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Stock market resumes fall amid growing worries about economy

An interview with Masao Suzuki
By staff |
March 2, 2018
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Masao Suzuki is a leading member of the Freedom Road Socialist Organization (FRSO) who follows the economy. Fight Back! interviewed him on March 1, after another drop in U.S. stock market.

Fight Back!: Earlier in February, when the U.S. stock market lost 10% of its value, some people were saying that this was the dawn of a major economic crisis. What do you think?

Masao Suzuki: Large declines in stock prices have gone hand-in-hand with economic crises. The best-known example was the famous stock market crash of October 1929, which ushered in the Great Depression of the 1930s.

But the October 1929 stock market crash took place after the economy had already entered a recession, which began in August of 1929. The biggest one-day fall in stock prices in October 1987 did not happen during a recession, but while the economy was still growing. The recession didn’t start until almost three years later, in July of 1990.

Fight Back!: So are you saying that the stock market doesn’t really matter that much to the real economy that actually produces goods and services?

Suzuki: I wouldn’t say that. A continued fall in stock prices could affect the economy in at least three ways. First of all, almost all stocks are owned by the households in the top 20% of the income distribution. These households earn half of all income and do a lot of consumer spending that makes up two-thirds of the economy. If a big fall in stock prices leads these households to cut back on spending to save more, this would be a major drag on the economy.

Another way that stocks could impact the economy is through the housing market. Sales of new homes have fallen the last two months in a row, and rising interest rates will slow future sales. A big fall in stocks could hurt people’s ability to come up with down payments to buy a house, which could further slow the housing market. Large drops in housing construction helped to trigger both the 1990 and 2007 recessions.

Last, but not least, the high-income individuals who own most stocks are the same people who control large corporations. If they become more pessimistic because the stock market is tanking, this could lead to less corporate spending on structures and equipment. This is what led to the 2001 recession, when business investment in servers, routers, fiber optic cable, computers, etc. fell following the dot-com bust.

Fight Back!: So how worried are you that a continued drop in the stock market could lead to another depression?

Suzuki: What worries me more than the stock market is that in the 1930s, then-president Herbert Hoover and his Republican Congress and Wall Street cabinet followed a business-friendly policy that actually made the depression worse. The term “trickle-down” was actually first used in 1932 to describe these policies. The next recession could come with Trump in the White House and Republicans a major force in Congress, even if they lose their majorities in the 2018 midterm elections. The Trump and Republican tax cut is nothing but trickle-down. I fear that we could see a repeat of Hoover’s trickle-down economics that could help push the next recession into a depression.