The Big Debate: How Long Can Wall Street Outperform Main Street?

“The most important issue in economics is growth.” — David R. Henderson (Hoover Institution)

“The stock market and the economy are two different things.” — Milton Friedman

This week, the Nobel Prize Committee in Stockholm, Sweden, awarded three economists (two of them American) for their work in economic growth, how technology advances civilization and our standard of living. I’m especially impressed with the works of Northwestern University Professor Joel Mokyr, such as “The Enlightened Economy” and “The Culture of Growth.”

How important is economic growth? David Henderson says it best: “Economic growth is the reason extreme poverty has become much rarer around the world, life expectancy has increased dramatically and most Americans now own many things that were unobtainable luxuries decades ago.”

This Nobel prize was a good choice because the United States and most other countries (including China) are growing much slower than they used to. Stagflation is once again rearing its ugly head. Is it possible to reverse this trend?

During the Reagan years, the U.S. economy grew at an average 3.5% per year, hitting 7.3% real growth in 1984. Today, we’re lucky if real GDP grows 2-3%. It’s even lower in Europe.

According to Bill Conerly at Forbes, the economic growth rate will continue to slow down in future years, despite the technological boom (see chart below).

Meanwhile, the U.S. stock market is advancing to new highs almost every day, with an annual growth rate of 9-10%.

Investors are ignoring signs of recession — the slowdown in business spending, a weak labor market, stubborn inflation and the trade war. To them, the future looks bright in this second “Roaring Twenties.”

As the chart below shows, there seems to be a growing disconnect between Wall Street (the stock market) and Main Street (economic growth, or real GDP) in the past 10 years.

Prior to 2015, stocks and GDP would grow separately but eventually come back together. In “The Maxims of Wall Street,” I wrote, “Wall Street and Main Street are like a rocky marriage with frequent separations, but never a divorce” (p. 157).

Now, it looks like a divorce, at least for a decade.

In China, the stock market and the economy have been divorced for a long time:

There are two questions about the United States:

1. Will the stock market eventually come back down to earth and match the slower performance in real GDP?
2. Is there any way the magic of 4%-plus growth can return to the good ol’ USA?

Outlook for the Stock Market

There is no doubt that the stock market is selling at a huge premium compared to its historical trends. The S&P 500 Index is selling at 27 times earnings compared to 18 or less a decade earlier.

Clearly, investors are optimistic.

At some point, something has to give — either the economy grows faster, or stocks need to go through a healthy bear market. If President Trump’s trade war worsens, it is doubtful the economy will grow faster during his term in office. The huge federal deficits and growing national debt (what Warren Buffett calls “fiscal folly”) could also be a drag on the economy, offsetting the benefits of tax cuts and deregulation.

It’s hard to predict what will trigger a bear market and the return to normalcy. But as Frank Holmes states, “Everything eventually reverts to the mean” (Maxims, p. 115).

How About Faster Economic Growth?

The other possibility is real economic growth of 4% or more. Is this possible?

Yes, by adopting the four principles of Reaganomics:

1. Stable prices (sound money, linking the dollar to gold or some other stable value).
2. Tax cuts to stimulate the private sector, which tends to be more productive than the public sector.
3. Balanced budget and a gradual reduction in the national debt.
4. Deregulation of the economy. Bureacracy and red tape kills the private sector. This includes a policy of free trade and liberal immigration.

As Ronald Reagan stated, “I believe, this is one of the most important sources of America’s greatness. We lead the world because, unique among nations, we draw our people — our strength — from every country and every corner of the world.”

My Guide to a Growing Economy

The evidence is strong that countries with too much government retards economic growth. For example, government spending in France is 57% of GDP, and government debt as a percentage of GDP is 116%. Not surprisingly, France’s real GDP growth was only 1.2% a year over the past 10 years (2014-2024).

My guidebook, “Economic Logic,” now in its sixth edition, has several chapters devoted to a creating a dynamic, pro-growth economy.

Chapter 17 specifically addresses “Economic Growth: The Role of Saving, Investment and Technology,” that includes a discussion of the dynamics of the capitalist system.

The new edition focuses on the vital importance of the supply-side to promote faster growth: productive saving, labor productivity, technological advances and globalization.

It introduces a major breakthrough in macroeconomics: my supply-side statistic Gross Output (GO)… a powerful four-stage universal model of the economy… a new “growth” diagram… a new diagram of the optimal size of government… and new alternatives to the standard Aggregate Supply and Aggregate Demand curves.

“Economic Logic” is also the first and only textbook to begin with a profit-and-loss income statement to demonstrate the dynamics of the economy. (Supply and demand diagrams are introduced in Chapter 6.) Students love this new approach and enjoy the “logical” approach to studying economics.

To aid students in comprehending the economic lessons, many other disciplines are integrated into the study of economics, including finance, business, marketing, management, history and sociology.

What’s in the New Sixth Edition?

I’ve added a good deal of new material to the sixth edition:

• The introduction of “time prices” as a new measure of economic prosperity in Chapter 1.
• John Mackey’s “stakeholder” model of capitalism has been incorporated into the stages-of-production process in Chapter 3. Moving the production process along requires the cooperation of all economic inputs or stakeholders.
• The pros and cons of bitcoin and cryptocurrencies in Chapter 13.
• The vital distinction between the “make” economy (Gross Output, or GO) and “use” economy (Gross Domestic Product, or GDP) has been added to Chapters 3 in microeconomics and 14 and 15 in macroeconomics.
• Updated discussions on job creation, the labor force participation rate and the recovery after the Great Recession of 2008-09 is discussed in detail in Chapters 10 and 25. Chapter 10 also addresses the labor markets, plus new insights in the minimum wage debate in Europe and America, and the prospects for renewed growth under the Trump administration.
• New government regulations (Sarbanes-Oxley, Obamacare, Dodd-Frank, SEC) following the 2008 financial crisis and the Bernie Madoff fraud, are discussed in Chapter 13.
• The consumption and savings rate patterns of China are compared to those of the United States in Chapter 17. This comparison helps to determine what drives the economy: consumer spending or savings/investment?
• The end of the Federal Reserve’s “easy money” policies of ZIRP (zero interest rate policy) and Quantitative Easing (QE) in 2022 are debated in Chapter 19.
• The tragic story of hyperinflation and socialism in Zimbabwe and Venezuela.
• The introduction and critique of “Modern Monetary Theory” in Chapter 22.
• A discussion of Singapore’s Medisave plan as an alternative to ObamaCare and Single Payer system in Chapter 23.
• Which factor is more significant in the business cycle, Keynesian lack of “aggregate demand” or Hayekian “malinvestment?” See Chapter 25.
• The rise of state capitalism in China is highlighted in Chapter 27.
• A glossary of terms has been updated in this edition.

What Others Are Saying

“Eureka! Skousen has done the impossible. Students love it!
I will never use another textbook again.” — Harry Veryser, University of Detroit-Mercy

“An excellent balance of theory and the real world that no other text has achieved.” — Charles Baird, CalState East Bay

“Better than any book out there! Skousen presents real business economics in a clear, provocative and logical fashion.” — Ian Mackechnie, University of Wales

“Perfect for any economics student — designed to maximize learning while minimizing monotony. Simple, direct and comprehensive.” — K. Au, home school instructor

“My college econ classes, filled with perplexing theories like the paradox of thrift, GDP and Keynesian fiscal policy, were completely refuted by this excellent free-market textbook. Students, if your professors don’t use this text, get it for yourself so you can really understand the concepts of sound economics.” — Amazon review

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The publisher’s retail price for “Economic Logic” is $129.99. Amazon offers the same book for $81. But you pay only $44 with FREE SHIPPING in the United States at SkousenBooks. I autograph all copies.

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Big News! Book Signing and Talk on Veteran’s Day, Nov. 11

I’m excited to announce my first Barnes & Noble book signing, talk and Q&A for my new book, “The Greatest American: Benjamin Franklin, the World’s Most Versatile Genius.”

It will take place at the Barnes & Noble Bookstore on 2418 E. Colonial Dr. in Orlando, Florida, on Veteran’s Day, Nov. 11, at 6 p.m.

This will be my first appearance at a B&N bookstore for “The Greatest American,” and I’d like to make a big splash by having my friends, relatives and subscribers join me. If you live in central Florida or will be visiting Orlando during this time, come on by.

You must reserve a spot for this event at Mark Skousen Author Event.

My Franklin book is different. It’s not a biography, but 80 short chapters on how to apply Franklin’s life and views to today’s hot issues — personal finance, business, government policies and diplomacy. It even includes a chapter that was censored by a magazine (on Franklin’s sex life).

In addition to giving a talk, answering questions and signing books, I’ll be including a RARE Franklin stamp with each book, such as the 1940 “half cent” Franklin stamp, or the 1947 stamp with images of both Ben Franklin and George Washington, one of a kind!

Hope to see you there. If you can’t make it, you can obtain an autographed copy and rare stamp by ordering it at https://skousenbooks.com/.

You Blew It!

Wall Street Open 24 Hours? Please No!

Is there no rest for the weary?

I spent a few days in Chicago and visited the Chicago Board of Trade. Gone are the days when traders shouted bid-and-ask orders in the commodity pits. It was fun to watch, especially in the last 10 minutes of trading, when it was like a war going on.

Computers changed all that. Today, all trades take place online, and there’s nothing to watch.

Technology is always changing our lives.

Now comes a blockbuster. Recently, Nasdaq announced that it plans to eliminate the traditional 9:30 a.m. – 4 p.m. and extend trading to 24 hours a day, five days a week, from late Sunday night to late Friday night.

The New York Stock Exchange has similar plans.

Gratefully, the markets will be closed over the weekend, so I don’t have to worry about getting a text message on Sunday during church that the market has crashed!

Alas, it does mean that the market could collapse at three in the morning while my wife and I are trying to sleep. Heaven help us.

Wall Street argues that increasing demand by international traders is the reason for the change. Cryptocurrencies already trade 24/7, why not stocks and bonds?

Another argument: Around-the-clock trading allows investors to react to breaking news and market events in real-time, which could lead to more efficient price discovery and reduce the risk of large price gaps between the day’s close and the next open.

The change requires approval from the Securities & Exchange Commission. Hopefully, cooler heads will prevail, and we can keep trading hours to traditional times.

Good investing, AEIOU,

Mark Skousen