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Turmoil
by
by Doug Henwood
Dissident
Voice
August 17, 2002
Bill
O'Reilly, host of the O'Reilly
Factor on the Fox News Channel,
one of the funniest shows on TV (and not always intentionally so), has a
feature on every show called "The Most Ridiculous Item of the Day."
O'Reilly's politics are largely appalling, but he's entertaining, and I'm going
to steal this idea and begin presenting a Most Ridiculous Item of the Week on
this show. Here's the premiere.
According
to official capitalist ideology, CEOs and other top execs deserve their
enormous salaries because they're big risk takers and because they contribute
so much to society. It's pretty well established that executive pay actually
bears little resemblance to performance - and here's an extreme case. Neal
Travis reports in today's New York Post (uh-oh, that's my second
citation in less than a minute of a Murdoch media property -- I assure you this
is entirely accidental) Bob Pittman, who's been squeezed out of a top job at
the troubled media giant AOL Time Warner, is going to leave with a $60
million-plus severance deal. Now this is a company whose stock is off more than
80% over the last two years - twice as much as the overall market, and which is
now under investigation by the SEC for accounting chicanery. If you get $60
million for being part of a colossal failure, what would the price tag be for
success?
But
Pittman's parting check is nothing compared to that enjoyed by ex-CEO Gerald
Levin, architect of the merger of AOL and Time Warner that is now universally
regarded as a disaster. Levin left the company earlier this year with more than
$200 million. Nice work if you can get it.
I
was thinking about potential guests to discuss the stock market meltdown and
the corporate scandals tonight, but I was overcome by an irresistible attack of
vanity, and concluded that I could do it better than anyone. So here we go.
First,
a measure of the damage. As of Tuesday's closing prices, the most widely used
benchmark for stock prices, the Standard and Poor's 500 index, was off 48% from
the high it made on March 24, 2000. (The S&P 500 is a broader measure than
its more famous cousin, the Dow Jones Industrial Average; the Dow is made up of
just 30 stocks, while the S&P, as its name suggests, is comprised of 500.)
That decline a hair behind the achievement of the last major bear market, the
October 1974 low, which was off just four tenths of a percentage point more.
The Nasdaq was off 76% from its March 2000 high. Both averages have a way to go
before matching the granddaddy of them all, the 1929-32 decline, which was 82%
on the S&P. The 1973-74 bear market was the worst since the 1930s, so we've
pretty much matched that record, and I don't think the bloodletting is over
yet, despite yesterday's powerful rally and today's see-saw action. Indeed, it
wouldn't surprise me to see the Dow tack on 500 or 1000 points over the next
weeks or months. But that wouldn't change the big picture much.
And
what is that big picture? What does this all mean? As I've said here before, in
normal times, the zig-ing and zag-ing of the stock market doesn't mean much to
the outside world. Unless it's your job, or your own money's on the line,
stocks often inhabit a world of their own, with little impact on or relevance
to the real economy. But we haven't seen normal times, at least as far as the
stock market is concerned, since around 1996, when individuals started playing
with stocks in a big way, and the market began escaping the earth's
gravitational field.
To
imagine what effects the bust might have, lets think back on the boom. A rising
stock market can have several economic effects. One is direct: strong markets
encourage companies to go public, meaning that the small circle of original
owners float shares in an initial public offering, or IPO. The proceeds of an
IPO generally go towards cashing out the original investors (typically the
founders and their earliest funders, like venture capitalists), and if there's
money left over, towards investing in expending the underlying business and
hiring new workers. We saw a big gusher of that sort of thing in the late
1990s, though it's clear in retrospect that lots of those businesses, like
Pets.com, should never have been funded in the first place. But there are also
indirect economic effects. A rising market encourages optimism, leading
established businesses to invest and hire more than they would have otherwise,
and inspiring stock-owning households to save less and spend more than they
would have otherwise. We saw lots of that too, as the personal savings rate in
the U.S. declined to near 0, the lowest level since the early 1930s, and
personal debt levels made new highs. So the rising market goosed the real
economy to levels beyond what it normally would have managed, whatever we mean
by normal.
There
were more subtle effects too. The bull market greatly raised the prestige of
American capitalism around the world; suddenly other countries wanted to be
more like us, which means with flexible labor markets and no welfare state.
Flexible labor markets is the polite way to say no job security, no benefits,
and low pay (unless you're Bob Pittman or Gerald Levin). Millions of people
came to believe that the market could not only fund a comfortable life in the
present, it could assure a comfy retirement in the future - especially since
Social Security was certain to go broke. (Social Security is not certain to go broke, but that's the
myth.) And people came to think that brilliant ideas and clever
branding strategies produced value in themselves, without needing mortal human
workers, because the stock
market said so.
So
let's throw that all into reverse. Falling markets mean very few IPOs, choking
off funding for new businesses to expand and hire, and depressing what Keynes
called the animal spirits of entrepreneurs, putting them in the mood for
retrenchment, not fresh undertakings. Households who thought they were getting
richer suddenly feel poorer - much poorer - and spend less and borrow less.
Prudent for individuals, yes, but not so good for an economy dependent on high,
even excessive, levels of consumption. Workers who were close to retirement are
now having to re-evaluate their plans; those who thought they could retire at
60 or 62 may find themselves working until they're 70 or older. Also,
governments at all levels are experiencing much lower tax collections, in part
because of economic weakness, but also the direct result of lower stock prices;
service cutbacks are inevitable, especially here in New York City, where the
economy has never been so dependent on Wall Street. One bright spot, though, is
that the global prestige of U.S. capitalism is taking severe hits, which is
what it deserves.
There
are also more subtle messages in the market's steep decline. As I've been
saying here, it's extremely unusual for the stock market to fail to respond to
the stimulus of lower interest rates, as engineered by the Federal Reserve.
Normally, a generous Fed inspires strong stock markets, not
once-in-a-generation declines. But that's what we've gotten. The only precedent
for this behavior is the 1930-31 period, when the Fed was actually less
aggressively indulgent than it has been over the last year and a half. And
though by most measures it looks like the recession ended last December or
January, the market's not acting like it; this is the only post-World War II
recovery in which the market has fallen rather than rising smartly.
Why
should this matter? For several reasons. The market does have a pretty good
record of anticipating major turns in the economy - not every squiggle, for
sure, but major trends. And there are several reasons for that. One is that the
market is a measure of liquidity in the system - how much spare cash is
floating around. If there isn't much spare cash - if cash is all devoted to
paying basic expenses and servicing debts - then the market may be weak. But
the market is also what pollsters call a "feelings thermometer" for
the investing class - a measure of how flush and optimistic people with money
feel. Since they're the ones who ultimately determine what's produced by whom,
if they're not feeling so good, the rest of us will feel the effects.
When
the stock market kept declining in the early 1930s, it was a sign that a deflationary
depression was underway. I'm pretty confident that a collapse of that sort is
impossible today -- government is just too
big for the whole economy to implode. But
what we've seen in Japan over the last 10 years may be a taste of how a deflationary
depression operates today -- a long period of economic stagnation and
increasing social stress. There's that possibility -- or for another precedent,
there's the economy of the 1970s that followed upon the last great bear market.
That was inflationary rather than deflationary, but it was also a time of high
unemployment, falling real wages, and mass alienation. I don't know what form
this bust is likely to take, but I'm pretty sure we've entered a period of
economic troubles. For a decade, the U.S. economy chugged along while the rest
of the world experienced stagnation or worse. I'm pretty sure that phase of American
exceptionalism is behind us. I don't know what's coming next, but it's probably
not good. Which is why it's essential for leftists or progressives or radicals
or whatever we call ourselves to get out there and explain what happened to the
public and organize against the austerity, crackdown, and reaction that
generally accompany bad economic times.
A
final point. Many Wall Street types are talking about a "disconnect"
between the market and the real economy. Yes, the real economy is doing a lot
better than Wall Street, at least for now. But they never talked like this on
the way up. On the way up, the rising market was proof that everything American
finance and industry did was right and great. Now we know that a lot of those
heroic financiers and industrialists were crooks, and the rest were in the grip
of manic self-deception.
Related
to the disconnect argument is another frequently on the lips (or typing
fingers) of pundits: the U.S. is nothing like Japan ten years ago. Our economy
is fundamentally stronger and more "flexible" (that word again) than
theirs. But there are other differences too. Japanese households were big
savers, not borrowers; today, U.S. households owe record amounts of money to
their creditors. Japan was (and remains) a giant creditor on the world scene;
the U.S. today, a giant debtor. So those are also ways in which the U.S. is no
Japan, though ways less flattering to us.
And let's revisit the late 1980s for a moment. Then, it was a commonplace that the U.S. was washed up and Japan was poised to take over the world. That aura of invincibility turned out to be a byproduct of Japan's great speculative bubble. It may be that the notion of the fundamental greatness of the U.S. economy is the last surviving byproduct of our own bubble.
Doug
Henwood is the editor of the Left
Business Observer, and the host of Behind
the News, a weekly radio program covering economics
and politics that airs on WBAI (FM 99.5) in New York. Henwood is the author of
Wall Street
(Verso, 1997) and the
State of the
USA Atlas (Simon & Schuster,
1994). This article is an edited version of comments made by Henwood on Behind
the News, July 25, 2002. Email: dhenwood@panix.com