The booming stock market might lead to conclusions that the economy’s doing great, except for most of the people in it. And that isn’t off by much.
How can that be? Where’s the tail and where’s the dog here? I’ll get to all that in a moment, but first let’s review the recent facts of the case and let’s do so around two recent articles in the NYT.
First, here’s the story re: the recent fireworks in the equity markets. Tuesday, the Dow blew past its pre-financial-crisis high and did so within the context of a broader economy that doesn’t look nearly so bullish to a lot of people in it.
“The recovery is remarkable because the American housing market remains weak, Europe still has moments of severe instability, and fiscal battles drag on in Washington.”
To which I’d add: Middle class incomes and wages remain flat and haven’t shown any sign of recovering their recent highs which between, weren’t very high in the first place.
A few caveats: It’s worth remembering that the Dow is an index of the stock prices of a mere 30 companies—biggies like GE, Bank of America, Coke, IBM, Wal-Mart—and certainly reflective of how big American corporations are doing. But the broader S&P 500 index hasn’t quite made up all its losses, and if you factor in inflation, both indexes are below their levels from way back in 2000. So, taking the longer view, their progress is perhaps a bit less disconnected than it seems at first blush.
That said, the equity market is doing a lot better than the job market. To be fair, there are lots of people, including middle income families with retirement accounts, who benefit from bull markets. But, if given the choice–bullish stock market or bullish job market—I suspect the average person would take the latter.
This brings us to the second relevant bit of information: The historically large gap between corporate profitability and jobs, the subject of the other relevant article. Corporate profits as a share of national income are at a 60-year high, while the compensation share is near a 50-year low. Overall unemployment is stuck at 8% and the more comprehensive gauge of labor market slack is stuck above 14%.
So, putting it all together, here’s what I think is going on: The macro economy has been growing in the United States since the second half of 2009 but too slowly to reach most people. That’s kept wages low, which has hurt family incomes but boosted the corporate bottom line. Remember, profits=sales-costs, so low labor costs boost profits.
But where are these sales coming from? Well, all those big denizens of the Dow are multinationals. They don’t depend on domestic demand, or more precisely, given their recent gains in productivity, they’ve been able to meet what demand there is without adding too many workers. But the larger point is that wherever there’s growth, that’s where they’ll be hawking their wares.
(Many analysts have cited the Federal Reserve’s low interest rate policy as a factor boosting markets as well. I think that’s in there but it’s secondary to the profitability point.)
All of this leads to a very troubling question: If the economy, productivity growth, corporate profits, and market indexes can all do perfectly fine without lifting the prosperity of the broad American public, what the heck are we supposed to do?
This, I fear, is a political question with a political answer that may be leading us in the wrong direction by implementing austerity measures in the form of spending cuts. Such cuts are hurting growth and propping up unemployment in ways that are uniquely damaging compared to past fiscal policy agendas at times like these.
What policy makers should of course be doing is helping those left behind with measures to offset the fact that demand has been too weak to reach working families.
Why aren’t they? The answer may be because their constituents are the beneficiaries of this split between profits and broad prosperity, not its victims.
President Obama, to his credit, has consistently articulated that we need to do more for jobs right now and that “deficit reduction alone is not an economic plan.” But he’s been unable to operationalize that insight.
This is a very serious problem, indeed. But it’s not a new one. Economic inequality has been on the rise for decades, and while income concentration rose to heights unseen since the 1920s (which didn’t end well, mind you) job growth in the last economic expansion was the slowest on record. The president has, in fact, twice run successfully by emphasizing this gap against opponents who tried to deny it.
And twice, the majority of the electorate has in essence said: “Yes, we very much need our policy makers to do something to close this growing gap between productivity and our living standards.”
We’re still waiting.