by by Doug Henwood

Dissident Voice
August 17, 2002


Bill O'Reilly, host of the O'Reilly Factor on the Fox News Channel, one of the funniest shows on TV (and not always intentionally so), has a feature on every show called "The Most Ridiculous Item of the Day." O'Reilly's politics are largely appalling, but he's entertaining, and I'm going to steal this idea and begin presenting a Most Ridiculous Item of the Week on this show. Here's the premiere.


According to official capitalist ideology, CEOs and other top execs deserve their enormous salaries because they're big risk takers and because they contribute so much to society. It's pretty well established that executive pay actually bears little resemblance to performance - and here's an extreme case. Neal Travis reports in today's New York Post (uh-oh, that's my second citation in less than a minute of a Murdoch media property -- I assure you this is entirely accidental) Bob Pittman, who's been squeezed out of a top job at the troubled media giant AOL Time Warner, is going to leave with a $60 million-plus severance deal. Now this is a company whose stock is off more than 80% over the last two years - twice as much as the overall market, and which is now under investigation by the SEC for accounting chicanery. If you get $60 million for being part of a colossal failure, what would the price tag be for success?


But Pittman's parting check is nothing compared to that enjoyed by ex-CEO Gerald Levin, architect of the merger of AOL and Time Warner that is now universally regarded as a disaster. Levin left the company earlier this year with more than $200 million. Nice work if you can get it.


I was thinking about potential guests to discuss the stock market meltdown and the corporate scandals tonight, but I was overcome by an irresistible attack of vanity, and concluded that I could do it better than anyone. So here we go.


First, a measure of the damage. As of Tuesday's closing prices, the most widely used benchmark for stock prices, the Standard and Poor's 500 index, was off 48% from the high it made on March 24, 2000. (The S&P 500 is a broader measure than its more famous cousin, the Dow Jones Industrial Average; the Dow is made up of just 30 stocks, while the S&P, as its name suggests, is comprised of 500.) That decline a hair behind the achievement of the last major bear market, the October 1974 low, which was off just four tenths of a percentage point more. The Nasdaq was off 76% from its March 2000 high. Both averages have a way to go before matching the granddaddy of them all, the 1929-32 decline, which was 82% on the S&P. The 1973-74 bear market was the worst since the 1930s, so we've pretty much matched that record, and I don't think the bloodletting is over yet, despite yesterday's powerful rally and today's see-saw action. Indeed, it wouldn't surprise me to see the Dow tack on 500 or 1000 points over the next weeks or months. But that wouldn't change the big picture much.


And what is that big picture? What does this all mean? As I've said here before, in normal times, the zig-ing and zag-ing of the stock market doesn't mean much to the outside world. Unless it's your job, or your own money's on the line, stocks often inhabit a world of their own, with little impact on or relevance to the real economy. But we haven't seen normal times, at least as far as the stock market is concerned, since around 1996, when individuals started playing with stocks in a big way, and the market began escaping the earth's gravitational field.


To imagine what effects the bust might have, lets think back on the boom. A rising stock market can have several economic effects. One is direct: strong markets encourage companies to go public, meaning that the small circle of original owners float shares in an initial public offering, or IPO. The proceeds of an IPO generally go towards cashing out the original investors (typically the founders and their earliest funders, like venture capitalists), and if there's money left over, towards investing in expending the underlying business and hiring new workers. We saw a big gusher of that sort of thing in the late 1990s, though it's clear in retrospect that lots of those businesses, like Pets.com, should never have been funded in the first place. But there are also indirect economic effects. A rising market encourages optimism, leading established businesses to invest and hire more than they would have otherwise, and inspiring stock-owning households to save less and spend more than they would have otherwise. We saw lots of that too, as the personal savings rate in the U.S. declined to near 0, the lowest level since the early 1930s, and personal debt levels made new highs. So the rising market goosed the real economy to levels beyond what it normally would have managed, whatever we mean by normal.


There were more subtle effects too. The bull market greatly raised the prestige of American capitalism around the world; suddenly other countries wanted to be more like us, which means with flexible labor markets and no welfare state. Flexible labor markets is the polite way to say no job security, no benefits, and low pay (unless you're Bob Pittman or Gerald Levin). Millions of people came to believe that the market could not only fund a comfortable life in the present, it could assure a comfy retirement in the future - especially since Social Security was certain to go broke. (Social Security is not certain to go broke, but that's the myth.) And people came to think that brilliant ideas and clever branding strategies produced value in themselves, without needing mortal human workers, because the stock market said so.


So let's throw that all into reverse. Falling markets mean very few IPOs, choking off funding for new businesses to expand and hire, and depressing what Keynes called the animal spirits of entrepreneurs, putting them in the mood for retrenchment, not fresh undertakings. Households who thought they were getting richer suddenly feel poorer - much poorer - and spend less and borrow less. Prudent for individuals, yes, but not so good for an economy dependent on high, even excessive, levels of consumption. Workers who were close to retirement are now having to re-evaluate their plans; those who thought they could retire at 60 or 62 may find themselves working until they're 70 or older. Also, governments at all levels are experiencing much lower tax collections, in part because of economic weakness, but also the direct result of lower stock prices; service cutbacks are inevitable, especially here in New York City, where the economy has never been so dependent on Wall Street. One bright spot, though, is that the global prestige of U.S. capitalism is taking severe hits, which is what it deserves.


There are also more subtle messages in the market's steep decline. As I've been saying here, it's extremely unusual for the stock market to fail to respond to the stimulus of lower interest rates, as engineered by the Federal Reserve. Normally, a generous Fed inspires strong stock markets, not once-in-a-generation declines. But that's what we've gotten. The only precedent for this behavior is the 1930-31 period, when the Fed was actually less aggressively indulgent than it has been over the last year and a half. And though by most measures it looks like the recession ended last December or January, the market's not acting like it; this is the only post-World War II recovery in which the market has fallen rather than rising smartly.


Why should this matter? For several reasons. The market does have a pretty good record of anticipating major turns in the economy - not every squiggle, for sure, but major trends. And there are several reasons for that. One is that the market is a measure of liquidity in the system - how much spare cash is floating around. If there isn't much spare cash - if cash is all devoted to paying basic expenses and servicing debts - then the market may be weak. But the market is also what pollsters call a "feelings thermometer" for the investing class - a measure of how flush and optimistic people with money feel. Since they're the ones who ultimately determine what's produced by whom, if they're not feeling so good, the rest of us will feel the effects.


When the stock market kept declining in the early 1930s, it was a sign that a deflationary depression was underway. I'm pretty confident that a collapse of that sort is impossible today -- government is just too big for the whole economy to implode. But what we've seen in Japan over the last 10 years may be a taste of how a deflationary depression operates today -- a long period of economic stagnation and increasing social stress. There's that possibility -- or for another precedent, there's the economy of the 1970s that followed upon the last great bear market. That was inflationary rather than deflationary, but it was also a time of high unemployment, falling real wages, and mass alienation. I don't know what form this bust is likely to take, but I'm pretty sure we've entered a period of economic troubles. For a decade, the U.S. economy chugged along while the rest of the world experienced stagnation or worse. I'm pretty sure that phase of American exceptionalism is behind us. I don't know what's coming next, but it's probably not good. Which is why it's essential for leftists or progressives or radicals or whatever we call ourselves to get out there and explain what happened to the public and organize against the austerity, crackdown, and reaction that generally accompany bad economic times.


A final point. Many Wall Street types are talking about a "disconnect" between the market and the real economy. Yes, the real economy is doing a lot better than Wall Street, at least for now. But they never talked like this on the way up. On the way up, the rising market was proof that everything American finance and industry did was right and great. Now we know that a lot of those heroic financiers and industrialists were crooks, and the rest were in the grip of manic self-deception.


Related to the disconnect argument is another frequently on the lips (or typing fingers) of pundits: the U.S. is nothing like Japan ten years ago. Our economy is fundamentally stronger and more "flexible" (that word again) than theirs. But there are other differences too. Japanese households were big savers, not borrowers; today, U.S. households owe record amounts of money to their creditors. Japan was (and remains) a giant creditor on the world scene; the U.S. today, a giant debtor. So those are also ways in which the U.S. is no Japan, though ways less flattering to us.


And let's revisit the late 1980s for a moment. Then, it was a commonplace that the U.S. was washed up and Japan was poised to take over the world. That aura of invincibility turned out to be a byproduct of Japan's great speculative bubble. It may be that the notion of the fundamental greatness of the U.S. economy is the last surviving byproduct of our own bubble.


Doug Henwood is the editor of the Left Business Observer, and the host of Behind the News, a weekly radio program covering economics and politics that airs on WBAI (FM 99.5) in New York. Henwood is the author of Wall Street (Verso, 1997) and the State of the USA Atlas (Simon & Schuster, 1994). This article is an edited version of comments made by Henwood on Behind the News, July 25, 2002. Email: dhenwood@panix.com