If you’ve been spending any time online or watching cable TV, you’ve gotten the message that humanity now faces two grave threats — a novel coronavirus and the crashing stock market — of roughly equal importance.
Yesterday CNBC’s Rick Santelli went further, staking out the position that stocks losing value is actually more terrifying than millions of deaths. “Maybe we’d be just better off if we gave it to everybody,” Santelli sagely explained. That way, lots of people would expire quickly, thereby removing the uncertainty that’s been plaguing investors.
It’s easy to criticize Santelli, but he was just taking the logic of America’s obsession with the stock market a few steps further than normal. For decades, whenever we’ve faced a choice between the reality of human beings and little numbers on a screen, we’ve always gone with the little numbers.
This is something profound about our mental weather. A huge fraction of America’s mental energy, and definitely the Trump administration’s attention, are consumed by the stock market’s gyrations. This in itself has been debilitating for us, no matter the direction in which it’s gyrated.
Now the coronavirus may be about to teach us a harsh lesson in what this fixation has done to us. The glare of the stock market’s imaginary wealth has blinded us to what real wealth actually is.
To understand this, you have to look at some basic facts about what the stock market is, and what it isn’t.
After the terrorist attacks of September 11, 2001, Courtney Love, lead singer for Hole and Kurt Cobain’s widow, announced that she was buying $200,000 worth of stock to support the United States. While her intentions were good, this was also completely pointless.
You can understand her mistake, though. To be alive in America is to be assaulted by endless high-decibel blather about the critical importance of the stock market. There are entire TV channels devoted to it, new highs are always celebrated on network news, it’s on the front page of newspapers, it’s on an app that comes preinstalled on your iPhone, and the president is constantly yelling at you about it.
Yet the stock market has little direct relevance for regular people. By some estimates, the richest 10 percent of U.S. households account for over 80 percent of American stock ownership. The richest 1 percent by themselves own half of that, or 40 percent of stock. Half of Americans own no stock at all.
Once you understand this, the media’s stock market mania is maddeningly hilarious. It’s as though half of the national news was yammering about the weather in Greenwich, Connecticut. (“Our top story on ABC World News Tonight: This afternoon Greenwich was unseasonably warm.”) And no one notices how bizarre this is.
By contrast, think about economic facts with concrete relevance to the lives of normal people: the unemployment rate, whether the middle class is getting raises, if the minimum wage is going up, strikes, health care, workplace safety. There’s no cable TV ticker about that.
That’s not to say that great news for the stock market never matters for regular Americans. But when it does, it can be bad for most of us. The economic journalist Doug Henwood explains it straightforwardly: “The reason the stock market has done so well for all these years is precisely because the working class hasn’t.”
Consider these basic numbers:
In the 36 years from the end of World War II to Ronald Reagan’s inauguration in January 1981, the median compensation for American workers almost doubled; it went up about 100 percent. Meanwhile, the return on the S&P 500 over that period (with dividends reinvested) was 700 percent.
In the 39 years since, the median compensation of workers has inched upwards perhaps 30 percent. But during this time the S&P has gone up over 2,100 percent — that is, three times what it did in the decades after World War II.
But don’t just take Henwood’s word that these things are connected. The 18th century economist Adam Smith is so beloved by the U.S. right that staffers in Reagan’s White House wore Adam Smith ties. Here’s what Smith wrote in his most famous book, “The Wealth of Nations”: “The rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension of society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin.”
The significance of this for the stock market is that the value of a stock is, in theory, the value of its current and future cash flow — essentially the value of the company’s profits. But as Smith wrote, high corporate profits aren’t a good sign for the rest of us. This is true for both straightforward and complicated reasons.
The straightforward one is that profits are partly a measure of the bargaining power between workers and stockholders. In poor countries, workers are poor and have less leverage, so they can’t get their share of the money, leaving more left over for their employers.
After decades of attacks on unions, the U.S. has started to experience this dynamic. Corporate America has become ruthlessly successful at holding down the compensation of their workers and using the money saved for their own luscious, luscious profits.
From World War II to 2000, after-tax corporate profits generally accounted for 5 to 7 percent of the U.S. gross domestic product. It’s since spiked as high as 10.6 percent, and still stands at almost 9 percent.
On the other side of the ledger, compensation for corporate employees as a percentage of GDP rose steadily from World War II until 2000. Since then it’s collapsed, with a slight rebound recently. As Henwood points out, even this makes the situation appear better than it is, since the massive pay packages of corporate executives are counted as employee compensation.
Corporations can also wring profits from countries in more complex ways. Every business enterprise creates both values and costs. Corporations excel at seizing the value for themselves, and forcing their societies to pay the costs. The fossil fuel industry is the world’s premier example: The value it generates goes to stockholders and executives, while it offloads the cost of destroying human civilization onto the planet’s other seven billion people.
The U.S. has experienced two gigantic financial bubbles in the past 20 years: the dot-com bubble and the housing bubble. Both bubbles felt fantastic as they inflated, convincing many people that they were suddenly wealthy. Then the bubbles burst, wreaking extraordinary damage on regular Americans. When the smoke cleared, it was obvious that the only people who’d gotten rich were various well-dressed charlatans.
Measured by the stock market’s recent highs, it was in similar bubble territory, and in fact still is. A standard way to measure the cost of a stock is its P/E, or price-earnings, ratio: the ratio of the cost of a share to the company’s earnings per share. According to one version of the P/E ratio, over the past 150 years the average of the S&P 500 has been about 15.
Until its recent face-plant, the S&P was trading at a P/E of about 33, so more than double the historical average. By the end of business on Thursday, it was still over 28. Thus stocks almost certainly remain overpriced and could fall much further.
Another way to look at the value of stocks is the ratio of the total market capitalization of publicly traded companies to the U.S. gross domestic product. This rarely reached 100 percent until the last 1990s. Before current selloff, the stock market was reporting that America’s public corporations are worth 200 percent of the U.S. GDP, the highest level ever.
The good news is that, again, the stock market has little direct relation to the underlying economy. It could continue falling with few consequences except for an uptick in anguished Trump tweets.
All that should be reassuring for anyone with standard anxiety about the stock market. But everyone should be feeling a deep, non-standard anxiety about it, a kind of anxiety that’s never on TV.
The problem with the stock market is not it going up, down, or sideways. It’s what our obsession with it has done to us. It’s that paying attention to capitalism has made us think like capitalists. It exerts a gravitational-like pull on our psyches, nudging us psychologically to the right and shredding our instincts for social solidarity.
First, there’s basic class conflict. Once you own even a modest amount of stock, you’ll likely find yourself ambivalent about companies squeezing as much money as possible out of their employees, even if you’re one of them. Rather than thinking about how to work with everyone else to stop the Fortune 500 from ravaging America, you’re hoping to get your teeny-tiny personal share from the ravages.
“A lot of middle and upper middle-income people identify with the stock market’s fate,” says Henwood. “Instead of seeing it as their class enemy, they see it as their friend.”
But a true friend would not incentivize you to profit from climate collapse. You know you should join a mass movement to stop global warming, but … your Exxon stock is doing great, so you figure that when the Antarctic ice sheet collapses, you can sell it and buy a house in Manitoba.
Next there’s the perspective the stock market encourages everyone to adopt about financial bubbles. Consider what it actually means for anyone panicking about the value of their 401(k). The sad fact is that their 401(k)’s value was never real, just as the cheap homes built in Florida suburbs at the height of the housing bubble were never worth $1.2 million apiece. What everyone has been counting on — hopefully without consciously realizing it — was that stocks would remain overvalued until after they sold them in retirement. That is, they were depending on being able to take advantage of someone else by selling them an overpriced asset, like a Florida house-flipper.
This economic structure inevitably makes us see others not as fellow citizens with whom we’re all in this together, but as potential marks. You can only buy low and sell high if you successfully fool others into selling low and buying high. The economist John Maynard Keynes famously described this type of “investing” long ago: “the actual, private object of the most skilled investment today is … to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.”
Before a new strain of coronavirus began sprinting around the world, all these problems with the stock market may have seemed abstract. But they are now extremely concrete. Think about what we could have done to prepare for this moment, if we’d been less mesmerized by little numbers on screens and paid more attention to the reality right in front of us.
One aspect of reality is that some diseases are extremely contagious and can kill you. That’s why everyone in America would be far better off right now if we had robust, universal health care, even the people who had to sell some of their shares in Apple to help pay for it.
Likewise, scientists have been warning for decades about exactly this kind of infectious disease. One of their suggestions was for the U.S. government to help pay to improve the public health infrastructure in poorer countries. We may all quite soon regret not doing this, even if it would have required making Amazon pay a tax rate greater than 1.2 percent and hence denting their stock price.
And if we’d been less transfixed by what corporations were doing, we could have realized what they can’t do. In the imaginary world of economic textbooks, a huge pharmaceutical company would have poured tens of billions into developing the capacity to more quickly perfect and manufacture vaccines in huge volumes, so that the omniscient stock market would reward them for their prescience. Here on Earth, the stock market would have punished any company that took such a big risk with an uncertain payoff. Yet we couldn’t see that the only way to better prepare for the new coronavirus would have been with much greater government action.
And there are pernicious effects of our stock market love affair that are even more subtle. When deciding what to do with their lives, young people learn what to value from adults, and what adults have been telling them is that what’s valuable is corporate wealth. Imagine how much better we’d all feel now if 1,000 of America’s smartest financial engineers had heard instead that the most important, respected thing they could do was become an epidemiologist.
But instead of investing in genuine wealth, the kind of wealth that keeps us alive, we preferred to chase the phantom wealth of the stock market. Now as the phantom wealth dissolves, we may come face to face with our decision to be poor in what truly matters.