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The Dow of Trump

The stock market’s rise doesn’t bode well for the 99 percent.

Paddy Quick Aug 21

President Trump boasts that the economy is doing very well, and claims credit for it. He points to high level of the stock market and low the unemployment rate as evidence for this. But an increase in stock market prices could well be a sign of future trouble for the working class. Indeed, despite the low level of unemployment, wages have barely kept up with inflation.

The Dow Jones Industrial Average (the “Dow” for short) is the most widely reported item of economic news. It is always implied that an increase in the Dow is “good news.” Thus the increase in the Dow from about 18,000 before Trump’s election to the present figure of around 22,000 is considered to be evidence that the U.S. economy is doing well, and that this will lead to an improvement in the well-being of U.S. workers.

The Dow measures the average prices of 30 of the largest US industrial corporations. (Financial corporations are not included). A corporation is, in legal terms, owned by its shareholders.  If there are 100 shares, each share constitutes the ownership of 1 percent of the assets of that corporation and thus a claim on 1 percent of its future after-tax profits. Some of these profits are distributed to shareholders in the form of dividends. The remainder, which could be half of the total, is retained by the corporation to be used, possibly, for the expansion of its plant and equipment or the purchase of another company. In this case, a shareholder’s 1 percent constitutes ownership of a greater quantity of assets. The share price therefore increases, and the shareholders may, if they choose, realize this increase in the form of capital gains by selling their shares. Since corporations generally retain a large proportion of their profits, share prices, in a “normal” economy, can be expected to rise.

After-tax profits might increase in the Trump era, but the benefits of this will go to the shareholders, the capitalist class, rather than to the workers.

But over and above this, the current price of a share is based on the expectations of those future profits. If profits are expected to increase in the future, current share prices will increase.  And the large increase in the Dow does indeed indicate that shareholders do expect future profits to rise above their previous level. This is why Trump can claim to be a successful economic leader.  

There are several ways in which after-tax profits might increase in the Trump era, but the benefits of this will go to the shareholders, the capitalist class, rather than to the workers. The most obvious reason to expect profits to increase is because of the promised “tax reform.” This “reform” will almost certainly include a reduction in corporate profits tax, and thus an increase in after-tax corporate profits. More generally, the tax changes promised are intended to shift of the tax burden away from the unearned income of the capitalists and onto the wages of the working class and the income resulting from the labor of family-based small businesses.

The second predictable change is a general reduction in regulations. Many such reductions, that do not require congressional approval, have already been put in place, and many more can be anticipated. These include changes in environmental regulations that will result in increased profits in the short run, but contribute to climate change at the expense of the world’s population. Other regulations affect health and safety in the workplace, product safety and protection against consumer financial fraud.

A third set of changes that are welcomed by the capitalist class are those that directly affect the wages of workers.  These include not only the jettisoning of moves to increase the federal minimum wage, but a direct assault on the ability of workers to unionize, with particular emphasis on public sector workers.

It is, therefore, not surprising that the capitalist class anticipates higher profits in the future.

Yet Trump and his supporters point to another possible reason why profits might increase, namely their claim that Trump’s policies will lead to an increase in the rate of growth of US production and a corresponding fall in the rate of unemployment.

The official rate of unemployment has indeed fallen substantially over the past 8 years, from a high of around 10 percent in 2009 to the 4.3 percent rate for July 2017. The 209,000 increase in jobs in July was welcome, but constituted only a continuation of the very moderate phase of the post-financial crisis of 2007-2008.  The rate of unemployment has been declining steadily over the past decade and no reasonable analyst attributes the post-January 2017 increase in the Dow to any actions by the Trump administration.  

The Federal Reserve has already begun to put a brake on any significant increase in the rate of growth of production by raising interest rates, and more rate hikes are anticipated. The prediction, by Trump, of an increase in the growth rate is now based almost entirely on the supposed “trickle-down effect” that he predicts would result from a reduction in taxes on the rich. This old story, that has no empirical support at all, posits an increase in the work of the wealthy if their tax rate is reduced by a few percentage points. (Is Warren Buffet planning to cut his night-time sleep time by five minutes and if so what difference would it make?) More plausibly, perhaps, it is argued that increased corporate profits would lead to increased production. But the facts of the last few years show that corporations are sitting on huge unspent funds for lack of what they consider to be profitable outlets. Remember that retained earnings are not necessarily used for increasing production.

A final reason for the rise in the Dow is the very low interest rates that the Fed has put in place to promote economic recovery. The owners of capital are understandably shifting their resources away from interest-bearing assets, such as corporate bonds and bank loans, and putting them into the stock market. The income of the capitalist class, however, comes not only from after-tax corporate profits, but also from the interest received by those whose capital constitutes that of corporations, either in the form of bank loans or corporate bonds. It is a mistake to think of capitalists as only those who own and supervise (in whatever form) the corporate workplaces where production takes place. The world’s wealthiest capitalists do not restrict their investment to shares, let alone those in single corporations. Warren Buffett, for example, with an estimated wealth of $73 billion, does not put all his eggs in one basket!  

Pension funds, that are important to many retired workers, are similarly diversified so that changes in the Dow Jones do not play a significant role in their ability to meet their obligations.   Their overall return on capital is not fundamentally different from that of the big capitalists.  This delayed source of income to wage-earners does not alter the fact that the income of the working class comes from wages. What matters is the division of a country’s total income between labor and capital, between wages and unearned income, i.e. profits plus interest.

The fall in the rate of unemployment must be welcomed, although many workers have given up looking for work and thus are not considered to be unemployed.  A low rate of unemployment makes it possible for workers to bargain up their wages. But the Federal Reserve, among others, recognizes that this is not happening. From July 2016 to July 2017, hourly wages outpaced inflation by less than 1%. The increased production thus goes almost entirely to the capitalist class.

When Trump boasts about the economy he is, in actuality, bragging about the continued success of the capitalist class in extracting profits from U.S. workers.

Paddy Quick is a Professor of Economics at St. Francis College and a member of the Union of Radical Political Economists (URPE).

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Photo: Trump pretends to drive a truck. Credit: White House/Benjamin Applebaum.