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The American Voice Institute of Public Policy Blogs the Issues!

Thursday, November 6, 2008

By Joel P. Rutkowski, Ph.D., President

Stock Market reacts to President-elect Obama and Democrat controlled Congress' Socialist Agenda

The stock market was not dramatically affected by Election Day events in recent elections. On the day after the election in 2004, the Dow Jones Industrial Average closed up 101 points to close at 10,137.05. And amid the uncertain outcome of the Bush – Gore contest, it edged down just 45 points, closing at 10, 907.06 in 2000.(1)  On November 5, 2008, the Dow Jones Industrials declined nearly 500 points and the major indexes all fell 5 percent or more the day after Senator Obama was elected the Forty-fourth President of the United States [U.S.] (2). The Dow fell 486.01 or 5.1 percent to 9139.27 at the close of trading. Prior to the election the Standard and Poor's 500 index gained more than 18 percent and the Dow had its best weekly advance in 34 years. (3.)

Investors' concerns about an Obama Presidency are influencing the stock market. Industries such as oil and gas producers, utilities and pharmaceuticals face greater regulation and taxes, while labor unions and automakers are expected to benefit from an Obama administration.  Furthermore, the Democrat Congress next year will attempt to pass regulatory overhaul of banks, insurance companies, hedge funds and the rest of the financial sector. Current market conditions plus best guesses of what's coming is reflected in stock prices. (4) Simply, the decline in the stock market reflects investors reacting to President-elect Senator Barack Obama's promises of tax-hikes and enhanced regulation as well as a lack of leadership in Washington.

On a large portion of the money currently invested in the stock market, President-elect Obama has proposed increases on capital gains taxes.  Individuals that would be subject to higher investment taxes represent nearly 80 percent of total stock holdings. This undercuts the future productivity of the economy, thus hindering future stream of earnings generated by corporate America as well as hurts these individuals' future after- tax returns.  The senator's proposed collective tax punishment is causing the whole stock market to suffer. (5)

Final Thoughts

From various questions asked voters in exit polls, it was determined for 80-90 percent of them economic issues guided their decisions.  However, what can be inferred from this is most voters do not have a very good understanding of economics or the positions of the candidates they supported. (6)  For example, the goal of President-elect Obama and Congress next year is to build an entire new bureaucracy to govern the economy.

The Treasury Department, on November 5, 2008, detailed how it planned to borrow a record $550 billion before the end of this year to back the bailout which was supported by President-elect Obama. As a result of the cost of the bailout and a budget deficit that some believe could reach more than $1 trillion next year Treasury said it would sell $55 billion in bonds next week, including a reintroduction of the three-year note - all part of a massive borrowing effort. (7)

President – elect Barack Obama, the majority in Congress, as well as a majority of Americans lack an understanding of one of the first lessons of economics: the lesson of opportunity cost. The value placed on whatever the same funds would have been spent on (or what would have generated in savings) had they remained in private hands is simply the “opportunity cost,” of government spending. Unless it taxes, borrows, or prints money government can never spend a single cent. Money and resources are diverted from the private sector (the capitalistic economy) to government – in every case. (8)

The intervention of the government will not solve the current economic crisis.  Capitalism, the sole engine of wealth creation and job creation in any economic downturn, is what is need. However, the private sector at minimum will have $1 trillion less to create products, wealth, and jobs causing the nation to go further into a deep and long recession.

A report by outplacement firm Challenger, Gray & Christmas said on November 5, 2008, that planned layoffs at U.S. firms surged to their highest in nearly five years during October, with cuts in the financial and auto sectors leading the way as the economic outlook worsened.  (9) The report said job cuts announced in October totaled 112,884, up 19 percent from September, and cited evidence of widespread economic malaise as troubles that began in housing and banking now were effecting the rest of the economy. And nearly 75 percent of industry categories are cutting more jobs.

October represented the year's worst month for job cuts for several industries, that include food, electronics, industrial goods, manufacturing, consumer products, and pharmaceuticals.

For October, the government is expected to report 200,000 jobs were lost bringing the total to nearly 1 million for this year.  Also seen rising to 6.3 percent from 6.1 percent is the unemployment rate. In the third quarter the U.S. economy declined 0.3 percent.  The reason companies are reducing their workforce is they do not see the economy rebounding any time in the near future. The goal of these businesses is to be more streamlined to meet the challenges that government interventionism and higher taxes will cause to the marketplace.  And before the market recovers the jobless rate will increase to more than 8 percent forecast economists. Furthermore, regarding employment, it could be months before net gains and a decline in the unemployment rate is observed if the economy begins to rebound in the spring or summer. However, this is highly unlikely if President – elect Barack Obama and the Democrat controlled Congress are successful in passing legislation that calls for higher taxes and deficit spending. 

New Deal 2.0

The next Congress with a massive liberal majority has been openly discussing the idea of re-engineering the New Deal for the twenty-first century.(10)  However, this would only thwart economy recovery a new study reveals. Drs. Harold L. Cole and Lee E. Ohanian, two UCLA economists after scrutinizing Roosevelt's record for four years, concluded the Great Depression dragged on for almost 15 years because of the policies of President Franklin D. Roosevelt. (11)

Dr. Ohanian, vice chair of UCLA's Department of Economics said,  "Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump.  We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies." (12)

Drs. Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933 in an article in the August issue of the Journal of Political Economy.

Dr. Cole, also a UCLA professor of economics said, “President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension-reducing employment and demand for goods and services. So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies." (13)

The economists found that only after the Department of Justice dramatically stopped enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks recovery occurred.

Dr. Cole said, "The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes. Ironically, our work shows that the recovery would have been very rapid had the government not intervened." (14)

Unfortunately, for those that voted for President-elect Barack Obama and the Democrats, they were deceived by promises.  And instead of reacting intellectually, they reacted emotionally.  For if they did the proper research on the issue, they would have deduced that the current economic crisis was caused by big government interventionism and that President-elect Barack Obama and the Democrats do not have the right plan to resolve the crisis expediently.  In fact, they   have already proposed five major policy errors that helped turn the 1929 economic downturn into a full – blown Depression.  These are tax increases, protectionism, massive new government spending programs ($1.32 trillion over the next 10 years), empowered labor unions, and crippling government regulation. (15)

Endnotes

  1. Sara Lepro and Tim Paradis,” Stocks plunge anew as recession worries resurface,” The Associated Press, November 5, 2008.


2. Eamon Javers, “Will the election drive the Dow?,” Politico.com, October 22, 2008.

3.Sara Lepro and Tim Paradis, “Stocks plunge anew as recession worries resurface,” The Associated Press, November 5, 2008.

4.  Charles Gasparini, “An Obama Panic?,” The New York Post, October 28, 2008.

5.James Pethokoukis, “The Obama (Stock Market) Discount May Be Real, “USNews.com, October 23, 2008.

6.Steve Ertelt, “Exit Polling Data Shows Barack Obama Win Based on Economy, Not Abortion,” LifeNews.com, November 5, 2008.

7.Martin Crutsinger, “Administration speeding up on economic problems,” The Associated Press, November 6, 2008.

8.Thomas J. DiLorenzo.  How Capitalism Saved America. New York, New York: Three Rivers Press, 2004.

9.    Pedro Nicolaci da Costa. “Planned layoffs jump to near five-year high, “ Reuters, November 5, 2008.

10.Martin Kady II, “ Democrats' plan: New Deal 2.0?,” Politico.com, October 14, 2008.

11.   Meg Sullivan, “ FDR's Policies Prolonged Depression By 7 Years, “UCLA Newsroom, August 10, 2008.

12. Ibid.

13. Ibid.

14. Ibid.

15.Pat Toomey, “Obama's Stock,” National Review Online, October 30, 2008.

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