Tag: economics

A futile CYA attempt

It appears that those of us who have been pointing out that Krugman advocated a $600 billion stimulus only two months before claiming a $787 billion stimulus was too small have finally force the man to address the issue. Unsurprisingly, he does so both dishonestly and incompetently:

Oy, it seems that another out-of-context quote of mine is being used to claim that I thought the Obama stimulus plan was just dandy. So: back in 2008, I wrote this piece in which I called for stimulus of 4 percent of GDP, or $600 billion. Didn’t we get that, and more?

No. If you read the actual argument — which explains in detail how I arrived at the number — you’ll see that I was thinking in terms of a one-year program; $600 billion is 4 percent of one year’s GDP. I wasn’t clear about the issue of stimulus spread out over 2 years; but if you apply the math in that post, you’ll see that it implies a two-year program twice that size, which was just about what Christina Romer concluded was appropriate.

There is one little problem here, which should be obvious to everyone. Krugman never said anything about a multi-year stimulus package. The fact that the $787 billion stimulus package covered two years has no bearing on the length of the $600 billion stimulus he was advocating. He can no more claim to have advocated a $1.2 trillion stimulus package over two years than a $6 trillion stimulus package over ten.

Furthermore, as one of his commenters pointed out, he used the specific $600 billion figure – indicating a one year stimulus – only four days later: “All indications are that the new administration will offer a major stimulus package. My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion. So the question becomes, will the Obama people dare to propose something on that scale? Let’s hope that the answer to that question is yes, that the new administration will indeed be that daring.”

He was wrong, he was busted and no amount of equivocation on his part can demonstrate otherwise.

VDH piles on

He addresses Krugman’s WWII stimulus argument from the historian’s perspective:

I’m not an economist, but as an historian, I consider this an abject misreading of the postwar period, at least through the early 1950s. The war years were characterized by frenetic hyperactivity: Americans worked long hours, women were brought into the work force, new towns and manufacturing centers sprang up, and people gave up necessities — all on the assurance that this furious pace and consumer scarcity would be short-lived.

As WWII ended and the clean-up began, there was an enormous amount of pent-up global demand for goods. Given the wreckage in Europe, Japan, and Russia and the underdevelopment of India, Asia, and South America, we were about the only ones with the industrial and commercial wherewithal to supply the world rebound — often receiving cheap oil, gas, minerals, and interest in exchange, which supplemented our own vast supplies of comparatively cheap and easily recoverable resources. Nor should we forget the psychological element: Americans, after winning two wars, were enormously confident about their newfound international stature and influence.

At home, four years of consumer deprivation during the war and the weak demography of the 1930s had combined to create huge demand, all while society was increasingly leaving the farm for good and becoming suburbanized. The result was that in the late 1940s and 1950s, the birth rate soared and consumers enthusiastically made first-time purchases of washers, dryers, fridges, cars, etc. Thus, the American economy grew by leaps and bounds.

Today’s situation is not comparable: We are in hock to foreign creditors for trillions and have not been a net creditor since the 1980s. A China, Brazil, South Korea, Taiwan, or India is as or more likely to supply recovering demand for food, steel, or electronics.

Krugman should be careful what he wishes for. England, the Soviet Union, Germany, Japan, and Italy all engaged in massive WII spending; England did so to a much greater extent than the USA ever did. And how did it work out for their postwar economies? The Broken Window fallacy only isn’t a fallacy when you win a war while incidentally breaking all the windows and killing all the glaziers in the neighboring towns. And the history of warfare declares that this doesn’t happen very often even when you are fortunate enough to win.

Seven Years Off

The first problem with Paul Krugman’s hypothesis is that 2010 is not 1938, it is 1931. This should be obvious because at no point in the last two years has anyone except me, Robert Prechter, Mike Shedlock, Karl Denninger and a few other economic heretics admitted that we have been in a depression for months now.

Here’s the situation: The U.S. economy has been crippled by a financial crisis. The president’s policies have limited the damage, but they were too cautious, and unemployment remains disastrously high. More action is clearly needed. Yet the public has soured on government activism, and seems poised to deal Democrats a severe defeat in the midterm elections.

The president in question is Franklin Delano Roosevelt; the year is 1938….

From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today.

Had anyone proposed spending even a fraction that much before the war, people would have said the same things they’re saying today. They would have warned about crushing debt and runaway inflation. They would also have said, rightly, that the Depression was in large part caused by excess debt — and then have declared that it was impossible to fix this problem by issuing even more debt.

But guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity. Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficits.

The second problem here is that Krugman is making a standard post hoc ergo propter hoc mistake. While the US did engage in a massive burst of unrestrained federal spending, it was not the spending that produced the postwar prosperity except in that it paid for the munitions and manpower that was used to destroy every industrialized economy that was not already destroyed by the Germans or the Japanese.

And the third problem, of course, is that the Keynesian notion that government spending is economic growth, let alone is capable of creating growth that is a multiple of the spending, is both logically and empirically false. Remember, no one even began to recognize that the Great Depression was a great depression until the end of 1931.

Double bubble trouble

A number of people have asked me what “the education bubble” means. While it’s not actually a true investment bubble since purchasing a college education is not a bona fide investment, the ever-rising cost of a college degree does have frothy and bubblicious aspects that can be seen very clearly in this chart from TaxProfBlog that compares CPI inflation vs the increase in US home prices vs the increase in college tuition.

In combination with the huge increase in students attending college, the value of a college degree is presently around one-third of what it was in 1990. I had previously estimated it was 28% of the value… but in either case, this assumes you are one of the 50% of college attendess who manages to successfully complete a college program and receive a degree within five years.

Hiding the decline

Karl Denninger is alerted to potential fraud in the housing price statistics:

I have a very disturbing email that came in this evening. It alleges out-and-out fraudulent reporting of home sales in one of the regional MLS systems. That is, prices paid that are in fact much lower than the “sold” prices reported in the MLS.

The person in question claims to have seen over 100 of these in his area. I have copies of two, and it appears, from the evidence that I have, that at least for those two the claim is accurate.

One in particular I was able to pull the auction data on. It “sold” under reserve, is listed as sold in the MLS at ~25% higher than the “sold” bid, and the premium is disclosed as 5%. This property also has a 90-day “anti-flip” provision on it, implying that the paper may be held by one of the GSEs. (It’s a nice-looking place, incidentally.)

Here’s the problem, obviously – Case-Schiller and other “home statistics” numbers related to price paid are all computed off these numbers provided by the local Realty boards (via NAR.) If the data in the MLS is bogus then so is the so-called “median sales price” and so are Case-Schiller’s numbers! These are not small discrepancies either – in both cases the “over-reporting” is by approximately 25%!

This would explain why housing prices have been mysteriously moving up while the number of home sales continues to plummet. It’s as if it’s not enough to cook the GDP, CPI-U, and U3 numbers, things are getting so bad that they have to create fictional statistics for practically everything in order to “hide the decline”.

Hey, it worked for the climate scientists. For a while.

Keynesians are so predictable

I’m so good, I can not only tell you that a mainstream economist is going to be wrong, I can even tell you what his excuse for being wrong is going to be. Here’s Paul Krugman’s ex post facto explanation for why the stimulus failed:

What’s going on here? It’s basically the Fifty Herbert Hoovers problem. Because state and local governments can’t run persistent deficits, and because aid to those government was shortchanged, cutbacks at lower levels of government have undermined expansion at the federal level. Overall government purchases have actually grown more slowly than the economy’s potential output.

This is, of course, his alternate explanation. His primary explanation, which everyone anticipated, was that the stimlus was too small. Even though it was $187 billion larger than he said it had to be. It should be noted that Krugman is attempting to kill two errors with one rationalization here, as he’s also attempting to explain why he was wrong to predict that Germany’s economic performance would be worse than the USA’s due to their rejection of further stimulus.

Revised!

The revision was, of course, UNEXPECTED!

The nation’s gross domestic product — the broadest measure of the economy’s output — grew at a 1.6 percent annual rate in the April-to-June period, the Commerce Department said Friday. That’s down from an initial estimate of 2.4 percent last month and much slower than the first quarter’s 3.7 percent pace.

Anyone still think my prediction of at least one negative quarter for GDP in 2010 is going to be incorrect? Heck, if you consider that they lowered the Q2 number by one-third from only one month ago, Q2 might be reported negative before the end of the year. And remember, that’s the map. The territory has been negative no matter what the map says now.

Unexpected!

Except, you know, for those who expected home sales to fall off a cliff as a result of the homebuyer’s credit pulling demand forward, exactly as Austrian theory has been explaining for decades:

New U.S. single-family home sales unexpectedly fell in July to set their slowest pace on record while prices were the lowest in more than 6-1/2 years. The Commerce Department said sales dropped 12.4 percent to a 276,000 unit annual rate, the lowest since the series started in 1963, from a downwardly revised 315,000 units in June. Analysts polled by Reuters had forecast new home sales unchanged at a 330,000 unit pace last month.

Emphasis added, with a good deal of derision. Now note how they’re still talking about the possibility of a “double-dip” recession.

“”The odds of the dreaded double-dip are increasing. I’ve been one of the only people in the double-dip camp explicitly, but more and more of the people who have been playing in the game of what is the probability — 20 percent, 30 percent — are going to start saying maybe it is 50 percent.”

What a load of complete CYA nonsense. There will be no double-dip because there has been absolutely no recovery from which to dip again. The so-called recovery is a simple statistical trick utilizing government spending to paper over the continuing economic contraction. As the second stimulus runs out, the extent of the contraction will become more readily apparent to everyone. Extend, pretend, and hope for change has failed.

Refusing to learn

My contempt for anklebiters notwithstanding, I very much appreciate substantive criticism. This is why. When you refuse to pay attention to your critics, all you manage to do is increase the likelihood that you will look even more ridiculous in the future, as Paul Krugman demonstrates by continuing to cling to his ignorant idea of a nonexistent “hangover theory”:

[A]t least some members of the FOMC have bought into the hangover theory — the modern version of liquidationism in which mass unemployment is somehow necessary in the aftermath of a burst bubble:

Narayana Kocherlakota, president of the Minneapolis Fed, argued that a large part of today’s unemployment problem is caused by issues the Fed can’t solve, such as the mismatch between the skills of jobless workers and the skills that employers wanted.

Here’s what Kocherlakota said in a speech after the meeting:

Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.

I tried, in that old piece on hangover theorists, to explain what’s wrong with this view in general.

Tried and completely failed, Mr. Nobel Prize winner. Krugman clearly has no idea how badly he was bitchslapped on that piece by me and numerous others. He knows nothing of Austrian economics, he has learned nothing in 12 years of its core concepts playing out right in front of his eyes, and he has absolutely no idea what is going on with the economy right now.

What’s worse is that Krugman clearly knows that his critics exist, as evidenced by his comments on his blog and the fact that he reads the comments that are posted there. Krugman isn’t just an ignorant economist, he has willfully and stubbornly chosen to remain that way.

Shameless spin

You may recall that on Saturday I warned of an UNEXPECTED collapse in home sales this week. Now consider the deceptive headline from NAR: July Existing-Home Sales Fall as Expected but Prices Rise.

Here’s the consensus forecast that preceded it: “the “consensus” forecast for existing home sales in July calls for a SAAR of 4.65-4.66 million which would be down just 9.3-9.5% from last July’s seasonally adjusted pace.”

And here’s the actual number in the report: Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, (it was originally reported as 5.37 million) and are 25.5 percent below the 5.14 million-unit level in July 2009.  Furthermore, it would be less misleading to say that they fell 28.7% from the previously reported figures rather than 27.2% from the newly revised ones.

The shameless spin doctors at NAR are attempting to claim that after a consensus forecast was overly optimistic by 825,000(!) existing home sales, a drop that is 216% larger than the one that was predicted, sales fell “as expected”.  I would encourage you to keep these shenanigans in mind as you read their economic forecasts going forward.  To put the magnitude of this collapse in perspective, here’s a chart from The Atlantic: