The media continue to be in a panic over the drop in the stock market over the last few weeks. Fortunately for political pundits, there is no expectation that they have any clue about the subjects on which they opine.  For those more interested in economics than hysterics, the drop in the market is not a big deal.

The market is at best very loosely related to the economy. It generally rises in recoveries and falls in recessions, but it also has all sorts of movements that are not obviously related to anything in the real economy.

The most famous example of such an erratic movement was the crash in October of 1987. The market fell by more than 20 percent in a single day. There was no obvious event in the economy or politics that explained this fall, which hit markets around the world. Nor did the decline presage a recession. The economy continued to grow at a healthy pace through 1988 and 1989. It didn’t fall into a recession until June of 1990, more than two years later.

There is little reason to believe the recent decline will have any larger impact on the economy than the 1987 crash. As a practical matter, stock prices have almost no impact on investment. The bubble of the late 1990s was the major exception when companies were directly issuing stock to finance investment.

Stock prices do affect consumption through the wealth effect, but the recent decline is not large enough to have all that much impact. Also, since it was just reversing a sharp run-up in the prior 18 months, it essentially means that we will not see some of the positive wealth effect that the economy would have felt otherwise.

Basically, the hysteria over the drop in the stock market is either people in the media displaying their ignorance or a political swipe at Donald Trump by people who apparently don’t think there are substantive reasons to criticize him. This drop is not the sort of thing that serious people should concern themselves with.

Update, February 8, 2019: On February 7, the bankruptcy judge overseeing the Sears Holdings case accepted Eddie Lampert’s $5.2 billion bid and allowed him and his ESL hedge fund to buy back the department store chain they had driven into bankruptcy. Nearl

Jake Johnston
The New York Times, December 26, 2018

Dean Baker
Truthout, December 24, 2018

There is a popular theme in the media these days that the Trump administration is leaving us poorly prepared for the next recession. The basic story is that high deficits and debt will leave us less room to have a large stimulus when the next recession hits. This is wrong, at least if we are talking about the economics.

Before laying out the argument, let me first say that I do not see a recession as imminent. The recent plunge in the stock market means that the rich have less wealth, not that we will have a recession.

Okay, I realize that not everyone with money in the stock market is rich, but the impact on spending is going to be barely noticeable to the economy. Furthermore, while middle class people are going to be upset to see their 401(k)s fall by 15 percent, they were fortunate to see the sharp rise the prior two years. Long and short, this is just not a big deal.

As far as other factors pushing us into a recession, I don't see it for reasons explained here. So I am not writing this because I think we are about to see a recession, but rather because I am trying to clear the path for when we eventually do.

The complainers in this picture say that because Trump's tax cuts mean the deficits are large even when the economy is near full employment, we won't be able to have even larger deficits when we are in a recession. They also say that high debt levels are leaving us near our borrowing limits. Both claims are just plain wrong.

First, as good Keynesians have long argued, our ability to run deficits is limited by the economy's economic capacity. This means that if we run very large deficits when the economy is near full employment, we would be seeing higher inflation as excess demand pushes up wages, which get passed on in prices.

We may be close to this point now, but higher interest rates, at least partly as a result of Federal Reserve Board policy, are leading to classic crowding out. Housing is falling and the value of the dollar has risen against other currencies, crowding out net exports. But inflation remains low and stable, so there is still likely room to expand further even with the unemployment rate at 3.7 percent.

The New York Times highlighted the findings of a remarkable study last week. The study, by Markov Processes International, examined the 10-year returns of the endowments of the eight Ivy League schools. The study found that all eight endowments had lower returns than a simple mix of 60 percent stock index funds and 40 percent bonds. In some cases, the gap was substantial. Harvard set the mark with its annual returns lagging a simple 60/40 portfolio by more than 3.0 percentage points. 

This finding is remarkable because these endowments invest heavily in hedge funds and other “alternative” investments. A main feature of these alternative investments is the high fees paid to the people who manage them. A standard hedge fund contract pays the fund manager 2 percent of the assets under management every year, plus 20 percent of returns over a target rate.

If Harvard’s $40 billion endowment was entirely managed by hedge funds, they would get $800 million in fees, plus 20 percent of the endowment’s earnings over some threshold. This means that even if the hedge funds completely bombed, as seems to have been the case over the last decade, they would be pocketing $8 billion over the decade for costing the school money.

This should have people connected with Harvard and the other Ivy League schools up in arms. It is common for hedge fund partners to make more than $10 million a year and some pocket over $100 million. These exorbitant paychecks are justified by the outsized returns they get for university endowments and other investors. But how do you justify this sort of pay when they are making bad investment calls that actually lose the universities money?

Diciembre de 2018, Mark Weisbrot y Lara Merling

CEPR regularly publishes a curated collection of original research from academic institutions and nonprofits on the state of the US labor market. The compilation is part of our ongoing effort to promote informed debate on the most important economic and social issues that affect people's lives.

The Brookings Institution

How to Adjust to Automation

Automation is likely to exacerbate existing deficiencies in the government approach to worker development and training. Current policies tend to target young people at the beginning of their working lives, leaving many older workers unable to upgrade their skills in the face of shifting labor market demands. The author calls for substantial reorientation in approaches to (and subsidization of) training throughout workers’ lives and points to the disruptive potential of automation and the likelihood of future recession as reasons for urgency.

Who Makes the Rules in the New Gilded Age?

The author makes a robust comparison between the digital information age of today and the Gilded Age that took place a few decades after the Civil War. Both then and now, the rules governing new technology were made by an elite few for their own benefit, resulting in societal instability and inequality. The comparison yields several takeaways for the reassertion of the public interest and the preservation of democracy.

“Fort Trump,” we will call it, suggested Poland’s president Andrzej Duda, who knows how to manipulate an insatiable ego.

December 2018, Mark Weisbrot and Lara Merling

Dean Baker
The Hankyoreh, December 18, 2018

Dean Baker
Truthout, December 17, 2018

On January 3, Democrats in the House of Representatives will vote to install Nancy Pelosi as Speaker of the House. The intelligence and street smarts on display as Representative Pelosi went toe-to-toe with President Trump over the border wall reinforces