The Wisdom of Reich

Posted by Deepish Thinker on September 24, 2009

Former Secretary of Labor and commentator extraordinaire, Robert Reich, has been raised an interesting question:

So how can the Dow Jones Industrial Average be flirting with 10,000 when consumers, who make up 70 percent of the economy, have had to cut way back on buying because they have no money? Jobs continue to disappear. One out of six Americans is either unemployed or underemployed. Homes can no longer function as piggy banks because they’re worth almost a third less than they were two years ago. And for the first time in more than a decade, Americans are now having to pay down their debts and start to save.

Even more curious, how can the Dow be so far up when every business and Wall Street executive I come across tells me government is crushing the economy with its huge deficits, and its supposed “takeover” of health care, autos, housing, energy, and finance? Their anguished cries of “socialism” are almost drowning out all their cheering over the surging Dow.

So, if all this Keynesian policy is so bad for the economy, why are investors so bullish?  Mr Reich’s argument is the Keynesian stimulus is working for corporate America (if not for ordinary Americans).

However, there are several plausible (non-Keynesian) explanations:

  1. The bull run is really just a bounce back from the panic selling that occurred earlier in the year.  Even if the economic outlook remains bleak, it’s much less bleak than it was.  Relief that the world isn’t going to end isn’t inconsistent with concern about the future.
  2. US corporations are poised to benefit from a rebound in the world economy and a sinking dollar.  There is nothing inconsistent about being bearish on the US economy and bullish on multi-nationals.
  3. The market may think that many of the Obama administration’s more ambitious proposals aren’t actually going to pass.  Cap-and-trade is already on the rocks, getting health reform through the Senate is far from certain and the volume of concern about the deficit increases every day.  If investors think the Keynesian surge is already abating they may be more comfortable buying stocks.
  4. It is clear that the government will find a reason to bailout just about any large corporation that runs into trouble.  This policy of socializing losses is likely to promote corporate risk taking on a fairly epic scale.  More risk means higher profit potential, which in turn means higher stock prices (arguably this is a form of state subsidy, but has little to do with boosting aggregate demand).