Why the Dow is Hitting 10,000 even when Consumers Can’t Buy and Business Cries “Socialism”

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.

The explanation is simple. The great consumer retreat from the market is being offset by government’s advance into the market. Consumer debt is way down from its peak in 2006; government debt is way up. Consumer spending is down, government spending is up. Why have new housing starts begun? Because the Fed is buying up Fannie and Freddie’s paper, and government-owned Fannie and Freddie are now just about the only mortgage games remaining in play.

Why are health care stocks booming? Because the government is about to expand coverage to tens of millions more Americans, and the White House has assured Big Pharma and health insurers that their profits will soar. Why are auto sales up? Because the cash-for-clunkers program has been subsidizing new car sales. Why is the financial sector surging? Because the Fed is keeping interest rates near zero, and the rest of the government is still guaranteeing any bank too big to fail will be bailed out. Why are federal contractors doing so well? Because the stimulus has kicked in.

In other words, the Dow is up despite the biggest consumer retreat from the market since the Great Depression because of the very thing so many executives are complaining about, which is government’s expansion. And regardless of what you call it – Keynesianism, socialism, or just pragmatism – it’s doing wonders for business, especially big business and Wall Street. Consumer spending is falling back to 60 to 65 percent of the economy, as government spending expands to fill the gap.

The problem is, our newly expanded government isn’t doing much for average working Americans who continue to lose their jobs and whose belts continue to tighten, and who are getting almost nothing out of the rising Dow because they own few if any shares of stock. Despite the happy Dow and notwithstanding the upbeat corporate earnings, most corporations are still shedding workers and slashing payrolls. And the big banks still aren’t lending to Main Street.

Trickle-down economics didn’t work when the supply-siders were in charge. And it’s not working now, at a time when — despite all their cries of “socialism” — big business and Wall Street are more politically potent than ever.

Originally published at Robert Reich’s Blog and reproduced here with the author’s permission.

8 Responses to "Why the Dow is Hitting 10,000 even when Consumers Can’t Buy and Business Cries “Socialism”"

  1. Atlas mugged   September 23, 2009 at 12:14 pm

    Just as deficit spending by the consumer was unsustainable, so will deficit spending by the federal government need to end and go into reverse. When “free traders” first figured out they could outsource labor and manufacturing, and import the finished goods back to the US where consumers would pay retail, and provide shareholders with large profits, well, the game was on. But now that most Western corporations are gaming the system in the same way well — who will keep feeding the goose that laid the golden egg, the American consumer? The flip side of every consumer is that they are also an employee. But if their jobs are outsourced, and they can no longer borrow to live beyond their means, well who will be there to grow the corporate top line for the needy shareholder?The Trojan Horse of free trade that brought the world’s cheapest labor into Western economies to undermine the middle class worker has now played out its benefit to the consumer. Great, I’ve no job, but I do have a closet full of cheap T shirts and outdated tech toys.If free trade is to be fair, then we need to divide nations into major and minor league trading teams, based on purchasing power parity. The US, Western Europe and Japan in the Major League, Chindia and the emerging markets in the Minor League — and all trade would be conducted with only those countries in your league. Any cross-league trades would necessitate tarrifs to protect the established nations standard of living.The goal is not protectionism, the goal is to reverse the downward spiral of economics that has Western developed nations on a race to the bottom, whose middle classes have worked for decades to build relative prosperity, only to have that quickly and dramatically reversed in the last 20 years, as “free trade” tosses aside any real definition of comparative advantage, only to be defined by who has the cheapest labor. Why not work to raise the standard of living of the emerging markets over time to come up to meet the standards of the industrial nations, rather than destroy the middle classes of Western nations to juice the quarterly profit margins of multinationals?As soon as this recovery stops dead in its tracks because the consumer can’t and won’t participate, and the political backlash to more government spending ties federal hands, maybe then, it will be time for the only sector with a healthy balance sheet to step up to the lead — the corporate sector — and hire workers in their home countries to reflate incomes so the goose can lay an egg or two.

    • Donald Wheatley   September 25, 2009 at 8:44 am

      I was a manufacturer buying aluminum extrusions. Aluminum extrusions are a low labor high energy content commodity. We could buy from China, delivered to our door weekly (just in time), for 15% less than from US or Canadian extruder. It seems that China artificially lowers the costs of making things.My suggested solution is to add a Value Added Tax (VAT) similar to Canada, Japan, etc. of say 20%. Everything at Walmart, Home Depot, Lowes, Sears and so on would go up 20% in cost. Then if this tax were used to take taxes off US business the cost of US made products would go up 20% due to the tax and down 20% or more due to lower costs. For example remove the employers 7.5% share of social security, reimburse the employers health care, take school taxes off industrial property, lower income taxes for starters.The consumer would have a choice US made or foreign. American manufacturers would grow and add employees.

  2. Burbank Mike   September 23, 2009 at 12:16 pm

    Right to the point explanation.When the government money runs out, or foreigners demand higher interest rates for treasuries, then this stimulus party will be over and the hangover will be devastating.

    • devils advocate   September 24, 2009 at 8:46 am

      the US Government will NEVER run out of (printing) moneyBOB:what if an additional stimulus for one trillion plus were to go into privatealternative energy projects – like a W.W. II overnight changeover?China took a huge risk because it faced (and still faces) losing its biggest customers (US and Europe) overnight…and it is paying offif the USA does not gamble on private industry it stands to lose out, period.p.s. enlarging the profits for the internal health industry is not healty for the country

  3. Guest   September 25, 2009 at 1:50 pm

    Has anyone else noticed that stock Market Volumes have been steadily decreasing for the past three months, according to Zero Hedge, $5.1 billion have been pulled out of U.S. Mutual funds since August 1st, yet the market is going up? Back in March 2009, after the last G20 meeting, the Japanese Fed stated that they were starting to purchase stocks to hold up the market. Is there a possibility that the FED is purchasing stock as well, and that the entire market is predicated upon a sham? What happens when the FED starts selling all these stocks that have propped up the Financial system?

  4. Anonymous   September 25, 2009 at 3:00 pm

    These are curious words from someone who did not speak out against the credit expansion during the Clinton years and after. Of course the average working person is being crushed. The Obama administration is a tied in to big finance as any other administration. The massive wealth transfer that has gone on will have to be paid for by future generations. Regan did the same thing by cutting social programs and handing out tax dollars (“privatization” “reducing government”) to private contractors.Wall Street is running the government. Obama was a protegee of Brudzinski. The Clintonites fill the high government posts. The auto unions are happy that they have any members left. How can we win in this scenario?

  5. haroldryan   August 4, 2011 at 11:21 am

    First of all my grasp of economics is simplisitic. With the stock market plummeting experts say " investors are edgey and pulling back". What does that mean? Who are these investors? Every month millions of Americans put money in their 401K's through their work plans. Many of these plans are mutual funds which invest in the stock market. So if there is a steady stream of money going into the market, why is it dropping? The money these people put in is real, yet the market keeps dropping. What is happening to the money going in? Who gets that money? The money invested sure hasn't added up to jobs in America. I've been putting money into funds since 1985. Like all americans I'm way behind. I gave the guy 2,000 dollars, which lost money. the next quarter he said I owed him 60 bucks because my account had lost money and now I was below the 2,000$ limit so I had to pay for his service. I give you money, which you lose, now i've got to give you more money to lose my money? Who is the sucker here?

  6. haroldryan   August 4, 2011 at 11:28 am

    A further rant. If you invest real money in a fund, someone takes the real money. they do something with it. You get a statement that your investment lost money. The statement is a piece of paper. Its only reality is if I withdraw my account I will receive money. This would be less than the investment. The investment and the withdrawal are real money, correct? So who got the real money I lost ? Someone somewhere has my money. If I put 5 bucks on the pass line and roll craps, the casino gets my money, I guess that's a comfort to at least know where that's going.