Economics

/ / , , , , , / 0 comments

After Bernanke

It is fairly well accepted now that Ben Bernanke will decide not to stay at the Fed next year when his current term is up. By and large I fall into the neutral camp when assessing his tenure. He was woeful at identifying the likelihood of crisis. He has been pretty good at reacting and doing what he can to solve it.

He needs to go back to Princeton and work on upgrading orthodox economic theory in light of its errors, general lunacy, and current irrelevance.

It is very hard to convey the messed up state of economics to outsiders. Economists, after all, speak with such utter conviction and litter their ideas with tons of clever looking math. Most of them know the foundation is rotten and needs replacing, but that is a major upheaval none want to undertake, so they plod along perpetuating the errors while hoping no one notices.  Bernanke typifies this part of the profession – self-referential, vaguely aware of its fatal flaws, yet determined not to get out of line lest he appear apostate. To paraphrase an eminent economist of the past: Bernanke is one of those economists who would prefer to be wrong with precision rather than right with a degree of uncertainty.

Anyway, the silly season is upon us as the chatter builds about ‘after-Bernanke’. Who will take his place?

Larry Summers is shamelessly canvassing for support. Summers is one of those people who jumps about, never stays anywhere long enough for us to assess his impact too clearly, is good at networking in the circles of power, and can be relied upon to join whichever team looks like it’s winning. His abiding sin, in my opinion, was his wholehearted advocacy of bank deregulation. It was a catastrophic policy straight from the free market Milton Friedman playbook, and led directly to the crisis. Yet here is Summers running around town trying to be Fed Chairman.

The succession discussion will also give us insight into the way in which our economic elite protects its self interest and ignores the rest of us. Today’s Financial Times offers up a good example of this. Philipp Hildebrand, a BlackRock bigwig, and former head of the Swiss National Bank, writes that the imperative for Bernanke’s successor is to pursue ‘price stability’. This means that fighting inflation is paramount. Of course this is what Hildebrand wants. His constituency consists of bankers and other creditors who fear inflation – they lose money when it rises. So damn the unemployed, and look after the money lenders. This is despite the lack of inflation, and in face of chronically high unemployment. When you read his article you get a great insight into the divergence that bedevils economic policy making. The elite lives in a different world – the current spate of record profits at the big banks is testimony to that – and its issues are not those of the 99%. So, naturally, the policies they advocate are focused on what ails them not us.

Actually, if you read the article carefully you will identify a nod to the 99%. This shows that Hildebrand is aware both of his elitism, and his indifference to the ordinary folk. Here it is:

Therefore Mr Bernanke’s successor must bring to the job rock-solid credentials as someone who will be a central banker committed to price stability. There must be no doubt in the minds of those in company boardrooms, on trading floors and on main street that whatever else happens, the Fed will keep inflation low and stable.

Notice it?

Apparently boardrooms, trading floors, and main street, are all in this together. Not. Main Street tends to be in debt. And debtors benefit from mild inflation – it makes paying debt back cheaper. The banks lose by the same token. So they are not in the same boat. Plus one of the reasons that we’ve had such low and stable inflation over the past three decades is that wages have been squashed. Profits, though, have soared. Boardrooms, trading floors, and main street do not always have the same policy goals. In fact, right now, they are have very different needs.

Bernanke, to his credit, has helped stave off deflation, which would have hammered main street relentlessly, but his successor, according to Hildebrand, needs to plot his or her way (Janet Yelling would get my vote to chair the Fed) away from that and back to old fashioned anti-inflation policy. Even if there isn’t any inflation.

The single minded pursuit of ‘price stability’ is killing Europe, I hope that Bernanke’s successor ignores Hildebrand and doesn’t fall into that same trap. Unemployment matters. Indeed it matters more.

I wonder how many articles the FT will print with that sentiment in mind?

/ , / 0 comments

A Dilemma

The recent crisis, and our not very good policy response, lingers on. The damage to ordinary people’s lives amounts to a hidden disaster that will take years to mitigate. The economics profession – and I use that word loosely because a true profession monitors itself better than economics does – has been shown as inept, fragmented, and unable to correct its evident errors. What existed before the crisis as settled orthodox theory has been exposed by events to be alchemy. But its practitioners continue to sell it as if nothing happened. This intellectual bankruptcy goes unpunished largely because economics is a small, self-contained, and self referential world. The elite schools are populated with past students of elite schools. The elite schools control the publishing process. The elite schools supply the armies of analysts at the elite institutions. The elite schools dominate the conferences. And the elite schools perpetuate the myth that they possess the central “truths” that need to be passed along to the future.

Worse, outsiders struggling to come to terms with the uselessness or ineffectiveness of the policy advice that pours out of the economics profession, have to wade through the constant internecine fighting that lurks just beneath the surface. Academic combat is laudable when it leads to progress. It is puerile when it leads to nothing but name calling. A theory failure ought to bring applause because it denotes learning. In economics it merely denotes the onset of politically motivated trench warfare. The front lines in the war never move, but an awful lot of ammunition is hurled back and forth. The collateral damage is extensive. The quality of policy advice suffers. Generations of students are exposed to alchemy and taught that markets will always turn lead into gold as long as the government gets out of the way. They are taught to ignore uncertainty; that consumers are rational; and that business firms maximize profits despite lacking the information needed to do so. If they read Milton Friedman they learn that anything goes in model building as long as it produces the “right results”, which is handy as long as you know what the right results are. And they learn that the unions that protected their grandparents wages are actually a bad thing.

Worse still is that this mess continues unabated. It proliferates.

No one understands economics.

No one.

It is not humanly possible.

The torrent of paper that the profession produces is so vast, wide, and deep that anyone trying to cope with needs a compass and  a route map. No one can read it all. Chunks get ignored and great past works get forgotten.

And who organizes the route map? Who provides the compass?

The elite schools. The very same group propagating the alchemy. They have secured the high ground. They edit and publish the top journals. they set the rules. They defy and denigrate outsiders.

So this is the dilemma:

We need academic contest, but have an elite that restricts entry and seeks to censor debate. We have enormous variety elsewhere – off the mountaintops dominated by the so-called elite. But in the valleys there is very little light. We have hundreds of “lesser” journals publishing heresies of various sorts. We have conferences to give space to different ideas.

But we don’t have resources. And we don’t have the connections the elite does.

So we need help.

What we don’t need is to create more journals, conferences, and other venues that are ever more financially marginal. We need to collaborate not splinter. We must not dissipate but concentrate. We need fewer more pluralist journals so that our voice still finds it way onto bookshelves and into libraries.

This is not easy. I am not optimistic. The rules are bent against us. The elite is already squeezing the life out of discussion through its control and willingness to deride rather than engage.

I read somewhere that in mathematics some 200,000 theorems get published each year. No one reads them all. No one. No one understands them all. No one. Can we argue that our collective knowledge is being moved ahead when we cannot even assess it efficacy? When no one even knows its extent?

In economics we have the same problem.

No one, not even the most stupendously well read, the most comprehensively educated, and the most intellectually facile can claim credibly that the flood of published work is adding or subtracting to our knowledge. It just continues unabated. Path dependent. A habit we cannot kick. And beyond our comprehension. No one can say that the answer to our current economic plight does not exist. It may. It may not.

So we need to confront our dilemma. We need to stop. We need to invoke our main strength: our diversity. To do that we need to convoke.

Less, as we are frequently told, is more.

/ / , , , , , , / 0 comments

Employment Numbers: Endless Drift

This morning we have been treated to an odd spectacle. Wall Street was very wrong about the number of jobs generated by the US economy last month, and is now scratching its head about what it all means.

First the figures: the economy added 195,000 new jobs to non-farm payrolls in June. Moreover, both the prior months were revised upwards, so that the average for the entire second quarter came in at 196,000 per month, only a little down on the first quarter’s 207,000 per month average.

Second the Wall Street view: by and large analysts had been expecting a much weaker figure – something in the region of 155,000. This comparative weakness was based on recent data that suggested the economy was slowing down somewhat from its first quarter pace. Manufacturing reports had indicated a slowdown, as had some of the other reports. Add in the view that the combination of tax increases and sequester spending cuts will slow growth down from its already anemic pace – 1.8% in the first quarter – and the prospect for strong job growth evaporates. Oh, and there’s the widely held opinion that the steady unrolling of Obamacare will inevitably stunt hiring because it requires businesses to provide health care coverage. This latter factor looms particularly large within the minds of those within the generally right wing oriented echo chamber that is Wall Street analytics.

Third: then there’s the bizarre way in which Wall Street analysts express themselves. Put bluntly: they say nothing, but talk a lot. Here’s Jane Foley of Rabobank:

“Very strong data should be good for risk appetite. However, the market’s likely reaction is complicated by the interpretation of what the numbers will mean for the Fed’s decision to taper QE. 

On June 26 the market celebrated the downside revision of US Q1 GDP on the assumption that this would lead to continued QE. This implies that a lacklustre improvement in US June payrolls could conversely fail to offer support to investor sentiment”

Or some anonymous source at Societe Generale:

“The Bureau of Labor Statistics’ (BLS) update on the employment situation in June will be the first of a trio of such reports that the Federal Open Market Committee (FOMC) will consider in advance of its 17-18 September meeting.

A reversal of May’s labour-force induced rise in the civilian jobless rate, combined with yet another above-consensus payroll print, likely will reinforce expectations of an asset-purchase tapering announcement at that time.”

Then there’s Paul Dales of Capital Economics:

“The recent survey evidence leaves us content with our forecast that US payroll employment (13.30 BST) rose by around 150,000 in June. That would be slightly smaller than May’s 175,000 gain. The 188,000 rise in the ADP measure of private payroll employment in June and the rebound in the employment index of the ISM non-manufacturing survey in the same month bode well for official payrolls. But the employment index of the ISM manufacturing survey fell to a four-year low. If the alternative household measure of employment and the labour force also both rose by around 150,000, then the unemployment rate would have been stable at 7.6%. A pick-up in jobs growth in the coming months would leave the Fed’s QE3 tapering plans on track.”

I lifted all three quotes from the Guardian this morning. I can’t quite make out whether the Guardian thought these quotes meant anything, or whether it was spoofing Wall Street.

None of them actually talk about the meaning of the numbers in any real sense. They are all obsessed with what the numbers mean for the Fed’s potential relaxation of its current QE policy. I understand this is important to the world of finance, but it would be nice to hear what analysts thinks about what the numbers mean for the rest of us. Let’s face it the financial world is long departed these shores and now seems more inclined to trade amongst its own based upon gossip, and reactions to interpretations of hearsay and insider tips exchanged at the bar last night. What’s going on in the real economy matters not a lot. What matters is how other traders will react to the expectation of how other traders will react.

Yes, I just said that.

The obsession with the Fed is understandable within such a byzantine world. Money is made by judging the meaning of nuances, innuendos, style, and the way in which Ben Bernanke combs what’s left of his hair. Money is made by watching and guessing the next move of the ratio between two indices, not by giving a hoot about the substance of what is driving those indices. In other words, money is being made by speculating in mid air, with the speculators not needing an understanding of what’s going on down there on planet earth.

Hence the vapid analytical statements.

For the rest of us, here’s what I think of this morning’s figures:

They are not very good.

They show that the economy is withstanding the negative impact of current economic policy. But only just.

They indicate that we are limping along in quasi stagnation and that the economy is generating just enough activity to keep the employment situation out of the panic zone.

They suggest, to me at least, that the economy would be about 0.5% to 1.0% better off were it not for the lunacy that is Washington policy.

They are too weak to push the Fed into changing its mind on QE any time soon. So interest rates will stay low for a while longer.

And, given that the job market is usually the epicenter of inflationary pressure, they suggest that the prospect for higher inflation is close to zero – despite what the right wingers keep saying.

Let’s all face it: a 196,000 per month hiring average is not very good given where we were. It barely keeps up with population growth and is not enough to bring the unemployment rate down – the headline unemployment rate is stuck at 7.6%.

Perhaps the biggest problem we have is that this limping along is just sufficient to prevent anyone in Washington having to dig in and do anything. Policy can stay anti-growth, and high unemployment can elicit a shrug rather than any concern. Remember: there are plenty of studies that show the unemployment rate doesn’t have much impact on elections. What matters to voters is the change in unemployment in the run-up to an election. Apparently voters can get used to high unemployment, and only worry if a shift seems to signal a threat to their own job. That makes sense, but it means that policy can sometimes allow for endless drift.

And endless drift is where we are.

 

/ , / 0 comments

Summer Doldrums

I apologize for the sparse blogging recently. I have, however a perfectly reasonable excuse: there’s not much new to talk about, and I, like you no doubt, am tired of repeating the same old stuff. News does continue to trickle out, so here’s an update:

  • The economy is chugging along slowly. Too slowly to make much of a dent in our ongoing unemployment problem, but just quickly enough to allow politicians to avoid doing anything – they can all claim that good news is just around the corner. The first quarter’s growth in GDP of 1.8% would be derisory under normal circumstances, but given the gridlock in Washington, the ineffective nature of economic policy – is there one? – and the desperate need on the part of our collective leadership to duck responsibility, such growth is the best we can expect.
  • I have been saying for more than a year that, in the absence of more government support via stimulus, the economy would limp along with growth between 2.0% and 2.5%. The stupid and dangerous spending cuts we know as the sequester will reduce growth as the year progresses. This suggests that the first quarter is a portent of what is to come. It may even be our high point for the year.
  • Hot spots in the economy do exist: construction and real estate are coming back to life nicely. Manufacturing noodles along, bouncing on the precipice between growth and decline, and consumption does just enough to offset the vagaries elsewhere.
  • You will have heard about the fuss caused by recent Federal Reserve Board statements. The story is this: various Fed officials, including Bernanke, opined about the potential ‘tapering off’ of the Fed’s aggressive support of the economy. Nowhere did they announce a policy change, all they said was that they were watching things closely and were prepared to ease off support – which means encourage higher interest rates – when the economy looked able to withstand such a change. Almost immediately longer term interest rates jumped. This was an absurd reaction to the Fed’s statements. Wall Street’s interpretation was that monetary policy was about to change and thus some investors dumped treasuries so as to avoid taking a loss later in the year. This interpretation was wrong and was based on gossip rather than the actual text of what was said. To understand this you need to recall that Wall Street is inhabited by the financial equivalent of the legendary fishermen’s wives. Gossip and guesswork dominate fact. The reason is clear: everyone has access to fact, so there is no trading edge or advantage to having simple facts. All the gain is to be made in understanding the hidden meanings. Perhaps a better analogy is with the old Kremlin watchers who made profound pronouncements based upon the order in which Soviet Officials stood at the May Day parades. So it was with the misinterpretation of the Fed’s statements. Nowhere did the Fed say it was about to raise rates.Yet within hours the common view on Wall Street was that a policy change was imminent. These are the same fools that brought us the crisis from which we are still digging out, so none of this ought be a surprise.
  • Meanwhile the economics profession continues its merry dance towards ever greater irrelevance. No one seems willing to admit errors of theory, despite the mass of evidence. We are treated to a never ending series of ‘he said-she said’ types of exchanges that advance our knowledge not one whit. The ideological taint grows ever more pronounced. And, as a group, economists refuse to acknowledge that their public policy role implies an ethical relationship with society that needs to be made explicit. The libertarians reject all notions of ethical codes on the basis that such codes represent an affront to their liberty. The rest seem to take it personally that anyone could dare suggest that economics needs to act like all the other professions. They act as if to call for a code of ethics is to call them each and severally unethical. I wonder if doctors react that way to the old Hippocratic Oath?
  • Lastly: with the Federal deficit now receding and the medium term budget looking decidedly benign, what will the Republicans do? They were using the budget’s red ink as a back door to attack government. Now they will have to be a little more overt. Then again they seem overly preoccupied with abortion and blocking minority voters. The economy doesn’t matter to them the way it did.

Oh. One last thing: if I read one more paper or book by a tenured libertarian economists bemoaning the lack of wage flexibility – by which they mean our general unwillingness to avoid taking real pay cuts – I think I will scream. The standard right wing answer to unemployment is that it exists only because workers resist taking lower wages. They also argue that unemployment assistance allows workers to be more choosey when they look for work and thus prolongs the period people are willing to be unemployed. It is all well and good to have such ideas, although I disagree with them, it is not at all well and good to proselytize such ideas from behind the comfortable walls of a tenured position. It is the height of hypocrisy. It screams a lack of ethics. But it is far too common.

It’s already been a dull summer. It looks set to stay that way.

Doldrums indeed.

/ / 0 comments

Home Prices Rocket

There is very little news in the economy at present, hence my comparative quiet. Today, however, I have to make note of the Case-Shiller home price index results for April: prices rose at the fastest rate ever. Of course ‘ever’ in this case is only back as far as 2000 when the index was first compiled, but April’s record jump of 2.5% in the 20 city index is still notable. For the full year ending in April the increase was 12.1%, the fastest since 2006.

Nineteen of the twenty cities whose prices comprise the index saw increases over the past twelve months, with San Francisco leading the way with a 23.9% increase and New York City bringing up the rear with a modest 3.2% rise.

Low interest rates, a steep decline in foreclosed and distressed properties, and tight supply are all contributing to the sudden resurgence of home prices. We are still about 25% below the bubble peaks so this surge ought not concern us too much just yet, and as price keep rising there will be an increase in supply as homes currently underwater – they were bought closer to the peak of the bubble – become more easily sold. This effect will dampen price increases somewhat as buyers find they have more choices and consequently less pressure.

Then there’s this:

 

Interest rates have risen as the credit markets try to figure out exactly what the Federal Reserve Board is doing. A stream of mixed messages and confusing statements has shaken the market up a bit. And as you can see from the chart rates have been bid up because investors now anticipate an end to the Fed’s efforts to prop up the economy.

The fun line to watch on the chart is the red one which tracks the inflation proofed interest rate. If you look closely you will see that for a much of the past eighteen months the ten year rate has been below zero. This ought to end the debate about the inflationary dangers of the Fed’s actions, but that would require some thought and an admission of error on that part of the more hawkish amongst us. That won’t happen however.

Since long term rates are the ones that have the greatest impact on the public, the market’s jitters could dampen activity later this year if the spike up at the end of those lines on the chart don’t start to level off. Actually now I think it through a bit more: perhaps the Fed is playing a game here. A little spike in rates – one that is muted later on – could be just enough to put a brake on home price inflation and nip the emergence of a new bubble in the bud. Let’s hope the game works without causing too much collateral damage. Congress doesn’t need any help in causing damage.

But that’s another story …

 

«< 72 73 74 75 76 >»