On January 15, 2020, Annalisa Merelli writes on Quartz:
The American stock market has been hitting historic highs since 2016, and has started 2020 with new records. On Jan. 9 Donald Trump, who often boasts of the impact of his presidency on stock markets, tweeted:
Donald J. Trump✔@realDonaldTrump
STOCK MARKET AT ALL-TIME HIGH! HOW ARE YOUR 401K’S DOING? 70%, 80%, 90% up? Only 50% up! What are you doing wrong?173K7:47 AM – Jan 9, 2020Twitter Ads info and privacy47.7K people are talking about this
Trump’s comment suggests anyone whose retirement investments didn’t go up more than 50% is investing poorly, therefore not benefiting from the market’s growth. But although the president frequently uses the market’s health as a proxy for general economic well-being, the two aren’t necessarily correlated.
In fact, historical reviews have shown that stock market booms can exacerbate inequality.
In the 1980s, for example, market appreciation resulted in a 2%increase of the Gini coefficient (the measure for income inequality), according to a 2007 paper published in the journal Economics. Over the following decade, strong market growth contributed to a 3% increase.
That trend continues today. Although Americans of any income level can invest in the stock market, the percentage of those who do varies greatly depending on household income. A survey of 919 US residents released today by financial education site Money Crashers found that people with higher income are much more likely to invest in the stock market than lower-income earners. According to the findings, 92% of people earning $250,000 or more invest in the stock market, while less than 30% of those making less than $20,000 do.
It’s not just a discrepancy between very rich and very poor: Middle-income people expressed concerns about the stock market, too, saying they are reluctant to invest because they feel like they don’t have enough savings, they fear losing money, or they don’t have trust in the economy.
As a result of these trends, the market tends to feed inequality, particularly in a time of higher returns: With more money invested in the market, richer Americans grow their treasure chests, while uninvested Americans stay the same.
The discrepancy in market engagement is a systematic characteristic of the US economy. A 2019 study published in the Oxford Review on Economic Policy looked at distribution of corporate equity, and found that the top 20% of income earners own about 13 times more equity than the bottom 60%—resulting in a small percentage of the population cashing in on any big market success.
But markets aren’t bad for inequality, per se.
A 2015 paper by Benjamin Blau, a professor of finance at Utah State University, found that greater market liquidity—that is, a market where investors feel like they can buy and sell rather easily—was positively correlated with decreased inequality. In a liquid stock market, Blau told Quartz, investors are more likely to provide capital to firms, because they feel like they can get out of the investment somewhat easily. This reduces the costs of raising capital from investors by making fundraising easier and faster, which in turn can benefit the bottom line, and result in wage growth.
“A liquid stock market improves wage growth, overwhelmingly to the benefit of the poor,” Blau says. Asli Demirguc-Kunt and Ross Levine’s comprehensive review of studies on finance and inequality, published in the Annual Review of Finance Economics (paywall) in 2009, cites several other studies that found inequality is reduced by easier access to market capital.
But liquidity and size are two independent, if at times linked, factors. So Blau says that his research indicates that when a market grows—that is, when stocks become more expensive—inequality does, too. “The larger the stock market, the greater the inequality,” he says. Conversely, he adds, “if the market goes down, inequality goes down, too.”
Gary Reber Comments:
The market tends to feed inequality, particularly in a time of higher returns: With more money invested in the market, richer Americans grow their treasure chests, while uninvested Americans stay the same.
The other factor is to “speculate” in the market, one must use past savings or be creditworthy to rely on credit. For the vast majority of Americans, they are not in such a position nor a position to risk (gamble) their savings and owed credit obligations. Though millions of Americans own diluted stock value through the “stock market exchanges,” purchased with their earnings as labor workers, their stock holdings are relatively minuscule, as are their dividend payments, if any, compared to the top 10 percent of capital owners. Statistically, stock market wealth is held by a relatively small number of the most affluent. In reality, most Americans don’t have any stocks to their name. In fact, many Americans don’t even have any savings to their name. Pew Research found that 53 percent of Americans own no stock at all, nor have any retirement accounts, and out of the 47 percent who do, the richest 5 percent own two-thirds of that stock. And only 10 percent of Americans have pensions, so stock market gains or losses don’t affect the incomes of most retirees.
The bottom line is this: A highly complex set of laws and exemptions from laws and taxes has been put in place by those in the uppermost reaches of the U.S. financial system. It allows them to protect and increase their wealth and significantly affect the U.S. political and legislative processes. They have real power and real wealth. Ordinary citizens in the bottom 99.9% are largely not aware of these systems, do not understand how they work, are unlikely to participate in them, and have little likelihood of entering the top 0.5%, much less the top 0.1%. Moreover, those at the very top have no incentive whatsoever for revealing or changing the rules.
The system must be reformed.
