The Post-Bubble Economy: A Better World

images Wednesday night in Tisdale SK by: Timothy W. Shire

The Post-Bubble Economy:
A Better World

Washington - Thursday, July 25, 2002 - by: Mark Weisbrot

burst
Across the country, it is finally sinking in. There really was a bubble in the stock market, and it has now burst. This is not like Tiger Woods having a bad day at the British Open. He may rebound to his past glory, but the stock market will not.

trigger
The accounting scandals and other corporate abuses are not the cause of the crash, but merely a trigger for a long-overdue return to more realistic stock prices.

50%
This crash was both predictable and predicted. Economist Dean Baker was the first to work out the arithmetic of the problem (still available at www.cepr.net). At the height of the bubble, he pointed out that stocks would have to lose more than half of their value in order to restore a sustainable relationship between stock prices and potential profits. The broad market is now down about 50% from its peak.

stock
market
This is the beginning of a new chapter of American economic history: call it the post- bubble era. We will be returning, at a pace that is difficult to predict, to an economy in which the stock market plays a more modest role.

economy
This is a change for the better. Contrary to popular misconception -- which is reinforced daily in the business press -- the health of the stock market is not the same as the health of the economy. And stocks have even less to do with the living standards of the vast majority of Americans.

80%
growth
real
economy
One way to see this is to look at our history. The Dow took more than 30 years to reach its 1929 (pre-crash) level, and it took even longer for people to regain confidence in the market. In the1970s, less than 20% of all households owned any stock. Relatively little capital for investment was raised in the stock market. Nonetheless, the economy grew quite rapidly from 1946 -73 -- the first half of the post - World War II era -- and most importantly, it was a broadly shared prosperity. The real (inflation - adjusted) median wage grew by about 80%.

zero
From 1973 to 2000 -- the second half of the post World War II era -- stock ownership spread to almost half of all households, with most of the increase occurring during the1980s and1990s. During this time, the real median wage increased by about zero.

re-distribution
of income
The run-up in stock prices contributed to the most massive re-distribution of income in American history, from the poor, working, and middle classes to the rich. That's because half of all households still don't own stock -- even counting retirement accounts -- and most of the other half own relatively little (less than $25,000).

cheer
the
bubble
All this is not to dismiss the personal tragedies of millions of Americans who have lost retirement savings in the crash. They have a right to be angry at the corporations who deceived them, and the politicians who aided and abetted the fraud while they cheered the growing bubble as a sign of economic progress.

slow
economy
And in the short run, the evaporation of more than $7 trillion dollars of wealth will slow the economy, since the people who lost that wealth will consume less. Many corporations may also retrench, cutting investment and employment.

government
spending
The government can address these problems by replacing private spending with public spending, as much as this is necessary to keep the economy growing and unemployment from rising. We could modernize our railroad system, as Senator Hollings has proposed. The Federal government could also help the state governments avoid spending cutbacks -- California alone is facing a $24 billion shortfall -- which could drive the national economy back into recession.

illusions
But we should never be so foolish as to confuse the recovery of the stock market with economic recovery, or with the public interest. The end of this and other illusions is the silver lining of the stock market's demise. Privatization of Social Security is now dead. Millions of people who had formed new identities as "owners" of corporations -- or even day traders -- will now see that their economic future depends on wages, salaries, and benefits. Americans may begin to be outraged that the majority of the labor force has failed to share in the gains from economic growth for nearly three decades.

social
progress
They may even see themselves as citizens entitled to universal health care, as in other developed countries. In the post-bubble era, economic and social progress will finally be back on the political agenda.

Mark Weisbrot

Co-Director
Center for Economic and Policy Research
1621 Connecticut Ave NW, Suite 500
Washington, DC
20009-1052

text distributed to newspapers by Knight-Ridder/Tribune Information


	images Wednesday night in Tisdale SK by: Timothy W. Shire
The Post-Bubble Economy: A Better World

Washington - Thursday, July 25, 2002 - by: Mark Weisbrot

burst	Across the country, it is finally sinking in. There really was a bubble in the stock market, and it has now burst. This is not like Tiger Woods having a bad day at the British Open. He may rebound to his past glory, but the stock market will not.

trigger	The accounting scandals and other corporate abuses are not the cause of the crash, but merely a trigger for a long-overdue return to more realistic stock prices.

50%	This crash was both predictable and predicted. Economist Dean Baker was the first to work out the arithmetic of the problem (still available at www.cepr.net). At the height of the bubble, he pointed out that stocks would have to lose more than half of their value in order to restore a sustainable relationship between stock prices and potential profits. The broad market is now down about 50% from its peak.

stock market	This is the beginning of a new chapter of American economic history: call it the post- bubble era. We will be returning, at a pace that is difficult to predict, to an economy in which the stock market plays a more modest role.

economy	This is a change for the better. Contrary to popular misconception -- which is reinforced daily in the business press -- the health of the stock market is not the same as the health of the economy. And stocks have even less to do with the living standards of the vast majority of Americans.

80% growth real economy	One way to see this is to look at our history. The Dow took more than 30 years to reach its 1929 (pre-crash) level, and it took even longer for people to regain confidence in the market. In the1970s, less than 20% of all households owned any stock. Relatively little capital for investment was raised in the stock market. Nonetheless, the economy grew quite rapidly from 1946 -73 -- the first half of the post - World War II era -- and most importantly, it was a broadly shared prosperity. The real (inflation - adjusted) median wage grew by about 80%.

zero	From 1973 to 2000 -- the second half of the post World War II era -- stock ownership spread to almost half of all households, with most of the increase occurring during the1980s and1990s. During this time, the real median wage increased by about zero.

re-distribution of income	The run-up in stock prices contributed to the most massive re-distribution of income in American history, from the poor, working, and middle classes to the rich. That's because half of all households still don't own stock -- even counting retirement accounts -- and most of the other half own relatively little (less than $25,000).

cheer the bubble	All this is not to dismiss the personal tragedies of millions of Americans who have lost retirement savings in the crash. They have a right to be angry at the corporations who deceived them, and the politicians who aided and abetted the fraud while they cheered the growing bubble as a sign of economic progress.

slow economy	And in the short run, the evaporation of more than $7 trillion dollars of wealth will slow the economy, since the people who lost that wealth will consume less. Many corporations may also retrench, cutting investment and employment.

government spending	The government can address these problems by replacing private spending with public spending, as much as this is necessary to keep the economy growing and unemployment from rising. We could modernize our railroad system, as Senator Hollings has proposed. The Federal government could also help the state governments avoid spending cutbacks -- California alone is facing a $24 billion shortfall -- which could drive the national economy back into recession.

illusions	But we should never be so foolish as to confuse the recovery of the stock market with economic recovery, or with the public interest. The end of this and other illusions is the silver lining of the stock market's demise. Privatization of Social Security is now dead. Millions of people who had formed new identities as "owners" of corporations -- or even day traders -- will now see that their economic future depends on wages, salaries, and benefits. Americans may begin to be outraged that the majority of the labor force has failed to share in the gains from economic growth for nearly three decades.

social progress	They may even see themselves as citizens entitled to universal health care, as in other developed countries. In the post-bubble era, economic and social progress will finally be back on the political agenda.

Mark Weisbrot

	Co-Director Center for Economic and Policy Research 1621 Connecticut Ave NW, Suite 500 Washington, DC 20009-1052
	text distributed to newspapers by *Knight-Ridder/Tribune Information*