Dean Baker is senior economist at The Center for Economic and Policy Research (CEPR). He is the author of several books including, The United States Since 1980; Social Security: The Phony Crisis (with Mark Weisbrot); and The Benefits of Full Employment (with Jared Bernstein). He appears frequently on TV and radio programs, including CNN, CBS News, PBS NewsHour, and National Public Radio.
SHARMINI PERIES: It’s The Real News Network, I’m Sharmini Peries coming to you from Baltimore. Just days after Donald Trump’s State of the Union, where he boasted about how well the stock markets were doing, stock exchanges around the world took a nose dive between January 2nd and January 6th.
It began on Friday at the New York Stock Exchange and rippled around the world to Europe and Asia, with many stock exchanges losing between 4 percent and 5 percent of their value. This was the largest such drop since 2011. Things have calmed down now and the question everyone is asking is, “What happened?” And, “What will be the consequences for the larger economy?”
Joining me now to explore these questions is Dean Baker. Dean is the co-director of the Center for Economic and Policy Research, and is the author of Rigged: How Globalization and the Rules of Modern Economy Were Structured to Make the Rich Richer. Welcome back, Dean.
DEAN BAKER: Thanks a lot for having me on.
SHARMINI PERIES: So, Dean, first, what’s your take on what happened to the markets between Friday and Tuesday?
DEAN BAKER: Well, I think the major part of the story is simply you’ve had a very sharp run-up in stock prices — in the U.S., at least, stocks have been pretty much on an upward track with very few downward periods from March of 2009 onward, and particularly in the last two years before this downturn, stock prices had risen by almost 40 percent.
It’s really an extraordinary run-up, so in that context you would expect somewhere along the way you’re gonna get some reversals, so whether that’s all at once, big falls on Friday and Monday, or if that will happen over a period of time, hard to say. But it really shouldn’t be a surprise to anyone that you’re gonna see some downturn in the market, it doesn’t just go up as much as some people who have their money there might like to believe.
SHARMINI PERIES: Now, one of the common explanations, at least in the business press, was the changing of the guard of the Federal Chair from Janet Yellen to Jerome Powell, who took over, and there was some speculation that of course both the positive wage reports we were seeing, as well as the possibility of interest rates rising, caused this drop. What is your take on that?
DEAN BAKER: Well, I think losing Yellen at the Fed is a big loss to the country, a big loss to the economy, ’cause here’s an economist with decades of experience in policy, certainly one of the leading macro economists in the world, so to have her replaced, not to knock J. Powell, I mean, I think he’s competent from what I could see, but he’s not an economist. He doesn’t have anywhere near the background and experience that Janet Yellen did, so that’s a big loss, but that wasn’t a surprise. I mean, Trump made his announcement that he was picking Powell, rather than Yellen, two or three months ago, so the market’s not gonna respond to an event that has long been anticipated.
The other items, there was a wage report, we had the jobs report come out last Friday and it had somewhat higher wage growth than people had expected. People were jumping on that, it really was not much of a story there. There was 2.9 percent wage growth, year over year wage growth by one measure, that same measure had shown wage growth in the past of 2.8 percent. It’s a little hard for me to believe that suddenly 2.9 percent’s a big deal, 2.8 percent wasn’t, that really doesn’t make any sense. And other measures showed no uptick at all in wage growth.
The interest rate story, the Fed has indicated it intends to raise interest rates, very hard to see any surprises there. So all these stories, and again, since the market’s recovered much of its value anyhow, I’ve been joking about it, people have all these great explanations for something that didn’t happen.
SHARMINI PERIES: Now Dean, some economists have expressed concern that we might be heading into a similar situation as we saw in 2006, when there was a massive housing bubble, when it burst it brought down the rest of the world’s economy in what’s come to be known as the Great Recession of 2008, 2009, except this time we’ve got a stock market bubble. What is your reaction to the comparison between that stock market bubble that burst, and this one?
DEAN BAKER: No, again, it really is a lot of sloppy thinking, and I should say, I was out there in 2006 yelling about the housing bubble, saying this is bad news, it’s gonna burst, it was gonna cause a recession, it could be a bad recession. So I was out there, I watch for bubbles, I also saw the stock bubble in the 90s, so I do have some experience with this one.
What you look for is: one, stock and/or house prices being clearly out of line with fundamentals. That does not seem to be the case right now. Profits are high, which explains high stock prices, along with very low interest rates. House prices are high but so are rents; that wasn’t true in 2006, rents weren’t moving, house prices were. So it was easy to see that house prices were out of line with fundamentals in the last decade, that stock prices were out of line with fundamentals in the 90s, neither seems true today.
Also, the other part of the story is, are they driving the economy? Is the economy being driven by high stock prices or high house prices? That was true in the late 90s with stocks, we had an investment boom based on the stock market. People were actually in start-ups that were selling stock, using it as finance investment, that’s very unusual but that was happening then. And also a consumption boom based on all people’s wealth, that people had money in stock markets, and they felt very wealthy, and they were buying a lot.
In the last decade, we had record rates of construction, housing starts were going through the roof — enormous overbuilding — and then on top of that, again, with housing wealth you had very high consumption, people borrowing against their homes. We don’t see either a construction boom or an investment boom today, so if the housing market, if the stock market were to fall, there’s not much room for those to go down.
And the other part, consumption is kind of high, so if you did see a large and sustained drop in the stock markets — in other words the stock market were to fall say 20 percent, 30 percent, and it stayed there, so it would not be a one-week or two-week story — you’d see some fall-off in consumption. That would be a hit to the economy. I doubt enough of a hit to cause a recession, but it would certainly be a drag on growth.
So I think that’s an unlikely story, not an impossible one, but even if it did happen, we’re not looking at anything like the recession, even in 2001, and certainly not the collapse we had in 2008, 2009.
SHARMINI PERIES: And when there’s this kind of a dip over a few days and then it, of course, picks up, does it have a larger effect on the economy?
DEAN BAKER: It’s very hard to see it having any economic effect. If you go back to 1987, we had a real stock crash there. Stock fell, I think it was 22 percent in a single day, and that was worldwide too, so it wasn’t just in the U.S., it was around the world. No one to this day has any good explanation, the fundamentals, had very little impact on the economy. The economy grew very strongly in 1988, and getting into 1989, so this is a much smaller dip, largely reversed, very hard to see any impact.
The one positive is it might get people to think a little more sensibly about the stock market. ‘Cause you had a lot of people, we saw this in the late 90s too, they thought you just put your money there and it goes up 10 percent, 20 percent a year. That doesn’t make any sense, and if we got people to think a little more carefully, ’cause the thing I almost worry about is people put all their savings in the market, it takes a dip and they’re not prepared for it. They need the money, so they have to sell it when it’s taking a dip, and people really get hurt by that, so if this causes people to be a little more clear-eyed about the stock market, that’s all for the positive.
SHARMINI PERIES: All right, Dean, I thank you so much for joining us today.
DEAN BAKER: Thanks for having me on.
SHARMINI PERIES: And thank you for joining us here on The Real News Network.