The Class Politics Behind Last Week's Market "Correction"


Ben Luongo | Social Economics | Analysis | February 12th, 2018



Markets plunged into correction territory last week after losing 10% from record highs. Economists continue to reassure the public that market corrections are a normal part of a cycle that peaks and troughs over time. The term itself implies that the precipitous drops are temporary adjustments that put the markets back on track. This is certainly how investors look at it. Ron Kruszewski, Stifel Financial Corporation CEO, told reporters that "people just need to relax. Just relax […] It's a healthy correction to a market that has gone almost straight up since the election over a year ago."

However, framing the recent market drops as transient and remedial fails to recognize the larger structural problems boiling under the surface. Indeed, this week's market sell-offs reflect issues of class and inequality - in particular it is a direct response to reports of modest increases in American wages.

This may sound counterintuitive. One would think that an increase in wages would be a welcome development in an economy whose GDP growth has remained consistently under 4% for the last fifteen years . After all, higher pay means increased consumption where the demand for more goods and services translates into even more jobs. However, investors interpret the good news of wage increases as a sign of inflation looming around the corner. CNN Money reported that "Concerns about inflation was most glaring on Friday, when stocks tanked after the January jobs report revealed the strongest wage gains since 2009."

The argument that inflation follows a rise in wages is called wage-push-inflation (WPI). It argues that executives, in an attempt to maintain corporate profits, finance wage increase through prices hikes. If you buy into this argument, then you worry that Federal Reserve will respond by raising interest rates in order to sow the economy. This of course makes it harder to borrow money and grow one's business. The WPI argument may sound good in theory, but it's not how the real world works. In reality, the recent increase in worker pay is a modest 2.9% increase , and it is the first in eight years. This hardly suggests a dramatic rise in the bargaining power of workers to demand higher wages. In fact, the real governing power in corporate policy rests with shareholders (I get to this in a minute).

It's hard to believe, then, that driving the market volatility are fears of rising inflation. Such inflation would have to follow a dramatic rise in worker pay, which simply isn't the case. In fact, the portion of the profits that workers take home continues to shrink as evidence of the labor share following overall downward trend . Additionally, inflation has been historically low for years. The Federal Research measure inflation through the Consumer Price Index which has held at a low and steady rate since the 1990s. Regardless, the fact that investors treat wage increases as a destabilizing force exposes the role that wealthy elites play in suppressing labor gains. To understand this, it's important to add context the market's bullish growth these past eight years.

As much as the media likes to conflate Wall Street with Main Street, market trends reflect elite interests more than anything else (new research by NYU economist Edward N. Wolff evidences how the top 10% of Americans own 84% of all stocks). An important point to make here is how markets are tethered to corporate profits. Where profits go, so go the markets.

The reason for this is because corporate profits are reinvested back into stocks in order to inflate their prices. Rising stock value send signals to speculators to purchase even more shares which, in turn, is good news for executive pay (executive compensation packages usually include stock appreciation rights (SARs) which are essentially bonuses for good market performance).

This feedback loop explains the bullish market for the past eight years. Executives invest in their companies stock, which is good for investors looking to grow their finances. Investors then buy those shares which increases business performance. And the cycle goes on treating executives and financiers very well. As is often the case in economics though, what's good news for elites is not always good news for labor. The rise of corporate profits have come at the direct expense of worker's wages.

The reason for this is because the incorporation of SARs into executive pay packages incentivizes management to more on those financial instruments and less on payroll. Think of it this way - executives can either a) reinvest their profits into their workers and factories, which is costly and yields a slower return on investment, or b) purchase stock buybacks and dividends, which generates a much faster return for impatient investors. Executives have chosen the latter. This is evidenced by an overall declining trend in domestic investment as share of the GDP.

While they spend less on building their business and hiring workers, they are investing more in those lucrative financial instruments (buybacks, dividends, etc.)

Overall, company expenditures have been siphoned over the years from payroll to financial instruments in order to cater to shareholder interests. This reveals who really exercises power in corporate policy. The new corporate governance functions to maximize shareholder value - speculators determine how companies invest, executives and management make a killing, and workers takes home a small portion of the pie. None of this suggests, in any way, that labor has the bargaining power to demand higher wages. On the contrary, this exposes how the markets are designed for executives to capture larger portions of the company's profits in a way that ensure the subordination of labor.

This came to a head with last week after investors responded to wage increases with market volatility. Nervous speculators threw the markets into correction territory after news that workers may be cutting into record-setting corporate profits. After all, wage increases imply more investment in payroll and less in those lucrative buybacks. The decision for executives to ease up on stock purchase and other financial instruments confused speculators who have been used to confident managers investing in their own company's stocks. As a result, investors become unsure of their shares and their decisions to divest created a seller's market (and all of that money that top-income earners got from the new tax deal simply sits in the bank).

Overall, last week's market drops were strategic movements to counterbalance the modest rise of worker's wages. So, the next time investors describe market drops using the term "correction," remember what they really see as the problem.


Ben Luongo is a doctoral candidate at University of South Florida's School of Interdisciplinary Global Studies where he teaches courses in global political economy and international human rights. He previously worked as a campaign organizer and directed several campaigns for groups like the Human Rights Campaign and Save the Children. His articles have appeared in the Foreign Policy Journal, Foreign Policy in Focus, International Policy Digest, and New Politics .