Harvard economist Robert Barro's article in the Wall Street Journal about the relationship between stock market crashes and depressions is just ... plain ... weird.
There's nothing wrong with Barro's research per se. It's just strangely simplistic and incurious, particularly by the standards of a top-notch economist at a top-notch institution. What the paper does (it will cost you $5 to download and read it) is essentially to take a census of (i) stock market crashes and (ii) severe economic downturns in industrialized economies from the late 19th century onward. It finds, unsurprisingly, that the one thing tends to be found more frequently in the presence of the other.The bottom line is that there is ample reason to worry about slipping into a depression. There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s.
Our research classifies just two such U.S. events since 1870: the Great Depression from 1929 to 1933, with a macroeconomic decline by 25%, and the post-World War I years from 1917 to 1921, with a fall by 16%. We also assembled long-term data on GDP, consumption and stock-market returns for 33 other countries, sometimes going back as far as 1870. Our conjecture was that depressions would be closely connected to stock-market crashes (at least in the sense that a crash would signal a substantially increased chance of a depression).
This idea seems to conflict with the oft-repeated 1966 quip from Paul Samuelson that "The stock market has predicted nine of the last five recessions." The line is clever, but it unfairly denigrates the predictive power of stock markets. In fact, knowing that a stock-market crash has occurred sharply raises the odds of depression. And, in reverse, knowing that there is no stock-market crash makes a depression less likely.
And that's really all it does. It doesn't address what order the events occur in: stock market crashes that somewhat lag depressions are treated the same by Barro as those which lead them. Nor does it purport to address the really meaningful and interesting questions, which are as follows:
Does the stock market contain information is not well reflected by other economic indicators? That is, can you make a better prediction about the fate of the economy by knowing the trajectory of the stock market than you can with other readily available economic indicators?
If so, does a stock market crash merely predict a depression? Or is it actually a contributing cause toward a depression?
Without answering these questions, the paper isn't a whole lot more insightful than one telling you that beachballs are found more often in the presence of sand, and vice versa. Do beachballs predict sand? That is a matter of semantics, I suppose. But do beachballs tell you anything useful about sand? Not really.
Actually, I'm not being fair to Barro and his co-author José F. Ursúa. There is a very interesting and worthwhile part of the paper about the relationship between stock market crashes and the equity premium.
But this is not the part that's being reproduced in the Journal. Rather, the Journal is engaged in an ongoing project to use the stock market as proxy for the performance of the economy as a whole, and by extension, the performance of the Obama administration. (It is certainly not alone in this regard; tune on CNBC or browse the archives for other examples.) This article tends to cement in the public's head the relationship between the stock market and the economy, and therefore must have been appealing to the Journal.
Obviously in the long run, there is going to be some reasonably strong relationship between the stock market and the economy. But the stock market can also deviate significantly and over long periods of time from economic fundamentals. It's a pretty rough indicator -- empirically much less useful than other metrics like money supply, manufacturing output and interest rate spreads in predicting the economy's fate.
And if there's anything that should have taught us that, it's been the past dozen or so years. The failure of markets to price assets efficiently is arguably one of the principal causes of the current economic crisis. I am increasingly wondering whether blind faith the rationality of asset markets might tend to perpetuate it.
58 comments
I personally believe in the beachball god, and he does not merely predict sand, he creates sand. It should also be noted that he says that sand is the most holy matter upon this earth, so yes a beachball does tell us something useful about sand.
Please be more tolerant to religions in future posts.
two such U.S. events since 1870 . . . the post-World War I years from 1917 to 1921
? ? ? ? ? ? ? ? ? ?
Since the US didn't enter World War I until April 1917 (therefore any part of 1917 prior to US entry into the war was prior to US involvement in World War I), and the war ended in an Armistice on November 11, 1918, a good 40% of his "post-World War I years" were actually BEFORE or DURING World War I.
If Barro's lack of knowledge of such a simple fact as that is evident to me as a non-economist, facts that an elementary history course teaches, or that can be Googled in 5 seconds, I have no trust in anything else he has to say, let alone any interest in anything else he has to say.
Considering that it was published in the now Murdoch-owned Wall Street Journal, though, tells me that facts are to be ignored unless they add to the propaganda being pushed.
I didn't pay for the SSRN paper, but I hope there was some quantitative analysis there. It always annoys me that utterly unimportant statistics will be tarted up by the art department into a 3D graph, and an article such as Barro's can be number-free to the point of innumeracy. How strong is the correlation? Moreover, can we reasonably conclude anything from the depressions that are coincident with market crashes vs. those that are not? Does the severity of the market crash say anything about the severity of the depression? From the WSJ article, you can't tell if Barro is just talking through his hat.
An excellent post.
The market wasn't able to predict the current recession, at least not in any useful way, so why trust it to predict when the economy will emerge?
The current state of the stock market is only one of many factors to be weighed when assessing the health of an economy. An important factor perhaps, but not the only one. Perhaps not even the primary one.
Nate, it is so nice to read analysis by someone more knowledgable than myself. I wish I could come to D.C. and help you run this site.
And another thing that I find 'interesting' about the Barro's propaganda is that many historians and economists state that between 1871 and 1900, the US had two depressions, namely one from 1873-1879, and another from 1893-1898.
I guess Barro ignored those depressions because they didn't fit his pre-ordained model? Or did he consider them panics, not full-pledged depressions? If so, what is his definition of 'panic' vs. 'recession' vs. 'depression'?
Here's an article from October 2008 on what the author calls "The Real Great Depression", the depression he states lasted from 1873 to 1877 (although some consider it lasting until 1879):
http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18
The real motive for the stock market talking point is the number of people who are invested in the stock market through mutual funds, 401Ks and pension plans. These peoples' retirement plans have been jeopardized.
Even worse the government seems to be bailing out the people who caused the problem - home owners with sub-prime mortgages and the bankers who profited from them. Many people, even on the left, hold this view and they're very angry about it.
This is a serious problem for Obama. He can't let the bailout be characterized this way if he ever hopes to get the rest of is program through congress.
The only antidote I can see is high profile effort to hold some people accountable. There was massive fraud in the origination of sub-prime mortgages. The government has to make a show of putting these people in jail for a long time.
This plan also has the virtue of shifting the focus from the sub-prime home owners to the sub-prime originators, which is only as it should be. String 'em up.
Might this bit from Geithner's remarks to the ways and means committee have something to do with the hysteria of some in the financial press?
"The Budget also seeks to restore fairness to the tax code. For example, the Budget proposes to tax the compensation paid to hedge fund managers, private equity partners and others in the same way that we tax the wages paid to ordinary American workers. By closing this "carried interest" provision, the tax code will provide equal tax treatment for wages regardless of whether an individual works as a teacher or a hedge fund manager."
Not that I think considerations of personal gain colored their views of the public interest.
Personally I have always wondered why stocks are considered such a good economic performance indicator. I know that actually we are all invested in the stock market, even if we don't appreciate it, but why is a trade in stocks, which for the most part is a very inhuman trade. My own view is that something like watching the sales in everyday products would be far more important to the way most people live there lives (for instance it seems to me that the tanking global car industry is far more concerning, and working out what people buying less alcohol actually means to how people are feeling the pinch.)
The performance of the market can be analyzed to death as far as being an indicator of something, but the this current crash is different.
We have a new president who is hell bent on destroying prosperity. He plans to raise income taxes on the wealthiest 2-3 percent (with no policitcal ramifications...who cares about those votes?) He's also getting rid of about a third of previously allowed deductions including charitable contributions,which effectively raises their taxes by another 20%.
And he's declaring war on investors by raising the capital gains tax rate to 20%.
These policies will crush econonic recovery, and people are running from the stock market.
As an economist it's a real shame to observe the spectacle that Barro and other well known economists from the right (Cochrane, Fama, Prescott, Mankiw, etc.) are providing. All of these guys are famous for very good reasons, as in providing significant contributions to economic theory. However, all of them are knowingly ignoring a lot of the economic theory they helped create. It's depressing how partisanship makes guys like Barro become a mere mouthpiece of a Murdoch's rag
Sounds like someone's in denial again about the clear and loud signal the capital markets are sending about the multitude of reason to fear Obama administration policies, economic and otherwise.
Whether or not those fears ultimately come to pass depends on the continuity of future events, not just today's picture. That's why the correlation is imperfect.
The stock market is a forward-looking mechanism, and it does not like what it sees. Dumbfounding to some to suggest that doesn't matter.
CNBC is becoming the Fox News of the finance channels. They are unwatchable - particularly Joe Kiernen and that complete tripe of a morning show.
Although I would agree that markets are not a great indicator of past events, they can be a indicator of future events as the economy is at least partially a slef fulfilling prophecy. As all here know, I worked hard for Obama and gave him my money and my time - and I think he is completely nuts to have used the stimulus bill to forward a political agenda instead of help the economy, and talking of increasing taxes now, even though we will need to let Bush insane tax cuts expire, is just a bad idea. Now, layering cap-and-trade on top of it is completely stupid as the companies laying folks off have have a choice - open the next factory here or overseas - and thus cap-and-trade is a job killer beyond all other job killers. I am dissappointed, and starting to get pissed...
Earth to Rahm, get a freakin' clue! You cannot stick with the 100 days you planned in October - we are in a crisis beyond all historical crises!!!!!
Not only is the stock market a bad indicator, but I think that, as useful as macroeconomics can be in formulating policy, all this talk of appropriate indicators is really missing the point. It's not the quantitative health of the economy that we should be caring about, but ultimately the quality of life that we experience as a society. (One might also add the ecological sustainability of this lifestyle...) This is certainly not independent of GDP, the S&P500, or the unemployment rate, but none of them tell the whole story.
Sounds like the paper wasn't worth the $5.
Thw stock market is a great mirror of the psyche of the American people.
I'm kind of tired of all the stock market, economic talk on the blog. I read lots of econ blogs and usually go right to the sources such as Krugman, Mankiw, Barrow, and DeLong...though I don't care for Marginal Revolution. I wish fivethirtyeight would go back to looking at the economic crisis through a more congressional game theory approach. Also Roland Burris and Al Franken what is up?
Nate can you sense some of our frustrations with Andrew's posts now. All he does is present data just like the article you are ocmplaining about.
I think you are missing something. With the emphasis on the special election for one Congressional District in Chicago, and the "stalking horse" of Limbaugh v. Steele, you are really missing something. The really important question is this: Have any of the appropriations bills pending as of the inauguration been passed and signed, or does the administration intend to operate for all of fiscal '09 under the continuing resolution plus emergency supplementals? With all the emphasis on the bailout and stimulus bills, I've not seen anything on the fiscal '09 appropriations bills since some lamentations that Congress would not address those bills until after the Christmas/New Year recess. Bottom line, most federal gov't operational spending has been effectively frozen at FY 2008 levels for nearly six months of FY 2009.
@Brad: CNBC has a good hour or two, starting at 5 AM (EST) when it mainly checks up on international markets. But at the morning goes on, i.e., after 7 AM especially, the commentators become (a) far more political, (b) rooting for the US markets and almost completely oblivious to international markets even though those in Europe and the Americas are still open for several more hours, (c) rotating through politicos ("Speak Armey?" and the like) bashing Obama.
I enjoy some of the information that they provide, and they do give some skeptics or realists such as Roubini, some exposure. But as for deep analysis of any kind? Less than 2% of what CNBC has to offer.
Alright, let's translate this into game theory.
Obama's reforms may arguably not go as far as they should, but they are desperately needed.
They're coming late, and the economy is already in deep trouble.
We can't afford serious Republican gains in 2010.
That's unlikely to happen, but not impossible.
They're banking on the idea that the economy won't be significantly improved or may worsen by the 2010 election cycle.
If those events occur, they want to shift all blame for the recession, which began long before Obama was elected, to Obama policies.
In short, their strategy will be to claim that, if the treatment is not instantly effective, the physician must have caused the disease.
An important illogical argument for them is that declining short stock market indexes are accurate "predictors" of the long term efficacy of Democrat policy.
A major and effective campaign of rebutting this strategy is in order.
We know their battle plan.
"Ku said...
As an economist it's a real shame to observe the spectacle that Barro and other well known economists from the right (Cochrane, Fama, Prescott, Mankiw, etc.) are providing."
Desperate times, desperate measures. The right is on the verge of completely losing the American public WRT their economic message. The last time that happened, it took the right 50 years to recover. These guys will fight to the death before they allow themselves to be marginalized like that.
For the past 28 years, the GOP has sold to the public the idea that wealth and potential are the most important factors to a healthy economy. After 3 decades, American want something different. The Dems need to frame the economic talk in terms of wages, security, and opportunity without resorting to populism.
@nova_middle_man: I like Andrew Gelman's columns a lot. They're a little bit like having to eat my broccoli but they are chock-full of information. And so were many of Nate's columns all through 2008.
It wouldn't be bad for Andrew to have a brief lede paragraph explaining his point and his logic and his data (he does this but it could be a bit more extended). It's also good when he cites other studies and literature for context and further reading.
I think he ads a very nice dimension to 538. And I can imagine that if Nate ever does reformulate 538, a bylined column would be very appropriate for Andrew and a few more regulars.
Pete Kent, GROG, Rudy, etc -
I've noticed the tone getting more negative than usual the last few days.
I dumped on Pete Kent, and although he deserved it, it's really not my style.
This is what happens when you use the Limbaugh style and constantly resort to insults and polarizing comments like "poor people are stupider than rich people".
That's why comments that mock or deride vulnerable people are not a very good strategy.
@Team Marmots: that's right, these economists have to come to terms with where the global economy is at this stage, and why political forces (political realicy) are threatening their theoretical world because of the lack of moderation and regulation. An interesting set of charts in this DK article and the comments to it.
@ nova_middle_man
I, for one, happen to really like Andrew's columns. The data he presents is interesting and raises good questions. Sometimes there isn't a ready conclusion, and sometimes the questions are worth more than the answers.
For the purposes of starting an information-based discussion, I find Andrew's columns compelling and a strong addition to Nate's site.
Nate,
Well, I'd refer you to John Kenneth Galbraith's "The Great Crash of 1929" to explore the question of whether stock market crashes predict or cause depressions. In short, JKG seems to be of the opinion that it is largely casual in that the "boom" period before a crash encourages very poor economic decisions that must all eventually be paid for when the reckoning comes.
For example, in the 20s, many businesses lent excess cash to be used for margin-buying on Wall Street, rather than make capital investments. To pick but one example from the current boom, GM justified losing money on each car in the 2000s by claiming to make money through their GMAC financing wing on mortgage services as well as car loans. The punishment is two-fold; in both cases, not only were the loans were bad, they masked poor business decisions for years.
I'm not so much worried about the stock market and implications from that end of the financial spectrum as I am about the outright war Obama has declared on potential home buyers.
He has stated overtly his plan to support or "prop up" home values with pending legislation. In doing so, he will be committing the most heinous economic attack on the young working class in this country in its entire history. His meddling with the housing market is a complete abomination and against everything the free market stands for. It should be appalling to every American!
I was watching Mad Money last week I think it was. I can't remember the individuals name but an investor gave Kramer a list of about 10-15 stocks he believed would fair well. Well, not only did they beat the DOW, S&P and NASDAQ, I believe they gained around 7% or so.
Point I'm trying to make I guess is, the DOW stocks may be a good indicator of certain industries during "normal" market times, but when some fail, others prosper. Someone with the tools needs to do a good study and find all the recession proof stocks or near recession proof and maybe mix them up with some of the big guys in various industries to make a new index.
Well when the stock market was at 10000 we were actually screwed so it seems like it reacts rather than predicts. Which of course would make sense since it's humans reacting to events by selling/buying stock rather than the selling/buying of stock creating those events (for the most part).
Mad,
First off, home prices are now pretty affordable. Only problem now is getting a loan. Once the prices stabilize, lenders will be a little more laxed.
Second, every time home prices sink, the AAA bonds created from the CDO's created by the financial institutions that the MBS's and the CDS's used to insure the bonds sink in value further compounding the problems of insolvency. This is what is causing AIG to burn through cash and causing this freeze in credit. This is also causing the continuation of Fannie and Freddie and every other big lending agency to get into a bigger hole.
So, basically, either we try and act now and put on the breaks a bit or, we sit around and let the home prices bottom out, who knows where, let financial institutions collapse, the insurance giant AIG to fail, insurance policies around the world to default.
Me personally, I'd rather we try and do something.
Mad -
He has stated overtly his plan to support or "prop up" home values with pending legislation.
Actually, I am also not crazy about this. However, either candidate would have done something similar, and it is arguably better than the alternatives.
Strictly speaking, the idea is to prevent foreclosures, but of course, the "opportunity cost" of that is a less sharp decline in housing prices.
The housing bubble was zero sum; the original winners were sellers of overpriced properties and their various agents; the original losers were buyers and whoever ended up holding the mortgage.
Now some of the loss is being distributed to the taxpayers.
Although I would, to some degree, like to see those who made the mistakes bear the entire burden, I also realize that a rash of foreclosures is deeply disruptive to communities and families, and that there are benefits to smoothing the rate of the crash.
I'll also note that I didn't expect to agree 100% with every single Obama policy; I just expected him to be better than John McCain would have been. So far I'm satisfied.
In doing so, he will be committing the most heinous economic attack on the young working class in this country in its entire history. His meddling with the housing market is a complete abomination and against everything the free market stands for. It should be appalling to every American!
Why bother with language like this? Obviously none of this is true. Your original point made some sense, so why dilute it with hysteria?
I feel like the one thing that everyone misses when they talk about the stock market is this: The stock market shows what people believe the future of certain businesses are going to look like. So it may every now and then be a "forward looking indicator" as proponents of the system tend to believe, but only when, by good luck and people actually got it right.
When was the last time anyone believed a person could accurately see the future? Then that is the largest reason to throw out the bull of the market being an indicator of the future. Nope, it is just the people's perception of what they think the future is going to look like for specific companies...
again, let me reiterate. When did we start believing in the future telling ability's of people?
I prefer Nate most of the time. Andrew is a good source of data and Sean on occassion too when he isn't on his hyperpartisan pills (its good for a laugh sometimes :-p)
I just find it extremely ironic that Nate is complaining about lack of analysis and just data in the article when that is exactly what Andrew always does.
What it does is line someone's pockets, finding yet another fringe way to make money off of the economic crisis.
Post-war 1917? LOL. Didn't we enter into that war in 1917?
@GROG:
Raising the capital gains tax rate to 20% is restoring the Clinton-era capital gains rate (which Bush cut to 15%). I would agree that playing around with the deductibility of charitable donations is not a wise move at this time. I would rather see an increase in the progressivity of the tax structure, with say, a 41% marginal tax bracket for those making over $1 million.
Nate,
I know it's kinda just the flavor of the month, but I would love to see this site delve a bit deeper into economics. I have a feeling there will be a few nasty surprises, and you won't like you find.
I don't think many people (especially in the finance world) approach problems from the comprehensive and analytical way you do.
If you can do for economic analysis what you've done for baseball and politics, you could make a real contribution to economy and the country.
Polls_apart said
". I would rather see an increase in the progressivity of the tax structure, with say, a 41% marginal tax bracket for those making over $1 million."
This is a declaration of war on some very rich people. You are putting them out of business. Regardless of the merits, you can't expect them to like it, and you can expect them to fight it by any means possible.
Look at the combined effect fund managers. Now they are taxed 15% on that part of their profit sharing that is capital gains, and the tax is due when the gains are realized. They make this money by taking extreme risks with no regulation and minimal consequences in case of loss.
The proposals are to declare their share as income (you propose %41. This triples the tax rate when you include piggybacked state taxes). To this add increased regulation, which decreases leverage, possibly taxing gains immediately by mark to market rather than deferring them to when realized, requiring more disclosure of trading methods (necessary for regulation and market transparency) government intervention in the financial institutions that backed them (with them as the poster children for where not to lend) and an increase in the capital gains taxes that makes investing with them less attractive.
They're not happy campers, and they have neither the resources nor the inclination to be net buyers of stocks. Much of the hysteria comes from them directly, indirectly and, of course, bought and paid for as well.
Actually, you guys should hope that guys like Obama, Nate, and harold's ideas succeed.
You see, nobody,s that warm to the GOP these days. If people sour on Obama and crew as well, they're not going to turn to you.
The GOP is currently committing speukku... and the Rahm Emmanuels, Keith Olbermans, and guys like me are more than willing to help you with that knife. The moderates want to keep you around-they think it's healthy to be bipartisan. Me, I think we can replace you with the Green Party and have bipartisanship with them.
I think there's a pretty reasonable explanation for why large stock market declines should be expected to cause a decline in output, at least if you think the IS-LM model as a reasonable short-run approximation.
A decline in the stock market implies a decline in non-human wealth, implies a decline in total wealth, implies a decline in consumption, implies a decline in output.
At least, this is how we teach it to the undergrads...
"A decline in the stock market implies a decline in non-human wealth, implies a decline in total wealth, implies a decline in consumption, implies a decline in output."
Actually, a decline in the stock market just means that at this point in time, people believe that these companies aren't going to perform well in the future, based on whatever knowledge they can get their hands on (which is usually just data of the past).
Again I must point out, how many times have people been able to predict the future accurately?
I think tax deducctability for charitable donations is a difficult issue. I think though Obama probably has it right, cetainly if jhe introduces something similar to what Gordon Brown introduced when he was finance minister over here. Its called 'Gift Aid' and basically you sign a form when you make a charitable donation, and the government pays another 23p in the pound (I think it is). Tax decductability for charitable donations is more likely, it seems to me, to be open to more fraud, and certainly less detectable fraud.
I don't quite know what the patterns of charity donations in the US are at the moment. But the other thing is that most richer people make more donations usually so its a bit of a regressive taxation in the US, where it benefits the rich the most.
Might be one of those things that you have to swallow the bad headlines for a week or two maybe, but in the end may be for the best.
(Rudy)>> The stock market is a forward-looking mechanism, and it does not like what it sees.
It does look forward. But it looks forward based on everything it knows and then guesses what the Other Guy is going to do tomorrow. Viewed through an emotional lense.
It certainly isn't some amazing oracle viewing long into the future. Otherwise stock prices would have been tanking early 2006 before the Citibank shit hit the perverbial fan. The sub-prime loan problem was known by then. Really, look back and people knew this was coming. Magnitude and exact timing wasn't known. Certainly not by the markets.
So right now the Bear Emotion rules the roost. Nobody wants to be the last one out the door. The market can be thought of as a bunch of self-serving cowards. Nobody is looking to be the self-sacrificing hero. That isn't the point of being in the market. *shrug* That's just how it works. Bear markets assume the worst, fear defines the mood. So until solid feedback numbers on policy shows up, and that just can't happen till at a minimum late May, the market on the whole assumes the worst.
"This is a declaration of war on some very rich people. You are putting them out of business."
Man, we must have never had any business or growth prior to the 1980s. Especially during the 1950s, our fastest growing decade, during which the top marginal rate was 91%.
The very rich people have been at war with everyone else for a long time now. I see no problem with fighting back.
And since the Dow's up 140 today, it clearly means the market agrees. Right? That's how this works, right?
Putting rates back to 39%, where they were under Reagan, is far from a war on the rich. This is 3%, 3% of what you make OVER $250,000! Think how few people that effects? Almost noone, now go tell a republican, they could use some facts.
The 3% in my prior comment attempts to point to the fact that all this repub huffing is about moving the top tax rate from 36% to 39%. Oh, and remember, the budget deficit increase under Bush is much smaller without his ill-advised tax cuts!
Codswallet,
I think you failed to grasp the argument. Fund managers are not the beast you think them to be. You seem to be confusing them and their funds.
The funds get hit with the 15% capital gains tax. The fund managers pay taxes as per regular millionaires. With or without the higher tax rate, the managers will make money by taking extreme risks with OTHER PEOPLE'S MONEY. Unless they put money into the fund they manage (and almost none do), they have no personal risk. They have no consequences concerned with losses or the risks they take. That burden is felt ENTIRELY by the people who actually fund the fund.
Capital gains tax is paid entirely by the fund. The managers earn "regular" income - usually a percentage of the total funds under their management. If a fund manager has any concerns about capital gains tax on his fund, he will trade less. Funds that are more stable trend to earn more than those that don't. So, the funds might actually improve in their performance!
The vast majority of funds compete so badly against index funds. During any given decade, there are a handful of fund managers who are actually worth anything. As such, the typical fund manager is already very unattractive. They make money by selling themselves to companies that have 401(k) and 403(b) plans. As long as the companies don't care about their employees, the fund managers will be "gainfully" employed.
The connection between fund managers and capital gains tax is a red herring. It could exist in theory, but almost never exists in practice.
3 states 4 corners said
"Capital gains tax is paid entirely by the fund. The managers earn "regular" income - usually a percentage of the total funds under their management."
For mutual funds, yes, but managers of hedge funds can use a different treatment. This is from Geithner's testimony quoted above:
"... the Budget proposes to tax the compensation paid to hedge fund managers, private equity partners and others in the same way that we tax the wages paid to ordinary American workers. By closing this "carried interest" provision..."
If the funds profits were capital gains, so is the carried interest (cf. the carried interest article in Wikipedia.)
Adam said:
"Man, we must have never had any business or growth prior to the 1980s. Especially during the 1950s, our fastest growing decade, during which the top marginal rate was 91%.
The very rich people have been at war with everyone else for a long time now. I see no problem with fighting back"
I said "some" very rich people, not all. I meant those benefiting from certain tax code provisions. These people face a tripling of their taxes combined with other government initiatives with strong negative effects on their business. This isn't even close to a majority of the very rich, but it's a very aggressive group who made a fortune investing other peoples money in the last 15 years or so. I believe they see this as life or death for their business model (without which they would be reduced to ordinary mortal status). They have all the arrogance of the dot com crowd and more.
Fred said:
"Putting rates back to 39%, where they were under Reagan, is far from a war on the rich. This is 3%, 3% of what you make OVER $250,000! Think how few people that effects? Almost noone, now go tell a republican, they could use some facts"
But putting the rates of a particular very small but very rich group up from 15% to 39% along with the loss of other tax advantages IS a war. It isn't a question of averages or good intentions. Their are some people who have economic motives to fight this with all their resources.
There's no use to appeal to reason or for compromise. These people will spend millions to hire Swift Boat style PR firms to launch phony grass roots campaigns. Think Swift Boat or the Clinton Health Plan.
I don't think it's just the hedge fund folks. I expect there are other tax code provisions that haven't had as much publicity that matter greatly to other wealthy subgroups. Not just a 3% increase. The extractive industries come to mind.
I find this type of analysis to be typical for the Barro papers I've read. He has lots of interesting data, finds a correlation and doesn't say much about the underlying theory. Barro provides data and a headline, but he seems to leave you hanging on analysis.
From the article I posted the URL to (above), a few brief excerpts:
. . . a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral.
The crash came in Central Europe in May 1873, as it became clear that the region's assumptions about continual economic growth were too optimistic.
As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis.
This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years.
Does any of the above sound like what is happening today?
Mortgages being too easy to obtain, driving up the price of real estate to unsustainable heights?
Borrowers ravenously assuming more and more credit, using unbuilt or half-built real estate as collateral and/or borrowing against the inflated value of the real estate?
Credit swaps?
Banks unsure how stable or how viable their lending partners are?
New sources for the products - the US in the 1870s, China and the rest of Asia in the late 20th/early 21st centuries?
Looks to me that economists who don't look at the economic situation of the late 19th century are ignoring information that doesn't fit their 'pet' theory of what's happening.
The parallels are quite similar.
Does the stock market contain information is not well reflected by other economic indicators?
Yes and No. Since its supposed to be a prediction of a companies future earnings, I supposed you could say that YES, it hints at a possible downturn if a companies investors dont think the company is going to generate enough revenues, and thus sell its stock. But at the same time, NO, because the sale of stock could be a reaction to anything, not just possible future economic factors.
Can you make a better prediction about the fate of the economy by knowing the trajectory of the stock market than you can with other readily available economic indicators?
No. You need way more data than just the stock market to predict the direction of the economy becasue the economy is made up of much more than what the stock market represents. The stock market can give you a general trend, possibly make an indication of the mood of the business community, but beyond that, no its not a predictor of any past or future economic situation, but its always a component of any situation.
Is it actually a contributing cause toward a depression?
Yes. It is because its a part of the over all economy, and if its dragging down, it will weigh down other parts of the economy as well. While it may not predict the economy, it plays a role in the direction that it goes that we know for sure.
Jon Stewart made this exact point tonight, albeit more hillariously than Nate.
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