June 30, 2020
One of the recurring items in the news that infuriates progressives and fans of economic logic everywhere is discussions of the stock market that treat it as a measure of economic well-being. Donald Trump carries this to an extreme, with seemingly no understanding that there are other important economic measures, but he is hardly alone. In fact, many economic commentators seem hard-pressed to explain the continued strength of the stock market, when most projections show the unemployment rate remaining extraordinarily high for the foreseeable future.
The reason why this is infuriating is that there is no direct link between the growth in the stock market and the health of the economy. This is not a leftist criticism of the evils of capitalism, it is the Finance 101 explanation of stock prices.
The stock market is supposed to reflect the present value of future after-tax corporate profits. (“Present value” means that we apply a discount rate so that profits anticipated five or ten years out are considered to be of less value than profits expected next month.) This means that events in the world that are likely to lead to higher future profits should raise stock prices, regardless of whether or not they are good for the economy as a whole.
This could mean that the stock market will rise when the economy is strong, since other things equal, a stronger economy is likely to mean higher corporate profits. But, the stock market could rise simply because corporate profits are expected to increase at the expense of everyone else’s income.
Just to take an example from recent policy changes, a big cut in the corporate income tax should lead to higher stock prices, since it should mean higher after-tax profits. There is little reason to believe that a cut in corporate income taxes would have a substantial effect in boosting growth (it didn’t), but since after-tax profits will be higher as a result of the tax cut, the stock market should also be higher.
The stock market does generally track the economy for the simple reason that stronger growth will usually mean higher profits, but this is hardly a tight connection. The price of corn will generally track the overall economy too since stronger growth will be mean more demand for corn, but no one in their right mind would treat the price of corn as an indicator of economic well-being.
So why do people insist on treating the stock market as a measure of economic well-being when it clearly is not? That probably is attributable to the people who benefit from a rising stock market. That would be the people who own lots of stock, in other words, rich people. Rich people are also the ones who own and control major news outlets. For this reason, they are not bothered when people writing news stories or columns say that the stock market is a measure of economic well-being, as opposed to being a measure of how much money rich people have.
To be clear, I doubt anyone in an ownership position at a newspaper or broadcast or Internet outlet ever told a reporter or columnist to write a piece saying that the stock market is a measure of economic well-being. Rather, this is one of those wrong things that a reporter or columnist can say over and over again and never be called on the carpet for it. By contrast, if a reporter tried to tell their audience that the price of corn is a measure of economic well-being, they would probably have some serious explaining to do to their editor and other higher-ups. If they continued to assert that the price of corn was a measure of economic well-being, they would probably be looking for a new job.
The point here is that power has a large influence on what arguments appear in news outlets. Because people with money benefit from higher stock prices, we are likely to continue to see the claim that stock prices are a measure of economic well-being long into the future, even though it is not true.
Power and Government-Granted Patent Monopolies
The story of the stock market as a measure of economic well-being is important to keep in mind when we consider the media’s decision to almost completely ignore the issue of patent and copyright monopolies as government policies that redistribute income upward. Just as the myth of the stock market metric of well-being is perpetuated because of who it benefits, the analysis of patents and copyrights as policies leading to upward redistribution is not ever mentioned because of who would potentially be harmed.
In the case of patent and copyright monopolies, the beneficiaries go beyond the relatively small group of people who own large amounts of stock in pharmaceutical companies, medical equipment manufacturers, or software developers. It includes the bulk of the highly educated workforce, including the people who edit, write, and report for major news outlets. Even if many of these people are not especially highly paid, they almost certainly have friends and relatives who benefit from patent and copyright monopolies.
There is a very widespread belief that trends in technology and globalization are major factors in the upward redistribution of income over the last four decades. The basic story is that developments in computers, biotechnology, and other areas have hugely increased the value of education (especially in the STEM fields) and reduce the value of unskilled (their term) manual labor. Many people who consider themselves quite progressive hold this view. They just feel that they should give back some of their good fortune by paying higher taxes to benefit the less fortunate.
However, if it is acknowledged that it is government policy, specifically patent and copyright monopolies, that is behind this upward redistribution, and not technology or globalization, then it means inequality was the result of deliberate policy, not the natural workings of the market.[1] This is a much less flattering view, both for those who want to keep the benefits from this upward redistribution and even for those progressives who would willingly pay higher taxes.
For this reason, the argument that upward redistribution was the result of deliberate policy, is not one that is welcome in most media outlets, including progressive ones. The idea that patents and copyrights are simply facts of nature persists, even though it is obviously absurd on its face.
It is unfortunate that power relations preclude serious debate on an issue that is so central to reducing inequality. But it is important to recognize the obstacles to having this debate if we are ever to overcome them.
[1] I have made this argument in a number of different places, for example here, here, and here. But to illustrate the issue as simply as possible, consider a world where there are no patent or copyright monopolies. How many people would be paid to research new drugs and develop new medical equipment in a context where any manufacturers could immediately copy anything developed and sell it at a price that would recoup manufacturing costs and a normal profit? How many people would be paid to design software for computers, smartphones, and other products if anyone could immediately copy the software without sending the developer a dime? While these are valuable services, how many people are employed doing them, and how much they get paid are quite clearly the result of policy decisions, not the technology itself.
Comments