President Obama’s State of the Union address was primarily economic. The euro zone is dealing with an economic crisis. Developing nations are concerned with economic growth.
So, are economists in charge?
An academic study of 1200 policy makers in EU and OECD countries provides some answers. Looking at heads of government, finance ministers and chief central bankers during the past 40 years, researchers concluded the following:
- During a financial crisis, it is more likely that a political leader will have an economic background.
- Euro zone prime ministers tend not to have economic training.
- In left of center governments, after a stock market crash, more government leaders have economic credentials.
- When a government has been around awhile, its finance ministers tend to have less economic expertise while its central bankers have more.
We should conclude by asking if economic expertise leads to better policies. The authors say, not necessarily.
And finally, Friedrich von Hayek would remind us that, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
Sources and Resources: A readable analysis of our leaders’ backgrounds, “The Technical Competence of Economic Policy Makers in Developed Democracies” was an interesting paper and the source of the above tables and information. If you prefer a shorter discussion, one possibility is a Washington Post summary or a brief version from its authors at Vox. Also, here is the Nobel Prize talk about Friedrich von Hayek.
Note: The entry was minimally edited after it appeared.
During October 1907, when the stock market crashed and the banking system panicked, we had no central monetary authority. We just had J.P. Morgan.
- “Why don’t you tell them what to do, Mr. Morgan? (Belle da Costa Greene, J.P. Morgan’s personal librarian)
- “I don’t know what to do myself, but sometime, someone will come in with a plan that I know will work; and then I will tell them what to do. (J. Pierpont Morgan)
Here is a description of events that preceded the 1907 panic:
“A … moralist was in the White House. War was fresh in mind. Immigration was fueling dramatic changes in society. New technologies were changing people’s everyday lives. Business consolidators and their Wall Street advisors were creating large, new combinations…The public’s attitude toward business leaders, fueled by a muckraking press, was largely negative. The government itself was becoming increasingly interventionist in society…Much of this was stimulated by…economic expansion.”
(Quotes are from The Panic of 1907, pp. 2-3; 97)
The Economic Lesson
On October 1, 2008, the Dow Industrial Average closed at 10,831. Only 10 days later, it was at 7773.71.
1907, 1929, 1937, 1987 also had October plunges. With 16 stock market crashes during the 20th century, October has had a disproportionate share.
An Economic Question: During 1907 and 2008, the GDP declined. How might stock market crashes and banking panics relate to a contraction in the economy?
How to define a stock market crash? One economic paper has 2 suggestions:
- “When you see it you know it.”
- Look at depth and duration: A 20% drop is a crash while length can vary. Several possibilities: 1 day, 5 days, 1 month, 3 months, 1 year.
Suggesting we have undergone 15 major stock market crashes during the 20th century, Professors Mishkin and White say the most drastic 2-day losses were during 1929 and 1987:
- On October 28, 1929 the Dow fell 12.8% and then, the next day, took another 11.7% slide.
- For October 19, 1987, the drop was 22.6%.
More recently, the Dow plunged from 11,616 to 6,547 between August 14, 2008 and March 9, 2009.
And that takes us to today. The Dow has tumbled 14% since its April 29 high of 12,810.54 while the S&P has declined 16%.
Perhaps most crucially, Professors Mishkin and White ask whether crashes are consequential. Their answer? For a correct diagnosis of our economic ailments we need to focus on financial instability rather than stock market volatility.
An Economic Lesson
The key difference between 1929 and 1987 was the economy. 1929 marked the beginning of the Great Depression with industrial production plummeting each year from 1930 to 1932 (-8.6%, -6.5%, -13.1%). By contrast, during 1987, the GDP increased 3.2%.
An Economic Question: How might the impact of a stock market crash ripple through the economy?