It was during Charles Erwin Wilson’s confirmation hearing to be secretary of defense under President Dwight Eisenhower in 1953 that “Engine Charlie” — so named because of his long-tenured position as CEO of the world’s largest car company — is said to have uttered the famously self-serving line, “What’s good for GM is good for America.”
In fact, what Wilson told Congress was more nuanced, and his actual words have relevance to the disconnect between stock prices and the economy in the aftermath of the Great Recession.
When asked if he could make a decision as defense secretary that would be adverse to GM, Wilson said he could but added he didn’t think that would happen because, “for years, I thought that what was good for General Motors was good for America, and vice versa.”
Of course, we’ll never know for sure if Wilson changed his mind about the allegedly symbiotic relationship between the corporate bottom line and the national interest, but in the broader perspective required of a government servant, he at least hinted at the recognition that Wall Street and Main Street were not the same place.
Profits, not incomes
The stock market is to the economy as the weather is to the seasons: strongly correlated, but often with important categorical divergences.
Just as a polar vortex and bomb cyclone can form amid the warmest global climate conditions on record, incomes can lag and economic growth disappoint even as the stock market booms.
It was a year ago that President Donald Trump left the business world for government work. Judging from his recent comments, however, Trump’s views about the relationship between the stock market and the economy appear to hew close to Wilson’s partial misquote, with the president even suggesting — erroneously — that gains in equity prices reduce the national debt.
On several occasions, Trump tweeted about how the string of record highs in the stock market meant the American economy was doing well. That’s at odds with the message he so forcefully delivered on the campaign trail in 2016, as stocks were putting the finishing touches on a 235% rise during President Barack Obama’s two terms.
Stock prices reflect the reported and projected profits of publicly traded U.S. companies, as viewed by investors through the filter of current and expected interest rates. Those prices do not necessarily reflect the earnings of ordinary Americans, which depend on numerous factors not always perfectly correlated to the health of public corporations.
In particular, the connection between profits and incomes is imprecise, at best.
Since the current long-term bull market in equities began in 1982, the nominal value of the U.S. stock market has climbed at a compound annual rate of 9.7%. Over that same period, equivalent growth in the median household income was a paltry 3.1%, less than one-third of the market’s rate.
Yet during the long-term bear market in stocks between 1968 and 1982, the capitalization of the U.S. stock market grew by 2.1% per year while the median household income increased by 6.3%, or triple that rate.
There are about 4,500 companies traded on U.S. securities exchanges. Most appear to be doing well. But those publicly traded companies represent only 0.00075% of the roughly six million American businesses with employees, and just 0.0002% of the 22 million American businesses without employees.
Less than one-fifth of the domestic workforce is employed by the Fortune 500 behemoths that make up about two-thirds the total capitalization of the U.S. equity market.
In recent years, a virtuous circle has developed between stock prices and the economy through the so-called wealth effect. To the extent that people feel confident when stocks are rising, they are more likely to support economic growth by spending some of those paper profits.
The risk, of course, is what happens when financial asset values stop rising, a conundrum over which monetary policy-makers have long fretted, but remain unsure about how to resolve.
In any case, the historical record is clear: The stock market does not automatically reflect the economy or the financial well being of most Americans. But to Charlie Wilson’s point, what was good for General Motors in the 1950s is probably still what’s good for General Motors.
Tom Saler is an author and freelance journalist in Madison. He can be reached at tomsaler.com.
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