We’re already all hearing quite a lot about the economy. We’re supposed to be very concerned about it. After all, what will we do if the economy tanks?
Surprisingly, more or less the same thing we’re mostly all doing right now, believe it or not. Because the thing is: you are not important to, nor are you truly a part of, the economy.
Oh, sure, you’re a part of it, in as much as your tiny income spent purchasing things contributes to a small part of the flow of money. You’re just not a part of it in that you actually get any of the benefits, really. You see, you’re important in supporting it, but it isn’t there to help support you when things go pear-shaped.
Allow me to elaborate.
When the US economy is doing very well, that means that the businesses are doing very well. They’re bringing in more money than they’re spending to sell the products and services and goods that they’re producing. When that happens, the market goes up and businesses are valued at higher and higher levels and so stock prices are high, etc.
This doesn’t really effect you though, unless you own part of the economy. You probably don’t. Not really, anyways.
To quote the New York Times:
“A whopping 84 percent of all stocks owned by Americans belong to the wealthiest 10 percent of households. And that includes everyone’s stakes in pension plans, 401(k)’s and individual retirement accounts, as well as trust funds, mutual funds and college savings programs like 529 plans.”
Gallup reports that about 55% of Americans report owning stocks.
So what? Well, putting those numbers in context isn’t difficult. It means that 55% of Americans, roughly, report owning stocks. It also means that 10% of those are the wealthiest families and they own 84% of the stocks. That leaves 16% in the hands of everyone else, who are only 45% of the population.
Really what that means is that aside from the 10% of richest households, the remaining 90% of Americans own around 16% of the market. That’s nothing!
It’s also important to remember how these polls work. Gallup went out and asked a bunch of people “Hey, do you own stock? Yes or no?” And a lot of people who own like, $100 worth of stock in Robinhood answered “Yes” because they own stock. They just don’t really own that much. So while 55% of the country supposedly owns stocks, that number is potentially kind of misleading.
However — if we continue on with these numbers from reliable sources and don’t think much of how precisely accurate they are, we still wind up at a pretty dismal conclusion. Most of us Americans don’t really own a part of the market.
That means that when the economy is doing awful — when stock prices are down — most of us aren’t getting hit with that. It doesn’t effect us in the same way it effects the wealthy and the powerful.
Now, there’s something else to be considered which is this: if the economy is doing poorly and businesses aren’t making much money and their valuations stink, won’t they fire people?
Yes! That effects us greatly! Apparently Goldman Sachs is estimating 30% unemployment soon.
The argument that we’re going to start hearing (and I’m sure if I did a Google search, the argument that is already being made) is that we need to prop these businesses up. After all, they are the employers and if they lose money they’ll have to fire employees. That’s no good for anyone.
This is Reagen-omics all over again. If the government dumps $1 Tn into the equities market to help bolster the stock market, which they’ve already done, then that money doesn’t really help any of us.
The way modern publicly traded companies work is that they return their money to shareholders. This is why American Airlines is going bankrupt: they gave all their profits away to the people who owned their stock and now they don’t have any money in the bank for a rainy day.
What are they doing about it? They’re going to fire a bunch of people.
That’s no good! The obvious solution would be to throw the $60 Bn at them that they’re asking for, right? If we give them the money they’ll spend it on keeping people employed.
Except, that’s not what will happen. That money will be reflected in the share prices, which will lead to profits for the shareholders when they decide to sell (or hedge, or whatever), and it will be returned to them in dividends should they hold on to it.
What won’t happen is that the airlines will suddenly have this big bundle of cash and invest it in their employees. They’ll still find a way to lay off workers. They’ll find all sorts of ways to up the ticket prices for consumers already hit by a downturn in the economy. They certainly won’t raise wages or offer better benefits.
The same is true of any bailout package that includes publicly traded companies or equities.
We’re expected to believe that this time if the government showers tax dollars on companies who need it to continue operating, without strings, that they’ll do what they’ve never done before and use it like they said they would.
Sometimes I’m told I’m being presumptuous. Maybe things will be different this time, people suggest. Perhaps all those big bailouts of the past taught all those companies a lesson and they’ll do “the right thing” this time.
And like yeah, I hear you, it would really suck to be those 500 CEOs of the Fortune 500 who have all collectively decided that they won’t be assholes this time and will focus on keeping their employees and stuff, instead of returning that value to shareholders, and then you hear people like me saying mean things about you. “Why don’t you believe us?” They’ll ask. And all I’ll have to point at is a long history of the exact opposite happening and they’ll have been totally and unfairly treated because I didn’t believe that they’d changed this time.
The odds of that being the case, though, are like, exceedingly slim.
It’s also a dumb thing for those CEOs to do because at the end of the day, modern corporate theory is that the CEO’s fiduciary duty is to their shareholders, not the employees. So not only would I be expecting these people to do something they’ve historically never done before, I’d be expecting them to also disregard what is more or less their job description.
Good luck with that.
We do have a problem though. While you and I, dear reader and beloved comrade, may not be part of the economy in the important way — the way in which we reap the benefits of an upturn in the market — we’re a part of the economy in which we all get boned when there’s a downturn.
And this is kind of a whopper of a downturn …
All I’ve managed above is to highlight the fact that bailouts to giant businesses, without strings attached, don’t work. They only increase the wealth of the people who own those businesses to begin with, and most of us don’t do that.
When the S&P 500 drops 1,000 points, our bank accounts are the same. When it goes up 1,000 points, our bank accounts are the same. We do not need to worry about the stock market numbers, you and I.
So, if the solution that is presented is to try to raise the value of the stock market, you should immediately be wary. This will not help you.
What are some solutions? One would be to attach some strings to those bailouts. Clearly there is already a system in place whereby the government can somehow magically throw massive sums of money into the equities market so utilizing that system might be a good idea for the sake of expedience. There do need to be terms attached, however.
Why not make it a requirement that any business which receives emergency funding during this crisis must maintain their workforce at levels equal to what they were a month ago, before the crisis started, and they must not lower wages, nor cancel benefits. Period. No goddamn exceptions.
What would happen in that event is that the stock prices probably wouldn’t change much, if they didn’t decrease. Why? Because the market takes information and incorporates it into a business’ stock price. If the news is that they can’t start firing employees to maintain or increase their share prices, thus benefitting their stock holders, then the price won’t go up.
That looks bad on a chart. “We threw all this money at the markets and yet the prices haven’t gone up!”
But it’s not the prices we need to worry about — it’s the wellbeing of the employees. It’s job security. It’s unemployment figures. it’s people’s ability to continue living in their homes.
The argument against strings attached to the bailouts is that it hamstrings a business’ ability to run itself according to the demands of the market. The thing is though, we aren’t in a market with demands anymore. This is not business as usual. This is an exception to the rule and it needs to be treated that way.
If the market was as wonderful and perfect as it was a month ago, before all of this, when our beloved leader was bragging about it, then it will be the same afterwards. Nothing about the market fundamentals have changed, have they? The only thing is some people can’t go in to work because they might spread a disease and kill people unnecessarily.
Once we can all go back to work without fear of spreading a disease, everything should be exactly where we left off, no?
In essence, the price of the stock market, the value of the American economy, is (and has been for a long time) decoupled from the realities of a staggering majority of Americans. If we are to have a solution, it cannot be to get that value back up to what it used to be, while the actual reality of the situation for everyone is drastically different.
I intend to write more about potential solutions¹, but what I can say with absolute certainty right now is that if we continue to think of the stock market or the GDP as the measure of the healthiness of America, we are doomed. If the government’s response will get the stock market back up to where it was a month ago, but 30% of America is unemployed, that’s not a real solution.
We need different metrics, and we need to be measuring different outcomes, to solve this crisis. At least, if we take for granted the premise that the economy was healthy before this started, which I don’t, but that’s another story.
For now, the takeaway here is simple: if anyone is pitching a plan that is more focused on fixing “the market”, “the economy”, or “stock prices”, then it is absolutely not a plan to help actual Americans — it is a plan to enrich the small percentage of the population who actually owns those things.
Think about that. It has many implications.
¹ Because yes, I get it, just being negative about the “solutions” being offered isn’t particularly productive. I still think the most reasonable solution is some simple strings attached to every single bailout, although who enforces those and whether they’d choose to enforce them ex post facto is a really depressing question to ask yourself.