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Friday, July 15, 2016

Paul Krugman: Bull Market Blues

High stock prices are "not evidence of a healthy economy":

Bull Market Blues, by Paul Krugman, NY Times: Like most economists, I don’t usually have much to say about stocks. Stocks ... have a lot less to do with the state of the economy or its future prospects than many people believe. ...
Still, we shouldn’t completely ignore stock prices. The fact that the major averages have lately been hitting new highs ... is newsworthy and noteworthy. What are those Wall Street indexes telling us?
The answer, I’d suggest, isn’t entirely positive..., in some ways the stock market’s gains reflect economic weaknesses, not strengths. ...
We measure the economy’s success by the extent to which it generates rising incomes for the population. But stocks ... only reflect the part of income that shows up as profits.
This wouldn’t matter if the share of profits in overall income were stable; but it isn’t. The share of profits ... has been a lot higher in recent years than it was during the great stock surge of the late 1990s ... making the relationship between profits and prosperity weak at best. ...
When investors buy stocks, they’re buying a share of future profits. What that’s worth to them depends on what other options they have for converting money today into income tomorrow. And these days those options are pretty poor... So investors are willing to pay a lot for future income, hence high stock prices for any given level of profits. ...
This may seem, however, to present a paradox. If the private sector doesn’t see itself as having a lot of good investment opportunities, how can profits be so high? The answer, I’d suggest, is that these days profits often seem to bear little relationship to investment in new capacity. Instead, profits come from some kind of market power... And companies making profits from such power can simultaneously have high stock prices and little reason to spend.
Consider the fact that the three most valuable companies in America are Apple, Google and Microsoft. None of the three spends large sums on bricks and mortar. ...
In other words, while record stock prices do put the lie to claims that the Obama administration has been anti-business, they’re not evidence of a healthy economy. If anything, they’re a sign of an economy with too few opportunities for productive investment and too much monopoly power.
So when you read headlines about stock prices, remember: What’s good for the Dow isn’t necessarily good for America, or vice versa.

    Posted by on Friday, July 15, 2016 at 09:10 AM in Economics | Permalink  Comments (40)


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