April 01, 2018
I realize it would be too much to ask that people who write on economics for major news outlets have any clue about how the economy works. I say that seriously; I have been commenting on economic reporting for more than two decades. Being a writer on economics is not like being a custodian or bus driver where you have to meet certain standards. The right family or friends can get you the job and there is virtually no risk of losing it as a result of inadequate performance.
But Roger Lowenstein performs a valuable service for us in the Washington Post this morning when he unambiguously equates the value of the stock market with the country’s economic well-being. It seems that Mr. Lowenstein is unhappy that Donald Trump’s recent tariff proposals sent the market plummeting. The piece is titled, “when the president tanks your stock portfolio.” It holds up Trump’s tariff plans as a uniquely irresponsible act because of its impact on stock prices.
Okay, let’s step back for a moment and ask what the stock market is supposed to be telling us. The stock market is not a measure of economic well-being even in principle. It is ostensibly a measure of the value of future corporate profits, nothing more.
Suppose the successful teacher strike in West Virginia spills over into strikes in other states, as now appears likely. Suppose this increased labor militancy spills over to the private sector and organized workers are able to gain back some of the money lost to capital in the last dozen years. That would not be good news for Mr. Lowenstein’s stock portfolio, but it would certainly be good news for the vast majority of the people in the country.
But this is the result of private actors, Lowenstein is upset about a president’s action’s tanking the stock market. Well, let’s give another one that would likely have an even larger negative impact on Mr. Lowenstein’s stock portfolio.
Suppose the next president announces that she will raise the corporate income tax rate back to 35 percent from its current 21 percent level. Any bets on what this does to stock prices?
Let’s take another step back. In principle, the market is supposed to reflect expected future profits, but as we know, the big bucks folks on Wall Street are subject to bouts of irrational exuberance from time to time. We saw this in the 1990s stock bubble and then again in the last decade with the housing bubble.
Suppose that President Clinton had used his State of the Union address in 1998 or 1999 to carefully explain (with data and charts) why current market valuations did not make sense and that prices were likely to fall back to earth in the not distant future. Alternatively, suppose President Bush had done the same with the housing market in any of the years from 2003 to 2007.
In both cases, this sort of analysis coming from the White House likely would have sent markets tumbling. In the first case, Clinton would have been showing that unless stockholders were willing to hold stock for returns that were far smaller than had been the case historically (and were roughly the same as the returns available on government bonds at the time) or future profits rose way faster than anyone economists were projecting, stock prices at the time could not be justified.
Bush would have been showing how nationwide house prices had diverged from a century-long pattern in which they had just kept pace with inflation. He could have also pointed out that this did not appear to be driven by the fundamentals of the housing market since rents continued to rise pretty much in step with inflation and we were seeing record vacancy rates. He also could have talked about the explosion of bad loans, which were widely talked about in the business press even before the collapse of the bubble.
In both cases, the Lowensteins of the world could have blamed the president for tanking their stock portfolios and they would be right. Their truth telling would have destroyed trillions of dollars in paper wealth and it would have been a very good thing.
Illusory wealth has a habit of disappearing in any case, and it is generally better that it happens sooner rather than later. To see this point, imagine there is some master counterfeiter who, along with his conspirators, is able to slip trillions of dollars of phony money into circulation.
As long as this gang of counterfeiters is able to get away with it, they are creating trillions of dollars of wealth. This money is generating demand in the economy, although the money is going first and foremost to meet their needs and desires.
When the counterfeiters get uncovered and their money is destroyed, the economy has lost trillions of dollars of what it had considered wealth. Will this be a big hit to the economy?
It certainly could be, but if the folks in policy positions respond appropriately then it need not be. Congress should pass fiscal stimulus and the Fed should lower interest rates to sustain demand. The destruction of the counterfeiters’ money should allow us to have demand in areas that meet the needs of the rest of us rather than the counterfeiters.
The same story applies to a drop in stock prices. If it turns out that stockholders have less wealth, and therefore spend less money, Congress and the Fed could take steps to boost demand so that needs of people who don’t own so much stock can be met. Of course, Congress and the Fed may not take such action, which is a really big problem, but that is not a reason to blame the folks who caught the counterfeiters.
None of this justifies Trump’s tariff policies, which I have argued are half-baked at best. But the basis for the criticism is not the potential hit to the stock market.
As long as we are talking big picture economics, there is one other important point to make in this context. Like other folks writing on this topic, Lowenstein just assumes the country as a whole has an interest in forcing China and other developing countries to respect U.S. patent and copyright protections.
This is not true. While it is clear that folks who have large amounts of stock in Pfizer, Microsoft, and other companies with large stakes in intellectual property claims would benefit, it does not follow that the country as a whole benefits from making these claims longer and stronger and applied to our trading partners.
When these forms of protectionism (yes folks, patent and copyright protection is protectionism) are applied domestically it means that we pay more for prescription drugs, medical equipment, software and a wide range of other products. Think of them like tariffs of many thousand percent, since these government-granted monopolies can raise the price of the protected items by factors of tens or hundreds.
Applying patent and copyright protection internationally means that foreigners have to pay more money for their drugs (often making them unaffordable for people in developing countries) and software. It means they have less money to buy our cars and planes. Every trade economist knows this, but for some reason, they rarely feel the need to make this point. (Unlike the irrepressible need to point out that higher US steel prices mean that US made cars will be less competitive.)
We do have an interest in ensuring the research and development costs will be shared internationally in an equitable manner. Our trade economist-types tell us how hard this would be to arrange, apparently having not been told of all the disputes over the terms and enforcement of intellectual property rules in recent trade pacts. Anyhow, we should be looking for more modern mechanisms of financing innovation and creative work, not endlessly shoring up a relic of the Medieval guild system. (See also Chapter 5 of my [free] book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.)
Typos corrected from an earlier version, thanks Robert Salzberg.
Comments