The Stock Market and the Limits of Class Warfare

This article appeared on National Review (Online) on August 26, 2015.

Hooray! The stock market crashed! Oh, wait — you’re not happy about that? But inequality in America has decreased. Those evil capitalists, Wall Street traders, and Chamber of Commerce types lost billions. This was a dream scenario for the Left and for populists of all stripes.

On Monday alone, more than $1.8 trillion in wealth evaporated. After losing a combined $182 billion last week, the world’s 400 richest people lost $124 billion on Monday. Charles Koch alone lost $1.3 billion that day!

Some on the Left were practically gleeful. “For the past 40 years, Wall Street and the billionaire class have rigged the rules to redistribute wealth to the richest among us,” Bernie Sanders tweeted, with the clear implication that they were finally getting what they deserved.

Schadenfreude may be sweet, but it is hardly sound public policy.

In fact, the market downturn exposes the fallacy of the Left’s obsession with inequality. Average Americans are no better off because millionaires and billionaires are poorer. We may actually be worse off.

That is because to a much larger degree than the Left would like to believe, we are all capitalists now. A recent Gallup poll found that 55 percent of Americans currently have money invested in the stock market. That represents about half of all households. Even among the poorest 20 percent of Americans, more than one in ten has money invested in the market.

Ironically, perhaps, some of the biggest investors are union pension funds. For example, CalPERS, the California Public Employees’ Retirement System, holds more than $300 billion in assets under management. The Thrift Savings Program for federal‐​government employees holds another $71 billion in assets.

When politicians criticize corporations for rewarding investors at the expense of workers, they forget that, to a large degree, those workers are investors.

Sure, when the market goes up, the rich get richer. But so do the rest of us. And when the market goes down, we suffer too. Yes, the swings up and down are bigger for the rich — after all, they have more money — but the rest of us rise and fall along with them.

Yet, populist politicians, in their ongoing war against the rich, continue to pursue policies that would do collateral damage to middle‐​class Americans.

For example, Sanders and others have proposed a tax on stock transactions. Such taxes are designed to punish Wall Street traders. But a transaction tax would penalize the shareholder whenever a fund manager purchased stocks, rebalanced a portfolio, reinvested dividends, sold stocks to meet the investor’s redemptions, or performed any of the other transactions that are part of everyday account management. The rich might be annoyed by such a tax, but they would still be rich. For middle‐​income workers, though, the tax hit could make a significant difference in their retirement income.

The same is true for larger economic questions. It is easy for politicians to demagogue against the rich and against large corporations. After all, if a business builds a plant in China or fails to raise wages in plants located here, it makes an easy target for those with a minimal understanding of economics. But it’s not quite that simple.

Higher taxes and the costs of regulation are often just passed along in the form of reduced wages, fewer jobs, or higher prices. Recall how the tax on yachts resulted in the loss of 7,600 middle‐​class jobs.

This is not to say that everything that is good for business is good for America as a whole. But true free‐​market capitalism, as opposed to crony capitalism, benefits us all: the rich, but also the poor and middle‐​class. As a recent study by Sutirtha Bagchi of Villanova and Jan Svejnar of Columbia found, when the rich get their wealth through political favors, benefits, and subsidies, the resulting inequality does indeed reduce overall economic growth, meaning that the middle‐​class and poor are likely to be hurt. But that study also found that when the rich earn their money on the free market, without government favors, any resulting inequality does not slow growth or disadvantage the rest of us. Indeed, we may all be better off. A rising tide really does lift all boats.

Sound policy, then, would focus not on taxing, regulating, and punishing the rich, but on reducing the government’s involvement in the economy and its ability to pick winners and losers.

The market will almost certainly recover from its latest stumble. From 1945 to 2013, the average correction lasted about 14 weeks. But, in the meantime, perhaps it will serve as a lesson on the limits of class warfare.