NCPA - National Center for Policy Analysis

Stock Market Fall Increased Equality

August 6, 2001

Some left-wing economists argue that inequality of income per se is harmful to many people's health. However, most economists believe one's absolute level of income or wealth is the key to well-being, not one's relative position.

Extreme leftists believe the psychological pain of being relatively worse off is so severe that policies making some better off without harming others should be opposed if they increase inequality.

Thus, when the stock market was rising, left-wingers attacked the increase in inequality. They said it was painful for many Americans to see others getting wealthy, even if they themselves were no worse off.

Then why aren't they applauding the massive reduction in inequality that has resulted from collapse of the stock market since early last year?

  • According to the Federal Reserve, the value of corporate equities (including mutual funds) fell more than $4 trillion between the 1st quarter of 2000 and the 1st quarter of 2001.
  • Census data indicate that about 60 percent of all stock is owned by the top 20 percent of households, while those in the bottom quintile own just 5 percent (see figure).
  • Therefore, about $2.5 trillion was, in effect, taxed away from the wealthy.

The fall in stock prices caused wealth to become more equally distributed. Relatively speaking, the poor are much better off than they were a year ago.

Of course, the collapse of the stock market has not benefited anyone except the very few who sold short at the peak. On the other hand, it harmed people who aren't shareholders, due to falling sales, companies closing their doors, and people losing their jobs.

Whatever benefits people may feel from increased equality, it is far more than offset by the pain and suffering of those who are now absolutely worse off.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, August 6, 2001.


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