Super Committee’s Failure Blamed for Falling Stock Prices Today

November 21, 2011

No deal was struck by the Super Committee on deficit reduction, as Republicans wouldn’t budge on their refusal to lift taxes and Democrats dug in their heels against gutting entitlement spending.  Equity prices fell in response as they had during the summer deficit battles that resulted in S&P’s downgrading of America’s credit rating to AA+.  At least that’s the cause and effect that talking heads on business TV, radio and wire services are holding up to ridicule, but such a view seems over-simplistic for explaining why stocks aren’t trading higher.

Equities have in truth underperformed for the past dozen years, far longer than the over-sized Federal deficit has been around.  The Dow Jones Industrial Average on balance has risen all of 0.3% per annum since November 21, 1999.  What has happened since then?  One might mention two recessions, the War on Terrorism, and a boom and bust in housing for starters.  It hasn’t been all doom and gloom, however, not by a long shot.  Core CPI inflation has averaged 2.0% per annum, down from 4.5% per annum during 1959-99.  Aided by the stellar performance of labor productivity, corporate profits have prospered through thick and thin, securing their largest slice of national income in decades.  Long-term interest rates are 325 basis points lower now on the 30-year bonds and have dropped 410 basis points on ten-year notes over these dozen years. 

But the bottom line — growth in jobs and GDP — went south.  Jobs rose 0.1% per annum between October 1999 and October 2011, while real GDP advanced at an annualized rate of 1.8%.  In the prior 40 years including the era of very elevated inflation and interest rates, real GDP had advanced 3.5% per year, and employment grew 2.2% annually.  When voters tell pollsters that America is now going in the wrong direction, the mounting deficiencies of jobs and production are the palpable problems that people feel even if they do not single those factors out.  Washington’s deficit is something about which voters know because the media puts the issue in their face every day.  If nobody talked about the federal deficit, Joe citizen wouldn’t know anything about such.  But a scarcity of jobs would still be common knowledge without public discussion because all one has to do is look around to see which way the winds are blowing.  Had employment grown in the 21st century along its long-term trend line, there would be almost 30 million more workers now than the actual 131.5 million tallied at last count.

Fiscal revenues would be much higher, too, and the deficit problem wouldn’t seem so formidable.  It’s backwards to blame joblessness on deficit spending.  It’s also incorrect to characterize the deficit as a result of skyrocketing spending by the public sector.  In the year to 3Q11, real government spending, the “G” component of the national income accounts contracted 2.4%.  That drop continues an inward progression from growth of 0.6% in the year to 3Q10, 1.7% in the year to 3Q09 and 2.6% in the year to the third quarter of 2008.

America needs measures that create jobs and restore long-term GDP growth.  Saying no to any rise in taxes is not a smart way to pursue these goals.  In fact, that is the followed strategy since 2000, when the American economy began to slow.  Personal income and capital gains taxes were higher then than now.  In some circumstances like the early 1960s, tax cuts can be a great way to boost growth, but generally that is true when tax levels are too high.  Clearly, the cuts that began about a decade ago, were not one of the times when reduced taxes proved to be a winning suggestion.  From the present economic hole, one has to be very careful about raising taxes.  The same can be said about slashing spending now, as some politicians demand to downsize government.  Neither move is going to boost jobs, and if jobs remain low, the deficit isn’t going to drop much either. 

Fix the labor market, and equities and housing will perform better.  Continue ignoring jobs, and the other problems will linger, too.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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