Economics as Advocacy

by Dave Schuler on May 31, 2012

Most of the economic news this morning is bad. Unemployment claims are up:

The Labor Department’s report Thursday on weekly unemployment claims showed first-time filings rose to 383,000 for the week ending Saturday. That was an increase of 10,000 from the previous week’s revised figure, a sizable jump after smaller increases in the previous two weeks.

The rise in jobless claims was consistent with a report from Challenger, Gray & Christmas, a private outplacement firm, that showed an acceleration of layoff announcements this month by employers. Challenger said Thursday that businesses in May announced plans to cut 61,886 workers from their payrolls, up 53% seasonally unadjusted from April and 67% higher than May 2011. The May layoffs were reported largely by the computer industry.

and GDP is down:

Adding to the dreary economic news, the government said in a separate report Thursday that U.S. gross domestic product grew at a slower pace in the first quarter than previously thought. Growth in GDP, the total value of goods and services produced in the nation, was revised down to an annualized rate of 1.9% from 2.2% initially estimated a month ago.

As I pointed out yesterday that means that in real terms GDP is actually flat or even declining. The Chicago PMI declined, too:

The pace of business activity in the U.S. Midwest slowed in May as new orders fell to their lowest since September 2009, a report showed on Thursday.

The Institute for Supply Management-Chicago business barometer declined to 52.7 from 56.2 in April, falling short of economists’ forecasts for a modest gain to 56.5.

A reading above 50 indicates expansion in the regional economy. It is one of the last regional factory activity surveys for the month ahead of the national manufacturing report due on Friday, which is expected to show growth in the sector slowed slightly in May.

The forward-looking new orders index fell to 52.9 from 57.4, while the gauge of employment slipped to 57.0 from 58.7.

I think these details mostly substantiate what many of us with ears to the ground already recognize: the economy is stalling. I think that all misses the real story. To me the real story is that all of these indicators did worse than economists expected them to.

Not long ago I stumbled across a study that found that over the last several years economists’ expectations had been wrong systematically on the upside, i.e. they had thought things would improve much more frequently than actually occurred. Being wrong is not unexpected. As Markus M. Ronner put it, prediction is difficult, especially about the future (the wisecrack has been attributed to Yogi Berra and Niels Bohr but the earliest instance of the remark found to date was by the Swiss theologian in 1918).

However, when error is systematically in the same direction there’s more going on. There’s either something wrong with the models that are being used or they’re engaging in wishful thinking. Or maybe they’re cheerleading. It worries me when economics is advocacy.

{ 37 comments… read them below or add one }

Dean Esmay May 31, 2012 at 9:13 am

This is depressing and a little frightening to read. These days I make less than half what I once did, and while I keep hoping an economic turnaround will change that, I begin to doubt it. More and more, I am wondering if the real problem isn’t what previous generations worried about but I used to dismiss: the fact that maybe, just maybe, we’re moving into an era when there isn’t much job growth because there is increasingly less left to do that we actually need people for. If so, it’s going to cause a seismic, generational shift in how economics has to work.

Dave Schuler May 31, 2012 at 9:20 am

That’s a topic that’s been discussed a lot around here, Dean. While I think it might be the case someday I don’t think it’s the problem we have now. I think the problem we have now is the product of bad policies piling up on us over a period of decades. Our chickens coming home to roost. Reversing that is difficult because there are too many people whose out-sized livelihoods depend on things as they are.

Steve Verdon May 31, 2012 at 10:47 am

I agree with Dave. The day we don’t need as many workers is the day we solve much of our resource constraints. Goods and services will likely be very cheap. Could happen, but not right now.

Much of our current problems are due to over-investment in things like the financial sector and housing and construction. We have a surplus of housing and prices need to come down so the market can clear. But that is bad so many of our policies are geared to try and prevent that. Then there are policies that are aimed at “keeping the system up and running” but have the secondary effect of preserving badly run companies, companies that should have gone through bankruptcy or even been liquidated. These things act like drags on the economy. And prices are very much like water…they want to seek their natural level, so if these policies are stopped “bad things happen”.

And the recession was more like what Mankiw and Kling were discussing awhile back, a “unit root” issue, or the “L-shaped recession”. Basically economic output decreased and unlike many previous recession there is either no bounce back or only very slight bounce back. Growth basically begins at a lower level. If this is the case then it will take even longer to “get back to where we were.”

This is my thinking on the issue.

Icepick May 31, 2012 at 11:44 am

[T]he economy is stalling.You just noticed? That happened about five years ago.The day we don’t need as many workers is the day we solve much of our resource constraints. You mean we’re in the Era of Plenty already? And nobody told me! Where’s my fucking pony?!

michael reynolds May 31, 2012 at 11:47 am

Isn’t it hard to bounce “back” if “back” was a bubble? Or series of bubbles? I mean, unless we want some new bubble.

I’m not an economist (I’ll pause while you enjoy the comic understatement) but I gather that for some time now we’ve been borrowing money to build houses we didn’t actually need. Kind of a vast make-work project fueled by expectations that the prices would just keep going up forever. So, in effect, we’ve had a large unemployment problem for quite some time but we kept those folks busy in make-work so they didn’t show up as unemployed.

And at the same time the government was borrowing money to buy more government (defense, welfare, medicaid, education etc…) than we could afford — a second make-work project predicated on the idea that we would find the money somewhere, somehow, possibly in China.

If that’s anywhere close to true, aren’t we just returning to reality after a long dream? What’s the bounce back from that? A new dream?

Icepick May 31, 2012 at 11:47 am

WordPress is eating my comments and my formatting.

michael reynolds May 31, 2012 at 11:55 am

The day we don’t need as many workers is the day we solve much of our resource constraints. Goods and services will likely be very cheap. Could happen, but not right now.

Isn’t that a description of the end state rather than a transition? If we’re on that path then we’d see some of the good and some of the bad without seeing the finished state. And we are, aren’t we? I can afford more computer power than NASA had 30 years ago and I use it to play games. A lot of things are cheaper and more widely available. I have the Google — access to a staggeringly large pool of data — and it costs me just about nothing.

It doesn’t take a completed paradigm shift for it to affect employment numbers. The robot economy is coming. It’s not here yet, but it’s coming, and already it’s killing some jobs. Ask travel agents how they’re doing. Or mail carriers. Or secretaries.

Icepick May 31, 2012 at 12:24 pm

It’s not here yet, but it’s coming, and already it’s killing some jobs. Ask travel agents how they’re doing. Or mail carriers. Or secretaries.

Go into a Best Buy and look at the fear on the faces of the employees.

Icepick May 31, 2012 at 12:26 pm

And meanwhile, Spain is cratering, perhaps faster than Greece, and consumption is falling across Europe. It’s going to be hard for the German consumer to float the entire European economy….

Dave Schuler May 31, 2012 at 12:32 pm

It’s going to be hard for the German consumer to float the entire European economy….

Especially if they believe that Spain and Greece are in trouble because the Spanish and Greeks are lazy spendthrifts.

Icepick May 31, 2012 at 12:34 pm

Student loan debt up 275% in last decade. Yeah, this is going to end well. But our leaders keep telling us to pile on the debt, er, I mean education. Yeah, education, THAT’S the ticket!

Dave Schuler May 31, 2012 at 12:39 pm

Yeah, I thought about posting on that one. Two things to reflect on:

1. Over the period of the last 20 years most of the increased costs in higher education are due to more administrators. Figure that one out. My take: Gammon’s Law.

2. That’s government-held student debt. In theory it could be forgiven with a wave of the pen. I’m guessing that won’t happen.

Icepick May 31, 2012 at 12:43 pm

Dave, I meant that German consumption itself barely rose. That is unsustainable (that small positive growth) if the Krauts can’t export anything to those lazy Greeks and Spaniards. (Sorry, don’t know any derogatory terms for Greeks or Spaniards. The derogatory term for Belgian is, of course, Belgian.) Germany is headed for an unpleasant recession too.

I know you read MISH’s site at least some of the time. He’s practically in ALL SPAIN, ALL THE TIME mode at the moment*. I don’t know if he’s right about Spain leaving the EURO before Greece, but it doesn’t look like they’ve got much in the way of options. And I find it hard to believe that Italy isn’t deep in it too.

The Silver Lining in all this is that the possibility a large war in Europe is going up up up up UP! (Surely still a very small chance, but who thought there was any chance a few years ago?) That’s always good for the US economy long-term! I may get another job sometime before I die! Woo hoo!

* Last I checked he hadn’t even mentioned the revised GDP numbers for the US. Maybe he’s still looking for revisions to the deflator.

TastyBits May 31, 2012 at 1:06 pm

In the robot economy, the unemployment numbers should sky rocket, and the robots will be able to produce non-stop. How will the unemployed be able to afford the goods produced by the robots? Unless the robots begin purchasing the goods they are producing, they will also be in the unemployment line, and unemployed robots can be rather nasty.

“For the Snark was a Boojum, you see.”

Icepick May 31, 2012 at 1:16 pm

Unless the robots begin purchasing the goods they are producing, they will also be in the unemployment line, and unemployed robots can be rather nasty.

SkyNet only blew up the world because it was about to be ‘retired’.

TastyBits May 31, 2012 at 1:16 pm


Isn’t it hard to bounce “back” if “back” was a bubble? Or series of bubbles? I mean, unless we want some new bubble.


@Michael Reynolds
In that one comment, I think you summed up the US economic status succinctly.

Ben Wolf May 31, 2012 at 2:42 pm

“To me the real story is that all of these indicators did worse than economists expected them to.”

I would suggest amending that to:

“To me the real story is that all of these indicators did worse than MAINSTREAM economists expected them to.”

There are people out there all over the political spectrum who are labeled “heterodox” and have been right considerably more often han wrong. Do we listen to them? Do we even consider the possibility there’s something wrong with a dominant school of economics which offers literally no predictive power? Have we completely lost our capacity to self-correct? If so then put your feet up and ride out the waves, cause it ain’t ever getting better.

Icepick May 31, 2012 at 3:35 pm

Have we completely lost our capacity to self-correct?

Why assume any of it is about being correct, as opposed to maintaining power and position?

Drew May 31, 2012 at 4:07 pm

This is one of the more interesting essays/threads in recent memory, for the multiple interesting points and point of view. If I could just augment a few things.

Dave observes that it is odd that the the “unexpected” revisions – and Ben augments – are systematically too optimistic. I couldn’t agree more. That said, and this may sound exculpatory, but to be intellectually honest, I should note that it is not an isolated phenomenon. The “TIPS” market since inception has systematically underestimated actual inflation. As noted, prediction is hard, especially about the future.

Steve Verdon observes that we have had/are in an L recession. A point I made to my investment partners 3 years ago. They. Think I read too much economics for a non-Econ major. But this is correct . But this calls for putting aside certain constrictive policies to get your way out. eg stop the class warfare tax increasing policy. Stop with the global warming crap. Even if you believe it to be true, it’s a long term problem. We have an economic problem NOW. Pouring money into windmills and solar is wasteful when we cannot afford it, and just proving to be sops to activists and campaign contributors, and destroying purchasing power and employment for the Average Joe. This is bad public policy.

Michael correctly notes credit as an engine for government spending and unemployment. This is probably dancing on a pin, but I would probably take a slightly different cant. Not to get into a history lesson, but a 100 year record of the tension between returns to capital vs capital shows high returns to capital up to about 1928, followed by a long period of shifting returns to labor, and then, distinctly beginning in 1974 – 1975 (not 1981 you Reagan haters) the return to an increase in return to capital that persists today. The point being, with wage stagnation, lifestyles for the middle class were maintained through credit. It took two forms. Government borrowed and gave away goodies. This was especially pernicious in the public sector, where lavish pension promises eliminated the need for public sector workers to save. They could consume during their working years. Outside of that, private citizens just ran up their credit cards to maintain lifestyle. The game is over.

Ice pick referenced the Germans. Dave has been absolutely correct IMHO about its pegging of their currency in whatever it was, 1997 or some such at a level that allowed them to import our jobs and export their products. Less understood, is that at the creation of the Euro, Germany had a built in 40% currency translation advantage vs other now Euro denominated nations. PERFECT !! Export heaven. BTW that’s why they will do a lot to prevent Euro collapse.

Lastly. I’ve recently seen some statistics. The payback, based upon aggregate data for college graduate earnings vs non-college graduate earning earnings vs tuition and loans, indicates that after 3 years the loans can be repaid vs non-college wages. 3 years. This isn’t to say that a more German model of trades etc isn’t warranted. But it does seem that there is some “poor me” bitching and moaning is going on. The sense of entitlement in the US seems to be at an all time high.

Drew May 31, 2012 at 4:09 pm

Heh. Should have proofed. In the Michael section, capital vs labor.

steve May 31, 2012 at 5:14 pm

“But this calls for putting aside certain constrictive policies to get your way out. eg stop the class warfare tax increasing policy. Stop with the global warming crap. Even if you believe it to be true, it’s a long term problem. We have an economic problem NOW.”

I would largely agree with this, except for the class warfare bit. This is a good time to deregulate small businesses and we can wait on global warming regulations.

On Germany, I think that their financial elites understand Drew’s point, but do their voters?

Steve

michael reynolds May 31, 2012 at 5:57 pm

My problem with all this is that I’m not sure — other than native optimism — why we should assume there is a solution.

michael reynolds May 31, 2012 at 7:01 pm

Expanding on that bit of gloom a bit: What was the “solution” to the fall of the Roman empire, or the loss of Britain’s colonies, or the end of the Shogunate, or the end of the triangular trade? Not every crisis leads to a happy resolution or a snap back to an earlier halcyon time. Sometimes things end. Maybe post-war America was a golden age not to be equalled for a long time, if ever.

Theres my happy thought for the day.

Icepick May 31, 2012 at 7:22 pm

The payback, based upon aggregate data for college graduate earnings vs non-college graduate earning earnings vs tuition and loans, indicates that after 3 years the loans can be repaid vs non-college wages. 3 years.

Okay, I’m not buying this. I’d like to see those studies/data.

PD Shaw May 31, 2012 at 8:42 pm

@icepick, I’m skeptical too, but your earlier link has this quote: “The median student loan balance is $12,800.” I’ve been wondering about that, seems low.

Icepick May 31, 2012 at 10:21 pm

I’ve been wondering about that, seems low.

That $12,800 comes from people either still attending, in which case the number will go much higher, or those that hit a for-profit school for a semester or two.

Ben Wolf June 1, 2012 at 6:01 am

@Michael Reynolds

In each decline you find an elite group fighting tooth and nail to maintain the status quo rather than adapt to the situation. We’re no different. We’re diverting enormous resources to shoring up the periphery of a dying empire just as the Romans did. We’re hell-bent on preserving an economic order which has made our political class wealthy and powerful. I’ve come to believe a major reason great nations often fall so hard is because their elites become dead weight preventing adoption of a new course.

Icepick June 1, 2012 at 7:24 am

Guess what, they all missed again!

Drew June 1, 2012 at 7:30 am

Gentlemen

I’m attempting to get the data sources. It’s a composite. The author is legit. Understand the skepticism, but let’s suppose the numbers are off by a factor of 2? Should anyone not go to college because it will take until they are 30 to pay off loans – in a work life that might go on another 35 years – because of the debt?

I’m certainly glad I made no such decision.

Dave Schuler June 1, 2012 at 7:35 am

Guess what, they all missed again!

I know I missed. My own private prediction was in the 75,000 to 100,000 range. In my own defense I was working from the BLS’s now obviously rosy scenario of last month.

If I may vent, this comes on the heels of at least one numbskull in the OTB comments section chortling over how the economy had gotten back to normal. I guess he’s right but it’s nothing to be happy about. We need a lot better than normal.

Icepick June 1, 2012 at 7:38 am

Drew, IF TRUE I would agree. But how am I supposed to believe that number if 50% of college graduates are lucky if they can get a job asking, “Would you like fries with that?” How is that supposed to be true if I keep running into newly unemployed ENGINEERS while the ones that have been out of work for years still can’t find work? Because THAT is the current reality.

Icepick June 1, 2012 at 7:41 am

I was half & half on my private prediction. I was thinking a 60,000 to 70,000 job gain, but I expected the UE-3 rate to plummet to 7.9 or 7.8%. You know, because of all the happy folks retiring.

Drew June 1, 2012 at 8:00 am

I just realized I made boo boo in my comment. Dave has been correct wrt China pegging their currency, and now we have the Germans deftly taking advantage of the Euro when formed.

Michael notes:

“My problem with all this is that I’m not sure — other than native optimism — why we should assume there is a solution.”

I share the concern, but will take the opportunity to make a point about incentives, and why I have the philosophy I do. Bain and the steel industry has been in the news recently. There is the good and the bad. GST was a Bain investment and made grinding balls and wire for wire rope. Low value added products in tough served markets. It didn’t work, and 750 jobs were lost. However, Bain also made an investment in a company called Steel Dynamics which makes and processes a completely different product set, and has grown essentially from scratch to 6000 jobs.

So yes, Michael, times are tough, but there are people out there, if incentives are retained in place, who will look through t he haze for opportunities and put their capital and time at risk. But if we insist on the Obama model – at least the Obama rhetoric – certain situations will be bypassed as too risky for the return and continuation of suboptimal growth becomes a self fulfilling prophecy.

Dave Schuler June 1, 2012 at 8:17 am

You know, because of all the happy folks retiring.

You keep hearing about that but I don’t think the actual numbers support the idea. I’ll scrounge around for the stats but I seem to recall that the only age group in which the percentage of employed has risen over the last half dozen years is the over 65 group.

Icepick June 1, 2012 at 8:34 am

Dave, the numbers do not support that claim at all, but it is a meme one continues to see here and there, especially from Administration supporters. SSDI is accounting for some of that in reality, and others are just (allegedly) dropping out. No word on if they’re tuning in and turning on. But bath salts are reportedly big in South Florida.

michael reynolds June 1, 2012 at 12:08 pm

Drew:

So yes, Michael, times are tough, but there are people out there, if incentives are retained in place, who will look through t he haze for opportunities and put their capital and time at risk. But if we insist on the Obama model – at least the Obama rhetoric – certain situations will be bypassed as too risky for the return and continuation of suboptimal growth becomes a self fulfilling prophecy.

So, apparently all we need to do is properly incentivize our business overlords and they will rain down jobs upon us?

If only Obama would go away and we could go back to the way things were — back when we were snorting lines of housing bubble and mainlining tech bubble and still ended up with no net increase in jobs. If only the Atlases could be placated, as the gods they are, they’d make everything all better, indifferent to technological changes, indifferent to the Euro, indifferent to demographics, indifferent to the possibility that life has simply changed. It would be the good old days all over again.

Because they’re gods. And they can just do stuff like that.

There were no good old days, Drew. The good old days were a lie, and those good old days are the cause in part of the bad new days. Our Atlases didn’t know what the hell they were doing then, and they don’t know what the hell they’re doing now. They’re fantasizing. They’re wallowing in self-pity and nostalgia, whitewashing the past and pretending to know when all they’re doing is hoping.

Drew June 1, 2012 at 1:17 pm

Michael

Stop it !!!!! Hyperbole is my province. Look, “business overlords?” or ” raining down?”. C’mon. At the risk of offending ice pick, take a shot of whiskey.

Look, I have been telling y’all for about four years that businessmen are pulling in like turtles. I’ve been variously castigated or ignored. Once again, they are NOT going to take risk under the current environment, sponsored by Fearless Leader. Crazy as it might seem, a message of regulate your ass, tax your ass doesn’t exactly create an environment where small businessmen say ” hey, I’ll risk my butt to make this investment.”. I just don’t know why this seems so controversial.

As someone who has experienced business for 30 years, and as someone who has read about business and economics of the last 150 years, I have to confess that I’m absolutely flummoxed by the crowd who think they can just create an environment that both vilifies and numerically impairs business people”………………….and then turn around and wonder “where is the growth, where are the jobs?”.

Yet the left seems to believe this is an acceptable posture, and then invokes supernatural doom and gloom when they create a crappy environment.

Fascinating.

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