Oooops! (Was The Real Economy vs. Wall Street: 1913 To 2006--In One Chart)

by: Paul Rosenberg

Sun Oct 12, 2008 at 19:00

While it does show--in comparison to the original chart, now below--is a similar increase in the Dow vs. GDP since 1980, what's striking is that this is part of a quite varied history preceeding it.  The most obvious conclusion that I can draw from this is that it's simply too simple or crude a comparison to get our hands around what's really going on, in part because there are now many other, more exotic markets in which big investors place their money, and in part because volume of funds matters as well as price.

I was, of course, aware of these facts, but it's often the case that added dimensions aren't necessary to get at important facts.  It's downright spooky, for example, that public opinion scholar James Stimson was able to identify underlying cycles that account for the vast majority of coherent cyclic change in American public opinion across dozens of issue areas.  This time, however, not so much.  So the question is: what should I be measuring???

So, like I just said, how can I learn from my hasty mistake?  What should I be measuring???

I know, for example, that finance as a percentage of the economy has grown significantly, and that, of course, this feeds back into GDP.  What I want to get at is how much financial investment there is that is largely just speculative and non-productive--or even counterproductive, in the sense of diverting resources from productive purposes.

I know that there's not firm dividing line between productive and non-productive, as a certain amount of speculation must be involved to hedge against droughts, for example, and that such speculation serves a productive function, even though it's not the same as investing in direct improvements.  But I know whatever I do is going to be a rough measure.  I'm just concerned that it have a clear logic to it, and that it be something there's decent public data for.

So, any ideas?

Don't Do This At Home, Kids!

Here's the original, erroneous post, which people have responded to below:

Here's a simple picture of our economy since just before WWI.  Taking 1913=100, here's how the year-end Dow Jones Industrial Average (DJIA) and the annual Gross Domestic Product (GDP) have grown over time.  If it looks like the economy changed radically in the early 1980s, well, that's because it did:

This chart should be both sobering and reassuring.  Sobering in that it tells us that the stock market gains of the past 20+ years really aren't sustainable, and probably weren't such a good thing in the first place.  Reassuring because maintaining the much steadier pace of GDP growth is probably both a more realistic and more important goal.

Of course there is considerable linkage between Wall Street and Main Street.  We're reminded of that 20 times a day of late.  But this chart reminds us of just how elastic that linkage can be.

As late as 1982, the Dow had only grown 13% more since 1913 than the GDP.  But from there on, the growth rates diverged wildly:

YEAR DJIA GDP DJIA/GDP
1980 1121 972 115.36
1981 1173 996 117.76
1982 1112 977 113.83
1983 1497 1021 146.6
1984 1482 1095 135.4
1985 1671 1140 146.56
1986 2255 1179 191.18
1987 2863 1219 234.79
1988 2592 1270 204.16
1989 3155 1315 240.05
1990 3369 1339 251.59
1991 3684 1337 275.57
1992 4131 1381 299.02
1993 4430 1418 312.32
1994 4771 1475 323.41
1995 5652 1512 373.73
1996 7223 1568 460.57
1997 9359 1639 571.08
1998 10848 1707 635.45
1999 13162 1783 738.12
2000 13501 1848 730.42
2001 12815 1862 688.12
2002 11604 1892 613.3
2003 13147 1940 677.82
2004 13562 2010 674.67
2005 13479 2072 650.58
2006 15675 2131 735.45

And note, the divergence more than doubled under Bill Clinton--from 299.02 in 1992, the year before he took office, to 730.42 the year he left.  Clinton was certainly better for the average American than Reagan or either of the Bushes, but he didn't do anything to alter the fundamental logic of the economy.  He just made things a little nicer on the side.

That era is over now.  Let's hope that Obama realizes that sooner, rather than later, and has both the strength and the wisdom to realize the need to lead in a new direction.