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What Mr. Trump Saw That You Didn't

The three charts on this page link real income for men and women, the outflow of wealth from the country to pay for imported goods, and the growth in consumer debt between 1995 and 2016. The point is that the charts are a unity and President Elect Trump was the first politician to see the linkage and ride it to the Presidency.

Real earnings for American workers have barely moved since 1995 (top chart).

The loss of earning power for working families is attributable to outsourcing many of the goods we consume to foreign countries. The U.S. has spent $13 trillion dollars since 1960 buying goods from foreigners than it was able to sell to them (second chart). This transfer of wealth out of the country meant that salaries paid workers could not grow.

This year, the balance of trade between imports and exports is estimated to be negative $707 billion. This means that the U.S. will have to borrow another $707 billion overseas to pay for its negative trade. It will issue Treasury bonds to foreign banks to pay for this debt and we will then owe interest on $13.7 trillion of debt accumulated since 1960 from negative trade balances. This flow of wealth out of the country is intolerable.

The flaw in the consumer's balance sheet is that he has not been able to reduce debt in this business cycle. Consumer revolving debt (credit cards, auto loans) has increased as a percent of disposable income almost every year since 1995. Part of the blame for this situation should be assigned to near zero interest rates that offer no incentive to save.

The bottom chart captures the unparalleled weakness of the period from the mid-1990s to the present better than almost any other argument. It says that middle class America has been choking on debt since 1995. More than half of American families have been spending more than they earned as real median family incomes over this period have stagnated.

In the five business cycles prior to 1995, the Federal Reserve Board would raise interest rates when it appeared that Inflation was heating up, consumers would stop spending, pay down debt, and a new business cycle could begin. In the mid-1990s we adopted the "Strong Dollar" policy. A policy that basically told the world that the U.S. would buy their goods if they would loan us the money to do the buying.

The strong dollar policy was not sustainable. It had been tried many times before in world history and had always failed. Mr. Trump made the loss of jobs from our experiment in globalization the cornerstone of his successful bid for the Presidency.

Mr. Trump was also on target when he identified the creation of millions of new jobs the compelling need at this juncture. Reducing and eventually eliminating our trade deficit is the key to creating the jobs that will lift workers' incomes so consumers can start spending again, and a lasting economic expansion can occur. This will happen sooner than most expect as the U.S. can quickly become self sufficient in all forms of energy.