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We start off with chilling economic news from the NY Times.
LET’S face it: economic forecasting is an act of sheer hubris. Which, of course, only incites people to do it.
The stock market offers its predictions, and, occasionally, it’s even right. As the economist Paul Samuelson once put it: “The stock market has called nine of the last five recessions.”
Economists have an even worse record, particularly when it comes to predicting downturns. In 1929, for instance, the Harvard Economic Society declared that a depression was “outside the range of probability.” Whoops.
Then there is the matter of the last recession. With the benefit of hindsight, we now know that the downturn began in December 2007. Few people realized it at the time. A survey by Blue Chip Economic Indicators that month found that, as a group, economists believed that the economy would grow by 2.2 percent in 2008. Instead, it began to shrink.
Are we heading into another recession now? Again, the consensus says we’re not.
But at least one organization with an exceptionally good track record says another recession may already be here. That is the Economic Cycle Research Institute, a private forecasting firm based in Manhattan. It was founded by Geoffrey H. Moore, an economist who helped originate the practice of using leading indicators to predict business cycles. Mr. Moore died in 2000, but the team he trained is still at work.
Relying on a series of proprietary indexes, the institute correctly predicted the beginning and the end of the last recession. Over the last 15 years, it has gotten all of its recession calls right, while issuing no false alarms.
That’s why it’s worth paying attention to its current forecast. It’s chilling: as bad as the economy has been, it’s about to get worse. …
Writing in the WSJ, David Henderson gives us the scoop on the new econ Nobels.
… Mr. Sargent was an early and important contributor to the “rational expectations” revolution in macroeconomics, an area for which his sometime collaborator, Robert E. Lucas Jr., won the Nobel Prize in 1995. One of Mr. Sargent’s key early contributions, along with University of Minnesota economist Neil Wallace, was the idea that people’s expectations about government fiscal and monetary policy make it difficult for government officials to affect the economy in the ways they intend to.
If, for example, people get used to the Federal Reserve increasing the money supply when unemployment rises, they will expect higher inflation and will adjust their wage demands higher also. The result: The lower unemployment rate that the Fed was trying to achieve with looser monetary policy won’t happen.
This conclusion was at odds with the Keynesian model, which dominated economic thinking from the late 1930s to the early 1970s. The Keynesian model posited a stable trade-off between inflation and unemployment. In 1970, major U.S. econometric models, built on Keynesian assumptions, predicted that the government could get the unemployment rate down to 4% if it accepted an increase in inflation to 4%. In a 1977 article titled “Is Keynesian Economics a Dead End?” Mr. Sargent wrote, “[I]nstead of 4-4, in the mid-1970s we got 9-9, a very improbable occurrence if econometric models of 1969 had been correct.”
In his later work, Mr. Sargent explored expectations in other contexts. An important one is the issue of how a government can end high inflation. Mr. Sargent studied four countries that had hyperinflation in the early 1920s—Germany, Austria, Hungary and Poland. All used inflation to finance high government deficits. They all succeeded in eliminating hyperinflation, but to do so they had to be credible. Of course, they got rid of their old currencies and started new ones. But they also had to affect people’s expectations by committing to substantially lower budget deficits. All four governments did. …
Forbes essay on how “spreading the wealth ‘ results in spreading the misery.
… A permanent increase in marginal tax rates may spread the misery to those with higher incomes, but it will kill, not create jobs in the U.S. economy. Personal income tax rates are the equivalent of a tariff on the employment of U.S. workers. The higher tariffs are, the less trade, or in this case, less domestic commerce takes place. Higher domestic tariffs on small business men and women, for example, reduce their cash flow while reducing their opportunities to engage in activities that produce an acceptable, after-tax return on their capital employed. Less trade, fewer jobs and a higher misery index are the result.
Bi-partisan support for the Chinese Trade Bill is another threat to the outlook. The bill would supposedly save U.S. jobs by raising the price of Chinese imports by 25% by either forcing the Chinese to raise the value of their currency relative to the dollar, or by imposing 25% tariffs on Chinese made goods. The idea: spread the misery of the lackluster U.S. economy to the Chinese.
The rhetoric in support of this policy appeals to our pro-American instincts, and general sense of solidarity with our fellow citizens. But if implemented, such a plan would only drive the misery index higher still.
First, raising the price of Chinese goods is the equivalent of legislating a pay cut for every American who now has to pay more for many of the goods at his or her local store. Second, paying more for Chinese imports means we will have less money to spend on other goods and services, most of which are provided by American workers. So, while a few jobs may be saved and the profits of favored U.S. corporations protected, thousands of jobs no doubt would be lost.
Nor can government create jobs by imposing new regulations on the economy. This truth is demonstrated by the price controls on debit card swipe fees mandated by the Durbin Amendment to the Dodd-Frank “financial reform” bill. On October 1, these fees were cut to about 24 cents from 44 cents per transaction. …
Democracy in America blog on the chaos created by government in the corn markets.
THIS fascinating installment of “Planet Money” on the farmland boom in Iowa is evidence that college towns occupy an alternate dimension; I had to listen to NPR to learn that the value of the rolling farmland I drive through every few days has more than doubled in the last few years. So why the boom?
The “Planet Money” presenters, Robert Smith and Dan Charles, cite three “global economic forces” that have pushed up land prices here in Iowa. Since there’s not yet a transcript, here’s my paraphrase:
1. Ben Bernanke. Near-zero interest rates have made borrowing to buy farmland look attractive. Money in the bank isn’t earning much, and the return on good Iowa farmland these days averages about 4% a year.
2. Corn prices. Most farmland in Iowa is devoted to corn. (The second most common crop, soybeans, yields a lower return but crop rotation is necessary to keep the soil in shape for bounteous corn yields.) The price of corn drives farm profitability, and the price of corn has gone up.
3. Oil prices. Oil prices drive corn prices. This year more American corn will go to ethanol factories than animal feed, which is a first. Farms in Iowa are now largely in the energy business. This is in part a creation of government policy. Ethanol subsidies get farmers $.45 in tax breaks for every gallon of ethanol, which comes to about 6 billion a year, propping up corn and land prices.
John Tamny writes on the real problem with Solyndra.
Dissembling about the capital destruction debacle that was his Administration’s loan guarantee to bankrupt green-energy firm Solyndra, President Obama told ABC News last week that “if we want to compete with China, which is pouring hundreds of billions of dollars into this space…we’ve got to make sure that our guys here in the United States of America at least have a shot.”
Of course if the president were better schooled in basic economics, he would well understand that “our guys” do have a shot to compete in this space thanks to U.S. capital markets being the deepest in the world. Thanks to angel financing, venture capital, PIPEs, convertible bonds, bonds themselves, and stock issuance, those with a good idea have myriad options when it comes to marrying their innovation with capital.
And there lies the obvious problem with Solyndra. Unable to raise needed operating funds in the private markets, it was forced to go to the federal government to get what our markets would not provide.
The implications for our economy are similarly obvious. Though $535 million is presently a laughable sum to a government that knows no limits, and which doles out a great deal more to support the waste that increasingly symbolizes Washington, there’s an unseen quality to this.
Indeed, what’s continuously forgotten by our federal minders is that they have no resources. For the Obama administration to guarantee a $500 million dollar loan is for it to ultimately extract $500 million from the private economy where it might have actually funded a real, economy enhancing concept. …