Do high stock prices mean economic inequality?

Any change in stock prices isn't intrinsically good or bad for everyone, Karlsson writes. Higher stock prices tend to be good for those who hold stocks, which typically benefits the wealthiest 'one percent.'

By Stefan Karlsson,?Guest blogger / May 7, 2013

A man looks at an electronic stock board of a securities firm in Tokyo. Is a rise in stock prices a good thing?

Koji Sasahara/AP/File

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The left-leaning Economist's view again declares that "Abenomics" ?is a success. That is hardly surprising (they've done that countless times in the past), but what is, or should be, astonishing is the standard by which they think it is an access-namely that the Japanese stock market has had an unprecedented rally, rising some 60% in value in just 6 months.

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But why should that be a good thing? Remember any price change isn't intrinsically good or bad for everyone. Higher prices are good for sellers, including future sellers, and bad for buyers, including future buyers. In this case this means that higher stock prices are good for those who already hold stocks. And the people who disproportionately hold those stocks are "the one percent", which is to say the one percent richest. So here we have a leftist website not only cheering on redistribution to the wealthiest, but making it the standard for judging whether policy is successfull!

Note that higher stock prices can either reflect higher profits, or higher valuations (or both). In the case of higher profits this could in turn either reflect higher economic growth or a higher profits share of national income. The author of the article would probably defend himself by arguing that the rally reflects the former, but there is no sign of that in actual data as for example?industrial production shrank by 7.3% in the year to March, a steeper decline compared to when "Abenomics" was launched. And historically, while corporate profits and stock prices have usually moved in the same direction as economic growth, the movements in economic growth has only been a small fractions of the movements in stock prices and even profits. And this link has been progressively weaker in recent years as stock markets have rallied even as economic growth in most countries have been weak at best, and often even negative. And in the latest months, the stock market rallies in Japan and elsewhere has had no connection at all to indicators of economic growth, which if anything has weakened.?

So, this leaves us with two possibilities: that the profit share of national income is increasing or that valuations are increasing. To the extent it is the former, this simply means redistribution from usually low or moderate income workers to disproportionately wealthy stock owners. To the extent it is the latter, it also implies redistribution to wealthy stock owners, except that the people who lose from it isn't mainly workers, but savers who are trying to build up wealth by buying stocks. Higher valuations now imply a lower dividend yield and therefore less value for people who now and in the future (unless the really is reversed) ?buy stocks, making it more difficult for them to become rich. Being rich will to a higher extent be a matter of inheriting wealth, not building it up.

In short, to the extent a stock market rally is unrelated to economic growth (as it is entirely now) it will mean a significant increase in economic inequality as well as a decrease insocial mobility, the very things the left claim to be opposed to.

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. This post originally ran on stefanmikarlsson.blogspot.com.

Source: http://rss.csmonitor.com/~r/feeds/csm/~3/-8xnreJTChA/Do-high-stock-prices-mean-economic-inequality

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