Tag: economics

Statistical shenanigans: U3

You may recall that my prediction that the U3 unemployment would exceed 11 percent in 2010 was “incorrect”. The BLS reported U3 at only 9.8 percent even though fewer people were working due to a concomitant increase in the number of people who had mysteriously decided to exit the labor force in the midst of the “recovery” That’s why I revised my 2011 prediction as follows: “U-3 unemployment will climb above 10 percent. The real unemployment rate will be much higher, but it will be masked by a decline in the Labor Force Participation rate below 64 percent. The employment-population ratio will fall below 58 percent for the first time since 1984.

Needless to say, I didn’t find it quite as inexplicable as some economists have to see that the current employment trend is defying “the rules of a normal economic recovery.”:

The labor force — those who have a job or are looking for one — is getting smaller, even though the economy is growing and steadily adding jobs. That trend defies the rules of a normal economic recovery…. The percentage of adults in the labor force is a figure that economists call the participation rate. It is 64.2 percent, the smallest since 1984. And that’s become a mystery to economists. Normally after a recession, an improving economy lures job seekers back into the labor market. This time, many are staying on the sidelines.

Their decision not to seek work means the drop in unemployment from 9.8 percent in November to 9 percent in April isn’t as good as it looks. If the 529,000 missing workers had been out scavenging for a job without success, the unemployment rate would have been 9.3 percent in April, not the reported rate of 9 percent. And if the participation rate were as high as it was when the recession began, 66 percent, in December 2007, the unemployment rate could have been as high as 11.5 percent.

Translation: the real U3 unemployment rate has been over 11 percent since 2010, as I originally predicted. However, the BLS has concealed this very high rate of unemployment by the simple tactic of reducing the size of the labor force despite the growing population of the country. This is only one of the many reasons that Mises was correct to condemn the use of statistical empiricism in economics; the statistics are neither reliable nor represent a consistent metric.

There is no mystery and it is not true that “nobody is sure why it’s happening.” The reason it is happening is completely obvious: there is no economic recovery. The Bureau of Labor Statistics is playing games, just like the Federal Reserve and most of the other Federal agencies, to conceal the observable fact that the Great Depression 2.0 has been underway for 30 months already. And their ability to hide it is gradually crumbling.

UPDATE: BLS report today: U3=9.1%, LFP=64.2%, E/PR=58.4%.

The cancerous eyes of the state

Murray Rothbard expands his logical case against empiricism in economics, specifically, explaining how the systematic gathering of statistics tends to lead inevitably to bureaucracy and increased government intervention in the economy:

[S]tatistics are desperately needed for any sort of government planning of the economic system. In a free-market economy, the individual business firm has little or no need of statistics. It need only know its prices and costs. Costs are largely discovered internally within the firm and are not the general data of the economy which we usually refer to as “statistics.”

The “automatic” market, then, requires virtually no gathering of statistics; government intervention, on the other hand, whether piecemeal or fully socialist, could do literally nothing without extensive ingathering of masses of statistics. Statistics are the bureaucrat’s only form of economic knowledge, replacing the intuitive, “qualitative” knowledge of the entrepreneur, guided only by the quantitative profit-and-loss test. Accordingly, the drive for government intervention, and the drive for more statistics, have gone hand-in-hand….

Suffice it then to say that a leading cause of the proliferation of governmental statistics is the need for statistical data in government economic planning. But the relationship works also in reverse: the growth of statistics, often developed originally for its own sake, ends by multiplying the avenues of government intervention and planning. In short, statistics do not have to be developed originally for politicoeconomic ends; their own autonomous development, directly or indirectly, opens up new fields for interventionists to exploit.

Each new statistical technique, whether it be flow of funds, interindustry economics, or activity analysis, soon acquires its own subdivision and application in government.

In the RGD chapter entitled “No One Knows Anything”, I demonstrated how wildly inaccurate, mutable, and untrustworthy the economic statistics on which so much government policy is predicated are. But the problem is that regardless of how inaccurate or even irrelevant they are, they will be used to justify government action in various areas of the economy and inspire public malinvestment while simultaneously exacerbating private malinvestment. If statistics are the eyes of the state, the central flaw with them that they will always be short-sighted, astigmatic, subject to optical illusions, and prone to aggressive intraocular lymphomas.

You don’t say

The headline on Drudge made me laugh.

“‘WE ARE ON THE VERGE OF A GREAT, GREAT DEPRESSION‘”

Really now? I am… so very surprised!

“Interest rates are amazingly low and that, thanks to Ben Bernanke, is driving everything,” Yastrow said. “We’re on the verge of a great, great depression. The [Federal Reserve] knows it. We have many, many homeowners that are totally underwater here and cannot get out from under. The technology frontier is limited right now. We definitely have an innovation slowdown and the economy’s gonna suffer.”

This was all entirely predictable. It was, in fact, predicted. My timing was a little off, as usual. I thought the media would start realizing the reality of the situation towards the end of 2010, not the middle of 2011. But the situation remains precisely the same one I described in the Introduction to The Return of the Great Depression and I see no reason to change a word of it.

“Due to the sizeable bear market rally that began in March 2009, many, if not most, economic observers are presently convinced that the global economic difficulties of last autumn are largely behind us now, courtesy of the aggressive, expansionary actions of the monetary and political authorities.

They are wrong. It is not over. It has only begun.

I believe that what we have witnessed to date is merely the first act in what will eventually be recognized as another Great Depression.”

Cracks in the Euro

A Greek official finally admits the obvious:

Greece must take tough measures to deal with its debt crisis or it will have to return to the drachma, the EU’s Fisheries Commissioner Maria Damanaki said on Wednesday. “I am forced to speak openly,” Damanaki was quoted as saying in a statement by the semi-official Athens News Agency. “Either we agree with our lenders to a programme of tough sacrifices … or we return to the drachma.”

I’m hoping Italy will return to the Lira, myself. I still have a few of them sitting around somewhere in the old filing cabinet. Anyhow, this “forced restructuring” is the only valid option since the ECB, the EU, and the bond-holding banks have repeatedly refused to cut Greece’s debts in a manner sufficient to permit repayment.

Be very afraid

It would seem the solution to cowbell is MORE COWBELL:

“Today there are very substantial risks, to be sure, but the economy is growing, unemployment is falling and financial conditions are normalized,” said Summers, who was director of the White House National Economic Council in the Obama administration from 2009 to 2010.

Summers said the “central irony” of a financial crisis is that it’s caused by too much confidence, borrowing and lending, and is resolved by more confidence, borrowing and spending.

There is no irony there because it isn’t a solution. This is exactly what I meant by “buying time” and what others have meant by “extend and pretend”. There is little chance that Summers actually believes this, but the financial charlatans of the world now have no choice but to keep clinging to the tiger’s tail while hoping for a miracle.

A tacit admission of depression

Karl translates Alan Blinder’s unusually frank remarks in the Wall Street Journal:

The only reason we have not recognized an economic Depression is because of utterly unsustainable government borrowing and spending of money it does not have and which it has no hope or intent to ever take in via taxes in the future. In other words, the Government has been lying to you.

There has been no economic recovery and we are in an economic Depression right now and have been since 2008.

There was no economic recovery after the 2001 Nasdaq collapse. The government borrowed and spent about 5% of GDP at the time every year to fake a recovery and we ran a debt-based false “recovery” when in fact we were in a five year long recession marked by an orgy of false “wealth” through bubbling home prices.

Now we’re borrowing and spending 12% – more than double that amount – a year to fake a recovery that has shown up in stock prices, and it mathematically must end the same way.

This is exactly what I attempted to warn everyone of in my economic columns in 2008 and in RGD. GDP is a terrible measure of economic growth because it is so easily gamed through the G component, government spending. What the 78% increase in government debt since the second quarter of 2008 has done is to create $4.1 trillion of fake growth. Needless to say, this is substantial in a $14 trillion economy.

The ironic thing is that if the pre-Keynesian measures that Keynes himself utilized in determining economic growth and contraction are used, it would already be recognized that we were in a depression due to the number of jobless people across the country. But due to the development of sophisticated statistical measures, the government is now able to claim that there is “real” economic growth even as the employment-population ratio continues to fall. Even many economists have forgotten that metrics such as GDP and U3 are merely measures of an observable underlying reality.

But as I have repeatedly pointed out, the map is not the territory, and unfortunately, the present economic map is becoming increasingly inaccurate.

Hitting the limit

The Secretary of the Treasury announces that the United States has maxed out its credit card:

Treasury Secretary Timothy Geithner has informed lawmakers that the government has officially hit the debt limit. Geithner made the announcement in a Monday morning letter to congressional leaders that said he was reducing the government’s investment in the two government employee pension funds as the nation entered a “debt issuance suspension period.”

The truth is that there is no way that refusing to take on new debt will lead to default. It doesn’t even make any sense. Think about it: does obtaining a new credit card mean that you are less likely or more likely to not pay the balance on your existing credit card? Attempts to associate the debt limit with default are simply dishonest, as an inability to obtain new debt is not synonymous with a lack of new revenue.

Killing Ireland to threaten Spain

This article by a professor of economics at Dublin College is easily the most informative summary of the disaster presently facing Ireland, and by extension, the financial world.

The one thing you need to understand about the Irish bailout is that it had nothing to do with repairing Ireland’s finances enough to allow the Irish Government to start borrowing again in the bond markets at reasonable rates: what people ordinarily think of a bailout as doing.

The finances of the Irish Government are like a bucket with a large hole in the form of the banking system. While any half-serious rescue would have focused on plugging this hole, the agreed bailout ostentatiously ignored the banks, except for reiterating the ECB-Honohan view that their losses would be borne by Irish taxpayers. Try to imagine the Bank of England’s insisting that Northern Rock be rescued by Newcastle City Council and you have some idea of how seriously the ECB expects the Irish bailout to work.

Instead, the sole purpose of the Irish bailout was to frighten the Spanish into line with a vivid demonstration that EU rescues are not for the faint-hearted. And the ECB plan, so far anyway, has worked. Given a choice between being strung up like Ireland – an object of international ridicule, paying exorbitant rates on bailout funds, its government ministers answerable to a Hungarian university lecturer – or mending their ways, the Spanish have understandably chosen the latter.

I didn’t realize that Geithner, the ex-NY Fed Secretary of the Treasury, was so directly involved in saddling the Irish taxpayer with the losses that would have otherwise been taken by the banks that were bailed out. I don’t see how it is possible to read this and still convince oneself that the world’s economic and financial problems of 2008 are in the past it’s perfectly clear that the global financial system hasn’t been fixed in any way, shape, or form, it is only that extend-and-pretend has gone from the national to the intercontinental level.

As I noted yesterday, despite my very contrarian predictions of a continued decline in housing prices, I actually appear to have underestimated the speed, and likely the eventual extent, of the collapse. In the same way, my predictions that the banks and governments of the world would reinforce their failure by taking it to the next level appears to have somewhat on the conservative side as well.

Ireland and Greece are already toast. They are almost guaranteed to default sometime within the next two years. What sort of domino effect this will kick off can’t be accurately predicted, but it seems reasonable to assume that the bankruptcy of an entire nation or three will be more calamitous than the mere failure of a single Austrian Creditanstalt.

Too optimistic, again

Well, you can’t say I didn’t repeatedly warn you about this housing “double-dip” coming. The problem, of course, is that it’s not just a dip.

Home values posted the largest decline in the first quarter since late 2008, prompting many economists to push back their estimates of when the housing market will hit a bottom.

I suppose there must be a silver lining in what some consider to be the ongoing hyperinflation… without it, you might be able to buy a house for $30k soon.

Econ doesn’t stick

This may explain why today’s economists are so hapless; they simply don’t know the relevant core principles:

Unfortunately, however, most students seem to emerge from introductory economics courses without having learned even the most important basic principles. According to one recent study, their ability to answer simple economic questions several months after leaving the course is not measurably different from that of people who never took a principles course.

What explains such abysmal performance? One problem is the encyclopedic range typical of introductory courses. As the Nobel laureate George J. Stigler wrote more than 40 years ago, “The brief exposure to each of a vast array of techniques and problems leaves the student no basic economic logic with which to analyze the economic questions he will face as a citizen.”

Another problem is that the introductory course is increasingly tailored not for the majority of students for whom it will be their only economics course, but for the negligible fraction who will go on to become professional economists. Such courses focus on the mathematical models that have become the cornerstone of modern economic theory. These models prove daunting for many students and leave them little time and energy to focus on how basic economic principles help explain everyday behavior.

But there is an even more troubling explanation for students’ failure to learn fundamental economic concepts. It is that many of their professors may have only a tenuous grasp of these concepts, since they, too, took encyclopedic introductory courses, followed by advanced courses that were even more technical.

It may sound cool, at least to dorks, to be a quant or a wonk. But all the technical expertise in the world doesn’t do you any good if you don’t get the core concepts right. That’s why, in RGD, I attempted to begin at the beginning and leave as much jargon and econometrics out of it as was reasonably possible. I was fortunate, as about half my econ professors had a fairly sound grasp of the core concepts. But given the more common nature of those who didn’t, it doesn’t surprise me to learn that their sort are in the majority. As I’ve mentioned before, I once met a nominal econ major from a big state school who had never heard of Keynes or the General Theory.