Friday, March 8, 2013

Obama's Two Americas

The markets are up; America’s down.

The stock market has finally surpassed its 2007 high. The bond market continues to defy gravity from its lofty perch.

Yet, the mood around town and around the country is down. A few people are getting rich while vast numbers of their fellow citizens are scraping by.

This morning Paul Krugman proclaims that the stock and bond markets debunk the prophecies of those who believed that the Obama presidency would be bad for stocks and bonds.

By his lights, it proves that the markets do not always tell the absolute truth. As though anyone thought that they did. He is right, however, to show that more than a few prognosticators got it wrong.

Krugman does not mention that the markets have been juiced by extravagant spending and Federal Reserve money printing. It’s always possible for a single, very wealthy player to rig the markets. Today, with the Fed buying a significant amount of government bonds and private mortgages, are the markets reflecting anything more than the fact that they are being manipulated?

Besides, isn’t there an old adage,that the markets will do what they want to do, but not necessarily when you want them to do it.

In fairness, the Obama/Bernanke thesis says that market manipulation can lead to economic prosperity. At the least, it can forestall an economic calamity.

The fact that the markets have not cratered does not mean that they will not. For all anyone knows they are setting us up for a massive shock.

It’s worth mentioning that while the Dow was reaching for the stars Apply Computer has undergone its own private market crash. From its top of 705 Apple dropped to a low of 419. Currently, it is trading at 430.

By anyone metrics, that counts as a crash. Is Apple stock trying to tell us something?

Once Krugman gets beyond the euphoria that overwhelms him when he thinks he is right, he recognizes that all is not well in America. Thus, he cautions against irrational exuberance over the stock and bond markets:

What, then, are the markets actually telling us?

I wish I could say that it’s all good news, but it isn’t. Those low interest rates are the sign of an economy that is nowhere near to a full recovery from the financial crisis of 2008, while the high level of stock prices shouldn’t be cause for celebration; it is, in large part, a reflection of the growing disconnect between productivity and wages.

The economy may be awash with money, but companies are not hiring. They are either hoarding money or returning it to shareholders in the form of dividends.

In Krugman’s words:

Meanwhile, about the stock market: Stocks are high, in part, because bond yields are so low, and investors have to put their money somewhere. It’s also true, however, that while the economy remains deeply depressed, corporate profits have staged a strong recovery. And that’s a bad thing! Not only are workers failing to share in the fruits of their own rising productivity, hundreds of billions of dollars are piling up in the treasuries of corporations that, facing weak consumer demand, see no reason to put those dollars to work.

Of course, one might ask whether the current state of affairs reflects government policies that have made it too costly to hire. And one might ask whether an administration that has burdened business with a mountain of new regulations has disincentivized hiring. Threats to raise the minimum wage cause businesses to think twice about hiring new employees. And then there’s Obamacare. How much more does it cost to hire a new employee under the Obamacare mandate? Doesn’t this have an effect on hiring practices?

As it happens, Peggy Noonan sees the same problems. Along with Krugman she sees that America is suffering from a jobs crisis. Noonan tends to place the blame on the leader of the free world, a man whose agenda has never really addressed the unemployment problem. 

Whatever good news the markets are trumpeting, Noonan discovers another America when she tries to check into an airport hotel in Pittsburgh.

In her words:

I'm in Pittsburgh, making my way to the airport hotel. The people movers are broken and we pull our bags along the dingy carpet. There's an increasing sense in America now that the facades are intact but the machinery inside is broken.

The hotel has entrances on two floors. I search for the lobby, find it. Travelers are milling about, but there's no information desk, no doorman, no bellman or concierge, just two harried-looking workers at a front desk on the second level. The man who checked me in put his phones on hold when I asked for someone to accompany me upstairs. As we walked to the room I felt I should explain. I told him a trial attorney had told me a while back that there are more lawsuits involving hotels than is generally known, and more crime, so always try to have someone with you when you first go to your room. I thought the hotel clerk would pooh-pooh this. Instead he said, "That's why we just put up mirrors at each end of the hall, so you can see if someone's coming." He made it sound like an amenity.

In an excellent column in the New Yorker George Packer also offers a reflection on the two Americas, on a nation that seems divided against itself.  

Packer explains:

Every day, in every way, things are getting better and better. The iPhone 6 may dispense with the annoying home button and feature a 4.8-inch screen and quad-core processor. Google is developing Google Glass, which will allow users to text, take pictures and videos, perform Google searches, and execute other essential functions of contemporary life simply by issuing conversation-level spoken commands to a smart lens attached to a lightweight frame worn above the eyes.

Unfortunately, Packer continues, things are not as good as they seem:

In other news, America’s economic and social decline continues. The percentage of corporate profits going to employees is at its lowest level since 1966. Unemployment remains stuck around eight per cent, and the long-term jobless make up almost forty per cent of the total—historically high figures that continue to baffle economists. “We have an unemployment crisis and only a debt problem,” says Peter Diamond, a Nobel laureate at M.I.T. The concentration of wealth at the top grows ever more pronounced. From 2009 to 2011—the years of the financial crisis and the recovery—the income of the top one per cent rose 11.2 per cent. The income of the bottom ninety-nine per cent actually shrank 0.4 per cent.

Eighty per cent of Americans believe their children will be worse off than they are. Analysts predict that the figure will pass ninety per cent at some point during Season Three of “House of Cards.”

He offers further evidence:

The good news: between 2005 and 2012, United Technologies saw its profits increase by thirty-five per cent.

The bad news: between 2005 and 2012, United Technologies hired a net total of zero workers. Last month, four days after the price of its shares passed a record high of ninety dollars, the company announced that it would eliminate three thousand employees, after having let go four thousand in 2012.

Detroit is experiencing a boom in private investment, with two new clothing stores already open, and a boutique hotel, coffee-bean roasters, and a Whole Foods store planned for downtown.

Detroit is so broke that its firefighters don’t have enough boots and toilet paper. Michigan Governor Rick Snyder has announced the appointment of an emergency manager to run the city’s finances.

Packer concludes with a reflection on the uses of technology. The way we use technology today reminds him of the way people in the Great Depression retreated to movie theaters to escape from reality.

During the Great Depression, Americans with a little extra money found refuge from hard times on the silver screen, bathing vicariously in the bright glamour of Astaire and Rogers, Grant and Hepburn. But when they left the darkened cinema house and returned to their harassed lives, did pundits and hucksters tell those audiences that everything really was getting better and better? Was there a nineteen-thirties version of the continuously improving iPhone and the TED conference? If so, did newspapers devote entire sections to covering them?

He adds:

The fetish that surrounds Google Glass or the Dow average grows ever more hysterical as the economic status of the majority of Americans remains flat. When things don’t work in the realm of stuff, people turn to the realm of bits. If the physical world becomes intransigent, you can take refuge in the virtual world, where you can solve problems–how do I make a video of my skydiving adventure while keeping my hands free?—that most of your countrymen didn’t know existed.

This “technological romanticism,” Packer concludes actually unites us:

The strange thing is that technological romanticism doesn’t divide Americans. In an age when class and wealth determine everything from your food and beverage to your TV shows, news sources, mode of air travel, education, spouse, children’s prospects, longevity, and cause of death, it’s the one thing that still unites us.

It’s fair enough to say that we are living in a nation divided against itself.  I agree with Packer that we have found unity only in our uses of high technology.

The remaining question is whether the current state of affairs reflects something intrinsic to the American political system and free market economy or is it merely the fact that we are now living in Barack Obama’s two Americas. 


David Foster said...

One point that is rarely considered: artificially juicing stock market prices at a particular point in time has the effect of reducing *future* returns.

So, to the extent that the market's current prices are being driven by Fed action (clearly to some extent, hard to say how much), that means that people who are only now reaching to point at which they have significant $ to invest will receive a lower rate of return over their future than they would have absent the juicing.

A similar principle applies in housing: juicing housing prices is good for those that now want to sell, not so good for those who only now are in the position to afford their first hourse.

Stuart Schneiderman said...

Great points... thanks for helping us to keep it all in perspective.

Anonymous said...

Agreed, this is our future, but its not "Obama's Two Americas" its "Our Two Americas".
I live in "America #1" apparently and work for an engineering consulting company with record profits since 2008, stock value tripled in 5 years, and my nice dividend will be taxed at sometime under 20% because I'm a job creator or something, although actually I'm just paying down debt like mad, just in case "America #2" comes to my neighborhood.

And if Romney was president now, he'd be claiming his brilliant leadership was what brought America back into to the sunlight, like Reagan of the 1980's and now we can cut taxes more for people like me and really get this economy going, if only I would stop paying down debt and hire someone to wash my car like a good millionaire.