The stock market is not a good metric for the economy, so I build a better one.
Not too long ago the Dow Jones hit a new milestone, hitting over 30,000 points. Meanwhile, hundreds of thousands filed for unemployment for the first time, many waited for hours to collect food from food banks, and thousands die every day in hospitals. How are we supposed to celebrate an economic milestone when nobody feels it?
The Dow Jones is simply not a good measure of the whole economy. It was never meant to serve that purpose. It is a simple index stock of the top thirty companies. It measures stock performance, not even the actual value of the companies themselves.
There are several problems with this measure. Many Americans do not own stocks and cannot feel the benefits. 47.3% of Americans work in small businesses, not public corporations. Of the rest, most do not work in those top thirty companies.
Yet we keep looking for the Dow, this singular number that fluctuates every day to tell us if things are looking up or down. Clearly there is value in having a single quantifiable measurement, as people do not want to spend hours each week trawling through raw economic data.
I have come up with a new metric, a measurement that is supposed to tell you definitively how well the economy is doing.
There are many different metrics that can be tracked: the number of bankruptcies, the U3 and U6 unemployment, the number of initial unemployment claims, and the consumer price index (inflation). The S&P 500, a stock index of the top 500 public corporations, can also be included.
This metric can’t just be squishing everything together. Each metric needs to be weighed so that each value is appropriate adjusted based on importance and magnitude. After tweaks, I settled on the formula:
=(S&P)*0.527*1.5-(Bankruptcies)*0.1-(U3*10+U6*3+Initial Claims*0.001)-(Monthly Change in CPI)*10
Look, I’m not an economist. I just threw a bunch of numbers together over the last hour. For November, the ‘Felkernomic’ was at -1535. That number is just as ambiguous as the S&P. Is it the best measurement? No, but it’s better.
Ultimately, quantifying something complex is never going to be perfect. There will always be people who tell you that your weights are wrong, and that there’s something else you’re missing. But I do think there is some value is trying to come up with a single number for the economy. In doing this we can begin a pursuit to find all of these measurements and discuss appropriate weights. Perhaps we will end up with dozens of separate competing models.
This isn’t necessarily bad though. It will give people more leverage against politicians who hold up the Dow as the end-all of the economy, and more important measurements can be prioritized in a way that the government and journalism can assess. Tax breaks for corporations can be easily quantified, but how do we properly measure the impact that small businesses or the arts have on our economy and society?
I hope that this blog post doesn’t just end up as me trying to act as an authority figure but rather invite people with more expertise to try to do better.