Tuesday, March 03, 2009

The Dow, the Economy, and the Stimulus

As always, I recommend reading the National Review's Corner to get a sense for the current shape of right-wing's political id. The latest bee in their bonnet is how the continued collapse of equity prices shows that Obama's stimulus plan isn't working, and then they speculate how far the Dow is likely to fall.

First, it's just idiotic -- big fat idiotic, you might say -- to argue (or, actually, to assume) that there is a direct and immediate relationship between the state of economy and the level of the Dow Jones industrial average. In fact, during recessions, stocks typically start to recover many months before the real economy hits bottom. 

The simple truth is that the extent of the current crisis, or recession, or Depression (or whatever we eventually decide to label this downturn) is only slowly becoming apparent, and as its scale and scope becomes more apparent, it is weighing down stocks. The stimulus package was never designed to help with short-term equity prices; as I say, it's an idiotic metric of the success of the package. It's designed to help the real economy, and as long as the second derivative on the real economy remains negative, there's just no hope for an equity recovery.

Politically, the Democrats should contest the idea that the level of the stockmarket six weeks into Obama's term (or even six months in) is an indication of success. I think most people know that, but apparently there's a gathering consensus (or perhaps more accurately, a symptom) on the right that stock performance is the only relevant barometer of economic success. 

Actually, when you think about that a little bit it almost starts to become a parody of what's wrong with the way Republicans think about economics.

I'll address the question of where stocks are likely to fall to in a separate post.

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