Turned up to eleven: Fair and Balanced

Thursday, March 13, 2003

Econ as Psych Redux
Some faithful readers (yes, you!) will recall that I made the statement that Economics is Psychology Writ Large, for which Ross Nordeen took me to task (just a general link, I don't have the patience for all that archives crap!). In any event, I think we agreed more or less to disagree, and I think it is fair to say that my statement was predicated on the oversimplification (drastic, I know) that the stock market is a fair proxy for the economy overall. On this point, again, reasonable people can disagree.

What brings all this to mind, you ask? Well, I am home early today, so I got to watch a few minutes of CNBC market coverage, on a day when the market rallied sharply. It is in many ways ridiculous to try and assess why people, in the aggregate, buy or sell on a given day, but that never stops anyone (and large moves are often news driven, I think). In any event, the driving force seems to be the announcement that the US would not look for a UNSC vote on war with Iraq until next week, and is open to negotiations over some sort of "test period" for Saddam to get one more chance to disarm. I will quite deliberately leave my own views on war (ambivalent to negative, rather in the Kevin Drum and Josh Marshall camp) aside, and simply say that the CNBC analysis of the situation makes no sense.

According to the sages of Wall Street, the market is eager for the war to be done with quickly, so the market can go up because "uncertainties" have been reduced. Needless to say, this is a barbaric, heartless way to look at the world, but this is what they do. In any event, under that analytic, it makes no sense for the market to rally on news of a delay in the process. This only makes sense, really, if the market is rooting for a peaceful outcome to the crisis (in other words, that talks at the UN and elsewhere might lead to Saddam's exile and disarmament without war). Of course, they probably aren't rooting for continued sanctions and inspections either, but it certainly doesn't seem that the actual behavior of the market makes sense under the defining conventional wisdom. It is quite amusing to see the talking heads contort to make the facts fit the explanation (insert Creationism joke here).

What does this have to do with my title? Well, maybe nothing, but I think it is worth noting that the economic indicators that are typically "leading" indicators are the Stock Market (about 6 mo, from what I have heard), consumer confidence, and purchasing manager's reports (please correct me if I have this wrong). All of these are measures, not of numbers of widgets bought, sold or made, but of peoples' psychological state (are you confident? worried? scared? defiant? will you buy guns or butter?), and these opinions/states/feelings in large measure determine what the economy is going to do next.