The Wall Street Journal opines today:
As 2009 opened, three weeks before Barack Obama took office, the Dow Jones Industrial Average closed at 9034 on January 2, its highest level since the autumn panic. Yesterday the Dow fell another 4.24% to 6763, for an overall decline of 25% in two months and to its lowest level since 1997. The dismaying message here is that President Obama’s policies have become part of the economy’s problem.
This sentiment reminds me of James Surowieki’s blog post from early January, the one in which he tried to read the tea leaves of hope scattered amidst the stock prices of the month. If you remember, back in the glory days of Dow 9000, Surowieki intuited that the gods had spoken in favor of SuperJesus Black Reagan’s hopium for the masses:
support for the stimulus package, as well as support for the Paulson plan, hasn’t just come from liberal economists or Democratic politicians. On the contrary, among the biggest supporters of both have been the world’s investors, at least insofar as their collective judgment is reflected in market prices…it was only after Obama unveiled his economic team and made clear how big his stimulus plans were that the market began its sharp recovery (the S. & P. 500 is now up twenty-five per cent since Nov. 20th).
Surowiecki then offered this roundhouse kick to finish things off:
The point is that it isn’t just some group of pointy-headed Keynesians saying that a big stimulus package will be good for the economy: the collective wisdom of the market is saying the same thing. And it seems peculiar for a supposed believer in the efficiency and intelligence of markets—which, as a libertarian economist, I assume Kling is—to simply disregard what the market is saying in this case. In effect, libertarian economists are saying that they have a better sense of what’s good for the economy than the aggregated wisdom of investors does.
At the time I read this I imagined Bruce Lee screaming over the body of his defeated opponent. But now I wonder if Surowiecki will write a follow-up post now that the wisdom of the market–as represented in stock prices–supports the skeptical libertarians? Ah, to be a New Yorker intellectual, cheerleader of the Donk, free to pontificate in a consequence free environment!
Surowiecki wants to score points against libertarian political economy by pointing out that the stock market is currently recommending one thing (Keynsian surge) while libertarian economists like Arnold Kling are plugging for another (market correction). In his post, he says we ought to read the stock market’s prices–and by this he means the collective wisdom embodied by stock prices–as an endorsement of Obama’s stimulus package. When Obama hints at the future glory, the financial markets seem to maintain their altitude. Thus he concludes,
…it isn’t just some group of pointy-headed Keynesians saying that a big stimulus package will be good for the economy: the collective wisdom of the market is saying the same thing.
But what is Surowieki’s evidence? He says the stock market tanked when the vestiges of fiscal conservatism made a show by rejecting TARP the first time around. He also adds that the market didn’t show signs of life until Obama introduced his economic think-tank and unveiled his Keynsian buffet menu. And as an aside, Surowiecki mentions that the S&P is up 25 percent since Nov. 20th. It is telling that he doesn’t say it’s down over 35 percent in the last year, despite the gains since its low point in November. (In other words, Surowiecki’s theory of collective wisdom places greater emphasis on cherry-picked short term valuations over those evident in longer time frames. He gives no explanation as to why.)
The Surowiecki nut: Post hoc ergo propter hoc, baby.
But how he believes his first data point–the stock market’s decline coincident with a rejection of Paulson’s plan–is evidence of market support for Obama’s economic foreplay is beyond me. Afterall, it’s safe to say a consensus has emerged on the effects of Paulson’s plan: in a word, it sucked. Besides, that should be a data point in support of the wisdom of Paulson’s plan, not for that of Keynsian wisdom. We’re talking about two different rent-seeking glory holes here.
As for the markets’ (short term) reactions to Obama’s stimulus, I return to an old piece of false tribal wisdom–namely, that what’s good for GM is good for the country. The patent falsehood of this statement is so obvious to me that it amazes me it passed the laugh test. Imagine this. For no intelligible reason, the government decides to give hundreds of billions to GM as a gift. Obviously, this is good for GM. We shouldn’t be surprised if GM’s stock increased accordingly. But how foolish would it be to conclude that this rise in the stock price evinced the relative merits of taxing the many to support the already well-off few? Would this increase demonstrate the wisdom behind so profligate a gift?
The point is that the stock price of many unproductive companies ought to go down. These companies ought to fail and in time, the fortunes of their more productive replacements will rise. Surowiecki says nothing about how stock prices track the creative destruction so fundamental to capitalism. Instead, he falls for the false tribal wisdom. Subsidies offered through a stimulus package may maintain the status quo, but only a daft journalist would think the interests of those reigning in the status quo aligns with the interests of the commonweal.