Ten Lessons From October's Markets
The dramatic plunge in the Dow late last October led commentators to ask if U. S. stocks were headed for the same fate as Asian markets. Once our market bounced back, many became convinced that noninflationary economic expansion and heady stock market appreciation would continue into the foreseaable future. I would like to suggest some alternative lessons from October:1. No market can continue to grow indefinitely at the rates displayed in the last three years. Between February 1995 and October 1997, the Dow Jones Industrial Average doubled. This translates into a market growth of three to four times long term historic averages. Over the long run, the value of the market must bear some relationship to the capacity of plants and workers to produce and consume goods and services.2. In the short term, markets fluctuate far more than changes in the "fundamentals" merit. When the market fell 554 points, some analysts suggested that it was merely factoring in new information about declining export possibilities in Asia. Yet the nations most immediately affected by the crisis represented about 4 percent of our export markets and a substantially smaller part of our GNP. The more plausible explanation is the herd mentality. Mutual fund managers worried about what their peers were going to do. Betting that others would sell, they didn't want to be left behind. They sold, producing a self-sustaining decline.3. What is good for markets isn't necessarily good for most of us. The business press tells us that the stock market has become democratized. Two out of five citizens now own at least some stock, but most of the new owners hold very small amounts. Stocks have become slightly democratized, but wealth hasn't. In 1992, the last year for which complete data are available, 1 percent of families controlled 39 percent of corporate stock. Today's figure is probably only slightly better.4. Jobs and wages are growing more slowly than the stock market. Economic historians chart ten major economic expansions since World War II. Economic journalist Doug Henwood recently pointed out that by almost every one of the measures( including rate of job growth, earnings, GDP growth, productivity increases, investments, and even profits) the current upward cycle "stacks up as mediocre to poor." Seven years into the current boom, real wages remain more than 5 percent below their level of 1989, near the peak of the last business cycle. Allan Greenspan continues to anticipate a surge in wages occasioned by the low rate of unemployment, but workers' jobs today are too insecure to give them the leverage to make such demands.5. Allan Greenspan is right about one thing. There is a lot of exuberance and irrationality in the markets. But the irrationality lies in the imbalance of profits and wages rather than in the threat of wage based inflation. Whatever one thinks of economic extremes from a moral point of view, they endanger modern market economies. The wealthy often consume a smaller percentage of their income. When workers' wages start to lag way behind, as in the twenties, eventually there isn't enough purchasing power to employ existing capacity. Inventories rise and employment drops. World economic growth in the "booming" nineties is already at about half the level of the fifties and sixties, an era of greater economic equity.6. World overcapacity is our problem. Asian overcapacity played a large role in the collapse of their markets. Our cars, computers, televisions, and cell phones are now world products. But when ill paid workers here and elsewhere can't afford them, purchases fall, putting further downward pressure on wages and production everywhere. Our computer industry is already worried about sluggish demand.7. Stock market "corrections'' won't correct these problems. In today's volatile markets, managers' reputations and their ability to escape hostile takeovers depend on short term fixes. IBM responded to the fall in its stock by repurchasing over three billion dollars of that stock. This was said to "buoy the confidence'' of its investors and the whole market. Yet it amounts to removal of capital that might have gone to development of new computer technologies, plants, and products. Just like downsizing, another strategy that investors often applaud, it costs jobs and slows long term productivity gains.8. Stock markets can play a valuable role, but as with all markets their excesses hurt us. Speculation could be curbed by restoration of an adequate tax on capital gains, and by security transfer fees applied both to individual investors and mutual funds. A modest wealth tax would fund needed social investment, education, and job creation and address the inequality that breeds underconsumption. The race to the bottom in international markets could be curbed by taxing currency transactions and by placing minimal wage and labor standards in trade agreements.9. Hong Kong isn't necessarily around the corner. Bailouts of Asian currency markets are continuing and Greenspan is probably more reluctant to play the interest rate card.10. Nonetheless, market volatility and ultimate disappointment awaits many investors. Absent ways to see that capital goes to real investment and that wages keep up with productivity gains, economic growth will continue to lag. Eventually even stock markets will catch on. Those of us who can guess when the herd will take flight could make a lot of money. The rest of us can best hope not to be trampled.John Buell is a political economist living in Southwest Harbor, Maine. He is author of Democracy by Other Means: The Politics of Work, Leisure, and the Environment.