Tuesday, November 8, 2016

Public Choice, Candidates, and the Stock Market

by Levi Russell

This article by Caroline Baum, which makes the case that downward stock market moves are not due to "uncertainty" but to pessimism, makes a strong case and the article is certainly worth a read. Uncertainty (i.e. the things we don't know that we don't know) is always with us, but pessimism ebbs and flows. Baum notes that the VIX or index of stock market price volatility has risen or fallen along with Trump's chances of winning the election. On the other hand, I think other theories about the effects of uncertainty on businesses and the economy make a lot of sense and are backed by strong empirical evidence.

Reading Baum's article reminded me of a piece by Andrea Hamaui on the Stigler Center's blog breaking down recent moves in the stock market by industry. Hamaui notes that the recent Clinton bump was due largely to gains in the healthcare and finance industries. Instead of making broad statements like "candidate X is good for the economy because the stock market rose when his/her odds of winning increased," looking at the industry breakdown allows us to analyze this from a Public Choice standpoint. The recent surge in finance and healthcare stock prices is likely due to the expectation that Clinton's policies would favor the firms currently operating in those industries. Continuation of current policies that make entry into these industries more and more costly increase the market power of incumbent firms. Stock market indices don't measure the value of firms that don't exist, or more precisely, the firms that weren't formed due to high policy barriers to entry.

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