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GameStop Reveals How the Growing Wealth Gap Defies American Meritocracy

Normally, I wouldn’t have involved myself in something so seemingly inaccessible and intangible as the stock market. But like many others during the coronavirus pandemic, uncertainty in a time of national fiscal panic made me reconsider. In 2020, the unemployment rate spiked from a recorded low of 3.8% in February to a peak as high as 14.4% only two months later, compared with a peak of 10.5% throughout two years of the Great Recession. In unprecedented economic turbulence—and Internet accessibility—countless ordinary people are looking for other, less conventional means of both short- and long-term financial gain.

Bar chart of 2020 unemployment claims due to COVID-19
Weekly unemployment claims. Image: Fortune.

The Widening Wealth Gap: Retail Investing Spikes during COVID-19

According to Citadel Securities’ Joe Mecane, corona-driven price volatility led to casual traders (or non-institutional investors) comprising nearly 25% of market activity, as compared with roughly only 10% in 2019. Following the gradual easing of account minimums and commission fees, months of lockdown, volatile opportunity for high gains, and greater accessibility to trading tools with apps like Robinhood, retail investors have flooded the markets in search of the imperceptible profits typically reserved for the richest demographics.

Chart of K-shaped economic recovery of COVID-19 from the Chamber of Commerce
K-Shaped Recovery During COVID-19.

Despite unemployment steadily dropping since April’s all-time high, financial recovery has since been unevenly redistributed. While Donald Trump had hailed the “V-shaped” comeback from COVID (or a return to normalcy), President Biden likened the recovery to a K—where “spoils have gone overwhelmingly to the rich,” CNBC’s Greg Iacurci explains. Lower earners, people of color, and women (who are disproportionately overrepresented in the service sector) have borne the brunt of the burdens wrought by unemployment and financial insecurity. Compared with the national unemployment peak of 14.4% in 2020, the rate for Black and Latino Americans peaked at 17% and 19%, respectively.

While I’m not presuming to know reasons and mindsets behind all retail investors’ choices, there is undeniably an association between the increasing wealth divide, financial insecurity, and the spike in retail investors’ activity. For varying reasons, it’s likely that a growing awareness of the ever-increasing wealth gap in the face of a dire and disproportionate economic plunge has ultimately helped set the stage for the GameStop showdown.

Local NJ GameStop goes out of business
Local New Jersey GameStop closes. Image: Dreamstime.

How Reddit Got Involved

Around September 2020, the Reddit forum r/WallStreetBets found out GameStop was one of the most shorted stocks on the market, meaning more shares were controlled by short-sellers than were available to buy on the market. Short-selling happens when institutional investors try to make a profit off of an already declining or failing business, essentially betting that the company will continue to struggle and decrease in value—while increasing investors’ potential for profit.

Shorting works by borrowing another investor’s stock with the promise of returning it later (and hopefully at a lower price). For example, imagine a friend leaves for a year-long vacation and lets you borrow her laptop while she’s gone. You know that a new model of the same laptop is coming out soon, which would lower the value of the current one, so you decide to go and sell the laptop for $500. Six months after the newer laptop has been on the shelves, you buy your friend’s older laptop back for only $200. When she returns, you hand her back her laptop—and pocket the $300 difference.

Chart on cell phone shows GameStop's share price exploding throughout one week in January 2021.
GameStop's share price soars. Image: Dreamstime.

Like any kind of gambling, betting on the value of a company can be a matter of unbelievable profit—or unforeseen loss. When Reddit users discovered that hedge funds were betting on GameStop’s failure, they saw an opportunity to turn the tables of profit—by buying enough shares to drive GameStop’s value back up again. Day-traders collectively stormed the market during the last week of January 2021, causing GameStop’s stock price to explode as much as 400% over the past three months. Unlucky short-sellers were forced to start buying back their borrowed shares sooner rather than later to minimize their losses in the ever-upward trend, further fueling the price surge in what’s known as a “short squeeze.” Share price spiked nearly 70% that Friday alone.

The Meritocracy Myth: No Risk for the Rich

The illusion that the stock market has always been wholly accessible epitomizes the myth of our meritocracy. Policymakers and government officials have long since molded the American Creed into the mantra of personal responsibility, a fool-proof strategy of insisting that hard work and discipline are the definitive determiners of success in America—not socioeconomic disparities or racial discrimination. This political trend of neoconservativism reached a peak during the Cold War period as a means to refute international accusations of structural racism.

Although “risk” has allegedly always been the idea behind the stock market, GameStop made national news because the real “risk” turned out to be the flow of net profit in the wrong direction: from the rich to the regular. Despite the rhetoric of risk and responsibility, Wall Street wealth has always been disproportionately cushioned from financial downfall at the expense of everyone else—we saw it in 2008, and we’re most certainly seeing it again now.