Economic Inequality and Stock Market Trends

In order to analyze the relationship between stock market performance and economic inequality within the United States (US). A deeper understanding of historical data from the S&P 500 and Gini coefficients for income distribution was required. This combined with looking at poverty levels over time provides a clear indicator of economic inequality related to the stock market.

The Gini coefficient is one of the most commonly used ways to measure inequality. A higher coefficient means that the country is closer to complete inequality. This means that only one person has income while the rest of the citizens don’t. A lower coefficient means that everyone is closer to having the same amount of income. There are two variables that have been used and compared to each other to determine income inequality over time. The first variable, Market Income Gini Coefficient measures income inequality before taxes and transfers. The second variable is Disposable Income Gini Coefficient, which measures income inequality after taxes and transfers.

In order to interpret this project from the lens of a Digital Humanities Scholar, it was decided to interpret the data using the theories of Data Marxism and Intersectionality. Data Marxism believes that the base of any society consists of the economic forces that regulate the consumption, production, and distribution of goods and services. Anything after that is the superstructure of society, which depends on the base to survive. Naturally, almost all people in any society will want as many resources as possible and that will eventually lead to a gap in wealth between those who are able to control the economic forces and those who don’t, subsequently creating class conflict.

By comparing the different Gini Coefficients between each other and S&P 500 closing prices, the project aims to find the connection between stock market trends and economic inequality. Using data marxism theory, it becomes apparent that U.S. society is on it’s way to the capitalist stage of development, Das Kapital, where society is put into two classes, the bourgeois who own the means of production and the proletariat who are forced to become contracted laborers to survive. It is important to note that this class binary does not exist completely in the US. Often, citizens are described to be a part of the upper, middle, or lower class.

Data Sources:

OECD Income Inequality Dataset (SWIID) - United States:

This dataset provides measures of income inequality specifically for the United States, including the Gini coefficient for both market (pre-tax, pre-transfer) and disposable (post-tax, post-transfer) income. The dataset spans several decades, offering a detailed longitudinal analysis.

S&P 500 Data from Yahoo Finance:

Historical data of the S&P 500 index includes daily closing prices, providing a comprehensive view of stock market performance over time.

Data Cleaning and Integration:

The data was filtered and cleaned to focus on the United States. The S&P 500 data was aggregated to yearly averages to match the temporal granularity of the income inequality data. The datasets were then merged on the 'year' variable for an integrated analysis. Visualizations were created to explore trends and correlations between the stock market and income inequality.

Gini Coefficient:

The Gini coefficient is a measure that represents the income or wealth distribution of a nation. A Gini coefficient of 0 represents perfect equality (everyone has the same income), while a coefficient of 1 (or 100%) means maximal inequality (one person has all the income, and everyone else has none). In this project, two types of Gini coefficients are used:

Market Income Gini Coefficient: Measures income inequality before taxes and transfers.
Disposable Income Gini Coefficient: Measures income inequality after taxes and transfers.

How Does the Stock Market Work?:

Here is a short video reviewing the history and the workings of the stock market provided by TED-Ed on Youtube. Having a basic understanding of this system is important in our analysis of its relationship with inequality.

Historical Context: Why it Matters

Historically in the United States there have always been prevalent implications caused by the relationship between stock market performance and income inequality. For example, during periods of economic growth, such as the post-World War II, economic growth was very high, and income inequality was significantly low. This could be attributed to progressive tax policies, strong labor unions etc. However, since the 1980s, income inequality has been rising at an unprecedented rate due to several factors such as tax cuts for the wealthy, and most prominently the shift from capital income share exceeding the share of labor income. In simpler terms, this means that a significantly larger portion of money is generated from investments in capital, as opposed to wage labor from work. Furthermore, wealthier people who already have investments in the stock market, real estate, etc are able to accumulate wealth at much faster rates than people who primarily rely on wages. This leads to further income and long term wealth inequality as the benefits of economic growth and financial gains are mainly gained by top earners and investors. This is a similar trend to Karl Marx's analysis of the bourgeoisie and the proletariat, where the bourgeoisie owned the means of production and capital and accumulated wealth at a disparate rate, as opposed to the proletariat who sold their labor and were exploited by the bourgeoisie. These dynamics perpetuate further economic inequality and challenge social cohesion as predicted by Marx. In addition, analyzing the current income inequality through a Marxist lens, the current climate can be attributed to the effects of a capitalist system that emphasizes profits, and sees labor exploitation as inevitable. Marx believed in the concept of "class consciousness" where the working class would realize their exploitation, and come together to push for remedies such as progressive taxation, higher wages, etc.

Unfortunately, this problem is not easily divided into the proletariat and bourgeoisie. Because Marxist theory especially highlights class division, it often fails to notice the nuance of this fight for many identities that exist within the “American proletariat.” On one hand, the American economic classes are not commonly divided into proletariat and bourgeoisie. In fact, there can be many subdivisions, but most commonly used are upper, lower and middle class. Racial and ethnic groups have also not shared the same experiences socially or economically. Due to this, events that cause economic turmoil for the entire country differ in the magnitude they affect different racial and ethnic groups as much as they affect classes. The historical makeup of the American classes are heavily tied to the country’s past laws and culture. Historically, there was progressive taxation in the United States as well as a higher labor share of income. This is no longer the case, and the current trend is a larger capital share of income, and many loopholes for taxation on the wealthy, while low income communities are effected disproportionately. A reflection of this makeup can be found in the ownership percentage of stocks where white families own more on average than other groups and hispanic families own the least (DeSilver). Class consciousness may not appear the same for everyone as inequality persists between the groups. In addition although overall economic growth is very high, the gap between the wealthy and the low income is increasing at a disparate rate as well.

Economic barriers that exist cannot simply be due to being wealthy or poor. Identities based on race, ethnicity, sexuality, gender, and ability can contribute and perpetuate these barriers. As we see laws repealed and anti-discrimination laws instituted, we see progress towards less inequality. In order to gauge the level of inequality in the US, the correlation of stock market trends and income inequality will be a good measurement. Overall our topic is significant within history, because not only are we able to analyze historical trends for income inequality, but also speculate potential consequences in the future if income inequality continues to rise, and the wealth gap becomes more disparate. In addition, by sourcing the reasons for an increase in inequality, it can help political leaders and lawmakers provide appropriate support for those who are disproportionately hurt by any financial crisis.

Karl Marx Portrait:

Renowned sociologist whose theories on capitalism, class struggle and economic inequality provides a foundation for Marxism.

Pyramid of Capitalist System:

Showcases the social and economic hieracrhcy under capitalsm in the 19th century where bourgeoise are wealth elite, and proletariat are exploted working class

19th Century Bourgeoise:

Illustration of 19th century Bouregeoise who owned means of production, exploited proletariat and amassed disparate wealth.

What is Poverty?

Poverty status is defined by comparing annual income to a set financial thresholds that depend on family size,number of children and the age of the householder. If family income before tax is less than the threshold for their family then they are in poverty. For individuals, poverty status is comparing their income to their poverty threshold. While the rest of the world was recovering from World War II, The United States of America (US), which was relatively unharmed,was able to take advantage of this and enter into an era of economic prosperity. Across the board, incomes for almost every demographic doubled and the US was arguable in its golden age. Ultimately this all came crashing down in the late 1970’s. With federal budget deficits growing because of the Vietnam War, the Bretton Woods agreement collapsing, and the arab oil embargo, the US entered a period of “stagflation” where prices kept increasing but the economy was barely growing. Thus the amount of people living in poverty increased.

Figure 1 "Number in Poverty Rate Using the Official Poverty Measure: 1995 to 2022"

The top line graph displays the amount of people who were in poverty (blue line) while the bottom line graph (green line) displays the poverty rate from1959 to 2022. The amount of people in poverty generally increases since 1970.

While the US economy eventually recovered from this, the problem now was that although most Americans were making more, the wealth between the average American worker and a select few was widening to levels never seen before.

Figure 2

"Gini Coefficients Over Time"

The line chart shows the trends in Gini coefficients for both market (red) and disposable (blue) income over the years. The Gini coefficient for market income consistently shows higher inequality compared to disposable income. However, both measures have shown an upward trend over the decades, suggesting increasing inequality in the US.

Figure 3

"Median household income in the United States from 1970 to 2020, by income tier"

This bar chart from Statista, displays the median income for the upper, middle, and lower class in the United States. All classes have seen an increase in the median household income, but there is a signficant difference between the growth in all three classes. The upper income class saw the highest increase while the lower income class saw the least increase.

Rising Inequality

From the data we collected, we created a visualization that tracks the disposable income and market income Gini coefficients from 1960 to 2023 (Figure 2). As noted before, the American bourgeoisie and proletariat are hard to distinguish due to the fact that this binary divide is not applicable to the American classes. In the United States, there are three major classes: upper, middle, and lower. If we compare the median income of the classes and the change between the years for each class (Figure 3), there is a noticeable gap between the median of the upper class and the others. Even though all classes see a rise in the median income, the gap does not close between the three classes. The divide and inequality continue to persist even if the median income increases. If we compare this gap of income and the rising Gini coefficients, we notice that as the gap between the classes continues to grow, so do the Gini coefficients.

Stock Market and Inequality

In order to see a relationship between stock market trends and economic inequality, those who benefit the most are just as important as those who do not benefit. The percentage of families owning stock directly in the United States is less than 20%, yet the composition of ownership amongst the classes shows that the wealthy own stocks directly the most (Owyang). Figure 4 presents the general upward trend of the average closing price, according to the S&P 500 index. The price continues to increase making participation in the stock market expensive therefore creating a financial barrier for those of lower and middle income classes to participate. Because of this, when the stock market is doing well, those who generally benefit are the wealthy which can perpetuate the income gap between the classes. We have observed the Gini coefficient has continued to rise since the 1970s, but we are now seeing how exactly the stock market affects the Gini coefficient

The line chart also shows how economic events can affect the average closing price for the stock market. The important years to focus on would be 2008 and 2020; these are the years we see a diverge from the general pattern due to an economic crisis. The success of the stock market does not benefit all classes equally, but does it hurt participants equally? To further investigate this question, we must look at who owns the stocks.

Figure 4 "Line Chart of S&P 500 Average Closing Price Over Time"

This chart shows the average closing price of the S&P 500 index over time, showing significant growth in the US stock market. Key economic events, such as the dot-com bubble, the 2008 financial crisis, and the COVID-19 pandemic, are evident in the fluctuations.

Stock Ownership

We have been primarily focusing on the division of class in the United States. Although this focal point is important, identity within the United States also plays an important role in stock ownership. In Figure 4, it shows that the average closing price for the stock market has risen substantially since the 1960s. If the stock market closing price continues to grow the only people able to participate would be those belonging to the upper income class or some of the middle income class. It is evident that a booming stock market will not essentially help all income classes equally if only a few of them are able to participate.

If we delve deeper into the topic of income and class inequality, the subject of identity cannot be ignored. We will primarily look at racial groups, ethnic groups and education levels that exist in the United States to discuss this topic further. Taking a look at the ownership of publicly traded stock, white families tend to own more than other racial or ethnic groups. According to the Pew Research Center, the percentage in ownership is divided with 66% of stocks owned by white families, 39% owned by black families, and 28% owned by Hispanic families (DeSilver). The occurence of financial crises is not predictable, but there is data to show that the effects of these crises are not equally felt.

A financial event, such as the Great Recession, will negatively affect everyone who participates in the economy. In Figure 4, the average price of the stock closing price decreased around 2008, and as observed in Figure 2, the Gini coefficient has been on the rise since the 1970s, but the number of those in poverty shot up around 2008 (Figure 1). Although everyone felt negative effects, the effect based on racial groups is not the same. White people were impacted the lowest, while Black people were impacted the highest economically according to the Gini coefficient increase (Yaya). Financial literacy and education levels can also contribute to these financial barriers that do not allow everyone to benefit from positive stock market trends. Those who come from higher education levels tend to invest in stocks more, but if only those who can afford or have access to higher education invest more, it limits who can participate even with the stocks being public (Balaban).

Identity and income class are intertwined in the American economic system. Because of this, identity and income class are good indicators of how economic inequality affects those pertaining to those groups. It also demonstrates how the stock market does not necessarily indicate trends with economic inequality because of these barriers. The visualizations provided have demonstrated that if the rise in stocks continues to grow all classes cannot equally participate, but it is also important to highlight that not all identities will have equal opportunity to participate as well.

From the chart (Figure 5) alone, it is hard to decipher if the percentage change in the S&P 500 really affects the Gini coefficient percentage change. The stock market in itself is very variable and unpredictable. The visualization “Heat Map of Correlations” also shows weak correlation between these variables, but it is evident that if we delve deeper into the class divide and stock market trends, they are not mutually exclusive and do have a relationship. In fact, if we look at key years, such as 2008 and 2020, there apears to be a big percentage change in the S&P 500 as well as in the Disposable Income and Market Income Gini coefficients. The Gini Coefficients continuous rise leads us into the stage where the bourgeoisie continue to increase their wealth, while increasing the economic inequality of others or the “proletariat.”

Figure 5 "Scatter Plot of S&P 500 Average Closing Price vs. Gini Coefficient (Market Income)"

This line plot compares the percentage changes in the S&P 500 closing prices with the percentage changes in the Gini coefficients over time. It visually demonstrates how relative changes in the stock market correlate with changes in income inequality.

Conclusion:

As scholars of the Theory and Method in the Digital Humanities class, we pay strong attention to answering the humanistic questions of social justice by utilizing digital/computational information tools. After rounds of thoughtful consideration and pre-data collection, our group finalized our project topic to evaluate the association between stock market patterns and economic disproportion in the United States. By utilizing historical data from the S&P 500 and Gini coefficients, our objective is to gain deeper insights into how specifically the stock market trend correlates with income inequality distribution. We delved into theories of Marxism and the concept of intersectionality to make connections and draw conclusions about how this topic is meaningful in revealing the socioeconomic climate among different classes.

Diving into the analysis part, we applied the theory of intersectionality and Marxism to emphasize how inequality is influenced by factors such as race and class struggle. Our historical context demonstrated the importance of this topic by stating the periods of economic prosperity in the U.S. have not benefited all groups equally, but in many scenarios exacerbated the disparities between the poor, wealthy, and diverse racial and ethnic groups. Furthermore, our visualizations showcased a positive correlation between growth in the stock market and the rise in Gini coefficients. These data visualizations also unravel the ramifications of fiscal policies, illustrating that while taxes and welfare opportunities reduce some inequality in a sense(difference between market and income Gini coefficients), the overall trend remained on the rise.

After an in-depth review, our project "Economic Inequality and Stock Market Trends" examines the significance of pondering both market dynamics and socio-economic policymaking when addressing economic inequality. Referring back to our research findings, indicate that if no outside factors change the income and wealth gap, it will likely continue to widen further, which will ultimately perpetuate social and economic disparities. With our analysis and seeing through the lenses of Marxism and Intersectionality, our goal is to provide further informative perception into the correlation between stock market performance and economic inequality in the US, and eventually contribute a unique dimension of critical thinking piece to the digital humanities scholarship.

Sources :
"How Does the Stock Market Work?" YouTube, uploaded by TED-Ed, 29 April 2019, https://youtu.be/p7HKvqRI_Bo_____si=y16eMu6iFGzwkFdp.

DifferenceBetween.com. (2023, May 6). What is the difference between bourgeoisie and proletariat. Retrieved June 27, 2024, from https://www.differencebetween.com/what-is-the-difference-between-bourgeoisie-and-

Encyclopedia Britannica, Inc. (n.d.). Karl Marx. In *Encyclopaedia Britannica*. Retrieved June 27, 2024, from https://www.britannica.com/biography/Karl-Marx

Goddard, T. (2016, February 1). In search of the bourgeoisie. *Chronicles: A Magazine of American Culture*. Retrieved June 27, 2024, from https://chroniclesmagazine.org/columns/perspective/in-search-of-the-b

Organisation for Economic Cooperation and Development. IOMC, https://partnership.who.int/iomc/participating- organizations/oecd.

Statista Research Department. “Median Household Income by Tier U.S. 2020.” Statista, 12 Mar. 2024, www.statista.com/statistics/500385/median-household-income-in-the-us-by-income-tier/.

United States Census Bureau. “National Poverty in America Awareness Month: January 2024.” Census.gov, United States Census Bureau, Jan. 2024, www.census.gov/newsroom/stories/poverty-awareness-month.html.

“Yahoo Finance.” Get the Latest on Finance & Market Insights, www.advertising.yahooinc.com/about/our- brands/yahoo- finance.

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