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February 21, 2017


When I first started blogging some years ago, I wrote that I would be writing about the intersection of economics and government, an area rich for discussion. For the past several months, I have been distracted from my mission and instead have been writing about Trump’s rise to power. The following represents a temporary return to my blogging roots in which I hope to uncover some myths about economic growth and the price of stocks.

Joseph E. Stiglitz, a brilliant economist and winner of the Nobel Prize in economics, compares our economy to a pie cut into slivers representing allocations to labor, financiers and other actors who make our economy work. Thus if one piece of pie is bigger than another, then there must be a reason the market makes for such favored status but this narrow view of relative reward can be upset if the pie gets bigger so that there is more to cut and competing actors demand a bigger slice of the bigger pie.

I define economic growth as getting a bigger pie to cut, and the pie can only get bigger if there are increases in aggregate demand for the goods and services provided by the economy. Thus when there is little or no ongoing increase in demand, the economy treads water and underperforms, as it has been doing now for years following the shock of Bush’s Great Recession. However, stock prices have ignored this rule of thumb through corporate buybacks of their own stock, dividend payouts, foreign “headquartering” by Apple and others to avoid taxes and various other accounting artifices to enhance stock prices and to pretend all is well when (in the face of tepid demand) it is not, and why?

Let’s look at some investment history. The Dow is now over 20,000 and is set to go higher. The S&P recently broke 20 trillion dollars in market value, quite a jump since its 1 trillion dollar mark in market value was set in 1982. Of course, much has happened in the S&P’s investment history during the last 35 years, especially in electronics. Thus the current S&P sky-high index is anchored by Apple which is alone worth 712 billion dollars in market value, as some of the companies covered by the S&P index have gained ground and some have not.  Apple is the biggest publicly traded corporation in the world by market value and its stock has surged by 44 percent over just the past year, perhaps by the adroit use of its interpretation of the Internal Revenue Code with foreign headquartering to avoid taxes, which may help explain the surge in the S&P index to its present historic levels.

So the Dow and the S&P are telling us that everything is great and that the economy is expanding, right? Wrong. The economy is not expanding. The pie is not getting bigger; rather the financiers are getting a bigger cut of the same-sized pie due to Trump’s promise to lower their taxes and end “burdensome” regulations of their activities. Such corporate welfare expectations are what are currently driving equity prices, and has little or nothing to do with better management, more competitive use of resources etc.

There are other negatives to assign to this situation. Thus, for instance, why should corporations work harder to compete on costs of their goods and services when efficiency is not necessary to prosperity and their stock prices, and who cares that their tax cuts run up our enormous deficit (which corporations decry publicly but who are major beneficiaries as taxpayers shore up their stock prices and assure their shareholders of even great capital gains opportunities)?

As we have seen, the stock markets have zoomed and are set to zoom some more but all the while there has been little if any median wage increases as adjusted for inflation for corporate workers since the 1970s! Wage inequality is alive and well and the lack of fair pay to the corporate workforce is the principal reason why aggregate demand is tepid, i.e., they don’t have the money to seriously go to market, and even if the pie could somehow get bigger in spite of poor demand, corporations and their financiers have a history of ripping off increased worker productivity and stuffing it into their stock portfolios, so aggregate demand would continue to operate at a standstill.

Thus there is little to no relationship between economic growth and stock prices. It wouldn’t matter if the Dow goes to 30,000 and the S&P to 30 trillion via phony accounting techniques and government handouts unless a fair portion of the economy’s income is shared with corporate workers so they can go to market with the necessary wherewithal to buy such corporate goods and services.

So why are we rewarding the rich and corporate class and their moneychangers with welfare checks while those who work to make them rich but are denied their fair share of the economy’s income? Ask your Congress person and senators, who write the checks – and out of our checkbook.      GERALD       E


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