Tuesday, November 27, 2007

Vote for Me, I Blow Bubbles

Do we think it would have been appropriate, in making comparisons of public's perception of the economy in 1998 to its perception today, to note that we were then in the midst of a stock market bubble?

13 comments:

Tom said...

Andrew, aside from the laughable comment about whinyness (he is the king of whining) I'm not sure what's so wrong. His basic theme is that "people are unhappy compared to 10 years ago, and most of them have a right to be"...which seems correct.

The economy has been strongly tilted to favor the affluent over the middle class...I'm not even sure how you could make an argument otherwise. Every instinct of the currently rich is to do as much as possible to make sure their idle/drunk children don't have to compete with "commoners": ruining and underfunding public schools, eliminating inheritance taxes, favoring interest/capital gains over income, etc. He's not saying that it's all due to the republicans' programs, but much of it is.

His other main point is about healthcare. Healthcare is going to take more and more of our money no matter who runs it. The demand curve for "life" is very steep; as the population ages, it will naturally spend more on health care and be less happy with what's left over.

I do confess, taking a survey after everyone has lost asset value in their homes is a bit like taking an employee survey right after a layoff...it's somewhat unfair. But I contend that the intended effects of republican economic policies has been achieved: the rich are richer, the poor are much poorer, the middle class finds it harder to compete, and the wealth is being locked in permanently by low relative taxes and the disappearance of the inheritance tax. They got what they wanted, and the people don't like it. As a famous republican once said, "you can't fool all of the people all of the time." :)

eightnine2718281828mu5 said...

Let's say we change Krugman's words to include the bubble:

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But simply putting another Clinton, or any Democrat, in the White House won’t ensure that the good times will roll again. President Clinton was a good economic manager, but much of the good news during the 1990s reflected events that won’t be repeated, including a stock bubble, low oil prices and the great medical cost pause — the temporary leveling off of health care spending as a percentage of G.D.P. that took place in the 1990s despite his failure to pass health care reform.
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I don't think the modification materially changes the article.

Barry Ritholtz said...

I'm not sure this matters much, but: I would argue that 1997-98 was the late stages of the 1982-2000 Bull market.

The real asset bubble inflation did not occur until 1999-2000.

Over the 6 month period from October '99 to March 2000, the Nasdaq doubled -- a 100% gain in half a year!

Prior to that, gains were outsized, but not totally insane.

Andrew Samwick said...

It is true that things got more insane in the subsequent two years, but as early as 1995, I was writing academic papers noting the departures of valuation ratios from historical norms.

There is no way to honestly look at 1998 and say that public's perception in the midst of that stock market runup is a reasonable benchmark for what the public should perceive today. This was my point about Krugman's article. If he's got a good point to make, which he does, then why undermine it with a comparison that is biased in favor of his argument?

Tom said...

Point taken...choosing your time frame has a long, cherished history in everything from economics to climate science. The only possible justification is to compare the last year of 2 two-term presidents, and even that is slightly off.

eightnine2718281828mu5 said...

I don't think Krugman's conclusions hinged on the source of labor's gains, he's just showing that labor is (unsurprisingly) happier when their wallets are fatter.

He's also pointing out that folks like Larry Kudlow who whine about 'the greatest story never told' miss the point that incomplete and abstract metrics (like GDP and the unemployment rate) don't impress the average citizen. And trying to convince them otherwise is probably a losing proposition.

One other point; the stock bubble was a response to a strong economy based on developments in the tech cycle; in no way was it an artifact of an executive, legislature, or central bank intervention. Clinton's fiscal policies of course played a supporting role, but it wasn't a decisive factor in the 90's boom.

Can we make the same claim for the Reagan or Bush II economies, where debt and liquidity were used to artificially stimulate the economy?

The Clinton economy was much more about free market operations than either Reagan or Bush; I find it exceeding ironic that Reagan and Bush are held up as paragons of the free market while in their narrative Clinton was merely 'lucky'.

Patrick R. Sullivan said...

Clinton was lucky: Inherited an expansion almost two years along. Also inherited spending caps designed by Phil Gramm in the 1990 Budget Act. Inherited the Peace Dividend.

Lost his Democrat majority in Congress after only two years which allowed the Republicans to check his (and his overbearing wife's) worst instincts. Inherited Alan Greenspan.

Finally, inherited the Y2K issue, which led to huge investments in IT. He left office just before the inevitable recession began in March 2001.

Tom said...

Patrick - I'm sure you're a nice man and all, but as my teenage daughter might type, OMG...delusions are never pretty.

I find it even more humorous when people who are supposedly "tough-minded" (usually businesspeople) chalk everything up to luck. Luck is a contributing variable to long-term success, never the controlling one. And, I might add, to long-term failure. (BTW, I hear Webster's dictionary is considering putting George II's photo in the definition of "failure")

Anonymous said...

Uh, but most people don't own stocks! We're not all finance professors...

Anonymous said...

Andrew?! #1) Ed Prescott was writing even in 2001 that he never bought the stock market bubble story put forth by Robert Shiller et al.; #2) even if the market was irrationally exuberant - stock valuations enter neither the GDP accounting nor the employment data directly. I'm rather shocked that you would post such a favorite piece of rightwing spin. No - the 1990's boom was real.

Anonymous said...

Tom - Patrick loves the same point in the business cycle nonsense. Even if not every business cycle is the same. You see - Patrrick is your typical Rovian puppet who has not a clue.

Andrew Samwick said...

Overvalued stock prices lower the cost of equity capital, leading to overinvestment in the corporate sector and thus to greater employment than would result with lower stock valuations. Thus, some portion of what occurred in the 1990s was driven by expectations of future growth that did not materialize. This is what Krugman should have acknowledged in the piece or what should have dissuaded him from using a the comparison in the first place.

eightnine2718281828mu5 said...

---
Overvalued stock prices lower the cost of equity capital, leading to overinvestment in the corporate sector and thus to greater employment than would result with lower stock valuations.
---

Well, if we're gonna trot out the stimulus underlying Clinton's economy, shouldn't we do the same for Bush?

Overvalued house prices ... lead to overinvestment in the housing sector and thus to greater employment than would result with lower housing valuations.

And this was a result of monetary policy dictated by a Federal Reserve intent on holding rates artificially low in the run-up to the 2004 election.

You should also toss in W's deficit-driven fiscal stimulus for good measure.