Obama and Economics

In his major speech about race earlier this week, Senator Obama talked about more than race. He also complained about the supposedly distressed circumstances of middle-class Americans by referring to “stagnant wages” and a “middle-class squeeze.”

The idea that middle-class people are not much better off now than they were in the past is a piece of leftwing mythology. Economist Brad Schiller does a nice job of exploding it in a recent Wall Street Journal op-ed . I’m more concerned, however, with the causes to which Senator Obama cites the nonexistent problem. According to Senator Obama, “the real culprits of the middle-class squeeze” include “a corporate culture rife with inside dealing, questionable accounting practices and short-term greed.”

Now, I’m not quite sure what “inside dealing” is, but senator may have been referring to insider trading, which is the buying or selling of publicly-traded securities by corporate insiders when they are in possession of material nonpublic information about the value of such securities. Insider trading is illegal under the Securities Exchange Act of 1934, and although a certain amount of such wrongdoing goes on (the murder statute isn’t completely effective in stopping homicides, either), the idea that middle class people are being impoverished because corporate insiders are rooking them on securities transactions approaches the delusional. Only about half of all Americans are even invested in the securities markets, and of these the great majority have seen the value of their investments increase over time, not decrease. They are certainly not being impoverished by insider trading schemes.

As to “questionable accounting practices,” here Senator Obama seems to be referring to the kinds of accounting scandals we saw back in 2002 with Enron and Worldcom. People lost money in those scandals to be sure, but only people who were invested in the securities of the affected companies, not the middle class generally. In any event, the amount of money involved was trivial in comparison to the aggregate wealth of middle-class Americans. For example, suppose whatever problems there are with corporate accounting were much worse than whatever they really are so that a company with the market capitalization of Enron (about $65 billion at its high water mark) failed every year and the total cost fell on the bottom two-thirds of Americans. The bill would be about $32.50 per person, or less than a dime a day. That doesn’t quite make for middle-class stagnation.

How about “short-term greed”? I’m not even sure what this is. As any financial economist can tell you, a rational profit-maximizer will choose the investment that has the greatest present value, which obliterates any distinction between long-term and short-term investments. Yes, sometimes special circumstances exist that lead people to prefer smaller short-term gains to greater long-term ones (Professor Stephen Bainbridge jokes that his 78 year-old mother, who is an avid investor, says that she doesn’t even buy green bananas any more), but these are the exception, not the rule. Moreover, even if a certain investor prefers short-terms gains to long-term ones, in most cases he’ll still take the long-term deal because financial tools exist to allow him to realize immediately the value of the long-term investment. To take a simple example, if you’re entitled to payments of $1,000 per year for twenty years, you’ll have little trouble finding someone in the financial markets who will pay you today the present value of that stream of payments. That, for example, is how the bond market works. In any event, the senator’s reference to “short-term greed” is particularly ironic because some of the companies that are most in trouble today—companies like Countrywide and Sallie Mae—have a business model in which they borrow short-term in order to invest long-term (think of how a bank borrows by taking deposits, which have to be returned relatively quickly, in order to lend for home mortgages, which are repaid over a very long period).

I could go on like this, but it’s apparent that Senator Obama’s identification of the “real culprits” of a nonexistent middle-class squeeze is simply a bit of tired class-warfare rhetoric: Wall Street versus Main Street, the rich versus the poor, the big corporations versus the little guy. What a yawn. A guy with Barack Obama’s oratorical gifts ought to be able to do better.