The first and greatest lesson of economics is that incentives matter — thus, it is useful and important that the stock markets are set to end the year at or near all-time highs. Of course, our indices like the Dow Jones and S&P 500 don’t account for inflation, so they need to end every year a little bit higher just to stand still. But the stock market hitting record highs is useful evidence that we’re getting something about the economy correct.
The basic insight is that if an investment is more valuable now than it used to be, then more people are going to invest more money in things, which is exactly what we want them to be doing.
We’re not exactly short of people insisting that not enough investment is going on. All the shouting about companies paying out to stockholders is just that: an insistence that more investment would be better than sending money to already rich people. Thus, we see proposals banning stock buybacks — more investment is held to be a good thing. While banning stock buybacks isn’t good, it is true that more investment is a good thing.
Investment is, after all, what builds our future, and the more we put aside now to build, the richer that future will be.
We have three ways of investing and encouraging more of it. We could get the government to take more money in taxes and spend it wisely — so wisely that $80 billion is wasted to build a high-speed rail line from Bakersfield, California to Merced, California.
Okay, so maybe that isn’t the best way to encourage investment then.
We could lower the cost of investing and allow people to do more things that are less expensive. The Trump administration is certainly trying to cut red tape, the bureaucracy that stops investment. We’ve also cut the tax on successful investments, which lowers costs again (or increases returns, whichever way you want to look at it). We can also make investing more profitable: People do more of what brings them greater rewards. Cutting taxation is again part of that, but so is a higher stock market.
For that’s what a higher market is. The value of a successful investment, i.e., one not made by the government, is now higher. Founding that office rental company that actually works, building a transport system to some place where people want to travel, is now worth more than it would be if the stock market were at lower levels.
Which brings us to one of our subsidiary lessons of economics. None of what we do is about righteousness or justice. Here, specifically, we don’t say that capital returns are moral, that there’s some ethical reason that people should enjoy the rewards of their efforts. It’s a purely pragmatic calculation. If we let people enjoy the profits of their past investment, then people will be encouraged to invest now to make our future richer — making the world a better place for our children being one of those hopes that everyone will sign up for.
That the stock market ends the year at a record high can indeed be seen as merely rewarding investors. But there’s no merely about it. It’s actually the point. If past investors gain, then we’ll have more investors now and in the future, those investors being exactly what makes the future richer than today.
Well, as long as the investments aren’t being made by whatever brain boxes decided to build a high-speed rail, a 19th-century technology in the 21st century, between two places no one does go to or desires to visit.
Which is the other reason we use stock markets to manage all of this: Neither bureaucrats nor government required.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at the Continental Telegraph.
