The Press Corps Drives More People Shrill

Daniel Gross is driven into shrill unholy madness by yet more journamalism from the Wall Street Journal:

Daniel Gross: October 08, 2006 - October 14, 2006 Archives: MORE NOMINAL SILLINESS: From the Wall Street Journal's editorial today:

Getting out of the statistical weeds, the news here is that the U.S. has a very tight labor market -- which is now translating into significant wage gains. Over the past 12 months wages have climbed by 4%, which is the biggest gain since 2001 and which economist Brian Wesbury points out is higher than the 3.3% average annual wage growth of the last 25 years.

Once again, the absurdity of talking only of nominal wage gains in a period of elevated inflation should be evident to anybody purporting to write about economic issues for an educated audience. So, too, should the absurdity of comparing nominal wage gains in today's period of elevated inflation to nominal wage gains in a recent period of depressed inflation. Four percent growth in wages in 12 months is indeed somewhat impressive, but not when inflation is up 3.8 percent in those same 12 months. If we all were paid in nominal dollars but paid bills only in real dollars, we'd all be really rich by now.

Angry Bear finds a ray of light in Brooke Masters:

Angry Bear: Brooke Masters writes:

Even the Dow's record is not quite as impressive as it seems. If inflation is taken into account, the Dow has to rise another 2,150 points before it will set an all-time high.It does seem that certain rightwingers are high-fiving over the fact that the Dow has reached 85% of its January 2000 level in real terms.

And finds Dean Baker driven into shrill unholy madness for a different reason:

Dean Baker adds this perspective:

One infuriating feature of business reporting is the constant cheering for a higher stock market. I have nothing against a higher market, but I know of no general public interest in a high stock market. In principle, the stock market represents the discounted value of the future profits of corporate America. If the value rises because the economy can now be seen as growing more rapidly, then this is certainly good news. But, if future profits are projected to be higher because of lower wages or lower corporate taxes (e.g. a higher tax burden on workers or fewer public services), why should the mass of the population, who own little or no stock celebrate?...

Comments

[Kaleberg]

I've never understood all the economic voodoo about stock prices having something to do with discounted future corporate earnings. It all seems completely bogus. Investors have to do SOMETHING with their money. It doesn't just vanish, and they can't all just give up and stash their cash in a mattress. The stock market is the DEFAULT place to put your money when there are no real investment opportunities, especially when bank accounts are paying negative interest. This has been drummed into people, and it works, at least from an investors point of view. When the economy dries up and the future looks bleak, move into the market. Since everyone else is in the same boat, more people are buying stock than selling, so stock prices go up.

In other words, there is a good solid, rational reason that the stock market is a good place to put your money, and it has nothing to do with discounted future blah blah blah.

[Robert Waldmann]

Has Daniel Gross ever heard of this thingy called the Phillips curve ? The curious reader is asked to consider the post on Ned Phelps just below. increasing nominal wage growth and inflation has often been described as a sign of a tight labor market by people who understand the concepts of "nominal" and real "perfectly."

[KenS]

It's curious. Conservatives seemed to know the difference between nominal and real when discussing whether recent gas prices had set a record. Check out this George Will column

http://www.msnbc.msn.com/id/8897401/site/newsweek/

[Bruce Webb]

KenS is right on point. Never assume that when arguing with someone from the economic Right that they are just too dense to grasp the concepts and figures. The fact is that they use and misuse figures in very conscious ways to achieve particular policy ends.

Tax cuts are good, Social Security is bad, George Bush is a brilliant leader. Patiently explaining the difference between the payroll survey and the household survey or between nominal and real to an Economic Rightest is not a waste of time only because one of your other readers might learn something.

Is PRS an economic cretin or a brilliant saboteur of discussion? In the end it really doesn't matter, he makes the perfect vehicle for conveying information to others.

(Is it absolutely necessary to treat Patrick as if he were a buffoon? No not really. But my God some brands of pomposity just beg to be mocked, and PRS just reeks of pomposity.)

[Jim S]

Kaleberg,

It used to be that people invested in the stock market because they would realize a return by a combination of dividends and a realistic rate of increasing stock price. Now those companies that pay a regular dividend as part of the expected return on investment constitute a minority so far as I know.

[Jon Fernquest]

"Once again, the absurdity of talking only of nominal wage gains in a period of elevated inflation should be evident to anybody purporting to write about economic issues for an educated audience."

Minimum competency issues like this should be stressed in economics curricula. I always cringe when I see the comparison-of-nominal-dollar-values-over-long-stretches of-time-wow-effect.

These nominal-real value fallacies appear in many different forms. As minimum economic competency, students should be tested on identifying them and applying the correct analysis. I'll have to add this to my to do list for next time I teach macro. Thanks for pointing these things out.

[Barry]

John, it isn't ignorance. It's dishonesty. Education will help, but education for the targets of the dishonesty.

[a]

"If inflation is taken into account, the Dow has to rise another 2,150 points before it will set an all-time high."

If you want to use this kind of reasoning, then in all fairness you should be counting the dividends paid during the period as well. This should lower the figure somewhat (but not completely - half way?).

[anne]

Actually the point of investing in stocks is to buy a share of future earnings, hopefully for a reasonable or even attractive price. Whether future earnings are actually paid as dividends is not important, for implied dividends of stock buybacks are as important as paid dividends.

Yes; stock market investing is important and reflective of confidence in future earnings relative to present stock prices.

[anne]

http://www.mscibarra.com/products/indices/us/performance.jsp
http://flagship2.vanguard.com/VGApp/hnw/FundsByName

Vanguard MS Fund Returns
9/30/96 to 9/30/06

Large Cap Index is 8.7
Large Cap Growth Index is 6.0
Large Cap Value Index is 11.1

Mid Cap Index is 11.9
Mid Cap Value Index is 14.8

Small Cap Index is 11.5
Small Cap Value Index is 13.9

Europe Index is 10.7
Europe Value Index is 13.8
Pacific Index is 1.9
Pacific Value Index is 3.9
Emerging Markets Index is 7.8

Energy is 16.8
Health Care is 16.9
Precious Metals is 12.0
REIT Index is 15.2

Long Term Bond Index is 8.1
Intermediate Term Bond Index is 6.7

[anne]

Worrying about stock market highs and low is of no account; worry about valuation. Stock returns here and in Europe have been surprisingly fine even through a severe bear market. Leaning to value however has been the proper strategy these last years. This too will change.

[anne]

http://www.mscibarra.com/products/indices/stdindex/performance.jsp

National Index Returns [Dollars]
10/5/96 - 10/5/06

Australia 11.9
Canada 13.5
Finland 17.4
France 11.8
Germany 8.8
Hong Kong 5.1
Japan 1.0
Netherlands 8.7
Norway 12.0
Sweden 12.6
Switzerland 10.5
UK 9.1
USA 8.4

National Index Returns [Domestic Currency]
10/5/96 - 10/5/06

Australia 12.6
Canada 11.4
Finland 17.7
France 11.7
Germany 8.9
Hong Kong 5.2
Japan 1.5
Netherlands 8.9
Norway 12.2
Sweden 13.7
Switzerland 10.4
UK 7.2
USA 8.4

Dollar Value Loss = 3.83%

[Gerard MacDonelll]

It is actually the good doctor who tries to have it both ways on this issue. On earlier occasions he has argued that we do not have an inflation dynamic. But on this occasion he argues that we need to deflate nominal wages by headline inflation, which would presume that the inflation expectation is being set by the headline inflation rate, in which case we would have inflation and the need for more Fed tightening.

Dr. Delong, there is a difference between disagreeing with you and being incompetent or evil. I mention this believing that the Bushies are mostly both. But that is a separate matter.

[Gerard MacDonelll]

It is actually the good doctor who tries to have it both ways on this issue. On earlier occasions he has argued that we do not have an inflation dynamic. But on this occasion he argues that we need to deflate nominal wages by headline inflation, which would presume that the inflation expectation is being set by the headline inflation rate, in which case we would have inflation and the need for more Fed tightening.

Dr. Delong, there is a difference between disagreeing with you and being incompetent or evil. I mention this believing that the Bushies are mostly both. But that is a separate matter.

[Yudel]

Seems to me that the recent Dow rise correlates quite well with anticipation of a Republican loss of power on election day.

[spencer]

From June 1999 to the end of last month the return from being fully invested in the s&p with daily dividend reinvestment was 9%.

Over the same period the return from 3 month t bills was 25%.