The Economy Under Trump: Business Optimism Combined with Inequality

Trump’s Chair of Economic Advisors presented a glowing analysis of how business optimism and investment boomed with Trump’s election. But what do these figures mask and how accurate are they? We take a closer look at the data with PERI’s Gerald Epstein

The Economy Under Trump: Business Optimism Combined with Inequality

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Story Transcript

GREG WILPERT: It’s The Real News Network and I’m Greg Wilpert, coming to you from Baltimore.

Once again, President Trump is tweeting how well the U.S. economy is doing. Last Monday, he tweeted, “The Economy is soooo good, perhaps the best in our country’s history (remember, it’s the economy stupid!), that the Democrats are flailing & lying like CRAZY!” A little later that day, during the daily White House press briefing, White House Council of Economic Advisers Chair, Kevin Hassett, gave a presentation on the economy’s performance under the Trump presidency. According to Hassett, the economy took off with Trump’s election in November 2016.

KEVIN HASSETT: And I think that if anyone were to assert that the capital spending boom that we’re seeing right now was a continuation of the trend that President Trump inherited, then they wouldn’t get a high grade in graduate school for that assertion. And I can promise you that economic historians will one hundred percent accept the fact that there was an inflection at the election of Donald Trump and that a whole bunch of data items started heading north. And so you don’t have to really reach far for a theory of what happened. President Trump deregulated the economy, we’ve talked about how that effects growth, the tax cuts have had exactly the predicted effect on the economy that’s brought businesses back to the U.S., factories back to the U.S. and created jobs for ordinary Americans.

GREG WILPERT: Joining me now from Amherst, Massachusetts to discuss the Trump administration’s claims about the economy is Gerald Epstein. He is codirector of The Political Economy Research Institute and professor of economics at UMass Amherst. Thanks for joining us again, Gerry.

GERALD EPSTEIN: Sure, thanks for having me.

GREG WILPERT: So, let’s take a quick look at some of these graphs that Hassett presented on Monday. The first had to do with a small business with optimism and it shows how it shot up with Trump’s election in November 2016. He followed this with business investment and then with capital goods orders and shipments. And a journalist challenged him, asking him how it can be that Trump is credited with the boom on the day of his election, which is basically this inflection point that he’s talking about. And here is how Hassett replied to this question.

KEVIN HASSETT: Americans businesses, especially, their activity is forward looking. And so, if you want to model their investment today, then you have to understand the fact that they’re forming expectations not just about this month but about the next five, six, seven, eight, nine, ten years. So, if you look at what happened the moment the president Trump was elected both in equity markets and in sentiment surveys, is that people started to ratchet up their expectations for what would happen to the economy. Perhaps everybody except for Clinton supporters was starting to do that right after the election. And the fact is that those expectations turned out to be rational.

GREG WILPERT: So, Gerry, how do you respond to this argument that it’s all about expectations, which Trump ended up confirming, and that the expectations began on the day of Trump’s election and therefore that’s where the inflection point is?

GERALD EPSTEIN: Well, in fact, the day that Trump was elected the stock market dropped several hundred points. It did soon recover, however, and so I think it is true that once Trump started making all these very business friendly appointments to his cabinet and brought all the bankers in from Goldman Sachs and elsewhere and talked about deregulation, that yes, I do think the business, the capitalist class, small businesses’, large businesses’ expectations for their profits- that’s what they’re mostly concerned about- did go up. And I think those data, those graphs that he showed, do indicate a big surge in expectations.

The question is, to what extent have those expectations really translated into real changes in economic activity by these companies. Will they benefit workers and will it trickle down? That’s really the question.

GREG WILPERT: Actually, one of the questions dealt with that precisely, and the person raised it in terms of inequality. And Hassett argued, actually, that inequality is declining and the poor are doing better under Trump. We’ve got a clip here now from his reply to this question.

KEVIN HASSETT: The fact is that we’re at a historic moment because we’re deep into a recovery. The unemployment rate is really low and we’ve created a capital spending boom. And so, normally what happens if you don’t have a capital spending boom is that people start to bid up the wages for folks. But they’re bidding them up because there’s a shortage of labor. What’s happening now is they’re bidding up wages because people have better machines to work with and their productivity is going up. That means that the recovery can last longer. And that’s really, really good for workers, especially at the low-end.

GREG WILPERT: So it seems that, in effect, he’s arguing that there have been higher capital expenditures or investment and this means greater productivity, and greater productivity translates into more goods sold per worker and workers can thus be paid more. What’s your take on this?

GERALD EPSTEIN: Okay, so let’s unpack this. This is the key part of the argument by Hassett. So, he showed some figures that you mentioned earlier on, claiming that there was this big uptick in investment, in particular non-residential investment, that’s investment in plant and equipment in factories and so forth. That took place right after Trump was elected and that can’t be because of Trump, at least initially, because it really does take time for those things to get put into place. And in fact, nobody expected Trump to get elected, so they couldn’t have planned before the election to do that.

So, if you go back actually, which I did, and look at the data on investment, non-residential investment, over the last decade or so, way before Hassett’s figures, what you see is that what Hassett is calling a boom actually took place also from 2008 to 2014, that there was a very big uptick in non-residential investment during those Obama years. And then, it is true, though Hassett didn’t talk about this, that investment really slowed down after 2014, kind of leveled-off until around 2016, 2017. And the question is, why did that happen? And there are a number of factors.

But a key factor is that the austerity programs that were pushed by the Republicans during the Obama administration implemented sequestration, tax cuts, government spending declines, that really put a damper on investment, leveled it off. And so, when the Republicans came in, the same ones who had been saying how terrible the deficit is and how we have to cut government spending, they came in and they cut this huge tax cut for the rich. And everybody knows the tax cuts, by themselves, will increase short-term demand and short-term spending, short-term growth, and that’s to some extent what we’re seeing here.

But of course, Hassett didn’t say that the Republicans completely flipped on this government spending tax cut issue when when Trump came in. Now, will this have a declining impact on inequality if you have a somewhat more investment and productivity goes up someone more, will that raise wages? Well, the fact of the matter is if you look back at the last twenty-five or thirty years, productivity has been growing much more rapidly than wages. There’s been this huge wedge, which many people have pointed out, between slower wage growth and rapid productivity growth.

And there’s not much reason why workers would be able to get more of the fruits of their labor now than they did before, except for the fact that the unemployment rate is lower. And the unemployment rate is lower as a continuation of the Obama expansion, due largely to the Federal Reserve keeping interest rates low and the short term impacts, perhaps, of the tax cuts. So, very little of this has to do with the impact of an investment boom, investment growth is just like what it was from 2008 to 2014, or big changes in productivity growth.

GREG WILPERT: Yeah, I actually found that a little bit curious, that he makes the argument that somehow workers negotiating for higher wages because of a shortage of labor is somehow bad, whereas productivity increases is good, and that this would lead to higher wages, which apparently isn’t really true it seems, at least from the graphs I’ve seen. But I also want to ask you about another graph that Hassett points to which is, he shows that blue collar employment increased by 3.3 percent since Trump’s election, presumably again, having to do with greater capital expenditures, which are made possible by the Trump tax cuts. Or is there a different explanation to this, what looks like, on the face of it, a jump in blue collar employment? What do you think of that?

GERALD EPSTEIN: Well, I think there is some evidence coming out that there has been a jump in blue collar employment and it appears to be largely driven by changes in the oil sector, gas, oil, et cetera. Oil prices have gone up since Trump came in and there’s been an increase in oil production, oil exploration, fracking, gas and so forth. And those create jobs and blue collar jobs. And so, there may be something going on there. But of course, this increase in these particular industries generates huge problems with climate change, greenhouse gases, et cetera. So, it’s not something that’s sustainable in the long run, for sure.

GREG WILPERT: Finally, I just want to ask you about the criticism that many people have leveled against Trump. I believe it is an argument that you’ve made as well, that the tax cuts went mostly towards stock buybacks and dividends and not to real investment in the economy. Is that really true? I mean, do we have to revisit this issue?

GERALD EPSTEIN: Well, no. I think it’s still largely true, though a kind of an Econ 101 Keynesian model suggests that if you have a tax cut and it increases consumption spending, as it has, and households have been borrowing a lot more because they’re more optimistic, that increases consumption spending, then you have this thing called the accelerator, where investment also will go up to try to keep up with the increased demand. And these are all classic demand side Keynesian kinds of processes which were cut short, which were eliminated, between 2014 and 2016 because the austerity pushed by the Republicans and accepted by Obama and some of the Democrats- it wasn’t just the Republicans that did this.

And now, with the huge tax cuts for the rich that the Trump administration, with the gleeful support of the Republicans, has put in, you’re going to see some of these demand side Keynesian kinds of expansions in investment and consumption. But it’s not the supply side magic that Kevin Hassett and his people are hoping for, that it’s all coming from more investment, more productivity growth, wages going up as a result of productivity growth. So far, there’s not much evidence of that at all.

GREG WILPERT: Okay. Well, we’ll definitely continue to follow this as usual. I was speaking to Gerald Epstein, professor of economics at UMass Amherst. Thanks again, Gerry, for having joined us today.

GERALD EPSTEIN: You’re welcome.

GREG WILPERT: And thank you for joining The Real News Network.