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Why the Dow is Hitting 10,000 Even When Consumers Can't Buy And Business Cries "Socialism"
So how can the Dow Jones Industrial Average be flirting with 10,000 when consumers, who make up 70 percent of the economy, have had to cut way back on buying because they have no money? Jobs continue to disappear. One out of six Americans is either unemployed or underemployed. Homes can no longer function as piggy banks because they’re worth almost a third less than they were two years ago. And for the first time in more than a decade, Americans are now having to pay down their debts and start to save.
Even more curious, how can the Dow be so far up when every business and Wall Street executive I come across tells me government is crushing the economy with its huge deficits, and its supposed “takeover” of health care, autos, housing, energy, and finance? Their anguished cries of “socialism” are almost drowning out all their cheering over the surging Dow. The explanation is simple. The great consumer retreat from the market is being offset by government’s advance into the market. Consumer debt is way down from its peak in 2006; government debt is way up. Consumer spending is down, government spending is up. Why have new housing starts begun? Because the Fed is buying up Fannie and Freddie’s paper, and government-owned Fannie and Freddie are now just about the only mortgage games remaining in play.
Why are health care stocks booming? Because the government is about to expand coverage to tens of millions more Americans, and the White House has assured Big Pharma and health insurers that their profits will soar. Why are auto sales up? Because the cash-for-clunkers program has been subsidizing new car sales. Why is the financial sector surging? Because the Fed is keeping interest rates near zero, and the rest of the government is still guaranteeing any bank too big to fail will be bailed out. Why are federal contractors doing so well? Because the stimulus has kicked in.
In other words, the Dow is up despite the biggest consumer retreat from the market since the Great Depression because of the very thing so many executives are complaining about, which is government’s expansion. And regardless of what you call it – Keynesianism, socialism, or just pragmatism – it’s doing wonders for business, especially big business and Wall Street. Consumer spending is falling back to 60 to 65 percent of the economy, as government spending expands to fill the gap.
The problem is, our newly expanded government isn't doing much for average working Americans who continue to lose their jobs and whose belts continue to tighten, and who are getting almost nothing out of the rising Dow because they own few if any shares of stock. Despite the happy Dow and notwithstanding the upbeat corporate earnings, most corporations are still shedding workers and slashing payrolls. And the big banks still aren't lending to Main Street.
Trickle-down economics didn't work when the supply-siders were in charge. And it's not working now, at a time when -- despite all their cries of "socialism" -- big business and Wall Street are more politically potent than ever.
Even more curious, how can the Dow be so far up when every business and Wall Street executive I come across tells me government is crushing the economy with its huge deficits, and its supposed “takeover” of health care, autos, housing, energy, and finance? Their anguished cries of “socialism” are almost drowning out all their cheering over the surging Dow. The explanation is simple. The great consumer retreat from the market is being offset by government’s advance into the market. Consumer debt is way down from its peak in 2006; government debt is way up. Consumer spending is down, government spending is up. Why have new housing starts begun? Because the Fed is buying up Fannie and Freddie’s paper, and government-owned Fannie and Freddie are now just about the only mortgage games remaining in play.
Why are health care stocks booming? Because the government is about to expand coverage to tens of millions more Americans, and the White House has assured Big Pharma and health insurers that their profits will soar. Why are auto sales up? Because the cash-for-clunkers program has been subsidizing new car sales. Why is the financial sector surging? Because the Fed is keeping interest rates near zero, and the rest of the government is still guaranteeing any bank too big to fail will be bailed out. Why are federal contractors doing so well? Because the stimulus has kicked in.
In other words, the Dow is up despite the biggest consumer retreat from the market since the Great Depression because of the very thing so many executives are complaining about, which is government’s expansion. And regardless of what you call it – Keynesianism, socialism, or just pragmatism – it’s doing wonders for business, especially big business and Wall Street. Consumer spending is falling back to 60 to 65 percent of the economy, as government spending expands to fill the gap.
The problem is, our newly expanded government isn't doing much for average working Americans who continue to lose their jobs and whose belts continue to tighten, and who are getting almost nothing out of the rising Dow because they own few if any shares of stock. Despite the happy Dow and notwithstanding the upbeat corporate earnings, most corporations are still shedding workers and slashing payrolls. And the big banks still aren't lending to Main Street.
Trickle-down economics didn't work when the supply-siders were in charge. And it's not working now, at a time when -- despite all their cries of "socialism" -- big business and Wall Street are more politically potent than ever.
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This article is a good one, and it makes good points and takes an interesting slant. But government spending isn't trickle-down economics. And the S&P's rise isn't based soley on government spending increases.
If anything, it's, once again, irrational investors jumping on the bandwagon that a slightly improving economy creates. Earnings increases don't match the stock market's rise. It's just investors emotions getting the better of them.
When the market heads in a certain direction out of proportion to the economy, then we've got a market out of balance. Again.
September 22, 2009 11:55 AM | Reply | Permalink
What, you mean that expansion of government mostly benefits the contributors to the political campaigns of the ruling party? Health care reform benefits health insurers and providers more than working stiffs?
Really?
Because given the cheerleading you ordinarily do for expansion of government in any form, Mr. Reich, I'm shocked. I thought government was the only defense the little guy had against the rapacious producer interests.
If you care about ordinary working people you'd be a libertarian. Government can't protect the little guy, but if government doesn't interfere, the little guy can at least try to protect himself, make good decisions, etc.
September 22, 2009 12:08 PM | Reply | Permalink
So, without government regulation and protection, exactly what is the mechanism by which the libertarian "little guy" is supposed to protect himself from corporations that are free to accumulate monopolistic market share and lie to their hearts' content?
I don't think Reich believes or ever stated that government is always good. But, other than the goodwill of the powerful, government - when it expresses the collective will of the people - is the only protection the "little guy" has. Problem is, as Reich points out in this very piece, government is now working almost exclusively in the interest of the powerful not the weak.
September 22, 2009 9:50 PM | Reply | Permalink
"So, without government regulation and protection, exactly what is the mechanism by which the libertarian "little guy" is supposed to protect himself from corporations that are free to accumulate monopolistic market share and lie to their hearts' content?"
Why, the Second Amendment, of course! Any citizen who has been adversely affected by corporate decisions should be free to shoot his children, his wives, and then beg for clemency on the basis of his loneliness. Ain't capatalism grand? It sure beats glibertarianism, anyway.
September 23, 2009 10:57 AM | Reply | Permalink
I guess I'm just shocked that he's surprised. Government is, always and everywhere, the tool of the powerful, because (among other things) anyone in control of government is by nature powerful.
My point was not that there was something out there other than government to protect the little guy, but that the little guy, with a little common sense, will be better off without government trying, or pretending, to "protect" him.
September 23, 2009 1:48 PM | Reply | Permalink
The status corporations hold is a grant of privilege by the government in the first place. Abolish it, then take the regulatory leash off of organized labor. Let's see how long corporate capitalism survives when management can't so much as sneeze without people bringing the whole mess to a screeching halt.
Robert Reich is correct about the positive effect that Keynesian intervention by government is having on big business, and how little effect it's having on the average person. Too bad he won't draw the logical conclusion from that observation...
September 23, 2009 4:08 PM | Reply | Permalink
I'd say a big part of the stock market's rise is because the market did and does what it always has done - it overreacts to everything. The market lows of early March were irrationally low compared to earnings, and the rise from those lows is largely a trend toward rational pricing. It's not as if we're seeing price/earnings ratios comparable to what we saw in the '90s. They've mostly settled in to a P/E of 10-15, which is a pretty comfortable level.
So I don't buy all the talk of a double-dip recession or a collapse of stock prices. Prices are not irrationally high. What was irrational was a DJ below 7000.
September 22, 2009 12:10 PM | Reply | Permalink
And herein lies the problem for the Democrats -- we spend billions without producing tangible good for working people. When we do offer benefits we means test the heck out of them so that people in the middle get nothing. We take over a car company and... fire thousands in the process. We recapitalize the banks but don't ask anything in return so small and medium sized businesses still can't get credit.
We have to understand -- it's not that we Dems are overspending. If people got something out of what we spent they wouldn't complain. "The government is wasting my tax dollars" sometimes means "I'm not getting enough for what I pay." And people who say that have a point. Our own agenda isn't generous enough towards working people.
September 22, 2009 12:33 PM | Reply | Permalink
Of course the car companies that were taken over would have fired even more when they went belly-up.
There's a perception gap, however, that "well, it would have been worse" just doesn't sit as well with people as "my money went towards improvements."
September 22, 2009 1:22 PM | Reply | Permalink
Good point Matyra. Though some of the "it could have been worse" is... I can't say it's wrong but I don't buy it. I think Bush lied to us about financial doomsday in October 2008. I'm at the very least skeptical about "it could have been worse" claims and am no means convinced that we stood on the precipice of The Great Depression II.
September 22, 2009 1:31 PM | Reply | Permalink
"Bush lied"?
I'm in wholehearted agreement with your substantive points, but let's place responsibility for the "lies" where they belong.
Bernanke, Paulson -- and Barney Frank and Christopher Dodd and let's not overlook the midons of the corpocratic castle (recall Paulson on bended knee before Madame Pelosi).
September 22, 2009 3:55 PM | Reply | Permalink
Midons -- "my lord" in Occitan; troubadors used the word when addressing the lady of the castle -- later, the chatelaine.
September 22, 2009 4:09 PM | Reply | Permalink
Pelosi utterly misinterpreted Paulson's gesture: “I didn’t know you were Catholic,” Ms. Pelosi said.
I guess it goes to show what an utterly parochial education (Institute of Notre Dame and Trinity College in Washington, D.C.) will do to a girl.
September 22, 2009 4:19 PM | Reply | Permalink
Ha! Fantastic.
September 22, 2009 7:10 PM | Reply | Permalink
Thanks for stating the obvious here. It underscores the absurdity of calling Obama a socialist, when he has deluged the system with welfare for large corporations and wealthy investors. He has in fact done more to shore up the failed capitalist system than anyone since Roosevelt.
September 22, 2009 1:37 PM | Reply | Permalink
I've always assumed that 'socialism' was a system to insure that the great majority of any citizenry would be able to live out 'the pursuit of happiness.' But apparently the definition has changed? Socialism is a system wherein the citizenry, through the government, enables the wealthy to keep, or even increase their wealth?
I just read (Harpers) that "...what is good for Wall Street is not necessarily good for Main Street. But Main Street cannot thrive if Wall Street is feeling sickly" - so the Street has the advantage. Seems to me that an out-of-balance economic system/economy like ours will always have a built-in history of feasts-famines-ups-downs-bubbles-bursts...
September 22, 2009 1:54 PM | Reply | Permalink
"State capitalism" is the technical term.
September 23, 2009 2:19 PM | Reply | Permalink
Deja vu... the post so nice you have to say it twice.
September 22, 2009 3:15 PM | Reply | Permalink
Oh, I know, is it because the stock market has absolutely nothing to do with reality?
September 22, 2009 3:42 PM | Reply | Permalink
Also, it looks like you have a little copyedit problem at the end of the article, Mr. Reich.
September 22, 2009 3:46 PM | Reply | Permalink
This sounds a lot like influence peddling. I wonder if some influence has been peddled.
September 22, 2009 5:49 PM | Reply | Permalink
despite all [big business and Wall Street's] cries of "socialism" . . . . Robert Reich
I, for one, haven't heard any such cries -- sounds like a Reichian red herring to me.
The Democrats are so tightly tied to their campaign financiers that socialism for the wealthy is all we're about to get. If Reich wants to criticize anyone he should consider starting with Obama, Emmanuel, Pelosi, and Hoyer.
September 22, 2009 8:45 PM | Reply | Permalink
You haven't? I have and apparently so has Reich. As usual, of course, the 'criers' are using the wrong ism. They should be screaming fascism since it's that ism in which large corporations become extensions of government.
September 23, 2009 1:42 PM | Reply | Permalink
A link to the report of a "big business or Wall Street" senior executive's statement that supports yours and Reich's claims, please.
September 23, 2009 3:59 PM | Reply | Permalink
Wall Street/business types can (and they have) legitimately scream 'socialism' if referring to government take-over of means of production/social services/finances... I have no argument with them.
My argument - and I wasn't clear - was with those who use 'socialism' as a pejorative for any program that involves the government.
September 23, 2009 4:57 PM | Reply | Permalink
Phelicity: My argument -- really an accusation -- is that Reich (sloppy and cliche ridden as usual) was setting up a strawman, a conventional liberal scapegoat, a diversion which is intended to relieve the Democrats who control Congress from responsibility (Reich's probably getting bored out there in academia-land and looking for a Washington address).
Reich didn't say "Wall Street/business types" -- whatever they might be -- were crying "socialism"; he said the institutions, organizations, enterprises, that is, the powers-that-be in big business and on Wall Street were crying "socialism."
And as I said originally, I haven't heard them, and I don't think you have either.
September 23, 2009 8:07 PM | Reply | Permalink
"a diversion which is intended to relieve the Democrats who control Congress from responsibility"
Responsibility for what? For preventing a second Depression? You do understand that the bailout that you seem to think is the root of all evil here was done to prevent economic catastrophe, right?
I can't tell whether you think the bailout was a hoax, or whether you think that the goverment should have allowed our banking system to fail. Please enlighten me.
September 23, 2009 8:33 PM | Reply | Permalink
Time for you to try another flavor of the Kool-Aid you've been happily ordering from all those conventional academic economists and revolving-door regulators (and Wall Street thieves) for so long -- and slavishly, chug-a-lugging down.
Do some reading -- Steve Keen, Paul Volcker, Kurt Richebächer, Dean Baker, Michael Hudson, Wynne Godley and especially, Dirk Bezemer's study published earlier this summer -- and get back to us.
September 23, 2009 10:16 PM | Reply | Permalink
Well, most of what you suggested seems to be nonresponsive, in that it has to do with whether or not the current crisis was foreseeable. The sprawling McMansions taking over miles of farmland and the $600K condos being bought by 25-year-olds in the greater Chicago area (where I live) made unsustainable imbalances in our economy blatantly obvious even to this non-economist.
The only thing that seemed to actually respond to my question was this: http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html
which suggests that massive stimulus on the order of $20 trillion would be sufficient to reinflate the economy.
But where you lose me is that you accuse the Democrats like Pelosi and Frank of bad faith even though they pumped a huge amount of money into the economy via the bailouts and TARP, just not the necessary $20 trillion. And I defy you to maintain with a straight face that the Fed could add $20 trillion to the money supply given our political environment.
These were non-economists responding to a potential collapse of the national economy. Saying that they should have seen it coming doesn't really answer the question of what they should have done differently in order to prevent that collapse. And neither do gratuitous accusations of bad faith or naive belief in conventional wisdom.
September 24, 2009 12:49 AM | Reply | Permalink
Democrats like Pelosi and Frank . . . were non-economists responding to a potential collapse of the national economy.
And the one constitutional obligation they had? To hold meaningful substantive hearings. And they didn't fulfill their obligation.
They -- the Democratic leadership -- were more interested in winning the upcoming election by accepting the common wisdom (remember 2002's AUMF?) than in designing a fair and equitable solution. So --- they didn't.
This thread is getting long in the tooth. Some day we can meet on a thread that argues the critical issue of how we go about analyzing the economy -- that is, the accountants' method versus the economists' model.
Seeya then.
September 24, 2009 2:36 PM | Reply | Permalink
I think MIT's Simon Johnson's latest is more accessible for non-econ geeks. His blog has a nice collection of explantatory articles" too. But hell what does he know?
September 24, 2009 1:29 AM | Reply | Permalink
I like his buddy, James Kwak, too.
If only he didn't have such a big head.
September 24, 2009 2:43 PM | Reply | Permalink
Ha! I missed that one. Thanks!
September 24, 2009 8:04 PM | Reply | Permalink
Reich, "...every business and Wall Street executive I come across is..." rather lets Reich off your hook since verification could only come from the executive involved (or an eavesdropper?)
The Bezemer article reminded me what I've thought all along - the 'surprise' registered by the recent economic implosion is unsupportable - unless one had been living in another dimension.
The amount of subprimes issued and imbedded in Mortgage Backed Securities shot up from $54 billion in 2000 to $508 billion at the peak in 2005. No red flags???
In 2006, 30% of first time mortgagees couldn't make their first payment. No red flags???
Finance companies now get 42% of their revenues from fees and only 58% from interest (compared with 20% and 80% in 1980.) No red flags???
FDR said, "In politics nothing ever happens by accident. If it happened, you can bet it was planned." I suggest the same could be said of economics/banking/etc. (and I find it unnerving that the CNBC yammerers refer to the recent market collapse as the result of a series of "mistakes.")
September 24, 2009 12:37 PM | Reply | Permalink
Nothing Obama does with the economy (doesn't he know there are poor white people?) will bite him in the butt the way trusting Bush's military and intelligence community will. They will gladly sacrifice Obama to their most important mission, avoiding any kind of accounting for the last eight years.
September 23, 2009 11:03 AM | Reply | Permalink
A robust, national public health care option, one not subject to triggers and providing value for money, priced using means testing, would go a long way in buffering the 'little guy' from economic downturns like the one we're living through, and, to some extent, redress a lot of this corporate welfare.
September 23, 2009 2:34 PM | Reply | Permalink
Here is all the proof you need to see that Reich is an idiot. He claims that health care and pharma stocks are booming. This is a chart showing the stock price of WellPoint, United Health, Cigna, Aetna, Pfizer, and Merck over the last 2 years.
http://finance.yahoo.com/echarts?s=WLP#chart7:symbol=wlp;range=2y;compare=mrk+pfe+aet+ci+unh;indicator=split+volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined
I don't think that an average loss of 40% is considered booming.
September 24, 2009 4:44 PM | Reply | Permalink
Would someone please help the Clever Slobber Generator understand that the timeframe he selected has no relevance to the period in which healthcare reform has been a serious consideration? I know I am completely unable to communicate with him or her.
To put it another way, if there is an idiot in the Reich/Bulldog pairing, it is clearly not Reich.
September 26, 2009 12:40 PM | Reply | Permalink