In the glory days of the early 1980s, stocks and bonds were cheap and Wall Street became the center of the American economy. But those cheap asset prices did a lot of structural damage to US society, some of which is still becoming clear. The pricey stock market and skinny bond yields of 2017, by contrast, may pay unexpected dividends in the future.
Asset prices tend to have an inverse relationship with the strength of the labor market. When unemployment is low, like it is now and like it was in the late 1990s, stocks tend to be expensive. This is because investors and business owners have a choice with how to allocate their dollars.
If stocks are cheap and bond yields are high, businesses will tend to buy financial assets or pay down debt. Conversely, when stocks are expensive and yields are low, financial assets aren’t as tempting, so those with capital are more inclined to expand a business or start a new one -- which means hiring people and paying higher wages.
What made the early 1980s so unusual was that both stocks and bonds were "generationally cheap." This created an environment where it was much, much more attractive to buy financial assets and work in financial markets rather than be a worker or hire workers. Not surprisingly, wages stagnated and inequality widened.
The problem, as we've seen over the past several years, is that while labor is an economic input just like land or energy, labor is also people -- parents, voters, members of society. If oil gets too expensive or cheap and companies adjust their business activities accordingly, the economy will eventually adjust and life will go on. If labor is at a structural disadvantage for years, on the other hand, families can fall apart, communities can deteriorate, and the political environment can become toxic. Sound familiar?
The country got some bad habits from the past few decades, when financial assets were seen as more attractive than workers. We've forgotten how to train workers, because for decades there were always plenty available to hire. Tax and fiscal policy became too heavily tilted toward managers of capital rather than workers. And because markets were seen as a relatively easy path to power and riches, young status-seekers flocked to Wall Street rather than trying to make their market somewhere else in society.
We're unlikely to see generationally cheap assets anytime soon, and instead, we may see a period of generationally expensive asset prices. This may have long-term benefits for American society.
As expensive asset prices help to support the labor market, we're starting to see employers and governments put more energy into workforce training to ensure an adequate supply of labor. This would help workers get better, higher-paying jobs, and it would lead to a more productive workforce.
A stronger job market with more robust wage growth can help young people forming households and give young families a firmer economic foundation -- good news for their communities and future children. As a worker shortage rather than a capital shortage becomes entrenched in the US economy, perhaps tax policy can change to draw more people into the workforce and increase the labor-force-participation rate.
And if Wall Street is seen as an ordinary white-collar job like law or medicine, rather than a path to becoming a billionaire and owner of a sports team, perhaps young people will seek out a different route to fame and status.
Over the past several years there's been talk of young people flocking to Silicon Valley rather than Wall Street, but over time tech may not be seen with such wonder. (It almost inevitably must decentralize, because it can’t pay enough people enough wages to all live in the ever-more-expensive Silicon Valley.) Our political leadership is relatively old and will need to be replaced over the next several years, so perhaps a greater number of young people will find elected office a more attractive career path than either finance or tech.
The bottom line is that a bad environment for Wall Street means good news for workers and society at large. You just have to look beyond the yield on your portfolio to see it.
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