Government to the rescue!

Politicians are fond of telling us how much we need their services. In this respect, politics is much like any other business. One way that it’s different … most businesses aren’t promising to play Robinhood. Politicians are unique in that they promote schemes to equalize the distribution of wealth. The free market, it’s often implied, and sometimes explicitly stated, acts to make the rich richer, leaving everyone else behind. We need politicians’ services to lean against the market and restore economic equity.

You will be shocked – shocked I tell you – to hear that these politicians are lying. Peel back a couple layers of the onion skin and you’ll find a rotten core. In fact the major operation of the central government has been to do just what it accuses the free market of doing; make the rich richer at everyone else’s expense.

How? Counting all of the ways would be beyond the scope of any one article, but the biggest and most important is through the machinations of the central bank.

Readers that follow the Federal Reserve are already aware of the basic facts. The Fed places great emphasis on not disrupting the financial markets. It tells them what it’s going to do before it does it, so as not to rattle Wall Street. If the stock market falls sharply, for instance, it is often chalked up to a “Fed mistake”, something the Fed goes way out of its way to avoid. But this concern is notably asymmetric. If stock prices rise sharply, it’s taken to mean the markets “approve” of the Fed’s conduct of policy. The central committee gets a gold star. In other words, the only disruption to be avoided is one that involves prices going down.

But let’s take a step back for a minute. There’s a value judgment embedded in there … that when it comes to stock prices, higher is better. A few moments’ reflection should make clear that this is not at all a given … it depends on your perspective. If you want to buy, it’s not. If you want to sell, or if you have a bunch, it’s good, but society wide I have yet to hear any basis for such a value judgment articulated.

If the price of gasoline goes down, it’s deemed a good thing, but it’s just as bad for the seller as it is good for the buyer. On what logic would it be any different for stocks? 

In the long run, the stock market is said to grow with the economy. What if it grows faster? What if the stock market keeps growing faster than the economy for years, even decades?

We don’t have to get very hypothetical to find out. That’s exactly what has been happening. GDP has been plodding along at 2%-4% for many years, while stock prices have been roaring ahead at 10%-20%-30%. The US stock market cap is now nearly twice GDP (FRED). There is only one way this can possibly affect the distribution of wealth. And that is that the owners of stocks in the aggregate get richer at the expense of those who don’t. And the owners of most of the assets are by definition the wealthy.

What about the “at the expense of” part? The stock market going up doesn’t create more stuff. That’s determined by GDP. So if GDP goes up 2% and asset prices go up 20%, most of the increased purchasing power enjoyed by the asset owners must be lost by the rest. Most of it through rising prices … think not only gas and groceries but cars and houses too, the latter of which isn’t captured by statistics like the CPI. It’s no mere coincidence that a decade of ultralow interest rates and soaring asset prices has led to soaring social discord as well. People know something is unfair, but not what it is or where it’s coming from, making them easy marks for pitches for yet greater government intervention to cure problems created by government in the first place.

This asymmetric policy bias, where the Fed views doing anything that might negatively impact asset prices as a last resort, while anything that positively impacts asset prices is practically an unwritten mandate, has been growing the wealth gap.

So when politicians tell you that government needs step in to moderate inequities created by the free market, ask first what government can do to step out from creating them. And make no mistake, the Federal Reserve gets its charter from the government, so technical arguments that the Fed is a private institution are purely semantic. The most powerful agencies of the wealth transfer conveyor belt act by authority granted by the government, even without explicit instructions from elected representatives. 

It’s not even really even been a big secret. Fed Chairman Ben Bernanke famously made raising asset prices an explicit policy goal, on the grounds of a “wealth effect” … that the wealth “created” by rising asset prices would stimulate consumer spending and thereby benefit “the economy”. Trickle down economics at its finest. It’s no accident, and it’s not the free market.

It’s a policy choice.