Whatever happens to the economy – jobs, wages, the hardships so many are facing – the stock market seems to be in a world of its own. Why?
The primary answer is simple. Stock values roughly reflect profits, especially anticipated profits. When profits are expected to rise, stock prices trend upward.
But that only raises a deeper question: How can profits be trending upward when jobs and wages are doing so badly?
Because of a disconnect in the American economy that began way before the pandemic – about 30 years ago.
Before the 1980s, the main driver of profits and the stock market was economic growth. When the economy grew, profits and the stock market rose in tandem. It was a virtuous cycle: Demand for goods and services generated more jobs and higher wages, which in turn stoked demand for more goods and services.
But since the late 1980s, the main way corporations get profits and stock prices up has been to keep payrolls down. Corporations have done whatever they can to increase profits by cutting jobs and wages. They’ve busted unions, moved to “right-to-work” states, outsourced abroad, reclassified workers as independent contractors, and turned to labor-saving automation.
Prior to 1989, economic growth accounted for most of the stock market’s gains. Since then, most of the gains have come from money that would otherwise have gone into the pockets of workers.
Meanwhile, corporations have used their profits and also gone deep into debt to buy back shares of their own stock, thereby pumping up share prices and creating an artificial sugar-high for the stock market.
All this has made the rich even richer. The richest 1 percent of American households own 50 percent of the value of stocks held by American households. The richest 10 percent own 92 percent.
But it’s had the opposite effect for everyone else. More and more of the total economy is going into profits and high stock prices benefiting those at the top, while less and less is going into worker wages and salaries.
America’s CEOs and billionaires are happy as ever, because more and more of their earnings come from capital gains – increases in the prices of their stock portfolios.
Meanwhile, the Fed has taken on the debts many corporations generated when they borrowed in order to buy back their shares of stock – in effect bailing them out, even as millions of Americans continue to struggle.
So the next time you hear someone say the stock market is a reflection of the economy, tell them that’s rubbish! The real economy is jobs and wages.
Source: https://robertreich.org/post/633348633756041216
Comments:
Vvienne Lenk
It’s an amoral entity — And the wealthiest who were awarded their next slice of the corporate socialism pie with the trump republican unnecessary tax cut – has made the wealthy even wealthy. Heaven forbid they should pay taxes for the same roads, bridges, tunnels, waterways, utiltilities, etc. etc. the rest of us use. Heaven forbid they should contribute SOMETHING to the country that made them filthy rich. Heaven forbid they should pay taxes to support the military that protects their vast resources here and abroad. It stinks.
Douglas Alford
The stock market is not a indicator on how the economy is doing, it’s a indicator on how the rich are doing.
Anthony Davis
You’re a blessing, sir, but you’re trying to educate a nation with large parts content on being stupid.
Voidisyinyang
$10 Trillion of FREE FED WELFARE FOR WALL STREET that’s why — just in the past six months. Amazing.
WMalven
LOL!!! “The rich” are backing Joe Biden, Sport, not Trump. Wall Street money is backing Biden 10:1 over Trump. Trump’s campaign money comes from his working class supporters.
Biden is the candidate of the rich, because they know his taxes won’t hurt them, because they can protect their money in shelters. They back him, because they know he’ll open up the borders and they can get all the cheap labor they want and impoverish American workers.
s b
It does no good to offer tax breaks to the wealthy when all they do is turn around and invest these “breaks” right back into the stock market. The people who will put money back into the economy are the middle and lower classes, through purchasing goods and services.
Mark Foster
Open up the Business Loans for these middle Americans to start a business & hire other employees themselves!
FletchforFreedom
In the 1950s there were two recessions and stagnant growth despite the massive economic boom at the end of the war as taxes, government spending and government employment plummeted (which leftist economists insisted would cause another Great depression). Since the 1950s total real compensation has increased steadily and substantially in every decade (the “stagnation” myth having been long debunked and workers have never been better compensated than right now. That is simply a fact.
The 1980s was a period of job creation never before even approached and while the ricj git richer, the “poor” got RICHER. Similarly, in the wake of the Trump tax cuts, not only did wages rise to record highs, unemployment fall to record lows and poverty levels fall to the lowest level ever recorded, but the increase in the standard of living materially exceeded that of the rest of the world.
Sadly, you are one of the economically and financially incompetent Reich drones who have bought into the objectively impossible buyback narrative. Buybacks do NOTHING to inflate a stock price because they simply reduce the company’s cash reserves and outstanding equity SIMULTANEOUSLY. It’s unimaginably stupid (like everything else Reich says) and, if he were right, earnings per share figures would skyrocket … and they haven’t. Another fact inconvenient for the imbecilic like yourself.
Given the poverty level, only a blithering idiot would suggest “We The People go broke”… oh, that explains it. I’m not talking theory; I’m talking (easily backup) fact as anyone can see from my other posts. You haven’t the slightest clue what you’re talking about.
Yes, seriously, people think as I do. Sadly, Reich drones like yourself avoid thinking entirely.
tonerduckpin
I try to explain that to my Republican friends all of the time. They think the entire economy is the stock market. It’s like talking to a fence post.
Mark Hammer
There are two parallel economies: the one in which people make money by having money, and the one in which people earn money via wages. That, in itself, is okay I suppose. The problem arises when we confuse the latter with the former; especially since, as was noted, the latter is pertinent to the largest share of any nation, and the world’s population.
Fifty years from now, I think we will reconsider the social institution of retirement in a different light. Partly because real wages have been frozen in order to benefit the 1% whose livelihood stems from investments, and because the social and economic conditions, that aligned to permit the social institution of retirement in the first place, are falling out of alignment, a chunk of the populace is depending on whatever money they have been able to invest, to support them in retirement. That money – and remember that pension funds represent a big chunk of the market – is NERVOUS, and moves around willy-nilly. If you’re a public-school teacher or a nurse, do you KNOW how your pension fund is investing or what they are investing in? Does that pension fund invest in a socially responsible way or are they simply looking for the biggest ROI to support you in later life? Keep in mind that many of the jobs that Trump promised to bring back, were offshored largely to provide greater ROI to the company’s shareholders.
So, although, yes, the stock market is NOT the real economy in many ways, the social institution of retirement has created a bleedthrough of the making-money-by-having-money economy into the “real” economy. I’m certainly not arguing – especially as a retireee myself – for the abandonment of retirement. But we do need to reflect on how to manage it more effectively, so as to avoid the negative spinoffs.
David Esposito
11% of gdp is capital gains, 5 of that 11 goes to the 1%. They own 40% of all wealth and are on track to owning 50-60% of all wealth in coming decades under current policies.
Razz Matazz
Stock prices are also a function of the money supply (high) and interest rates (low). Who buys bonds when rates are low…only the U.S. Treasury. Everybody else buys stocks and that drives up the prices. The executives buy shares on the cheap through stock options and grants, and sell massive amounts of shares at much higher prices, reaping big windfalls.
Wayne Caswell
CEOs have learned that it’s easier to increase profits by cutting expenses (mostly wages) than by innovating and expanding markets. They also make more personally from stock buy-backs and investments in political influence than by investing in Research & Development.
Ice 9 Snowflake
Something I always notice when I hear “conservatives” talk about jobs and wages is that they seem to believe (or really want us to believe) that jobs and wages are more-or-less a “charity” that the “job creators” bestow upon the more deserving of the common folk when we behave ourselves by not demanding too much in wages or reasonable, safe working conditions. The ideal is to pay little for labor, charge much for living necessities, and get the wage-earners into debt, while putting out propaganda about how their indebtedness and poverty are functions of bad character and disobedience- making them undeserving of better wages or conditions in the first place. It’s the whole, unspoken, Republican economic platform, but at least it’s ‘anti-Communist’.
Chance Robinson
I’ve been posting this information for a long time, but don’t have the platform to get the word out (too lazy). I would add the point that “Shocks” to the Stock Market are simply homage to uncertainty, which provide short sellers the opportunity to rake in a windfall. Thanks to high frequency trading, things usually return to normal for growth stocks within a month, while the indexes lag much longer.
Demetrius Lolos
Ronald Reagan is responsible for this and this won’t last forever. The problem with the stock market is that when it does inevitably crash, the first reaction most companies have is to fire workers to pump up their stocks. We have to make stock buy back illegal again.
Robert Melvin
I agree it started with Reagan and I’m in total agreement with making buy back illegal. However, I don’t know about an inevitable Crash. It’s true that we generally see a 10% downturn lose every year and a 20% correction lose every six years [approx.]; but, through the market continues its ups and downs, the trend line has been going up since the 1890’s
Demetrius Lolos
Currently there are a lot of businesses that operate for no profit. Not only that, but have no plan to become profitable. But they are publicly traded. So not only are stocks way over inflated in value but you have companies who will never turn out a profit. Also, 2008 never ended. We solved 2008 by putting a lot of people in debt. That’s not a solution but shifting the problem elsewhere.
The COVI19 virus will get much worse and at some point there will be no money for stock buy back, unless we want Ultra Inflation. A lot of businesses will permanently stay closed. A crash is inevitable, because we failed to put the burden of 2008 onto the 1%. We can’t force twice as much debt onto people this time around.
Patrick
The stock market is driven purely by speculation by Ivory league mathematicians writing computer algorithms to predict stock prices to make investments and earn huge amounts of money in an George Orwell world. There’s a name for these guys which escapes me at the moment. But it’s a really scary thought when you stop and think about the current situation.
Carl Shoemaker
If money flows into the pockets of workers
It flows back into the local economy right away
Thus benefitting the locals economy
And the local economy grows thereby
Andy Chalkley
The ‘Real Economy’.
Gavin K.
This is how Neoliberalism works. Reduction of labor rights, increase in wealth disparity, and prioritization of the macroeconomic conditions (in a very impersonal, systems-based line of thinking) over the microeconomic repercussions (the financial and social well-being of the grassroots workers who actually make the wheel spin)
May the Science be with You
We can spell it out as much as we want. The selfish do not care. Their latest slogan is that having wealth is not the same as having lots of money. I really want to facepalm every time I hear that. What do those a-holes think we want money for? It’s to be able to buy some wealth of our own. The goal isn’t money, the goal is owning something. Fucking intellectually dishonest greedy assholes. The fact that so many poor and middle class people buy into that bullshit and defend the super rich makes me boil.
It’s not just the rich assholes who are hoarding all the money. Too many poor people would rather step on each other for the slight chance to make it to the top than help each other have an equally good life.
The middle class is so afraid of the poor coming after their money that they defend the super rich, not realizing that the only reason their taxes are so high because the super rich pay little to nothing.
DEL J
This moron, again. You should really strike the word science from your user name until you decide to actually do fucking research.
The top 1% of earners in the US pay more in taxes than the bottom 90% combined. That’s FAR more than the middle class pays. Not to mention that statistically there aren’t even actually that many poor people in the US. There wouldn’t even be any more poor people in just a few years if they weren’t having more kids than every other demographic.
Percentage of people with multiple jobs now: https://www.bls.gov/opub/ted/2018/4-point-9-percent-of-workers-held-more-than-one-job-at-the-same-time-in-2017.htm?view_full
Income now: https://www.bls.gov/oes/current/oessrcst.htm
Work Hour Trend: https://stats.bls.gov/opub/mlr/1997/04/art1full.pdf
Hours worked now: https://www.bls.gov/news.release/empsit.t18.htm
Characteristics of minimum wage workers: https://www.bls.gov/opub/reports/minimum-wage/2016/home.htm
Sixty percent of people in the US overspend on non-essentials: https://www.swnsdigital.com/2019/05/americans-spend-at-least-18000-a-year-on-these-non-essential-costs/
Total real compensation has increased steadily and substantially in every decade since statistics have been kept (no competent economist anywhere still repeats the long debunked stagnation myth). Economists know to use total compensation rather than just wages:
https://fred.stlouisfed.org/series/COMPRNFB
Median incomes have reached $22.70/hr (a record high):
https://www.bls.gov/news.release/pdf/wkyeng.pdf
Unemployment and underemployment were near record lows:
https://fred.stlouisfed.org/series/u6rate
Poverty was the lowest it’s been in 30 years and was approaching record lows:
https://www.census.gov/library/publications/2019/demo/p60-266.html
The poorest among us are the only ones that skew our statistics so badly downward, and that’s ONLY because they have statistically significantly higher birth rates than any other group of people. As individuals, their lifestyles are getting better every generation by leaps and bounds as well, but the fact that we pay them to have children has severely bad consequences for the rest of us, and eventually for them as well.
Birth rate by income in the US: https://www.statista.com/statistics/241530/birth-rate-by-family-income-in-the-us/
Poverty rate vs Child Poverty Rate:
Income and Poverty in the United States: 2018
One percent pay more than bottom ninety percent combined:
https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-rates-and-tax-shares
