The Economy Under Trump: Business Optimism Combined with Inequality

Yves here. To underscore a point made by Gerald Epstein in this Real News Network interview on the state of the economy: small business optimism in particular has just about no correlation with small business spending and hiring plans. It appears a lot of small businessmen are constitutionally optimistic. How optimistic they have to be to think that expanding their business is a good idea isn’t obvious.

And as for how great the economy supposedly is…due to re-activating a chronic ankle sprain, I’ve been forced to take cabs a few times this week, and I’ve been asking drivers about the state of the economy. They say it is no better and one groused that his past Saturday night haul was unusually bad.

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:Y ou’re welcome.

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

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  1. Collins

    This is just another example of how economics is simply not a science, much as people want it to be. True science deals with causation; economics is limited to correlation, however sophisticated. The occasional ‘proofs’ are sporadic and virtually always retrospective & selective.
    Just look at the multiple tools invented trying to predict recession. None of them are reliable or consistently reproducible. That’s why discussions like this one remain opaque, at least to me.

    1. paulmeli

      When the government spends more GDP goes up. When bank lending increases, GDP goes up. When business Investment increases, GDP goes up.

      Is that not causation?

    2. Michael Taylor

      I kind of came away from my economics undergrad degree thinking the same thing. Theoretically in the long run and under some idealized conditions, the causality is thought to be deterministic, but I agree, its not like a hard science, (no matter how much complex math you impose on it) in that you only get ice if the water is cooled to < 32F. I think a lot of it comes from the fact that the discipline attracts a lot of smart people who do have a quantitative inclination, and are looking to establish some measure of product differentiation (also another thing: a lot of academic sounding words to describe straightforward conceps) between them and other social disciplines they view as inferior.

      1. False Solace

        To be a science you have to make testable predictions, and if your predictions are contradicted by the evidence you have to discard them. By those criteria MMT is far more science-like than mainstream econ. Mainstream econ is full of laughable failures and is taken credibly only by idiots in mass media and politics.

      2. Synoia

        It contains a linear, instantaneous feedback loop, in that

        Government + Private + Trade = 0 is instantaneous, no time component, and only true over an accounting period, for example the last quarter.

        In real time, day to day, there are time delays in the equation which are not considered, which produce feedback. These time delays are also sources of non-linearity, which suggest the system is chaotic.

        The first differential of the equation over time, is only zero if the is no growth or decline in spending in the economy.

        dgov/dt + dpri/dt + dtrd/st velocity of change, is very probably not equal to 0, and the second differential over time, acceleration of change, also not equal to zero and very much subject to emotional (nonlinear) changes.

        MMT is based on good accounting practices, but I’ve read no work on the day to day changes in the variables which describe a dynamic system subject to both random fluctuations (noise), and sharp reaction to events.

  2. sharonsj

    What’s odd to me is that the underground economy is faltering too. I always thought that second-hand selling would be a mainstay in a poor economy. However, turnout at flea markets and other shows I vend at is falling as more people are searching for the cheapest items. And the turnout applies to vendors as well; most of us are older and it seems that younger people are not willing to put in the long effort for a non-guaranteed return. They want immediate gratification and acclaim, as though they all expect to be reality stars. I wonder if the rest of us are just experiencing overwhelming fatigue at the struggle?

    1. False Solace

      Millennials and Zs don’t own houses and they don’t start households at the rates of previous generations. They don’t have a need for “stuff” or a place to put it. I’d expect secondhand prices to continue to fall. There are a lot of aging Baby Boomers with houses packed full of things their kids don’t want.

      What I do see a market for is 30+ year old appliances and clothing from the pre-crapified era. I just recently bought a small kitchen appliance “Made in the USA” dated 1994. I sought it out specifically because I know it will hold up longer than the brand new version sold on Amazon. I’d avoid things like sets of china, knickknacks, and heavy dining room furniture.

  3. oaf

    ” greater productivity translates into more goods sold per worker and workers can thus be paid more. What’s your take on this?”
    Productivity could be defined as more goods sold…but it is also about goods produced. Production and sales (consumption) are not directly linked. Only if consumers can buy the product does productivity go up, as defined by the latter definition. This has so little to do with paying workers more that, generally, this premise seems, on the surface, ridiculous!!! The CEO and cronies get the increases. Workers may get a token. Praise, perhaps!
    Any numeric increases in workers’ pay palls in contrast to cost-of-living increases foisted upon us by them the markets serve…

  4. Jean

    We agree with you Yves, but it’s tempting to remember the old George Burns quote:

    “Too bad that all the people who know how to run the country are busy driving taxis and cutting hair.”

    Based on our experiences in cabs lately, you no longer have the professional lifelong middle class drivers, representative of the American working class, but rather a group of mostly exploited immigrants at the bottom of the economic barrel who will suffer disproportionately.

    1. jrs

      How much of this is affected by Uber? I don’t think the economy is great, not really for a wide range of people locally from my experience, but some people’s personal economies may be bad due more to specific industry issues than the general state of the economy.

  5. Tom Doak

    Most small businesses (if they are really small) are fairly risk averse. If business starts to pick up, they will hire on extra people to meet the demand, but they’re not going to borrow from a bank to hire people if there is any chance that things will reverse course. There’s a difference between optimism and confidence. Not even big businesses have much confidence these days.

  6. Scott1

    It was a big deal to me that Henry Petroski included Financial engineering in the discipline of Engineering. I consider someone like David Cay Johnston to be a Financial Engineer. I do not see him working with anything theoretical.
    Economics as a science is damned young if you think a science requires empirical evidence. Piketty had the benefits of statistical evidence. Pretty much what all of that thick book of his meant to me was that wealth in the majority of cases, depends on inherited deeds and financial instruments.
    Keynes had evidence to prove that you didn’t have to keep the working classes poor to keep them working. He had evidence that when they were paid more than subsistence wages they put money into educating their children and home improvements. It is unfortunate for me that many of the books by Keynes are damned expensive. He had an acutely developed eye for characters as i was able to read as he watched Clemenceau engineer the enslavement of Germany, effectively shoving Wilson and all his high minded rhetoric off the table. Keynes clearly saw that the result would be WWII.
    It is a sociologically determined certainty that slaves will rebel. Capitalists are aware of this and do all they feel necessary to limit the working classes ability to unite so as to take from the Capitalists realistic shares of the wealth they create.
    Racial divisions are a fantastic gift to capitalists who can simply write themselves higher and higher shares of businesses they get to sit at the top of. Writing laws that benefit the Capitalists ownership, rentier class turns the corporation into the country which pays them with increasingly lower taxes. Feudalism before, Feudalism now, Feudalism forever.
    I do admire now Warren Mosler who is a prominent theorist but has entered into the Financial Engineering arena as he runs for Gov. of the USVIs.
    Science is infinite and engineering is finite. Metal breaks.

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