Stocks Run Amok
This article is from the November/December 1998 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/archives/1998/1198frank.html
This article is from the November/December 1998 issue of Dollars & Sense magazine.
First, the bad news. The 1990's bull market, with its stratospheric stock prices and double-digit annual returns, was a bust for the typical U.S. household. From 1990 to 1996, while stock prices quadrupled, wages fell, median family income fell, families borrowed more and saved less, piling up some perilously heavy consumer debt. In the meantime, the richest 1% increased their share of the country's wealth to nearly 40% - an even more obscene swindle than they managed during the Reagan years. Now for the good news: the bull market is over.
For those accustomed to reading the mainstream business press, this may come as a shock. Stagnant stock prices are good news? What about all those slashed bonuses on Wall Street, those forced sales of East Hampton summer homes? Doesn't a sinking Dow presage economic collapse, like in 1929? Well, not exactly. In their fascination with Wall Street and the gravity-defying Dow Jones, the mainstream media sometimes lose sight of just how little the stock market has to do with actual economic activity. Herewith a primer for the hopelessly confused.
Q: Isn't is supposed to be good when stock prices go up? What am I missing here?
A: Sure it's good, if you happen to live in one of the 10% of wealthiest households that own 89% of the stocks. Or if you happen to be Bill Gates, whose personal wealth exceeds the combined wealth of 40% of the U.S. population. Nearly two-thirds of American households own no stock at all. Of those that do, most have only a few thousand dollars in stock. For the vast majority of Americans, a decline in interest rates paid on debt (and falling stock prices do tend to push interest rates down) yields far more financial benefit than a rise in the price of stocks.
Q: Okay. Rising stocks didn't help most people, but they didn't hurt people either, right?
A: Not directly. But ask yourself, why did stocks rise so high? Stock prices got bid up because corporate profits were rising so rapidly. During the nineties, companies cut workers, pay, and benefits, then forced employees to work longer hours, all to boost the bottom line. Profits soared and Wall Street went wild. In the timeless conflict between labor and capital, Wall Street is the cheering squadron for capital. By July of this year, shareholders had bid stock prices so high that corporations would have had to feed their workers on thin gruel and chain them to machines simply to satisfy Wall Street's bloated profit expectations.
The market decline of recent months won't end the conflict between labor and capital, but it may relieve some of the pressure on management to boost profits at any cost. As an added benefit, the declining Dow is stealing the thunder from the boosters of Social Security privatization.
Q: But don't stock market crashes cause economic depressions? Like in Asia or in 1929?
A: Stock market crashes can cause financial panics, in which assets lose value and people with wealth refuse to lend it out for fear of loss. Panics without doubt can wreak severe economic damage if a country has heavy foreign-currency debt, like in Asia, or if the Federal Reserve in Washington sits idly by and lets the financial system seize up, as in 1929.
A repeat of this latter scenario is not impossible. The IMF, for example, not only allowed financial collapse, but actually insisted upon it in Asia; in public statements, the U.S. Fed supports IMF prescriptions. However, last month's bailout of the Longterm Capital hedge fund indicates that for the Fed, at least, what is good enough for Asia is not good enough for the U.S.
A repeat of 1929 seems highly unlikely. A truly sharp dip in stock prices might cause some shareholders to curtail spending and this could slow the economy a bit. Ultimately, though, the growth of the economy rests on the production of goods and services, not on the trading of paper shares on Wall Street.
Q: So all's well, then? We have nothing to worry about?
A: Oh, there's plenty to worry about. Depression in Asia, falling exports, declining corporate profits, stagnant wages. Any or all of these could slow spending and curb economic growth. Any of all of these could be offset or overcome by activist government economic policy - creating public sector jobs, rebuilding social infrastructure, cutting interest rates.
The real worry today is that the U.S. government is paralyzed. With our elected representatives off soliciting campaign contributions and investigating the president's sex life, Alan Greenspan seems to be the only person in Washington not asleep at the wheel. We may be in for a bumpy ride.