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Progressive policies may hurt the US stock market – not a bad thing
Implementing necessary economic reforms will produce a stock market decline – Dean Baker

Recently we saw the media becoming terrified over a US stock market plunge, following an escalation of Trump’s trade war with China. There are some good reasons to be concerned about Trump’s ill-defined trade war and his reality TV tactics, but the stock market plunge is not one of them.

New York Stock Exchange building (Source: Flickr cc)

While the idea that the stock market is a measure of the health of the economy permeates news reporting and popular understanding, it has no basis at all in economics. The stock market is a measure of the expectations of future profits of companies that are listed in the exchange. It is only coincidental when it provides information about the health of the economy. It is important that the public understands this distinction as the US 2020 election draws closer.

The basic logic is simple. The price of Microsoft, Boeing or Pfizer stock is not going to rise because the workers are getting pay increases or because they can take longer vacations. However the price of these companies’ stocks will rise if investors believe that events will cause their profits to be higher. That’s the end of the story.

This is why the Trump tax cut was good news for the stock market. Investors were not passing judgment on whether lower corporate tax rates would mean more rapid economic growth. They were betting that if companies paid less money in taxes, then there would be more money left for shareholders.

When we hear Trump boasting about the stock market rising on his watch, he is essentially saying that taxpayers are giving more money to shareholders, thus making shares more valuable. It is not a measure of the health of the economy. The public needs to recognize this simple logic, because Democratic Party members are proposing a number of policies that are likely to hurt corporate profits and therefore will lead to lower stock prices.

For example, most of the Democratic presidential candidates are advocating strong measures to address climate change. These measures will almost, by definition, mean that there will be a sharply lower demand for both oil and natural gas. This will therefore mean sharply lower profits for a major sector of the economy, which will surely depress the stock price of fossil fuel companies.

In the same vein, a majority of the U.S. Democrats are proposing measures that will sharply reduce the profits of the insurance industry and the prescription drug industry. These measures should be expected to lead to sharply lower stock prices for the companies in these sectors.

The same basic story applies to the hi-tech sector, where at least some of the current candidates, most notably Senator Elizabeth Warren, have proposed measures designed to break up dominant firms like Facebook and Google. These measures would be a big hit to some of the most highly valued companies on the market.

Similarly, measures that increase the power of workers and make it easier for them to form unions should also be a hit to profits. Because workers would gain a higher share of income, and companies would get a smaller share.

As the US election draws closer, if a Democratic presidential candidate pushing this set of policies appears likely to end up in the White House, it is reasonable to expect the stock market to fall. This will be especially likely if the Democrats are expected to pick up seats in both the House and Senate, making it easier for a new president to implement progressive policies.

We can expect that Trump and the Republicans will seize on any decline in the stock market as evidence of how terrible the Democrats’ policies would be for the economy. The media is likely to go along with this charade, since they routinely treat the stock market as a gauge of the economy’s health.

That is when it will be essential to remind economics reporters of some basic economics. The stock market is a measure of expected future profits and nothing more. Yes, Democrats want to see some corporations — like those destroying the planet with fossil fuels or those ripping off patients with monopoly protected drug prices — making less profit. But that wish says nothing about the overall health of the economy.

It is also worth noting that we had very strong growth, together with widely shared benefits, during the 1950s and 1960s – when stock prices were far lower relative to the economy. So the idea that a rapidly growing economy cannot operate with a much lower stock market not only contradicts economic theory, but also a large amount of evidence.

Obviously, some people will be hurt by a falling stock market, but because of the incredible inequality of stock holdings, the vast majority of the losses will be incurred by the richest 10 percent of the public, with the top 1 percent having close to 40 percent of the losses.

There will be middle-class people that see some hit to their retirement funds, but this just goes back to that old saying: If you think you have an effective policy that doesn’t hurt anyone, then you don’t understand the policy. We need to make fundamental changes in many areas, and this will almost certainly mean that there will be a stock market decline. We need to acknowledge this fact and recognize that reining in bad practices in the corporate sector is good for the economy of the country and the world, even if it happens to be bad for investors.


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