Exaggerations at All-Time Highs

The Dow Jones Industrial Average once again hit a record high today: 12,514.98. I would find this much more interesting if the Dow were adjusted for inflation, but it's not. The dollar has lost about 17% of its purchasing power in the last seven years, which puts the Dow well below its January 2000 peak of 11,750, or over 14,200 in 2007 dollars. Like all the major stock indices and averages, the Dow is biased upwards by inflation, the real story is not that the Dow has hit a record high, but that it failed to do so for eighty months.

Phrases like "record high" have no place in economic and financial journalism unless heavily qualified by explanations of the significance of upward biases like inflation and economic and population growth. It may sound like harmless fluff, but these stories have real political consequences. Rightly or wrongly (hint: not rightly), many people attribute the performance of the stock market to the president, and the financial stories they read influence their evaluation of him. On the other hand, given that the public is working with bad theories (e.g., that the president has a great degree of control over stock market performance), this is of questionable significance.

Another example: Profits. It seems like every time a company or industry is accused of wrongdoing, a reporter manages to work the phrase "record profits" into a story. This is no coincidence, but neither is it evidence of anything sinister: Between inflation, economic growth, and the tendency of successful companies to gain market share, record profits are nothing special, and a reporter can, if he chooses, draw attention to profit growth selectively in order to cast a company or industry in a favorable or unfavorable light. Better measures of success or profitability, ones not biased upwards by inflation and economic growth, include profit margins and market share. Record profit margins are much more significant than record profits, if not quite as sexy.

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