Alex Hern looks at how a chance change in the make-up of the Dow Jones would lead to a 2000 point difference, and asks what this tells us about economic decision-making
If one decision made by one stock index in 2009 was slightly different, the entire narrative around the great recession would be altered – despite nothing on the ground having changed at all.
The Dow Jones Industrial Average (DJIA), one of the key indexes for measuring the strength of the American economy, rarely changes the makeup of the companies it records. But on June 8, 2009, they made two changes, swapping Citigroup with Travelers and General Motors with the computing company Cisco.
On Monday, Adam Nash looked at what would have happened if they’d chosen another technology firm, Apple, instead of Cisco:
In real life, the Dow closed at 12,874.04 on Feb 13, 2012. However, if they had added Apple instead of Cisco, the Dow Jones would be at 14,926.95. That’s over 800 points higher than the all-time high of 14,164 previously set on 4/7/2008.
Can you imagine what the daily financial news of this country would be if every day the Dow Jones was hitting an all-time high? How would it change the tone of our politics? Would we all be counting the moments to Dow 15,000?…
The Dow already decided to make a change in 2009. They decided to replace a manufacturing company (GM) with a large hardware technology company (CSCO). They could have easily picked Apple instead.
The end result? People talk about the stock market still being “significantly off its highs” of 2008. In truth, no one should be reporting the value of the DJIA. But they do, and therefore it matters.
The point to take away isn’t about Apple versus Cisco; it’s about the fallibility of using measures of economic health that bear no relation to the life lived by the majority of the population.
When economic policy is aimed at keeping markets happy and indexes high, it is aimed at an abstraction of the economic measures that actually matter: growth, inflation, and unemployment.
Sometimes it can work. Sometimes, as with the DJIA, it doesn’t. The lesson for those who keep an eye on such things is to learn when to tell one from the other.
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• Credit rating agencies beaten by a spreadsheet – Alex Hern, February 16th 2012
• Transforming the financial sector from a bad master to a good servant – Stephany Griffith-Jones, February 16th 2012
• Daily Mail 2009: Ratings agencies ‘critical’, 2012: ‘Doom-mongers’ – Alex Hern, February 15th 2012
• Small businesses can play a vital role – but only if they get the finance they need – Tony Dolphin, February 2nd 2012
• The UK isn’t Greece, it’s Iceland – Alex Hern, December 21st 2011