Twenty-two years ago this fall, a new book with the provocative title “Dow 36,000” was published to great fanfare — and not a little derision. U.S. stocks had been on fire. The technology and internet boom spurred a wave of day-traders and investment mania that now seems quaint. But at the time, the Dow Jones industrial average index was hovering around 10,000. And even in those heady days, forecasting a near-quadrupling of the index appeared naïve at best and ridiculous at worst.
Today, the Dow is on the verge of reaching that mark, even with recent gyrations triggered by a cocktail of concerns about the Chinese property market, inflation and the U.S. debt ceiling. That doesn’t make the earlier prediction prescient: had stocks simply averaged 7 percent a year — a benchmark commonly set by professional investors — the Dow should have hit 36,000 by 2018. While the trend has been up and up, the past two decades have been anything but smooth for stocks. Through the financial crisis and recessions of the past 20 years, along with periodic selling bouts, prices have oscillated wildly.
Even so, stocks have seen massive gains relative to wages. What then to make of the growth of the Dow? The more-than-fivefold gains for the tech heavy Nasdaq? Is it a sign of an economic system badly tilted toward the wealthy? Proof that financial markets exist in an alternate universe of capitalism, ever-expanding as the prospects for so many millions continue shrinking?
These days the politically fashionable solution is to ratchet up the corporate tax rate from the current rate of 21 percent to as high as 28 percent, the rate on long-term capital gains from 20 percent to as high as 39.6 percent, and potentially tax some unrealized gains as well. But while the urge to penalize thriving companies and investments may be a justifiable reaction to the wage-stock market disjuncture, taxes will do little to address the systemic problems separating the haves from the have-nots.
Though more than half of American households own stocks, the gains in financial markets are often treated as a prime example of how those with money — and how capital in general — have reaped unfair rewards. The current imbroglio in Congress over how to fund a several-trillion-dollar spending plan has turned to taxing stock market gains at a higher rate, in part because of a conviction that corporations and the very wealthy enjoy privileged tax treatment on those gains relative to wage-earners.
Without question, the past decades have been a golden age for capital. Anyone with money in financial markets — and yes the wealthy have proportionately more invested — has seen gains that are likely inconceivable to a wage earner who has no stake in the markets.
One of the ironies of the pandemic is that it has been relatively good for most Americans’ finances. According to the Federal Reserve, the bottom half of American households saw their net worth increase by 36 percent in the first year of the pandemic, although the vast majority of the country’s net worth is still held by the top 50 percent. The federal government spent trillions and companies such as Amazon and Walmart, in need of workers, increased hourly wages. According to some research, since “Dow 36,000,” while U.S. equities overall have skyrocketed, with some major indexes up as much as 400 percent since 1999, household wealth for entire swaths of society has barely budged. Other studies paint a better picture for household wealth, but still nowhere near the gains of equities.
It can be simultaneously true that capital has enjoyed an enviable position and that markets going up is not a sign of a rigged system. There are now about 4,000 publicly traded companies on the major exchanges in the United States — 20 years ago, there were around 7,000. Capital markets reward those that excel in eking out double-digit growth in a single-digit world. Only the strongest companies survive.
Those companies reap the rewards of capitalism. Apple, for instance, has had phenomenal growth. But it sells expensive phones to the hundreds of millions of people who can afford them, while many more cannot. The same is true for most public companies: They sell to those who can buy and ignore those that can’t.
Successful companies succeed thanks to a global middle class that continues to expand, albeit dented by a pandemic. Companies that cater to them can hire the best and brightest and deploy technology to save on labor costs. They are hubs of innovation and creativity.
In the meantime, governments and citizens are saddled with the real costs of being alive. Companies don’t need to concern themselves with public infrastructure, defense, elder care, education and child care. The bulk of these costs are externalized.
In short, public companies are the cream of global capitalism — whether that’s a triumph of the system or an abomination, the price for owning a slice of this system should be at a substantial premium to everything else. And those prices should go up.
The challenge, then, is to broaden the gains of capitalism — not hobble it.
Congress could draw up innovative laws and nuanced rules to better distribute the gains of capitalism. Rather than hiking taxes, why not use tax code to nudge companies to give all workers shares in the company so that labor enjoys some of the benefits of capital? Or tie wage increases to the profitability of the company rather than indexing them to inflation?
Given the dynamism of public companies and a world awash in capital, it’s a fair bet that we will one day see the Dow at 72,000 or 144,000. Rather than trying to slow that momentum, why not disseminate the rewards to wage earners by bringing them into the fold? That may sound like utopia, but only because we’ve forgotten to strive for it.
Zachary Karabell is the founder of The Progress Network and the author, most recently, of “Inside Money: Brown Brothers Harriman and the American Way of Power.”
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