Sen.Elizabeth Warren has touted plenty of awful plans in her bid for the presidency, attempting to marry expansive and socializing economic policies with the nationalist rhetoric that clinched the Electoral College for President Trump. But while her hodgepodge of plans, ranging from that for “economic patriotism” and “green manufacturing,” have reeked of opportunism, her post today warning of an economic crash actually diagnoses the very real, apolitical, and oft-ignored problems bubbling under our economy.
By every metric, the Trump economy’s perseverance is an exception to historical trends. We’ve sustained the longest bull market in American history despite a notably slow recovery from the Great Recession. Even though our unemployment rate has hit a half-century low, our inflation rate has not surpassed 2.0% in any month of 2019 thus far. And although Trump appears to be testing fate with a seemingly pointless trade war, our economic growth has led to real wage growth for ordinary Americans for the first time in years.
But even if the fundamentals of the economy have defied the odds, Warren rightly diagnoses the underlying bubbles threatening our status quo.
Key among Warren’s warnings is the corporate debt incurred by leveraged loans, which package debt from companies with lower credit ratings. She rightly notes that the $1 trillion corporate loan market looks disturbingly “like the pre-2008 subprime mortgages: poorly-underwritten loans with minimal protections that are then packaged and sold to investors.”
Warren also correctly diagnoses household debt as an impending problem — though she stops short of admitting that the student loan bubble is in fact that, a bubble — and acknowledges our dwindling manufacturing market leaving vast swaths of the country behind. But as usual, Warren’s prescribes the wrong solutions to the right problems.
Like Trump, Warren falls into the same fallacy of blaming the bleed of American manufacturing jobs on policy rather than automation. In reality, multiple studies have found that automation caused more than 80% of the loss of manufacturing jobs, and McKinsey estimates that in the future, technology can automate nearly half of all activities that people are currently paid to do. The solution to the creative destruction left in the wake of technological progress isn’t to halt the progress but invest in realigning workers with the skills required in our increasingly information-driven economy.
And of course, this contradicts Warren’s favorite solutions to a major component of the household debt crisis, student loans. As it stands, the federal government effectively subsidizes expanding college bureaucracies through the promise of unlimited and nearly unconditional student loans. Warren’s dreams of free college and widespread student loan debt cancellation would only empower colleges to continue to jack up prices, leaving taxpayers on the hook to foot the bill. And more importantly, Warren’s plan ignores the growing skills gap furthered by a political class that has lionized increasingly inflated college degrees and hindered the expansion of vocational training.
Warren’s solution to the leveraged loan bubble, increased regulation, may be justified. And her plan to spend away to retain manufacturing jobs is fallacious, but it would probably simply do nothing.
But to take a series of personal debt categories, and then nationalize them, risks creating a systemic bubble problem that could undermine the economy.
