"The stock market isn’t the economy: more than half of all stocks are owned by only 1 percent of Americans, while the bottom half of the population owns only 0.7 percent of the market." - Paul Krugman, NY Times, 'The Recovery Is Bypassing Those Who Need It Most', Monday
The stock market is in a bubble of historic proportions (Financial Times Tuesday, 'U.S. Stock Bubble Ranks Among Biggest in History') and needs to be punctured. It is time this misbegotten financial anomaly be brought back down to earth. The nonstop headlines appearing on the financial pages of how the stock market exchanges (DOW, NASDAQ, S&P 500) keep defying economic gravity while Main Street suffers are exhausted. As I explained in my Aug. 18th post part of the reason for the disconnect can be traced to the Vix volatility index, which is Wall Street's "fear gauge". It is a barometer of how unstable stocks are in responding to current crises or shocks.
Another measure is called the Economic VIX Index, created by Jim Paulsen, a chief investment strategist at Leuthold Group. This index reflects the volatility in growth. It's important now because its history over the decades since World War II shows two things:
1) Stocks do best when economic volatility in the U.S. is at its lowest.
2) Stocks do best when economic volatility in the U.S. is at its highest.
The current crisis driving response from one day to the next is the pandemic which also drives volatility : Will a vaccine soon be available so the economy can get back to normal? Will a good, effective treatment be available, if not what other options are there? Will a second or third wave hit us? Since the answers may vary one day to the next then the Economic VIX is also likely to vary, even whipsaw as different voices give different accounts even on the same day. But why would stocks continue to do well - despite Main Street's woes-- even in an atmosphere of upheaval. According to Paulsen:
"This is because the economy is in an unsustainable situation and everyone is working to improve it, both government and companies. So policy officials are scared to death and they are bringing every conceivable tool they have to get us out of the situation."
But again, this is also based on an expectation: that there is constant and continued positive response to containing the virus. Also, in the case of the roaring tech stocks that they "remain the clear winner of the coronavirus pandemic." (WSJ, Sept. 5-6, p. B1). Why is this? Because (ibid.):
"Although the virus upended most businesses, big technology companies have weathered the crisis as people relied on apps and software to work, stream movies and communicate with friends and family"
But there is also a darker, more cynical aspect at work (e.g. WSJ, p. B3, Sept.5-6):
"The shift to remote work over the past few months - in some cases marking a permanent change- has refocused the sights of many corporate and private equity buyers to acquisitions that help build new capabilities."
Among the latter 'capabilities' is the startling potential to dispense with millions more human workers altogether. Why keep them if the same amount of work can be done in remote venues and by fewer techies? This understated element is also clearly what's driving the tech binge.
Indeed, in a recent essay, David Autor - an MIT economist- and Elizabeth Reynolds (head of the Task Force in the Work of the Future at MIT) outlined the ways they believe technology -driven trends unique to the pandemic will continue to disrupt the lives of some of the nation's most vulnerable workers. One cited is "telepresence", i.e. by forcing so many professionals to work remotely all at once the pandemic may have permanently reduced how often people work from an office and indeed how many in the future are even hired to work from offices.
This is still hard to reconcile with the desperate plight of America’s 24m jobless, a crisis that’s approached the unthinkable levels of the Great Depression of the 1930s. But incredibly, that still isn’t the biggest story on the news cycle. It is rather the continuing social unrest and protests, even violent reactions like Right wing terrorists firing their weapons or pepper spray at innocent protesters. In terms of perspective the latter is 'small cheese' compared to the economy cratering. As blogger Will Bunch put it in a past weekend post on smirkingchimp.com:
"Seriously? You’re worried about social unrest now? Just imagine the chaos in a few months, when homeless people sleep on park benches under a blanket of newspaper headlines ...."
But what about the newly announced "moratorium" on evictions? More smoke and mirrors. True, the government issued a new eviction moratorium last week. But here's the rub: it is without funding for rental assistance. Hence, tenants unable to cover rent will face a massive balloon payment or eviction at the end of the year. Unable to cough up $1,100 rent now? How about $4,400 in December? This hardly gives them new financial breathing space.
"Bubbles are formed around individual stocks and sectors. As the concentric circles of excess widen, more and more stocks are infected. Wildly exaggerated stock stories force a delinking between fundamental analysis and stock prices."
And he adds as a warning (ibid.):
"This gets at the troubling thing about bubbles. They do not simply undergo smooth and endogenous shrinkage until they disappear. Instead, they continue to expand until they burst."
Who are the people actually partaking of this stock bubble? Mostly the richest Americans who have the disposable income to make bets in the Maul Street casino, and they are from 1 to 2 percent of the populace. According to Edward Wolff, an economics professor from New York University (quoted last week in the WSJ, 'Stock Gains Go To Fewer People Now'):
"The middle class has essentially been left out of the stock market surge. The rich have taken off from the rest of society."
In other words, a tiny element of the investor class are racking up huge profits from an abnormal market that is skewed toward technology. (As the FT reports, 5 tech companies account for a fourth of the value of the entire S&P 500). One which ultimately may be responsible for even greater income inequality. But given the small participation fraction, one can feel better if and when this bubble bursts. Which will even things out in terms of aggregate demand and bring the market more in tune with Main Street.
How to expedite this?
The first and most obvious way to do this is to raise the interest rate - thereby making the "crack" (money) on which the market feeds more expensive. Right now investment money is so cheap, so low cost that any amount of leverage is possible. Why worry too much about paying the piper back with interest rates next to zero? As Will Bunch has observed in his most recent blog post:
"We’ve created a system that can pump in literally trillions of dollars to prop up stocks — led by a Federal Reserve whose chairman was appointed by a president who uses the sky-high Dow to argue for his re-election — but gridlocks over the idea of helping families pay their $500 monthly rent."
Raise the interest rate, say to 2.5 - 3.5 % and watch the stock balloon burst and a modicum of realism return - and sanity. At that point we - the savers (who rely on bank interest rates for savings accounts, not risky equities or 'munis') will enjoy getting some decent return for once. At the same time we will be elated to see the parasites who profit from the cheap money - driven by low interest rates - return to ground level.
But this is only one side of the coin, taxes also need to be raised- locally and by state governments- if not federally. (Unlike most states the federal gov't does not have to balance its budget every year, so it could solve the problem tomorrow by providing fiscal relief to states and localities, like the $1 trillion provided by the HEROES Act that passed the House in May.)
Regardless of whether the Repuke Senate acts or follows the McConnell approach of letting states pound sand, states and localities can bolster their local economies by raising taxes on those who have not been hard hit by the recession. This is not only the right thing to do from a humanitarian standpoint, it is sound economics. Don't believe me? Consult the terrific monograph: The Indebted Society (1995), by James Medoff and Andrew Harless, wherein they found, p. 87:
"High tax rates are associated with higher productivity growth. There is a consistent and strong relationship.".
This was written barely a year into Bill Clinton's imposition of a marginally higher tax rate on the wealthiest, and we saw after the fact more than 20 million jobs created, even as the deficits decreased and a healthy ($600m) surplus was left for Bush Jr.
In the present situation we need tax hikes as opposed to tax cuts which latter will trigger devastating spending cuts by virtue of insufficient revenue. Such spending cuts are enormously harmful to the people who rely on government services as well as the public workers who would lose their jobs. In a recession, such cuts also course through and damage the broader economy, causing layoffs to ripple through the community.
These layoffs adversely affect spending on goods and services, so negatively impact aggregate demand. Aggregate demand is composed of two parts: 1) demand generated by consumers for goods and services, and 2) the demand for investment goods. When the level of aggregate demand is high, both these components are generally equally high, and the levels of production and employment are high. On the other hand, when aggregate demand is low - or even one of the components (e.g. (1)) is very low, then levels of production plummet.
So when you fire a teacher, for example, you not only harm her family. You also create a chain reaction, harming the local grocery where she shops, and all the other people and businesses she gives money to.
These layoffs adversely affect spending on goods and services, so negatively impact aggregate demand. Aggregate demand is composed of two parts: 1) demand generated by consumers for goods and services, and 2) the demand for investment goods. When the level of aggregate demand is high, both these components are generally equally high, and the levels of production and employment are high. On the other hand, when aggregate demand is low - or even one of the components (e.g. (1)) is very low, then levels of production plummet.
So when you fire a teacher, for example, you not only harm her family. You also create a chain reaction, harming the local grocery where she shops, and all the other people and businesses she gives money to.
Doing the math - using even conservative estimates- one finds that each dollar of spending cuts translates to a drop of at least $1.50 in the gross domestic product. (There are reasons to believe that the drop is as much as $2.50.) With state budget shortfalls forecast to approach $300 billion this fiscal year, a spending-cut-only approach to balancing state budgets will cause at least a $450 billion reduction in G.D.P.— more than 2 percent.
One complaint about adopting tax increases is: 'We can't afford to do that right now!'. But that's false. While it is true tens of millions have lost their jobs, almost half of Americans report that their household has not lost any employment income at all, according to Census Bureau data. That figure jumps to two-thirds for households bringing home more than $200,000 per year. All of these households can be taxed for the greater good, so states and localities don't have to go on a"Hannibal Lecter"- style economic slashing fest.
Thus tax increases, especially on these high-income people in the stock market (who aren’t living paycheck to paycheck), are much less economically damaging, costing the economy only around 35 cents for every dollar raised. States and localities that raise taxes on the rich to increase spending will create at least $1.15 of economic activity for every dollar raised, and most likely closer to $2.15 or more.
The beauty of this higher tax approach, especially in concert with a Federal Reserve (much) higher interest approach, is that it will bring the financial system and Main Street economy more into balance. The 1 percent or so now making out like bandits in the stock market (because savers are basically subsidizing them) will now be out of luck. Meanwhile, the 97- 98 % not in the markets will finally see some financial relief. Or should!
See Also:One complaint about adopting tax increases is: 'We can't afford to do that right now!'. But that's false. While it is true tens of millions have lost their jobs, almost half of Americans report that their household has not lost any employment income at all, according to Census Bureau data. That figure jumps to two-thirds for households bringing home more than $200,000 per year. All of these households can be taxed for the greater good, so states and localities don't have to go on a"Hannibal Lecter"- style economic slashing fest.
Thus tax increases, especially on these high-income people in the stock market (who aren’t living paycheck to paycheck), are much less economically damaging, costing the economy only around 35 cents for every dollar raised. States and localities that raise taxes on the rich to increase spending will create at least $1.15 of economic activity for every dollar raised, and most likely closer to $2.15 or more.
The beauty of this higher tax approach, especially in concert with a Federal Reserve (much) higher interest approach, is that it will bring the financial system and Main Street economy more into balance. The 1 percent or so now making out like bandits in the stock market (because savers are basically subsidizing them) will now be out of luck. Meanwhile, the 97- 98 % not in the markets will finally see some financial relief. Or should!
No comments:
Post a Comment