Save us from the (economic) puritans
By Scott Sumner
[Disclaimer, this post uses “puritan” as a term for those suspicious of pleasure, not actual members of the Puritan religion.]
Bret Stephens recently had this to say, in defense of Trump’s tweets on issues such as tariffs:
And as an astute friend pointed out to me recently, Trump’s scary tweets even seem to have the effect of tempering market exuberance, acting as a kind of check in lieu of interest-rate hikes.
Stephens’s friend may be astute, but this comment fails on multiple grounds. To begin with, at the moment there is no need for the Fed to hike interest rates, and thus no need for a substitute for rate increases . But the real problem runs much deeper, and centers on the term “market exuberance”. There’s a clear implication that market exuberance is a bad thing, which is not true.
While I often disagree with Trump’s tweets on economics, he’s right about one point. Market exuberance is generally a good thing. More often than not, events that are good for the overall economy are also good for the stock market. Of course there are occasional exceptions. For instance, I could imagine stocks rising due to the enactment of some sort of corporate welfare, say the renewal of the Ex-Im Bank. But those cases are more the exception than the rule. Economic booms are good for average Americans and good for corporate America. The same is true of free trade, private property and deregulation. Countries that close themselves off from the world and adopt statist policies tend to be much poorer than countries with free markets.
Governments should never try to “temper” market exuberance, just the opposite. In September 1929, the “astute” Fed was so suspicious of an exuberant stock market that they raised real interest rates up to 7% (compared with roughly 0% today.) How’d that work out?
The term ‘exuberance’ also reminds me of Alan Greenspan’s famous 1996 prediction that the stock market was exhibiting “irrational exuberance”—a prediction that turned out to be embarrassingly far off base. If anything, 1996 stock prices now seem to have been too low. Unfortunately, Greenspan’s failed prediction has not stopped people from being suspicious of exuberant stock markets.
Trump’s tweets are occasionally problematic, but his interest in creating an exuberant stock market is perhaps the least of his sins.
Like many conservatives, Bret Stephens seems to believe that asset markets are not efficient. That seems odd. If I didn’t believe the efficient markets hypothesis were true, then I would no longer support free market policies.