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August 20, 2009

Comments

Nato

Whose projections had us only going to 8% unemployment? I don't remember any such thing. I only remember a litany of "double-digit" unemployment warnings. Also, when does Nathan think the economy started to recover?

Nathan Smith

My bad: the projection was 8% *with* the stimulus, 9% without. See here: http://gregmankiw.blogspot.com/2009/05/accountability.html. The projections were by the president's economic team.

Nato

That projection was far too rosy, though I bet at the time they were projecting (what they thought was) dismally to make it easier to hit their targets. Once the data for the second half of 2008 were revised drastically downward, it became clear that anyone in January thinking they could keep the unemployment rate to 8% was hopelessly wrong.

Nato

Come to think of it, wasn't Obama responsible for the collapse of the economy back before he was president?

Nathan Smith

I'm not sure whether Nato is mocking or not, but mockery is certainly not an appropriate attitude towards the hypothesis that the stark decline in the stock market from over 11,000 to just over 6,000 in the late 2008 and early 2009 reflected, among other things, political fears that a Democratic victory would herald an expansion of government that would drag down the economy in the long term. The timing is consistent, and events since have tended to bear out the market's (under this hypothesis) fears. The rising popular backlash and the likely defeat or retreat on Obamacare may now be reassuring the market, accounting for the recent rise. Of course, all this is speculative.

Nato

lmao.

Nathan Smith

lmao is internet-speak for "laughing my a** off." But to think that the theory that Obama and the Democrats partially caused the stockmarket drop is silly, is itself deeply silly. A transfer of power on this scale is easily a large enough event to justify major revisions of expectations for the future, and such revisions might well have been adverse. Certainly a comparison of the economies of the United States and Europe over the last thirty years would justify an idea that a more social-democratic state with more government involvement in the economy is not good for growth, and, therefore, not good for stocks. That a Democratic victory would cause a growth of government is not only not silly but is almost a truism. We can't run experiments to see if a McCain victory would have had the opposite effect (I think it would have), but the causal chain is clear and strong and consistent with the facts. No such coherent causal chain can be constructed for the "stimulus is working" hypothesis.

Nathan Smith

By the way, to think Obama partly caused the stockmarket slide is quite consistent with supporting Obama. You might say, for example, that Obama will redistribute from capitalists to workers, so naturally stocks will suffer but ordinary people will be better off. You might say that Obama will benefit the environment and a weaker economy is a price worth paying for that. You might say that Obama's "change" involves risk, but that the risks will prove in due course to have been worth taking. You could say that markets were spooked by Obama but they were making a mistake. Possible political causation of the stockmarket slide of late 2008 and early 2009 doesn't need to be a partisan issue.

Nato

Nathan, there were *so* many things to be spooked and relieved about that were so much more relevant than the actions of the government. If we'd elected Hugo Chavez or something, then that might have been a plausible cause of major market movement, but outside of the birthers, I don't think anyone really thought Obama would be a radical. Saying that expectations of stimulus effectiveness have caused the recovery is plausible but probably substantially wrong, since I think the real cause of the recovery in asset prices is confidence that the worst of the credit crisis has passed*. Thinking that the Obama administration is responsible for much of anything at this point (except not screwing up really badly in short term policy) is laughably implausible. Large movements of the market have continued to be in response to disclosures from critical firms and of economic data. The various major market actors have mentioned government policy when appropriate, and there's no reason to believe they would refrain from explaining their short or long positions in terms of the government, yet they did not. The Obama hypothesis (either positive or negative!) is obviously a partisan importation.

*Obama can take credit, there, primarily for not jogging the elbow of the Bush Administration while they were responding and he was president elect.

Nathan Smith

Yes, there was a lot going on, that's why it's entirely reasonable to think that Obama's political fortunes *didn't* have much to do with the stockmarket slide. But it's certainly also reasonable to think that he *did.* If we elected Hugo Chavez, a stockmarket crash would be a near certainty for political reasons alone, even if in all other respects economic conditions were great. That's certainly not the case with Obama. Obama doesn't need to be a "radical" to hurt the economy over the long run; a significant, permanent expansion of government would be enough to do that.

Nato, the government taxes and spends upwards of 20% of GDP, and has much wider effects on the economy through regulation. It's much bigger than Citibank or Goldman Sachs. It isn't tenable that Citibank and Goldman Sachs matter to the markets, but what the government does, and who controls it, is irrelevant.

Nato

"Obama doesn't need to be a "radical" to hurt the economy over the long run; a significant, permanent expansion of government would be enough to do that...[T]the government taxes and spends upwards of 20% of GDP, and has much wider effects on the economy through regulation"

I agree about Obama's long-run effect, but what's under discussion is quite short run. Further, most of the government budget isn't discretionary, none of the regulation on offer is considerably more radical than SOX, and financials performance is critically important not only because of it gives important information about the valuation of assets under management (which are many trillions of dollars) but because their health was a direct reflection of the state of what everyone agreed to be the biggest threat: credit crisis. This is so obvious I don't know what else to say. Are there any economists besides yourself who think it plausible to assign the bulk of the recent market movement to recent government action?

Nato

Excepting, of course, those economists who credit government intervention for averting credit meltdown. Those aren't that hard to find.

Nathan Smith

re: "I agree about Obama's long-run effect, but what's under discussion is quite short run."

No, sorry, that's not how the stock market works. A large share of of stock market investment-- pension funds, university endowments, that kind of thing-- is oriented towards the long run. If the economy is going to do badly in the long run, that's a good reason to get out of the stockmarket *today.* When you think about the stockmarket, you have to be able to think in terms of *net present value.* Not that irrational, short-run factors don't have an effect-- there can even be "rational panics" where I try to sell before you do even though I know fundamentals are strong-- but expectations about long-run performance must be fundamental to stock market performance under any theory of the stock market where even some investors are rational.

And note that it's quite possible to believe that government intervention averted credit meltdown *AND* that it's fairly likely that Obama and the Democratic victory in Congress was a big part of what was weighing down the stockmarket in late 2008 and early 2009. Keeping credit markets from freezing up is a very short-run issue, stock market performance a very long-run issue. And while I seem to remember seeing a few econopundits blame the stock market slide on Obama, no, I haven't seen many, and I don't recall any specific ones off the top of my head, but it seems like a safe bet that they're thinking it. With Krugman and DeLong slugging away, with the whole intelligentsia still drunk with BDS, people are picking their battles. That's my guess, anyway.

Nathan Smith

Also, does it matter whether Obama caused part of the stock market slide? The stock market goes up, the stock market goes down, a lot of people are affected, but what are you going to do about it? You can't ask politicians to try to maximize the short run value of the stock market. Given that the hypothesis isn't really testable anyway, why would an economist waste time scribbling about it? Why am I wasting time scribbling about it? Well, I didn't raise the issue myself, did I? But my general scruples about crazily unwarranted beliefs compels me to fight against Nato's weird conviction that it is somehow absurd or impossible that the overwhelming takeover of the legislative and executive branches by Democrats for the first time in 16 years might, just maybe, have been part-- not all!-- of the reason the stock market dropped 30% of its value or so on Election Day and in the months following.

Nato

"I didn't raise the issue myself, did I?"

Actually, Nathan did raise the issue. I said (mockingly) "wasn't Obama responsible for the collapse of the economy back before he was president?" And Nathan immediately started talking about the DJIA. Of course, he did correctly infer that I was referring to an earlier dispute about the plausibility of Obama being responsible for certain movements in stocks, but he brought that one up too.

"my general scruples about crazily unwarranted beliefs compels me to fight against Nato's weird conviction that it is somehow absurd or impossible that the overwhelming takeover of the legislative and executive branches by Democrats for the first time in 16 years might, just maybe, have been part-- not all!-- of the reason the stock market dropped 30% of its value or so on Election Day and in the months following."

Obviously "part" gives a lot of wiggle room, but the original discussion was about the stock market having given a "verdict" by dropping for a few days after Obama's election. (after which it went up somewhay, then down a little, and back up even more, then started dropping in a fairly sustained manner for the first three months of the year) Of course, the stock market first started dropping in late 2007 and was down 40% by early October, dropping most precipitously in the wake of the GOP's most competitive polling period of the campaign. Obviously, I don't think this was a stock market verdict of any kind, or that the market was afraid of a McCain victory or anything, but if I was to accept Nathan's logic, I would regard the coincidence as prima facie evidence of the market thinking that his policies would be bad for the economy. Meanwhile, the Democrats' genuinely-surprising large victory in '06 occurred during a time when the market was climbing steadily. One has to be a pretty assiduous cherry-picker to get the data to fit Nathan's narrative, and it's become painfully certain that his conviction that Obama is bad for the economy is driving (I presume unconsciously, because I believe Nathan always argues in good faith) selection of data points. I'm aware this is an uncharacteristically strong claim for me, but the conclusion is inescapable. The reason other econopundits who dislike Obama (frequently for quite good reasons!) haven't blamed the stock market slide on him in any significant way is because they know they would be widely seen to have no case even by their own side, because it's that obvious.

Nato

Not to say econopundits haven't blamed him for failing to avert the slide, but that is critically different than saying Obama et al. caused it.

Nathan Smith

I don't think I've understood most of what Nato's said here. It does seem likely that the 1,000 stockmarket slide immediately after Obama's election does reflect investor responses to his election-- surely it was the biggest news event of the day-- and Nato's arguments against that were as unpersuasive as his arguments are now, but the issue is hardly important. At the time I was more concerned because I was afraid it heralded a steeper slide. I'm not sure I understand the "critical difference" between blaming Obama for "failing to avert the slide" and "causing it." To the extent that stock market values are the president's business-- and I wouldn't want to emphasize that too much-- that seems a little like saying that the driver was not responsible for causing the crash, merely for failing to avert it by braking at the red light.

There's a sense in which Nato is right that in trying to blame the stock market slide on Obama one has "no case on one's side," because it's just hard to establish anything about what causes movements in the stock market. "Event studies" sometimes laboriously diagnose the effect on stock market valuations of things that happen to particular firms. They do so by (a) identifying an "event window" during which the market may plausibly be assumed to have fully accounted for the information, (b) identifying a comparator that proxies for the counter-factual. For example, if GM announces some M&A deal, or hires a new CEO, an event study might compare what happens to GM stock over, say, a week, and compare it to Ford or Chrysler, if no particularly striking news occurred there. If Ford rises 10% over the period and GM drops 30%, the M&A, or the new CEO, can be presumed to have been bad news and knocked about 40% off GM's value. If this sounds like something similar to what journalists write to account for daily market movements-- "the Dow Jones rose on the news that...", it isn't. The stock market is not quite but is a lot like a random walk, but journalists know their stories sell better if they're *stories* and not just numbers, so the phony causation-claims are a staple of financial journalism. Not only are journalists not doing careful event studies, but such event studies are scarcely possible at the level of the stock market as a whole, for there are no comparators; there is no Ford to proxy for what would have happened to GM without the announcement. Still less would a *political* event study be possible, since elections are few and far between and have very complex implications, making it implausible that the market could digest and respond to these implications quickly enough to distinguish the impact of the election for other factors. So, in that sense it is true that there is "no case," or nothing like an adequate scientific case, for the proposition that Obama caused the stock market slide. Which, combined with the fact that more high-profile econopundits have to worry about giving red meat to journalists, is why they haven't written about it, and why I'm not particularly interested in writing about it.

But to say "there is no case" for X in a rigorous scientific sense is not remotely the same as saying that X is implausible. To say that "Obama caused the stock market slide" is implausible is really quite stupid. I could talk about how there were indeed widespread hopes on the left, from Krugman for example, that Obama would be another FDR, and that FDR's policies helped cause a capital strike and prevented the Dow from regaining its 1929 levels until *1954,* and how at a time of crisis the leverage of a newly elected liberal politician would be especially large... but to go into such detail at all is really an unwarranted concession. The government controls 20%+ of the economy, and influences the rest of it: that's really all you need to know to deduce that a stockmarket slide might have political causes.

nato

"It does seem likely that the 1,000 stockmarket slide immediately after Obama's election does reflect investor responses to his election"

Well, this is clearly true in the tautological sense that whatever the election's effect on the DJIA was, it was represented in that drop. On the other hand, anyone watching the election odds closely at the time would have been surprised only that a couple of Republican senators (Stevens and Coleman) had apparently staged unexpected victories. This is all retread of our earlier argument, of course, but it bears re-mention.

"such event studies are scarcely possible at the level of the stock market as a whole, for there are no comparators"

But there are other stock markets, bourses, etc. One can even compare DJIA to the S&P and other domestic indexes, depending on what one wishes to measure. The Nissei 225 went up on the 5th (the election would have been called for Obama at about 5am on the 5th in Japan), then went down steeply for two days, tracking US performance closely but at a day delay. This would imply that some other item of information came out after trading closed in Japan on the 5th, which would be five hours before trading opened in New York.

nato

Also:
"...the driver was not responsible for causing the crash, merely for failing to avert it by braking at the red light"

Excellent. If the car was headed for a collision and there was no one in the car, it would still crash. If there was no action in Washington and the economy was headed for a crash, it would crash. In that reading, Obama had the responsibility for doing something because he was the driver of the car at the time it was headed for that collision, but he wasn't the cause of the collision course.

Nathan Smith

To extend the analogy, I'm afraid Obama exacerbated the collision course, promising to CUT taxes and INCREASE spending when we were already running fiscal red lights. To do nothing would have been culpable negligence. He put his foot on the accelerator.

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