To Hell With Wall Street!

For many Americans, including here in Southern California, the recent resurgence of the Dow suggests that, despite the crisis in Asia and other now unfashionable parts of the world, all is well with the economy. Yet a closer look suggests that the market’s comeback may well mask more serious problems ahead. Rather than the penultimate sign of America’s economic genius, the current obsession with the Dow could ultimately prove our economic undoing.

Perhaps the most profound sign of these future troubles was a report recently that the U.S. savings rate, for months below 2 percent, has dropped below zero; that is, we are spending more than we are putting away. Of course, the country’s not going broke, but too many Americans are using the market itself as a kind of super-charged savings account rather than salting their dollars away in historically safe, if less exciting, instruments like CDs, bonds and traditional savings accounts.

Corporate equities, according to economist David Friedman, today account for 16 percent of all household assets, up from 9 percent at the beginning of the decade. Since 1991 the mass movement into stocks has accounted for a phenomenal 56 percent of all asset growth in U.S. households.

This trend has ominous implications. First of all, the market was not designed to be a safe and secure place to put the bulk of one’s savings; it is speculative by nature and best seen in that context. Yet as more and more Americans have sunk their hard-earned savings into the market, a sustained fall in the Dow could have an immediately catastrophic effect on consumer spending and business prospects. Equities now equal 143 percent of U.S. disposable income compared to less than a fifth that amount in Japan, Germany or France.

Secondly, the growing centrality of the market now dominates economic policy-making in unprecedented ways. It appears increasingly clear that what passes for Clinton-Greenspan economic policy centers on keeping the Dow high, whether through interest rate cuts, bailouts of hedge funds or IMF loans to distressed countries.

This obsession with the Dow also tilts economic policy toward the largest companies. Although the 30 firms comprising the Dow amount to less than 1 percent of the 3,700 companies trading on the New York Stock Exchange, they account for over 20 percent of the market’s total value. Just 250 companies absorb 75 percent of the $10 trillion invested in NYSE companies. On the supposedly more “startup-oriented” Nasdaq, 40 percent of total investment, or nearly $800 billion, is absorbed by just five of the exchange’s more than 5,000 listed firms: Microsoft, Intel, MCI, Cisco and Dell.

This orientation is particularly bad for areas such as Southern California, where small employers, and private companies, predominate more than in other regions of the country. For such firms, a strong Dow presents some distinct disadvantages, since traditional savings, real estate or CDs are among the traditional sources of capital to the smaller firms.

Even before the current market turbulence, there have been growing signs of a significant shortfall of capital for smaller firms. A 1997 survey, before the global financial crisis became apparent, found that 95 percent of state venture fund managers thought growth companies in their regions had inadequate access to capital. The California Research Bureau recently estimated that so-called “gazelle” firms, the nation’s strongest job producers, are short as much as $5 billion of investment in Los Angeles and Orange Counties alone.

Yet as long as the Dow stays in or around 8500 to 9000, there will be precious little discussion in Congress or the national press about the problems now impacting the real economy that is, what people actually make, sell and export. Indeed many commentators, particularly in the media, tell us we shouldn’t even worry about such mundane concerns.

An influential Wall Street Journal columnist recently celebrated how America’s “new economy” was based on such essential, largely trade-resistant services as “three hundred dollar haircuts” presumably consumed by investment bankers and fashionable journalists as well as “restaurant meals, entertainment and apartment rentals.” This apparently runs rings around countries like Japan, which mistakenly persist in trying to make and export goods.

Yet on Main Street, or Ventura Boulevard, the real world is causing people to take a more painful kind of “haircut.” Most troublesome has been the loss of markets overseas, particularly in developing countries. Exports, which provided generally high-wage jobs to working- and middle-class Americans, continue to plummet while imports from cash-strapped emerging markets may produce a record U.S. trade deficit of $250 billion to $300 billion, nearly double the previous year, according to the World Trade Organization.

Perhaps the most tragically unreported collapse has been in the agricultural economy, which historically has felt downturns first and often takes the longest to recover. America’s export-driven farm economy is in free fall, with incomes projected to drop 12 percent this year. This, in turn, will spread to the industrial economy: Farm equipment producers project that their sales could fall by one-fifth this year.

Manufacturing is also taking a licking, which means future hardship for reality-based economies like those in the Midwestern machine-producing heartland or here in Southern California. Sectors from aerospace to garments are now feeling the pinch; over 150,000 manufacturing jobs have been lost nationwide since March.

Close to home, Hollywood, which has traditionally been among the most recession-proof parts of the economy, has begun to feel the impact. The defining characteristics of our Wall Street-centered economy an inflated dollar, increased cost-cutting pressure to maintain high stock valuations and a disdain for long-term investments has dampened the industry’s desire to invest locally. With the Canadian dollar severely depressed, commercials, television shows and feature films are being shifted as never before from Los Angeles to the north. According to Cody Cluff, president of the Entertainment Industry Development Corp., U.S.-based firms have already lost about $500 million from such moves, at least $200 million from Southern California.

These issues the overvalued dollar, trade, the loss of high-wage jobs should be on the front burner for economic policy makers instead of obsessively scheming on how to keep the Dow high. But that won’t likely happen until the market falls significantly. For those reasons alone, a 1,000- or 2,000-point drop may not be such bad news after all.

Joel Kotkin is a senior fellow with the Pepperdine Institute for Public Policy and a research fellow at the Reason Public Policy Institute.