MARCH 13, 2009
The one conservative talking point that has gotten the most traction since Barack Obama won the election is that he’s killing the stock market with his big-government agenda. Conservatives pundits started saying this in November, and mainstream news implies it constantly. "Stocks are down almost 19 percent since the Obama administration took office," reported ABC News recently. MSNBC has been endlessly featuring a graph of the stock market’s decline since Obama took office. While Obama’s economic policies have gotten plenty of things wrong, the idea that they can be judged by the stock market is unbelievably fatuous.
To understand this ubiquitous notion, let us start at the bottom of the conservative intellectual food chain and work our way up. The crudest version of the Obama Bear Market hypothesis is put forward by the likes of Rush Limbaugh, Sean Hannity, and Fred Barnes. Their favorite data point is that the market tanked at several key moments: the day after the 2008 presidential election, the day of Obama’s inauguration, and the day he signed the economic stimulus bill. Clearly the markets panicked in reaction to Obama’s incipient big-government, wealth-confiscating agenda, right?
Sure, unless you realize that those events just might have been priced into the market already. Obama, in case you forgot, was considered a lock before Election Day. (On election eve, Intrade had given Obama a 92 percent chance of winning.) Likewise, the vote that made the stimulus bill a fait accompli took place several days before the bill’s signing. The real market-driving news came even earlier, when Obama unveiled his plan. Contemporaneous reports on the market reaction—The New York Times, December 9: "WALL STREET SURGES ON STIMULUS HOPES"—dug up little evidence of fears about socialism.
Watch senior editor Jonathan Chait take down CNBC's Jim Cramer:
You may not believe me that pundits are citing the market’s drop on January 20 as an indictment of Obama. It’s true! "The Dow fell 332.13 points on inauguration day," noted Barnes, holding this up as evidence that "The market’s view is that an Obamanomics-driven economy looks grim." I’m trying to figure out the operating theory here. One possibility is that, before January 20, investors thought Obama would get cold feet, or that maybe President Bush would surround the White House with tanks and stay forever. Alternatively, the markets did know Obama would assume the presidency that day, but got really depressed when it actually happened. Neither of these possibilities speak well of the stock market as a rational gauge of the country’s economic future.
It is true, of course, that stocks have fallen sharply since Obama won the election. A recent Wall Street Journal editorial noted that the Dow Jones Industrial Average fell 25 percent over the first two months of the year. "The dismaying message here," fretted the oh-so-earnest Journal editors, "is that President Obama’s policies have become part of the economy’s problem."
Well, this is more persuasive than the "Oh my God, some long-anticipated event has finally happened so I’m selling my stocks" hypothesis. But it still lacks some key details. Such as: maybe some other economic events triggered the sell-off? No way, continues the Journal:
So what has happened in the last two months? The economy has received no great new outside shock. . . . What is new is the unveiling of Mr. Obama’s agenda and his approach to governance.
Huh? First of all, Obama’s agenda was unveiled well before the election. Second, there have been constant new economic shocks, from the massive downward revision of fourth quarter (pre-Obama) GDP to the collapse of economies across the world.
Indeed, American stocks are merely suffering the same drop as stocks in countries not subject to Obama’s socialist agenda. While the Dow did fall by 25 percent over the first two months of 2009, the Global Dow fell by 26 percent. If Obama’s agenda was the problem, then you’d think U.S. stocks would fall further and faster.
The larger fallacy here is to assume that the stock market is a proxy for the entire economy. Many people realize that the stock market is an imperfect gauge. But it’s not just an imperfect gauge of the economy—it doesn’t even attempt to measure the economy. Stock prices represent the market’s guess at the profitability of corporations. While that’s related to the health of the overall economy, it’s not the same thing, and sometimes the two diverge sharply. During the Bush administration, for instance, corporate profits soared while wages for most families flatlined.
One clear instance where Obama hurt the stock market came when Tim Geithner announced the administration’s financial rescue plan. Stocks dropped that day. Was this a fair indictment of the plan? Or a reaction to the possibility that the government might wipe out shareholders? In other words, was the market drop a signal that Obama’s plan was bad for the economy as a whole or just bad for bank stocks? The two propositions mean very different things.
This, alas, is the very distinction the stock-mongers on television fail to grasp. The stock market has become the media’s real-time economic report card. Economic statistics that actually measure broader material well-being come out once a month, some once a year, others once a decade. The stock market updates instantly, making it irresistible.
Cable channels, especially CNBC, have come to represent the stock-centric view of the world. Stock televangelist Jim Cramer, who has assailed Obama for "wealth destruction," perfectly embodies the narrowness of this view. "Stocks, along with housing, are our principal forms of wealth in this country," he asserts. In fact, according to University of Wisconsin economist John Karl Scholz, the richest 10 percent has more than half its net worth in stocks, but those in the middle have less than 4 percent of their net worth in equities.
As a case in point, Cramer assailed Obama for "destroying the profits in health care companies (one of the few areas still robust in the economy)." The United States has the most expensive, least efficient health care sector in the advanced world. The flipside of that inefficiency is massive profits in the health care sector. Anything that reduces waste necessarily reduces that profit. Cramer naturally sees this as a disaster. But why should the rest of us care?
Jonathan Chait is a senior editor of The New Republic.