Tag: economics

The social cost of maleconomy

Don Peck writes an ominous article about the transformation of America in the Atlantic:

By the time the average out-of-wedlock child has reached the age of 5, his or her mother will have had two or three significant relationships with men other than the father, and the child will typically have at least one half sibling. This kind of churning is terrible for children—heightening the risks of mental-health problems, troubles at school, teenage delinquency, and so on—and we’re likely to see more and more of it, the longer this malaise stretches on.

“We could be headed in a direction where, among elites, marriage and family are conventional, but for substantial portions of society, life is more matriarchal,” says Wilcox. The marginalization of working-class men in family life has far-reaching consequences. “Marriage plays an important role in civilizing men. They work harder, longer, more strategically. They spend less time in bars and more time in church, less with friends and more with kin. And they’re happier and healthier.”

Communities with large numbers of unmarried, jobless men take on an unsavory character over time. Edin’s research team spent part of last summer in Northeast and South Philadelphia, conducting in-depth interviews with residents. She says she was struck by what she saw: “These white working-class communities—once strong, vibrant, proud communities, often organized around big industries—they’re just in terrible straits. The social fabric of these places is just shredding. There’s little engagement in religious life, and the old civic organizations that people used to belong to are fading. Drugs have ravaged these communities, along with divorce, alcoholism, violence. I hang around these neighborhoods in South Philadelphia, and I think, ‘This is beginning to look like the black inner-city neighborhoods we’ve been studying for the past 20 years.’

Fortunately, all those millions of relatively impoverished immigrants from third-world cultures are likely to provide a wonderful antidote to this decline into matriarchal barbarism. Since immigration is good for the economy, imagine how bad unemployment might be if it weren’t for 12 million illegal immigrants doing the jobs that unemployed Americans can’t do.

Why mainstream economics is not science

A concise summary:

The entire point of the scientific method is to rule out premises that are contradicted by observations. It has never meant beginning with premises you know to be false and absurd, tracing out whatever implications you can draw from there, and, when circumstantially finding congruence with your “predictions” and observed data, asserting the result of your machinations as “scientific knowledge.”

The reader should now be able to note just how shaky and peculiar the methodological stance of positivist, or rather “positive,” economics actually is. In Friedman’s essay, “The Methodology of Positive Economics,” he defends deriving consequences from clearly false premises with regard to the study of human action. He aptly states that hypotheses are not required to be “realistic” in their assumptions.

Unfortunately for him, a “hypothesis” that incorporates notions and assertions that are demonstrably false is not a hypothesis but a falsehood. Many of the falsehoods that are defended by him, like homo economicus, perfect competition, and perfect knowledge, are still applied in neoclassical economics today.

One can identify from Friedman’s essay a confusion about the way in which assumptions are utilized in the natural sciences. Systems are never modeled according to assumptions that are fantastically flawed in describing them. If physics is truly the science that modern neoclassical economists seek to emulate, it is unfortunate for them that they have utterly misunderstood its methodology. Much of what is labeled “economics” today therefore cannot correctly be described as a science.

The intrinsic non-science is a very important point that I implied, but never quite managed to state so succinctly in RGD. But in significantly fewer words, this is what I was working towards getting across to the reader in the chapter “N-body economics”.

Debt-deflation continues apace

Although it has been drowned out by all the excited reports of massive GDP growth in the fourth quarter of 2009, the economic situation continues to worsen in the eyes of those who are focused on much more important variables, such as the amount of credit in the system. The most recent Fed report, for the week of January 20th, shows that commercial bank loans and leases have reached a new low since 2008, $37.6 billion less than the revised October 21, 2009 low. Bank loans have contracted nearly 9% from the October 2008 peak and are already down 0.42% in the first three weeks of 2010. At the present rate, bank loans will contract another 7.67% in 2010, exceeding last year’s record credit contraction of 7.05%.

To put this in perspective, the only reason the chart goes back to 1973 rather than 1947 is that the lowest rate of credit growth from 1947 through 1972 was 2.65% in 1949.  It’s not just that two straight years of credit contraction has only happened once before in the post-war era, it’s that the magnitude of it is completely without precedent.  And this is all without the banks being forced to take write-downs for the bad loans that they made and securitized off their books.   As the Market Ticker has been pointing out since April 2007, selling on bad loans to investors does not take a bank off the hook when, as was very often the case with subprime and Alt-A loans, there is a fraudulent element in the mortgage such as overstated income.

S&P put out a report the other day in which it essentially said “if the banks have to eat the reduced value now they’re all insolvent.” We in fact have fixed none of the underlying issues that brought down Fannie, Freddie, AIG, Bear and Lehman. The only reason we have seen supposed “improvement” in the markets is that the government has given permission to lie to financial institutions in the exact same form and fashion (that is, hiding actual liabilities and probable losses) that brought down ENRON. But the underlying loss is still real, still present, and still out there. Refusing to recognize it doesn’t make it go away. It just sweeps it under the carpet with the hope (wish really) that the institution will be able to screw you, the consumer, out of enough money to cover the shortfalls before they’re forced to recognize the already-occurred losses and thus declare bankruptcy.

If the mortgage security put-back issue comes to the fore, my linear projection of 7.67% bank loan contraction almost surely be overly optimistic, just as my forecast for 2009 deposit failures in RGD was. If we are still in the early stages of debt-deflation, then we must still be in the early stages of economic contraction. Paul Krugman likes to write about demand gaps, but even his most negative calculations are dwarfed by the size of the credit gap between the pre-2009 8.37% average annual credit growth and the 2009-2010 -7.5% annual contraction.

Debt is always the core of the problem. Witness how the imminent debt implosion in Greece makes the previously unthinkable prospect of sovereign defaults and the eventual disintegration of the Euro and the European Union look increasingly more likely:

The EC has no data on public debt beyond 2008, when the figure was €237bn, or 99.2pc of GDP. A surging budget deficit of 13pc of GDP has pushed the figure much higher since then. Brussels expects the debt to reach 125pc this year, and 135pc in 2011 unless spending is slashed. If auditors discover a fresh chunk of hidden debts, this would test Greek financial credibility to the limits. “If there is anything too this, it is the final straw,” said one banker.

GDP grows 5.7 percent!

The BEA’s Q4-2009 Advance report:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 5.7 percent in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.2 percent.

Given that the last report went from 3.5 percent down to 2.2 percent, what are the chances that this impressive number – more than double the average rate of economic growth over the last 50 years – will hold up? Even Wall Street isn’t pretending to take the GDP reports seriously any longer. Note that at $14,463.4, US GDP is now reported to be larger than it ever has been before.

Apparently the 89.7 percent of workers who still have jobs are exceedingly productive. As far as I’m concerned, this claim of economic growth at a 5.7% annual rate does nothing but demonstrate the increasing disconnect between the macroeconomic statistics and the actual economy.

And the academy trembled

I have no serious academic credentials and I see little value in them, given the vast quantities of demonstrable nonsense produced on a regular basis by the credentialed. Which tends to make this particular syllabus rather amusing:

INTERNATIONAL POLITICAL ECONOMY

I. Course Overview

This course examines the relations between international politics and international economics. It provides an overview of the main international political economy approaches. We begin with a theoretical introduction to political economy in the first part of the course, then we explore the evolution of the international economic system and its political implications. A particular focus is devoted to the so-called ‘globalization debate’ and its evaluation, with a specific focus on trade and finance issues, as well as development and inequality. Also part of the course is dedicated to the interaction of economic issues and security.

The following books are required for the class and are available for purchase at the bookstore:

* Gilpin, Robert. 2002. The Challenge of Global Capitalism, Princeton University Press.
▪ Day, Vox. 2009. The Return of the Great Depression. WND Books.
▪ Bhagwati, Jagdish. 2007. In Defense of Globalization. Oxford University Press.
▪ Stiglitz, Joseph E. 2003 (2nd Edition). Globalization and its Discontents. Norton

I suppose I should be pleased, but mostly I just hope the professor doesn’t find himself in too much trouble.

Mailvox: curiouser and curiouser

A professional energy analyst shares his professional perspective, which is an excerpt from a note he sends to their clients:

Have you seen the report today? All the media sees out of this is that the economy is expanding. Two minutes of gazing at the stats shows the opposite. Manufacturing should rally from September through February as part of the seasonal cycle. To have December choke is a very negative indicator.

Here’s an excerpt of my daily note to clients: Our longer-term bearish outlook on industrial natural gas demand continues after the Federal Reserve release today of industrial capacity utilization. The number rose from 71.5 in November (revised down) to 72. The optimists out there will tell you that 72% is the highest in a year. We’ll tell you that seasonality plays a part in that, manufacturing usually increases through February’s end. We’re also quick to point out that we were at 72.7 in December a year ago… and the economy was abysmal a year ago — we’re currently trailing even that. Even more disappointing is the fact that some industrial plants have permanently shuttered. That creates a smaller denominator in the capacity calculation and an appearance of greater growth than was really there. A 7% annualized growth rate for Q409? That’s great. But annual output dropped 9.7%, the worst slide since 1946 when the WWII defense machine relaxed.

The real kicker to the report comes from the Fed itself: Industrial production increased 0.6 percent in December. The gain primarily resulted from an increase of 5.9 percent in electric and gas utilities due to unseasonably cold weather. Manufacturing production edged down 0.1 percent, while the output of mines rose 0.2 percent. That’s right. They’re telling you that manufacturing was down, but the number went up on utility output of energy. What does the media take away from this? An actual headline: “Industrial output rises for 6th month in a row.” That is a fact. A fact that smells like horse manure when you consider the implications on present industrial natural gas consumption.

Being a complete amateur when it comes to this sort of sector analysis, I find it very interesting that the professional opinion happens to coincide rather closely with my take on the overall economy. The numbers just seem to keep getting curiouser and curiouser….

The statistical game expands

The Market Ticker suspects shenanigans beyond the usual chicanery:

On January 5th the durables report for November was ‘released’. It showed a 0.2% increase. I didn’t write on it at the time, as it didn’t appear to be particularly consequential. The report, of course, came in the middle of the first-week January market rally. But now, in the dark of night, the number has been revised – to a decrease of 0.7%. The reason is a claimed “statistical error.” This, by the way, should have been obvious from the retail sales report, which I did write on.

Here’s the ugly – the Census’ link to the report is now listed as missing (that is, intentionally removed!) and what’s worse the link they refer you to, the “Historical M3 Releases” does not have the corrected November data – it only has releases through October on it.

That is, November’s report has disappeared.

I demonstrated the fictitious nature of government statistics in the chapter of RGD entitled “No One Knows Anything”. I suppose it’s easier to simply not bother making anything up, though. Since so few people even understand what the numbers are supposed to represent, why not just periodically shout “The Dow is at 12,000 and all is well!”

It would probably be more convincing anyhow.

Prediction 3 is looking good

“3. The Federal budget deficit for 2010 will exceed the projected $1.17 trillion.”
– December 28, 2009

It’s nine months too soon to declare victory, of course, but that prediction isn’t looking too bad as of January 13th.

The December figures bring to $388.5 billion the deficit for the first three months of Washington’s 2010 fiscal year. That’s on top of a staggering $1.4 trillion budget shortfall for fiscal 2009, more than three times the size of the deficit that the government ran in 2008.

In other words, the federal deficit is on a pace to hit $1.554 trillion in FY2010. Which is remarkably strange considering that we’re now six months into an economic recovery featuring 3.5 2.8 2.2% GDP growth. Say, doesn’t the GDP formula include government spending….

Animals spirits sink

The Market Ticker notes that consumer confidence is sinking:

There’s no good news embedded in here. Personal finances and the buying climate dropped by amounts matching their largest one-week change ever, possibly spurred by people getting their credit-card statements from Christmas (or simply reflecting on what they spent – and determining it was too much.)

Only nine percent rate the economy positively.

Shockingly, the news of the Federal Reserve printing massive profits for itself and bankers paying themselves huge bonuses hasn’t convinced people fearing for their jobs and cutting back on their expenses that all is well. And the whole “stock market advance as leading indicator” isn’t exactly the most convincing argument on offer in light of the fact that everyone can still remember what all the cheerleaders were saying when the Dow was over 14,000.

UPDATE – Speaking of animal spirits, Beau offers his services: “Against the backdrop of economic Götterdämmerung, I have some cheerful news that might pick up some animal spirits. beau.matchmakingservice -at- yahoo.com is ready to assist ilk wishing to discreetly make their intentions known to other ilk. Some of the more prolific posters certainly need no introductions, but in uncertain times animal spirits could perhaps use a boost. beau.matchmakingservice is available for regulars, irregulars and lurking ilk.”

Breeding Ilk… that’s all the world needs now.

Krugman gets it wrong… again

Imagine that:

Paul Krugman has weighed in to an ongoing debate sparked by Jonathan Chait’s criticism of a passage in my essay “Keeping America’s Edge.” I believe that I have responded to Mr. Chait’s assertions comprehensively. Unlike Chait, Professor Krugman has argued that I have presented incorrect data.

Krugman says this:

But I went back to Manzi’s source of data, and it turns out that it’s even worse than that. If you use the broad definition of Europe, which includes the USSR, it did indeed have 40 percent of world output in the early 1970s. But that share has not fallen to 25 percent — it’s still above 30 percent.

His assertion is flatly false.

First, Krugman has incorrectly identified my source of data. I have never corresponded with Krugman concerning data sources and analysis for the passage in question (unlike Chait, who was careful to contact me prior to publishing his blog post, and to whom I sent data sources and calculation details), so I cannot know on what basis Krugman asserts that the dataset to which he links is my “source of data.” It is not. As per the blog post in which I reviewed multiple data sources for the analysis in question, I averaged multiple sources of data. Krugman has selected only one of these sources, presented it as if it were my sole source, and therefore (obviously) failed to replicate the published result. The error is his.

Second, Krugman incorrectly interpreted the economic dataset that he did identify.

I know I’m shocked that A NOBEL-WINNING ECONOMIST could get it so wrong. And speaking of errors and Krugman, a recent reviewer of RGD managed to impressively cock things up in “correcting” my explanation of the loan multiplier in a fractional reserve system. Amusingly, he seizes upon this “error”, combined with the fact that I dared to criticize A NOBEL-WINNING ECONOMIST, to claim that the book “Should Never Have Been Published”. While I have to take responsibility for failing to distinguish between “the bank” and “the banking system”, our intrepid reviewer nevertheless managed to completely miss both the obvious context (the fractional reserve system) as well as the point (the increase in the money supply created by the loans). I’ll explain this in more detail later this week for the six regulars who are actually interested in this sort of thing as well as any anklebiters who would like to revel in the possibility that I am wrong about something, but if you’d like to verify this for yourself, I would encourage you to plug a 0.75% reserve ratio into the table in the Wikpedia example – note that I was completely unaware of this table until about two weeks ago – and compare it to the Loan Multiplier of 133.33x to determine for yourself whether Mr. Eskildson’s “correction” is on target or not.

It should be noted, that this method only provides an estimate for the amount of interest collected over the course of the year, since this completely depends upon the number of loan-and-deposit cycles that occur over the course of the year as well as the three caveats mentioned in the book. Using the 10x example from Wikipedia would mean that $4.80 in annual interest is collected, which is neither the maximum $6.67 mentioned in RGD nor the $0.0599 which the reviewer claims is the correct amount.