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Considering how audio reviews are mostly hand-waving and woo-woo, sometimes with a few meaningless graphs thrown in for supposedly objective air cover, and some of them are genuinely corrupt, this is not a good thing.

I prefer Dean Baker's take on this (with a hat tip to Laurent G for pointing me in the direction of the excellent Mr Baker):

The Stock Market is Not the Home Team

One infuriating feature of business reporting is the constant cheering for a higher stock market. I have nothing against a higher market, but I know of no general public interest in a high stock market.

In principle, the stock market represents the discounted value of the future profits of corporate America. If the value rises because the economy can now be seen as growing more rapidly, then this is certainly good news. But, if future profits are projected to be higher because of lower wages or lower corporate taxes (e.g. a higher tax burden on workers or fewer public services), why should the mass of the population, who own little or no stock celebrate?

Of course, the higher stock market may just be due to the irrational exuberance of people who control lots of money, as happened in the nineties. This is also not obviously good news. In this case, a higher stock market will shift wealth to those smart enough to get out, from those stupid enough to get in.

In short, there is no general public interest in a higher stock market. When reporters celebrate a run-up in the market, their class bias is showing.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Oct 8th, 2006 at 05:19:35 AM EST
[ Parent ]
I would add that the demonstration of class bias is often unintentional.  Reporters think the stock market is some sort of perfect indicator on the health of the economy.  But, as the FT pointed out the other day, Corporate America is also having to turn in much higher profits to boost stock prices these days, as P/E ratios return from the obscene levels we saw in the 1990s and 2000.  The FT also noted that, when transferred from dollars to sterling or euros or yen, the market is still quite a bit down from the 2000 peak.  Sterling, for one, has risen from about $1.50/£ to $1.86.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Oct 8th, 2006 at 06:21:14 AM EST
[ Parent ]
Reporters think the stock market is some sort of perfect indicator on the health of the economy.

But where does that come from?

Mind you, the stock market is a sort of good indicator of the state of investor confidence.

Is the total stock market valuation a good proxy for the capital stock of an economy?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Sun Oct 8th, 2006 at 06:26:09 AM EST
[ Parent ]
It is a good indicator of investor confidence.  You're right, and I don't deny the importance of that from the perspective of economic forecasting.

As far as it being a good proxy for the capital stock, I'm not sure whether it's good or not.  There are eleventy-million factors inherent to stock prices, and they'll vary from investor to investor.  Jerome and Laurent are probably the guys to ask on that.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Oct 8th, 2006 at 06:36:50 AM EST
[ Parent ]
It is a good indicator of investor confidence.  You're right, and I don't deny the importance of that from the perspective of economic forecasting.

You wouldn't, you're a Keynesian.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Sun Oct 8th, 2006 at 06:40:04 AM EST
[ Parent ]
Yes.  Very true.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Oct 8th, 2006 at 06:48:53 AM EST
[ Parent ]
Drew, what is your take on the WSJ's recent piece about the "Tax Tidal Wave"?

Truth unfolds in time through a communal process.
by marco on Sun Oct 8th, 2006 at 07:06:42 AM EST
[ Parent ]
Setting aside the bullshit about the deficit (which I'll be happy to address later if you'd like).

A quick point:

The recovery in tax revenues, I think, results partly from some of the more minor tax cuts expiring.  (See Krugman columns over the last two years for explanations that are better than anything I can cough up.)  I also suspect that corporate tax revenues rising as something to do with earnings from overseas and imports.  I question the words "inflation-adjusted," as well, because the WSJ has this strange tendency towards "Let's not and say we did" in its articles.

Now I'm a believer in the idea that a Laffer Curve -- a ridiculous name by the way -- exists, but also that we tax to the left of optimization.  The Laffer Curve has been understood for centuries, if not longer.  You can trace it back, at the very latest, to Islamic scholars in the Dark Ages.  Keynesians working for JFK were already implementing supply-side economics ten years before Laffer wrote his big papers.

But enough of all of that.  Here's the idea I really want to dig into, so think about this (and bear in mind that this is merely a theory of mine thought up in the process of about five minutes, so be nice):

GDP = C+I+G+NX

It is necessarily the case that, in order for tax revenues to be higher at a lower level of taxation, the economy must grow at faster rates, right?  Maybe not.  At least not in the short run.  The Journal says revenues rose by -- what? -- 76% over two years?  The economy certainly has not grown by 76% since 2004.

Taking all that, let's think about the accounting: If you borrow a ton of money from abroad, and then spend it on goods and services in the domestic economy, it should be the case that the trade deficit widens, earnings rise, but that GDP growth will not change much.  Remember, you have to deduct exports from GDP.

In other words, this, to me, sounds like an accounting gimmick rather than a genuine Lafferian change in behavior.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Oct 8th, 2006 at 07:46:48 AM EST
[ Parent ]
Thanks.  I'd be interested in hearing about deficit bullshit if you find the time, but this is plenty for me to digest in them meantime.

(By the way:

The Laffer Curve has been understood for centuries, if not longer.  You can trace it back, at the very latest, to Islamic scholars in the Dark Ages.

It will definitely surprise a few folks I know to hear that one of their cherished economic policies can be traced back to medieval Muslims.)

Truth unfolds in time through a communal process.

by marco on Sun Oct 8th, 2006 at 08:01:10 AM EST
[ Parent ]
Actually, I'm not certain, but I think it can be traced back to ancient China.

The budget deficit is much more simple: The $250b deficit does not, I believe, include "emergency provisions" for Iraq and Afghanistan, which tend to run about $70-100b per year.  It also does not include borrowing from the Social Security surplus, which runs about $125-150b per year.  That borrowing from SSA is supposed to be paid back, not that it ever will be.  Adding all of that yields a deficit of $445b to $500b, which, not surprisingly, is roughly the amount by which the national debt increased, according to the Bureau of Public Debt.

The WSJ has been pulling this stunt for years.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Oct 8th, 2006 at 08:09:27 AM EST
[ Parent ]
The $250b deficit does not, I believe, include "emergency provisions" for Iraq and Afghanistan, which tend to run about $70-100b per year.
This is not accurate.  This spending is included in the spending, and included in the deficit.
It also does not include borrowing from the Social Security surplus, which runs about $125-150b per year.  That borrowing from SSA is supposed to be paid back, not that it ever will be.
This is accurate, but has been government policy for decades.  Both Clinton and Bush have made recommendations that would begin to address this issue, but Congress, has not had the political will to address this (social security and medicare).  Not that this should make you feel good, but our European friends are also ignoring the same issue.  They are also not including this future liability in their budget deficits.  None of us are funding our obligations for our future retirees.  I have written at least one diary on this, focusing on France and the US.  The comments to this diary seemed to support the same view as the US Congress and European parliaments, ie.  this is no big deal, let's just ignore it and fix it later.

Adding all of that yields a deficit of $445b to $500b, which, not surprisingly, is roughly the amount by which the national debt increased, according to the Bureau of Public Debt.
So the $450--500 number is not accurate, and not consistent with the way the US historically reports the number, nor the way other countries report.
by wchurchill on Sun Oct 8th, 2006 at 02:50:01 PM EST
[ Parent ]
The $250b deficit does not, I believe, include "emergency provisions" for Iraq and Afghanistan, which tend to run about $70-100b per year.
The more I thought of this, it sounded vaguely familiar.  I think there may be seem congressional rules that prevent certain "non-repetitive" expenditures from being included in the spending forecasts (not the actual spending, but the forecasts).  Or it may be that the Bushies are taking advantage of certain practises regarding the budget, that keeps the "one time?" nature of the Iraq war expenditures out of some of the forecasts.  I can't recall the exact reason, but i'm pretty sure it relates to forecasting spending and deficits, and not to the reporting of spending and deficits.  Don't know if that helps, but it has kind of stuck with me all day.
by wchurchill on Mon Oct 9th, 2006 at 02:12:35 AM EST
[ Parent ]
Oh, and on my comment about the WSJ pulling the "Let's not and say we did" schtick on inflation: Watch out for the WSJ and the CNBC crowd when they use the term "inflation-adjusted," because you always have to ask, "Which figure are you adjusting for?"  There are about four thousand CPIs to choose from at the BLS website.  More often then not, they'll use the core index and call it the official inflation rate, which makes economists pull their hair out, because it doesn't include food and energy prices.  (And, as we all know, energy and food prices don't impact our budgets, right?)  The CPI tends to about double the CPI-core, or even higher, so it's incredibly misleading to adjust for core prices and present it as the true picture, even if the impact doesn't seem very large.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Oct 8th, 2006 at 08:17:39 AM EST
[ Parent ]
A few back-of-the-envelope calculations say to me that the math works, too, but pairing me with mathematics has admittedly always been a risky business.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Oct 8th, 2006 at 08:42:50 AM EST
[ Parent ]
Sorry: You have to deduct (net) imports from GDP.  Exports add to GDP.  Imports subtract from it.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Oct 8th, 2006 at 09:08:55 AM EST
[ Parent ]
Until some affective connection between macroeconomic policy changes, e.g., tax rate change, and microeconomic activity the Lauffer Curve remains in the same intellectual sphere as Astrology.

Just to ensure we're both on the same page: What do the variables reference in your equation?  

And for 3 PN points ....

Is that a conditional or identity equals sign?  ;-0

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sun Oct 8th, 2006 at 10:37:51 AM EST
[ Parent ]
The variables reference consumption, investment, government purchases, and net exports.  (With trade deficits, NX is obviously negative.)

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Oct 8th, 2006 at 11:28:59 AM EST
[ Parent ]
Drew I would also like to see your comments on the deficit.  

But just to disect your comments a little:

the Journal says revenues rose by -- what? -- 76% over two years?  The economy certainly has not grown by 76% since 2004.

But what the WSJ said was

One place it has come from are corporations, whose tax collections have climbed by 76% over the past two years thanks to greater profitability.
I imagine you actually didn't see the WSJ article.  As you can see, the article says corporate tax collections rose by 76%.  Corporate profits are far different, as you know, than the growth of the economy.  Corporate profits are still growing very nicely off of the very low levels of 2000--2002, and you profit growth or decrease often differs dramtically from overall GDP growth.
by wchurchill on Sun Oct 8th, 2006 at 01:15:01 PM EST
[ Parent ]
have been artificially inflated in the past 2 years by a temporary provision which taxed at a much lower rate repatriated profits. A number of US corporates have taken advantage of this clause to bring back significant amounts of money form their foreign subsidiaries - even taxed at the lower rate, this has boosted corporate tax massively.

This will not be repeated in future years.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Oct 8th, 2006 at 04:38:49 PM EST
[ Parent ]
A few other comments on tax policy, and then I'm hoping you do address the deficit and tax policy.

First, on the Laffer Curve, you and I have traded comments on this, and i don't think we have a big disagreement. (I'm not going to comment btw on the appropriateness of giving the credit to Art Laffer, but more on the economic concept.)  I believe we agreed that there are areas on the curve where the concept is clearly relevant.  At some tax levels, say 50%, 60%, 70%, or whatever,,,,,at some high rates of marginal tax rates, there is clearly a disincentive to allocate one's time to money making activities.  Lowering taxes from these high levels is very likely to have the impact implied in Laffer's model.  At lower levels of taxation, lowering the marginal tax rate would have less of an impact.  There is no data, that we have seen anyway, that allows us to understand the curve,,,,so it's hard to go beyond the intuitive statements made above.

But I would be interested on your view on the changes to tax rates on dividends and capital gains.  The WSJ comments on the lowering of the rate on dividends:

More good news is that dividend-tax payments appear to be up as well, even though the tax rate was lowered to 15% from as high as 39.6%. A National Bureau of Economic Research study found that "after a continuous decline in dividend payments over more than two decades, total regular dividends have grown by nearly 20%" and that this reversal happened at "precisely the point at which the lower tax rate was proposed and subsequently applied retroactively."  There hasn't been a purer validation of the Laffer Curve since Ronald Reagan rode off into the sunset.
But specifically to dividend policy.  Dividends are taxed twice.  They are taxed as corporate earnings at the corporate rate, and then they are taxed when distributed to the individual.  When dividends were taxed at ordinary income tax rates, 40% or so,,,,corporations had a choice as to how to distribute earnings to shareholders.  They could pay dividends with the resulting impact on taxes.  Or they could initiate stock buy back programs.  Stock buy backs normally result in a rise in share prices, all other variables held constant, because corporate earnings are divided by a lower number of shares, leading to higher earnings per share, and higher stock prices.  Shareholders could sell these shares, and pay the lower capital gains tax rates.  So naturally corporations made the rational choice, and dividends trended down dramatically over the last 30 years of the last century, and stock buy backs increased.  This is one of those unintended consequences situations, but it obviously happened.  IMHO, this was a very negative development, because paying regular quarterly dividends is a method of holding corporate management accountable, and this tax situation hindered that natural control (but that is another story).  So in my view, the lowering of dividend tax rates was a boon for a better running economy.  I understand it's an area where the "stock ownership class" benefits more than other people.  But my view is the benefit to the economy is more important, and if more tax revenues are wanted from the wealthy, ordinary income taxes should be raised on the highest earners.

Second capital gains taxes have been lowered.  If my memory is right, from 28% to 15%.  This is another area of unintended consequences, IMO.  It certainly seems from a wealth distribution standpoint that taxing people, presumably the wealthier, when they attain profits from capital gains is extremely reasonable.  The problem is that these investors have a choice regarding the capital gains tax--pay it, or don't pay it.  I mean by that, that they don't have to sell the asset, but can continue to hold it, and let it grow in value.  If they need cash, they can borrow against it.  Obviously this doesn't stop the sale of capital assets, eventually you don't want to borrow, or you just want to get out of the asset.  But at the margin, it reduces the sale of capital assets, and it prevents the flow of investment to the areas of the economy that can most benefit from investment dollars--the growing and profitable areas.  Lowering the rate has lowered the "cost" of selling capital assets.  Turnover of these assets more frequently, even at lower tax rates, is likely to generate more tax dollars, rather than less.  and clearly be a very positive benefit for the overall economy.

As for the budget deficit, at $260 billion it is now about 2% of our $13 trillion economy, well below the 2.7% average of the last 40 years. Most states and localities are also afloat in tax collections, and including their revenue surpluses brings the total U.S. public sector borrowing down to roughly 1.5% of GDP. Not too shabby given that we're waging a war on terrorism and Congress spent $50 billion last year on Hurricane Katrina clean-up.
It's certainly worthwhile to acknowledge this, and to further note that this 2% compares very favorably to the 3% maximum, sort of maximum I guess, that is the guideline of the EU.
by wchurchill on Sun Oct 8th, 2006 at 02:19:36 PM EST
[ Parent ]
valuations of individual companies, and the stock market as a whole, are the discounted value of projected future cash flows for the relevant entitiy.  To the extent that capital stock would support those forecasted cash flows, I guess you could say there is a relationship.  But other factors are more important--the projections themselves and the discount rate being used to discount the projections, for example.  (In particular, the importance of the discount rate, and the risk premium component of the rate, are critical.)
Reporters think the stock market is some sort of perfect indicator on the health of the economy.
The operative word here is "think".  I'm not sure reporters in general think, and I know Jerome goes crazy about some of the comments they make in the area of economics.  The stock market is somewhat related to the health of the economy, but just a little thought shows it's not logically a perfect relationship.  First, the stock market's value is an estimation of the future--when we talk about the economy, we're often talking about the present,,,,"GDP grew 3.6% this quarter", or something like that.  Second, and this is more and more true as the world becomes more global, companies on the Dow Jones, the S&P 500,, etc. have a great deal of their sales and production outside of the US.  It's not at all uncommon for 50% of a companies sales to be outside the US, nor for 50% of production to be outside the US.  So while the stock market is normally related to the domestic economy, it's not even meant in theory to be "a perfect indicator on the health of the economy".
by wchurchill on Sun Oct 8th, 2006 at 12:52:12 PM EST
[ Parent ]

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