Not surprisingly, Politico has a particularly stupid piece today, chronicling the need for policy makers to conform public relations efforts with messages most beneficial to stock indexes. Implicit throughout the article is the notion that’s what’s best for the stock market is what’s best for the economy. Obviously, politicians should avoid saying things that will negatively affect the stock market if they can, but it certainly shouldn’t guide their policy or public debates about which policies are best.
The simple fact of the matter is that the stock market is at best a reflection of the actual economy. Generally speaking, if the economy grows — in terms of employment and output — the stock market will grow as well. Likewise, if the economy is in recession, it’s also quite likely the stock market will take a hit. But reversing the order of those general rules is a far more dangerous assumption. For example, if policy makers wanted to bolster the stock market, they could cut the capital gains tax, but it’s quite unlikely that this measure would do anything of any good beyond propping up asset prices in the short term, which incidentally, would benefit primarily those who need help the least (and thus are least likely to spend their gains in useful ways). In fact, you might argue the entire “Bush Boom” was predicated on this belief: as asset prices grew steadily while actual wealth did not. As it turned out, this wasn’t an economic policy we could believe in.
Policy efforts should aim at fixing the root causes of declines in the stock market, with the understanding that when the economy returns to growth, the stock market will return to vitality as well. People should under no circumstances listen to morons like Chris Matthews, who posit that the fluctuations of the Dow are a “scoreboard” for evaluating Obama’s economic policy. That is dumb.
UPDATE: I would add however, that when I included the phrase “when they can” this refers to things like Tim Geithner going public with an inchoate plan when all they had to do when they could have said they need more time.