WASHINGTON, August 24, 2015 − Over the past week, the stock market has lost more than 10% of its value and is dropping further in frantic Monday trading. While some of the current decline can be attributed to weak foreign economies like those of China and much of Europe, it is the long term effect of President Obama’s policies that is really at the heart of this decline.
While there are any number of theories that attempt to explain the movement of the stock market, basic financial principles really determine the price that investors are willing to pay for an individual stock. With billions to invest, institutional investors typically have the largest impact on stock prices. But their motivation to invest is similar to even that of the smallest investor.
Investors looks to place their funds where the return is the greatest, subject to the risk those investors are willing to take. The final price paid for a stock is mostly determined by the anticipated future income that the stock will earn. When investors anticipate future income for a specific company will increase, the price of the stock will generally rise to reflect the increased value. Conversely, when the anticipation of future income from a firm falls, its stock price will usually fall.
When we see a large decrease in the price of stocks, it usually means that investors anticipate lower future profits, although admittedly there are a number of other factors that could contribute to the decline. Many economists have reduced their forecasts for economic growth for the remainder of 2015 and perhaps well into next year.
The current recovery is now more than six years old. Post-World War II, the average time between recessions is less than 5 years, so this recovery is already longer than average. It is, however, the worst recovery, in terms of growth, that the US economy has experienced in the last 80 years.
The reasons for this are simple.
In order for an economy to grow there has to be adequate demand in the market, and business has to be able to produce output to meet the demand. Once this happens, the economy begins to “snowball,” because in order for business to produce more output they must hire more workers.
Newly employed workers have more income to spend which increases demand further. Then business produces more output to meet the new demand and hires more workers. The result, after severe recessions, is that annual economic growth usually exceeds 4% for at least a few years. Primarily due to President Obama’s policies, however, economic growth has averaged just over 2 percent during this recovery since the recession was formally declared at an end. This abnormally slow growth is the real cause of our ongoing economic problems.
The Federal Reserve vastly increased the money supply and dropped interest rates over the past several years. Typically, this activity usually results in more lending by banks, which gives consumers more funds to purchase big ticket items like houses, while providing business with more funds to expand.
But because President Obama was more concerned with correcting perceived social injustice than he was with returning the US economy back to a growth path, the Dodd-Frank bill was passed. The intent of the law was to protect consumers from predatory lenders.
Unfortunately, Dodd-Frank not only reduced predatory lending, it reduced all lending. Consumers couldn’t get loans and neither could small businesss. That meant there was little new demand from consumers and little new supply from business. That’s why today there are only slightly more people employed than there were prior to the start of the recession.
Making matters worse, Obama added highly burdensome regulations that further slowed business expansion and reduced the number of new business start-ups. During the last six years there have been more businesses closing in the US that new businesses start-ups.
Imposing yet another burden, Obama required virtually all businesses to pay for health insurance for all employees, even traditional part-timers who worked only 30 hours per week. This reduced business hiring.
Obama tried to increase demand by having the government vastly increase spending. He had Congress pass a nearly $800 billion stimulus package which in theory would have increased demand in the economy. It didn’t work primarily because he targeted the spending in areas that had little impact on total demand, like giving funds to the solar panel industry. He spent money on products that had little or no demand in the market. A tax cut would have been far more effective.
While it is true that the slowdown in international markets does have some effect on the US economy, particularly for those firms that export much of their output, the primary cause of the poor US economic performance and the decline in the stock market are the failed policies of the current administration.
Ironically, even the surprise devaluation of the Chinese currency might actually end up helping the US economy since all of the products made in China and sold in the US will now be less expensive, giving consumers more money to spend on other goods and services.
The only way to correct the current economic stagnation in this country is to create real demand in the market, create an environment where business can expand to meet the demand and allow consumers and business to freely interact without encountering miles of bureaucratic red tape. This can be accomplished using the same techniques we used in 1982 following an even more severe recession. At that time Congress cut taxes for everyone, removed burdensome regulations and create an environment that encourages the great American economic machine to move forward.
The Obama Administration is doing exactly the opposite.