Over Analyzing

Apropos of my earlier post, Kevin Drum has a post defending the use of the Dow as an economic indicator.

What’s more, it’s sort of interesting just how good a proxy for the economy the Dow Jones is.  Take a look at a historical chart and you’ll see that its ups and downs correlate pretty well to the overall state of the economy.  If you’re looking for a sexy, fast-moving, gut-wrenching indicator of the economy’s animal spirits, you can do a lot worse than the DJIA.

Which is precisely the point: the Dow is a reliable proxy for economic growth/contraction from a historical perspective. To take the term “perspective” literally, this means “zoomed out” to ignore day to day fluctuations resulting from panicked speculation. Moreover, this underscores the point that the Dow reflects the economy, not the other way around. Policy should be crafted accordingly.

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