Why the Stock Market Had a Terrible Day

The big surprise is why anyone should be surprised the stock market dropped 3 percent today. The immediate trigger was the price of oil moving above $140 a barrel for the first time. A secondary trigger was yesterday's decision by the Fed not to reduce interest rates. (Some conservatives maintain it was the Fed's failure to RAISE them that caused today's ruckus on Wall Street, because global investors took it as a sign they could do better by investing elsewhere than the U.S., which caused the dollar to drop. They're wrong. The recession is the biggest worry for everyone, including global investors.) Another was the implosion of the US autos sector, and additional writedowns by major Wall Street banks.

But behind all of this is the one fundamental fact that economic analysts would rather not dwell on: American consumers are at the end of their ropes. High energy prices have contributed to it, as have high food prices. Consumer confidence is plunging. Housing prices are still dropping, which means the piggy banks of home equity and refinancing are closing.

But without consumers, there's no one to buy all the goods and services we create. Sure, big American companies are doing fine abroad, but foreign sales can't sustain them. Nor can exports. Hence, bond defaults by companies are up. Earnings are down.

What to do? Two things. We need an expansive fiscal policy that stimulates the economy with infrastructure spending -- especially mass transit, levees, and bridges, as well as investments in green technologies.

We also need a more progressive tax system that puts more money into the hands of the middle class and working class -- which will spend it. Economists Thomas Saez and Thomas Piketty have recently calculated that even excluding capital gains, 75 percent of the pretax income growth between 2002 and 2006 went to the best-off 1 percent of American families. Had they had more recent data, I'm sure they'd find the same or more through 2008. But the rich don't and won't put their burgeoning incomes back into the U.S. economy. They don't consume at nearly the same rate as everyone else because they already have most of what they need. And they don't necessarily invest their growing income in America. To the contrary, they invest it around the world wherever it can get the highest returns. And because consumer purchases are slowing here, there's less money to be made by investing here. Full circle.