Taking a Long-Term View to Evaluate Trade, Market Policy
As I write this article in late November of 2018, the stock market has fallen significantly from its recent highs. These losses, which have erased nearly all the gains made thus far in 2018 push us toward official correction territory for both the DOW and NASDAQ for the year.
These figures are attention-grabbing, and their import should not be understated. However, the relative importance of these shifts should not be overstated either. Modest retreats (from a percentage change perspective) from all-time highs achieved after what has essentially been a nine-year bull market run need not have us running for the hills. So, how should we view the recent market contraction?
All else being equal, we should prefer higher stock valuations relative to lower ones, as rising equities represent increasing wealth and investor optimism and more ready capital for businesses to grow and invest.
But too many observers act as if the purpose of sound economic policy is to drive ever-higher stock market valuations, and this is precisely backwards. We should, of course, support policies that lead to robust economic growth, such as the 2017 tax reform that is likely driving the current upswing in GDP seen in the last few quarters. It is also likely that the reduction in corporate taxes and the simplification of the tax code, has contributed to the recent market euphoria.
However, it is vital to remember that we should support policies because they promote economic growth, investment, and economic empowerment through job creation, not simply because they may also contribute to an existing bull market, which is a secondary policy effect.
This may seem like a modest distinction, but here is where it becomes vital. We should not support policies only for their expected positive market impact. Similarly, we should also not necessarily oppose all policies simply because they may negatively impact the market. As a capitalist, investor, and business man, I obviously prefer strong and growing asset values. The federal government should avoid counterproductive polices that drive down the value of investments held by over half of the country directly or indirectly through their investments and retirement accounts.
The growing desire in progressive political circles to punish success, to “take down the 1%” as a political end in and of itself is very troubling. But what about policies that involve a legitimate tradeoff between increasing investor wealth and serving the interests of working men and women?
As an example, let’s consider the recent $250 billion tariffs imposed on Chinese goods and the threat to impose an additional $250 billion dollars in 2019. Some pundits have argued that these tariffs and the associated uncertainty have contributed to the recent sell offs in the market. This may be correct. Generally, we should oppose obstacles to trade as free markets are strongly linked with long run prosperity. But the simple fact that these tariffs may have contributed to recent sell offs is not by itself a sufficient reason to oppose them, particularly if they are likely to pay economic dividends down the road or make significant progress toward other policy goals.
If the imposition of tariffs and threats for more are used to successfully eliminate existing barriers to trade, or to make China finally begin enforcing patent laws, the benefits of these policies could easily offset the temporary costs to our country. While the benefits of the current tariff regime are largely major business interests, American workers would also benefit by expanding markets for their goods and services, and by protecting the intellectual property underpinning the goods they produce.
Rest assured, I have not suddenly become a proponent of progressive social engineering or an advocate of class warfare. I will even concede that most policies advocated by populist politicians of the right or left end up causing far more harm than benefit. What I am arguing is that the artificial narrowing of our perspective when examining economic issues to only consider their economic impacts and potentially unrelated short-term market fluctuations is foolish.
Policies should be evaluated using a long-term time view and consider the total impact across a range of national objectives, including national security, social cohesion, economic empowerment, and how the policy would help urban and rural communities thrive. Every one of these national priorities is affected by our economic policies, and none of them are fundamentally altered by short-term fluctuations in equity markets.
So, the next time you read an article that judges the current (or any) administration’s actions by looking at short-term market volatility, ask yourself whether the author has considered the long-term effect of the policy in question. Far too often, it is obvious that they have not.
Damon Dunn is a fellow in business and economics at the Pacific Research Institute.