July 15, 2016 (Prices Byte)

Paul Krugman actually did not make any predictions on the stock market, so those looking to get investment advice from everyone’s favorite Nobel Prize winning economist will be disappointed. But he did make some interesting comments on the market’s new high. Some of these are on the mark, but some could use some further elaboration.

I’ll start with what is right. First, Krugman points out that the market is horrible as a predictor of the future of the economy. The market was also at a record high in the fall of 2007. This was more than a full year after the housing bubble’s peak. At the time, house prices were falling at a rate of more than 1 percent a month, eliminating more than $200 billion of homeowner’s equity every month. Somehow the wizards of Wall Street did not realize this would cause problems for the economy. The idea that the Wall Street gang has some unique insight into the economy is more than a bit far-fetched.

The second point where Krugman is right on the money (yes, pun intended) is that the market is supposed to be giving us the value of future profits, not an assessment of the economy. This is the story if we think of the stock market acting in textbook form where all investors have perfect foresight. The news that the economy will boom over the next decade, but the profit share will plummet as workers get huge pay increases, would be expected to give us a plunging stock market. Conversely, weak growth coupled with a rising profit share should mean a rising market. Even in principle the stock market is not telling us about the future of the economy, it is telling us about the future of corporate profits.

Okay, now for a few points where Krugman’s comments could use a bit deeper analysis. Krugman notes the rise in profit shares in recent years and argues that this is a large part of the story of the market’s record high, along with extremely low interest rates. Actually, the profit story is a bit different than Krugman suggests.

July 2016, Dean Baker

July 12, 2016

Mark WeisbrotThe Huffington Post, July 11, 2016

Dean Baker
Truthout, July 11, 2016

Mark WeisbrotThe New York Times en Español, 8 de julio, 2016

George Will used his column to complain that the Federal Reserve Board is redistributing upward with its low interest rate policy. Since this is a source of confusion that extends well beyond Will, it is worth taking a few minutes to address this issue directly.

The essence of the argument is that low interest rates drive up asset prices like stock and assets, thereby increasing the wealth of people who own these assets. Since the rich own most of these assets, especially stock, the argument is that the higher asset prices are helping the rich at the expense of the rest of us.

Before addressing the logic of this point, it is first worth examining the extent to which asset prices have risen as a result of low interest rates. The pre-recession peak of the S&P 500 was 1576 on October 1, 2007. Since then the market has risen by roughly 35 percent to 2130. The economy has grown by just over 25 percent over the same period. Virtually no one thought there was a stock bubble in 2007. (I warned people about the market at the time, not because of a stock bubble, but rather because I expected the crash of the housing bubble to lead to a severe recession, which the market was not anticipating.)

If the market wasn’t in a bubble in 2007, it’s hard to make the case it faces one today. Also, if there has been a permanent shift to higher profits (which I don’t believe, but many economists claim), then the price to trend earnings ratio would be roughly the same today as it was before 2007.

For those keeping score, the federal funds rate was 5.0 percent in October of 2007 and the 10-year Treasury rate was 4.5 percent. That compares to today’s rates of around 0.3 percent for federal funds and 1.6 percent for 10-year Treasury bonds. If the argument is that low interest rates have given us a stock bubble, the Fed has not bought itself much for its efforts.

Dismayed by the decision to rerun controversial and fraud-plagued presidential elections, the US State Department announced on Thursday a suspension of electoral assistance to Haiti. State Department spokesperson John Kirby said the decision was communicated to Haitian authorities last week, noting that the US “has provided over $30 million in assistance” for elections and that the move would allow the US “to maintain priority assistance” for ongoing projects.

Kirby added that “I don’t have a dollar figure in terms of this because it wasn’t funded, it wasn’t budgeted.” However multiple sources have confirmed that the U.S has withdrawn nearly $2 million already in a United Nations controlled fund for elections. Donor governments, as well as the Haitian state, had contributed to the fund. Prior to the US move, $8.2 million remained for elections.

The pulling of funds indicates the growing displeasure with Haitian authorities’ decision to rerun last year’s presidential elections.

“We’ve made no bones about the fact that we had concerns about the way the process was unfolding,” Kirby told reporters on Thursday. During a July 4 address, US Ambassador to Haiti Peter Mulrean was even clearer: “We had difficulty understanding the decision … to start the presidential election from scratch.”

According to University of Virginia professor Robert Fatton, the withdrawal may be the “typical punishment” for “feeling insulted by the decisions taken by the people in its so-called ‘backyard.’”

“We believe it’s the sound thing to do, the right thing to do, for the people of Haiti in the long term,” Kirby said about the suspension. The Haitian government and electoral authorities have previously indicated a desire to fund elections from its own coffers. 

“We already made ourselves clear: Haiti will make all effort to find the $55 million to do the elections,” presidential spokesman Serge Simon told the Miami Herald. “If no one comes to our assistance we will manage because the priority for us is the elections,” he added.

“Haiti organizing its own elections with its own funds is a very good thing,” Fatton said. While noting that it would not guarantee a cleaner election, Fatton continued “This new reality may finally compel Haitians to blame or congratulate themselves for the outcome, and it represents a small but important step in the country’s recovery of a modicum of its national sovereignty.”

Second-round presidential elections, scheduled for January, were scrapped amid allegations of fraud and increasing street protests. The handpicked successor to former president Michel Martelly had placed first, according to the since discarded results. The US, European Union, United Nations and other donors that make up the “Core Group” in Haiti all endorsed the results as credible.

With no president-elect waiting, Martelly stepped down when his term ended in February. The legislature elected a provisional president from the political opposition – Senator Jocelerme Privert.

Privert, with the strong backing of civil society organizations, local elections observers and a wide swath of the political spectrum, created a verification commission to audit the previous election. The five-member panel found evidence of “zombie votes” — representing hundreds of thousands of votes — as well as widespread irregularities and recommended tossing the results. Haiti’s electoral council, heeding the recommendations, scheduled new presidential elections for October.

European Union election observers, disagreeing vehemently with the decision, pulled out of the country. The Organization of American States (OAS), after initially backing the results, pledged to respect the Haitian-led verification process and new electoral calendar. However the US suspension of electoral assistance may impact the OAS’ ability to continue monitoring the electoral process.

The US provided $1 million to the OAS for its electoral observation mission last year.

Some have expressed concern that the US suspension of assistance could have greater ramifications for the electoral process. “The fact that the US is pulling $2 million from the ‘election basket’ may be a sign that it is prepared to delegitimize the forthcoming elections if the results do not coincide with its interests,” Fatton said.

In 2009, shortly after the coup d’état, the effects of which continue to be felt throughout Honduras, the country’s director of counternarcotics, retired General Julián Arístides González, was assassinated by unknown assailants. Then in 2011, a hit squad gunned down Aflredo Landaverde, another senior antidrug official. Despite much evidence of criminal activity by the Honduran police — including involvement in police brutality, extortion, rape, and sex trafficking and prostitution rings — investigative commissions made little headway. In fact, the Honduran government dismissed all advice from an independent police investigation commission created in 2012, before it was dissolved by the ruling National Party in 2014.

In August 2013, when current president Juan Orlando Hernández was president of Congress, he oversaw the creation of the Public Order Military Police (Policía Militar de Orden Público), a new branch of the Honduran Armed Forces. Since then, corruption scandals and allegations of abuses targeting civilians have continued unabated. The response from the government has been to further militarize law enforcement. In April 2016, news broke that high-level officials in the National Police had been involved in the assassinations of these antidrug officials and that evidence compiled in an internal report had passed through the hands of numerous police and Security Ministry officials without action.

These revelations came on the heels of massive public outcry over corruption scandals in other Honduran institutions, and the Honduran government was quick to create a new police reform commission. But there are reasons to suspect that the commission is really window-dressing aimed at ensuring continued international support.