When the COVID-19 pandemic hit in early 2020, the economic impact was devastating.
Thousands of businesses shut down.
Millions of people lost their jobs and the stock market crashed.
But then, it quickly recovered.
In fact, before 2020 was out, it hit record highs and has kept going.
People whose fortunes are in stocks saw their wealth rocket into the stratosphere.
But if the stock market is doing so well, why are thousands of businesses
still shut down and millions of people still unemployed?
They want the population to imagine that a rising stock market
is some sort of index for the well-being of the economy as a whole.
It isn't. It never was.
Let's get one thing straight:
The economy and the stock market are not the same thing.
The economy is that part of society involved in the production
and distribution of the goods and services upon which any society depends.
Factories, industry, employment, trade, banks – that's all part of the economy.
And so is the stock market. It's where people buy and sell ownership –
also known as stocks or shares – in companies.
Companies sell their shares to generate revenue for them or for their owners.
Take Apple, for example. It's one of the biggest companies
in the world with 16.5 billion shares on the stock market.
If you buy one of these shares, then you now own one-16.5 billionth of Apple.
You're a part owner and based on how many shares you own,
you get a say in how Apple is run.
And if Apple decides to give some of its profits to its shareholders,
you get a share – get it? – of that profit.
The truth is, though, the only people who can afford enough shares to really impact
a huge company like Apple are billionaires and big investment firms.
And their goal is to see the price of the shares they own go up, because
selling your shares for more than what you paid for them, that's profit.
Share prices go up when more people want to buy them.
So anything that's seen as good news for the company's future is welcomed by shareholders.
New product announcement?
More revenue on the earnings report?
Figuring out a way to keep your money offshore so you don't have to pay tax on it?
Firing workers to lower payroll?
All that can push a company's share price up.
So the stock market only captures a very small picture of the economy.
The economy is much larger. It involves people whose work is not recaptured
in the stock market and their livelihoods as well.
A company can even lose money and still see its share price rise.
Maybe investors believe that strongly in its future.
Tesla and Amazon, for example, didn't make a profit for years,
but their share price kept going up.
It's all about how valuable investors feel a company's shares will be in the future.
And that's one reason why the stock market can be doing
well, while the rest of the economy isn't.
It is one of the few indexes of how the economy is doing
that looks good,
that points upward,
that has been rising.
But only about 17% of U.S. companies with more than 500 employees
are even on the stock market.
Well, the stock market had another good day.
The stock market's up. The unemployment rate is down.
The stock market is, in fact, an accurate reflection, both of what's going on now
and what's likely to go on in the future.
Politicians and the news media often fixate on the stock market largely
because it's an easy metric for sort of interpreting the economy.
But it's not really an accurate measure
for the economy because most people are not impacted by its gains.
56% of American households own stocks, mostly in some form of retirement fund.
But just 10% of Americans own 90% of stocks – 90%.
And if we go further up, all the way to the top 1%, they own half.
That tells us a couple things.
One, corporate power is incredibly concentrated in the hands
of just a few people.
And two, when the stock market does well,
it primarily benefits just a handful of the ultra-rich.
It reflects the interests of those who hold lots of capital
and who can actually invest in ways that benefit their own interests.
So they invest in such a scale that they can shape
the direction of stock market prices.
That gap between the rich and everyone else has been growing in recent years.
But in the middle of the 20th century, the opposite had happened.
And for decades after that, the economy was doing well.
Wages were going up and companies were reinvesting a lot of their profits
back into their business.
The economy that worked well for the mass of people was that it
didn't work so well for the richest owners
and controllers of capitalist business.
After the economy slowed down in the 1970s,
there was a change in business culture, known as the shareholder value revolution.
Previously, the point of a company was,
was actually to reinvest money and the profits into its workers.
So to invest in them, to develop new capacities, to invest in developing
a product. And then it changed to a focus on shareholders in the 1970s and '80s.
Now, it was no longer about growing the business to make more money.
It was about making shareholders as rich as possible, as fast as possible.
Suddenly, there's a shift in the mentality of people
participating in the stock market.
And this is where when you think of the movie "Wall Street."
Greed, for lack of a better word, is good.
And this is largely because companies now want to do all kinds of maneuvers
to quick, you know, on the short-term, stimulate their share prices.
What it actually did is ended up motivating companies
to engage in behaviors that disenfranchise workers.
That's because to maximize profits for shareholders, U.S.
corporations cut costs by downsizing, moving work to cheaper labor markets
and lowering wages, which have stagnated even as productivity has gone up.
So where's all that extra money going?
Profits are going into the hands of executives
who also are owners in those companies.
They own those shares, as well as financial investors.
One way these corporate executives and investors boost
their stock prices is by buying back the company's own shares.
That reduces the amount of stocks available, sending prices up.
Shareholders love stock buybacks. It's easy profit,
especially compared to the risk involved in developing new products to sell.
Buybacks used to be illegal.
They were seen as a form of market manipulation.
But that changed in 1982 under the Reagan administration.
Going back to Apple, the company has spent over $400 billion –
with a B – on buybacks since 2012.
As Professor Neely mentioned, the executives
making these decisions are shareholders themselves.
So stock buybacks are very lucrative for them.
But the impact on the rest of the economy can be negative.
Look at how the biggest companies on the stock market
allocated their profits between 2003 and 2012:
91% went to shareholders.
That didn't leave much for things like research, reinvestment and wages.
And if you think that's bad, look at the restaurant industry,
which recently spent, get this, 137% of its profits on stock buybacks.
Think about that.
These companies have been borrowing money
to buy back their own shares and make their shareholders richer.
What if that money was spent on the actual workers instead?
Starbucks employees could have gotten $7,000 more per year.
McDonald's workers could have gotten $4,000 each.
Outside the restaurant industry, Lowe's, CVS and Home Depot
could have given each of their workers a raise of $18,000 a year.
So far, we've seen that
one, the stock market really doesn't reflect the health of the economy.
Two, the stock market mainly benefits the very rich.
Three, shareholders take much of the value
created by workers, with workers taking less and less.
And four, share prices can be manipulated by things like stock buybacks.
Part of the reason companies have been able to buy back so much of their
own stock with borrowed money is because the government has kept
interest rates low in response to the 2008 and 2020 economic crises.
The idea was that cheap loans would help stimulate the economy.
But instead of going to those who need the most,
loans have mainly gone to the wealthiest people and companies.
So it's no surprise the stock market recovered faster
than much of the rest of the economy after each crash.
2008 and 2020 could have been a chance to rethink how the economy is structured.
Instead, the U.S. government response kept the system as is with shareholders at the top.
And they are able to pocket that money, reinvest it, save it.
Often they invest it abroad in offshore tax havens and we all lose out as a result.
But even at home, U.S. tax laws still advantage wealthy shareholders.
The income that they make from their investments,
they're charged capital gains taxes,
as opposed to traditional income taxes that are made on salaried income.
And those capital gain taxes are charged at a much lower rate.
With the super-rich holding about a third of their wealth in stocks,
this tax discrepancy only widens the wealth gap.
It's just another way in which the stock market is detached from the rest of the real economy.
It's also why in a country where a third of adults can't afford a
$400 emergency, the dream of stock market wealth will stay a dream for most people.
Meanwhile, the richest take more, pay back less
and then tell us things are good because their stocks are going up.
If there's one thing that you all could take home about the stock market,
I would hope that it would be that to think about how the stock market
is reflective of a capitalist society.
And in that, it is designed to benefit those who hold capital.
So it is intrinsically unequal.