I have elsewhere quantified the connection between government spending and economic growth (e.g., here and here).* I have also shown that stock prices indicate the direction of economic growth. It should not surprise you if I say that
- the re-election of Obama portends further growth of government spending — specifically, the uncontrolled growth of entitlement spending, as accelerated by Obamacare;
- the rate of economic growth will continue to decline for as long as entitlements grow as a percentage of GDP; and
- in anticipation of slower economic growth, stock prices will continue to decline, in real terms.
You can follow the links in the first paragraph if you wish to learn more. Here is a bit of additional evidence for my gloomy outlook. The real value of the S&P Composite Index has fluctuated in trough-to peak-to trough cycles, four of which have been completed since the 1870s:
Derived from Robert Shiller’s data set at http://www.econ.yale.edu/~shiller/data/ie_data.xls.
We are now on the downside of the fifth cycle, which began in July 1982 and peaked in August 2000. If the present cycle follows the pattern of the other two long cycles, it may not bottom out until sometime after 2020 (though it may never end if economic growth continues to decline). And if it does bottom out then, the real value of the S&P composite will have risen only about two-fold from where its value at the start of the cycle in July 1982. In nominal terms, the S&P Composite will have dropped to about half its current level by 2020.
But, as I say, the stock market merely anticipates underlying economic conditions. Those conditions seem destined to worsen because the entitlements mess will not be dealt with for as long as there is gridlock in Washington.
* See also the second graph in this post by James Pethokoukis of the American Enterprise Institute. The graph highlights the inverse relationship between entitlement spending and growth-producing innovation. Entitlement spending diminishes investments in innovation by (a) diverting resources from productive to unproductive uses and (b) penalizing (taxing) productive activities that fund innovation and its implementation.
The Laffer Curve, “Fiscal Responsibility,” and Economic Growth
The Causes of Economic Growth
In the Long Run We Are All Poorer
A Short Course in Economics
Addendum to a Short Course in Economics
The Price of Government
The Price of Government Redux
As Goes Greece
Ricardian Equivalence Reconsidered
The Real Burden of Government
The Illusion of Prosperity and Stability
Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth
Taxing the Rich
More about Taxing the Rich
America’s Financial Crisis Is Now
A Keynesian Fantasy Land
The Keynesian Fallacy and Regime Uncertainty
Why the “Stimulus” Failed to Stimulate
The “Jobs Speech” That Obama Should Have Given
Say’s Law, Government, and Unemployment
Unemployment and Economic Growth
Regime Uncertainty and the Great Recession
Regulation as Wishful Thinking
The Real Multiplier
Vulgar Keynesianism and Capitalism
Why Are Interest Rates So Low?
The Commandeered Economy
Stocks for the Long Run?
We Owe It to Ourselves
Stocks for the Long Run? (Part II)
Estimating the Rahn Curve: A Sequel
In Defense of the 1%
Bonds for the Long Run?
The Real Multiplier (II)
Lay My (Regulatory) Burden Down
The Burden of Government
Economic Growth Since World War II
More Evidence for the Rahn Curve
The Economy Slogs Along
The Obama Effect: Disguised Unemployment
The Stock Market as a Leading Indicator of GDP
Government in Macroeconomic Perspective
Where We Are, Economically
Keynesianism: Upside-Down Economics in the Collectivist Cause