Over the last few years, the economic statistics being reported
for the U.S. Economy have been very contradictory. The stock market has
soared to record levels. Profits for the major corporations have never
been higher. Meanwhile, the manufacturing and farming economies are essentially
in recession, and personal bankruptcies are at record levels. Why should
one part of the national economy be doing so well, while other parts are
suffering? I think there are some important questions we should be asking.
What is really going on here?
The First Question we Should Ask
Why is the stock market doing so well? I think there are two reasons.
First, many large corporations do business all over the world, and make
profits from all over the world. So, their performance does not necessarily
reflect the U.S. economy, but the economies of all the nations where they
do business or have interests. The world economy would have to take a very
grim turn for some of these stocks to fall much. The second reason is politics.
About fifty years ago, politicians in Washington were bamboozled into thinking
that the Stock Market Crash of 1929 caused the Great Depression. Actually,
this was not so. The depression was caused by very bad conditions in the
world economy, and by the totally irrational policies of the Federal Reserve.
The stock market only reflected the economy. But that didn’t stop people
in Washington from making the stability of the stock markets a national
priority. Remember, the crash was the totemic event that heralded the Great
Depression, so the stock markets had to be protected. Today, the myth persists
(at least in Washington) that the stability of the stock market is vital
to our national economic security. So, our leaders are still working hard
to prevent another economic disaster from starting on Wall Street. Unfortunately,
their policies are misguided, and the next economic disaster will not start
on Wall Street. The stock market is only a reflection of the economy. Economic
disasters have other causes, like oil price shocks (remember 1973 and the
OPEC oil embargoes?). Note, while the stability of the markets are not
important to the nation’s economic security, their stability is vital to
the economic security of many investors (some of them politicians). As
a result, there is a political push for stable markets, and this has turned
the stock market into a welfare market. A welfare market based on the belief
that Uncle Sugar will not let the Dow drop seriously. So, in this environment,
stock prices do not necessarily reflect economic performance. As long as
the traders have faith that Uncle Sugar will ride in and save the day,
they might as well be trading baseball cards. Of course, there are several
problems in all this that we should at least consider. For instance, shouldn’t
stock prices reflect the performance of the companies that issued the shares?
What mechanism is left to impose discipline on corporate management once
stock prices are negated? Greed and laziness often drive corporate management.
The only real discipline comes from the share holders concerns about the
profitability of their stocks. Then, there is the political feed back loop.
Some of the investors who are getting rich off the stock market have political
connections, or are politicians themselves. Don’t they have a strong incentive
to see that Washington keeps the markets perpetually rising, regardless
of the economy? We could see the markets continue to rise even as the economy
falls into recession. Finally, what happens when (not if) the (possibly
next?) President decides that saving the stock market is not the business
of the Federal Government. The election of Al Gore could be a dangerous
thing.
The Second Question
Why are corporate profits so high when some other economic statistics
are mediocre? There are two questions I would ask here. First, which corporations
are making those profits? Second, where are those profits being made? Remember,
a corporation is a tribe of economic nomads forever following the winds
of opportunity, much as earlier generations of nomads followed the changing
seasons and the green pastures. The world is a big place. A corporation
can have many investments all over the world. In truth, a medium or large
size corporation cannot be said to be American, or British, or Japanese,
or anything else national. Corporations are international institutions.
That a corporation’s stock is traded in New York, or Tokyo is only incidental.
So, if we are looking at things in terms of the U.S. economy, we must ask,
“Are the profits being made in Chicago, or Sri Lanka?” If a corporation
is making its money in Bangladesh, that can have little effect on our economy.
Another thing we should note is that corporate books are cooked to a much greater degree than in either entrepreneurial (truly private) businesses, or government. Understand, it is the quarterly profit statements that determine the tenure of the board of directors. So, what is meant by the word profit? It depends on your point of view. There are many ways to look at corporate profits. We can look at reported profits. We can also consider net income or taxable income. What about the profits that actually reach the shareholders? Also, we should note that corporate profit statistics are distorted in many ways. For example, a liberal politician might try to use reported income, or even the gross revenues, to better reveal the true greed of the corporate establishment. The directors of some corporations might try similar, though much slyer, semantic tricks to convince shareholders of the effectiveness of their policies. Or, to cover up the real issue, “How viable is the corporation in the long run?” In the end, corporate statistics are only valid in terms of the business of the corporation that generated them, and must be looked at very carefully.
The Third Question
How valid are government statistics? There are several questions
we should ask about these statistics. First, what are the interests and
the backgrounds of the people who compiled the statistics? And second,
what are the statistics really recording? For instance, did you know that
housing construction is listed as capital spending (capital goods are things
used to help generate income, like business computers, delivery trucks,
and machine tools) in some economic statistics the Federal Government put
out? So, why do they include house construction in with capital spending?
I think the reasons for this are possibly dubious, but easy to understand.
Capital spending is one of the big indicators of future economic growth.
Economic growth is a very big totem in Washington. Political careers
ride on “economic growth.” Things that impair “growth” are very, very Taboo,
and can sometimes ruin promising political careers. Understand, statistics
are compiled, to a certain extent, to please the people at the top (and
sometimes, leaders subtly, or unsubtly, let it be known that they want
to be pleased). A statistic can be many things. For example, what
a compiler thinks his boss’s, boss’s, boss’s, boss wants (but never told
Mr. Compiler). Or, maybe, what one of the intermediate bosses thinks the
big boss, several levels up, wants. Or, maybe, the big boss let it be known
that he had certain numerical needs. In any bureaucracy, lies and flattery
go up the chain, attaboys and promotions come down. The bigger the institution,
the worse this gets (and the harder it gets to decipher the statistics).
The attitude can be very cynical down in the cubicles. “Lets give the boss
some feeliwheelies for his boss, Mr. Politician, to bandy on the evening
news.” “Besides, we know what to look for in the statistics.” The fact
that they do this is unimportant, because it is inevitable in any human
organization. The issue is, how much do they do it, and how do we tell.
This cooking makes government statistics useful only if you know where
to look for numbers, and how to decipher them.
Limited Analysis
So where is the economy now? If we exclude corporate profits and stock
prices because they are useless unless first carefully analyzed, what should
we be looking at? I’m not sure about this. We have stagnant wages, slowly
rising prices, falling interest rates, and a negative savings rate. Traditionally,
these are signs that the economy is about to fall into recession (the national
economy, not the world economy). Looking at the performance of the economy
over the last five years, I would say there has been expansion in an economy
that has some serious, but perhaps unrecognized, problems. As for my economic
predictions. I think the economy will eventually fall into deep recession.
A big thing to look for is the fall of the Yen on the world money markets.
This will be a good sign that the Japanese import/export engine is choking.
If the Japanese export engine chokes, we will have trouble over here. Note,
the Bank of Japan has been supporting the Yen in deference to U.S. whims
(and contrary to Japanese national interests). If the Japanese export
engine finally chokes, the Bank of Japan will be unable to support the
Yen. I have no sympathy for them; they should have let the Yen fall years
ago, and braved the hysteria from Washington. The problem is, if the Yen
falls, there will be problems over here because the Dollar will most likely
rise (a strong dollar hurts U.S. exports, and ultimately the domestic economy).
This could lead to a domestic recession (possibly severe if the national
economic fundamentals are very bad). Prediction can be an iffy thing, I
make no guaranties of any great accuracy.
A Brief History of Bubbles
Shortly after the first stock markets opened in London, about 300 years
ago, an interesting phenomena happened, it was called, The Great Bubble.
Stock prices rose and rose on a speculative wave of optimism and greed.
Men who had once been servants, suddenly were wealthy enough to buy estates.
Women who had once been waitresses were seen riding in fine carriages.
As investors made profits from the ever rising bubble, they began to think
they would make money forever on an ever rising market. Soon, the brokers
were selling stocks in ventures that only promised, “Great Fortunes to
be Made” (with no details). Finally, the bubble burst, and there was a
panic. There have been many panics since then. I think historians (after
this episode of foolishness finally ends) should consider calling the performance
of Wall Street over the last five years, The Great Welfare Bubble. The
rising market has really had only one fundamental, faith in Uncle Sugar
and his generous hand outs. Are the traders any different from the “Welfare
Queens” that some politicians like to rail about? Not really, I think.
Is the argument usually given to justify Washington’s policies, “If the
markets fall there will be a depression, and we will all be doomed!”, any
different from Chicken Little’s cries of, “The sky is falling!” Or, for
that matter, the arguments used for justifying other forms of welfare.
Not really. Also, I think the problems of real domestic economy have been
ignored in favor of investor profits. This policy deficit coming from Washington
may be the most serious problem facing the national economy.
A Little Moral Philosophy
The basic economic problem here is simple, and universal to human nature.
We all have at least two best interests (but some of us do not realize
it). Each of us has (usually a collection of) an individual best interest.
And, each of us has (usually a set of) a collective best interest. About
two hundred years ago, Adam Smith, the economist, wrote about something
he called, “Glorified Self Interest.” Glorified self interest, simply put,
is the understanding that what is in the best interests of my society,
is in my general best interest. So, what is in the best interest of the
economy as a whole, is in my general economic best interest. Adam Smith
hoped that we would all come to realize this, or be educated to realize
this. The problem is that we have an economy based on investment. The markets
are driven by many, many, investors. Each one of those investors wants
maximum personal profit. Some of those investors are pressuring politicians
to insure their goal, regardless of the cost to the economy as a whole.
Collectively, they have become a very, very, special interest, a dominant
economic voice in Washington. So, naturally, the Federal Government is
being driven to put the private profits of those investors ahead of the
best interests of the economy as a whole. Since many of the people who
are making these decisions are investors themselves, as are their opponents
on the other side, it is easy to understand why there are so few voices
raised against their policies. However, there is a question I must ask,
“Are these economic policies any different than the policies of the Socialists?”
Not really. It is only that the target of government aid is different.
Where the socialists tried to use the government to shift money to the
workers (that is, to labor unions), our leaders are trying to use the government
to shift money to ourselves, the investors. Call it, “Inverted Marxism,”
because it is really no different than any of the older forms of socialism
(except in the minds of its advocates). In the end, I think there may be
a price to be paid for this folly, and we will each have a share.
I hope you enjoyed reading this.
30 May 1999 - 11 June 1999