"What’s bad for Main Street and good for Wall Street in the short term is bad for both in the long term" (Robert Reich)

by Ken

We all know -- don't we? -- that watching the stock market provides a reflection of certain factors in the state of the economy, it's far from any kind of reasonable measure of the economy. Which is the reality that underlies Robert Reich's blogpost "Why the Lousy Jobs Report Boosted Wall Street" (which I read via Nation of Change).

The stock market surged yesterday after the lousy jobs report. The Dow soared 160 points Friday, while the S&P 500, and Nasdaq also rose.

How can bad news on Main Street (only 113,000 jobs were created in January, on top of a meager 74,000 in December) cause good news on Wall Street?

Reich lists four assumptions likely being made by investors. The first three involve facts of life of money movement which are clearly real but outside most of our day-to-day realities: First, that the Federal Reserve "will now continue to keep interest rates low." Second, that since the Fed probably will slow down its plan to cut back on its bond-buying "quantitative easing" program, this "will continue to make buying shares of stock a better deal than buying bonds. And third, those low interest rates will encourage "big investors (including corporations) to borrow money to buy back their own shares of stock, thereby pushing up their values" -- great for the stock prices, not so great for spending on innovation and longer-term investments.

The fourth assumption, though, provides a really sharp contrast between what's good for Wall Street and what most of us would consider good for the country's economic health:

With the job situation so poor, most workers will be so desperate to keep their jobs, or land one, that they will work for even less. This will keep profits high, make balance sheets look good, fuel higher stock prices.

"But," says Reich, "what’s bad for Main Street and good for Wall Street in the short term is bad for both in the long term."

The American economy is at a crawl. Median household incomes are dropping. The American middle class doesn’t have the purchasing power to keep the economy going. And as companies focus ever more on short-term share prices at the expense of long-term growth, we’re in for years of sluggish performance.

When, if ever, will Wall Street learn?

"If ever" indeed.

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