25 March 2009

No Confidence in the Global Economy?

If sell-offs in the stock market are some form of judgment on the government's economic policies, what should we make of the reversal suffered today? The Dow Jones index surged following yesterday's decline, advancing by more than 100 points, but plummeted into the red for the day on the news that IBM was going to outsource more jobs to India. Should we conclude that stockholders and brokers disapprove of the company's action? Most market observers would probably say no, but people seem to be interpreting the IBM news as an indicator of the continuing weakness of the economy as a whole; otherwise, why sell? What does this particular story tell us apart from the fact that the IBM management are unpatriotic bottom (line) dwellers?

As it happens, the current issue of The New Republic features an editorial by Jonathan Chait demolishing the Republican argument that market declines reflect dissatisfaction with the Obama Administration's policies. He points out that it's absurd to attribute any single day's performance to fears of Obama policies that were already well known beforehand. Why blame a 300+ point decline on Inauguration Day on Obama when the market already had a good idea months earlier of what the new President meant to do? He also notes that stock prices are falling all over the world. If American markets are really disturbed by Obama's policies, the U.S. Dow should be falling "further and faster" than its global counterparts, but Chait says it isn't.

He also notes:

The larger fallacy here is to assume that the stock market is a proxy for the entire economy. Many people realize that the stock market is an imperfect gauge. But it's not just an imperfect gauge of the economy -- it doesn't even attempt to measure the economy. Stock prices represent the market's guess at the profitability of corporations. While that's related to the health of the economy, it's not the same thing.

TV encourages the wrong kind of thinking, Chait claims.

The stock market has become the media's real-time economic report card. Economic statistics that actually measure broader material well-being come out once a month, some once a year, others once a decade. The stock market updates instantly, making it irresistible. Cable channels, especially CNBC, have come to represent the stock-centric view of the world.

As I wrote earlier this week, the real danger could arise if people on the market actually come to believe that their decisions to sell or buy are political, or that they could somehow influence government policy by buying or selling. I get the feeling that some Republicans would actually like things to work this way, with Wall Street acting as a check on Washington. If that day comes, it'll be as much a revolution (or if you prefer, a coup) as if a mob invaded the Capitol with pitchforks and torches. And it would be very odd to hear self-styled "conservatives" cheering on the process.

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