Media sites hostile to U.S. President Donald Trump had a field day after the Dow Jones plunged a few weeks ago. On February 9, the Dow fell more than 1,000 points – more than 4% – for the second time in four days. The Monday drop had been the biggest ever by points. Hundreds of journalists and editors screamed that Trump should be explaining things, but not a peep or tweet emerged on the matter from the White House.
The journalists’ guiding logic is simple. In the last year, Trump never stopped boasting that the U.S. stock gains were the fruit of his economic policy. So if he’s responsible for the gains, they reasoned, he has to take responsibility for the drops that prove the markets’ lack of faith in his policy.
To discuss the performance of equities in the context of Trump’s success or failure is to make three hidden assumptions:
1. The president wields great influence on the economy and on growth, in the short term.
2. There is a clear link between the economy and growth, and developments in the stock market.
3. When the stock market rises, the state of the general public improves, and vice versa.
As we shall see, all three assumptions are wrong. There are connections between the presidency, the economy and the stock market – but they are tenuous, and some run counter to the intuition of the public and pundits alike. These assumptions, which are etched in stone in the United States and, to a lesser degree, in Israel too, reflect some of the most egregious failures of the democratic market economy.
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Let’s start with some simple numbers. U.S. stocks gained more than 235% during Barack Obama’s eight years as president. Does that say anything about Obama? It does not. The main reason for the astonishing feat was technical. Obama came to the White House at the height of a financial crisis. Uncertainty reigned and stocks were at rock-bottom. The tools Obama wielded to contend with the crisis were not substantively different from what George W. Bush used in the last weeks of his term.
Whether Trump’s policy moves in his first year were positive or negative, there is little connection between them and the performance of the economy. Countless other parameters affect growth and its quality – global, local, historical, cultural, structural and short-term.
Share prices are affected by corporate profits, the price of capital (interest) and future profit expectations, which are not much affected by what the president does in the short term. Acceleration in growth may drive a rise in inflation expectations and interest rates, and drag down financial asset prices.
But the most important erroneous assumption is the third: The notion that rising corporate profits and share prices are good for the general public.
On January 30, three major companies – Amazon, JPMorgan Chase and Berkshire Hathaway – announced the establishment of an organization designed to lower health care costs for their employees. They didn’t explain how the organization would achieve that difficult goal, but given their sheer size (together, they’re worth over $1 trillion in terms of market value) and, mainly, given the special status of their bosses (Jeff Bezos, Warren Buffett and Jamie Dimon), the markets reacted immediately.
Did the share prices of the three giants leap skyward? They did not; health care costs are a marginal parameter in their business models. The market reaction hit certain health care companies: insurers, drug wholesalers, whose shares fell 3% to 10%. The U.S. health care system is the most corrupt and costly in the Western world. American spending on health care is equivalent to 18% of GDP, though the results of the system do best by the rich.
Shareholders evidently felt that Dimon, Buffett and mainly Bezos would find ways to make buying health insurance or services more efficient. The drop in health-care service shares demonstrates the possible inverse correlation between the sector’s performance on the stock market and the greater good of consumers, or the American people as a whole.
Stocks up, greater good down
In recent years, shares of the insurer United Healthcare rose sharply. Is that because the company found more efficient ways to give good service to its customers? Most likely not. It reflects the market force and rising concentration of the sector, and mainly the increased government spending on health care ensuing from Obamacare reform.
In Israel, the market caps of two mobile operators, Cellcom and Partner, halved in seven years. In that time, the cellular market transformed from cartel to competitive, and consumer bills fell by 50 to 90%. The correlation between share price and the good of the public is inverse.
Teva stock also plunged in the last year, leading to media moans about the sinking of Israel’s flagship drug company. But one reason its stock tanked is that its patent on Copaxone – a treatment for multiple sclerosis – is finally expiring. As drug companies do, Teva tried all sorts of legal and regulatory gambits to hold back the evil hour. Israel bemoans the sinking flagship, but American MS patients are ecstatic. Teva exploited its monopoly to jack up the medication’s price 600% in a decade for no other reason than it could, and also it was the norm in the U.S. health care system, which is designed mainly for the power groups, not the sick.
The public profits from rising stocks is a double lie. Rising corporate profits may reflect economic activity that does nothing for the man in the street. Concentration or rising market share enables them to raise prices for consumers and oppress weak suppliers, lower wages for their workers, who have no alternatives, avoid taxes, and harm the environment.
Don’t our pension plans, which are invested in shares, benefit from stock market gains?
Actually, the beneficiaries of most gains on the market are the top 1%, or even 0.1%. In the United States, the top 10% own 84% of the value of all stocks. The poorest aren’t invited to the party. They don’t have financial assets. But their cost of living increases and their environment is destroyed.
Stocks up, wages down
Last December, five German and U.S. economists published an ambitious study estimating yields from stocks, bonds and property from 1870 to 2015. Leaving aside which is best, one key aspect is the gap between stock market yields and economic growth, and the rise in the median wage.
As more and more wealth created by the business sector and accrued in financial assets went to the richest, from the 1980s onward, most of the income (and financial gouging) went to the 1% while median pay in America dropped. While wages fell, stocks continued rising.
In a decade or two, as they need their pensions, a lot of middle-class Americans are going to discover that the markets often work against them.
Race to the bottom
The greater the economic concentration, the greater the companies’ power over consumers, suppliers, workers and over politicians – the more the stock market model turns capitalism into cannibalism. Small groups of managers, top employees and shareholders dine out on the masses, the weak.
The transition from capitalism to cannibalism is elusive. It’s hard to pin down a moment when some companies begin generating less and less value for people, and more and more value at the expense of people.
Take Amazon: the creativity, the bold moves, its size and Bezos’ vast vision enable it to supply wonderful service. But in the future, it could exploit its monopolistic or monopsonistic status to trample competition and telescope the market.
Last September, the company called on all big U.S. cities to compete over offering it the best terms for building its new headquarters there.
It makes sense for a city to offer tax breaks, etc. – tens of thousands of people could get jobs; Amazon hired 200,000 people in the last two years. But at the level of the general good, it’s a race to the bottom. Resources are transferred from the general public to one company. Amazon, with no lobbying or bribing of politicians, sets the rules for itself.
Is it coincidence that its boss, Bezos, bought the Washington Post five years ago and in the last couple of years turned it into one of the most influential papers in the United States? No. Deep pockets speak loudest. WaPo employees are happy now because the paper is anti-Trump and liberal, but will it remain so when Bezos’ interests clash with liberal ones of competition and freedom?
The market economy and capital markets are the most efficient mechanisms of economic growth and prosperity. Sweden, Denmark and Finland – the most successful countries of all – embrace market economics and open capital markets. Alongside competition, they have social welfare networks, and universal education and health care, that protect the losers in the cruel rat race. Thus, they preserve the legitimacy of the system.
But the economy turns cannibalistic when the giant companies and interest groups’ power enable them to set the rules and accrue more and more wealth.
If the cannibalistic direction of capitalism isn’t checked – by weakening the giant companies, dismantling the tax militias and power groups that bleed the taxpayer dry – the mounting middle-class frustration will threaten the social stability and legitimacy of liberal democracy, leading to the rise of authoritative leaders who will identify more and more enemies, internally and externally.
It has happened before – for instance, in Europe during the 1930s. Trump is a failed and allegedly corrupt businessman who accrued capital all his life, even though his investors, workers and partners mainly went broke. His obsession with the stock market as a gauge of his success as president is symbolic, and augurs ill.
The United States remains Israel’s main partner. But when it comes to ideas, values, culture and economic policy, Israel must adopt the model of the successful countries and stay as far away from America and Trump as possible.