Stocks, the Free Market, and the Wealth Gap
“The Stock Market,” as represented by the DOW Jones “Industrial” average, now wobbles around 35,000. These days hardly anyone bats an eyelash when the DOW falls (or rises) 500 points in a day. That’s remarkable considering that within the lifetime of many of today’s investors a 500 point drop would have trimmed off more than a fifth of the DOW’s value. (In June 1982 the DOW stood at 2,326.18).
Stop and think about for a minute what that means. From 1982 to today the value of a portfolio of stocks that mimic the DOW has grown by a factor of 15. In other words, a $1000 investment in this imaginary DOW-mimicking stock index fund made in 1982 would now be worth $15,000. Meanwhile, inflation, as measured by the Consumer Price Index, has only doubled. That relatively minor $1000 investment made in an IRA or 401k in 1982 would have 7.5 times the buying power today (minus some income tax paid on the withdrawal from the retirement account).
Has the real intrinsic value of this DOW stock portfolio actually risen by 7.5 times in the last 40 years? Here’s where things get weird. Once upon a time investors paid a lot of attention to something called the “Price Earnings Ratio” (P/E ratio). The ownership of stocks rewards investors in two ways, dividends and share price. The price part of the P/E ratio is the cost of a share, while the earnings part is the profit a corporation pays out to investors as dividends. The Price Earnings Ratio of another (and similar) major stock index, the S&P 500, was close to 8 in 1982. The P/E Ratio today is around 37. This rise in P/E ratio is a pretty strong hint that current stocks are “overvalued”, that is, stock prices aren’t justified by the dividends they pay out.
In a free market, according to the economics I learned in high school, price will rise as demand increases (or supply contracts). In the early 1980s my generation, the “baby boomers” were starting to hitting their stride in the jobs and earnings department. The baby boomers were a bulge in population a portion of which had a lot of self-interested political and economic clout. It should be no surprise that Individual Retirement Accounts (IRAs) and 401k-s, investment vehicles that accrue investment gains without being taxed (until withdrawal), took off in the 1980s—just as “the Reagan Revolution” got underway.
Someone pointed out to me decades ago that stock values were bound to rise over the long term simply because the baby boomers were destined to bid up stock values. I wasn’t smart enough to notice that IRAs and 401k-s were a made-to-order accelerant of this trend. After all, my parents grew up during the 1929 Crash and the Great Depression that followed. They were leery of stock investments. What money they had was stored in bank accounts drawing interest that barely kept pace with inflation. Retirement was based on social security and pensions—both of which stopped at death and neither of which build wealth that could be passed on to the next generation.
Now step back and think of everyone who stood at the investment starting line in 1980. Modern-day Republicans would like you to see everyone standing there with no racing handicap, everyone with an equal chance in the race. In fact, that is horse manure. Some entrants in this wealth race came to the starting line with familial wealth behind them that dated back generations, some came with an education supported by the GI Bill, some came who had been excluded from the GI Bill, some came with equity in a home, some came from families that had been restricted to red-lined neighborhoods where home equity didn’t grow.
Given the variety of handicapping at the starting line in 1980, some were able to scrape together enough to fund food and shelter, some scraped together a little to put in an interest-bearing bank savings account, and some were able to make use of the newly popular investment vehicles, the IRAs and 401k-s. Between the population bulge of the baby boomers and the tax free investment vehicles at their disposal demand rose for ownership of stocks. To mix metaphors, the stock wealth multiplier train left the station—and a whole lot of folks were left behind wondering what happened—and increasingly bitter and guarded. Those who were still running the race in 2008 and were almost in reach of the investment train got swatted back as their investments both in their homes and the stock market cratered. Meanwhile, those who made money by managing money demonstrated by the bank bailouts that they were untouchable, that we really aren’t all in this together.
Today’s vast differences between workers’ wages and CEO’s salaries and golden parachutes is just the tip of the iceberg of disparate wealth fueled by a stock market that bears no resemblance to the lives a great many people live.
In this midst of this inflationary wealth spiral for some Republicans have worked hard to make the effects even worse by cutting taxes for the wealthy and slashing estate taxes, making it ever easier to accumulate wealth and pass it on, even as they rely on culture war rhetoric to maintain their minority power.
Keep to the high ground,