Don't Be Fooled. The Trump Rally Is Not A Sign Of Economic Health

Tyler Durden's picture

Submitted by Steven Horowtiz via The Foundation for Economic Education,

The headlines tell us that the Dow Jones is up around 1,000 points since Donald Trump won the election on November 8th. The conventional wisdom is that this shows how much confidence people have in Trump’s ability to generate a healthy American economy. The argument is that if people are willing to buy stock in American firms, this indicates their belief that those firms will see improving profits over the next few years. They then draw the conclusion that more profitable firms indicate a healthier American economy.

Although this argument is correct about stock prices reflecting an increasing belief in the profitability of US firms, it makes a major error in assuming that profitable firms necessarily mean a better economy.

The Economy Isn't A Thing

First, it’s important to understand that phrases like “a healthier economy” are themselves problematic. The “economy” is not the thing we should be concerned about. In fact, in some fundamental sense there’s no such thing as “the economy.” As Russ Roberts and John Papola memorably put it in the music video “Fight of the Century:”

The economy’s not a car.
There’s no engine to stall.
No experts can fix it.
There’s no “it” at all.
The economy is us

Things are not “good/bad for the economy.” They are good or bad for the people who comprise the market process, specifically in our capacity as consumers. All the economy amounts to is people engaging exchanges in order to better satisfy their wants. What we should care about is whether or not people are able to better satisfy those wants.

And “better satisfy” here means not just more and better goods and services, but at cheaper prices too. Lower prices mean that consumers have income left over to purchase goods they otherwise couldn’t, enabling them to better satisfy their wants by satisfying more of them.

Distorted Signals

In a genuinely free market, the profitability of firms is a good reflection of their ability to better satisfy the wants of consumers. Our willingness to pay for their goods and services reflects the fact that we receive value from those products, so their profits are at least a general signal of having created that value and satisfied consumer wants.

Trump’s policies may well enrich many firms, but they will impoverish the average American.

In fact, consumers get much more value out of most innovations than is reflected in the profits of firms. A famous study by economist William Nordhaus estimated that profits made up only about 2.2% of the total benefits created by innovations. If you doubt this, ask yourself how much it would take for you to give up your smartphone and its connectivity. Then multiply that by all of the smartphone users in the world. Then compare that to the profits made off smartphones. The total value to consumers will dwarf the profits of smartphone producers.

However, when markets aren’t free, profits do not necessarily reflect value creation. Firms who profit through privileges, protections, and subsidies from governments demonstrate that they are able to please political actors, not that they can deliver value to consumers by better satisfying their wants. The profits of cab companies with monopoly licenses reflect their ability to foreclose competition, not the quality of the services they provide.

In a world of this sort of crony capitalism, profits are de-linked from a connection with consumers and we cannot say with confidence that any given firm’s profits reflect value creation.

Notice though that such firms might still be profitable! In a world of cronyism, many firms will do very well, especially to the extent that they have connections with those in power, or are willing to do what they are told in order to curry such favor. To the extent that cronyism will make many firms profitable, that would be reflected in rising stock prices and stock indexes.

That, I would argue, is precisely what we’re seeing today as Trump takes power.

The Trump Effect

Trump’s economic nationalism and cronyism will surely enrich a number of American firms. Tariffs on imported cars, for example, might well improve the profitability of US car manufacturers. The same would go for steel or agricultural products. Firms like Carrier that are willing to exercise political clout, or roll over in the face of demands or threats from various levels of government, could see their profits rise as a result of new government-granted privileges. The record-setting Dow Jones sure could be right that the profit stream for many US firms will increase under Trump.

But don’t confuse that profitability with improved economic well-being. Trump’s policies may well enrich many firms, but they will impoverish the average American. We are not better off having to pay more for domestically produced goods thanks to a 35% tariff on imports. We are not better off when firms are given tax breaks or direct subsidies to keep their production in the US where labor or other inputs are more expensive, raising the costs of those goods and increasing our $20 trillion dollar national debt.

Profits will be seen as the reward for knowing the right people, not innovation and efficiency.

We are not better off when firms have to meet the conditions set by a strongman before he will “allow” them to operate in the US, which only serves to reorient the economy away from pleasing consumers to pleasing Trump.

This sort of cronyism and discretionary use of power turns the positive sum social cooperation of the market into a negative sum battle among firms to curry favoritism and power from the state. Entrepreneurial energy that could have brought forth innovative technologies and cheaper, better goods and services is diverted to seeking profits through what Ayn Rand so memorably called the “aristocracy of pull.”

This diversion of entrepreneurship will have profound long-term effects, as it severs the link between profit-seeking and satisfying consumer wants. Profits will be seen as the reward for knowing the right people and how best to curry favor from them, not from innovation and efficiency.

And when profits become about favoritism not value-creation, the moral case for the market, or what’s left of it anyway, disappears as well. Profits can at least in principle be justified in terms of their link with consumer want satisfaction and the creation of value. As profits become increasingly arbitrary, even those firms who continue to create value will have a harder time justifying their profits. This loss of confidence in the ethical basis of the market will erode support for truly competitive markets even more, even as profits for many might increase.

Don’t be fooled. The Trump rally is not a sign of economic health, but of what quite likely will be harm to all Americans through higher prices, fewer choices, and a reduction in entrepreneurial innovation.

Profits and rising stock prices in truly free markets reflect real value creation and want satisfaction. Profits and rising stock prices in a system of economic nationalism and cronyism reflect the satisfaction of the desires of those with political power. Firms and political actors might win more power and influence, but average Americans, many of whom voted Trump and his crew into office, will be the big losers.

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KittyKittyBangBang's picture

the don just lik all the rest ...................

JRobby's picture

First 100 days may see alot of resignations .............. or not.

Keep stacking

markpower49's picture

The author (((Steven Horowitz))) is just another lying J*wish progressive desperate to knock Trump. This article is gabage.

saveUSsavers's picture

They are all able to sell Goldman stock TAX-FREE ! You think their own trading desks might be told to surge the stock price ahead of that?

ModernMusket's picture

You do know the world runs on banks ,right? What are you going to do-let all the banks collapse? How will that help the world, much less us?

LetThemEatRand's picture

You don't appoint three Goldman guys and Jamie fucking Dimon because you want the market to become a market.  

Clock Crasher's picture

I'm torn between to refering to DJT as either mega-psyop or soma-salesman

LetThemEatRand's picture

I'm sad to say it given that I voted for him, but there's no mystery here.  He's a reality TV star.  "Reality TV" is not reality.

Lynn Trainor's picture

Trump has an amazing array of strikingly beautiful edifices ringing the world.  That is an amazing success story! 

DavidC's picture

Spot on!

Would I rather have had Clinton or Trump? Not much of a choice, I'd have gone for Trump (I'm not in the US and didn't, therefore, vote). But here he comes, feet of clay...


beemasters's picture

Just because you prefer Trump, it doesn't mean you can't criticize him. Stop justifying his wrongs or your choice (it's not your fault), but be sober from Trump intoxication or creepy infatuation. Enough of it already.

Lynn Trainor's picture

I'm not starry eyed over Trump, just looking at the facts on the ground.  I disagree with Trump's torture advocacy and his call once for Snowden's execution - I'm leery of his ties to the Religious Right as I know a theocracy would be the death knell of religious freedom.  Historically, whenever there's a union of church and state, intolerance and persecution are the result, which is what our Founders wisely tried to safeguard us against.  But that said, Trump is an amazing individual with many qualities and has demonstrated a noble character many times in his willingness to help others while not wanting attention brought to his good deeds.  Trump is A WORKER!

On the other hand, just saw this video which gives me pause:

Wall Street’s Goldman Sachs Is Big Winner In Trump Election Victory

max2205's picture

8 years.....still ticking 

1980XLS's picture

It's a celebration of Snowflake pain.

Embrace it while it lasts.

south40_dreams's picture

"Not A Sign Of Economic Health"

There's an understatement!

Lynn Trainor's picture

I think Trump knows what he's doing.  I admire the way he is constantly available.  Have you watched his news conferences? - he knows those reporters by name.  He likes dealing with people and meeting challenges head on. He's doing his level best!  I believe he has our best interest at heart.

JRobby's picture

Unprecedented liquidity, only at the highest "big table" level. The $$$ has to go somewhere.

When you factor in QE holdings of all kinds, if you even can? Price supression and bubbles everywhere. You see monumental rigging the likes of which can not end well.


wisehiney's picture

Squeeeeeeze em up.

Terrorize em down.

Hang on.

Rides not over.

DEMIZEN's picture

Lets not forget how did we get here and why Trump was elected. How did we get to the point where it takes 100 years to have a starter farm investments returned, for example? 

NewHugh's picture

I'm still better off than with that douchebag Hillary.  You shills all go whine and piss and moan and I'll be a whole lot better than I would have been.

DavidC's picture

Agreed, but see my comment above.


StreetObserver's picture

Whatever, the money in my pocket is under my control.

Obama's economy gets next to none of it, except mandatory spending for food and energy.

Trump's administration gets a boost from everything that I have been waiting to buy for many years.


Cheapsob's picture

The lesser of two evils choice was made. That's all we had. Risk/reward. 

silverer's picture

Way less evil. And no nuclear war.

Jungle Jim's picture

This is true. But, on the other hand, my gold Eagle is suddenly worth a  lot less, and my gun is only worth about half as much, as the day before the election.

wareco's picture

Well, if you bought gold expecting to make a profit, then you bought it for the wrong reason.  I view gold as an insurance policy.  The purchase price is similar to paying the insurance premium on a policy.  You hope your house never catches fire, but if it does, you are at least partially covered. The same with your fiat.

Flounder's picture

What about under expecting?

Moe Hamhead's picture

Still, it's mighty depressing.  There should be a lemon law for presidential elections.

Mass_hysteria's picture
Mass_hysteria (not verified) Dec 9, 2016 10:18 PM

they're pumping it up to crash it under trump.........(((they have complete control over the economy))) 


complete control over the economy = control of the country

silverer's picture

In the meantime, I continue to get barraged with letters, emails, and phone calls from dozens of different companies that want to lend money to me. WTF? I'm guessing because the financial system must continuously expand to exist, and if that does not happen, banks are screwed. But I don't want to be in debt. Most people don't. But who in their right mind wants to take out big loans and entertain debt when they are getting ready to retire, which is now a growing portion of the population? I think we are facing the perfect financial storm. And everybody's retirement is in the markets, and the money is mostly a mirage created by the Fed.

UnschooledAustrianEconomist's picture

Spot on. I get a shitload of credit card offers every week. But my only mistake is, I have no debt. How dare I.

dunce's picture

A lot of people are writing him off before he even takes office much less implements any policies. I choose to ignore you.

Lynn Trainor's picture

I agree with you.  I'm surprised at the negativity on Trump here.  Trump is refreshing on a multitude of levels.  He is a fighter and a plugger, not a lazy bone in his body!! 

Did you hear that Hannity audio of Obama expressing helplessness and pessimism about Trump's claim that he can bring jobs back, saying Trump has no magic wand?  Just stand back and watch, Obama, Trump will show you how it's done - Trump's already doing it and he's not even president yet.  Much of it is just common sense, practical solutions - as president Obama was out of his league.  The punked look on Obama's face when Trump visited the White House said it all.

rejected's picture

"ask yourself how much it would take for you to give up your smartphone and its connectivity. "

Unfair question, I don't own one of those POS.

When I grew up we had smart people and dumb phones.

Jungle Jim's picture

The only phone I have hangs on the wall. It has a cord. I seldom use it, and it costs *waay* too much. I keep the ringer turned off 99.999 percent of the time because the only calls I get now are from collection agencies. See, I was bankrupted when the "phony paper price" of PMs was crushed. Yes, the coin shop dude *does* care about the "phony paper price" when I go to sell a coin.

gregga777's picture

The American People are not better off when American criminal crony capitalist conporations export factories and jobs to poor third world nations and Communist or fascist dictatorships. The Chknese Communist Party has no problem at all rationalizing preventing American conporations from competing inside China with their domestic conporations which are mainly State Owned Enterprises.

The ENTIRE underlying reason that conporations overwhelmingly embrace Globalization is that it enables them to practice naked, predatory Capitalism in poor, weak countries which would violate all existing Developed Market laws, rules, regulations, ethical standards and best practices.

Conporations employ slave labor including children. Conporations violate sustainable forestry practices by clear cutting vast swaths of forests. Conporations expose workers, including young children, to extremely hazardous and dangerous working conditions including toxic substances. Conporations overfish the territorial waters of desperately poor nations.

And when caught in the act the Conporation pretends to be shocked. The Conporation claims, "We know nothing!" It's all very deliberately based on cold calculations of pure profits versus loss of human life and environmental destruction.

A fundamental tenet of human nature is that the "haves" always seek to feed off of and dominate the "have nots". Historically predatory Capitalists paid starvation wages for workers doing dangerous and unhealthy jobs. A few examples:

That wasn't the government doing that though they did nothing to protect the workers lives or to improve their real wages. It was rich, predatory Capitalist factory owners that were behind such appalling working conditions. But, at their request, the government did use their military and police forces to violently suppress worker strikes.

Universally Conporations want to return the world to naked, predatory Capitalism. That is ENTIRELY what Globalization is all about.

dchang0's picture

Have you ever stopped to ask these supposedly "prey" workers how they feel about a big, bad, evil corporation moving into their area bringing those awful, predatory jobs?

Many people will stand in line for hours for jobs in these supposedly "prey" areas--sometimes thousands of people wait in line for a few hundred jobs. If you were to go in there and try to talk them out of it they would laugh in your face. To them, working in a factory for long hours beats working in the fields, doing backbreaking farm work.

We in the top 1% of the top 1% of the entire global economy can look down from our ivory towers and try to protect the littlest of the little people from whatever we perceive to be evil, but why don't we let them decide for themselves what they want to do with their lives?

chimchim's picture

Capitalism is human nature.
Just keep the gov. Out of the markets.

g'kar's picture

Looks more like a continuation of the 8 year Obola rally unless you take into consideration the Goldman and RINO guys Trump wants to put in to maintain the status quo.

swampmanlives's picture

They can't let the markets crash now. The Baby Boomers are retiring.

PitBullsRule's picture

We already have 10K guys in Indiana trying to sell air conditioners that cost too much.  What else do you want?  I've already scoped out my spot in Hooverville.

FuckJanetYellen's picture

The queen kikess is going to make this motherfuvker explode next week.  

Davidduke2000's picture

soros and his clan had a week full of meetings mainly to boost the stock market and crash it when Trump take office to put the blame on him. Trump said during the campaign that the stock market is in a bubble, too let oit ride high is a self inflicting wound that will cause him damage before he starts his presidency.

Bear's picture

It is now very clear to me that Mr. Trump will encourage economic insanity by encouraging all manners of fiscal expansion while at the same time saying that we're in a bubble and encouraging caution. Print and lie ... what else is new?

francis scott falseflag's picture


I've said this before and will repeat it here: If Hillary had won the election, this thousand point Trump Rally

would be called the Hillary Rally.  The Dow would have had the same movement upwards.  That's because

the market is controlled by factors that have nothing to do with "Blue Skies" or "Climbing a Wall of Worry."

The perception of a rising market is the singular event keeping the American Economy afloat.


The tail of the stock market is wagging the dog of the economy.


That and the Prayer that while the market is being buoyed up, someone, somewhere will find a way to spin

the straw of reality into the gold of dreams.

Joe Wazzzz's picture

The stock market is being bouyed because any economy based on fiat money is based in pure confidence and the Trump election has sparked new hope for the impossible. All it will do ultimately is increase the damage when the mathmatical reality check comes home to roost. What he will do is shorten the distance between the public becoming convinced of their delima and the mathmatical wall at the end of the tunnel.

There are not nearly enough buyers out there to buy the things that a hyper-debt powered recovery can create. Boomers are absolutely unprepared for old age, Genxers and Millennials are up to their necks in debt. Boomers are down scaling and everyone else it trapped where they are. The only hope would be the importation of massive numbers of dirt poor, hungry immigrants who will work for nothing and spend every dime they make, which would create incredible cultural stress and strife and which Trump has sworn to end. Are we to assume that all the Americans on the government or mom and pop dole are all of a sudden going to pick up rakes and shovels and head to the fields? They will only return to honest labor when they themselves are starving.

The only upside to Trumps election is that it buys time for those with eyes wide open and it protects the 2nd amendment and the Supreme Court and (please God!) keep us out of foriegn wars for the foreseeable future. You think the Titanic can't sink? "She is made of iron sir, I assure you she will!"

FreeShitter's picture

Trump or Hillary doesnt matter......the bankers are shuffling the chairs before the final voyage.

Batman11's picture

"In a genuinely free market, the profitability of firms is a good reflection of their ability to better satisfy the wants of consumers."

For efficient capitalism we should abolish advertising.

Advertising is always manufacturing wants that the consumer didn't have in the first place.

Heavy advertisng came in during the 1920s when productivity had reached a level where demand had to be manufactured to shift all the stuff people didn't actually want.

Today we assume capitalism is supply side constrained!