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GDP growth up, stock market up, will the economic expansion continue and who are the winners? Dean Baker and Randall Wray join host Paul Jay

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PAUL JAY The economy is growing and Donald Trump is inching up in the polls, but is this growth sustainable? And who’s benefiting? That’s next on The Real News Network.

Welcome to The Real News. I’m Paul Jay. The official unemployment rate is down to 3.6 percent, the lowest rate since 1969. While wages have been stagnant for a long time, it’s reported they are now finally outpacing inflation and the stock market is hitting record highs. GDP growth, in the first quarter of 2019, clocked in at 3.2 percent, which is the fastest annualized growth rate since 2015. Now, I said the stock markets– record highs. I have to add, today the trade war with China might be back on. So today, it’s crashing a little bit, but the trend over this year has been higher and higher, and people in the markets have been getting richer and richer. But is the growth sustainable? And who’s benefiting?

Now, joining us to begin with is Dean Baker. He’s a Senior Economist at the Center for Economic and Policy Research (CEPR). He’s the author of several books including, The United States Since 1980, Social Security: The Phony Crisis he wrote with Mark Weisbrot, and The Benefits of Full Employment he did with Jared Bernstein. And also joining us is L. Randall Wray. He’s a Professor of Economics at Bard College and Senior Scholar at the Levy Economics Institute of Bard. He’s the author of many books including, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems. Thank you both for joining us.

PANEL Thanks. Thanks for having me on.

PAUL JAY So Dean, kick us off. First of all, what’s driving this growth? What seems to be sustaining itself longer than predicted. In the mornings, I drive the kids to school and I listen to Bloomberg Radio. And for weeks and weeks, I’ve been hearing predictions of the coming slowdown, the coming recession, and now, certainly it ain’t here yet. So what’s driving this growth?

DEAN BAKER Well a few things. First of all, let me just quickly make a comment about the stock market. The stock market in principle is a measure of future corporate profits. So the idea that somehow this is a measure of the economy, that simply is not true and, of course, it’s not surprising if you cut corporate taxes, that you’re going to see a rise in stock markets because again, that should mean higher corporate profits. So good for you if you own lots of stock. Unfortunately, that’s not most of us, but that’s what the stock markets measure.

Now, in terms of the economy, it looks pretty good. The first quarter number was somewhat deceptive. We had a big rise in inventories, so I know the Trump administration was touting the number. I have no idea what he knows, but economists understand inventories don’t continually accumulate. But just as a GDP accounting thing, we have a lot of unsold inventories. GM and Ford have all these cars sitting in their lots, which actually is pretty much a story there. That means, more inventory accumulation that adds to growth. If you pull out inventories and some other factors, the growth in the first quarter is actually under two percent. So what we’ve seen is that the tax cut that Trump had, did lead to more growth in 2018. That really wasn’t a surprise. That was widely predicted and it was because of more consumption. It was not the investment story. So if you look to what Trump and his administration were saying, they give this big corporate tax cut that was going to give incentives to invest and we’re going to have an investment boom. Investment was actually very modest into 2018, no noticeable uptick due to the tax cuts, and certainly nothing like what was promised. And actually, the most recent quarter barely grew at all.

So we did see some uptick in consumption because we put a lot of money in people’s pockets, mostly high-income people. That did fuel growth and that led to more job creation and that was a good story. Very bad way to push the economy. I mean, we could have done this with a Green New Deal. We could have done this with tax cuts oriented towards more lower-income people. There were a thousand better ways to boost demand in the economy, but it did do that to 2018. And now, we have a low unemployment rate and we are seeing workers with more bargaining power. Wages have been exceeding inflation for pretty much about five years now. And that’s a decent story. It doesn’t make up for a lot of bad times over the last four decades, but things are mostly going in the right direction. I will mention one very, very important caveat. I’ve noticed in the recent data, there’s been a rise in black male unemployment. Those numbers are erratic, but that’s very disconcerting.

PAUL JAY Yeah. It seems like it could be almost double white unemployment.

DEAN BAKER Well no, it’s typically double on white unemployment. It’s going more than double. That’s my concern. I mean, I’m not happy about being double white unemployment, but that’s the way it’s been for as long as we’ve had data on this, but when it starts rising, it’s more than double white unemployment. Black male unemployment in the most recent data was– I don’t have the number in front of me but– it was close to seven percent as opposed to around three percent for white males. So that’s very disconcerting. As I said, the numbers are erratic. It could be reversed when we get another month or two of data, but that is a very disturbing story.

PAUL JAY Randall, do you agree with Dean? And if so, the question is how sustainable is this?

L. RANDALL WRAY Yeah, sure. I think Dean gave a very good summary. He knows the data better than I do. It’s very good that wages are rising a little faster than inflation. The headline unemployment numbers, I think, are misleading. I know Dean will agree with this, that it’s not counting a lot of people who want jobs. I mean, it’s not clear how many jobs you can create for the people who’ve been left behind strictly by pumping up demand through tax cuts for the rich and so on, without getting some inflation. So I don’t think that’s necessarily the right way to do it. How sustainable is it? I think it depends a lot on what the debt looks like. It seems like corporate debt is much higher than is usually reported. We know student loan debt is very high and growing, and credit card debt, auto-related debt. So I think, the sustainability isn’t really going to come in the real part of the economy, or unsustainability let’s say, is going to come in the financial sector again.

PAUL JAY Right. Dean, I’ve been hearing as I listen to Bloomberg Radio that a large–I get this measurement of corporate profits, although if there’s a big shake up in the stock market, it must have some effect on the investment climate and such. And I’ve been hearing that a lot of this spike in the stock market is about corporate stock buybacks. It’s kind of an artificial inflation of a lot of the stocks. How big a factor is that?

DEAN BAKER I don’t really think it’s that big a factor. The alternative is that they’d be paying it out in dividends. There’s going to be this kind of–

PAUL JAY Can I just add one point? Again, going in my Bloomberg Radio, is that a lot of this is being fueled by debt. Even though, if they’re sitting on mountains of cash, many of them, they’re still borrowing. That corporate debt is very high and a lot of it is linked directly to stock buybacks.

DEAN BAKER Yeah. Well, as I said, the alternative is that they’d be paying out dividends that also drives up stock prices. I don’t quite understand why people are more concerned about buybacks than dividends. It’s giving money to shareholders. I don’t–you know, if they just said, okay, we’re not going to do buybacks, saying well we’ll hand it out in dividends, that wouldn’t make me feel any better. So no, I think the runup in the stock market is that corporate profits have risen a lot. Interest rates are very low. It makes sense for stock prices to be relatively high. And the idea that it’s at a record high–well, it’s kind of like, the tree in my backyard is taller today than it was ever before. It grows, so generally the economy is going to grow. Generally, the stock market’s going to go up. We’ll have recessions and that will be a hit to the market, but the fact that the market’s hitting new highs, that’s really not, shouldn’t be all that surprising. So I’m less worried about that.

In terms of the debt, I think it’s important to look at debt-service. I mean, one of the good things about the US economy is that we’re pretty good at dealing with bankruptcies. So where you have companies that find themselves unable to pay their debt, they can continue operating, unlike other countries. Many other countries don’t have good bankruptcy, so companies basically stop operating. That doesn’t happen here, but the more fundamental issue here, debt service actually isn’t that high because interest rates are very low and that gives companies good incentive to borrow. So if you see a situation where you can borrow long-term for four percent, five percent– very low interest rates by historical standards, a lot of companies are going to do that. Now if at some point they go, oh, maybe we want to have lower debt. They could sell stock. They could sell other assets. I’m just not that worried about that corporate debt story. I doesn’t mean some companies aren’t going find themselves in trouble. That always happens. The question is whether it will really sink the economy.

PAUL JAY Well, let’s dig into this sustainability question again because it has such political implications. If this continues like this right up to the 2020 elections–and Trump is inching up in the polls right now. He has a heck of a lot better chance of being re-elected. What do you think? I’m asking Dean because he’s a little more on the data, but then I’m going to come to you Randall. You know, how long does this carry on for?

DEAN BAKER Yeah. Well, if we look at prior recessions, all except for two of them were caused by the Fed raising interest rates to try to head off inflation. Or, at least ostensibly trying to head off inflation–we won’t read their minds as their true motives– and going too far and causing a recession. The two exceptions were the recession in 2001 that was caused by the collapse of the stock bubble and the recession in 2008 that was caused by the collapse of the housing bubble. So, I look at those options. I go, okay, is there a bubble in the economy that’s driving growth? Those are both driving growth and none of this is 2020 hindsight. I was yelling as loud as I could about the stock bubble, yelling as loud as I could about the housing bubble. They were clearly drop [inaudible] growth. I don’t see any bubble in the economy that’s doing that, so that doesn’t mean that it could be a bubble in Bitcoin, a bubble in Tesla’s stock, a bubble in Uber stock– it seems like the only thing they know how to do is lose money and rip off the drivers. You know, those are all bubbles. They could burst and it won’t have much impact on the economy. So I don’t see a bubble bursting leading to a recession.

The alternative, and I thought this was actually a very plausible story that would happen in the near future, is that we continue to see more rapid wage growth, that would be passed on in more rapid inflation, the Fed would get freaked out, start raising rates, they go too far, and give us a recession. I actually thought that was a plausible story for the near-term future. I even wrote a piece putting it in 2020. I think that’s less likely today because basically, we don’t see acceleration wage growth. So for now at least, there’s zero evidence of rising inflation. And the Fed, I think, for the most part, they’ve been pretty reasonable. I mean, there are some people at the Fed I think are very unreasonable in terms of fighting inflation, but I think Jay Powell, the chair, and most of the other people on the Fed right now, are fairly reasonable in terms of saying, okay let’s sit back and wait until we actually see serious evidence of inflation before we start pushing rates through the roof. So long and short, I’d have to say better than a 50-50 chance, Donald Trump’s going to have a good economy in 2020. Democrats will have to find another reason to go after him.

PAUL JAY But Randall, part of the reason Dean’s saying the economy may not go into recession is because it’s unlikely that there’ll be a rise in interest rates. But that’s to do with the lack of real wage growth. There’s a little bit of wage growth, but not a lot. And certainly, the stat I have is corporate profits are up about 7.8 percent over 2018 and wage increases are a small fraction of that. It’s a double-edged sword, I suppose. One is, maybe the interest rates go up. On the other hand, people aren’t really making more money.

L. RANDALL WRAY I think that there could be a problem in the data on profits. I don’t do this research directly, but I do listen to others who do. The profits could be overstated, which would explain why corporations are using debt for the buybacks, because if profits were as high as they’re reported to be, it’s a little puzzling that they’re going into debt. So I think there is some link, as you hinted at, between borrowing and the buybacks. I am less optimistic than Dean because again, I think that the problem will turn out to be in the shadow banking sector, like it was last time. If the Fed did start raising interest rates, then that could increase the debt-service ratio–

PAUL JAY Randall, just for a second. Explain for people that don’t know the term “shadow banking sector,” what that means.

L. RANDALL WRAY Well, of course, it basically means everything that is not a regulated bank. And  just like last time around, we just don’t know that much about what’s going on. We know more than we did last time, but because they’re in the shadows, it’s very hard to know what’s going on. The biggest banks are highly leveraged in a lot of the off-balance sheet stuff, so there are financial analysts who are looking at this stuff. It sounds very scary. I don’t know how much weight to put on that. The thing that I learned way back in 1996 when we were calling for the end of the Goldilocks economy, is this economy is very big. It gets momentum going in one direction or the other, and it can continue in that direction for much longer than you expect that it would. I agree with Dean that it looks like the Fed is going to hold off. I don’t think that the pace of job creation is so great, that the inflation pressures are going to get high enough, that the Fed is going to go crazy. So it could go on. It can go longer than I think that it would.

PAUL JAY Dean, you have any comment on this issue of the wages? Why aren’t the wages going up more than one might have expected there?

DEAN BAKER Well, it is a good question. They, as I said, they had started to rise more rapidly. So if you look at nominal wage growth in at least over the short-term [inaudible] corporate measure, that had accelerated, it had been, if we go back say three-four years, it had been about 2.5-2.6 percent and it had accelerated to crossing three percent. And back earlier this year, it was running at a 3.4 percent annual rate. The most recent data show it’s slowing slightly to about 3.2 percent. Now, that would suggest some weakening of the labor market, which is hard to reconcile with pretty good-rated job creation and 3.6 percent unemployment. You know, I try to look very closely at evidence that people might be concerned about their jobs. One of the categories that I and others, it’s not one I invented, but if you look at the percentage of unemployment due to people who voluntarily quit their job, it’s actually fairly low. It’s around 12 percent.

By comparison, if we go back to 2000, the last time we had a pretty good labor market, it was over 14 and in fact, peaked at over 15 percent. So the fact that we don’t have all that many people who feel comfortable quitting the job until they have another job lined up, suggests that they may not be all that confident about their labor market prospects. So I think it’s possible that we are seeing– I shouldn’t say it’s possible. We definitely are seeing a decent rate of job creation. It’s hard to knock the 263,000 we saw last month, and if we take a longer period average, it’s over 180,000. That’s not a bad rate of job creation, a low unemployment rate, but it’s possible people still don’t feel they have a lot of bargaining power on the job. We know we’ve tremendously weakened unions over the last four decades, minimum wage laws have not kept up with inflation, at least nationwide. There are states and certainly, California and New York, that have been pushing minimum wage laws, but that’s clearly not true everywhere.

And one of the big developments that is getting more attention, I think there’s still a lot of people who don’t know about it, is non-compete agreements, that you have somewhere at 30-40 percent of the workforce, according to some estimates, has signed non-compete agreements. What this means is that you can’t go work for a competitor. Now, in many cases, that won’t be binding. If it went to court, they’d laugh at it. But the origins of this is that, suppose I’m working for Microsoft and I have access to all their latest software. They make me sign a non-compete agreement so I can’t work with a competitor and take all the stuff, the knowledge I got about their software, and use it at a competitor. Arguably, that makes sense, but you even have sandwich shops where they make their workers sign non-compete agreement saying, they can’t go work at another sandwich shop. Again, that probably is not an enforceable contract, but most people are not lawyers. They might think that, oh my god, I really can’t work anywhere else. So how much that explains? Hard to say, but there are a number of factors that just have weakened workers’ bargaining power tremendously. So even though we seem to have a relatively strong labor market, wage growth is still pretty modest.

PAUL JAY All right. Thank you both for joining us. It sounds like you’re both saying this economy we’re in right now could at least be going past 2020 elections. All right. Thank you and thank you for joining us on The Real News Network.

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L. Randall Wray is a Professor of Economics at the University of Missouri-Kansas City, a Senior Research Associate at the Center for Full Employment and Price Stability, as well as a visiting Senior Scholar at the Jerome Levy Economics Institute of Bard College. He is a past president of the Association for Institutionalist Thought (AFIT) and has served on the board of directors of the Association for Evolutionary Economics (AFEE). He is developing policies to promote true full employment, focusing on Hyman P. Minsky's "employer of last resort" proposal as a way to bring low-skilled, prime-age males back into the labor force. Wray's research has appeared in numerous books and journals including Journal of Post Keynesian Economics, Journal of Economic Issues, Review of Political Economy, Review of Social Economy.

Dean Baker is co-director of the Centre for Economic and Policy Research