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.
Trump clearly also wants to pursue trade and industrial policy aimed at boosting manufacturing in the U.S. that would help provide higher incomes and more jobs for the voters who helped drive him to the White House. But again it's not immediately clear that Trump's approach will prove effective.
His first major effort in the area required giving $7 million in tax incentives to United Technologies to keep 730 union jobs in Indiana. The company's Carrier air conditioning subsidiary will still move another 550 jobs to Mexico.
And after the deal, Trump got into a bitter dispute with United Steelworkers local union leader Chuck Jones after Jones had the temerity to criticize the terms of the deal and Trump's accounting of the number of jobs involved.
Trump tweeted that Jones had done "a terrible job representing workers. No wonder companies flee country!" Jones, a popular and respected union leader, began receiving death threats. Getting into public fights with union officials will not help Trump's numbers in the Rust Belt.
There is also the very real concern that if he pursues big tariffs on Chinese- and Mexican-made goods he could stoke a trade war that would make products more expensive for those without significant means to absorb the increase. And he could disrupt a global supply chain and make it more expensive for American manufacturers to produce goods that relay on inputs from around the globe. That would mean fewer, not more, American jobs.
Trump's Cabinet selections thus far may also not endear him to his blue-collar loyalists. He's assembling a team of the super-rich with a combined net worth of at least $15 billion, from Mnuchin to Commerce Secretary Wilbur Ross to Education Secretary Betsy DeVos. On Thursday, Trump selected fast food CEO Andrew Puzder for Labor secretary. Puzder is a strong critic of minimum wage hikes and labor protections enacted by the Obama administration.
In Iowa on Thursday, Trump defended his gilded Cabinet, saying he wants "people that made a fortune." Trump and his wealth proved highly attractive to many voters in 2016. So it may not hurt him politically to lean on other highly successful people to populate his administration.
But if the group around Trump promotes an agenda that is highly favorable to the already wealthy and does little to protect and boost those stuck in economic purgatory, the incoming president could see his popularity stagnate and recreating the map that put him into office could become impossible in four years.
— Ben White is Politico's chief economic correspondent and a CNBC contributor. He also authors the daily tip sheet Politico Morning Money [politico.com/morningmoney]. Follow him on Twitter @morningmoneyben.