The stock market’s recent spike in extreme volatility produced reams of good explanations about its fundamental and technical causes, but it failed to address the permanent fundamental conflict that underlies the volatility: the possible shift in political-economic power between and the deep-rooted conflict between business and labor, Wall Street and Main Street.
The best reasons for the market’s price gyrations stem from the impact of higher inflation due to rising interest rates and what this could mean for future corporate earnings, bond yields and worker’s wages.
There are two key elements to this conflict: One is the fundamental macro-economic balancing act between the Federal Reserve’s monetary policy of balancing inflation versus promoting job growth. At the workplace level, the newly-enacted tax laws give corporations more flexible spending options, including the pressure to raise wages and remain competitive in a tight labor market.
The problem is that the financial media and general public don’t know the political-economic philosophy that is framing this whole analysis and driving the results against converting these new corporate financial gains into higher wages.
The Fed’s long-stated argument is that any hint of higher inflation is detrimental to the capital markets. Similarly, their premise is that wage gains contribute to higher inflation, so the Fed, especially under Alan Greenspan, consistently opted to contain inflation at the expense of any policies that would raise raises.
The best example of the Fed’s policies against promoting wage increases and advancing other social welfare benefits comes from Alan Greenspan. During his 14 year tenure at the Fed and earlier as chairman of the Council of Economic Advisors, Greenspan, who does not have a PhD in economics, helped
Reagan win the election by deflecting Bush’s charges of “voodoo economics.” Greenspan, an ardent proponent of Ayn Rand’s objectivism philosophy of self happiness as the main purpose of life, then embarked on a campaign to cut entitlements, including Social Security, by raiding the Social Security Trust Fund surplus to help pay for deficit spending.
Greenspan, a radical free marketer who denounced the Sherman Anti-Trust Act, also once cheered as his mentor, Ayn Rand, called President John Kennedy a fascist dictator. Greenspan also opposed the minimum wage and regulatory agencies, such as the Food and Drug Administration, which he said hindered corporate operations. But, practices such as price collusion, would be permissible since they would favorably change market condition to favor participating corporations. Similarly, monopolies would be tolerated if they competed since they could maximize efficiency, their use of capital while minimizing costs and prices.
Flash Forward to 2017
There is no doubt of Greenspan’s positive legacy at the Fed and among neoliberals, but his policies are evident today. Wage growth is still stagnant and a New York Times article noted that in 2017, after the Trump tax cuts were enacted, one-time payments consumed 12.7% of total compensation budgets, while raises amounted to just 2.9%. This is the corporate equivalent of telling employees to “let them eat cake.” The tax cut benefits to many employees will be temporal since corporations are loathe to enact permanent pro-employee financial advances. This corporate pattern has continued since the late-1980s.
One reason is that corporations have no incentive to make any wage and benefits increases permanent. Management prefers to minimize making new permanent worker benefits, such as greater 401(k) contributions, since they reduce net profits. As every recession has shown, when unemployment levels rise, management can pay lower wages and treat workers poorly. In an environment of rising or full employment, things change, especially the stock market.
As this Intercept article pointed out, “market watchers have said flat-out that the crash was triggered by a new jobs report released Friday that showed that wages, nearly a decade into the recovery, might finally be starting to rise.”
So a main catalyst for the market volatility is due to rising wages. In this market sequence, analyzed according to neoliberalism, rising wages are bad for the economic system.
For its part, the Fed sets policy to keep its “inflation target” or “inflation objective” under its 2%. And even though this inflation target has not been reached, the Fed (still adhering to Greenspan’s political-economic policies) takes policies to slow down growth, which hurts workers’ wage growth opportunities. Most recently, then-Fed Chair Janet Yellen said the Fed is reconsidering this target rate as a means to stimulate wage growth, even as some academic economists are questioning the link between inflation and unemployment.
Yet as Fed policy incorporates new inflation targets, neoliberal thought is to contain labor costs and keep any wage gains by workers, including restaurant service workers, at a minimum.
This is why the Intercept reporters said: “The recent Dow Jones fluctuations have very little to do with a legitimate fear of inflation. The stock market panicked largely because CEOs and shareholders fear that they’re losing their upper hand over a workforce that’s cutting increasingly into their record profits.”
Limits of Financial Reporting
To explain the market volatility, financial reporters stayed in their well-treaded area of technical analysis, and other market fundamentals that came from brokers, economists and traders. The problem is that these sources don’t understand their own environment and how it shapes their world outlook.
This is not surprising. In the U.S., neoliberalism was sold to the electorate as a form of “common sense,” but with some new interpretations. The philosophy got a footing in universities, corporations and think tanks, as institutions, such as the U.S. Chamber of Commerce, the Heritage Foundation, the National Bureau of Economic Research, American Enterprise Association, as conservative foundations (Olin, Scaife, Pew Charitable Trust) developed and promoted propaganda campaigns, books and even a TV series, addressing the neoliberal agenda directed at the public and corporations.
The philosophy of neoliberalism is based on that individual freedoms that are guaranteed by free markets and trade that creates wide income disparities, minimizes the role of unions, and promotes unfettered consumerism. Its main goal is to redistribute of income and increase social inequality. Its rhetoric stresses individualism (which explains the rise of Libertarians), and it has the power “to split off libertarianism, identity politics, multiculturalism, and eventually narcissistic consumerism from the social forces ranged in pursuit of social justice through the conquest of state power,” in the words of author David Harvey.
In his 2005 book, A Brief History of Neoliberalism, Harvey says “to guard against their greatest fears—fascism, communism, socialism, authoritarian populism, and even majority rule—the neoliberals have to put strong limits on democratic governance, relying instead upon undemocratic and unaccountable institutions (such as the Federal Reserve or the International Monetary Fund) to make key decisions.” This may be playing out now before the American public, yet most financial journalists do not even know neoliberalism exists and hos it is shaping their reporting.