Hold Your Applause Please ....

There often is a large discrepancy between what we see and what is actually the case. This week we’ve seen a remarkable run -up in the stock market as the Dow Jones Average closeed above 13K points for the first time ever. At right is a triumphalist graphic lifted from the celebratory account in The New York Times.

But what does this event mean? What is actually going on here? Perhaps this surge (not to be confused with other similarly named efforts) means that we are getting lots of “productive” investment that will encourage economic growth and a wide and deep distribution of the resulting wealth and income. It would be nice to think so, but there is little reason to do so. On such issues it would be nice if the mainstream press pushed just a bit past official appearances. This would not take terribly much work. And it might uncover cause for concern, it might give the revelers pause. Consider these two passages from recently published, readily available books.

“Most people think that aside from its gambling function, the stock market somehow provides nourishing finance to real corporations so they can invest and expand. The IPO wave of the late 1990s would seem to confirm that on both counts. But while the case for gambling is solid, that for the provision of finance isn’t. Over the long haul, firms are overwhelmingly self-financing - that is, most of their investment expenditures are funded through profits (about 90%, on long term averages), and surprisingly little by external sources, like banks and financial markets. And it’s especially true of the stock market, which has historically provided only a sliver of investment funds. This is true not only of the U.S., but for virtually every economy known to economics.”*

"“In 2004 a little more than half of all U.S. households had no stock holdings in any form, either direct (owning shares of a particular company) or indirect (owning shares through a mutual fund or through a 401k-style defined contribution pension plan), and, of those that did, almost two of three households had holdings of less than $5,000. This fact contradicts the popular notion that the typical household is greatly invested in the stock market. Moreover, from 2001 to 2004 the share of households holding stock, particularly those holding more than a small amount, declined - the first decline since 1989.”**

If these two passages accurately grasp actual economic phenomena, it is highly unlikely that recent events on Wall Street are working to the advantage, direct (as a source of household income) or indirect (in the form of productive economic activity***), of large numbers of the American population. So, why the vigorous applause? As a good pragmatist, I am worried about consequences. And in that regard this "accomplishment" by the markets seems especially hollow.
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* Doug Henwood. After the New Economy. New Press, 2003, pages 187-8.
** Lawrence Mishel, et. al. The State of Working America, 2006-2007. Cornell University Press/Economic Policy Institute, 2007, pages 260-1.
*** Compare, for instance, this story from The Times today on "sluggish" economic growth.