And do workers have pension portfolios?
I just watched an interview that Michael Shellenberger did with Batya Ungar-Sargon. (It’s on Shellenberger’s gated Substack.) They’re discussing Trump’s tariffs and Ungar-Sargon argues that Trump is waging class warfare on the rich on behalf of the working class. Her evidence gets her halfway there. Trump’s tariff announcements certainly have destroyed much of the wealth owned by the rich.
But they will hurt the working class in two ways: (1) as consumers and (2) as owners of stocks.
Take the second point first. Trump’s announced tariffs have destroyed wealth for virtually everyone who holds a wide portfolio of stocks. That’s not just the rich. Many American workers own stocks in their 401(k) and 403(b) retirement plans. So Trump’s announcements have hurt them too.
I don’t know any worker who doesn’t buy goods. Most workers spent a large part of their after-tax income on goods. That brings me to point (2). If the tariff rates are implemented at anything close to the levels that Trump is threatening, prices on almost all imports will rise and that will cause prices on many domestically produced goods to rise.
Why do many economists focus on the stock market? Because stock prices adjust for new information and they do so quickly. The price of a stock reflects investors’ expectations of the flow of income from owning that stock. So stock prices are a good early indicator of wealth destruction. Prices of consumer goods move more slowly. But they will move.
I’ve seen people say that stock prices are based on short-term earnings. Not true. Imagine that Eli Lilly announced today that it would end all R&D and plow that money into earnings. Earnings would be higher and I’m very confident that Eli Lilly’s stock would fall.
Another note:
About 15 years ago I gave a talk to a local Rotary Club group. In it I made my case for free trade. If you don’t know Rotary, let me explain that the median age of the members was close to my age at the time, about 59. Also, my hair had already turned grey. In Q&A, someone said that he could see how free trade benefited corporations but how did it benefit the kind of people in the room. I had already explained how it benefited consumers, but I thought I would try a new tack. I said, “I see a lot of people in the room with the same hair color as mine. Don’t you have retirement assets? And isn’t a large fraction of your retirement assets in stocks? The audience laughed and the guy laughed. I think people have this absurd view that there is no connection between corporations and them.
READER COMMENTS
Craig
Apr 7 2025 at 9:03pm
“If you don’t know Rotary”
Was a board member, on the scholarship committee and also things like the local historical society, I was a real local yokel. Indeed the age tends to be higher, but usually its just local business owners and retirees who can actually make a luncheon in the middle of the week. One of the nice things about it is that one can visit many local Rotary clubs. My favorite one is a quite active club, which I still visit even though I am no longer a member of Rotary since leaving NJ, which holds its meetings at the yacht club on Nassau in the Bahamas. They still salute the king/queen and as an American I’m not sure what I’m supposed to do…
“I think people have this absurd view that there is no connection between corporations and them.”
You’re preaching to the choir 90% on this one however I might note that one will often hear certain bad news for ‘Main Street’ which ‘Wall Street’ pick up on as good for stocks, typical fact pattern is ‘stocks rip on weak jobs report as investors think Fed won’t feel pressure to raise rates’
Monte
Apr 8 2025 at 12:42am
Trump has single-handedly wiped out $trillions w/his tariffs, true enough, and it could get worse. But for some added perspective, the value lost from these tariff-induced disruptions pales in comparison to the major stock market crashes of the last 100 years. Reason enough to be concerned, but nothing to get manic about. The global economy is pretty resilient and, IMO, the circumstances aren’t quite as dismal as many of Trump’s detractors would have us believe.
But convince me, please, why I should sell stocks and sideline my money or hedge into gold because of Trump’s tariffs and then vote democrat and return power of the legislature to the left.
Jon Murphy
Apr 8 2025 at 9:36am
That cannot be right for many reasons, not the least of which is the size of the market is way bigger now. A 10% decline of a $1T market is way worse than a 100% decline of a $1m market.
Monte
Apr 8 2025 at 11:37am
On an inflation-adjusted basis, the trillions lost due to Trump’s tariffs still pale in comparison to the trillions lost due the 10 worst stock market crashes over the last 100 years. Are you arguing that losses due to Trump’s tariff policies are as severe or more so than the losses suffered during the Great Depression or the 2008 financial crisis?
Jon Murphy
Apr 8 2025 at 12:25pm
Yes. The size of the market alone. We’re talking trillions of dollars, not millions. Magnitudes different
Monte
Apr 8 2025 at 1:07pm
I just don’t see the current economic situation as severe as the Great Depression or the 2008 financial crisis. Those, among others, were global financial crises that affected the entire financial system, leading to massive unemployment, bank failures, and deep recessions that took decades to fully recover from. I don’t think we’re there yet.
Jon Murphy
Apr 10 2025 at 9:08am
The current economic situation is not as bad as the Great Depression or 2008. But the stock market crash is way worse.
The 1929 crash wiped out about $14b in wealth. Adjused for inflation, that’s approximately $258 billion in 2025 dollars.
Prior to yesterday, the stock market lost $9 trillion. This market crash doesn’t pale in comparison to the Great Depression. The Great Depression pales in comparison to this one.
Monte
Apr 10 2025 at 10:20am
It’s more about scale and proportionality, isn’t it? Relative to GDP and total market capitalization, the impact of the ‘29 crash was catastrophic. It wiped out a huge chunk of total wealth and the ripple effects were disastrous. Banks failed, unemployment hit 25%, and the economy collapsed. And looking back at 2008, the S&P500 dropped more than 50% peak to trough, unemployment hit 10%, and the banking system nearly collapsed.
Comparatively speaking, the GD and ‘08 were systemic failures that were far more devastating, it seems to me.
Jon Murphy
Apr 10 2025 at 10:33am
And my point is the scale is massive. Again, $9t versus $258b.
‘Twas. Relative to GDP, this one is worse. ’29 was a decline of about 1.6% of GDP (14b/~865b). This one was about 33.3% (9t/~27t).
True that in terms of market capitalization, it was lesser. That’s my point. The market is much larger, so your claim that this decline “pales in comparison” to ones in the last century is prima facie incorrect.
Monte
Apr 10 2025 at 11:02am
OK, but today’s losses haven’t had near the overall impact that the GD and ‘08 did. At least, my retirement portfolio is betting on it.
David Henderson
Apr 8 2025 at 10:55am
You write:
No.
I remember when Apple introduced the iPhone and the stock shot up. Someone asked me, “Should I buy Apple?” I answered, “No, you should have bought Apple.” Stock prices, as I wrote, reflect investors’ expectations of future earnings.
Monte
Apr 8 2025 at 11:26am
Thanks, David. I was being a bit cheeky here. I remain optimistic (and heavily invested in the market) in spite of the turbulence. But your point is well taken.
TMC
Apr 8 2025 at 11:56am
Monte, correct.
Date, Event, Loss, Recovery after 1 Yr.
1. October 19, 1987 Black Monday -20.47 23.19
2. March 16, 2020 COVID-19 Pandemic -11.98 66.07
3. March 12, 2020 COVID-19 Pandemic -9.51 58.96
4. October 15, 2008 Global Financial Crisis -9.03 20.79
5. December 1, 2008 Global Financial Crisis -8.93 35.85
6. September 29, 2008 Global Financial Crisis -8.79 -4.14
7. October 26, 1987 Black Monday 2.0 -8.28 23.59
8. October 9, 2008 Global Financial Crisis -7.62 17.76
9. March 9, 2020 COVID-19 Pandemic -7.60 41.10
10. October 27, 1997 Asian Financial Crisis -6.87 21.48
I bought in more this morning. Not sure if we’re at a bottom, but not likely too far off.
David Henderson
Apr 8 2025 at 1:33pm
Thanks, TMC.
And the weird thing about the October 1987 crash, something I pointed out on a BBC interview, is that we don’t have a clear idea about why the biggest one-day crash in history happened. We have hints, but not much more. By contrast, we’re pretty sure why the drops in the last week have happened.
Craig
Apr 8 2025 at 3:54pm
1987 was on heels of bad trade deficit numbers which sparked fears of a weaker dollar thus causing people to want to sell dollar denominated assets.
David Henderson
Apr 8 2025 at 5:40pm
But remember that to explain a large change in stock prices, you have to point to another large change, and one that just a little before. The drop was on a Monday, so the change would have had to happen after markets closed on Friday. I don’t think the news about the trade deficit came out then. It’s always reported when markets are open.
Craig
Apr 8 2025 at 6:39pm
At that time I was a bit young to really care and I learned about it more as a ‘factoid’ a few years later when I was in college, ie it was too recent to have been in the curriculum and not much time was spent on it, but occasionally it would enter the discussion in class.
Quick google:
“Stock markets raced upward during the first half of 1987. By late August, the DJIA had gained 44 percent in a matter of seven months, stoking concerns of an asset bubble.4 In mid-October, a storm cloud of news reports undermined investor confidence and led to additional volatility in markets. The federal government disclosed a larger-than-expected trade deficit and the dollar fell in value. The markets began to unravel, foreshadowing the record losses that would develop a week later. Beginning on October 14, a number of markets began incurring large daily losses. On October 16, the rolling sell-offs coincided with an event known as “triple witching,” which describes the circumstances when monthly expirations of options and futures contracts occurred on the same day. By the end of the trading day on October 16, which was a Friday, the DJIA had lost 4.6 percent.5 The weekend trading break offered only a brief reprieve; Treasury Secretary James Baker on Saturday, October 17, publicly threatened to de-value the US dollar in order to narrow the nation’s widening trade deficit.”
https://www.federalreservehistory.org/essays/stock-market-crash-of-1987
Seems like we have news which the market perceives will result in a weaker dollar at minimum coinciding with a weaker dollar it not otherwise causing it followed by the government itself straight up threatening to make the dollar weaker. Indeed, one might say that Baker’s threat might be the direct cause of the following Monday, of course that threat itself is rooted in the trade deficit number being bad that month.
steve
Apr 8 2025 at 5:23pm
The difference I think I see is that in those prior drops there was no reason not to expect markets to return to profitability. The issue causing the drops was either bogus or was time limited. In this case we dont know what tariffs will be from day to day, how long they will last and what the conditions would be to resolve them. We dont know how many individual corporations and consumers overseas decide that the US is not a good trading partner and look elsewhere. With the amount of uncertainty we have no idea if factories will come back to the US and when. We dont know where the workers will come from and how quickly they will develop the skills.
Steve
Warren Platts
Apr 9 2025 at 4:10pm
TMC, you are right. The casino always bounces back. Now is a buying opportunity. Warren Buffett has been mostly in cash for over a year now. When he starts buying, cover your shorts…
TMC
Apr 8 2025 at 11:57am
Link for above.
https://www.hartfordfunds.com/practice-management/client-conversations/managing-volatility/top-10-stock-market-drops-recoveries.html
Peter
Apr 8 2025 at 6:13pm
I just don’t buy (2), never had. The Stock Market is a market, in the aggregate nobody is harmed as for everyone panic selling their stock (harm) someone is buying it (benefit). Now sure at the individual level there are some people that HAVE to sell right now today because they are going to be in the morgue Friday and they will be harmed but that number is effectively zero statistically and another worker will benefit from their fire sale.so it’s a wash.
The daily Instant Stock Market index level is irrelevant to nearly all workers and their retirements. Even during the Great Depression if you had held a broad basket pseudo mutual fund, you would have turned out ahead. Plus face it, the majority of Americans don’t have retirement money regardless hence aren’t impacted at all. The guy working 7Eleven his whole life living off food pantries could care less how low SPY goes. The loses aren’t realized hence it’s just ego, like not winning PowerBall. It’s a middle class panic problem of their own creation.
Roger McKinney
Apr 9 2025 at 9:41am
Great points! The Austrian economist Ludwig Lachmann showed that the stock market allocates capital to the best performing companies and is the best for predicting the future.
David Henderson
Apr 9 2025 at 3:51pm
Thanks, Roger.
Where did Lachmann show that? I didn’t know that he had done empirical work.
Roger McKinney
Apr 9 2025 at 8:12pm
It’s in Capital and Its Structure but it’s mostly logic and not so much empirical. The basic idea is that money in the stock market leaves low profit businesses for high profit and thereby creates the structure of capital.
David Henderson
Apr 10 2025 at 7:24pm
Ah. Thanks, Roger. I would have said that he used reason and logic to reach that conclusion. In that sense, he showed it.
Knut P. Heen
Apr 9 2025 at 12:29pm
I would not be too confident about your Eli Lilly prediction. Big Pharma may do better by just buying patents and terminate most of their own R&D. Their comparative advantage is large-scale production, distribution, and marketing. VC-funding of small start-ups provides much stronger incentives for R&D than employment in a big company (spending other people’s money on “interesting” rather than profitable research).
Alan Goldhammer
Apr 11 2025 at 4:02pm
David,
Can you provide an answer to the questions I pose?
I fully understand how tariffs work and know that the calculation for the reciprocal tariffs was something pulled out of a hat (or some malfunctioning AI tool). However, I don’t know if imports are fully modeled for how much they add to the US economy. Any small business that brings in Chinese products to sell, adds value by creating jobs and part money that they generate from sales foes to the Federal, State, and Local governments in the form of taxes. Why should not this added value be subtracted from the trade deficit? Isn’t this also added to the US GDP? Maybe these are just naïve questions but, as you know I am not an economist.