BOOM MARKET TOOK MONEY FROM THE MASSES

BOOM MARKET TOOK MONEY FROM THE MASSES

published 7-12-02

In 1990, at the beginning of the longest economic expansion, about 25 percent of Americans owned shares in the stock markets. By the end of the 10-year boom, about 55 percent did so. Communism disappeared and a massive reallocation of resources from the military to other sectors helped fuel the high-tech information revolution which, in turn, boosted productivity tremendously.

The Gross Domestic Product was booming. Consequently, it seemed to make sense to invest in energy companies like Enron and Halliburton or in WorldCom and Global Crossing, giants of the Internet and telecommunication revolution that was spinning itself around the globe. Initial Public Offerings proliferated and provided ample opportunities to partake in the growing economic pie. The expansion seemed endless, causing some observers to speculate that economic recessions were relegated forever to the dustbin of history. Some Wall Street pundits predicted that the Dow Index would be propelled to 36,000.

The chairman of the Federal Reserve, Alan Greenspan, spoke of the "wealth effect," that is to say the rising market made shareholders feel richer, spend more and save less. William Seidman, head of the Resolution Trust Corp., which dealt with the Savings and Loan scandals of the '80s, predicted the most intense economic expansion ever. High entrepreneurial innovations and labor mobility would assure it. Conventional statistics such as GDP growth, retail sales, job figures, inventory and consumer confidence proved Seidman to be correct. For their part, members of Congress, like Dodd, Lieberman and Tauzin, praised the stock option method of rewarding corporate CEOs for their productivity as "unique" and "truly American." The media, in turn, saw new markets and offered plenty of new TV programs focusing on the booming stock markets and the new high tech companies which supplied an endless parade of newfangled electronic products and computer gadgets that made Bill Gates super-rich among the super rich. Unlike the boom and bust of the railroad and power companies of the 19th century and the radio, automobile and stock market boom of the Roaring '20s, this was a New Economy.

But was it really a New Economy and did the tens of millions who were drawn into the markets get wealthier? And, above all, did the booming GDP benefit those who did not enter the market? A closer analysis tells a different story than conventional statistics do. Contrary to Greenspan, a direct "wealth effect" from the booming stock market did not and cannot exist. If person A buys shares of WorldCom at $10 per share and sells them at $60 to person B, A will indeed have a 500 percent capital gain and may spend more. Yet B shifted his wealth to A, bought high and will spend less. If he kept his shares, he is now burdened by horrible losses. He will spend even less. Involuntarily, he activates the poverty effect which neutralizes the wealth effect. Hence, stock market trading merely rearranges the economic pie. It does not directly enlarge it. For this reason, the buying and selling of shares is not included in GDP calculations.

Moreover, the Dow Index, vigorously used to sell shares and brag about how rich investors could become if they would only join the roaring bulls of the '90s, is of dubious value. It started more than 100 years ago as 12 industrial stocks, later expanded to 30. Over time, some of these corporations went bankrupt, were replaced with others, were merged, etc. so that the current Dow Index is composed mostly of non-industrials. Thus, it cannot be consistent with itself, compares apples with oranges and is mostly used for capturing new customers and entertaining current ones. Essentially, valid and true quantifiable measurements are almost impossible. To accept the Dow Index as scientifically valid is an absurdity. In spite of this, millions intensely reified it--and reification of such indices is a modern form of superstition, that is to say, the pretense of knowing more than one actually does. Never mind its conceptual weakness, the soaring Dow Index gathered in the sheep so that their wool could be shorn.

The booming GDP also produced more and more jobs. Nearly everyone viewed the New Economy as a model for all other advanced economies. Surely, it proved that the broad masses, even those not participating in the markets, were also getting rapidly wealthier. But again, a closer look leads to another conclusion. Household and family net worth, the only true indicator of wealth, did not rise at all from 1990 to '95 and had actually declined relative to inflation since 1974. After '95, it rose only marginally relative to inflation and adjusted for hours worked and for the rising numbers of breadwinners per family. In contrast, the incomes of the Fortune 500 CEOs exploded into the stratosphere. In 1980, their annual income was about 45 times the average worker's income. By 1990, that had risen to about 90 times. Boosted by stock options and outright fraud, it peaked in 2000 at an incredible 480 times the average annual worker's income. While the workers' income remained tied to economic productivity, the CEOs' income became hopelessly divorced from either economic productivity or merit. It reflected corruption, fraud and a form of institutionalized theft. In other advanced economies, the relation between the workers' income to the CEOs' income stayed in the 20 to 25 range (as it was in the U.S. in '65), reflecting more closely economic productivity. This fact forces those who were entrapped by the hysterical enthusiasm about the booming GDP and stock markets to ponder the question whether American CEOs are really 20 times (!) more productive than Japanese or European CEOs or whether their explosively rising incomes really meant an expansion of criminality substituting for economic productivity.

Other important economic indicators also reflected the fate of the broad masses more accurately than consumer confidence, retail sales and GDP growth statistics: l. the increasing number of people living in trailer houses, 2. the changing ratio of assets to income and 3. affordability of home ownership. They shed additional light on the question whether or not the booming GDP and stock markets really made the masses wealthier.

In 1960, according to census figures, of 180 million Americans, about 1.4 million lived in trailer homes. Every census thereafter showed a massive increase. By 2000, about 20 million out of 280 million lived in trailer homes. While the population, over a 40 year period, grew by 55 percent, the number of those living in marginal housing rose by a factor of about 14 times! If this pattern were to continue into the next 40 years, then by 2040, out of a possible 434 million Americans, about 285 million would be living in trailer houses. Indeed, it could be said, that trailer homes are America's future and the core of the American dream or reality. The so-called booming '90s did not reverse the trend nor did it reduce the number of slum houses.

In the 1950s, the ratio of assets to income for a typical family was about $8000 to $4000 or a 2-1 ratio. In spite of the booming '60s, '80s and especially during the first half of the roaringly booming '90s, this ratio actually declined somewhat. It meant that in spite of the rising stock markets and more wives working and an expanding work week, the masses were not benefiting much, if at all. The ratio improved somewhat in the second half of the booming '90s though without doubt it has declined drastically in the last two years. Home ownership between 1940 and 1960 rose substantially from 43 percent to 62 percent. Since then, it has been flat or risen only marginally in spite of more breadwinners per family and more working hours per year. A new house could be bought in the '50s for about 2.5 times the annual income. This factor rose substantially over the decades. In some regions, it is as high as 8 to 10. Affordability of home ownership has declined noticeably, forcing more to live in marginal trailer houses.

Taking it all into account, future economic historians will focus on the poverty effect of the booming stock markets and how it was used to transfer wealth from the masses, who entered the markets by the tens of millions, to the wealthy. This transfer of wealth was made possible by IPOs, stock options, broker's fees and the fact that the rich and the insiders, having access to superior information, bailed out of the markets before the masses. The latter took the poverty effect. They will trickle out of the markets and are unlikely to re-enter it soon. In the end, their reduced spending will ripple through the economy for years to come.

"Sig" Sutterlin teaches at Indian Hills Community College. He has been a Senior Fulbright Scholar in Europe, has published a book on international diplomacy and has received a special recognition award from the International Network of Trade for an essay on international trade.