Sometimes Brad de Long is a little harsh on those who get their economics wrong (economics is one of those areas that people need to try to understand and grapple with, even if they aren’t experts - the stakes are just too high), but his criticism of William Saletan and Ben Jacob’s attack on Gephardt brings up two things worth repeating often: First, the effects of economic policy are not instant but takes place over a long period. Therefore it makes no sense to make a statement like “the recovery didn’t get into full swing until 1996, so the Republican Congress is responsible for it.” Second, the stock market does not equal the economy.
…good economic policy that accelerate growth raises the level of the stock market; confidence that future taxes on the rich will be low raises the level of the stock market; good news about technological revolutions raises the level of the stock market; new that future interest rates will be low raises the level of the stock market. The stock market is an indicator, but not an especially good indicator, of the overall health of the economy. Do Saletan and Jacobs really know so little about the economy that they think the stock market–rather than real GDP, or real wages–are good measures of how well it is doing?
The mistake is hardly theirs alone, as news headlines encourage us to view market indices as the sole indicator of greater economic health. And I wonder if some version of the fallacy was not behind the Bush administration’s dividend tax plan, which sought to fight recession in part by lifting equity prices.
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