Dow Plunges 634 Points
August 8, 2011
The Dow Jones Industrial Average plunged 600 points today and more than 1300 points since the debt deal was announced last week (about an 11 percent drop in value).
What is the cause of this collapse? One theory is that the debt deal did not go far enough in cutting spending. If this view is correct, the markets are reacting to the debt downgrade by S&P and the fear that further insolvency looms.
But if this theory were true, this scenario should be accompanied by a rise in Treasury interest rates. Instead, the ten-year interest rate remains exceedingly low.
The alternative theory is that the markets are suffering from an eye-popping wake-up call—that another recession lies ahead because government is retrenching and the private sector is unable to pick up the spending slack. This would be a classic demand-side downturn. In addition to the United States, Europe is also facing a huge slump.
The ethics of fiscal expansion versus fiscal austerity is admittedly complex. But ethical discourse should be guided by a consensus on the facts, and by theories that can explain the facts. Rising unemployment—and long term unemployment—is of great concern for human capital formation, even if one is unconvinced by any moral obligation to help the less fortunate. With interest rates so low, one can make a strong case for badly needed infrastructure investments that would also boost labor demand. While austerity is a good thing in thinking about one's childrens' long term future, many of our children need jobs and training more than they need Medicare guarantees.
Meanwhile, the outrageous rioting in London (click on video) does little to warm the hearts of those who would seek to aid the less fortunate.
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