest income inequality in our history. Workers lived in homemade shacks at the city dump while wealthy Americans like movie star Clark Gable drove around in luxury cars.
That produced an ugly political backlash in the form of FDR and the New Deal and increased interest in Communism and Marxism. The New Deal contained a strong strain of class warfare. If history runs true to form, Trump’s policies will strengthen the left and lead to forced redistribution of wealth.
At the end of the day; Donald J. Trump will only make income inequality worse and set the stage for more class warfare. Hopefully his failure; like Hoover’s, will lead to real solutions rather than cheap populism and failed policies.