As I write this, the Dow Jones Index has just welcomed the vote of the House in favor of the Paulson Plan by dropping 300 points.
It is tempting to use today's drop as a sign that the plan is not so great. Some will remind us of the adage "buy the rumor, sell the news" (ie anticipate the good news), others will note that the bailout plan is not seen by markets as the end of their woes, despite the massive propaganda we had to that effect in the media, and others will simply flag the worries about jobs and growth have not disappeared with the bailout. Some, more perceptive, will note that the bailout is a one-off gift to the financial world and thus easily discounted, just like an exceptional profit is in any corporation's result.
But given that it was the Dow's 800 drop after the first negative vote of the House that convinced a number of people to reconsider their hostility to the Plan, it is worth pondering the more fundamental question of whether the Dow Jones (or any other index) is actually a good proxy for the state of the economy.
In other words - was Congress right to listen to the alarm expressed by the markets last Monday?
My emphatic response is: NO!
Stock markets give us information about one thing only: the expectation of future profits from the corporate world. No, there used to be a time when such corporate profits were closely correlated with the overall state of the economy, as they moved in line with productivity growth and wage growth.
However, the Reagan revolution has been all about the victory of spin - the neolibs understood that you did not actually need to share the wealth with the proles, you just needed them to keep on believing that the proxy indicators used to signify prosperity did signify prosperity, even as they were twisted beyond recognition.
To wit: it became possible to decouple the evolution of company profits from that of the overall economy by simply capturing a larger share of the wealth created. That boosted stock markets (which reflect profit expectations) even though it did little for, or rather took away from, growth for everybody else.
But given that the signal (Dow Jones up = prosperity!) was carefully nurtured - and reinforced by pushing things like defined-contributions pensions rather than defined-pensions plan, 401ks, the "ownership society" and 24/7 financial news TV to ensure that most Americans have "skin" in the market (to an extent probably overestimated by most, but nevertheless very real).
This create a self-reinforcing cycle of valuing everything in monetary terms, admiration for those that succeeded in accumulating vast wealth, dismissal of everything that could not be valued in dollars, and a increasingly vicious "common wisdom" that the rich deserve what they have, the poor have what they deserve and the winner-takes-all.
And thus the Dow Jones has become the barometer of everything. Exept that it really only represents, today, how successful the haves and havemores have been at transferring wealth from everybody else to them.
And it suggests today that $700 billion is not quite enough for them, ie you can be sure that they will come back for more.