The antidote to economic anxiety is better government

The stock market will recover. Whether jobs and pay will come back for most people is less certain

August 25, 2015 2:00AM ET

Sharp recent drops in the U.S., Chinese and European stock markets and the large crowds drawn by two very different men seeking to be president, Sen. Bernie Sanders and Donald Trump, point to the same issue: widespread economic anxiety.

Government policies — and to some degree, technological changes — are creating tectonic shifts in the global economy, in which we can observe a few gigantic winners while most strivers get little for their labor. Social unrest is on the rise in China and Europe because of wage cuts and job instability. That induces continual anxiety, occasional fear and, at the moment, outright panic among heavily leveraged hedge funds and other stock traders.

Although the news coverage is clamorous, the stock market will recover. Monday’s sudden stock market drops from Beijing to New York simply reflect the leverage of high-speed traders, many buying shares with $30 of borrowed money for every $1 of equity. With that much leverage, panic easily sets in when stock prices become volatile.

Encouraging this reckless behavior are the near zero interest rate policies of the Federal Reserve and other central banks. Artificially low interest rates decrease the costs of speculation and encourage frothing the market for quick profits, enabling traders and their clients to accumulate money without creating wealth.

This scenario is entirely preventable: If the government limited stock trades to ban or minimize borrowed money, there would be less speculation and less instability. In the long term, stock prices would move in greater accord with the profits and expected profits of each company.

But politicians everywhere listen intently to the traders, who call for continued easy credit and little regulation, asks accompanied by campaign donations that drown out proposals by those of us who argue that sound regulations promote wealth creation, growth and stability.

To lessen widespread economic anxiety, the political donor class must support electable candidates committed to balanced government economic policies.

On another level, we can see how economic worries — especially pay and job security concerns — are arousing voters of all political stripes, especially those in their prime working years and those who have families. It makes sense: My analysis of 2013 wage data shows, adjusted for inflation, a $79 decline in average pay compared with 2012 and a $508 real decline from 2007.

Those turning out to hear Sanders and Trump may not understand the economics of aggregate demand and the government policies that prompt their anxiety. However, they do know that 35 years after Ronald Reagan won the presidency with promises that lower income tax rates and the handcuffing of government regulators would make America prosper, the results are dire: falling incomes, flat to falling wages except at the very tip top, a severe narrowing of asset ownership, slow job growth and job insecurity — all while the rich get ever richer.

Thus while Sanders and Trump draw people with very different perspectives, in many ways their underlying appeal is similar. They both speak to anxieties about jobs, pay and Social Security, even if they propose divergent solutions. Sanders, 73, promotes democratic socialism, under which government regulates business for the public benefit and provides education, more Social Security and other services that reduce individual economic vulnerability. Trump, 69, promotes a government that would block offshoring jobs, round up undocumented immigrants in the U.S. to open more jobs to Americans and protect Social Security and Medicare benefits to reduce the individual economic vulnerability of citizens only.

Numerous polls show broad agreement across the political spectrum on economic issues that vex people. Vast majorities want to increase Social Security benefits, reduce offshoring of jobs, close corporate tax loopholes and impose higher income taxes on those making more than $1 million annually (a position that even millionaires favor).

This broad agreement means that except for those in Congress who would block it, plenty of room exists to build a larger, more solid American economy. As the chart below shows, the U.S. economy is performing well below its potential. Gross domestic product (the total output of goods and services by business, government and nonprofits) is running at less than 97 percent of capacity. For this year alone, that’s $512.4 billion less output than we could have.


The biggest reason the U.S. and European economies have not fully recovered from the 2008 economic meltdown is official austerity. Under President Barack Obama, the budget deficit has been reduced by about two-thirds, which is not good for easing economic anxiety.

Past American recessions, including the one Reagan encountered shortly after taking office in 1981, were fought with big increases in government spending that sent cash flowing through the economy. But under Obama, the Republicans fought any stimulus. To get any funds at all, he agreed to use 40 percent of what was approved on small business and other tax cuts, which in the short run are inherently anti-stimulus. (On the other hand, President George W. Bush gifted Wall Street with such huge infusions of cheap money that the too-big-to-fail banks have increased their share of the banking market, adding instability.)

Also, while the U.S. has enjoyed a record of 65 straight months of job growth under Obama, it has not yet wiped out the losses for prime age workers, those 25 to 54 years old. Consider that in December 2007, when the last recession began, 80 percent of prime age workers had jobs, a number that fell to 75 percent in early 2009 as Obama took office. The most recent data show that 77 percent of prime age workers are employed. That means not much more than a third of the decline has been undone. At current job growth rates, it will likely be several years until we return to that 80 percent figure.

The stock market will recover in time. If you have a stable income and money saved, the time to invest is when prices are down, which is now and probably for the coming weeks or months.

But whether jobs and pay will come back for most people is not at all certain. And while the crowds turning out to cheer Sanders and Trump both want to improve their economic circumstances, the choices offered by these two men — neither of whom has a chance of living in the White House — point to very different government actions to relieve that anxiety. Continuing current policies will worsen that anxiety, which means we must get the political donor class to see beyond its self-serving interests and support electable candidates committed to balanced government economic policies.

David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal,” “Free Lunch” and “The Fine Print” and the editor of the new anthology “Divided: The Perils of Our Growing Inequality.”

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy.

Find Al Jazeera America on your TV

Get email updates from Al Jazeera America

Sign up for our weekly newsletter

Get email updates from Al Jazeera America

Sign up for our weekly newsletter