Markets Plunge: Hundreds of Billions Redistributed to the Less Wealthy

Dean Bakers headline for his blog post on the drop in the marketwhich goes on to state

You won't see that headline in the articles reporting on today's stock market plunge. However, it is in fact true, as can be seen with a moment's reflection.

The stock market's value does not directly affect the country's ability to produce goods and services. We have just as much labor, capital and technical know how after the market plunged as before it opened. The only thing that changed was that the people who hold shares in the market now have about $400 billion less in wealth.

The market's $400 billion loss in value reduced the ability of shareholders to make claims on the economy's output, but It didn't reduce the economy's productivity ability. This means that people who own little or no stock can now claim a larger portion of the economy's output. As a practical matter, this means that the price of some items (e.g. houses) might fall, so that they will be more affordable to people who either don't own a home or would like to buy a bigger home.

[If this is hard to understand, imagine the extreme case where the stock market fell to zero. People like Bill Gates would no longer have the money to keep up their homes. They would be forced to sell them for whatever price they could get. Those without substantial stock or property are suddenly well-situated to buy a house.]

In short, the stock market is often about redistribution. When it falls sharply this is a redistribtuion from the wealthy to the less wealthy. That is not upsetting for everyone, even though the media may not report it that way.