BUSINESS
09/30/2015 07:30 am ET Updated Sep 30, 2015

You Can Ignore This Billionaire Trump Supporter's Prophecy Of Doom

Carl Icahn's video diatribe offers little to aid the economy or the American worker.

Wall Street billionaire Carl Icahn fancies himself a man of the people. He wants to prevent politicians and CEOs from wrecking the economy, Icahn explains in the video "Danger Ahead," because he "grew up on the streets of Queens" and doesn't want to see the public "get screwed again."

His 15-minute video, released Tuesday, offers a dire warning about the calamity facing the country if policymakers do not follow Icahn's recommendations. He's backing Donald Trump for president because his fellow New York billionaire is the candidate most likely to "move Congress" to achieve these goals.

Presumably, Icahn's humble Queens background -- or the fact that he's made over $20 billion pressuring top companies for better returns -- is why we should take his warnings seriously. Judging by the attention his video has received on CNBC and other business news outlets, those qualifications are enough for some.

But while Icahn identifies some very real problems in the U.S. economy, there is little evidence to support his alarmism or his assessment of the root causes of those problems. And his solutions will do little to help ordinary Americans.

Carl Icahn fears we're on the brink of a stock market meltdown that will rival the 2008 financial crisis.
Andrew Burton/Getty Images
Carl Icahn fears we're on the brink of a stock market meltdown that will rival the 2008 financial crisis.

What Stock Market Bubble?

The "danger ahead," according to Icahn, is the bursting of a bubble in the stock market that will rival or exceed the 2008 financial crisis in impact.

The trouble with that thesis is there are no signs of a significant stock market bubble. The price-to-earnings ratio for the Standard & Poor's 500 -- a group of 500 benchmark stocks -- is not much higher than its historic median, and much lower than it was at, say, the peak of the 2000 tech bubble. If there were a real bubble now, that key ratio would be much higher as stock prices grew irrationally out of sync with corporate earnings.

"The stock market boom is a recovery from a huge bust," Adam Posen, president of the Peterson Institute for International Economics, told HuffPost earlier this month. 

Carl Icahn accuses Federal Reserve Chair Janet Yellen of creating a stock market bubble by keeping interest rates low.
Andrew Harrer/Bloomberg via Getty Images
Carl Icahn accuses Federal Reserve Chair Janet Yellen of creating a stock market bubble by keeping interest rates low.

The Fed Is Not To Blame 

Even if the boom were a "bubble," Icahn chooses the wrong culprit. He blames the Federal Reserve's prolonged low interest rates for the "bubble." By keeping rates low, Icahn asserts, the central bank has made it too easy for corporations to borrow money, which they have used to buy other companies and repurchase their own stock, pumping up stock prices. (Trump shares Icahn's concerns about low rates.)

But current low interest rates have actually helped keep financial markets stable by allowing the economy to grow at a healthy rate. If the Fed were to raise rates, that would tend to limit employment and wage growth, effectively reducing workers' disposable income. And that would make it more likely that individual borrowers would have trouble paying off debts and put pressure on the financial system overall. 

"In so much as we're worried about financial stability, a weaker economy and disinflationary pressures are going to make it worse," said Mike Konczal, a financial policy expert at the left-leaning Roosevelt Institute. 

Raising interest rates is a "terrible" way to address financial bubbles because of that unintentional fallout, Konczal added. If a particular financial sector "goes sideways when interest rates are zero, it is not a reason to put millions of people out of work," he said.

A better method for controlling bubbles, Konczal said, is to write and enforce regulations to curb speculation. 

Getting Corporations To Invest Again

Worse still, higher interest rates would do little to encourage corporations to invest their cash in equipment and workers. The trend away from investment and toward shareholder compensation began long before the recent low interest rates. Stockholder payouts, in the form of dividends and stock buybacks, have been higher on average since the mid-1980s, according to Roosevelt Institute research. Over the same period, average corporate investment as a share of assets has declined.

Why did corporations shift focus away from pursuing long-term value and toward creating short-term stock price gains? In the 1980s, activist shareholders -- among them, famously, Icahn -- pressured companies to essentially share the profits with shareholders faster.

Reforms that could help reorient corporations, Konczal said, include decoupling executive pay from share price, regulating stock buybacks and increasing worker say in corporate decisions. 

Greater worker input would likely lead to higher wages, which would drive companies to boost productivity -- whose lackluster growth Icahn laments. When companies are forced to raise wages, Konczal explained, they either innovate to replace their workers with technology, "which is good because it creates productivity growth," or they provide workers with better tools and training to "justify" the higher pay, which also tends to lift productivity.

Bureau of Labor Statistics

A Corporate Tax Holiday? 

Icahn wants to allow corporations to repatriate overseas profits at lower tax rates, supposedly to jump-start growth.

But on its own, bringing home overseas earnings at lower rates isn't likely to boost corporate investment or hiring. A 2011 report by Senate Democrats looked at the impact of a similar one-time tax holiday in 2004. It found that the 15 companies that benefited most actually cut some 20,000 jobs overall and slowed the growth of their research spending.

"If you are running for office, these are probably good bogeymen to take [aim at], but if you are actually serious about making the tax code fairer and making the economy work better for the whole population, they are not," said Dean Baker, co-director of the left-leaning Center for Economic Policy and Research. 

Baker did welcome Icahn's commitment to closing the carried interest loophole, which allows super-rich private equity and hedge fund managers to pay a lower tax rate than many middle-class Americans. Under Trump's tax plan, however, that wouldn't really make much difference. As Baker pointed out, because Trump would also dramatically lower income tax rates, the money managers would still get a sweet deal.

In fact, it's hard to reconcile Icahn's apparent desire to make the economy work better for ordinary people from Queens with his support for Trump. Icahn declares in his video that we need another Teddy Roosevelt to take on today's J.P. Morgans. That doesn't sound like Trump.

CONVERSATIONS