Home > Uncategorized > The stock market plunges, a major blow against inequality!

The stock market plunges, a major blow against inequality!

from Dean Baker

The stock market tumbled by 2.0 percent on Friday. Given that the top 1.0 percent hold a grossly disproportionate share of stock wealth, this means they took a big hit. Are we more equal as a society now?

Those who like to focus on wealth measures on inequality would have to say yes. And if the market continues to fall (not a prediction, but it certainly is possible that the correction will continue) then we will see further gain on the inequality front. Suppose it falls 30 to 40 percent, bringing price to earnings ratios closer to historic averages. Will the country then look much different than it does today?

I’m inclined to say no, at least if the distribution of income has not changed. To my view, the major story on inequality over the last four decades has been the more than doubling of the share of income that goes to the 1.0 percent, from less than 10 percent in the 1970s to slightly more than 20 percent today. The top 0.1 percent have been the biggest gainers in this picture.

Wealth has not always followed the same pattern, since so much of the wealth of the rich is tied up in stock. We had two big plunges in the stock market during this period, 2000 to 2002, when it fell by more than half, and again between 2007 and 2009. It’s hard to see how the poor and middle class were doing any better at these troughs in wealth (2002 and 2009) than they were when wealth was at its peaks before the crashes.  It’s not even clear there were any relative gains. Bill Gates and Warren Buffett surely had no problems buying whatever they might have desired in 2002 or 2009.

Apart from the sharp fluctuations, the meaning of wealth as a measure of inequality is problematic. Wealth does in principle give its holder claims to the economy’s resources, but there are some important issues here. Suppose the richest one percent decided to spend their whole income this year, next year, and the year after, as opposed to saving 20 or 30 percent (something like estimated savings rates).

There is no economic reason this could not happen. It would increase demand in the economy, possibly leading to inflation and higher interest rates, but there is no doubt they would be able to buy goods and services that corresponded to their income.

Suppose the rich decided to spend 100 percent of their wealth over the next three years. This would mean a massive selloff of stock and bonds. This selloff would cause the value of these assets to plummet, which means that the wealth they would be able to translate into goods and services would be hugely less than their wealth was before the selloff. Of course any individual rich person probably could dump their assets without affecting the whole market, but if we’re talking about a class, this is not true.

For this reason, I think those concerned about inequality should keep the focus on income, not wealth. It’s fine to celebrate Friday’s drop in the Dow, but this is not going to help people in the middle and bottom unless they see gains in income shares, even if though their wealth share has risen.

  1. February 4, 2018 at 1:06 pm

    HUD suffered a $6 billion cut and the Low Income Housing Tax Credit program was also slashed. Public housing should be a priority and not a frivolity or an excess. Public policy is different than a sledgehammer and a wrecking ball!$5 trillion was given to households earning over $1 million. The 1% receive a gift of $207K per household up to 2027. Hypocrites do not tell the truth but lie and deceive and decry truth-tellers as losers and haters! Paul Ryan in the tradition of normalized conflict of interest received millions from the Koch brothers! Don’t let the GOP hucksters steal everything before the next election!

  2. February 5, 2018 at 4:49 am

    I agree with Dean Baker that “those concerned about inequality should keep the focus on income, not wealth.”

    The problem with focusing on wealth inequality is the way “wealth” is measured. Adding up the amount of cash that people have stashed away is the easy part. The only way it is possible to measure the wealth of those who are quite a bit richer than everybody else is by noting the current market value of the property/assets they own.

    That is all well and good, but the price that a single individual could get for her assets if she, alone, were to sell them on the market is quite a bit different from the price that all owners of such assets would get if all of them were to try to sell them on the market.

    Most advocates for poor people decry wealth inequality for good reasons, but those who argue that wealth should be taxed directly to lessen wealth inequality (instead of just income) seem unaware of just how problematic that idea is.

    What they are actually advocating is that certain measurements of wealth ought to be taxed (i.e., the market price of assets should be taxed). That such a plan would be difficult to execute, given the volatility of prices in the asset markets, is one very practical reason to look for another way to reduce wealth inequality.

    But why even go in that direction if you can see that measured wealth inequality is a direct consequence of income inequality?

    If you can successfully steepen the progressivity of the income tax’s top marginal rates and eliminate loopholes, you will ultimately be fantastically successful in reducing wealth inequality.

    The reason for this: if you reduce the amount of disposable dollars that all rich people have available from one year to the next, it is going to force down the market prices of all the assets which constitute the majority of a rich person’s calculated ‘wealth.’

    That is precisely what happened throughout the 1930’s and 1940’s in America after Congress dramatically raised the top marginal tax rates on income that rich people had to pay. Yes, the richest people in the economy still owned all the assets that were available for sale in the stock market, but the prices at which they were bought and sold were much lower simply because rich people had fewer dollars “coming in” that they could throw at the asset markets.

    The predictable drop in asset prices that would occur, if marginal income tax rates were made much more steeply progressive, would result in a dramatic reduction in wealth inequality for precisely this reason.

    Kudos to Dean Baker for this post.

  3. February 5, 2018 at 10:37 pm

    I never understood why labor is taxed but, much less so, passive and inherited assets. This comment helped. The ’30s and ’40s had a Great Depression and a World War to bring about that wholesale asset devaluation! It ought not take tragedy to tweak the tax code.

    • February 6, 2018 at 12:35 am

      The ’30s and ’40s had a Great Depression and a World War to bring about that wholesale asset devaluation! It ought not take tragedy to tweak the tax code.

      It (asset devaluation) ought not, and in actual fact would not create am economic tragedy (high unemployment) if the money that the government collected from rich people was immediately pumped into true economic investments: improvements in infrastructure, human capital (health and education), etc. at sufficiently high levels that all unemployment was eliminated.

      That is pretty much what happened in the 1940’s when stock prices remained under the historical average even while the economy was experiencing a relentless productive boom due to high levels of government spending:

      So, not to worry…

      • Rob Reno
        February 7, 2018 at 12:14 am

        I’m jealous James! How did you get a picture in there? Did you sneak an tag in their and link to some server somewhere or what?

      • Rob Reno
        February 7, 2018 at 12:16 am

        Figured it out James ;-) Good job.

    • Rob Reno
      February 7, 2018 at 12:38 am

      I must have missed something. I still don’t understand,

      why labor is taxed but, much less so, passive and inherited assets.

      I can’t see any justification for treating one source of income preferentially over another other than they have the political power to rig the tax code to treat their income preferentially. The argument they are the job creators is BS in my view. They just had the wealth to throw at lobbyists influencing politicians who wrote the tax code to benefit the special interest with the most money to donate to their campaign. But I’m open to a reasonable justification if there really is one.

      • February 14, 2018 at 10:13 pm

        You must have miss the parenthetical comma. I am saying the passive income – rents – get favorable treatment over labor. I think we agree.

      • Rob Reno
        February 14, 2018 at 10:23 pm

        I knew that I just didn’t do a good job at expressing myself. You said it better than I. Yes, we agree.

  4. Edward Ross
    February 9, 2018 at 12:04 pm

    Rob Reno “why is labour taxed but, much less so, passive and inherited assets.”

    your explanation of the rort in the system is something that the average man in the street can see and it is what makes him so distrustful of academics and politicians. further it generates a fear of his struggle to survive will get worse, combined with an apathetic attitude because he feels impotent to voice his concerns. This is why I have long argued that the public of all ages need to be taught how to think and then given the confidence to challenge an economic system that penalizes them.

    To support this assertion I remind the reader of two important quotes. The first is

    “The movement to empower the individual began with the Greek philosophy, continued with the enlightenment and led to political and social reforms that empowered ever wider segments of he population. That movement has ground to a halt and is reversing largely unnoticed: the elites have done away with the idea of a liberal education that would empower the population by givih them an understanding of social and political realities. Instead we have what is essentially vocational training.” Claude Hillinger Piktty’s Capital in the Twenty- First century edit Edward Fullbrook Jamie Morgan.212

    The second is:
    “Today this task (to guarantee square equality)means that our state and National governments should free themselves from the influence and from the sinister control of vested invested interests… today, large business interests frequently control and corrupt the men and methods of government for their own interests. We musts expel these interests groups from politics.” (Roosevelt, 1901). p 122 Piketty’s Capital in the Twenty First Century

    Here in my opinion from experience in the world of ordinary of people, addressing these issues could tern a passive public into a strong force for change. As for the theorists I believe this is where they should begin their study and observation before constructing theories in what amounts to an isolated ivory tower.

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