It is routine to present the stock market’s performance as a measure of the economy’s health: When it goes up, this is routinely reported as good news, whereas a drop is presumed to be grounds for concern about the strength of the economy.
“Here at home some good news from Wall Street today,” Tom Brokaw reported on NBC Nightly News (10/10/01). “The markets rallied.” ABC‘s Charles Gibson was similarly upbeat, telling Good Morning America‘s audience (11/20/01), “We’re going to begin with the good news from Wall Street: the market up 109 points yesterday.”
When Robert Rubin resigned as President Clinton’s treasury secretary, the Washington Post (5/13/99) included the stock market’s growth right alongside the unemployment rate and key interest rates as proof that “under Rubin’s tenure, the economy has thrived.” A New York Times article (8/8/00) on a shuffling of top economic officials in South Korea highlighted its stock market’s negative reaction, and told readers that the stock index is “a barometer of the country’s economic mood.”
When the market bubble first began to deflate in April of 2000, much reporting tried to calm stockholders with assurances that the economy was sound, as if it therefore followed that it was still wise to hold stocks. For example, a Washington Post article (4/15/00) noted that “many analysts stressed that the economy is still in the midst of its largest expansion ever.”
There is no shortage of other instances in which a rising stock market is presented as good news—or a falling market as grounds for concern. Public Radio International‘s Marketplace even plays happy music on days when the major market indexes rise, and slow melancholy music on days when the market falls.
Hold the happy music
This coverage of Wall Street is perverse, since the stock market (when it is acting rationally) is only reflecting expectations of future corporate profits, not the overall health of the economy. While to some extent profits grow with the overall economy, the larger short-term fluctuations in profits are attributable to redistributions from either workers or taxpayers. This redistribution is not in any obvious way good news for the 75 percent of the population that holds little or no stock.
In the case where profits are rising due to a redistribution from wage income, most workers will be seeing lower wages than if the profit share had remained constant. If profits are higher due to a reduction in taxes, then the government is collecting less money in tax revenue from corporations, and it will either have to raise taxes on everyone else, or provide fewer services. Neither of these changes would seem to provide much basis for happy music.
The alternative, and most common, scenario is the one in which the market rises for speculative reasons, having nothing to do with future profits at all. This also bad news for most of the population. The value of a share of stock represents a claim to the nation’s wealth. If shareholders have more claims to wealth—because of a run-up in share prices—but the economy is not actually producing any more wealth, then there must be less for everyone else. For most of the population, the economic impact of a speculative run-up in the stock market is the same as if a massive counterfeiting ring could print perfect fake money. If they started spending, say, $5 trillion in phony bills, this would lead to a run-up in prices for various goods—most obviously housing.
This is exactly what happened with the NASDAQ bubble, as has been documented in recent research by the Federal Reserve Board (Federal Reserve Board of San Francisco Economic Letter, 9/15/00). Areas such as the Silicon Valley, where many of the owners of tech stocks lived, saw the biggest run-ups in housing prices. This housing inflation made it impossible for many working-class and even middle-income workers to afford decent housing. Again, not much of a case for happy music here.
The reality is that the stock market is primarily about the distribution of wealth, in the same way that corn prices are about distribution. Corn producers will be delighted to see corn prices rise, but the rest of us have little interest in paying more for corn. The media usually do a decent job of reporting rising corn prices as a simple economic fact. It is only rising stock prices that warrant a cheerful soundtrack.
Dean Baker is co-director of the Center for Economic and Policy Research.
See also FAIR’s resources on Economics.