Policy Objectives
People are generally happier when the stock market goes up than when the stock market goes down. But given that large numbers of people own no stock, and most people own only a very small amount of stock, it makes no sense to make stock market performance the main goal of economic policy. Most people’s year-to-year financial situation is more influenced by the state of the health care system than by the state of the stock market. Most people’s retirement security is more influenced by whether or not large cuts are made in promised Social Security benefits than by the state of the stock market. But the interests of the relatively small minority of people whose financial situation is dominated by the state of the stock market have disproportionate influence over the media and the political system.
29 Responses to “Policy Objectives”
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September 25th, 2008 at 1:32 pm
With talk like that, you’re not going to be on NPR’s “Marketplace” too often.
September 25th, 2008 at 1:35 pm
Much of hiring is ultimately controlled by CEOs who care a lot about stock prices. Capital raising also depends on the stock market.
Both of these affect main street.
Of course, stock performance is not the main goal, but it matters.
September 25th, 2008 at 1:37 pm
Where’s the actual evidence that any of this is true? There is no way that enough middle-class people retire on Social Security alone for “most Americans” to be more influenced by Social Security changes than by the changes stock market. Rather, most of them have either a pension or a 401(k); in the latter case, obviously, they’re stockholders, but in the former case they’re stockholders, too, albeit through their company’s investments rather than their own. But the stock market still matters to them! If their pension plans aren’t funded, that’s going to be a much bigger deal than marginal Social Security cuts.
September 25th, 2008 at 1:40 pm
But given that large numbers of people own no stock, and most people own only a very small amount of stock, it makes no sense to make stock market performance the main goal of economic policy
You have it a little backwards. Stock prices reflect the market’s expected future cash flows from public companies. When economic conditions are strong, stocks go up; when they’re poor they go down. While investors certainly have a direct stake in where the market is, the reason it’s a major political concern is because of what it signals about the health of the broader economy.
That said, who has ever said stock market performance the main goal of economic policy? I’m pretty sure Democrats and Republicans broadly agree that the three main goals should be keeping GDP growth strong, and keeping inflation and unemployment low. If you do all those things — guess what — stock prices are likely to go up.
September 25th, 2008 at 1:48 pm
Lotsa people with 401(k) (or the non-profit equivalent 403(b)) accounts these days, and more all the time as defined benefit pensions go the way of the dodo. Ever heard of TIAA-CREF? That’s just about everybody who works for (or has worked for) a college or university.
September 25th, 2008 at 1:49 pm
Deal done – Dow up 280. Nothing says lovin’ like $700 billion in the oven. Your $$$$ have put smiles on lots of Wall Street faces.
Mad? Remember, it’s always better to give than to receive.
September 25th, 2008 at 1:52 pm
Just how small a minority is that? I don’t own a “lot” of stock by some standards, but what I do own is a big chunk of my net worth, and I’m ten years from retirement to boot. And a heap of other people depend on equity values in other ways; charitable donations fluctuate with the market, as do university endowments and pension funds. That said, I’m not crazy about any policy designed to keep stocks pumped up; in the long run, as Ben Graham said, the market is a weighing machine, and, as Warren Buffett says, a down market is like a sale on hamburger–a buying opportunity. I’d rather see a stock market that’s fairly valued and whose value reflects a strong and dynamic economy than one that’s artifically inflated. Finally, of what, BTW, is this a propos? The bailout? The big threat here isn’t to the stock market; it’s to the “real” economy. Given your obsession with taking the advice of your book title and keeping your head in the hand about that, diverting our attention to the stock market might make sense. But a lot of us–including people like Krugman and DeLong who know more about this stuff than any of us–find the danger to the real economy from this situation to be really scary. This needs to be taken seriously.
September 25th, 2008 at 2:03 pm
I think you’re a bit out of touch. Most people get very little or no pension money. Their biggist investment is their house. If my parents are any guide, the assets they drew on or left were from a civil service pension (federal payments not based on securities), medicare benefits, returns from bonds and their house.
Even the individual retirement funds that are dependent on securities are often based on more than the stock market. People switch to bond funds as they get older, and many younger people don’t bother to invest in them at all.
This is particularly true for people who are not wealthy. Necessities, investing in your house, investing in safe securities all come before investing in stocks or stock funds. A lot of these people work in jobs that don’t even offer pensions.
September 25th, 2008 at 2:05 pm
You’re correct…Indeed, I would go a step further and say that many people mistakenly equate the nation’s economic performance to the stock market.
September 25th, 2008 at 2:13 pm
While investors certainly have a direct stake in where the market is, the reason it’s a major political concern is because of what it signals about the health of the broader economy.
Not true. The stock market can be doing well while most or many people are not.
September 25th, 2008 at 2:26 pm
Here’s what former TX Senator (and McCain economic advisor) said during the floor debate on legislation he sponsored to repeal the Glass-Steagall Act:
September 25th, 2008 at 2:57 pm
Market fundamentalism, Matt.
Read Thomas Frank’s One Market Under God for the history and context, along with a series of smackdowns that will ensure that you never treat a handful of commentators seriously again.
September 25th, 2008 at 3:22 pm
My god your incredible naivete continues to blow me away.
You are no better than the right-wing pundits that just lie. You try to cover the truth of who owns the U.S. “economy,” who controls it…I can’t even go on.
You’re a credit to the Ivy League.
September 25th, 2008 at 4:11 pm
I agree. I’ve been thinking how the people who are on the floor of the stock market are more analogous to unelected officials, driving our daily lives based on a separate oligarchical set of investors…
September 25th, 2008 at 4:16 pm
I don’t know about “people”, but I do know about me. I (along with my bank)own a house whose value is dropping fast. I own what used to be about $150000 in stocks and bonds: their value is dropping fast. I am 62. I won’t get much Social Security; I am self-employed and have never made a lot of money. I have always assumed I would work until I could no longer do so, but I was hoping to have a house to live in and some funds to cushion my old age, when it comes. And oh yeah, I pay over $6000 a year in health insurance premiums. Watching the market drop scares me very much. I’m not selling. I’m just scared.
All that being said, you are probably right. The folks who have lots and lots and lots invested in the stock market do have a disproportionate influence over the media and the political system. And that sure ain’t me…
September 25th, 2008 at 8:55 pm
Most people do own “a little stock” in absolute terms. But, most people also depend on a 401k or a pension — not SS — for the majority of their retirement. And most of those accounts are in the stock market, at least until you get close to retirement. Anyone who’s planning to rely on SS more than they rely on their 401k is, um, not too smart.
September 25th, 2008 at 8:57 pm
Also, whoever said upthread that nobody, Republican or Democrat, thinks of propping up stocks at the #1 goal of economic policy is right. Growth, low inflation, and low unemployment are the goals of everybody’s economic policy.
September 25th, 2008 at 10:52 pm
While I agree with Matt’s general sentiment, it is nevertheless true that the Dow has become a kind of national short-hand for the strength of the economy. When the Dow is surging, people think “it can’t be that bad,” even if their economic lives suck, and when the Dow is spiraling, people think, “oh shit, we’re heading for the big crash.” You could spend a lot of time thinking about the psychology that goes into this, but I think it’s actually pretty simple: the Dow is an easy way of keeping score.
Job growth, health care costs, and even job losses are fairly abstract insofar as they are difficult for average people to quantify and put in context. The Dow? It’s basically a score. When the Dow is going up, the US economy is racking up points: we’re winning. When it is falling, we are losing points…and we are losing.
The other major psychological aspect is this: if you are poor, it is scary when even rich people are losing money. It means that no one is in control, even on Wall Street. And that’s a scary thought for most people.
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