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Oct 1 / Jonathan

Dean Baker: the stock market is not the economy

Economics Lesson for Reporters: Other Things Equal, a High Stock Market is a Transfer of Wealth from People Who Don’t Own Stock to People Who Do

Reporters on economics and business should know that, but from the reporting on the bailout, it is clear that very few do. There seems to be a view that stock market wealth is money from heaven.

Ownership of stock is a claim to the future profits of the corporations whose stock is owned. If the value of stocks increase because the economy is expected to grow more rapidly, and therefore future profits will be larger, then it is reasonable to say that a higher stock market is good news for everyone.

But suppose the stock market goes up because the markets think that the government will tax school teachers and fire fighters to hand money to Wall Street banks. Is this one good for everyone?

Finally, suppose that the Wall Street titans haven’t a clue what future profits will be (these are the folks that pushed the NASDAQ above 5000), and a rise in the stock market is driven by irrational exuberance. In this case, the higher stock market simply means that stockholders have a greater claim on the same amount of national wealth. This would be like handing out a trillion dollar bills and giving them only to shareholders. That’s good for the shareholders, but not for the rest of the country.

It would be nice if the folks who report the news understood that the stock market is not the economy.

—Dean Baker

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