With Labor Day fast approaching, unemployment stands at 10.2 percent, gross domestic product is down 31.7 percent, and the stock market is at or near record highs. The economy, as it’s commonly understood, is a smoking ruin, and Wall Street doesn’t care.
We’ll get a new unemployment report on Friday, and judging from a sort of preview issued every month by the private payroll firm ADP, it’s going to fall short of expectations, which aren’t high. But according to CNN’s Fear & Greed Index (its delightfully blunt term for the put/call ratio), the bull market currently scores 75 out of 100, registering as “extreme greed” and close to a two-year high. A year ago, when unemployment stood at 3.7 percent—close to a 20-year low—and when GDP was increasing rather than shrinking, the Fear & Greed Index was 25, registering as “Extreme Fear.”
All this has me thinking back to a term, “plutonomy,” that was in vogue a decade ago, when the U.S. workforce was still struggling to recover from the Great Recession of 2007–9. As I noted at the time (“Brooks Brothers Bolshevism,” September 24, 2011), the word “plutonomy” sounded like agitprop straight out of The Daily Worker. But this cartoonish term was coined by three Citigroup analysts to describe a U.S. economy in which the bottom 99 percent in the income distribution had, for all practical purposes, ceased to participate.
“Economic growth is powered by and largely consumed by the wealthy few,” the Citibank study declared. “The earth is being held up by the muscular arms of its entrepreneur-plutocrats.” Although they sounded like sansculottes, the Citibank analysts were actually pro-plutonomy—that is to say, they were advising rich people not to invest in anything that depended too much on the well-being of the great unwashed.
We’re often told not to mistake the stock market for the economy. The economy reflects the level of prosperity within the larger society. The stock market reflects merely the mood of the investor class, which is much more quirky and changeable. If the larger society, and especially workers, are hurting, then eventually the stock market is going to hurt, too, but it’s not going to be a direct line from A to B.
But what if that’s wrong? What if the Citibank sansculottes were right that the welfare of 99 percent of the population simply doesn’t matter to the masters of the market, and that the economy exists entirely apart from such sentimental considerations? In other words, what if the stock market really is the economy?
Once you entertain this dismal proposition you start seeing evidence for it everywhere.
Average hourly wages declined with the advent of the Great Divergence, the post-1979 rise in income inequality that continues today. They nosed up during the late-1990s tech boom, but today they’re only slightly higher than they were in 1964. During that same post-1979 period, the Dow rose ninefold. After the 2001 recession, median household income took 16 years to recover fully; the Dow took only about three.
The GDP has done better, but it hasn’t kept up with the Dow, either, increasing not quite eightfold since 1979. That confirms, at least for the current era, Thomas Piketty’s formulation (in his 2014 book Capital in the Twenty-First Century) that return on capital exceeds economic growth (“r > g”). Plutonomic reasoning, however, would require a small revision. Piketty would have to redefine r as economic growth (because return on capital, plutonometrics dictate, is economic growth), and g as some outmoded measure of growth that’s no longer terribly relevant.
Consider the strangely diminished picture ahead for American corporations. (Remember them?) The prevailing view is that they’ve grown too powerful. But in fact, since their midcentury heyday of corporations calling the shots, not only within the economy but throughout American society (see James Burnham’s 1941 tract The Managerial Revolution and John Kenneth Galbraith’s 1967 study The New Industrial State), corporations have gotten addled by bloat and enslaved by their shareholders.
Gerald F. Davis, in The Vanishing American Corporation (2016), sees the corporate consolidation of recent years as a sign not of strength but of weakness. Corporations have become the playthings of hedge fund managers and other Wall Street predators, and are reduced to measuring their strength not in how many people they employ but how few. Nicholas Lemann makes a similar argument in his 2019 book, Transaction Man, relating how the banking sector, stripped of its powers in the 1930s and held in abeyance through the corporate ascendancy of the 1950s and 1960s, reestablished dominance in the 1980s and swallowed the economy whole. To the extent that corporations hold power today, it’s only as proxies for the financial sector.
Well sure, you may reply. The economy has been financialized; everybody knows that. But at some point, those pixels on Bloomberg screens intersect with actual human experience, right?
That, after all, would appear to have been the lesson of the Great Recession of 2007–9: You had an out-of-control run-up in the value of financial instruments that were linked to mortgages sold by con artists to people who couldn’t afford them. Eventually, rising mortgage defaults caused the worst financial setback since the Great Depression (until now). Even during the Great Recession, though, the financial sector recovered with astonishing rapidity. The Dow was back to its pre-recession level by 2013, even as what we quaintly consider “the economy” was still gasping for breath. The housing market took longer to recover, and wages still longer.
At some point, you’d think the damage done by Covid-19 ought to tank the stock market, if only because unemployed workers who can’t pay mortgages and rent will topple the real estate market, to which the financial sector remains linked. But for the moment, the U.S. housing market is eerily robust. Purchases and sales of new homes rose in June. The overall rate of homeownership actually increased, to 67.9 percent, from April to June, up from 64.1 percent the year before, when many fewer people were wondering how the hell they were going to keep a roof over their heads. The likely reason is that interest rates are down—the only visible concession the financial sector has made to the current unpleasantness. And even that prominent indicator demonstrates that the banks are all that really matter.
Certainly when I review my own experience in the twenty-first-century economy, I’m hard-pressed to see how I figure at all except as the steward of my retirement accounts. Like many journalists my age (early 60s), I got my last raise (after inflation) during the tech boom. Look, I’m not complaining; by any sensible standard I’m quite well-off. I live a prosperous and fulfilling life.
But when I examine myself through the prism of economic growth, it’s hard to feel impressed. My wages are slightly less (after inflation) than they were when I turned 40 a quarter-century ago. The value of the labor by which I sustain myself and my family failed to expand as I acquired additional eminence and experience. Rather, what increased was the value of my 401(k) holdings, owing not to any actions on my part but merely to the passage of time. (In other words, because of r > g.)
As far as the U.S. economy is concerned, Timothy Noah exists not through his works or his deeds but rather, through his investments, which were set aside and managed by others. Should those investments open their eyes, take in the awful state of working Americans, and plummet, I’ll be very sorry. But I’ll also wonder what in hell took them so long.