Stocks and GDP

Michael Brun brun at uiuc.edu
Mon Jan 25 19:47:04 PST 1999


Some possible explanations for the discrepancy beween US GDP growth rates and Stock Market average growth rates:

(1) Since financial flows are more global than actual production, couldn't US stock market averages (especially of elite "blue-chip" shares) grow faster than the US GDP because of faster GDP growth elsewhere? E.g., before the recent crisis, the money could have been made in Asia, where growth was around say 8% instead of the US 3%, but then invested in US stock markets because they're viewed as safer or more prestigious, giving the intermediate stock average growth rate of 6%.

[Don't tell Clinton and the Repubs about this--it's an argument for their view. It shows how US Social Security, by going on the stock market, might be able to benefit from workers all over the world, not just here in the US, without even letting them in this country or in the system! Of course, should this leak, the refutation is ready also, namely risk: "What about Russia and Brazil?" Then one can continue by arguing Social Security can get the best of both worlds--exploitation of the global labor force AND security from risk--if funded from increased corporate income and capital gains taxes. How's that for twisted social democracy?]

So then, Doug, you could revise your claim to state that stock market averages cannot over the long term outpace the growth rate of the global economy, rather than just the US national economy.

(2) How about a "disposable 'market investment' income" concept: what's left over after taxes and consumption? If the marginal propensity to consume declines with income and the marginal tax rate does not increase enough to compensate, then a given percentage increase in income could lead to a greater percentage increase in stock market investment. Of course, the trend to greater inequality in income distribution would exacerbate this tendency beyond what aggregate income figures would lead one to predict.

So on top of the growth rate of the global economy, add trend toward increasing inequality.

(3) Is there truth to the rumor that because of corporate stock buybacks, there is "more money chasing fewer stocks" and hence stock value inflation; or is this an urban--or suburban--myth? Even if true, is it only recently true or has it been a long term trend?

(4) Then there are trends--usually not sufficiently long term to count--in preferences between stock markets, bond markets, real estate markets, and so on, that could account for massive movements of money and changes in valuation.

(5) There are even changes in fashion: people who wouldn't have thought of dabbling in stocks 20 years ago are now doing so, and not just because they have the money, but because everyone is talking about it. It's like personal computers, or like cars in the 1950's: a not yet mature market. When it does mature, this source of growth will fade.

So Greg, Doug would be right if common assumptions like closed economy, stable income distribution, fixed preferences over time, equilibrated markets, and constant marginal utility of consumption were all to hold. Probably none of them hold, but what the hell?......Michael Brun



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