Donald Trump will take office next month with a strong economy and markets booming on hopes for big tax cuts and widespread deregulation.
Both investors and consumers seem to love the president-elect's proposed agenda. Markets keep hitting new highs with the Dow Jones industrial average approaching 20,000. Consumer sentiment rocketed to 98.0 on Friday, the highest reading since January 2015.
But underneath the gaudy numbers there is reason for Trump and his incoming administration to be concerned. Two new academic papers out this week painted a fairly grim picture of the bifurcated nature of the current U.S. economy.
Economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman released a study showing that half the U.S. population has been "completely shut off from economic growth since the 1970s." And Stanford economist Raj Chetty and a group of other academics found that over the last 50 years, the percentage of children who go on to earn more than their parents plunged from 90 percent to 50 percent.
The stunning drop in economic mobility was particularly pronounced in the industrial Midwest, where Trump seized on economic dissatisfaction and anger at the status quo to put together his shocking Electoral College win despite losing the popular vote by 2.6 million.
Trump will have to do something to fight these big, historic trends if he wants to hold onto his blue-collar support over the next four years. And it's not obvious that a very large tax cut tilted to upper-income brackets will achieve this. Incoming Treasury Secretary Steven Mnuchin pledged on CNBC that any reductions for top earners would be "fully offset by less deductions that pay for it."
It will be critical for Trump's blue-collar credentials that the new administration follows through on this pledge. If they do, it would represent both a break from Trump's own campaign platform and the approach generally taken by congressional Republicans who favor cutting all rates without worrying too much about the debt and deficit impact.