Wednesday, November 18, 2009

"The Great Disconnect Between Stocks and Jobs"

Robert Reich at TPM wrings his hands ineffectually:
How can the stock market hit new highs at the same time unemployment is hitting new highs? Simple. The market is up because corporate earnings are up. Corporate earnings are up because companies are cutting costs. And the biggest single cost they’re cutting is their payrolls. So they let people go and, presto, their balance sheets look better and their stock prices rise.
On the evening of September 23, 1952, General Dwight D. Eisenhower, the Republican nominee for President of the United States, was scheduled to deliver a campaign speech in Cleveland, Ohio. That night however, his vice-presidential running mate, Richard M. Nixon, gave his famous "Checkers" speech defending himself from charges that he had received inappropriate financial gifts. Instead of his originally scheduled address, whose topic was inflation and "false prosperity", Eisenhower substituted his reaction to Nixon's televised appearance. The text of Ike's unspoken speech was published the next day in the Washington Post and Eisenhower essentially "the same" speech a month later in Troy, New York. But that later version of the speech, coming just a week and a half before election day, would have had little impact on framing the election campaign.

The Eisenhower speech's theme of "false prosperity" echoes elements of essayist and literary critic Kenneth Burke's satirical essay of twenty-two years earlier, "Waste – the future of prosperity," which Burke subsequently reprised in a 1958 essay, "Borrow. Spend. Buy. Waste. Want." The particular variety of waste that Eisenhower condemned in his speech was the Truman administration's policy of using massive rearmament spending to stimulate the economy -- a policy whose single-mindedly cynical deliberateness would be revealed in 1975 when National Security Council memorandum 68 (NSC-68) was declassified (see especially Fred Block's 1980 Politics and Society article, Economic Instability and Military Strength: The Paradoxes of the 1950 Rearmament Decision).

I want to quote resonating paragraphs from Burke's 1930, Ike's 1952 speech and NSC-68 and also to suggest that a profound amnesia and denial about the manifestly wasteful sources of "economic growth" massively constrain and distort American political discourse and thought -- both popular and academic.

Burke: "If all our people are to be kept straining at their jobs, the duty of the public as wasters becomes obvious...

"But by expanding this principle, we find even greater encouragement. For long we have worried about war, driven by a pre-industrial feeling that war is the enemy of mankind. But by the theory of the economic value of waste we find that war is the basis of culture. War is our great economic safety-valve. For if waste lets up, if people simply won't throw out things fast enough to create new needs in keeping with the increased output under improved methods of manufacture, we always have recourse to the still more thoroughgoing wastage of war. An intelligently managed war can leave whole nations to be rebuilt, thus providing work at peak productivity for millions of the surviving population."

Ike: "The inflation we suffer is not an accident; it is a policy. It is not, as the Administration would have us believe some queer and deadly kind of economic bacteria breathed into the atmosphere by Soviet communism.

"This is the way a recent edi­torial in a great metropolitan newspaper put it: "Inflation is the calculated policy of the White House on the labor front, the fiscal front, the agricultural front." The point and purpose of this policy I have already in­dicated: to fool the people with a deceptive prosperity. The method is very simple: to give more people more money that is worth less....

"There is in certain quarters the view that national prosperity depends on the production of armaments and that any reduc­tion in arms output might bring on another recession. Does this mean, then that the continued failure of our foreign policy is the only way to pay for the failure of our fiscal policy? According to this way of thinking, the success of our foreign policy would mean a depression."

NSC-68: " Furthermore, the United States could achieve a substantial absolute increase in output and could thereby increase the allocation of resources to a build-up of the economic and military strength of itself and its allies without suffering a decline in its real standard of living. Industrial production declined by 10 percent between the first quarter of 1948 and the last quarter of 1949, and by approximately one-fourth between 1944 and 1949. In March 1950 there were approximately 4,750,000 unemployed, as compared to 1,070,000 in 1943 and 670,000 in 1944. The gross national product declined slowly in 1949 from the peak reached in 1948 ($262 billion in 1948 to an annual rate of $256 billion in the last six months of 1949), and in terms of constant prices declined by about 20 percent between 1944 and 1948.

"With a high level of economic activity, the United States could soon attain a gross national product of $300 billion per year, as was pointed out in the President's Economic Report (January 1950). Progress in this direction would permit, and might itself be aided by, a buildup of the economic and military strength of the United States and the free world; furthermore, if a dynamic expansion of the economy were achieved, the necessary build-up could be accomplished without a decrease in the national standard of living because the required resources could be obtained by siphoning off a part of the annual increment in the gross national product. These are facts of fundamental importance in considering the courses of action open to the United States."

It's the WASTE, stupid. The stock market knows that the more unemployment there is, the more waste the federal government will be encouraged to buy. There is no alternative. As Kenneth Burke observed in his 1930 satire, "We have simply to make sure that the increase in the number of labor-saving devices does not shorten the hours of labor." Even Paul Krugman has dipped his toe in that water, as had Alec MacGillis of the Washington Post the week before. Larry Summers has tipped off Wall Street that the White House won't make any such "mistake": "It may be desirable [to the unemployed] to have a given amount of work shared among more people. But that's not as desirable [to Wall Street] as expanding the total amount of work."

Robert Reich, along with the AFL-CIO, appears to still be sitting on the fence on this one. Shame!


gordon said...

Maybe a Jobs Guarantee is the way to go. It could easily be expanded to include a training element.

Sandwichman said...

What part of the word "waste" do you not understand, Gordon? Training for what?

The only circumstances in which a Jobs Guarantee would be "the way to go" would be if there is an adequate plan to employ all the labor on actually needed goods and services. It doesn't make any sense to "employ" people just for the sake of giving them make-believe work to do. It would be cheaper to give them the money. All of the talk about Jobs Guarantees is very abstract and superficial because -- you know what? -- an awful lot of planning work would have to be done to suitably employ 20 million people. Maybe all the folks at the Center for Full Employment and Price Stability are hoping to get consulting gigs as full employment planners?

Talk about administrative nightmares.

Martin Langeland said...

Wow! That Ike quote combined with his farewell address make me wonder where they kept the real Ike during his administration?
One problem with our fixation on Wall St. is that this has almost nothing to do with the rest of the economy. Only a scant amount of its volume arrives in the treasuries of business. The rest of it is just so much boodle on the craps table changing hands from sucker to plutocrat. But we get that infamous thrill up our legs every time the Dow moves.

Kaleberg said...

Every investor knows the rule. When people have money to spend, invest in something to take their money. When the economy is in the crapper, and there are no investment opportunities, put your money in the market. It worked most of the 20th century, and I expect it will work in this one as well.