The Lane Between Wall Street and Main Street
Update Aug. 25, 2022. The Tuition Loan Forgiveness is an example of a Bottom-Up policy mentioned in the post. The entire economy will benefit.
We hear the terms, Wall Street and Main Street, all the time in political and economic discussions. They aren’t the same thing, but how are they different? Do governmental policies affect them differently?
What is Main Street? It is everyday economic activity as measured by GDP. It’s workers, factories, retail outlets, services and consumers. In 2021, the magnitude of GDP, the size of Main Street, was $23 trillion dollars.
What does that leave for Wall Street? Wall Street handles ownership and financing of economic activity. It reflects past successes and weighs future prospects. It’s the NYSE stock market, Nasdaq, commodity markets, banking and insurance systems. In 2021, US stock market capitalization ($41T) and US bond capitalization ($46T) amounted to $87 trillion dollars. We use Wall Street as a store of wealth in America through the ownership of stocks and bonds.
The lane that connects the two streets flows with money. Net profits, $3T in 2021, from GDP flow to Wall Street, while Wall Street invests in new products, $2T in 2019, using past profits and loans to grow Main Street economic activity. Interesting that more money flows from smaller Main Street to larger Wall Street.
Now that we have a bit of background, let’s consider how two recent policy changes affected the two streets.
Tax Reduction Impact
In the 2017 Tax Cut and Jobs Act (TCJA), the corporate tax rates were reduced and touted as allowing American business to become more competitive worldwide and to increased economic activity. Here’s what Forbes (Nov 17, 2017) wrote.
The argument for cutting corporate tax rates is that it will stimulate business capital spending. Greater capital spending increases the economy’s total productive capacity, and it boosts the value of each additional worker. Thus, capital expenditures grow the economy and wages both.
What actually occurred? The lowering of the corporate tax rate resulted in a boost to corporate profits of $100B in the first year. Roughly 91% of that gain was kept by Wall Street in the form of stock buybacks and dividends. Only 9% was used to fund R&D and capital investment that benefited Main Street.
On Feb 21, 2019, Forbes addressed the lack of capital investment from the tax reduction.
[I]t’s helpful to focus on R&D, because R&D is a leading investment—it creates opportunities. Capital investment then follows to exploit those opportunities. In short, the reason the TCJA didn’t increase R&D investment is that most companies were already over-investing in R&D.
The corporations gave bought back stock which triggered bonuses for executives. This Forbes statement, of course, contradicts the argument they made to support TCJA!
Trickle Down gave Wall Street $100B lesser tax burden in the first year. It kept $91B. Wall Street trickled down $9B to Main Street.
Lower corporate taxes enriched CEOs and helped the already well-to-do and wealthy who own corporate stocks. The TCJA did not noticeably increase economic activity, the pulse of Main Street, where most people experience the economy, through jobs, wage increases, and inflation.
Federal Pandemic Rebates
Because of the lockdown required to escape the worst effects of the business shutdowns and limiting economic activities because of the COVID-19 pandemic, the Fed followed a multi-prong strategy. Let me focus on the cash rebates issues to every American. The vast majority of citizens spent those funds. This increased GDP as the money flowed down Main Street, with stops at the grocery, personal shoppers, and door-to-door delivery and hence to wholesalers and manufacturers. Finally, the new profits landed in corporate coffers and Wall Street.
This spending of the rebates generated jobs and business activity such that, in 2022, we see historically low unemployment rates and rising salaries.
The monetary effect of broad-based rebates benefited Main Street first, then the increased profit flowed up to Wall Street.
The Bubble Up policy gave Main Street a bundle of money to spend. Main Street spent that bundle on goods, services, and salaries, delivering 13%, the net profit, to Wall Street.
Future Economic Actions
Bubble Up is a more efficient than Trickle Down in countering troubles in the broad economy.
Equal reduction of individual tax burden is the way to boost the economy, not by a change to all rate brackets. A decrease in taxes of $1,000 to each taxpayer is spent by the overwhelming majority of recipients. That extra spending money generates a greater activity than the original amount. This multiplier effect describes the turnover of the busboy’s salary by his spending and those shopkeepers spending it on services and goods, whereby further peoples have their income increased and spend the increase on goods and services. As a result, corporate profits increase and flow up to Wall Street.
The impact of new debt incurred by the legislation is ignored here. Not because it is unimportant to consider, but because it distracts from the different manner by which Wall Street and Main Street react to government policies.