Tag: economics

WND column

Fallacy of Recovery

A one-time skeptic of fiscal stimulus, [German chancellor] Ms Merkel plans what amounts to a third stimulus package worth about € 7 billion ($10.4 billion), starting on January 1st.
– The Economist, Oct. 31, 2009

The mainstream media is full of reports of economic recovery and an end to the recession of 2008, even though the Business Cycle Dating Committee of the National Bureau of Economic Research has not yet spoken its official word on the matter. The significant rise in the stock markets and a single advance GDP report has been enough to convince nearly every economist and financial analyst that the worst is past, that 10.2 percent unemployment is a lagging indicator, and that the primary concern at hand is now too much monetary and fiscal stimulus leading to inflation.

Read the rest of the column at WND
Karl Denninger at the Market Ticker appears to have reached the same conclusion. Note that I wrote my column prior to reading his post To the Barkers: Answer This Question:

“The recession ended in June”: Dennis Kneale

“The recession was definitely over in September”: Any one of a number of people.

Ok. Let’s say that I accept all this at face value, even though while driving through my definitely-beach-oriented local town here this afternoon I noted even more closed-and-gone storefronts than there were a couple of weeks ago, and last night at the local open-air mall, although the evening was absolutely gorgeous, you could have fired a 155mm Howitzer down the “main drag” without killing anyone – because there was almost nobody there, and literally not one shopping bag was in evidence.

I simply have to ask the pundits and the carnival barkers, of which CNBC is the worst (but certainly not the only sinner) the following – why do we need any of these programs if in fact the economy is growing again:

Something clearly isn’t adding up. So, who is more likely to be correct? The skeptical economists looking at the evidence and seeing that nothing fundamental has changed or the mainstream economists utilizing the very same models that didn’t let them see a recession coming in the first place? And furthermore, if the models are known to be unreliable, then how does it make any sense to put faith in an estimate that is constructed on the bases of those models?

The man who predicted the Great Depression

Mises finally gets his rightful due from the Wall Street Journal:

“Theorie des Geldes” did not become the playbook for policy makers. The 1920s were marked by the brave new era of the Federal Reserve system promoting inflationary credit expansion and with it permanent prosperity. The nerve of this Doubting-Thomas, perma-bear, crazy Kraut! Sadly, poor Ludwig was very nearly alone in warning of the collapse to come from this credit expansion. In mid-1929, he stubbornly turned down a lucrative job offer from the Viennese bank Kreditanstalt, much to the annoyance of his fiancée, proclaiming “A great crash is coming, and I don’t want my name in any way connected with it.”

We all know what happened next. Pretty much right out of Mises’s script, overleveraged banks (including Kreditanstalt) collapsed, businesses collapsed, employment collapsed.

This is why I’m pretty relaxed about RGD. As an economist, I’m not fit to replace the battery on Mises’s calculator. If he wasn’t afraid to be dismissed as a lunatic for standing against the socialist tide, I’m not afraid to risk the same for standing against the Neo-Keynesian one. The market and the GDP statistics are totally irrelevant in my opinion. The former looks terrible when measured in terms of gold or any foreign currency and the latter have been twisted and contorted so greatly that I suspect it will have to be trashed altogether by the time the Great Depression 2.0 comes to an end.

Remember that GDP comparisons to the Great Depression are intrinsically questionable because GDP didn’t exist until it was created in order to measure industrial output in World War II. Which, astute history buffs will recall took place after the economic events of 1929-1933.

Green shoots!

One of the economic measures I track actually showed signs of life! Total loans and leases at commercial banks increased by $12.4 billion the week of October 28th, the first weekly increase since May 27th. Of course, that little uptick was only a two-week rise of $15.7 billion and preceded a five-month, $451.4 billion decline, so I would be hesitant to put too much confidence into it. It will require an increase of at least $250 billion to be meaningful in any way, but it only seemed fair to point out that for at least one week, the credit contraction process appears to have reversed itself.

Of course, more debt can’t possibly solve any of the myriad economic and financial problems, but let’s not bicker and argue over esoteric theory. GDP is up! Debt is growing! And how about that Dow! It’s a bull market straight to 36,000! Unemployment? Lagging indicator. Now, wait a minute, this suddenly all sounds very familiar….

Slippery slope or cliff-jumping

Government goes vertical:

But what about the slippery slope? Well, it went totally vertical. On the very day that the government czar announced that he would cut the pay of companies that received taxpayer bailouts, the Federal Reserve announced that it would start regulating compensation at the thousands of banks that it regulates, as well as American subsidiaries of non-U.S. financial companies. Some state regulators said they planned to issue similar requirements for state-regulated banks not covered by the Fed plan.

All of this is being done without any legitimate power under the Constitution, and much of it without even the authorization of Congress. Congress refused to bail out the auto companies, so Bush did it on his own authority. Congress never authorized the Federal Reserve to regulate the pay of bank employees.

This is not a slippery slope. This is falling off a cliff. As one news story pointed out: “The restrictions were the latest in more than a year’s worth of government intervention in matters once considered inviolable aspects of the country’s free-market economy and represent a signal moment in the history of the American economic experiment.”

It’s amazing that the lesson so many Americans took from the fall of the Soviet Union appears to have been: “Well, if giant government worked for them….”

The tide flows out

Guess who’s naked now?

A widening gap between data and reality is distorting the government’s picture of the country’s economic health, overstating growth and productivity in ways that could affect the political debate on issues like trade, wages and job creation.

The shortcomings of the data-gathering system came through loud and clear here Friday and Saturday at a first-of-its-kind gathering of economists from academia and government determined to come up with a more accurate statistical picture.

The fundamental shortcoming is in the way imports are accounted for. A carburetor bought for $50 in China as a component of an American-made car, for example, more often than not shows up in the statistics as if it were the American-made version valued at, say, $100. The failure to distinguish adequately between what is made in America and what is made abroad falsely inflates the gross domestic product, which sums up all value added within the country…. Grappling with these blind spots, nearly all of the 80 experts at the conference, which was sponsored by the Upjohn Institute and the National Academy of Public Administration, agreed that the statistics now published tend to overstate the strength of the economy.

If you’re only watching GDP, you are getting an increasingly inaccurate picture of the economic situation. There is no way that economic activity is growing in a credit-based economy where credit is contracting. It’s like watching a football game where the team fails to get into the end zone, but somehow racks up 28 points on the scoreboard. As I’ve shown in RGD, the variance in reports for the same quarter is not infrequently larger than the average growth reported.

It’s interesting that they should finally admit these statistical problems now, just as the gap between reported growth and reported employment is becoming apparent to the casual observer.

Double-digits

Unemployment sails over the predicted high for 2010. The ever-reliable mainstream economists were forecasting an increase to 9.9 percent… and I’d encourage you to stop and think about why they might have assumed that. Remember, Keynesian economics is all based on psychology.

Unemployment Rate Rises to 10.2 Percent
The nation’s unemployment rate rose above 10% for the first time since 1983 in October, a much worse jump than expected as employers continued to trim jobs from payrolls…. According to a survey of top forecasters by the National Association of Business Economics last month, the consensus estimate among economists was that unemployment would hit a high of 10% in the final three months of this year and the first quarter of 2010.

Expect a lot of happy talk about how unemployment is a “lagging indicator”. Anyhow, the employment-population ratio is down to 58.5 percent and U-6 is now 17.5 percent. I will be very surprised if U-3 does not exceed 12 percent in 2010.

Karl Denninger reminds us that the consensus forecast for 2009 was 8.4% and breaks it down at the Market Ticker with the help of this graph.  He’s looking primiarly at loan losses while I’m looking at declining bank credit, but the perspective is the same.

Errata

In any book full of statistical minutia, it’s highly probable that the author will make the occasional dumb mistake. Sometimes it’s a typo, sometimes it’s a failure of research, sometimes it’s a misstatement, and sometimes it’s just an inexplicable error. This doesn’t make you feel any better when you catch your own dumb mistakes, or worse, have to rely upon other people catching them for you. But this historical howler, I have to confess, makes me feel rather better about my own 1931-related error. It also may help explain my low opinion of certain mainstream economists for those who think I show insufficient lack of respect for fame and professional credentials. And while I’m inclined to give authors the benefit of the doubt when it comes to statistical citations, I’m not sure this one can be considered an excusable error, especially since it was made by an economist who has often written about the Great Depression as if he knows a great deal about it.

“Back to bank runs: in 1931, about half the banks in the United States failed. These banks were not all alike. Some were very badly run; some took excessive risks, even given what they knew before 1929; others were reasonably well, even conservatively managed. But when panic spread across the land, and depositors everywhere wanted their money immediately, none of this mattered: only banks that had been extremely conservative, that had kept what in normal times would be an excessively large share of their deposits in cash, survived.”
– Paul Krugman, The Return of Depression Economics, p. 100 (1999)

I found myself wondering if he’d figured out his tremendous mistake or if anyone had bothered to point it out to him at some point in the ten years between editions. Fortunately, I also happen to have his revised edition. The answer: apparently not.

“Back to bank runs: in 1931, about half the banks in the United States failed. These banks were not all alike. Some were very badly run; some took excessive risks, even given what they knew before 1929; others were reasonably well, even conservatively managed. But when panic spread across the land, and depositors everywhere wanted their money immediately, none of this mattered: only banks that had been extremely conservative, that had kept what in normal times would be an excessively large share of their deposits in cash, survived.”
– Paul Krugman, The Return of Depression Economics and the Crisis of 2008, pp 96-97. (2009)

If you should happen to consult RGD, you’ll see that 2,293 of the 20,367 banks in the United States failed. That’s 11 percent, which is not even close to “about half”. You can also check Banking and Monetary Statistics 1914-1941 or Friedman and Schwartz’s A Monetary History of the United States 1857-1960 if you don’t wish to take my word for it. The problem is that repeating this erroneous historical “fact” twice in ten years isn’t merely an error, it tends to suggest that Krugman really doesn’t know all that much about the Great Depression, and even worse, hasn’t read Milton Friedman.

Going academic

While my contempt for the present university system, such as it is, runs both deep and wide, I was nevertheless pleasantly surprised to be informed by a professor at a large university of his intention to make use of RGD in one of his upper-level economics courses. So, at least one group of economics majors won’t graduate without ever having heard of the Austrian School or learning about the intrinsic unreliability of macroeconomic statistics.

UPDATE – In other book-related news, a Muslim reader has informed me of his intention to translate TIA into Arabic; apparently someone has translated the first four chapters of Dawkins’s The God Delusion and he decided to see that the other side was represented. He said he’ll send me a PDF when he finishes, and I’ll post it here for download. I think it’s great, but I have to confess that it never occurred to me that the first language any of my books would be translated into would be Arabic. Go figure.

Perhaps not the best idea

It appears that a few of the less intelligent atheist ankle-biters have decided that it’s a good idea to attack my writing on economics because they find my opinions on atheism and evolution to be so distasteful. Amusingly, they have decided that my criticism of Paul Krugman proves that I don’t know anything. Because, you know, he has a Nobel Prize and all. As it happens, last night I was re-reading Krugman’s book The Accidental Theorist, published in 1999 with absolutely no perception of the tech bubble that was about to burst. Instead, he was still worried about currency crises. I rather like the book because Krugman isn’t a complete idiot, he’s just willfully ignorant and inclined to cling to his defunct Keynesian models. I intend to go through the chapters and highlight various points of interest good and bad, of which this snide slam on the supply-siders, written in the summer of 1997, is a good example of the latter.

Suppose that you had managed your personal finances based on what you heard four years ago from Newt Gingrich, read in Forbes, or for that matter saw on this very page [The Wall Street Journal]. You would have sold all your stocks and probably put your money into gold. If the supply-siders were fund managers, not only would you have fired them, you would have sued them for the lack of due diligence.

This inspired me to take a look at the prices of stocks vs gold since August 1997. Needless to say, there is a very good reason that Paul Krugman admits that he is not a successful investment forecaster.

Gold: +336% From $324.10 to $1,087.45
S&P 500: +9.5% From 954.29 to 1,045.41

And this is not even taking into account the fact that the S&P 500 of today is not the S&P 500 of 12 years ago, as mergers, bankruptcies, and shrinking market caps have caused numerous stocks to vanish. 43 changes were made in 2007 alone! Suppose that you had managed your personal finances based on what you heard 12 years ago from Paul Krugman… unfortunately, a lot of Americans basically did and went heavily into stocks and real estate instead of gold and commodities. You would have done rather better to listen to a non-laureate’s advice. And even for the five years from 1997 to 2002, you were better off with flat gold than with your stocks down 15 percent.

I somehow doubt this has caused Paul Krugman to revisit supply-side theory. Not that I subscribe to it either, but if the performance of the stock markets vs gold is your metric of comparison, well, it would appear a serious rethink is in order.

But it must be said that Krugman reaches some very worthwhile conclusions on occasion. Such as when, in the same book, he wrote what are arguably the most relevant words he has ever written: “I am always grateful when influential pundits make such statements, especially in prominent places, for in doing so they protect us from the ever-present temptation to take people seriously simply because they are influential, to imagine that widely-held views must actually make at least some sense.”

A failure of happy talk

A third stimulus plan appears to be in the works:

Commerce Secretary Gary Locke was “imprecise” when he said President Barack Obama’s advisers are considering a second stimulus measure, his spokesman said today. Locke, in an interview with Bloomberg Television, said: “If there is to be another stimulus — and that’s being hotly discussed and very seriously considered within the administration as well as members of Congress — it needs to be very targeted, very specific and we need to be very mindful of the deficit as well.”

It’s amazing how quickly they forget the $145 billion Bush stimulus plan of 2008. And, of course, the mere fact that more stimulus is being discussed despite the loud trumpeting of the “recovery” indicates that it is employment that is the true measure of economic growth rather than GDP.