Never Mind the Dow, Here’s the Economy!

Shortly before I left my native Cape Town, South Africa, for New York in 1993, much of the city’s middle class was seized by a frenzy of greed organized into something called “The Aeroplane Game.” It was a simple pyramid scheme in which “passengers” were recruited, as $200 a pop, and when the bottom row of “seats” was filled, the “pilot” at the top of the pyramid took the $1600 of the newcomers, and everyone moved up a notch — as long as new “passengers” kept joining, everyone was assured of winning. But any fool not blinded by greed could see that sooner or later, there’d be hundreds or thousands of “passengers” left stranded on the tarmac. The game only worked as long as people could be persuaded to have confidence in the idea that the game could keep growing and growing, and that everyone would get rich. Mercifully, local law enforcement put a stop to it before too many people were burned.

A lot of the Marxism my generation was taught on university campuses in the early ’80s was fundamentally misguided, but it did instill in me a healthy skepticism of any notion that wealth can simply be conjured out of thin air, or that “confidence” is the basis of an economy — an economy can’t keep expanding simply because   people believe  that it will keep expanding. That’s not Marxism, I suppose; that’s just common sense — the sort of common sense that says if a society keeps consuming more than it produces, it will get into very big trouble. Or that a society that not only bases its consumption on debt levels that its real economic output can’t sustain, but actually turns debt into a commodity to fuel a speculative market, is courting a very hard landing. (The sort of common sense that, when you expressed it during the dot-com bubble, was like being, to borrow a line from Abby Hoffman, a spoilsport at an orgy.)

The mantra that the collapse of the serial-bubble economy centered on Wall Street for the past two decades is simply a crisis of confidence is as widespread as it is flawed. It is confidence — groundless pollyannaish optimism in greed-driven denial of the iron laws of economic gravity — that got us into this mess. Confidence is what got those poor Capetonians buying “aeroplane game” tickets even though the law of geometric progression dictated that the vast majority would lose their money; and confidence, driven by falsehoods peddled by the barons of the “ownership society”, is what got tens of millions of Americans spending money they never had based on an assumption that the value of their homes and of their investments on the stock exchange would keep on expanding exponentially.

Restoring confidence in the credit system may prevent a cataclysmic meltdown in the U.S. economy, but it won’t fix the long-term decline based on fundamental ailments that the bubble-driven stock market and real estate booms of the past decade have simply deferred. Instead of manically watching the Dow yo-yo from day to day, we should simply recognize that it has been vastly overvalued for some time. Until such time as America’s economy (the real economy, not the fetish market of financial services) has been restored to some semblance of health — a generational project, unfortunately, given the devastation wrought by a generation of Reaganomics and, it must be said, by its “New Democrat” imitators — any dramatic recovery in the Dow will be brittle, based on false confidence or some new “bubble.”

When you’re looking for someone to diagnose a very dark situation, who better to turn to than Mike Davis. In a must-read commentary on the ever-excellent TomDispatch (which now features podcasts!), Davis laments the absence of any discussion on the presidential campaign trail of the deeper crisis, which is not simply in the stock market and credit system, but in the real economy that has long been eclipsed by a financial services industry that trades in debt and other “exotic financial instruments”, and a stock market that for far too long has had precious little connection to the well-being of the real economy. Davis attacks what he calls McCain’s “preferential option for the rich,” but also raises concern over Obama’s vagueness, and the fact that he has “made only passing reference to the next phase of the crisis: the slump of the real economy and likely mass unemployment on a scale not seen for 70 years.”

Davis writes,

With baffling courtesy to the Bush administration, [Obama] failed to highlight any of the other weak links in the economic system: the dangerous overhang of credit-default swap obligations left over from the fall of Lehman Brothers; the trillion-dollar black hole of consumer credit-card debt that may threaten the solvency of JPMorgan Chase and Bank of America; the implacable decline of General Motors and the American auto industry; the crumbling foundations of municipal and state finance; the massacre of tech equity and venture capital in Silicon Valley; and, most unexpectedly, sudden fissures in the financial solidity of even General Electric.

The current bailout is going to subject generations of Americans to expanded public debt and domestic austerity — the U.S. is going to spend trillions of dollars it doesn’t have simply repairing the mess made on Wall Street; and that doesn’t even begin to address the crisis in the real economy. Where are the jobs going to come from to replace the millions that have been lost over the past two decades, and which will now hemorrage at a perilous rate? How will America fund the massive overhaul urgently required in its basic infrastructure? How will it educate a new generation of Americans to compete in a global economy when the option of debt-leveraged college tuition moves rapidly beyond the reach of much of the middle class?

It was telling that John McCain’s first response to the current crisis was to offer the old chestnut that “the fundamentals of the economy are sound.” On the contrary, the fundamentals of the economy are the deeper problem than simply a freezing up of credit markets. As Davis writes, “We are seeing the consequences of a perverse restructuring that began with the presidency of Ronald Reagan and which has inverted the national income shares of manufacturing (21% in 1980; 12% in 2005) and those of financial services (15% in 1980; 21% in 2005).”

Many Democrats are far too smug in blaming this simply on the excesses of Reagan and now Bush. They authored it, of course, but it would be wrong to let Bill Clinton off the hook. As I wrote recently,

The measure of the success of the Reagan revolution, and its trans-Atlantic soulmate, Thatcherism, was that they managed to turn their own ideological agendas on economic and financial policy into conventional wisdom. So complete was the hegemony of their ideas on shrinking government, free markets, deregulation and privatisation that they were embraced by their opposition parties: Bill Clinton sought to distinguish himself from his party’s New Deal consensus by calling himself a “New Democrat” – and sought to emphasise continuity with some of Reagan’s basic principles of fiscal policy.

Over in Britain, Tony Blair rechristened his party “New” Labour to distinguish it from its social-democratic roots. So successful was his embrace of Thatcher’s free-market revolution that he found himself running for re-election with the support of such Conservative bastions as Rupert Murdoch’s tabloid flagship, the Sun…

…Under Reagan, conservatives set about gutting the banking regulations instituted during the New Deal precisely to prevent a recurrence of the 1929 crash. Banks should be given maximum freedom to innovate, Alan Greenspan, the chairman of the Federal Reserve, believed. Bankers are smarter chaps than politicians and bureaucrats, and regulation was tyranny. Many of the same orthodoxies persisted through the Clinton era.

The crash of 2008 has been precisely a product of some of the exotic innovations by the clever chaps on Wall Street operating in a regulation-free environment, driven only by greed.

The victims of the Reagan legacy include millions of ordinary Americans who put their trust in institutions that encouraged them to invest their savings in a stock exchange whose growth had less to do with the real economy of manufacture and export, than with a series of speculative bubbles – first the internet, then real estate. The result was a kind of casino capitalism, in which stock prices had less to do with the ability of companies to deliver earnings, than with the belief that the values of the stock would rise due to demand from other buyers.

In today’s discourse, the Dow Jones Industrial Average is routinely viewed as the key indicator of the economy’s performance, but it reveals nothing of America’s crumbling infrastructure, the comprehensive de-industrialisation that has occurred since the end of the Cold War.

Never a particularly optimistic fellow, Davis warns that the damage is done; even the New Deal would not save us now. For one thing, the U.S. has lost its industrial base. For another, Davis makes the interesting point that the New Deal arose largely in response to the very real danger, in the 1930s, of American workers rallying to the Red Flag — it was the threat of revolution in response to the social collapse of the Depression that forced Washington to launch those massive public works programs building infrastructure, that got millions back on the job. And, of course, it really was the rearming of America for WWII that created full employment — an unlikely scenario now, given the way wars are fought and the way industry is structured to supply them.

A Theocracy of Dow-ism

I’m not an economist, but I was always rather puzzled by the manner in which the Dow Jones Industrial Average, and the stock market more generally, is taken in the mainstream U.S. media as the key indicator of the economy’s well-being. Not just in the media and the national conversation, but also in the habits of those running much of corporate America.

The Internet stock boom made clear that the stock market was not driven by the real potential earnings and profits of the companies whose equity was being traded; stocks were priced based on the assumption that their value would increase, less because of any clear business plan for profitability, than because of the expectation that in an environment of speculative frenzy, others would want to buy them. You know, like houses.

And even in the years of heady growth in the Dow, America’s economy was already deeply flawed:

  • its industrial base denuded, shedding well paid union jobs that would propel people into the middle class and replacing them with poorly paid service sector jobs;
  • its health system consuming close to one fifth of its GDP (by far the world’s highest share) but still leaving tens of millions of its citizens without adequate coverage — and prevented by the invoking of anticommunist demagoguery (invoked on behalf of those who profit most from the present system) from creating a national health system — even though the absence of such a system eventually forced such industrial giants as General Motors to relocate plants to Canada where the state health care system actually meant lower labor costs;
  • its infrastructure crumbling amid an ideology that discouraged public-works investment;
  • its citizenry discouraged from saving and encouraged to maintain dangerously high levels of household debt (mirroring that of the national economy, whose rampant consumption was financed by China’s savings) — President Bush’s first advice to Americans after 9/11 was to go shopping;
  • its poorer citizens encouraged, under the rubric of the “ownership society”, to buy houses they couldn’t afford with mortgages they couldn’t afford, which were then bundled into financial instruments to repackaged as speculative investment vehicles;
  • its savings, for retirment, or college, all directed towards the stock market, as if the only direction in which it could travel was up…

The Dow told of none of this, of course – except, perhaps, that the migration of the nation’s retirement savings into the equity markets will have inevitably helped inflate stock prices. But Americans were asked to believe that what was good for Goldman Sachs was good for them. Hell, Goldman-Sachs seems to be who you get in the Treasury no matter which party you vote for: The company’s former CEO, Bob Rubin, was Clinton’s Treasury Secretary (and currently advises Obama); Bush’s is Hank Paulson, another Goldman-Sachs alum.

As I wrote last weekend,

fixing the problems of the American economy will take some fundamental policy shifts, because it will require not only regulation of the banks but a programme to stimulate the economy not by cutting taxes, but by directing investment to infrastructure and the development of a new generation of industries. Wall Street is unlikely to be the source of the innovations required to turn around America’s economic decline.

To put this more bluntly, fixing America’s economy will require not only jettisoning the Reagan dogma of deregulation, shrinking government, and tax cuts as the cornucopia of economic growth, but also the Clinton legacy that turned the Democratic Party  into as much of a friend to Wall Street as the Republicans had traditionally been. Wall Street is not the economy, and the last two decades have shown that the stock market can be hale and hearty even when the economy is being steadily denuded. It’s on fixing the real economy that voters should be forcing politicians to focus.

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26 Responses to Never Mind the Dow, Here’s the Economy!

  1. Rupa Shah says:

    After all is said and done and the fixes are in place, our society which includes our governments ( local and federal), corporations and individuals, are going to have to learn to live within our means. Otherwise, repetition of this is inevitable.

  2. Ken McIsaac says:

    There needs to be a more balanced persuasion in promoting basic healthy lifestyles versus acquiring more money and possessions. Enormous economic pressures are constantly applied to us starting at an early age. Some restrictions are needed. Education in the side effects of commercialism and the benefits of living more simply must also be promoted at an early age.

    This will come about sooner or later, gently over time, or more quickly and harshly.

    “Economic advance is not the same thing as human progress.” – John Clapham

  3. Hey, Tony, nice thoughtful piece, especially your critique of the whole role of “confidence” (as in “confidence game” or “confidence trick”, indeed.)

    I’ve also written about the anomaly of the way the MSM here in the States routinely not only uses the Dow as the basis and yardstick of all its economic reporting but also more generally addresses the readers/viewers overwhelmingly as “fellow investors” in the US economy rather than as workers (who might indeed get screwed by the investors and other owners of the businesses they work for.) To that extent, the whole of the mainstream discourse here has bought and continues to peddle the myth that the whole country has become “a single ownership community.”

    Talk about Koolaid.

    Of course, if you’re Peter Jennings or Katie Couric or any of the rest of those high-level entertainers who put a face on “the news” then you are a plutocratic member of the ownership class. What irritates me is their assumption that the rest of us are either (a) just as rich as they are, or (b) so ashamed that we aren’t that we pretend to be, anyway.

  4. MFB says:

    The DOW is not an indication of the health of the United States, but it is an indication of the optimism of the US ruling class, who determine the health of the US economy.

    Perhaps that should be “health”, since obviously the US economy has been running on borrowed money and time for decades.

    It does appear probable that the ironic photo is appropriate.

  5. Pingback: Political vaudeville | Antony Loewenstein

  6. Pingback: Now the end of the financiers era « Divining the News (DTN)

  7. Andrew Freedman says:

    This financial crisis comes from the greedy deregulation of the American banking industry.From the 1930’s up until 1999.I’m 33 so for the first 24 years of my life there were laws limiting the trading of stocks in commerical banks on Wall street.

    So stock traders struck it rich in the Conservative 1980’s by buying stock in Coca-Cola,IBM e.t.c. But no one bought a lot of stock in commercial banks there was a federal law limiting it.So if some man in Oklahoma had his home foreclosed on and the bank wasn’t paid it didn’t harm the stock market.

    George Bush Sr.,the father of the current President and the unofficial father and supporter of some American Eugenics projects wanted to repeal this law limiting the involvement of commerical banks on Wallstreet.

    The law limiting the trading of commerical bank stocks on Wallstreet was passed by former President Franklin Roosevelt.

    Since Bush Sr. was just V.P. in the 1980’s and even Ronald Reagan as Conservative as he was didn’t want to repeal what most Americans thought was a sensible banking regulation Glass-Steigel as it is called remained on the books.

    Bush Sr. then became President and still found no support in the American government for it’s repeal.Then in 1999 Bill Clinton who’s supposed to be a Democrat like me decided that people like me elected him to pass Bush Sr.’s banking bill.

    And after the economic boom of the 90’s in 1999 right before leaving office Bill Clinton when the Republican congress sent him the bill repealed Glass-Steigel we had a booming economy in 1997 and 98 partly because this law was still on the books.

    So now a man in Oklahoma’s home is forcelosed on the bank doesn’t get paid.And shares of stock in the bank go down because unlike back in ’98 today Commerical bank stock is traded on Wallstreet.And when shares in the bank stock go down the 401k’s of Middle class working class Americans are damaged.

    How much worse does it have to get? Until everyone tells the common people that the repeal of Glass-Steigel started this.And then we must pass a sane law making it clear as we did back in the 1980’s and 90’s,that you can trade stock and get rich this is America,you just can’t buy stock in commerical banks.

    After Clinton signed Bush Sr.’s banking bill a year later in 2000 Hillary got a ton of cash from financial services companies when she ran for the Senate.She probably made poor Bill do this.She used to be a Republican before she married him.

    Now as for Israel.I haven’t changed since I’m Jewish I think we need a state Tony.The sameway I think that friends of mine who are African-American deserve to receive Affirmative action benefits to make up for past racisim.

    However I am not against Palestinians which is why I support a two state solution.Which is fair to both Israeli’s and Palestinians.Withdrawl from Iraq I only supported the war when I really thought we were fighting to set people free I don’t believe in killing for economic self interest so let’s leave Iraq.

    And I still want to keep nukes out of Iran nonviolently through sanctions.As for Obama’s big win I voted for him.And I am happy he won.But yesterday I was talking to some African-American friends of mine and I’m not sure if Obama’s win has ended racisim in America.

    It’s odd but some whites other then me and you Tony appear to like President Obama but still unfortunately have stereotypical attitudes towards other Black people.

    I don’t care about a person’s ethnic background so I voted for Obama based on his policies and I ignored all this talk by some whites about how Obama’s mother is white.And how Obama is supposedly distantly related to Dick Cheyney.

    What does it say or not say about America that the whites who reminded everyone of Obama’s white mother were white Democrats who wanted to get him elected?They thought they were being friends and helping him with rural voters by telling them his mom is white.Dick Cheyney’s wife confimred that there is a distant relation between Obama and Cheyney.


    I was annoyed that when we finally are progressive enough as a country to elect a man based on who he is and not his ethnic background.A certain amount of people ruin it by making an election that was supposed to end racisim here in America be another election about something that shouldn’t matter a persons ethnic background

    So I’m happy Obama has won but surprised that racisim didn’t disappear. I think Obama will be a good President

  8. Andrew Freedman says:

    Tony I hate typos Commercial banks
    not Commerical banks is what I meant to write in my post on your page but I could care less if I misspelled Dick Cheyney’s name

  9. Andrew Freedman says:

    Tony I hate when I have a typo Commercial banks not Commerical banks is what I meant to post in my response on your page

  10. Braydon Rohan says:

    There has been a vast change in the economic system.There has been sectoral changes.In real estate deals foreclosures are increasing because of bank rates.

  11. Ronaldo Waylon says:

    In this trend of increasing bank rate I came across a website, this seems to be a good foreclosure company with vast knowledge on foreclosures in Canada.

  12. Jaxon Markell says:

    This article will make everyone think, ‘where is the world going in terms of economy?’ At this current prevailing situation, is it safe to invest in foreclosure homes in Canada?

  13. adam decker says:

    Here is a link related to foreclosures in Canada, perhaps you can find some information there.

  14. Brenda Weiss says:

    The current recession has made drastic changes in the economic system of the whole world. The site suggested by Adam, helped me to know about foreclosure, in detail

  15. lala says:

    great post Thanks you Tony

  16. Nice criticism Tony.

  17. I was annoyed that when we finally are progressive enough as a country to elect a man based on who he is and not his ethnic background.A certain amount of people ruin it by making an election that was supposed to end racisim here in America be another election about something that shouldn’t matter a persons ethnic background

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