Mass Unemployment Is Terrible for Wall Street, Too
On Monday, I went on Bloomberg Television and discussed whether Congress was responding aggressively enough to the U.S.'s economic problems. (Answer: It's not.) A chyron that Bloomberg put below me -- "Where is the Crisis?" -- reflects why Congress is asleep: For a lot of elites in New York and Washington, things don't look too bad.
Here's how host Erik Schatzker put it to me:
"These don't feel like crisis conditions. You have record levels for the Dow, the S&P 500, U.S. stocks. I think German stocks, was it, set a record last week? So even in Europe, where austerity rules, stocks are hitting new highs."
Of course there is a crisis. Unemployment has been more than 7 percent for four and a half years. More than 4 million Americans are in the workforce but have been unemployed for six months or more, four times as many as in 2006. And once you're out of work that long it's very hard to get back in.
That's why millions of others have given up looking for work altogether. And consumer demand is weak because income growth has been poor, and Americans, nervous about their financial prospects, are paying off debts instead of spending.
But here's the really odd thing about the blase attitude on Wall Street: While the crisis is asymmetrical and its worst effects are on the poor, it's terrible for the rich, too.
The accompanying chart shows two ways of looking at the S&P 500 index. The yellow line is the index itself, which is indeed higher than ever. That's no surprise: In the past few years, corporate profits have grown as a share of the economy, at the expense of wages.
But the blue line shows the overall price-to-earnings ratio of the companies that make up the S&P 500. This figure remains low: Companies are trading at 15.9 times earnings, substantially below their usual level over the past 30 years. So while stock prices are up a lot over the past three years, they're not as high as you would expect given how profitable corporations are.
And that's because of the weak economic outlook. Companies need customers to sell their products and services to, and if the outlook for consumer demand is bad, so is the outlook for corporate growth. Profit margins may be high, but growth of profits is likely to be weak. This is the same reason the Federal Reserve has so easily been able to keep long-term interest rates low: Bond investors don't demand much of a return on their money because they don't see a lot of good ways to invest in equities and make profits.
This is why I don't buy a claim that we sometimes hear from the left: that owners of capital want this weak recovery because it's keeping the labor market slack and workers' bargaining power low. Maybe that's someone's strategy, but it's not a smart one. Repressing economic growth is a hugely negative-sum game. Insufficiently reactive fiscal and monetary policies have made poor families miserable, but they haven't been good for business prospects either.
In order to create good opportunities for equity investment and corporate growth, investors need a strong and employed consumer base. The question is what it will take for Wall Street to see that the crisis in employment is a crisis for everyone -- even the rich.
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