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June
24 , 2002
Editorial
Column by Mike Schiller, author of "Created Equal"
Visit www.mikeschiller.com
Text & photo (c) 2001-2002 Mike Schiller
Why
The Investment Bubble Burst
Economic/Socio-political analysis by
Mike Schiller
Bush has been desperately trying to point fingers at Clinton,
repeatedly pointing out that the stock market crash began
in late 2000. In doing so, his credibility hinges on one hope·
the American public's continued lack of understanding of the
factors that influence stock trends. If Bush had his way,
every American would gullibly believe stock prices are determined
by "the media" or "consumer spending" or "productivity." The
truth is that while those factors may influence an investor
to pick one stock over another, they generally do not prompt
people to decide "yes I will put my money in the stock market."
How the bubble burst and why there has not been a rally despite
increased consumer spending and profit gains can be explained
by looking at how the investment bubble began in the first
place. It had nothing to do with technology- the investments
in technology were made first, the advancements came later,
and then the hype followed. Why were the investments made
in the first place? The potential to make millions? Please
spare me the dramatics. It's been known for decades that investing
in stocks, especially unknown companies, is always a gamble.
There were other Enrons before Enron. Companies have for centuries
succeeded despite investor cynicism, and failed despite investor
confidence. It's always a gamble. If someone wants to put
their money into a stranger's hand on the potential to make
millions they will go to Las Vegas where it's much more fun
and if you win you get the money immediately. No waiting,
free room and board, great restaurants and interesting live
entertainment. Why would someone choose to gamble on stocks?
I'll give you a hint-- it begins with a T. Yes, kids, taxes.
Stocks are tax deferred, you don't' pay taxes until you sell.
Las Vegas winnings are taxed immediately. Savings account
interest is taxed yearly. Long term government bonds take
forever to mature and you pay taxes immediately when you cash
them, and get penalized if you cash in early. Short term government
bonds are useless for tax-free wealth growth because you have
to cash them sooner and still pay the taxes. High net worth
investors would put all their money into a more stable investment
tool if it carried the same tax benefits as stocks. This is
why Clinton's tax increases in the early 90's were responsible
for creating an investment boom. In an effort to avoid paying
higher taxes, wealthy individuals poured their money into
stocks, and left it there. They didn't want to put their money
in stocks, they felt they had no choice. It was the only tool
available through which they could preserve their wealth.
Within a few years, these investments propelled research and
product development which led to technology advancements.
The investments also fueled job growth, small business growth,
company expansions, more job growth, income growth, consumer
spending, more advancements, more job growth, then the hype,
then more investments, then more company expansions, and more
and more job growth. The stock market became attractive and
somewhere along the way everyone forgot how it happened (or
maybe the media intentionally obscured it).
Rural Midwestern Republicans were furious! (Note: The virulent
anti-labor thing within some republican factions tends to
be predominantly geographical, it's that whole "still pissed
about losing slavery" thing. Urban Republicans tend to be
much more moderate. This is such an important economic analysis,
I must be fair where fairness is due. This next paragraph
doesn't apply to most urban republicans).
Rural Midwestern Republicans were furious! Suddenly they couldn't
yell at their employees for no reason! They couldn't make
people spend 90% of their income on suits just to keep their
jobs anymore! Employees had to be paid enough to actually
afford a decent standard of living! Human rights had become
the status quo! Oh NO! This was all happening with
their own investment money and there was nothing they could
do about it because they had an ideological need to avoid
paying taxes. Taxes can be used to fund welfare programs that
give struggling families the leverage they need to avoid working
in unsafe or unhealthy conditions! Taxes pay for social security
so that retirees don't have to work at supermarkets! Taxes
pay for the Department Of Justice and the SEC to investigate
white collar crimes! The stock market was their only option
for tax avoidance and yet their stock investments had made
the job market accessible enough for employees to negotiate
decent wages! It was a catch-22 in their eyes and they hated
it. They didn't care how much money they could make in the
stock market, they just wanted to avoid taxes. So they funded
the Bush campaign and elicited a promise for retroactive tax
cuts.
When the SCOTUS illegally installed Bush in the White House,
they knew that selling off their stocks immediately would
be a politically cunning move. Bush would give them retroactive
tax breaks, so whatever taxes they paid for selling would
end up coming back like a boomerang. The stock market crashed
as investors dumped stock, and it looked as if some bubble
had magically "burst." There was nothing magical about it.
The sell-off had been planned as calculatedly and deliberately
as September 11th. In the eyes of conservatives, it was worth
any losses they might incur, because the money they got was
more than they put in, and Bush would continue to pay them
additional money through various channels over the course
of four years.
Amazingly, The Wall Street Journal never caught on
to this. Their subscriptions and advertising dollars depend
on public interest in the stock market, which only exists
when taxes are higher. They still don't understand. Very few
people do understand. The stock market has always carried
a mystique because of the complicated formulas, the terminology,
the cycles, all sorts of things that seem too complicated
to be so simple. When high net worth individuals don't need
to worry about taxes, they don't need to invest in stocks,
and since it's a risk, they avoid stocks. When taxes go up,
high net worth investors have a new incentive to invest. The
prospect of keeping their money in a place where they can
safely grow it while avoiding taxes is great. The scale upon
which they weigh risk versus reward is tipped more heavily
toward the reward side. They invest, and they wait for the
investment to grow. Higher taxes makes people put their money
in stocks, and the desire to keep money in the market to avoid
paying taxes keeps the market relatively stable.
This is why the economy grew at the rate it did during the
Clinton years, and it's also how we can return to that growth
rate. Having the money to invest does not make people invest.
Tax cuts do not "free up" money for investment. Tax cuts make
is easier to hoard money without a gamble, and Wall Street
becomes irrelevant. If Wall Street is smart, they'll catch
on to this simple truth and donate their money to Democrats
this year. If the Democrats are smart, they will repeal Bush's
tax cut the minute the elections give them enough votes to
override any vetoes. The health of the stock market, and the
firms which sell stocks, depends on higher taxes. This realization
could make the difference in saving that ailing industry.
There will not be another investment boom until Bush's tax
cut is repealed. There will be another investment boom the
moment Bush's tax cut is repealed. The economy is simpler
than some would like people to believe. Sometimes what seems
to be a complex mystery is actually just a simple truth. "Honey,
Bush shrunk the stocks."
Mike
Schiller is the author of "Created Equal?" a poem about
the denial of marriage rights to gays and lesbians. He has
completed his first book, "Sentences I Freed From
The Ropes They Tried To Weave Around Me." due out
this spring. He also runs a successful poetry web site,
www.mikeschiller.com
, which currently averages over 3,000 visitors per month.
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