Center for Business and Economic Research - Ball State University


CBER Data Center
Projects and PublicationsEconomic IndicatorsWeekly CommentaryCommunity Asset InventoryManufacturing Scorecard

About

Commentaries are published weekly and distributed through the Indianapolis Business Journal and many other print and online publications. Disclaimer

RSS Feed

Disclaimer

The views expressed in these commentaries do not reflect those of Ball State University or the Center for Business and Economic Research.

Recent

Two Key Economic Lessons in One BillHoosiers face trade-offs and opportunity costs in the wake of SEA1.

Time to Fix Economic Development PolicyAllocating tax dollars to land development won’t cause economic growth.

The Unanticipated Effects of SB1Businesses, governments and households may all feel the effects.

The Stupidest of PoliciesThis whipsawing of tariff rates has unnerved financial markets, which on Wednesday, were toying with a liquidity crisis.

View archives

Top Tags

jobs and employment 261
economics 201
state and local government 188
education 186
economic development 171
indiana 171
budget and spending 145
taxes 144
law and public policy 142
workforce and human capital 139
Browse all tags
Reporter / Admin Login

October 11, 2002

The Long Arm of Wall Street

Those of us who try to convince people that the stock market and the economy are two different things are fighting a losing battle. The unambiguous story of Wall Street is one that Americans have always been able to grasp, whereas the eddies and currents stirred up by the statistical indicators on the overall economy seem, by contrast, as clear as mud. After all, the popular reasoning goes, people who are losing their shirts in the bear market aren't likely to be in a spending mood to help out the economy.

As sensible as that seems, the evidence to support it is meager at best. What economists call the "wealth effect" -- the change in spending habits that occurs when the value of our portfolio changes -- was minimal during the upward phase of the stock market's roller coaster ride last decade, and is likely to remain so during this painful ride down.

There's two things going on that help explain this apparent contradiction. The first has to do with what kinds of people own stocks. Thanks to our country's very low rates of savings, the median amount of purely financial assets held by American households is essentially zero. When you count households, half are net debtors, and the other half have positive balances. The bulk of financial assets are held by a relatively small number of very wealthy individuals, whose fluctuations in consumption are too small to influence the overall total.

Observed behavior also supports the notion that all of us discount, to some degree, fluctuations in our financial wealth. Our portfolios may be valued in dollars, but they don't behave like the cash in our pocket books. Given the volatility in valuation of most financial assets, both the glee and the gloom we experience at the highs and the lows of the market are tempered by the knowledge that tomorrow is another day.

But even if the plunging stock market doesn't cripple consumer spending the way that the headline news stories often suggest, that doesn't mean that it’s not high on the list of policymaker's concerns. The bear market, now more than two years old, has produced plenty of collateral damage, some through mechanisms we're just beginning to understand.

The most direct threat posed by Wall Street's swoon is to business investment. The market's correction has cast a pall on business expansion plans, putting productivity gains enjoyed to this point in the recovery at risk. The continued chill over business spending also has hammered countless Indiana-based manufacturing businesses, who depend on increases in the economy's capacity for their livelihood.

But businesses are not the only ones standing in the line of fire. Over the years of the go-go 1990's, state governments across the country grew addicted to the ever-increasing revenues provided by realized capital gains. The size of these gains continually surprised revenue forecasters, fueling an increased appetite for spending that now proves difficult to control.

Research conducted by the consulting firm Economy.com draws a direct connection between the budget crises raging in state capitals today and the end of the party on Wall Street. The bottom line is that the surprises in revenue are now negative, digging the hole deeper that states must climb out of.

Even more threatening for states like Indiana, who are hoping for a quick return to the revenue growth of old, is the potential impact of loss carry-forward provisions in the Federal tax code. Those could extend the period of sluggish tax revenues well beyond the trough of the market, whenever we reach that point. The threat to the economy comes from the collective efforts of states to raise tax rates to repair their budgets, negating the stimulus of Federal tax cuts.

If it’s any consolation, financial markets abroad are just as sick. That's kept the dollar afloat and put off the stampede of capital out of the country that many still fear. But it’s hard to find a segment of the economy that hasn't been touched by the long arm of Wall Street.

Link to this commentary: https://commentaries.cberdata.org/401/the-long-arm-of-wall-street

Tags: economics, finance


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

© Center for Business and Economic Research, Ball State University

About Ball State CBER Data Center

Ball State CBER Data Center is one-stop shop for economic data including demographics, education, health, and social capital. Our easy-to-use, visual web tools offer data collection and analysis for grant writers, economic developers, policy makers, and the general public.

Ball State CBER Data Center (cberdata.org) is a product of the Center for Business and Economic Research at Ball State University. CBER's mission is to conduct relevant and timely public policy research on a wide range of economic issues affecting the state and nation. Learn more.

Terms of Service

Center for Business and Economic Research

Ball State University • Whitinger Business Building, room 149
2000 W. University Ave.
Muncie, IN 47306-0360
Phone:
765-285-5926
Email:
cber@bsu.edu
Website:
www.bsu.edu/cber
Facebook:
www.facebook.com/BallStateCBER
Twitter:
www.twitter.com/BallStateCBER
Close