The Dow Jones Industrial Average and the S&P 500 had a rough week before Tuesday, falling more than 8 percent from their peaks. You shouldn’t make too much about what the stock market does in a short period of time, so those cries of panic earlier this week are unwarranted.
But big sighs of relief—even if Tuesday’s rally sticks—would also be premature. Whatever stocks do in the coming week or month, the fact is that the economic agenda of President Trump and his Republican allies is destined to fail the wage-earner over the long run. Ironically, the reason why it will fail is precisely that it focuses far too much boosting stock prices; but boosting them through a zero-sum attack on the economic power of American workers. This attack isn’t just a betrayal of populist promises made over the past year by Trump, it’s also bad economics.
Any discussion spurred by the stock market should start by noting that nearly 85 percent of all stocks are held by the wealthiest 10 percent of households, with the top 1 percent holding almost 40 percent (including stocks held indirectly in retirement funds). Nearly half of all American households hold no stocks at all. This might explain why policymakers—particularly President Trump and his Republican allies—are so eager to use the levers of policy to boost stock prices, even as this would do nothing to boost typical households’ living standards.
Policy decisions can nudge up stock prices by either boosting overall growth or by affecting a zero-sum transfer from workers and other stakeholders to stock owners. Nothing done by the Trump administration so far holds much hope for spurring overall growth significantly, but lots of their policies have redistributed economic resources and leverage to corporate owners from everybody else.
Take, for example, the Tax Cuts and Jobs Act (TCJA) that the Republicans passed last December. The corporate rate cuts included in the TCJA provide a one-time boost to stock prices, but the big claims made about the TCJA’s long-run growth effects are clearly bogus. Further, in proper zero-sum fashion, we’ve already seen the Republican plan for how to pay for the TCJA: cuts to spending that benefits low and middle-income families. If these cuts came to pass, even any near-term stimulus resulting from the TCJA would be erased.
The Trump administration has also mounted a full-on attack on the leverage and bargaining power of workers through its regulatory apparatus. Lowlights include rolling back Obama administration rules that expanded the right to paid overtime and protected workers against being fleeced by financial advisers during retirement planning. But the reductio ad absurdum of this attack has surely been a Labor Department ruling that restaurant owners are free to confiscate their workers’ tips.
As a long-run strategy, beating down the rights of workers can boost stock prices, at least to a point. It’s no mystery, for example, why German companies often have lower market values than American firms with similar assets and liabilities (PDF); in Germany the legal and policy regimes make it more likely that workers will be able to claim a reasonable share of income generated by the firm.
However, in the long-run this agenda of tilting the playing field further in favor of corporate owners will surely fail to deliver broad-based growth, and might even fail to deliver higher stock prices.
For example, the biggest boost to workers’ leverage in recent years has been the Fed tolerating steady reductions in unemployment without quickly raising interest rates to slow the recovery. Unemployment has finally gotten low enough that there are some signs that wage growth is firming up, and could even threaten to take a small bite out of firms’ profits in the coming year.
But if the Fed (led by Trump’s new appointees) tamps down workers’ leverage by raising interest rates more quickly, this will harm stock prices by slowing overall growth and by making bonds an attractive investment. In short, rising wage pressure can cut into profits, but the cure for this rising wage pressure—hiking interest rates—might be worse than the disease for many firms.
Finally, there is growing evidence that the relentlessly zero-sum agenda of redistributing economic leverage from typical workers to corporate owners and managers has finally run into its limits. Put simply, low and moderate-income households living paycheck-to-paycheck have to spend nearly every dollar they earn, while rich households don’t. Hence, redistributing income upwards will (all else equal) slow aggregate demand and constrain economic growth.
In the decades leading up to the Great Recession, we papered over this problem and generated demand by lowering interest rates steadily and by spending the gains of stock and housing market bubbles. The past decade of slow growth while interest rates sat at zero much of the time should have taught us that these fixes weren’t sustainable.
A more durable solution would be a policy commitment to restore economic power to low and middle-wage workers along every available margin: macroeconomic, regulatory, labor, international, and tax policy. Such an agenda would certainly boost wages, but it would also likely spur faster overall growth. And if we can think in time horizons longer than a week, it’s probably even better for most stockowners, because it will solve the drag on demand growth imposed by rising inequality. All in all, the more time and attention we all spend obsessing over growth in wages and the less we do over growth in stock prices, the smarter economic policy would get.