Watching the Dow Jones Industrial Average top 22,000 points for the first time last week raises the long-debated question of whether what’s good for big companies like General Motors is good for the rest of America. Or more specifically: Is it just Wall Street and not Main Street that benefits from rising stock prices?
It’s tempting to think that the beneficiaries of stock price increases are the wealthiest slice of Americans who own and trade stock on a regular basis, along with the leadership at companies whose rising stock prices make their companies worth more than ever. It’s true that many of those people do benefit from higher stock prices, but Main Street benefits, too, just less directly.
{mosads}The key is remembering that stock ownership is not limited to individuals. Organizations and institutions can purchase stock as an investment. In particular, firms that manage pension plans for other firms take the money that employees contribute and invest it in a variety of financial instruments, including stock. So-called “institutional investors” are major owners of stock, and the value of pension plans and other investments they manage depend upon the prices of the particular stocks they invest in.
So if your pension plan has invested in stocks whose prices rise, the value of that investment — and your wealth — increases, too.
People who own tax-free educational savings accounts for their children also benefit from a rising stock market, as it pulls up the value of those investments as well.
Bernie Sanders and Occupy Wall Street supporters who work as teachers and college professors might spend a lot of time complaining about the spoils of capitalism going to the 1 percent, but they will be able to retire much more comfortably when stock prices go up. Many of them have retirement plans with TIAA-CREF, a large institutional investor with significant stock holdings.
Even those who hate things like the stock market and capitalism benefit when the economy is doing better.
Thanks to their retirement plans with institutional investors who own large quantities of stock, tens of millions of Americans are indirect owners of stock and have a stake in how well the stock market, and the economy more generally, are doing. In contrast to the perception that economic growth only benefits the 1 percent, growth that increases stock prices has benefits for a wide swath of middle-class and working-class Americans.
Of course, this story comes with one important caution. The gains of a rising stock market can be offset by losses to American families if we generate that increase through poor public policy.
For example, if the Trump administration were to put major international trade barriers in place, it’s possible that many U.S.-owned firms would see their stock prices rise, though firms that engaged in a lot of exporting might not. Especially in the short run, an index like the Dow Jones might go up.
However, those same protectionist policies that might raise the value of many people’s retirement plans in the short run would also cause price increases in many of the goods and services those same people purchase on a regular basis. The net effect would almost certainly be negative.
So while rising stock prices can benefit American households through their effects on things like retirement plans, what ultimately matters for the health of the economy as a whole, and the net effect on those households, is why markets are rising.
Real economic growth coming from the production and exchange associated with free enterprise and free trade will both drive up stock prices (and the value of retirement plans) and provide people with more and better goods and services at lower cost. What ultimately matters is good public policy.
The best way to ensure that much of the benefits of rising stock prices go to the 99 percent is to abandon the crony capitalism of protectionism and bailouts that reward the Wall Street 1 percent. That will unleash the power of free enterprise and free trade to create sustainable economic growth, rising stock prices and better retirements for millions of Americans on Main Street.
Steve Horwitz is the Schnatter Distinguished Professor of Free Enterprise in the Miller College of Business at Ball State University.
The views expressed by contributors are their own and not the views of The Hill.