Evan Vucci/AP Photo
‘In my neighborhood in Scranton, not a whole hell of a lot of people owned stock,’ Biden noted at last week’s CNN town hall.
Donald Trump has been falling back on a standby talking point that is more revealing that he probably knows. At last week’s ABC town hall, and repeatedly for months, he has said that a Joe Biden victory in November will cause the stock market to crash. Ordinarily, this is attached to a reference to Biden’s plan to tax the wealthy, though not always.
For someone with pretensions to being the guardian of the forgotten man and woman, appealing to them on the basis of the stock portfolios they don’t own seems misguided. The top 1 percent have half the stocks, and the top 10 percent have 84 percent of all stocks, and that percentage is rising. “In my neighborhood in Scranton, not a whole hell of a lot of people owned stock,” Biden was able to say at last week’s CNN town hall, and it was an easy way to take up the mantle of populism.
But if we scrutinize the question a little more, and ask whether a Biden victory would cause stocks to fall, we actually get at what Trump’s statement is really about: an implied threat from the capital class to make no changes to the status quo.
Generally speaking, predictions about the presidency and stock market policy are quite silly. Paul Krugman infamously predicted that markets would tank after Donald Trump won the presidency in 2016. Presidential policy can be useful for the economy, but the stock market has nothing to do with that. The market is just a means for enrichment for a thin class of investors, who are betting on expectations for future corporate profits.
Now, Biden is calling for changes to tax policy in ways that will at least create a short-term sell-off in stocks. He wants to treat capital gains and dividends as ordinary income for households above $1 million, sharply increasing the tax rate. He also would eliminate the so-called step-up in basis for capital gains, which wipes away massive increases in income for the heirs of people like David Koch when they die. Presumably, these changes, once enacted, would take effect on a certain date, and in that interim period people would sell stocks to take advantage of the lower tax rate on their capital gains, and buy them back after they’re up and running. So if Biden’s tax plan is enacted, there will be at least a mini-crash.
Biden also wants to increase the corporate tax rate from 21 percent to 28 percent, about halfway back to where it was before the Trump tax cuts. You see the pattern of who is actually affected by these changes: wealthy Americans and corporations. Like it or not, Biden’s team has vowed not to raise taxes on anyone making under $400,000 a year. Undoing the Trump tax cuts’ disproportionate benefit for the upper class and corporations actually offers a way to raise $3.8 trillion over the next decade by doing only that.
In the long run, of course, decent economic and especially public-health management in the coronavirus crisis would be the best possible outcome for the economy and the stock market. But I don’t think the investor class is thinking much about the economy, or anything other than keeping their personal party going.
Currently, the Federal Reserve is propping up asset values in stocks and other markets through a mass corporate bailout program. This has pulled the capital markets even further away from the actual economy, becoming a hermetically sealed package unto itself, a world where no coronavirus or economic struggle exists. The implication of Trump’s threat that a Biden win will crash the stock market is that any puncture of that hermetically sealed package will cause righteous anger on the part of investors.
Check, for example, the activity in options markets, where traders are hedging their bets in case of a mass sell-off in November. This has veered sharply from a month ago, as the realization of Biden’s mostly favorable electoral position has solidified. Corporations are being asked to take on more cheap debt now, in advance of the election, on the assumption of, well, a crash.
That expectation of volatility could just be due to the potential for a truly hazardous post-election period. But importantly, it’s coming from the same people who would stand to lose under Biden’s tax policy. Traders and investors would be paying the higher taxes on their activities, as would investment banks that take in high fees from the explosion of corporate bond sales. They all are effectively signaling that they will throw a tantrum in order to influence policies that would affect them. And they are actively preparing themselves with hedges to soften the blow of short-term losses that would proceed from carrying out what in some contexts you would call a capital strike.
Traders and investors, as well as investment banks, are effectively signaling that they will throw a tantrum in order to influence policies that would affect them.
This is a dangerous scenario. Capital thinks it can take hostages and create panics to force policy to move in their direction. When Biden says that the campaign is about “Park Avenue versus Scranton,” MSNBC hosts who live near Park Avenue notwithstanding, he’s correctly identifying this fight.
You might say that stocks must go down in order to create a more equitable society, but I would pitch it this way: The economy is over-financialized, with executive performance too tied to stock performance, with corporate outcomes too reliant on financial engineering, with companies too focused on manipulating stock prices and rewarding investors rather than on creating products people want. That financialization has been built up through policy accommodations to capital. And any attempt to break that channel will trigger a furious pushback, up to and including economic sabotage.
When Trump says that Biden will crash the stock market, he’s saying that Biden will end the policy of allowing investors to use financial machinations to get rich in the Wall Street casino, and that he will ensure labor takes more of the profits. Trump might have more faith in that possibility than I do! But he’s unwittingly outlining a change that is necessary for a country that allows everyone to prosper.
