The Market Gets Queasy
As we approach yet another of our self-inflicted crises, the ‘sequester cliff’, I find it amusing that the markets are reacting with surprising unanimity. Cutting government spending, apparently, is a jolly bad thing to do.
Why else would the stock market be in the beginnings of a panic?
Why else would the financial media obsess over the potential loss of business?
And why on earth would the Wall Street Journal be concerned at all?
The paradox and contradictions are acute.
On one hand big business lashes into Washington for running up debt and spending too much. On the other it gets vexed when it realizes that those cuts mean less business revenues.
On the one hand big business really, truly, wants supply side economics to work – it gets all the hand outs in that case. On the other it knows that it loses big time if demand stays depressed.
The acid test for anyone trying to figure out which side of the argument – austerity or stimulus – is correct is simple: follow the money. Or, rather, follow the lead of those who want to make a profit.
Business is sitting on scads of dollars of unspent profits. Corporate cash hoards are at historically high levels. It isn’t getting spent or invested. Why not? There’s no point. There is no point in investing in an economy where demand is already too low to keep our existing factories and workforce humming. We have excess capacity. That’s why we have high unemployment. We have lots of idle people and lots of idle factories.
The austerity folks imagine that by cutting government spending we will magically conjure a burst of business activity. They argue that less government means more private stuff. It doesn’t. In an economy where the average person pays more in payroll tax than in income tax, cutting income tax means nothing. Absolutely nothing. Worse, cutting government spending means cutting wages and cash flows. Those cuts mean fewer customers for business. So, faced with fewer customers and therefore even less demand, business will have no choice but to reduce activity further. Austerity will make the economy worse. Take a look at Europe to see how much worse.
Business executives know this. It annoys them no end.
They tend to be a conservative bunch. They would love it were right wing politics and right wing economics to work in unison. But they don’t. The economics sucks. It is bad for business. That throws business into a quandary. It makes the markets queasy.
With profits already sucking out a larger percentage of our national annual wealth than ever before – I know small business people have a hard time thinking that’s true – the only way to increase future profits is to make sure we have a population with money to spend. We need higher wages. And we need government spending to stay where it is.
That may no agree with your politics. But it ought to agree with your pocket book.
In fact, I know it will.
No wonder the market gets queasy: it has its politics and its economics in a muddle.
