Sumner, the Stock Market, and Price Controls
Sumner replies at length to my question, “Why did financial markets like Nixon’s price controls so much?” His easiest answer is that Nixon’s infamous August 15 speech did a lot more than impose price controls. It also devalued gold by 10%, which would naturally tend to raise nominal stock prices. Sumner also has some answers that would require more careful study to evaluate. But I’m very skeptical of at least one:
As far as I can recall most economists supported the wage/price
controls. This is important because this whole debate was motivated
not by the question of whether markets are perfect, but rather whether
they are better guides to policy effectiveness than the experts. And
in this case the experts were wrong as well. So even in this 38 year
old case, which admittedly looks very bad for EMH people like me, the
experts seem to have done no better.
I don’t know of any data for 1971, but at least by 1979, economists overwhelmingly opposed wage-price controls. The original Kearl et al survey, “A Confusion of Economists” (AER 1979) included the statement, “Wage-price controls should be used to control inflation.” Only 6% “generally agreed,” 22% “agreed with provisions,” and fully 72% “generally disagreed.”
While it’s possible the profession had a huge change of heart in just eight years, I don’t buy it. Economists are notoriously stubborn. Furthermore, there are only three out of Kearl et al’s questions where the responses are more lop-sided: One is on tariffs, one is on rent control, and one is on interest rate ceilings. So it looks like economists opposed wage-price controls because they opposed price controls in general, not because Nixon’s “hadn’t worked” during the past eight years.
In any case, my favorite part of Scott’s reply makes an important concession:
We will not use market responses to directly evaluate whether a
particular policy is good or bad. Rather we will use markets to answer
technical questions, such as how much inflation or NGDP growth we are
likely to get next year and the year after.
I made the same point back in March:
Portfolios are “real bets” about a narrow range of tightly bundled
questions. When I hold an index fund, for example, I am simultaneously
betting on the quality of economic policy, the resilience of the
economy, the average risk premium, etc., but only as they relate to the
price of stocks. The beauty of the betting norm is that it opens up a
much wider range of individually-wrapped questions.
Bottom line: Before you appeal to financial markets as evidence, make sure that the markets are addressing the same question that you are.