October 20, 2021
As a big fan of the original Star Trek, I have to confess that it was kind of neat to see Captain Kirk actually go into space. But there is a real issue here about the silly games of the super-rich that is worth some thought.
There have been numerous stories and papers about the huge increase in the wealth of the super-rich since the pandemic began. Virtually all of this is due to the run-up in the stock market during this period. Part of that is bounce back, the S&P 500 lost almost one-third of its value between its pre-pandemic peak in February of 2020 and its pandemic trough a month later. If we want to tell a really dramatic story we can start at the pandemic trough and take the rise in the stock market from March 20th.
But even if we are being serious, there has been an extraordinary runup in the stock market in the last twenty months. The S&P 500 is more than one-third higher than its pre-pandemic peak.
There are several different explanations for this increase. One is simply that low-interest rates generally boost stock prices. Interest rates did plummet during the pandemic shutdown, with the 10-year Treasury rate falling from a bit over 1.8 percent in February of 2020 to lows of under 0.6 percent last summer. As a general rule, lower interest rates will mean higher stock prices.
But this explanation will not go too far: the interest rate on 10-year Treasury bonds is currently over 1.6 percent. The gap between a 1.8 percent pre-pandemic Treasury yield and the current 1.6 percent yield could only explain a small portion of the rise in the stock market.
A second possibility is that stock investors are genuinely optimistic about the outlook for future profits. People are often confused about what the stock market is supposed to measure. Stock investors don’t give a damn about the future of the economy, they are asking about the future profits of Amazon, Facebook, and other stocks that they hold. If they think that their profit picture looks good, then they are willing to pay more for their shares.
This could be because they think that the economy will do well and that all the doomsayers in the media don’t have a clue. If the economy has strong growth in 2022 and 2023 and corporations get their share in higher profits, then high stock prices might be justified.
An alternative story would be that they expect the recent shift from wages to profits to continue. In this case, profit growth could be strong even if economic growth is not. This would again mean that all the people whining in the media, about companies being squeezed by rising labor costs, are clueless. But, what else is new?
And, there is the third possibility that we are just seeing another case of irrational exuberance. The possibility that there is no rational basis for stock prices should not seem strange to anyone who saw the collapse of the stock bubble at the end of the 1990s and the collapse of the housing bubble from 2007 to 2009. Investors are often ignorant of economic fundamentals, so it is certainly possible that there was no economic basis for the run-up in stock prices over the last 20 months.
But, whatever the rationale, there is no dispute that the run-up in stock prices has made the super-rich much wealthier. The question is how much should we worry about this.
I have always said that I am not very concerned about wealth inequality. It is poorly measured and highly volatile. I am far more concerned about income inequality.
I recognize the political power that is associated with extreme wealth, but I don’t believe the people who make this argument have given it serious thought. Suppose we cut the wealth of the super-rich by 50 percent or even 75 percent. Will Jeff Bezos lack the resources to push his political agenda if he only had $50 billion at his disposal? If we want to address the enormous gap in political power created by extremes of wealth, we have to look for ways to build the power of those at the middle and bottom. The idea that we will do it by reducing the wealth of those at the top is hardly plausible.
What About Space?
Okay, so what does all this have to with Captain Kirk going into space? If we think about how the extremes of wealth can hurt the rest of us, it gets back to their command over resources in the economy. This is the story of the clogged supply chain and overloaded ports. We are demanding more goods and services than the economy can deliver just now.
The space flights being promoted by Jeff Bezos, Richard Branson, and presumably Elon Musk, involve an enormous use of resources. It takes large numbers of often highly skilled people to plan and monitor these space flights. With the enormous amount of free advertising the media has given these ventures, we can expect that many more very rich people will be getting in line to take their trips into space.
This will mean pulling many workers away from areas where they could be doing more productive work, like designing better solar and wind energy systems, better batteries for storing energy, and better ways to produce vaccines and drugs. This will be a real cost to the economy.
The frivolous use of large amounts of resources by the very rich is a problem for the economy and society. This is distinct from their wealth as a bookkeeping entry. For example, Warren Buffet is one of the richest people in the world, but by all accounts, he lives a very modest lifestyle. If his wealth doubled it is hard to see why it would create any major economic issues. On the other hand, if the billionaire gang manage to make space travel a major form of recreation for the very rich, this is a real problem.
I don’t have any great plans for stopping the latest space race. I have always argued that the best way to prevent extreme inequality is to stop structuring the market in ways that generate extreme inequality. This means less reliance on patents and copyrights as mechanisms for financing innovation and creative work. It means downsizing the financial sector by structuring it in ways that promote efficiency, not extreme wealth for the few. And, having a corporate governance structure that doesn’t make it so easy for CEOs and top management to rip off the companies they work for.
These, and other issues, are addressed in Rigged, but the main point here is that we should try to keep our eyes on the ball. Wealth as a bookkeeping entry should be largely a matter of indifference to the rest of us. When the super-rich pull away large amounts of resources for their fun and games, that is a big problem.
 I’ll skip the obvious joke that the problem isn’t sending rich people into space, it is bringing them back.