Three mutually uncorrelated economic disturbances that we measure empirically explain 85% of the quarterly variation in real stock market wealth since 1952. A model is employed to interpret these disturbances in terms of three latent primitive shocks. In the short run, shocks that affect the willingness to bear risk independently of macroeconomic fundamentals explain most of the variation in the market. In the long run, the market is profoundly affected by shocks that reallocate the rewards of a given level of production between workers and shareholders. Productivity shocks play a small role in historical stock market fluctuations at all horizons.This would appear on the surface to push against the notion that we are the 100%. Over the long term, fluctuations in stock market value come from reallocation between workers and shareholders.
The actual findings of this paper are interesting and useful, but I think we need to be careful about how they are interpreted. Much like the Mian & Sufi findings about the housing boom, mostly what is going on here is that they have adjusted away almost the entire story, and they are analyzing the small sliver that is left. They have detrended the data exponentially. For instance, take a look at this graph from the voxeu article:
Over the long term, we can see here that fluctuations from the trend largely correlate with changes in the share of income to shareholders.
From the article's conclusion:
Technological progress that raises aggregate consumption and benefits both workers and shareholders plays a small role in historical stock market fluctuations at all horizons...This seems like misleading interpretation to me. We are talking about a 10% fluctuation over a period where the trend growth was something like 700% in real terms.
Indeed, without these shocks, today's stock market would be about 10% lower than it was in 1980. The shocks responsible for big historical movements in stock market wealth are not those that raise or lower aggregate rewards, but are instead ones that redistribute a given level of rewards between workers and shareholders.
Here is a scatterplot of real capital income and real compensation since WW II. If you want to know what capital income will be in a given year, an extremely good proxy would be knowing the level of compensation in that year - and vice versa. The correlation is .97.
So, whatever we might learn from this paper - and there are things to learn from it - it seems very important to keep in mind that this paper is about a 3% portion of the total story.
It seems to me that the quote above should be prefaced with the sentence: Technological progress that raises aggregate consumption and benefits both workers and shareholders explains general growth in stock market values, which is about 97% of the growth in income and wealth. Shifting factor shares might explain much of the other 3%.
It's a shame that the human psyche is so drawn to battles over relative status. The story of human history and human advancement is a story of the battle to overcome this mental defect. We are the 100%. How much social attention is paid to the 97% of the story versus the 3%?
The largest risk of economic dislocations, like what we have seen over the past couple of decades, isn't the actual shocks themselves. It is the human tendency to retreat into battles over relative status. Notice that their measure of the effect of factor shares on stock wealth has declined since the late 1990s. How's that workin' for ya? Is there any disagreement that 1968 and 1998 were better for both shareholders and workers than 1978 or 2008?