It’s Just not That Simple

 

It’s Just not That Simple

        “The economy is great because the stock market is at an all-time high.!!” The current occupant of the White House has ballyhooed this for the past 3 years and 10 months. He does so because, as every single US commercial banker knows, having all closed their doors to him for loans, he is an economic dunce. He is not alone, as many before him have also suffered the same tunnel vision that the sole valid index of prosperity of an economy is the stock market. This seems to me a bit like believing a trip to Vegas to play roulette with ones 401k is a good retirement strategy. Here are some other “whistling in the dark” quotes re: “the market.”

         "Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."   Irving Fisher, Ph.D. in economics, Oct. 17, 1929

                 "I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence    that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress."     Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929

        An even more outré approach has been taken by some revisionists who blame the Great Depression solely on “excessive government regulation.”  Here’s an excerpt from a Forbes article citing that viewpoint:  “In short order, beginning in 1930, we had the Smoot-Hawley Tariff, an income-tax increase led by a top-rate hike of 150%, a 50% increase in government spending, enormous real increases in state and particularly local tax rates, government seizure of the American people’s gold holdings, and regulation like never seen before. The idea that investors did not peer into the future circa 1929 and ascertain the outlines of these things is preposterous. Government, not the market system, caused the Great Depression in whole.”

        There’s so much wrong with this that I am truly amazed that it ever made print: First: The Smoot Hawley Tariff was passed in March 1930.  Like all tariffs, it isn’t as much “regulation of business” but rather an ill-advised attempt to generate income by taxing imports and protecting domestic producers. In a global economy, as the Trump China tariffs have re-proven, this is sheer folly, and the Smoot-Hawley was just that, too.  Smoot-Hawley seriously backfired as furious European countries imposed a tax on American goods making them too expensive to buy in Europe, and restricting trade which contributed to the economic crisis of the Great Depression. Economists warned against the act, and the stock market reacted negatively to its passage, which more or less coincided with the start of the Great Depression. It raised the price of imports to the point that they became unaffordable for all but the wealthy, and it dramatically decreased the amount of exported goods, thus contributing to bank failures, particularly in agricultural regions.

        Without the $32 billion in additional farm subsidies necessitated by the loss of China markets due to Trump’s China tariffs this might have had a modern rerun. In any event, the Trump tariffs generated the expected response from China, whose new tariffs have cost each US household an estimated $850 annually since their inception. That’s another yearly $104 billion (nine zeros) in unnecessary spending paid by US importers and passed along to consumers.

        Second: While the top marginal tax rate was increased, it didn’t “cause" the Depression, which began in 1929, since the rate was 25% in 1928, reduced to 24% in 1929, increased back up to 25% in 1931 and 1932, (by which time the Depression was  two years old) and then increased in 1932 to 63%. This was, remember, the highest marginal rate and affected perhaps 2% to 5% of all Americans. The top rate remained at 63%. However, the rate on $10,000 rose to just 11% from 10%, and the rate on $50,000 rose to just 34% from 31%. The estate tax rose to 60%. Of course, the “average” household income in 1938 was just $1368…. annually!

        Third; “A 50% increase in Government spending.” Well yeah, as unemployment sky-rocketed and incomes dipped. Of course, allowing mass starvations might have been an alternative, but no one signed on for the pilot program, so agencies like the WPA and PWA paid workers to build such “wasteful” public works projects as the Lincoln Tunnel, Hoover Dam, Grand Coulee Dam, Blue Ridge Parkway, LaGuardia Airport, Triboro Bridge, the TVA and much more. The Civilian Conservation Corps put idle young men to work and taught job skills in the process. CCC projects included 3,470 fire towers erected, 97,000 miles of roads built, 3 billion trees planted, 711 state parks created and over 3 million men employed. So, yes, government spending increased but the money was far from wasted and was not “welfare.”

        Fourth: There were indeed, increases in state and local taxes during the Depression, which makes sense, since many more Americans needed the sort of help best administered centrally/locally. It is almost impossible to find historical data for all states and average them for purposes of this essay, so I chose California. I’m fairly sure most other states’ aggregate taxes were lower then, as they are today.

         Reality shows that in 1933, the combined state and local tax rate (sales and property) in California was 2.5%, increasing to 3% in 1935, and back to 2.5% in 1943. Hardly punitive, “enormous” (as the writer claimed) or dramatic. Note: When listening to “anti-taxers” whine about increases (and boy, do they) remember that an increase of 1% to 1.5% is a “50% increase,” just like a rise from 40% to 60%, but obviously the impact is not the same.

        Fifth: the issue of leaving the Gold standard is too abstruse for a short essay, so let’s move on. In any case the phrase “seizure of the American People’s Gold holding” is grossly misleading, since no one’s gold was seized, but traded for equivalent currency or credit. (also, in the depression, the average American had no gold, before, during or after. Period.)

        Sixth: “Regulation like never seen before.”  This of course reflects Trump’s fondest desire – that men and women like him be allowed to plunder in the marketplace, extort and what have you, free from any restrictions on what they may inflict on the rest of us. This is a key motivator for the Trump administration’s attempts to reduce Dodd-Frank’s consumer protections and Commercial Banking and Securities trading limitations. One other well-known apostle of this stance is John Stossel, who might best be characterized by his statements in the wake of Hurricane Harvey, defending price gougers charging $99 for a flat of bottled water as “honest market economy.” This is in the best Morgan, Rockefeller and Gould tradition which holds that any regulation of business is “bad,” if it limits profit in the interest of public well-being.

         Another, earlier Roosevelt, fought this sort of battle when private interests attempted to own the Grand Canyon. Barack Obama fought this when he signed stronger clean water legislation, since rescinded by Trump. Automobile manufacturers whined about new required safety features, and mileage and emissions controls until they were enacted, and the industry then readily did what they could have all along. Their advertisements now extol those same safety features as if they never resisted them.

        This presents the question of who is the Government supposed to serve? All of us? Those of us with the most money?

        Back, now, to the original issue of whether a strong stock market is the true index of a strong economy. As I showed above, many of those same who tout it as such, disavow the importance of it when the economy soils its linen, shifting blame at will. Who’s right? Well Jethro, it just ain’t that simple.

        While some, like Trump, self-proclaimed genius who couldn’t complete his BA with honors (yes, I’ve seen the graduation program;  he “graduated” period.), view “the Market” as the be all and end all, and one true index of economic health,  real economists are quick to point out other indicators, which require a better depth of knowledge. Some of these other indices are called “leading” indicators, since they are useful in forecasting economic performance. Others are “lagging” indicators because generally they tell us “What happened” and are more diagnostic and analytical tools than instructions. Without great detail (too long to do) they include:

Leading Indicators:

        Manufacturing activity:  Manufacturing activity is another indicator of the state of the economy because it influences the GDP (gross domestic product) strongly; an increase in which suggests more demand for consumer goods and, in turn, a healthy economy. Moreover, since workers are required to manufacture new goods, increases in manufacturing activity also boost employment and possibly wages as well.

        Inventory Levels: High inventory levels can reflect two very different things: either that demand for inventory is expected to increase or that there is a current lack of demand. In the first scenario, businesses purposely bulk up inventory to prepare for increased consumption in the coming months. As consumer activity increases, businesses with high inventory can meet the demand and thereby increase their profit. Both are good things for the economy. However, high inventories can reflect that company supplies exceed demand. This may indicate that retail sales and consumer confidence are both down, which is a negative. In the market runup to the 1929 crash, inventories were ahead of demands.

        Retail sales:  strong retail sales contribute directly to GDP, which also strengthens the home currency. When sales improve, companies can hire more employees to sell and manufacture more product, which in turn puts more money back in the pockets of employees who are also consumers.

A significant downside to this indicator, though, is that it doesn’t account for how people pay for their purchases. If consumers go into debt to acquire products, (like with credit cards!) it could also indicate an impending recession if the debt becomes too steep to pay off.

        Housing market:

Declines in housing have a negative impact on the economy for several key reasons: They decrease homeowner wealth, if housing prices drop, equity follows. They also, perforce, reduce the number of construction jobs needed to build new homes, which increases unemployment. They reduce property taxes, which limits government resources. Homeowners are less able to refinance or sell their homes, which may force them into foreclosure. Read The Big Short!

        New Business Startups: The number of new businesses entering the economy is another indicator of economic health. In fact, some insist that small businesses (in aggregate) hire more employees than larger corporations and, thereby, contribute more to addressing unemployment. Also, small businesses can contribute significantly to GDP, and they introduce innovative ideas and products that stimulate growth. Therefore, increases in small businesses are an extremely important indicator of the economic well-being of any capitalist nation.

Lagging indicators:

        Changes in Gross Domestic Product (GDP): GDP is typically considered by economists to be the most important measure of the economy’s current health. (Have you ever heard Donald Trump speak of the GDP? I haven’t) When GDP increases, it’s a sign the economy is strong. In fact, businesses will adjust their expenditures on inventory, payroll, and other investments based on GDP output.

        Like the stock market, however, GDP can be misleading. For a current example, the government has increased GDP by 4% as a result of stimulus spending and the Federal Reserve has pumped approximately $2 trillion into the economy. Both of these attempts to correct recession fallout are at least partially responsible for GDP growth. Both also are contributors to a whopping 2020 deficit on top of the already planned Trump budget shortfall.

        Corporate profits: Strong corporate profits are generally correlated with a rise in GDP because they reflect an increase in sales and therefore encourage job growth. They also increase stock market performance as investors look for places to invest income. This however can also be misleading depending on variables such as economic sector. As an example, If I consider the profit only of economic entities related to home learning and conferencing (ZOOM, for example) the picture is rosy. If I consider "dining out" businesses, not so much.

        Interest rates: Interest rates represent the cost of borrowing money and are based around the federal funds rate. Too high, deters borrowing, slows investment. Too low can lead to inflation.  Current interest rates are thus indicative of the economy’s current condition and are at an all time low. The effects of this over time remain to be seen.

        Whatever happens, the stock market will be just one of a number of valid indicators and remember, much of the investing currently is on a “what if” basis, chief among which is the strong performance ---so far, of the drug sector because of the obvious necessity for a COVID-19 vaccine. Meanwhile, while speculators run wild, US unemployment - 4.5% in March, is 6.9% in November, and that’s a 65% increase!

    So, the next time someone hypes the economy referring to the Stock Market, respond with "Yeah, but what about that debt to GDP ratio?" when their eyes glass over, explain that Debt to GDP ratio is the ratio of the percentage of the total national debt compared to the GDP. a generally accepted "good" number is about 60% ( a simple example : you owe $6, your GDP is  $10) that's a debt to GDP ratio of 60%, Currently the US debt to GDP ratio is over 100%!  Trump was told about this two years plus ago, and when warned by an advisor that a fiscal cliff was coming he responded, "Yeah, but we won't be here."

Feelin' the love yet?