Rising stock prices and rising inequality

Posted: 26 May 2016 in Uncategorized
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BlogImageGiniCoSP052316

The folks at the Federal Reserve Bank of St. Louis find a correlation between inequality and stock prices. And, to their credit, they get half of the story: rising stock prices (and therefore increasing returns on equity wealth) have contributed to increasing inequality in the United States.

Comparing stock prices with the Gini coefficient provides further evidence of financial movement with income inequality. The steady increase in U.S. income inequality from the 1970s through the early 2000s was accompanied by strong gains in the stock market. The S&P 500 composite index grew from 92 in 1977 to over 1476 in 2007—about a 140 percent increase. These gains were huge. By comparison, the gains in the prior 30 years (1947-77) were only 50 percent. The correlation between the Gini coefficient and stock prices from 1947 to 2013 is strongly positive. As stock prices rise, the gains are disproportionately distributed to the wealthy. Lower- and middle-income families who are also wealth-poor are less likely to expose their savings to the higher risks of equity markets.

What they don’t get is the other side of the story: rising inequality has caused higher stock prices. A combination of higher profits for large, publicly traded corporations (which has served to boost the underlying returns on equity and allowed corporations to engage in stock buybacks) and a larger share of income going to the top 1 percent (as their share of the surplus has risen, which allowed them to purchase even more shares) fueled the increase in stock prices.

Once we put both sides of the story together, the conclusion is clear: rising inequality in the United States has been both a condition and consequence of rising stock prices from the late-1970s onward.

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