Softpanorama

May the source be with you, but remember the KISS principle ;-)
Contents Bulletin Scripting in shell and Perl Network troubleshooting History Humor

Numbers racket,"Potemkin numbers" and fake metrics

"Proofiness" as symmetric form of the term "truthiness"

News Bookshelf Recommended books Recommended Links NAIRU Destructive cult of  GDP Propaganda of Shareholder Value
Mathiness -- Mathematical Masturbations in Economics Lies, Damn Lies and Statistics Fake Employment Statistics Slightly skeptical view on core CPI Corruption of FED Productivity Myth and "Rising labor costs" hypocrisy  
Externality - Wikipedia, Wall Street Propaganda Machine Audatioues Oligarchy and Loss of Trust Famous quotes of John Kenneth Galbraith Grey Cardinal of Washington Financial Humor Etc

As noted in Bailout Nation, reliance on garbage data was one of the contributing factors in one of the world’s greatest economic catastrophes of all time. "Garbage in -- garbage out" rule holds in economics as well as in natural sciences.

One of the largest enablers of recent financial crisis were compromised data that distorts the true facts. In old days the word "data" usually has a meaning "raw data".  If it was already massaged for some reason  it was considered output of some model.  The more it was  massaged, the more exceptions were introduced to the model, the further they got away from what the raw data was initially conveying.

With the advent of computers this situation dramatically changed. As a result, a supposedly informed investor is not really informed at all, if the "data" he is basing his decisions on has been changed in ways the investor is unaware of. As a result, the "data" becomes useless; however, damage is done because people continued  making decisions based on the "data" available, making faulty decisions on defective data. This is a scary situation considering where we are financially and economically, not only in the USA, but also around the world.

In Proofiness- The Dark Arts of Mathematical Deception  Charles Seife introduces term "proofiness" as symmetric form of the term "truthiness" — the Word of the Year in 2005, according to the American Dialect Society, which defined it as "the quality of preferring concepts or facts one wishes to be true, rather than concepts or facts known to be true." The term was popularized by Stephen Colbert in the first episode of "The Colbert Report."

Proofiness id "the art of using bogus mathematical arguments to prove something that you know in your heart is true — even when it’s not."

Falsifying numbers is the crudest form of proofiness. Seife lays out a rogues’ gallery of more subtle deceptions.

"Potemkin numbers" are phony statistics based on erroneous or nonexistent calculations.

Justice Antonin Scalia’s assertion that only 0.027 percent of convicted felons are wrongly imprisoned was a Potemkin number derived from a prosecutor’s back-of-the-envelope estimate; more careful studies suggest the rate might be between 3 and 5 percent.

"Potemkin numbers" are phony statistics based on erroneous or nonexistent calculations.

One of the largest enablers to the economic crisis we find ourselves in today is compromised data that distorts the true facts. For example Greenspan's adherence to 'core CPI' took the asset inflation out of the picture. the latter was one of the major contribution of Fed to the dot-com crush and later housing bubble.

I have always viewed the word "data" as meaning raw data. It is whatever it is period. In my mind, it is no longer considered "data" if someone has already massaged it for some reason or another.

The "data" should always remain as raw data; because the more it is massaged to take in more and more exceptions to the model, it gets further and further away from what the raw data was initially conveying.

As pointed out in this post, a supposedly informed investor is not really informed at all, if the "data" he is basing his decisions on has been changed in ways the investor is unaware of. As a result, the "data" becomes useless; however, damage is done because everyone making decisions based on that "data" is making faulty decisions on defective data. This is a scary thought considering where we are financially and economically, not only in this Country but around the world.

Most large enterprise statistics also can't be trusted and margin of error is at least 20% (if not more ;-). And large corporations do fudge numbers as a matter of policy (bonus preservation strategy ;-), no question about it. The situation essentially became much like in the USSR. All tricks from Gerstner book of games with pension fund, 401K contributions and health insurance premiums (and more) are used.  For example quality of earlining is typically very low. Based on my very limited experience large companies are still cutting everything to the bones to preserve profitability. Short-termism prevails. As a result customer service often became third world class. Or you can navigate the maze of automatic voice menus' until you drop without reaching human operator.

See also:

mathiness

‘mathiness’ is economists' misuse of mathematics to justify their pet theories. Any paper that cites game theory or the Euler consumption equation to promote public policy should be regarded as fraudulent until shown to be otherwise. Mathematics serves the same function for academic economists as Latin theology did for medieval clerics: both provide an aura of erudite wisdom where there is no wisdom at all to be found.

kbaa, The Irate Plutokrat

It is good to see Krugman write in opposition to ‘mathiness’, economists' misuse of mathematics to justify their pet theories. And his suggestion that ‘behavioral economics doesn’t provide anything like as much guidance as it should’ is probably as close to an admission as we are ever likely to get from an academic economist that it’s human psychology that drives the economy after all, and that all of the various high minded macroeconomics theories are nothing more than propaganda to be used by lobbyists who present them as scholarship.

Economics is a subject that is driven by data, i.e. numbers. Wherever there are numbers there is always the possibility of misusing mathematics to intimidate. Any paper that cites game theory or the Euler consumption equation to promote public policy should be regarded as fraudulent until shown to be otherwise. Mathematics serves the same function for academic economists as Latin theology did for medieval clerics: both provide an aura of erudite wisdom where there is no wisdom at all to be found.

NB For those who have never studied Calculus, “Euler” is pronounced “oiler”, but there’s no connection with the price of oil or any other commodity, and don’t let any academic economist try to tell you otherwise.


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Old News ;-)

[Sep 17, 2017] GDP was never meant to be a measure of how well-off society is. Only under neoliberalism it has become such a fake indicator with huge propaganda value

Notable quotes:
"... "Here is my two cents: these three researchers may have just put the nail in the coffin of using production-side measures of the free economy-and that is not really all that bad. GDP is a measure of total production. It was ever meant to be a measure of how well-off society has become. ..."
"... While introduction of the concept of GDP and systematic its measurement (with all its warts, especially in calculation of "real GDP") was a great achievement, absolutization of GDP under neoliberalism and, especially, false equivalence between GDP growth and growth of the standard of living of population are dangerous neoliberal myths. ..."
"... We should fight neoliberal cult of GDP. ..."
"... Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what. ..."
Jun 12, 2017 | economistsview.typepad.com

Christopher H. , June 12, 2017 at 03:10 PM

Interesting post at Digitopoly by Shane Greenstein

"Here is my two cents: these three researchers may have just put the nail in the coffin of using production-side measures of the free economy-and that is not really all that bad. GDP is a measure of total production. It was ever meant to be a measure of how well-off society has become.

More to the point, maybe it is time to focus on the demand-side measures of free goods. In other words, you get a lot more for your Internet subscription, but nothing in GDP reflects that. For example, the price index for Internet services should reflect qualitative improvement in user experiences, and needs to improve."

libezkova said in reply to Christopher H.... , June 12, 2017 at 07:44 PM
While introduction of the concept of GDP and systematic its measurement (with all its warts, especially in calculation of "real GDP") was a great achievement, absolutization of GDP under neoliberalism and, especially, false equivalence between GDP growth and growth of the standard of living of population are dangerous neoliberal myths.

We should fight neoliberal cult of GDP.

Simon Kuznets, the economist who developed the first comprehensive set of measures of national income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses of National Income Measurements":

The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. [...]

All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.

In 1962, Kuznets stated:

Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.

[Sep 11, 2017] The only countervailing force, unions, were deliberately destroyed. Neoliberalism needs to atomize work force to function properly and destroys any solidarity among workers. Unions are anathema for neoliberalism, because they prevent isolation and suppression of workers.

Highly recommended!
Apr 15, 2017 | economistsview.typepad.com
Denis Drew , April 15, 2017 at 06:58 AM
What's missing in each and every case above -- at least in the USA! -- is countervailing power. 6% labor union density in private business is equivalent to 20/10 blood pressure in the human body: it starves every other healthy process.

It is not just labor market bargaining power that has gone missing, it is not only the lost political muscle for the average person (equal campaign financing, almost all the votes), it is also the lack of machinery to deal with day-to-day outrages on a day-to-day basis (that's called lobbying).

Late dean of the Washington press corps David Broder told a young reporter that when he came to DC fifty years ago (then), all the lobbyists were union. Big pharma's biggest rip-offs, for profit school scams, all the stuff you hear about for one day on the news but no action is ever taken -- that's because there is no (LABOR UNION) mechanism to stay on top of all (or any) of it (LOBBYISTS).

cm -> Denis Drew ... , April 15, 2017 at 12:16 PM
It is a chicken and egg problem. Before large scale automation and globalization, unions "negotiated" themselves their power, which was based on employers having much fewer other choices. Any union power that was ever legislated was legislated as a *result* of union leverage, not to enable the latter (and most of what was legislated amounts to limiting employer interference with unions).

It is a basic feature of human individual and group relations that when you are needed you will be treated well, and when you are not needed you will be treated badly (or at best you will be ignored if that's less effort overall). And by needed I mean needed as a specific individual or narrowly described group.

What automation and globalization have done is created a glut of labor - specifically an oversupply of most skill sets relative to all the work that has to be done according to socially mediated decision processes (a different set of work than what "everybody" would like to happen as long as they don't have to pay for it, taking away from other necessary or desired expenditure of money, effort, or other resources).

Maybe when the boomers age out and become physically too old to work, the balance will tip again.

Peter K. -> cm... , April 15, 2017 at 12:18 PM
"What automation and globalization have done is created a glut of labor - "

No it's been policy and politics. Automation and globalization are red herrings. They've been used to enrich the rich and stick it to everyone else.

They don't have to be used that way.

There is nothing natural or inherent about it. It's all politics and class war and the wrong side is winning.

cm -> Peter K.... , April 15, 2017 at 01:32 PM
OK - they have *enabled* it. The agency is always on the human side. But at the same time, you cannot wish or postulate away human greed.
cm -> Peter K.... , April 15, 2017 at 01:44 PM
Same thing with the internet - it has been hailed as a democratizing force, but instead it has mostly (though not wholly) amplified the existing power differentials and motivation structures.

Anecdotally, a lot of companies and institutions are either restricting internal internet access or disconnecting parts of their organizations from the internet altogether, and disabling I/O channels like USB sticks, encrypting disks, locking out "untrusted" boot methods, etc. The official narrative is security and preventing leaks of confidential information, but the latter is clearly also aimed in part at whistleblowers disclosing illegal or unethical practices. Of course that a number of employees illegitimately "steal" data for personal and not to uncover injustices doesn't really help.

Denis Drew -> cm... , April 15, 2017 at 03:19 PM
Surely there is a huge difference between the labor market here and the labor market in continental Europe -- though labor there faces the same squeezing forces it faces here. Think of German auto assembly line workers making $60 an hour counting benefits.

Think Teamster Union UPS drivers -- and pity the poor, lately hired (if they are even hired) Amazon drivers -- maybe renting vans.

The Teamsters have the only example here of what is standard in continental Europe: centralized bargaining (aka sector wide labor agreements): the Master National Freight Agreement: wherein everybody doing the same job in the same locale (entire nation for long distance truckers) works under one common contract (in French Canada too).

Imagine centralized bargaining for airlines. A few years ago Northwest squeezed a billion dollars in give backs out of its pilots -- next year gave a billion dollars in bonuses to a thousand execs. Couldn't happen under centralized bargaining -- wouldn't even give the company any competitive advantage.

libezkova -> Denis Drew ... , April 15, 2017 at 04:14 PM
"What's missing in each and every case above -- at least in the USA! -- is countervailing power."

It was deliberately destroyed. Neoliberalism needs to "atomize" work force to function properly and destroys any solidarity among workers. Unions are anathema for neoliberalism, because they prevent isolation and suppression of workers.

Amazon and Uber are good examples. Both should be prosecuted under RICO act. Wall-Mart in nor far from them.

Rising fatalities from heart disease and stroke, diabetes, drug overdoses, accidents and other conditions caused the lower life expectancy revealed in a report by the National Center for Health Statistics .

http://www.cdc.gov/nchs/products/databriefs/db267.htm

http://economistsview.typepad.com/economistsview/2017/03/paul-krugman-the-scammers-the-scammed-and-americas-fate.html#comment-6a00d83451b33869e201b7c8e3c7c6970b

== quote ==
Anne Case and Angus Deaton garnered national headlines in 2015 when they reported that the death rate of midlife non-Hispanic white Americans had risen steadily since 1999 in contrast with the death rates of blacks, Hispanics and Europeans. Their new study extends the data by two years and shows that whatever is driving the mortality spike is not easing up.
... ... ..

Offering what they call a tentative but "plausible" explanation, they write that less-educated white Americans who struggle in the job market in early adulthood are likely to experience a "cumulative disadvantage" over time, with health and personal problems that often lead to drug overdoses, alcohol-related liver disease and suicide.

== end of quote ==

Greed is toxic. As anger tends to accumulate, and then explode, at some point neoliberals might be up to a huge surprise. Trump was the first swan.

Everybody bet on Hillary victory. And then...

[Jul 12, 2017] Ever more official lies from the US government by Paul Craig Roberts

Notable quotes:
"... John Williams counts the long term discouraged workers (discouraged for more than one year) who formerly (before "reforms") were counted officially. When the long term discouraged are counted, the US unemployment rate is in the 22-23 percent range. This is born out by the clear fact that the labor force participation rate has been falling throughout the alleded "recovery." Normally, labor force participation rates rise during economic recoveries. ..."
"... It is an extraordinary thing that although the US government itself reports that if even a small part of discouraged workers are countered as unemployed the unemployment rate is 8.6%, the presstitute financial media, a collection of professional liars, still reports, in the face of the government's admission, that the unemployment rate as 4.4%. ..."
Jul 12, 2017 | www.unz.com

The "recovery" is more than a mystery. It is a miracle. It exists only on fake news paper.

According to CNN, an unreliable source for sure, Jennifer Tescher, president and CEO of the Center for Financial Services Innovation, reports that about half of Americans report that their living expenses are equal to or exceed their incomes. Among those aged 18 to 25 burdened by student loans, 54% say their debts are equal to or exceed their incomes. This means that half of the US population has ZERO discretionary income. So what is driving the recovery?

Nothing. For half or more of the US population there is no discretionary income there with which to drive the economy.

The older part of the population has no discretionary income either. For a decade there has been essentially zero interest on the savings of the elderly, and if you believe John Williams of shadowstats.com, which I do, the real interest rates have been zero and even negative as inflation is measured in a way designed to prevent Social Security cost of living adjustments.

In other words, the American economy has been living on the shrinkage of the savings and living standards of its population.

Last Friday's employment report is just another lie from the government. The report says that the unemployment rate is 4.4% and that June employment increased by 222,000 jobs. A rosy picture. But as I have just demonstrated, there are no fundamentals to support it. It is just another US government lie like Saddam Hussein's weapons of mass destruction, Assad's use of chemical weapons against his own people, Russian invasion of Ukraine, and so forth and so on.

The rosy unemployment picture is totally contrived. The unemployment rate is 4.4% because discouraged workers who have not searched for a job in the past four weeks are not counted as unemployed.

The BLS has a second measure of unemployment, known as U6, which is seldom reported by the presstitute financial media. According to this official measure the US unemployment rate is about double the reported rate.

Why? the U6 rate counts discouraged workers who have been discouraged for less than one year.

John Williams counts the long term discouraged workers (discouraged for more than one year) who formerly (before "reforms") were counted officially. When the long term discouraged are counted, the US unemployment rate is in the 22-23 percent range. This is born out by the clear fact that the labor force participation rate has been falling throughout the alleded "recovery." Normally, labor force participation rates rise during economic recoveries.

It is very easy for the government to report a low jobless rate when the government studiously avoids counting the unemployed.

It is an extraordinary thing that although the US government itself reports that if even a small part of discouraged workers are countered as unemployed the unemployment rate is 8.6%, the presstitute financial media, a collection of professional liars, still reports, in the face of the government's admission, that the unemployment rate as 4.4%.

Now, let's do what I have done month after month year after year. Let's look at the jobs that the BLS alleges are being created. Remember, most of these alleged jobs are the product of the birth/death model that adds by assumption alone about 100,000 jobs per month. In other words, these jobs come out of a model, not from reality.

Where are these reported jobs? They are where they always are in lowly paid domestic services. Health care and social assistance, about half of which is "ambulatory health care services," provided 59,000 jobs. Leisure and hospitality provided 36,000 jobs of which 29,300 consist of waitresses and bartenders. Local government rose by 35,000. Manufacturing, once the backbone of the US economy, provided a measly 1,000 jobs.

As I have emphasized for a decade or two, the US is devolving into a third world workforce where the only employment available is in lowly paid domestic service jobs that cannot be offshored and that do not pay enough to provide an independent existance. This is why 50% of 25-year olds live at home with their parents and why there are more Americans aged 24-34 living with parents than living indepenently.

This is not the economic profile of a "superpower" that the idiot neoconservatives claim the US to be. The American economy that offshoring corporations and financialization have created is incapable of supporting the enormous US debt burden. It is only a matter of time and circumstance.

I doubt that the United States can continue in the ranks of a first world economy. Americans have sat there sucking their thumbs while their "leaders" destroyed them.

(Republished from PaulCraigRoberts.org by permission of author or representative)

[Jul 05, 2017] NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false

Notable quotes:
"... NAIRU is a specific claim and estimate about the way the economy works. As you discovered yourself, the Fed literally produces a NAIRU estimate and uses that estimate to determine policy. NAIRU cannot be estimated accurately, and furthermore there is zero evidence of accelerating inflation. So there is literally nothing redeeming about the theory except to say that there is some relationship between supply labor, and inflation. Which is to say, that your support of the thing is wrong, and all of our criticisms that NAIRU is trash are correct. ..."
"... The answer is that there is no unemployment rate that generates accelerating inflation. As inflation is not simply a relationship between unemployment and prices. Inflation is a result of many different types of inputs. ..."
"... There are literally zero examples of low unemployment rates, even below 1% during WWII, that have resulted in accelerating inflation. You and the NAIRU crowd have no legs to stand on. ..."
"... You make the same mistake as all illiterate persons, that is, you cannot read. What I have clearly stated is: "NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false."* The measurement problem is a side issue.** ..."
"... "better to say that there is no necessary or constant relationship between employment and inflation that can be expressed either as a function or a rule," ..."
"... Good line here Tom... they don't have a function... ..."
"... I've closely followed this NAIRU argument here and on other threads. I don't have a dog in this fight, but it seems perfectly obvious from all this that Auburn and Brian have this exactly right. And for the life of me I cannot fathom how anyone can misunderstand their argument: there may be a link between employment and inflation, but the NAIRU doesn't capture it. There may be a link between dogs barking at a full moon, but my theory of a moon made out of green cheese doesn't capture it. ..."
"... Standard labor market theory as it is incorporated in the NAIRU-Phillips curve is not vaguely true, or evolutionary true as David Glasner maintains, but provable false. ..."
Jul 05, 2017 | mikenormaneconomics.blogspot.com

Ralph Musgrave said... February 28, 2017 at 4:06 PM

Brian,

For the second time, you claimed "Nobody says there is no relationship between supply, employment, and inflation." My answer is the same as before: what does Brian Romanchuk mean by saying NAIRU should be "bashed, smashed and trashed". Seems a pretty outright condemnation of the whole idea to me.

Tom,

You say "Probably better to say that there is no necessary or constant relationship…". Quite agree. But whoever said there WAS a constant relationship? Certainly not the Fed. Anyone with a bit brain ought to realise that NAIRU will vary with a whole host of variables: standards of education, recent unemployment levels (hystersis) and so on.

EK-H,

You make the naïve mistake many people make of thinking the because something cannot be measured accurately that therefor it does not have a precise value. The amount of iron in the Moon has a very very precise value indeed. Ask God how much iron there is on and in the Moon and he'd tell you the figure to the nearest 0.00000001%. In contrast, astronomers might not know the quantity to better than plus or minus 10% for all I know. It is therefor perfectly permissible to write equations or get involved in discussions which assume a very very precise value for the amount of iron in the Moon. Same goes for NAIRU.

Much of the stuff I've written makes the latter assumption: it is helpful to make that assumption sometimes.

Auburn Parks said.. February 28, 2017 at 4:39 PM .

No Egmont, its not about scientific idiocy. Its about the nature of the subject. Economics is not different than social psychology in this regard.

Ralph-

NAIRU is a specific claim and estimate about the way the economy works. As you discovered yourself, the Fed literally produces a NAIRU estimate and uses that estimate to determine policy. NAIRU cannot be estimated accurately, and furthermore there is zero evidence of accelerating inflation. So there is literally nothing redeeming about the theory except to say that there is some relationship between supply labor, and inflation. Which is to say, that your support of the thing is wrong, and all of our criticisms that NAIRU is trash are correct.

What is the unemployment rate that would correspond to accelearating inflation right now Ralph?

Auburn Parks said.. February 28, 2017 at 4:42 PM .
The answer is that there is no unemployment rate that generates accelerating inflation. As inflation is not simply a relationship between unemployment and prices. Inflation is a result of many different types of inputs.

There are literally zero examples of low unemployment rates, even below 1% during WWII, that have resulted in accelerating inflation. You and the NAIRU crowd have no legs to stand on.

AXEC / E.K-H said.. February 28, 2017 at 4:43 PM .
Ralph Musgrave

You say: "You make the naïve mistake many people make of thinking the because something cannot be measured accurately that therefore it does not have a precise value."

You make the same mistake as all illiterate persons, that is, you cannot read. What I have clearly stated is: "NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false."* The measurement problem is a side issue.**

Egmont Kakarot-Handtke

* See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
** See 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html

AXEC / E.K-H said.. February 28, 2017 at 5:11 PM .
Auburn Parks

The moronic part of economists, i.e. the vast majority, maintains that economics is a social science. Time to wake up to the fact that economics is a system science.#1

Economics is NOT a science of individual/social/political behavior - this is the social science delusion - but of the behavior of the monetary economy . All Human-Nature issues are the subject matter of other disciplines (psychology, sociology, anthropology, biology/ Darwinism, political science, social philosophy, history, etcetera) and are taken in from these by way of multi-disciplinary cooperation.#2

The economic system is subject to precise and measurable systemic laws.#3

Egmont Kakarot-Handtke

#1 See 'Lawson's fundamental methodological error and the failure of Heterodoxy'
http://axecorg.blogspot.de/2016/03/lawsons-fundamental-methodological.html
#2 See 'Economics and the social science delusion'
http://axecorg.blogspot.de/2016/03/economics-and-social-science-delusion.html
#3 See 'The three fundamental economic laws'
http://axecorg.blogspot.de/2016/03/the-three-fundamental-economic-laws.html

Tom Hickey said.. February 28, 2017 at 6:19 PM .
But whoever said there WAS a constant relationship? Certainly not the Fed.

Not now. They had to learn this by first the NAIRU model that assumed a natural rate and cet. par., and then the difficulty of writing a rule that could be applied across time.

Too many confounding factors involved that are not directly related to employment or the interest rate.

And there are still people calling for a rule.

Noah Way said.. February 28, 2017 at 7:30 PM .
"Economic science" is an oxymoron.
AXEC / E.K-H said.. March 1, 2017 at 5:39 AM .
Noah Way

You say: "'Economic science' is an oxymoron."

It is, first of all, of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics the scientific standards of material and formal consistency are observed.

Political economics has produced NOTHING of scientific value in the last 200+ years. The four majors approaches - Walrasianism, Keynesianism, Marxianism, Austrianism - are mutually contradictory, axiomatically false, and materially/formally inconsistent.

A closer look at the history of economic thought shows that theoretical economics (= science) had been hijacked from the very beginning by the agenda pushers of political economics. These folks never rose above the level of vacuous econ-waffle. The whole discussion from Samuelson/Solow's unemployment-inflation trade-off to Friedman/Phelps's natural rate to the rational expectation NAIRU is a case in point.

The NAIRU-Phillips curve has zero scientific content. It is a plaything of retarded political economists. Samuelson, Solow, Friedman, Phelps, and the rest of participants in the NAIRU discussion up to Wren-Lewis are fake scientists.*

Egmont Kakarot-Handtke

* See also 'Modern macro moronism'
http://axecorg.blogspot.de/2017/02/modern-macro-moronism.html

Matthew Franko said.. March 1, 2017 at 8:13 AM .
"better to say that there is no necessary or constant relationship between employment and inflation that can be expressed either as a function or a rule,"

Good line here Tom... they don't have a function...

But I would point out that with the employment issue, we have had an unregulated system interface (open borders) for decades which is ofc going to result in chaos..

Ralph Musgrave said.. March 1, 2017 at 10:20 AM .
EK-H,

I see: so you're saying the "underlying employment theory" of NAIRU "is false": i.e. you're saying there is no relationship between inflation and unemployment.

Why then don't you advocate a massive increase in demand. Think of the economic benefits and social problems solved.!!

Reason you don't advocate that is that, like all the other NAIRU deniers, you know perfectly well that THERE IS a relationship between inflation and unemployment.!!

AXEC / E.K-H said.. March 1, 2017 at 1:43 PM .
Ralph Musgrave

It would be fine if you could first learn to read and to think and to do your economics homework.

The point at issue is the labor market theory and the remarkable fact of the matter is that economists have after 200+ years NO valid labor market theory. The proof is in the NAIRU-Phillips curve. So what these failures are in effect doing is giving policy advice without sound theoretical foundation. Scientists don't do this.

What is known since the founding fathers about the separation of politics and science is this: "A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision." (J. S. Mill)

The first point is that economists violate the separation of politics and science on a daily basis.#1 The second point is that their unwarranted advice is utter rubbish because they have NO idea how the economy works. The problem society has with economists is that it would be much better off without these clowns.

You ask me: "Why then don't you advocate a massive increase in demand. Think of the economic benefits and social problems solved.!!"

Answer: The business of the economist is the true theory about how the economic system works and NOT the solution of social problems. This is the proper business of politicians. In addition, an economist who understands how the price and profit mechanism works does not make such a silly proposal, only brain-dead political agenda pushers do.#2

What I am indeed advocating is that retarded econ-wafflers are thrown out of economics and that economics gets finally out of what Feynman aptly called cargo cult science.#3

Economists claim since more that 200 years that they are doing science and this is celebrated each year with the 'Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel'. Time to make this claim come true.

The only thing economist like you can actively do to contribute to the progress of economics is switching on TV and watching 24/365.

Egmont Kakarot-Handtke

#1 See 'Scientific suicide in the revolving door'
http://axecorg.blogspot.de/2016/11/scientific-suicide-in-revolving-door.html
#2 See 'Rethinking deficit spending'
http://axecorg.blogspot.de/2016/12/rethinking-deficit-spending.html
#3 See 'Economists and the destructive power of stupidity'
http://axecorg.blogspot.de/2017/02/economists-and-destructive-power-of.html

Ralph Musgrave said.. March 1, 2017 at 2:14 PM .
EKH,

"The business of the economist is the true theory about how the economic system works and NOT the solution of social problems. This is the proper business of politicians."

"The business of the economist" is not just "true theory": it is also to give the best economic advice they can even where the theory is clearly defective. In the case of the relationship between inflation and unemployment, the EXACT nature of that relationship is not known with much accuracy, but governments just have to take a judgement on what level of unemployment results in too much inflation. Ergo economics have a duty to give the best advice they can in the circumstances.

Re social problems, your above quote also doesn't alter the fact that economists are in a position to solve HUGE social problems if they promote an increase in demand where that is possible. So why are you so reluctant to solve those social problems by advocating a huge increase in demand. It's blindingly obvious.

Like all the other NAIRU deniers, you know perfectly well there is a relationship between inflation and unemployment!!

David Swan said.. March 1, 2017 at 3:23 PM .
To say that there is "a" relationship between inflation and unemployment does not even remotely support the claims inherent in the NAIRU, nor does it justify its use to guide the macroeconomic framework. NAIRU does not claim that there is "a" relationship between inflation and unemployment (that lesser claim is covered adequately by the Phillips Curve). NAIRU claims that low levels of unemployment generate ACCELERATING inflation (i.e. "hyperinflation"), a claim based on pure sophistry and nothing else. If you would like to support the NAIRU's utterly fallacious claim that low unemployment generates ACCELERATING inflation, then please provide data to support that claim.

Furthermore, "a" relationship between unemployment and inflation in no way justifies the central bank intervention of choking off economic growth to prevent "too many jobs". Is the inflation harmful or benign? With the historical perspective available to us from nearly 5 decades of NAIRU, all that is required is to look at the chart of hourly wage growth vs productivity and observe that real wages growth took a sharp right turn at the very time NAIRU was implemented worldwide. There has not been one iota of real wage growth since the 70's (despite low inflation), whereas the real wage grew steadily prior to that (despite moderate inflation). If that is the price of "protecting" us from inflation, then in what way is it beneficial to do so?

Brian Romanchuk said.. March 1, 2017 at 3:38 PM .
I see Ralph Musgrave referred to my article again.

Good Lord, how can I make what I wrote simpler to understand?

The DEFINITION of NAIRU is the level of the unemployment rate at which the price level starts to accelerate. Sure, there's usually another variable in there mucking up the works, but it's going to be a second order effect in the current environment.

AXEC / E.K-H said.. March 1, 2017 at 4:42 PM .
Ralph Musgrave

You say: "Ergo economics have a duty to give the best advice they can in the circumstances."

The only duty of scientifically incompetent economists is to throw themselves under the bus. Economists are a menace to their fellow citizens as Napoleon already knew: "Late in life, moreover, he claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust." (Viner)

Economists do NOT solve social problems they ARE a social problem.

You repeat your silly question: "So why are you so reluctant to solve those social problems by advocating a huge increase in demand. It's blindingly obvious."

Yes it is blindingly obvious that deficit spending does NOT solve social problems but CREATES the social problem of an insanely unequal distribution (see the references above).

This follows from the true labor market theory which is given with the systemic employment equation.#1 "The correct theory of the macroeconomic price mechanism tells us that ― for purely SYSTEMIC reasons ― the average wage rate has in the current situation to rise faster than the average price. THIS opens the way out of mass unemployment, deflation, and stagnation and NOT the blather of scientifically incompetent orthodox and heterodox agenda pushers."#2

Right policy depends on true theory: "In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion." (Stigum)

Economists do not have the true theory. They have NOTHING to offer. The NAIRU-Phillips curve is provable false. Because of this ALL economic policy conclusions drawn from it are counterproductive, that is, they WORSEN the situation. So, Samuelson, Solow, Friedman, Phelps and the other NAIRU-Phillips curve proponents bear the responsibility for mass unemployment and the social devastation that comes with it.

From the fact that the NAIRU labor market theory is false follows that economists are incompetent scientists and that ALL their economic policy proposals are scientifically worthless.

Egmont Kakarot-Handtke

#1 See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
#2 See 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html

John said.. March 2, 2017 at 9:53 AM .
I've closely followed this NAIRU argument here and on other threads. I don't have a dog in this fight, but it seems perfectly obvious from all this that Auburn and Brian have this exactly right. And for the life of me I cannot fathom how anyone can misunderstand their argument: there may be a link between employment and inflation, but the NAIRU doesn't capture it. There may be a link between dogs barking at a full moon, but my theory of a moon made out of green cheese doesn't capture it.
AXEC / E.K-H said.. March 5, 2017 at 5:29 AM .
NAIRU and economists' lethal swampiness.

Comment on David Glasner on 'Richard Lipsey and the Phillips Curve Redux'

David Glasner contributes to the NAIRU discussion#1 by reproducing essential content of his 2013 paper. Back then he propagated Lipsey's concept of multiple equilibria or band of unemployment (NAIBU) which is consistent with a stable rate of inflation. The NAIBU concept is a fine example of the tendency of economists to soften, relativize, qualify, and semantically dilute every concept until it is senseless and useless.

It is the very characteristic of economics that there are no well-defined concepts and this begins with the pivotal economic concepts profit and income. The habit of swampification keeps the discourse safely in the no man's land where "nothing is clear and everything is possible" (Keynes) and where anything goes.

Swampification is what Popper called an immunizing strategy. The beauty of vagueness and ambiguity is that it cannot be falsified: "Another thing I must point out is that you cannot prove a vague theory wrong." (Feynman)#2

David Glasner applies the concept of evolution in order to swampify the NAIRU: "The current behavior of economies … is consistent with evolutionary theory in which the economy is constantly evolving in the face of path-dependent, endogenously generated, technological change, and has a wide range of unemployment and GDP over which the inflation rate is stable."

In other words, presumably there is a relationship between unemployment and inflation but nobody knows what it is. While science is known to strive for uniqueness, economics is known to strive for ambiguity and obfuscation. This swampiness is rationalized as realism. After all, reality is messy, isn't it?

To recall, the Phillips curve started as a simple and remarkably stable EMPIRICAL relationship between wage rate changes and the rate of unemployment. The original Phillips curve was reinterpreted and thereby messed up by Samuelson and Solow who introduced the economic policy trade-off between inflation and unemployment which was finally thrown out again with the NAIRU.

A conceptional error/mistake/blunder slipped in with the bastardization of the original Phillips curve that was never rectified but in effect buried under a huge heap of inconclusive economic shop talk. This means that until this very day economics has no valid theory of the labor market.

See part 2

AXEC / E.K-H said.. March 5, 2017 at 5:34 AM .
Part 2

So, the microfounded NAIRU-Phillips curve has first of all to be rectified.#3 The macrofounded SYSTEM-Phillips curve is shown on Wikimedia
https://commons.wikimedia.org/wiki/File:AXEC62.png

From this correct employment equation follows in the MOST ELEMENTARY case that an increase of the macro-ratio rhoF=W/PR leads to higher total employment L. The ratio rhoF embodies the price mechanism. Let the rate of change of productivity R for simplicity be zero, i.e. r=0, then there are three logical cases, that is, THREE types of inflation.
(i) If the rate of change of the wage rate W is equal to the rate of change of the price P, i.e. w=p, then employment does NOT change NO MATTER how big or small the rates of change are. That is, NO amount of inflation or deflation has any effect on employment. Inflation is neutral, there is no trade-off between unemployment and inflation.
(ii) If the rate of change of the wage rate is greater than the rate of change of the price then employment INCREASES. There is a POSITIVE effect of inflation on employment.
(iii) If the rate of change of the wage rate is smaller than the rate of change of the price then employment DECREASES. There is a NEGATIVE effect of inflation on employment.

So, it is the DIFFERENCE in the rates of change of wage rate and price and not the absolute magnitude of change that is decisive. Every PERFECTLY SYNCHRONOUS inflation/deflation is employment-neutral, that is, employment remains indefinitely where it actually is. The neutral inflation can start at ANY point between full and zero employment. The crucial fact to notice is that there is no such thing as "inflation", there are THREE types of inflation.

The systemic employment equation defines the causal relationship of "inflation" on employment. However, there is the inverse causality of employment on "inflation".

Common sense suggests that positive inflation (ii) is more probable the closer actual employment is at full employment and negative inflation (iii) is more probable the farther away actual employment is from full employment. In other words: the market economy is inherently unstable. The feed-back loop between employment and "inflation" is the very antithesis to the idea of equilibrium. To recall, the NAIRU is DEFINED as an equilibrium. Standard economics has built equilibrium right into the premises, i.e. into the axiomatic foundations. All of economics starts with the idea that the market economy is an equilibrium system. It turns out that this premise is false, just the opposite is the case.

Standard labor market theory as it is incorporated in the NAIRU-Phillips curve is not vaguely true, or evolutionary true as David Glasner maintains, but provable false.

Egmont Kakarot-Handtke

#1 See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
and 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html
#2 "By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, 'When you are dealing with psychological matters things can't be defined so precisely'. Yes, but then you cannot claim to know anything about it."
#3 See 'Keynes' Employment Function and the Gratuitous Phillips Curve Disaster'
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421

[Jun 12, 2017] Monopoly power can increase nairu, while suppressing unions can decrease nairu

Jun 12, 2017 | economistsview.typepad.com

djb , June 10, 2017 at 01:42 AM

Fed Needs a Better Inflation Target - Narayana Kocherlakota

yes for a given amount of monopoly power, which the fed does not really control,

the most the fed can do is work on the real interest rates

but if we have less monopoly power that would reduce the part of nairu that is also known as involuntary unemployment, and help real wages, without having so much inflation

in other words closer we get to full a perfectly componetitive market, the less change of accelerating inflation because in a perfectly competitive market , firms are price takers not price makers

in a perfectly competitive market, the unions couldn't drive inflation, without monopoly power there is no accelerating inflation period

the fed cant control that only the legislature and judiciary can control the ext of monopoly power

the point is the can only target inflation and real interest rates

but there are other factors that can get us to full employment, ie eliminate involuntary employment, that affect inflation wages and employment in different ways and different directions

and those factors other than inflation and interest rates that affect involuntary unemployment seem to be ignored when we are having these discussion

pgl - , June 10, 2017 at 01:49 AM
Good point. Thanks for remembering this is an economist blog.
djb - , June 10, 2017 at 07:34 AM
NAIRU is painted as some dyed in the wool equilibrium point that the universe will always tend

you know the "natural level" of unemployment

you know where 'NATURE" wants to go

fact is it is no such thing

monopoly power can increase nairu

suppressing unions can decrease nairu,

both hurt workers

djb - , June 10, 2017 at 07:37 AM
a stronger safety can increase nairu and help wages

[Jun 12, 2017] Digitopoly The Value of Free in GDP

Jun 12, 2017 | www.digitopoly.org
Did the rise of free information technology improve GDP? It is commonly assumed that it did.

After all, the Internet has changed the way we work, play, and shop. Smartphones and free apps are ubiquitous. Many forms of advertising moved online quite a while ago and support gazillions of "free" services. Free apps changed leisure long ago-just ask any teenager or any parent of a teenager. Shouldn't that add up to a lot?

Think again. The creation of the modern system of GDP economic accounting was among the greatest economic inventions of the 20th century. Initially created in the US and Britain, this system has been improved for decades, and, for all intents and purposes, it is the system in every modern government around the world today.

Although this system contains some flexibility, it also has its rigidities, especially when it comes to free services. I expect the answer to sit awkwardly with most readers. Nonetheless, a little disciplined thinking yields a few insights about the modern experience, and that is worth the effort.

... ... ...

This was an obvious problem when commercial television first spread using advertising as its primary revenue source. The consumption is free, and the only revenue comes from advertising. When the TV experience improved- say, as it moved from black and white to color - GDP recorded only the revenue for television sets and advertising, not the user experience.

There was hope that industry specialists would find some underlying proportional relationship between consumption of services and advertising revenue-for example, between the time watching TV and the value of watching commercials. Such proportionality would have been very handy for economic accounting, because it would yield an easy proxy for improvement in the quality of services. Accountants would merely have to examine improvement in advertising revenue.

Alas, no such relationship could be found. Just look at the history of television to understand why. Television has gotten much better over the last few decades, but-for many reasons-total advertising has not grown. The economics is just not that simple.

A similar problem has arisen today. Search engines attract users, and that generates tens of billions of dollars of revenue from advertisers, and that revenue contributes to GDP. However, the services delivered by search contribute no revenue and, by definition, contribute nothing to GDP. With so many free services today, this weakness in GDP accounting seems awkward. It does not matter how amazing the services are, nor how much they have improved over time. Any improvement in the quality of search services is not a contribution in GDP except insofar as it generates more advertising dollars.

Recently, three professional economists- Leonard Nakamura, Jon Samuels, and Rachel Soloveichik-tried to wade into this topic again, and tried something experimental and novel. They wondered how GDP would change if these free services were reconceived as a barter.

Kien says: Jun 10, 2017 at 11:43 pm

Hi, thanks for your wonderful blog.

A good way to try and quantify the value of free goods/services is to estimate (as best as one can) how those goods/services make us healthier and/or live longer active lives. A solution free environment and public parks are good examples of free services that make us healthier. In principle, the social media (e.g., Facebook) and voluntary work could reduce social alienation, and make people healthier.

On the other hand, some goods/services that contribute to the GDP can have negative effects on health & wellbeing – e.g., gambling.

Just a suggestion!

Kien

[May 31, 2017] Nairu does not make sense

Notable quotes:
"... Of course part of the point of 401(k) and similar plans is to "align" workers with the company and companies in general, aside from paying them in stock rather than cash. I suspect it works more so than it doesn't, overall. ..."
"... Sarcasm or satire, yes. I'm not claiming that the narrative is "correct", but that it exists. Surely you must have heard of "alignment" between shareholders and employees. Usually used to justify large stock grants to executives, but also applicable more broadly. ..."
"... And in the case of vesting, (3) employees are supposedly reluctant to "leave money on the table" by quitting before the stock is vested. This must work in aggregate or companies wouldn't do this. ..."
"... Honestly cm, I have not heard about the alignment between shareholders and employees. That doesn't mean it doesn't exist, I realize that. ..."
"... I don't have any stats to cite but I would say that is ridiculous. I would say that almost all people who are characterized as working class make their income through their labor. Not from some stock ownership. ..."
"... It is supposedly common for startups to pay below-market (compared to established companies) to their employees, with the promise of appreciation of stock grants after an IPO/acquisition. Usually that's a bad deal for most employees, as the IPO may not happen, or when it happens, their stock has been heavily diluted. ..."
"... In established companies, stock-based compensation can be more substantial for managerial or professional staff, but not life-changing - e.g. you may get a 5-20% upgrade on your salary depending on how important you are considered, which is nice, but it will not change the fact that you still have to show up for work every day. ..."
Feb 17, 2017 | economistsview.typepad.com

Jerry Brown -> Poison Pen... February 17, 2017 at 02:18 PM

What country (or planet) are you referring to when you say Workers are primarily stock holders? It ain't this country.

cm -> Jerry Brown... February 17, 2017 at 10:44 PM

It is a commentary on a narrative. Of course part of the point of 401(k) and similar plans is to "align" workers with the company and companies in general, aside from paying them in stock rather than cash. I suspect it works more so than it doesn't, overall.

Jerry Brown -> cm... February 17, 2017 at 10:52 PM

Say What?? Are you saying that Poison Pen was being sarcastic? I hope he was. Or are you saying that narrative is correct?

cm -> Jerry Brown... February 18, 2017 at 12:03 AM

Sarcasm or satire, yes. I'm not claiming that the narrative is "correct", but that it exists. Surely you must have heard of "alignment" between shareholders and employees. Usually used to justify large stock grants to executives, but also applicable more broadly.

Companies have several programs: ESPP (employees can buy a limited amount of company stock at a 15% discount), 401(k) retirement accounts that may contain company stock or other investment funds, stock and stock option grants (employees are not buying the stock but get it as part of a regular or retention bonus program, usually with vesting - commonly your grant will vest over 4 years).

The idea behind all programs involving company stock is (1) disbursing stock is usually cheaper to the company than cash, for the same nominal amount - for large programs where administration overhead is amortized, (2) employees are supposedly "incentivized" to act to increase the stock price.

The latter is believable at higher management levels, for lower level employees it is supposed to increase their motivation to put business priorities before their own, how much it works is anybody's guess.

cm -> cm... February 18, 2017 at 12:07 AM

And in the case of vesting, (3) employees are supposedly reluctant to "leave money on the table" by quitting before the stock is vested. This must work in aggregate or companies wouldn't do this.

If somebody absolutely wants to quit because of a bad situation or a sufficiently compelling offer, they will. But it raises the bar. Also I have heard about companies sufficiently interested in hiring somebody with "handcuffs" offering compensation, i.e. effectively buying out your unvested stock (or replacing it with their own extra grant).

Jerry Brown -> cm... February 18, 2017 at 12:50 AM

Honestly cm, I have not heard about the alignment between shareholders and employees. That doesn't mean it doesn't exist, I realize that.

Regardless, I would want to see a bunch of stats that showed that workers were primarily (or "predominately" was the actual word used) stock holders and that they derive a meaningful part of their yearly income through that ownership while they are working.

I don't have any stats to cite but I would say that is ridiculous. I would say that almost all people who are characterized as working class make their income through their labor. Not from some stock ownership.

cm -> Jerry Brown... February 18, 2017 at 02:25 PM

I am not claiming that workers are primarily stockholders. I am claiming that companies have programs to issue, or sell stock at a discount, or match 401(k) contributions up to a limit (in all applicable cases with our without vesting) to their employees. 401(k) and ESPP probably have to be offered to everybody, stock grants are usually selective. (Probably restricted by grade level and job function.)

The primary motivations for companies are that stock is usually cheaper for them than cash, and the retention effect of vesting. Employee alignment with the stock price is also a narrative, but it is not clear to me who believes it.

Are you disputing that companies are interested in pushing narratives of their labor relations that are beyond just "you work here and we pay you", and are in fact doing this?

cm -> Jerry Brown... February 18, 2017 at 02:33 PM

It is supposedly common for startups to pay below-market (compared to established companies) to their employees, with the promise of appreciation of stock grants after an IPO/acquisition. Usually that's a bad deal for most employees, as the IPO may not happen, or when it happens, their stock has been heavily diluted.

In established companies, stock-based compensation can be more substantial for managerial or professional staff, but not life-changing - e.g. you may get a 5-20% upgrade on your salary depending on how important you are considered, which is nice, but it will not change the fact that you still have to show up for work every day.

[May 31, 2017] Defence of NAIRU and Phillips curve is an attempt to defend indefensible

Notable quotes:
"... Almost three and a half years ago, I published a post about Richard Lipsey's paper "The Phillips Curve and the Tyranny of an Assumed Unique Macro Equilibrium. ..."
"... One important early post-WWII debate, which took place particularly in the UK, concerned the demand and inflationary pressures at which it was best to run the economy. The context for this debate was provided by early Keynesian theory with its absence of a unique full-employment equilibrium and its mainly forgotten, but still relevant, microeconomic underpinnings. The original Phillips Curve was highly relevant to this debate. ..."
Mar 03, 2017 | uneasymoney.com

Almost three and a half years ago, I published a post about Richard Lipsey's paper "The Phillips Curve and the Tyranny of an Assumed Unique Macro Equilibrium." The paper originally presented at the 2013 meeting of the History of Econmics Society has just been published in the Journal of the History of Economic Thought , with a slightly revised title " The Phillips Curve and an Assumed Unique Macroeconomic Equilibrium in Historical Context ." The abstract of the revised published version of the paper is different from the earlier abstract included in my 2013 post. Here is the new abstract.

An early post-WWII debate concerned the most desirable demand and inflationary pressures at which to run the economy. Context was provided by Keynesian theory devoid of a full employment equilibrium and containing its mainly forgotten, but still relevant, microeconomic underpinnings. A major input came with the estimates provided by the original Phillips curve. The debate seemed to be rendered obsolete by the curve's expectations-augmented version with its natural rate of unemployment, and associated unique equilibrium GDP, as the only values consistent with stable inflation. The current behavior of economies with the successful inflation targeting is inconsistent with this natural-rate view, but is consistent with evolutionary theory in which economies have a wide range of GDP-compatible stable inflation. Now the early post-WWII debates are seen not to be as misguided as they appeared to be when economists came to accept the assumptions implicit in the expectations-augmented Phillips curve.

Publication of Lipsey's article nicely coincides with Roger Farmer's new book Prosperity for All which I discussed in my previous post . A key point that Roger makes is that the assumption of a unique equilibrium which underlies modern macroeconomics and the vertical long-run Phillips Curve is neither theoretically compelling nor consistent with the empirical evidence. Lipsey's article powerfully reinforces those arguments. Access to Lipsey's article is gated on the JHET website, so in addition to the abstract, I will quote the introduction and a couple of paragraphs from the conclusion.

One important early post-WWII debate, which took place particularly in the UK, concerned the demand and inflationary pressures at which it was best to run the economy. The context for this debate was provided by early Keynesian theory with its absence of a unique full-employment equilibrium and its mainly forgotten, but still relevant, microeconomic underpinnings. The original Phillips Curve was highly relevant to this debate.

All this changed, however, with the introduction of the expectations-augmented version of the curve with its natural rate of unemployment, and associated unique equilibrium GDP, as the only values consistent with a stable inflation rate. This new view of the economy found easy acceptance partly because most economists seem to feel deeply in their guts - and their training predisposes them to do so - that the economy must have a unique equilibrium to which market forces inevitably propel it, even if the approach is sometimes, as some believe, painfully slow.

The current behavior of economies with successful inflation targeting is inconsistent with the existence of a unique non-accelerating-inflation rate of unemployment (NAIRU) but is consistent with evolutionary theory in which the economy is constantly evolving in the face of path-dependent, endogenously generated, technological change, and has a wide range of unemployment and GDP over which the inflation rate is stable. This view explains what otherwise seems mysterious in the recent experience of many economies and makes the early post-WWII debates not seem as silly as they appeared to be when economists came to accept the assumption of a perfectly inelastic, long-run Phillips curve located at the unique equilibrium level of unemployment. One thing that stands in the way of accepting this view, however, the tyranny of the generally accepted assumption of a unique, self-sustaining macroeconomic equilibrium.

This paper covers some of the key events in the theory concerning, and the experience of, the economy's behavior with respect to inflation and unemployment over the post-WWII period. The stage is set by the pressure-of-demand debate in the 1950s and the place that the simple Phillips curve came to play in it. The action begins with the introduction of the expectations-augmented Phillips curve and the acceptance by most Keynesians of its implication of a unique, self-sustaining macro equilibrium. This view seemed not inconsistent with the facts of inflation and unemployment until the mid-1990s, when the successful adoption of inflation targeting made it inconsistent with the facts. An alternative view is proposed, on that is capable of explaining current macro behavior and reinstates the relevance of the early pressure-of-demand debate. (pp. 415-16).

In reviewing the evidence that stable inflation is consistent with a range of unemployment rates, Lipsey generalizes the concept of a unique NAIRU to a non-accelerating-inflation band of unemployment (NAIBU) within which multiple rates of unemployment are consistent with a basically stable expected rate of inflation. In an interesting footnote, Lipsey addresses a possible argument against the relevance of the empirical evidence for policy makers based on the Lucas critique.

Some might raise the Lucas critique here, arguing that one finds the NAIBU in the data because policymakers are credibly concerned only with inflation. As soon as policymakers made use of the NAIBU, the whole unemployment-inflation relation that has been seen since the mid-1990s might change or break. For example, unions, particularly in the European Union, where they are typically more powerful than in North America, might alter their behavior once they became aware that the central bank was actually targeting employment levels directly and appeared to have the power to do so. If so, the Bank would have to establish that its priorities were lexicographically ordered with control of inflation paramount so that any level-of-activity target would be quickly dropped whenever inflation threatened to go outside of the target bands. (pp. 426-27)

I would just mention in this context that in this 2013 post about the Lucas critique, I pointed out that in the paper in which Lucas articulated his critique, he assumed that the only possible source of disequilibrium was a mistake in expected inflation.

If everything else is working well, causing inflation expectations to be incorrect will make things worse. But if there are other sources of disequilibrium, it is not clear that incorrect inflation expectations will make things worse; they could make things better. That is a point that Lipsey and Kelvin Lancaster taught the profession in a classic article "The General Theory of Second Best," 20 years before Lucas published his critique of econometric policy evaluation.

I conclude by quoting Lipsey's penultimate paragraph (the final paragraph being a quote from Lipsey's paper on the Phillips Curve from the Blaug and Lloyd volume Famous Figures and Diagrams in Economics which I quoted in full in my 2013 post.

So we seem to have gone full circle from the early Keynesian view in which there was no unique level of GDP to which the economy was inevitably drawn, through a simple Phillips curve with its implied trade-off, to an expectations-augmented Phillips curve (or any of its more modern equivalents) with its associated unique level of GDP, and finally back to the early Keynesian view in which policymakers had an option as to the average pressure of aggregate demand at which economic activity could be sustained.

However, the modern debated about whether to aim for [the high or low range of stable unemployment rates] is not a debate about inflation versus growth, as it was in the 1950s, but between those who would risk an occasional rise of inflation above the target band as the price of getting unemployment as low as possible and those who would risk letting unemployment fall below that indicated by the lower boundary of the NAIBU as the price of never risking an acceleration of inflation above the target rate. (p. 427)

[May 30, 2017] How Milton Friedmans NAIRU Has Increased Inequality, Damaging Innovation and Growth

Notable quotes:
"... Never underestimate an [neoliberal] economist's ability to ignore reality. ..."
"... In a kleptocracy, looters are not called looters. That might cause the serfs to rebel. So they are called "creators" instead, and their stolen loot becomes the just and righteous reward for their work. Indeed it is the manifestation of natural law without which society and the economy would fall into darkness, etc., etc. ..."
"... NAIRU is not to blame but the looters who espoused it. They are afterall the crafters of the conventional wisdom. There were no mistakes. As looting-enabling propaganda, NAIRU functioned exactly as it was supposed to. ..."
"... NAIRU is the perfect example of purpose-driven science, and Milton Friedman et al and NAIRU rank right up there with the German racial scientists and eugenics and social Darwinism when it comes to justifying pure evil. ..."
"... The idea that there really is no "Gault" in a modern economy is not new. J.K. Galbraith described the inherent interdependence between management and workers in his book The New Industrial State in which he coined the term "technostructure" to describe how modern industry no longer could realistically claim to run by a single person. Instead, the rise of scientific and business specialties made nearly all employees of a business vital. No one, especially the CEO, could really claim to all the profits. ..."
"... Relative wealth is the key to power and concentrated wealth to absolute power, the holy grail. Thus inequality is not an unintended consequence at all; it's the neolibs' actual goal, a feature not a bug. Power is their ultimate narcotic. And their pursuit of it is relentless and violent. ..."
"... I believe this is the elemental nature of our criminal elite that people must understand, first and foremost, before change is remotely possible. Unfortunately it's difficult for sane people to comprehend such madness, and they continue to believe people like Obama have a conscience, that Congress really seeks the greater good, that our warriors really want to avoid war. They can no more relate to people like Jamie Dimon, Lloyd Blankfien, or Benjamin Shalom than they can to a pedophile or a rapist. They have no common reference with the enemies of humanity. ..."
"... Feudalism wasn't concerned with economic growth and performance. Those ideas came with the Enlightenment and the Modern eras, and the end of monarchy. My point was to use "vassal" in the sense of someone who owe allegiance to a master but is not a slave. ..."
"... Mexico, you made the claim that NAIRU was "purpose-driven science". I countered with the point that NAIRU was pseudo-science and that economics is not a science. Neither statement has anything to do with indicting science. ..."
Aug 26, 2013 | www.nakedcapitalism.com
Edward Lambert , August 26, 2013 at 12:57 am

Great article!!! The drum beat continues Productivity is definitely constrained by tight consumer liquidity from weak labor compensation.
Economists are going to learn a big lesson, when they see unemployment get stuck above 6.7%. They will try to explain it by pointing to problems in the economy or government. But the dynamic to limit employment is already established and it is due to low labor share. My calculations say the limit is 7.0% but I am allowing some margin of error.

The next two years should certainly be enlightening for many economists, including Krugman, Delong and Thoma. They do not see the effective demand limit coming.

diptherio , August 26, 2013 at 9:22 am

Never underestimate an [neoliberal] economist's ability to ignore reality.

Impishparrot , August 26, 2013 at 1:08 am

Hello? All talk of policy and regulations have left-out the workers. They make shit and they buy shit. Without them, how would multi-national corporations be able to afford the lawyers, lobbyists, members of Congress – both House and Senate, and it would now appear, members of the US Supreme Court.

Min , August 26, 2013 at 3:21 am

"Higher real wage claims necessarily reduce firms' profitability and hence, if firms want to protect profits (needed for investment and growth), higher wages must lead to higher prices and ultimately run-away inflation. The only way to stop this process is to have an increase in "natural unemployment", which curbs workers' wage claims.

"What is missing from this NAIRU thinking is that wages provide macroeconomic benefits in terms of higher labour productivity growth and more rapid technological progress."

True. But that aside, the original argument is a non-sequitur. Certainly, a fight between labor and capital over how to share the economic pie can lead to inflation, but it does not follow that full employment leads to accelerating inflation instead of converging inflation or fairly constant inflation. The NAIRU argument takes the behavior of capital as given and puts the onus of responsibility on labor. It amounts to special pleading.

BTW, it is not unusual in human systems to have conflicts that threaten to become a runaway feedback cycle. But somehow that rarely happens, for reasons that are not always clear. We still do not understand human systems all that well.

nonclassical , August 26, 2013 at 12:48 pm

..Greenspan's (therefore Rand "goddess") ideological position is based upon equal access and most especially information to markets this "equality" is undone by secrecy, insider trading, HFT, etc, etc.

In other words, it's all ideological-never existed, anywhere, any time, in reality..

Hugh , August 26, 2013 at 4:20 am

In a kleptocracy, looters are not called looters. That might cause the serfs to rebel. So they are called "creators" instead, and their stolen loot becomes the just and righteous reward for their work. Indeed it is the manifestation of natural law without which society and the economy would fall into darkness, etc., etc.

"Greenspan's stance reflected the conventional wisdom , codified in the theory of the non-accelerating-inflation rate of unemployment (NAIRU). It must take the blame for unleashing and at the same time legitimizing a vastly unequal and ultimately unsustainable growth process."

NAIRU is not to blame but the looters who espoused it. They are afterall the crafters of the conventional wisdom. There were no mistakes. As looting-enabling propaganda, NAIRU functioned exactly as it was supposed to.

"firms want to protect profits (needed for investment and growth)"

No. Firms are inanimate. They do not want anything. Nor is it the case that their managements want to protect their profits for the purpose of investment and growth. In a kleptocracy, management wishes not just to keep but increase profits in order to loot them.

The authors of this article, like those they criticize, leave out the social purposes for why we have an economy and why we allow corporations to exist. Both look on the economy as a natural process governed by natural laws (that is what this article is about: which laws best describe the economy), and not the human enterprise it is. The real measure of the economy is whether it is producing the society we want to live in. Classical measures, such as growth and productivity, may be irrelevant or even at odds with this construction.

from Mexico , August 26, 2013 at 7:23 am

Hugh said:

NAIRU is not to blame but the looters who espoused it. They are afterall the crafters of the conventional wisdom. There were no mistakes. As looting-enabling propaganda, NAIRU functioned exactly as it was supposed to.

Exactly!

NAIRU is the perfect example of purpose-driven science, and Milton Friedman et al and NAIRU rank right up there with the German racial scientists and eugenics and social Darwinism when it comes to justifying pure evil.

David Lentini , August 26, 2013 at 10:06 am

I isn't fair to call NAIRU "science", since it, like economics, isn't scientific in any way. Science has enough problems without having to take on charlatans like Friedman.

Friedman's work, as exemplified by NAIRU, is pseudo-science used to justify the demands of the industrtialists and financiers to remove governmental economic regulation. It's an example of what I like to call "Laissez-Faire Lysenkoism ", after the infamous Soviet agronomist who rigged his experiments and data to demonstrate that communism had a biological basis.

I agree very much with the article's analysis and conclusions. But I want to add two things:

1. The idea that there really is no "Gault" in a modern economy is not new. J.K. Galbraith described the inherent interdependence between management and workers in his book The New Industrial State in which he coined the term "technostructure" to describe how modern industry no longer could realistically claim to run by a single person. Instead, the rise of scientific and business specialties made nearly all employees of a business vital. No one, especially the CEO, could really claim to all the profits.

2. I think the question of economic performance is too narrow. The real issue ultimately is power. At some point, wealth will become so concentrated that the rich won't care about economic performance; they'll just make vassals and slaves of the rest of us. At some point money per se will become obsolete, since everything will be owned by a few anyway.

Massinissa , August 26, 2013 at 10:22 am

On number 2, I don't remember Feudalists ever worrying about economic growth, except when it came to how much grain they could extract from their serfs.

It doesn't matter all that much to the ruling classes how much growth there is or not as long as they control all that there is.

If low growth means easier control, then they will prefer that. Though I must say im not sure that low growth does mean easier control.

Doug Terpstra , August 26, 2013 at 4:43 pm

Dave's close, but you got it! Neoliberal economics is not interested in a dynamic economy, in optimum output, or in aggregate wealth-creation, and most certainly not in shared prosperity (egad!). It is only relative wealth that concerns our neoliberal elite.

Relative wealth is the key to power and concentrated wealth to absolute power, the holy grail. Thus inequality is not an unintended consequence at all; it's the neolibs' actual goal, a feature not a bug. Power is their ultimate narcotic. And their pursuit of it is relentless and violent.

I believe this is the elemental nature of our criminal elite that people must understand, first and foremost, before change is remotely possible. Unfortunately it's difficult for sane people to comprehend such madness, and they continue to believe people like Obama have a conscience, that Congress really seeks the greater good, that our warriors really want to avoid war. They can no more relate to people like Jamie Dimon, Lloyd Blankfien, or Benjamin Shalom than they can to a pedophile or a rapist. They have no common reference with the enemies of humanity.

David Lentini , August 26, 2013 at 5:16 pm

Feudalism wasn't concerned with economic growth and performance. Those ideas came with the Enlightenment and the Modern eras, and the end of monarchy. My point was to use "vassal" in the sense of someone who owe allegiance to a master but is not a slave.

As for the other points you made, I was trying make those too: At some point the inequality makes modern economics irrelevant.

from Mexico , August 26, 2013 at 10:37 am

David Lentini says:

I isn't fair to call NAIRU "science", since it, like economics, isn't scientific in any way.

No true Scotsman, hun?

I think the indictment of science is far broader than mere economics.

from Mexico , August 26, 2013 at 10:46 am

And by the way, who gets to decide what is science and what is pseudo-science? How does the layman tell the difference?

David Lentini , August 26, 2013 at 11:28 am

I'll assume that you're not just baiting me. Or are you taking the side of the climate-change deniers? Try starting with the basic definitions:

http://en.wikipedia.org/wiki/Science

You can also take the time to read the classics of Bacon, Descartes, Newton, et al.

A succinct definition of "science" is not that easy. But I argue that scientific statements at the least have to be robust-they have to be capable of reliable confirmation i.e., identical conditions should lead to the same observations, in other words "predictability" (Popper's "falsification" is a useful rule of thumb); a new theory should be able to explain or describe all relevant phenomena described by older theories as well as new phenomena to maintain unified explanation.

As I've argued many times on this 'blog, economics fails both tests. Instead economists offer statements that ape scientific forms, what I call "pseudo-science". They do this out of ignorance and a desire to cow the public (including scientists).

And we're all entitled to review the facts and make our judgment in light of the definitions and uses of the term "science".

I don't see your point in attacking science, which you of course never define. I believe that humanity needs a view of life that is far broader than provided by science alone. But the scientific view is still vital to our lives. The problem is that far too many have become mesmerized by the usefulness of science in addressing certain types of questions, and have been trying to force their own investigations into a scientific mold rather than admitting that the scientific method cannot address all questions equally well.

from Mexico , August 26, 2013 at 3:52 pm

Well for me, the question is still who gets to decide what is science and what is pseudo-science?

The school of hard knocks has taught us that none of the above are trustworthy or reliable. The historian of science Naomi Oreskes gives a great talk about this phenomenon here:

http://www.blogtalkradio.com/virtuallyspeaking/2012/04/12/naomi-oreskes-tom-levenson-virtually-speaking-science-1

This means that one is therefore forced back onto their own lights.

Which brings us back to the question: How does the layperson tell the difference between science and pseudoscience? I don't know many laypersons who have read Bacon, Newton or Descartes.

And what if they've read Hume, Kant or Nietzsche? Then they come away with a very different idea of what science is. For example:

Thus, though metaphysics is an illusion from the point of view of science, science in turn becomes but another state of illusion as far as absolute truth is concerned. In The Birth of Tragedy Nietzche already attacks the scientific optimism of his time under the guise of "Socratism." The "theoretic man" pursues truth in the delusion that reality can be fathomed, and even purged of evil, by rational thought and its applications. But faith in the omnipotence of reason shatters, for the courageously persistent thinker, not only on the fact that science can never complete its work but chiefly on the positive apprehension that reality is irrational. As Nietzsche writes later, "We are illogical and therefore unjust beings from the first, and can know this : that is one of the greatest and most insoluble disharmonies of existence."

–GEORGE A. MORGAN, What Nietzsche Means

David Lentini , August 26, 2013 at 5:24 pm

Mexico, I already answered that question. I really don't care what Naiomi Oreskes thinks; I think for myself. And I don't have much patience for people who won't make the effort to learn enough about science to answer the question for themselves.

There's a world of difference between Oreskes's writings about the abuse of science to further partisan political positions, and the meaning of science itself and deciding what qualifies as science. Just make the effort to learn and stop quoting everyone else.

As for your quote about Nietzsche, all this argument leaves is the usual relativistic confusion. And that just invites abuse. Science and the scientific method can be defined well enough to distinguish reliable claims from charaltanism. If you want absolutes, you might just as well accept what the most powerful tell you to accept.

from Mexico , August 26, 2013 at 8:39 pm

Oh I get it!

You get to decide what science is and what pseudo-science is.

It's like Humpty Dumpty said:

'I don't know what you mean by "glory",' Alice said.

Humpty Dumpty smiled contemptuously. 'Of course you don't - till I tell you. I meant "there's a nice knock-down argument for you!"'

'But "glory" doesn't mean "a nice knock-down argument",' Alice objected.

'When I use a word,' Humpty Dumpty said, in rather a scornful tone, 'it means just what I choose it to mean - neither more nor less.'

'The question is,' said Alice, 'whether you can make words mean so many different things.'

'The question is,' said Humpty Dumpty, 'which is to be master - that's all.'

–LEWIS CARROL, Through the Looking Glass

OldFatGuy , August 27, 2013 at 12:10 pm

Yes, someone does get to decide. Because there ARE universal truths, like it or not.

For example, the world is not flat. Period. All the relativism in the world won't change the fact that the world is NOT flat.

Arguing against fact doesn't make one some sort of relativist intellectual (is that a term??) it makes one WRONG. And the only way humanity can ever transcend chaos is to acknowledge those truths that are universal. We, as a species, are still nowhere near there, and it's like trying to play a baseball game with no foul lines, basees, umpires, or even a ball. Yes, if life were like a baseball game there are entire groups of people today that argue it can be played without a ball. We'll never get beyond this chaos and into a peaceful order until we all get on more or less the same playing field, and the only way to do that is to acknowledge truths (or rules, like foul lines, in baseball).

Science is but one avenue to identify those truths. There are others.

David Lentini , August 26, 2013 at 11:06 am

Mexico, you made the claim that NAIRU was "purpose-driven science". I countered with the point that NAIRU was pseudo-science and that economics is not a science. Neither statement has anything to do with indicting science.

If you argue about flaws in science, whatever that means,n then start a new thread.

Hugh , August 26, 2013 at 2:59 pm

Science is a method, but what that method is applied to and how its results are interpreted are not. Science is also a human activity and so must be viewed through the lens of our humanity, not as objective truth external to us.

allcoppedout , August 26, 2013 at 4:33 am

Lord save us! Humans are biological systems and such systems have all kinds of modularity to protect various sub-systems and the overall system from collapse.

So where is a modular economics?

Growth? What's that? A sensible, scientific notion of it would be a system that raises everyone a lot, curtails rich by-products that capture politics and load the many with economic rents, educates to planet level responsibility, reduces work and squalid energy burning and related wars

We should be seeking stability and incorporating real well-being and a new understanding of growth. Growth as we have it is a Gucci handbag while others live on a squalid jack tuna boat earning almost nothing for your fish, eaten with a fancy T-shirt on proclaiming 'save the dolphins', served with salad picked by migrant workers to keep your figure trim along with the coke you snort.

What growth should be one of the first questions of economics, followed by how we might create a modular financing of what we should be doing. Without such, no subject.

Aussie F , August 26, 2013 at 7:33 am

In reality all the dynamism is in the state sector – from the internet, to superconductors, pharmaceuticals, biotechnology, containerisation. 'The market' just deals with copyright and marketing.

diptherio , August 26, 2013 at 9:30 am

Does this mean it's time to stop wearing my NAIRU jacket?

David Lentini , August 26, 2013 at 11:31 am

Only if it's a NAIRU straight jacket. :-)

[May 30, 2017] With unemployment measures irrevocably corrupted by political pressures, how one can be talk about validity of derivatives such as NAIRU, unless he/she is drunk

Feb 18, 2017 | economistsview.typepad.com
libezkova -> pgl..., February 18, 2017 at 05:34 PM
pgl,

This is all about mathiness and corruption of neoliberal economist, which is a real Fifth Column of financial oligarchy no question about it. With unemployment measures irrevocably corrupted by political pressures, how one can be talk about validity of derivatives based on them, unless he/she is drunk ?

In this sense NAIRU is yet another sophisticated neoliberal fake that help to drive the public policy in the interests of financial oligarchy under mathiness smoke screen and a bunch of corrupt neoliberal economics serving as a propagandist army of financial oligarchy.

It's time to revamp the old quote changing it to " When I hear the term NAURU...I reach for my gun!."

If course it would be too cruel to shoot all neoliberal economists, so reeducation camps should probably be considered.

I think only U6 has some connections to reality. And the discrepancy between official and Gallup value of U6 is 4%

In other words only the first digit is probably valid and the range is 10 to 20%.

== quote ==
For January 2016 the official Current U-6 unemployment rate was 10.1% up from last month's 9.1%. On the other hand the independently produced Gallup equivalent called the "Underemployment Rate" was 14.1% up from 13.7 in December and 13.0% in November. The current differential between Gallup and BLS on supposedly the same data is 4.0%!

marcus nunes : , February 17, 2017 at 12:44 PM
Alternative "NAIRU bashing": https://thefaintofheart.wordpress.com/2015/02/14/why-insist-on-searching-for-the-holy-grail-aka-nairu/
RGC : , February 17, 2017 at 04:11 PM
SWL is becoming aggressively neoliberal. There is no sound theoretical basis for NAIRU and no empirical reinforcement:

Time to Ditch the NAIRU

James K. Galbraith

The Journal of Economic Perspectives, Vol. 11, No. 1. (Winter, 1997), pp. 93-108

http://tek.bke.hu/files/szovegek/galbraith_time_to_ditch_the_nairu.pdf

pgl -> RGC... , February 17, 2017 at 04:37 PM
SWL strikes me as someone who goes well beyond the usual neoliberal laziness. Is that what you mean by "aggressive"?
RGC -> pgl... , February 17, 2017 at 04:45 PM
In reading his blog lately it seemed that he was very defensive about his economics and also angry at the Corbyn wing of Labour.
marcus nunes : , February 17, 2017 at 12:41 PM
"How do we link the real economy to inflation"? NAIRU a waste of time. Try aggregate nominal spending growth

http://ngdp-advisers.com/2017/02/08/fantasy-world-conventional-central-bankers-money-no-role/

libezkova : , February 18, 2017 at 06:17 PM
Sorry Anne, but neoliberal economists are really prostitutes of Financial oligarchy. Well paid, of course.

That's where NAIRU comes from. Phillips curve is a joke and always was. It's king of sad that it still mentioned in in non--humorous context:
https://thefaintofheart.wordpress.com/2012/07/20/seven-years-on-things-still-look-the-same/

The NAIRU essentially presupposes the existence of the wage-price spiral. Which can happen only if wages are either indexed to inflation by law, or there are strong trade unions to defend workers rights. Under neoliberalism both are those factors are suppressed and can be viewed as non-existent.

And the statement that the NAIRU myth belongs to the vocabulary of charlatans does not deviate from the serious character of the discussion. This is just a historical truth.

Hot of the presses: "Debunking the NAIRU myth" January 19, 2017 By Matthew C Klein

https://ftalphaville.ft.com/2017/01/19/2182705/debunking-the-nairu-myth/


== quote ==

First, some history. In 1926, Irving Fisher found a relationship between the level of unemployment and the rate of consumer price inflation in the US. In 1958, AW Phillips studied UK data from 1861-1957 and found a relationship between the jobless rate and the growth of nominal wages, although the relationship seems to have been an artifact of the gold standard given the vertical line he found in the postwar period:

Some people (wrongly) interpreted Phillips's data to mean that there was a straightforward trade-off between the inflation rate and the unemployment rate. Policymakers could just pick any spot on "the Phillips Curve" they want. Among a certain set, the big debates in the 1960s were about whether the government should target an unemployment rate of 3 per cent or 5 per cent.

This worked out poorly, but the reaction took the form of an equally dubious idea: the Non-Accelerating Inflation Rate of Unemployment, or NAIRU. In this view, the change in the inflation rate should be related to the distance between the actual jobless rate and some theoretical level. If the unemployment rate were above this "neutral" level the inflation rate would slow down and potentially turn into outright deflation. If the jobless rate were "too low", however, consumer prices would rise at an accelerating rate.

Suppose you believe NAIRU is a real thing. What would be the argument against pushing the unemployment rate as close to zero as possible? In theory, the cost of the policy would be ever-accelerating inflation, eventually perhaps leading to hyperinflation. But the reason to dislike excessive inflation is that it ultimately makes everyone poorer, which should, among other things, increase unemployment. (Just look at Venezuela, for a recent example.)

According to the wacky world of NAIRU, however, hyperinflation can coexist just fine with hyper-employment. Clearly there must be other mechanisms at work, or else we are leaving money on the table by allowing the jobless rate to ever rise above zero.
== end of quote ==

Some comments are interesting too:

grputland, Jan 22, 2017

To test the NAIRU hypothesis against historical data, shouldn't we plot unemployment vs. change in inflation? -- instead of CHANGE in unemployment vs. change in inflation?
Be that as it may:

If there is such a thing as a NAIRU, it is still a mistake to treat the NAIRU as a "given" rather than a function of policy.

If a certain tax feeds into prices, it leaves less room for wages to feed into prices before (according to NAIRU logic) inflation accelerates. So any tax that feeds into prices will tend to raise the NAIRU. This is especially the case if the tax causes the cost of labor for employers to be higher than workers' take-home pay.

Thus the NAIRU, if it exists, is not a counsel of despair, but rather a counsel to get rid of taxes that feed into prices (especially taxes on labor) and replace them, as far as necessary, with taxes that DON'T feed into prices -- that is, taxes on economic rents.

marcus nunes , Jan 20, 2017

NAIRU - RIP

https://thefaintofheart.wordpress.com/2015/02/14/why-insist-on-searching-for-the-holy-grail-aka-nairu/

Contrapunctus9, Jan 20, 2017

Many variables contribute to the inflation rate, certainly more than just domestic employment (and how it is calculated). The Fed's dual mandate is inflation and employment, so it makes sense that these are a focus of the Fed's communication. But the Fed tends to focus on the result rather than the cause. It is troubling that there is little discussion from most of the FOMC on inflation factors which are now more important than unemployment (currency values, foreign labor, technology, commodity demand and speculation, labor monopsony, underemployment, labor skill demand mismatch, etc).

Producer and consumer prices are increasing, largely due to China driven commodity prices. Managerial compensation and production hourly wages are increasing. But weekly wages are stagnant due to fewer hours. The Fed is ignoring the latter, even though it is what is more important to sustained core inflation.

Observer, Jan 19, 2017

Looking just at the U3 unemployment rate for the NAIRU without considering the still high U6 rate and lower labour participation rate in the US may be the issue. There's still labour market slack even though U3 is at its "full" employment level.

grumpy, Jan 19, 2017

Models have to be used with caution (they are only tools) and interpreted with awareness of the real world - including for example, the varying wage bargaining power of labour, which is different, post globalisation, to what it was in the '70s.

Who do you think wanted globalisation and liberalisation of trade, and why?

Many economists revere their models excessively.

[May 30, 2017] NAIRU worship at FED

Notable quotes:
"... In the 90s, Democrats like Yellen and Blinder were pushing Greenspan to raise rates when he located the trap line at a different location than they did and held off. ..."
"... A story that fits the actions. But I suspect misses the motive. Perhaps Green stain far from wanting to improve job markets i.e. defy the false wage repressing NAIRU taboo zone. He simply wanted the crazy stock bubble to continue to inflate... ..."
"... I assume Greenspan never really bought the NAIRU fairy tale. Anymore then I do. Otherwise he could never have so skillfully repressed bottom half wage rates for more then fifteen years. ..."
"... Kocker buys the general story as much as say larry sommers buys it. They simply, like Greenspan, move the mythic NAIRU up or down to support other motivations ..."
"... To simply deny the NAIRU ppens the pearly gates to a job class FED. Heaven forbid -- ..."
May 30, 2017 | economistsview.typepad.com

Paine, May 30, 2017 at 10:45 AM

The models are just rationalizations of a deeply embedded policy paradigm In place since Greenspan

The motivation: Wage rate regulation

Inflation of product prices by other means then wage costs is ignored. The relation between job market conditions and wage rate change
Is the core focus

If UE can go lower without wage rates accelerating. There is no urgency Ie There is no need to accelerate the present pace of normalizing the policy rate

Hence the informed expert opinion now calling for the FED to play it kool

However the wall street silk hat set takes a more cynical view

" why take a chance "

Christopher H., May 30, 2017 at 11:00 AM
Yes Sanjait and PGL are (willfully?) naive in their pleas for Obama's Fed to behave better.

It's not the models. It's not a bug it's a feature. The Fed has to be pushed by a popular movement which would also enact significant reforms on the fiscal side.

Paine, May 30, 2017 at 11:49 AM
No

Buys the basic wage trap line

"This may seem like a strange objective, given that Congress has charged the Fed with promoting "maximum employment," which sounds like "try to make employment as high as you can." But the Fed knows that if it pushes economic activity above its long-run level in pursuing that goal, it will eventually have to hit the brakes and bring growth below normal to cool the economy and keep inflation under control. The Fed doesn't want to be in that position, so it gets just as worried when unemployment falls below its target as it does when unemployment is too high. 1 As a result, when the economy is close to what the Fed sees as full employment, the central bank takes a decidedly anti-growth policy stance to keep employment in check."

Paine, May 30, 2017 at 11:55 AM
This is NAIRU worship. NK fails to bash this up. For example: How can we glibly conclude that over shoots must be over corrected. Seems on the face of it a convenient asymmetry: The system can run control ably Up. But not Down

The fed can lower UE step by step without some inevitable over shoot. But not back up. The reverse gear causes a destructive excessive jolt. Well maybe so

But we ought to really look this fearsome dynamic assymetric right in the eyes. For a long time. Not just assume its credible because it fits some morality play plot written to please wall street

Christopher H., May 30, 2017 at 11:57 AM
Kocherlakota buys it?

Depends where you locate the "basic wage trap line."

In the 90s, Democrats like Yellen and Blinder were pushing Greenspan to raise rates when he located the trap line at a different location than they did and held off.

Paine, May 30, 2017 at 12:08 PM
A story that fits the actions. But I suspect misses the motive. Perhaps Green stain far from wanting to improve job markets i.e. defy the false wage repressing NAIRU taboo zone. He simply wanted the crazy stock bubble to continue to inflate...
Paine, May 30, 2017 at 12:11 PM
I assume Greenspan never really bought the NAIRU fairy tale. Anymore then I do. Otherwise he could never have so skillfully repressed bottom half wage rates for more then fifteen years.
Paine - , May 30, 2017 at 12:15 PM
Kocker buys the general story as much as say Larry Summers buys it. They simply, like Greenspan, move the mythic NAIRU up or down to support other motivations

To simply deny the NAIRU ppens the pearly gates to a job class FED. Heaven forbid --

[May 30, 2017] The concept of NAIRU is false

Feb 18, 2017 | economistsview.typepad.com
Jerry Brown -> New Deal democrat... , February 17, 2017 at 10:03 PM
You might enjoy this blog
http://www.concertedaction.com/2017/02/17/simon-wren-lewis-nairu-and-tina/

Main points

I agree with both of those statements.

Ed Brown -> Jerry Brown... , February 18, 2017 at 08:58 AM
Jerry, http://tek.bke.hu/files/szovegek/galbraith_time_to_ditch_the_nairu.pdf
JF -> New Deal democrat... , February 18, 2017 at 06:46 AM
New Deal, I thought the hyper inflation of the 70s came about because pricing determinations all aligned in a ratcheting, a sign of a complete breakdown in market-based economics, inviting govt intervention to halt it.

Where was it proven that wages caused these results then?

The notion of wages being related to general pricing trends is clear during deflationary trends. Common sense, hurting and wages follow the downward spiral. If I asked a question about wages I might agree that the downward trend is being caused by the downward trend in general pricing and demand.

But it needs to be proven that there us a correlation and then a cause and effect reality when general prices are rising rapidly, if you are asking if wages are a cause if this rapid rise. The data do not now support this as you know.

The Fed needs to figure out what it can do when general prices begin to ratchet. I wish they would look at wages last, look at other factors and other 'tools' to influence pricing determinations, again, long before they use these false notions to justify attacking employment.

I want better economics and better logic, a different actions. For instance, can the Fed order the credit channels not to ratchet their pricings rapidly, this would have a direct influence on pricing. Can the Fed stop rolling over their book of assets with new purchasing subsidies to the financial asset marketplaces and instead lower the amount of buying and selling so that the markets see that low rates still exist (and so premia built into pricing need not use this as a reason to ratchet). Do something differently than slamming hard on the Volker rate-peddle and tell everyone to take it out on employment.

[May 29, 2017] As GDP includes such things a military production and consumption as well as gambling profits (Wall Street firms profits, stock market gains) how realistic is productivity as a metric?

May 29, 2017 | economistsview.typepad.com

libezkova -> cm... May 27, 2017 at 10:35 PM

I have a question:

Productivity is typically defined as GDP divided by the total number of hours worked by population.

As GDP includes such things a military production and consumption as well as gambling profits (Wall Street firms profits, stock market gains) how realistic is productivity as a metric?

I do not think it is realistic. Like many other neoliberal metrics (and first of all GDP), I think it is a fake -- a pseudoscience, if you wish.

Sandwichman -> libezkova... May 27, 2017 at 09:49 PM
Productivity is only a realistic concept when dealing with stable units. Dividing GDP by labor hours (or private sector labor hours) is not realistic because the monetary units are not actual stable units because the composition of goods and services measured by GDP changes over time.

In other words, even if GDP may be useful for comparing aggregate monetary value of goods and services from period to period. It tells us nothing about physical output and THAT, not monetary value is what the concept of productivity implies.

If the proportions of various goods and services remained constant from quarter to quarter, then GDP/hours would tell us something about productivity. But they don't, so it doesn't.

See "Productivity as a Social Problem: The Uses and Misuses of Social Indicators," Fred Block and Gene A. Burns

https://www.jstor.org/stable/2095366

Sandwichman ... May 28, 2017 at 05:03 AM

https://www.researchgate.net/publication/271685715_Productivity_as_a_Social_Problem_The_Uses_and_Misuses_of_Social_Indicators

December, 1986

Productivity as a Social Problem: The Uses and Misuses of Social Indicators
By Fred Block and Gene A. Burns

The study of social indicators is valuable for understanding the role that the social sciences play in the political arena. One common pattern is for a particular social indicator to become frozen in place once it takes on political significance, and this can result in ironic consequences. This study traces out the case of indicators of aggregate productivity trends in the United States. These measures were initially developed as part of an underconsumptionist argument that was linked to the political left, but there was considerable debate over different measurement schemes. Over time, one particular measure of trends in aggregate productivity became central for wage negotiations and for government policy. This created a context in which the slower rates of growth of this measure of productivity in the 1970s helped to validate the views of those on the political right who saw the need for greater restrictions on wage gains and government civilian spending. The paper raises questions about the value of this particular measure and ends by emphasizing the problems of locking in place an "objective" social indicator when the reality being measured is in continual flux.

Paine, May 28, 2017 at 06:20 AM

Is not really engaged if you stop with the discover it's not all baby. There is bath water --

Yes indeed
But we must proceed to the necessary task

Throw out as much bath water as we can whilst holding tight to the baby


It's too easy and too useless to simply condemn the whole procedure of indexation
Despite its inevitable contradictions

Paine -> Paine ... Sunday, May 28, 2017 at 06:24 AM

Specifically. Retain the sublime LTV. It never lets us down if we use it with careful skill
Like excalibur
Drawn from the stone

anne -> Paine ... May 28, 2017 at 06:36 AM

Retain the sublime LTV

[ At which point there is no reason for me to read further, since I am not capable of understanding such initials. Does a VTL have fur and growl? ]

Paine -> anne... May 28, 2017 at 08:06 AM

We marxians so reverence the notion We dare not spell it out in full LTV -- Labor theory of value

Once. The bourgeois theory of value until ricardoput too sharp a point on it

And it became the intellectual sword of the exploited toilers

All lasting exchange value is created by social labor

The part of the value of social product exchange thru markets
Not reflected in labors compensation is a product of one or other form of class exploitation

Complication

This includes rewards to innovation
Real cost reduction
And improvements of all sorts
as well as arbitrage wind fall and mere rent

anne -> Paine ... May 28, 2017 at 06:27 AM

It's too easy and too useless to simply condemn the whole procedure of indexation. Despite its inevitable contradictions

[ Really important criticism, which is why I am far more interested in accumulating data for current comparative productivity measures. I find current comparative productivity measures revealing and important, and readily available. ]

anne -> Sandwichman ... May 28, 2017 at 06:23 AM

Criticizing measures of productivity is reasonable, but where are the alternate measures and the data to be used in recording these alternates? Current measures are backed by extensive data and used comparatively the measures so far strike me as meaningful and important.

JF -> Sandwichman ..., May 28, 2017 at 06:43 AM

"It tells us nothing about physical output and THAT, not monetary value is what the concept of productivity implies."

Yes, GDP presentations should also report the data removing the Finance and insurance segments from the statistical program and calculations.

Considering that with the age of the computer and advanced telco capabilities it is silly to include these segments in productivity duscussions, so we need a GDP view that matches.

And as we know these segments grew in terms of top line revenue flows remarkably in a very short time, and this should raise questions about its role in the economic system and whether the views of even the 1980s make sense.

Paine -> libezkova..., May 28, 2017 at 07:57 AM

You could use crude oil or electricity or debt or any numbered entity as the denominator. Thy are all formally similar

Why labor hours ?

This is the labor theory of exchange value in modern bourgeois scientific framing

If we posit a simple historical mission for capitalism it might be the minimizing of the social necessary labor time to produce the material requisites of society itself

Liberating humans from the burden of necessary labor

[May 29, 2017] Difficulties of comparing GDP between various countries: exampe of Russia

May 29, 2017 | www.moonofalabama.org
Jen | May 27, 2017 10:02:53 PM | 61
Khalid @ 51:

"... but GDP is a better measure of what is available to each country for domestic use ..."

I've now found where you've got your information about Russia having a smaller economy than South Korea, Canada and Italy. It's at this link:
http://databank.worldbank.org/data/download/GDP.pdf

The same list tells me that Saudi Arabia had a greater GDP than Sweden, Belgium, Norway and Denmark did in 2015. But does this information tell us anything about the health or long-term prospects for the Saudi economy compared to the economies of the other countries I just mentioned? Does the information tell us how well average Saudi citizens live compared to how well the average citizen lives in Sweden? Does the information say anything about what Saudi Arabia produces and/or exports, and about the range of products the KSA makes, compared to what Sweden does?

I'm sure you can do better than come up with a stack of numbers and nothing else that explains or qualifies them.

Oh and BTW, most labour migration between Russia and other countries is made up of Central Asian migrants travelling to Russia to work in construction and other jobs requiring little or no technical skills, or to study in the country's universities, and going back home to visit family on special occasions (like Persian New Year) or help gather in local harvests. Money flows in the form of remittances between Russia and Central Asian countries like Uzbekistan and Tajikistan tend to be out of Russia and into those other countries.

"Tajikistan: Migrant Remittances Now Exceed Half of GDP"
http://www.eurasianet.org/node/68272

"Remittances Inflows to Uzbekistan, Tajikistan and Kyrgyzstan in 2016: Current Trends and Prospects"
http://www.ayu.edu.tr/static/aae_haftalik/aae_bulten_en_80.pdf

The Economist "From Russia with Love"
http://www.economist.com/news/finance-and-economics/21688441-remittances-are-good-thing-except-when-they-stop-russia-love

/div

Khalid | May 28, 2017 1:40:29 AM | 65

@61. So GDP is a measure of what is produced in the country. GNP adds or subtracts from it money that is sent from elsewhere. Russia with a significantly larger GNP compared to GDP is a net recipient of income inflow, the Central Asian migrants not withstanding.

There are two potential problems with higher GNP. Firstly, Taxes on the income being sent have been paid in a different country. So for example the millions of Mexicans who send money from US to Mexico pay their taxes in US. The Mexican government does not see any of that revenue. Secondly the money coming is primarily spent via consumption. While this may help the local economy a little bit there is also demand for more infrastructure to support this added consumption but the government is not getting revenue to address this need for greater infrastructure and is always trying to play catch up.

Most countries with higher GNP (compared to GDP) continue to have weak economies susceptible to the ravages of the World economy. Russia is no exception. A weak economy cannot support a strong military without significantly sacrificing spending for improving it citizens well being. There are a number of countries maintaining large armies (for various reasons) that are disproportionate compared to their economic power. Russia is an extreme case of this. And the Russian citizens suffer because of this.

Jackrabbit | May 28, 2017 3:40:48 AM | 68
Kalid @50:
Russia has an economy that is smaller than that of South Korea, smaller than Canada, smaller than Italy.
On the basis of purchasing power parity (PPP) , Russia has an economy that is more than TWICE that of South Korea or Canada and 61% greater than Italy's.

The Russian economy is about 20% that of USA but the Russian per capita GDP economy grew faster than USA, Canada, or Italy from 1990-2015.

<> <> <> <> <> <> <> <> <> <>

2015 per capita, adjusted for PPP multipled by current population (from Wikipedia):

> USA: 18.244

> RF+Crimea: 3.639

> Italy: 2.258

> South Korea: 1.782

> Canada: 1.556

dh | May 27, 2017 11:49:10 AM | 15

[May 08, 2017] Goods and services in Russia are considerably less expensive than in the West (and this includes the cost of producing fighter jets or rockets), so for such purposes GDP PPP is a better indicator than is nominal GDP

Some interesting notes about difficulty of comparing GDP of various countries, in this case the USA and Russia.
Notable quotes:
"... Russia's overall GDP PPP places it slightly below Germany - 6th place in the world ..."
"... But the US GDP is of an different structure. Compared it is overblown with pure financial sales and "hedonistic adjustments". More is blown by the culture. In the US much more everyday things relies on money. In case of case they are all worth nothing. Furthermore, if it comes to conflicts than the whole US Infrastructure has to be "revalued", and i doubt that it can withheld some stress tests. ..."
"... Over the years, the Pentagon encouraged Congress to move parts of national security spending out of its budget to the extent that almost half is found outside the DOD. The USA really spends over a trillion dollars a year. For example, nuclear weapons research, testing, procurement, and maintenance is found in the Dept of Energy budget. ..."
"... [AKA "SmoothieX12"] ..."
"... No serious analyst takes US GDP as 18 trillion dollars seriously. A huge part of it is a creative bookkeeping and most of it is financial and service sector. ..."
"... In general, overall power of the state (nation) is not only in its "economic" indices. I use Barnett's definition of national power constantly, remarkably Lavrov's recent speech in the General Staff Academy uses virtually identical definition. ..."
Apr 17, 2017 | www.unz.com

Anonymous , April 17, 2017 at 5:31 am GMT

Russia spent almost 5.4% of GDP on military spending. The US last year spent 3.3% and with Trump's proposed increase this number will increase by a few decimal points.

Russia is a middle income country while the US is a rich country, in the top 10 of GDP per capita. If oil prices don't substantially improve and Russia continues to spend the way it does on the military it will simply go broke.

Sources: https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita (Russia is between Mexico and Suriname)

https://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures

@AP
Goods and services in Russia are considerably less expensive than in the West (and this includes the cost of producing fighter jets or rockets), so for such purposes GDP PPP is a better indicator than is nominal GDP. In terms of GDP PPP, Russia is of course not on par with the United States but is considerably higher than Mexico. It is in the same neighborhood as places such as Hungary.

Russia's overall GDP PPP places it slightly below Germany - 6th place in the world :

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

@Lewl42
Russia is a middle income country while the US is a rich country, in the top 10 of GDP per capita.

But the US GDP is of an different structure. Compared it is overblown with pure financial sales and "hedonistic adjustments". More is blown by the culture. In the US much more everyday things relies on money. In case of case they are all worth nothing. Furthermore, if it comes to conflicts than the whole US Infrastructure has to be "revalued", and i doubt that it can withheld some stress tests.

If oil prices don't substantially improve and Russia continues to spend the way it does on the military it will simply go broke

No country that relies on oil ( Russia do not) has made substantial improvements. Normally they are problem states where the problems made by oil are solved by money.

So from my point of view the opposite is true. Russia has made the big mistake to open itself to the west and was bitten. Now they readjust (with a border to china). Thank's to the US Oligarchs which thrown away that chance for they're primitive Neanderthal tribe thinking.

@Carlton Meyer
Over the years, the Pentagon encouraged Congress to move parts of national security spending out of its budget to the extent that almost half is found outside the DOD. The USA really spends over a trillion dollars a year. For example, nuclear weapons research, testing, procurement, and maintenance is found in the Dept of Energy budget.

http://www.pogo.org/straus/issues/defense-budget/2016/americas-1-trillion-national-security-budget.html

And as others have noted, GDP is a measure of activity, not prosperity. For example, mortgage refinancing creates lots of GDP, but no real wealth. Hurricanes and arson are good for GDP too!

@5371

Stupid beyond belief. Countries can't go broke doing something, if they control the natural and human resources they need to accomplish it. In addition, you apparently did not read Smoothie's explanation of why just comparing the sums spent is silly.
@Joe Wong
"Russia is a middle income country while the US is a rich country, in the top 10 of GDP per capita." this is very funny, how about the 20 trillions of US national debt and it is skyrocketing fast? If you only count asset without counting liability US maybe in the top 10 GDP per capita, but if you count net asset the US is in the negative GDP per capita, a broke nation. Perhaps it is American Exceptionalism logic, claiming credit where credit is not due, living in a world detached from reality.

"If oil prices don't substantially improve and Russia continues to spend the way it does on the military it will simply go broke." this is even funnier, Russian does not use USD in Russia, nor Russian government pay its MIC in USD, meanwhile Russian Central Bank can print Ruble thru the thin air just like the Fed, why does oil price have any relationship with Russian internal spending? Another example of "completely triumphalist and detached from Russia's economic realities" which is defined by meaningless Wall Street economic indices and snakeoil economic theories and rhetoric taught in the western universities.

Andrei Martyanov [AKA "SmoothieX12"] , Website

... ... ...

P.S. No serious analyst takes US GDP as 18 trillion dollars seriously. A huge part of it is a creative bookkeeping and most of it is financial and service sector. Out of very few good things Vitaly Shlykov left after himself was his "The General Staff And Economics", which addressed the issue of actual US military-industrial potential.

Then come strategic, operational and technological dimensions. You want to see operational dimension -- look no further than Mosul which is still, after 6 months, being "liberated". Comparisons to Aleppo are not only warranted but irresistible.

In general, overall power of the state (nation) is not only in its "economic" indices. I use Barnett's definition of national power constantly, remarkably Lavrov's recent speech in the General Staff Academy uses virtually identical definition.

[Apr 20, 2017] You may go here and see for yourself how FIRE overtook manufacturing in US in output. What is output , of course, remains a complete mystery

Notable quotes:
"... Sure, and that is why a company which produces nothing of value "commands" the so called "investments" which are several times larger than those of Boeing who is de facto US national treasure and who, as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely the point–structure of GDP. ..."
"... In general, we speak here different languages and I may only refer you back to Michael Lind's quote in my text. Judged in a larger, geopolitical framework, one can observe very clearly the process of US literally running out of resources and no amount of "raised capital" can change it. This is not to speak about the whole house of cards of Pax Americana which rested on US military imperial mythology. Once this mythology is debunked (the process which is ongoing as I type it) the house of cards folds. ..."
"... Sure, and that is why a company which produces nothing of value "commands" the so called "investments" which are several times larger than those of Boeing who is de facto US national treasure and who, as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely the point--structure of GDP. ..."
"... You may go here and see for yourself how FIRE overtook manufacturing in US in output. What is "output", of course, remains a complete mystery, same as many other services, once one considers the "quality" of education in US public schools which reflects in the most profound way on US labor force which increasingly begins to look like a third world one. ..."
www.unz.com
Andrei Martyanov says: • Website Show April 18, 2017 at 2:34 pm GMT
@inertial You just illustrated my point. Facebook vs. Gazprom market caps - all that shows is that Facebook has access to vastly larger amounts of capital than Gazprom. Well, duh.

Market capitalization is determined mostly by institutional investors - mutual funds, pension funds, insurance companies, etc. - who pool private savings and channel them into various investments. There are massive amounts of such savings available in USA; in Russia, not so much.

In Russia, the government is just about the only major saver and investor. This works fine in areas where the government must play a role, such as weapons manufacture. In other areas, enterprises that need capital to develop must either accumulate it themselves over the years (which puts limit on growth,) or get the government to help them out, or borrow abroad at usurious rates. That's not good. Ideally, Russian enterprises should enter Russian stock or fixed income market and raise as much capital as they need.

As for Boeing, yes it's a gem. But it does have some difficulties in raising capital. It's been balancing on the edge of bankruptcy for years and, unlike Facebook, it has huge liabilities. Incidentally, Boeing very much engages in all that "useless" high finance stuff. The buy and sell and issue bonds and short term paper; I don't know if they issue options but they certainly trade them. They don't believe that they are performing "virtual transactions with virtual money;" on the contrary, they consider this and essential part of the business, as important as building engines or whatever. Perhaps they know something you don't?

Finally, a tip. Any "expert" who doesn't treat US (or other) economic data seriously is an idiot.

Market capitalization is determined mostly by institutional investors – mutual funds, pension funds, insurance companies, etc. – who pool private savings and channel them into various investments. There are massive amounts of such savings available in USA; in Russia, not so much.

Sure, and that is why a company which produces nothing of value "commands" the so called "investments" which are several times larger than those of Boeing who is de facto US national treasure and who, as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely the point–structure of GDP.

You may go here and see for yourself how FIRE overtook manufacturing in US in output. What is "output", of course, remains a complete mystery, same as many other services, once one considers the "quality" of education in US public schools which reflects in the most profound way on US labor force which increasingly begins to look like a third world one.

https://www.bea.gov/iTable/iTable.cfm?ReqID=51&step=1#reqid=51&step=51&isuri=1&5114=a&5102=15

In general, we speak here different languages and I may only refer you back to Michael Lind's quote in my text. Judged in a larger, geopolitical framework, one can observe very clearly the process of US literally running out of resources and no amount of "raised capital" can change it. This is not to speak about the whole house of cards of Pax Americana which rested on US military imperial mythology. Once this mythology is debunked (the process which is ongoing as I type it) the house of cards folds.

Ondrej , April 18, 2017 at 3:20 pm GMT

@Andrei Martyanov
Market capitalization is determined mostly by institutional investors – mutual funds, pension funds, insurance companies, etc. – who pool private savings and channel them into various investments. There are massive amounts of such savings available in USA; in Russia, not so much.
Sure, and that is why a company which produces nothing of value "commands" the so called "investments" which are several times larger than those of Boeing who is de facto US national treasure and who, as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely the point--structure of GDP.

You may go here and see for yourself how FIRE overtook manufacturing in US in output. What is "output", of course, remains a complete mystery, same as many other services, once one considers the "quality" of education in US public schools which reflects in the most profound way on US labor force which increasingly begins to look like a third world one.

https://www.bea.gov/iTable/iTable.cfm?ReqID=51&step=1#reqid=51&step=51&isuri=1&5114=a&5102=15

In general, we speak here different languages and I may only refer you back to Michael Lind's quote in my text. Judged in a larger, geopolitical framework, one can observe very clearly the process of US literally running out of resources and no amount of "raised capital" can change it. This is not to speak about the whole house of cards of Pax Americana which rested on US military imperial mythology. Once this mythology is debunked (the process which is ongoing as I type it) the house of cards folds. Maybe this would help to someone:-)

„Excluding as we do noncapitalist change, we have to define that word which good economists always try to avoid : capitalism is that form of private property economy in which innovations are carried out by means of borrowed money, which in general, though not by logical necessity, implies credit creation. A society, the economic life of which is characterized by private property and controlled by private initiative, is according to this definition not necessarily capitalist, even if there are, for instance, privately owned factories, salaried workers, and free exchange of goods and services, either kind or through the medium of money. The entrepreneurial function itself is not confined to capitalist society, since such economic leadership as it implies would be present, though in other forms, even in a primitive tribe or in a socialist community." (Schumpeter 1939, 216)

This means that in perfect equilibrium interest would be zero in the sense that it would not be a necessary element of the process of production and distribution, or that pure interest tends to vanish as the system approaches perfect equilibrium. Proof of this proposition is very laborious, because it involves showing why all the theories which lead to a different result are logically unsatisfactory.

Hence, the money market with all that happens in it acquires for us a much deeper significance than can be attributed to it from the standpoint just glanced at. It becomes the heart, although it never becomes the brain, of the capitalist organism (Schumpeter 1939)

http://classiques.uqac.ca/classiques/Schumpeter_joseph/business_cycles/schumpeter_business_cycles.pdf

[Apr 15, 2017] Statistical Significance Is Overrated - Noah Smith

Apr 15, 2017 | economistsview.typepad.com
Gerald Scorse , April 14, 2017 at 06:20 AM
Statistical Significance Is Overrated - Noah Smith

"[R]emember that statistical significance is only part of what you need to know. How strong an effect is, and how important it is in the real world, might matter even more."

I try to learn something new every day. This is it for Friday, April 14, 2017. Thanks Noah.

Chris G -> Gerald Scorse... , April 14, 2017 at 07:29 AM
I thought Smith's column was quite good. (I don't write that very often.) "We know what the effect accurately and precisely. It's really small and doesn't matter." is important if/when that's the case. You want to know when you can get away with ignoring something when you're creating your (approximate) model of how the world works. Conversely, "We know what the effect is pretty accurately but not super precisely. We know enough that we can say that it's a big deal but we're still figuring out precisely how big a deal." is also critical information. Knowledge re the former effect may be more statistically significant than the latter while at the same time being less materially significant. That can be a fairly subtle point to a non-technical audience. Heck, it can be a subtle point to technically-oriented audience.
libezkova said in reply to Chris G ... , April 14, 2017 at 04:11 PM
I think that requirement of the normal (or Gaussian) distribution that is behind most statistical metrics is the weakest part.

Normal distribution is the distribution with the maximum entropy for a specified mean and variance. As such it is poorly suited as the distribution of the data reflecting economic or social processes (fat tails problems).

[Apr 14, 2017] Declining consumption of electricity in the USA might mean that GDP data are fudged

Apr 14, 2017 | economistsview.typepad.com
libezkova , April 13, 2017 at 08:51 AM
Another face of secular stagnation and outsourcing of manufacturing:

The De-Electrification of the U.S. Economy - Bloomberg View
https://www.bloomberg.com/view/articles/2017-04-12/the-de-electrification-of-the-u-s-economy

== quote ==
In much of the world, of course, electricity demand is still growing. In China, per-capita electricity use has more than quadrupled since 1999. Still, most other developed countries have experienced a plateauing or decline in electricity use similar to that in the U.S. over the past decade. And while the phenomenon has been most pronounced in countries such as the U.K. where the economy has been especially weak, it's also apparent in Australia, which hasn't experienced a recession since 1991.
== end of quote ==

From comments:

One interesting data point that should be within that "industrial" number: "U.S. aluminum production has gone from 2.5 million tons in 2005 to 1.6 million in 2015." http://www.seattletimes.com...

Aluminum smelting uses a lot of electricity, and that's a 36% decline. I'm not sure of the total electricity use of the aluminum industry in the U.S. but it's conceivably big enough to make a difference in that last graph.

anne -> libezkova... , April 13, 2017 at 09:16 AM
The essay is surely interesting, but what "might" it mean?
Fred C. Dobbs -> anne... , April 13, 2017 at 11:54 AM
(Bloomberg)
... In an article published in the Electricity Journal in 2015, former Lawrence Berkeley energy researcher Jonathan G. Koomey, now a consultant and a lecturer at Stanford, and Virginia Tech historian of science Richard F. Hirsch offered five hypotheses for why electricity demand had decoupled from economic growth (which I've paraphrased here):

In an article published in the Electricity Journal in 2015, former Lawrence Berkeley energy researcher Jonathan G. Koomey, now a consultant and a lecturer at Stanford, and Virginia Tech historian of science Richard F. Hirsch offered five hypotheses for why electricity demand had decoupled from economic growth (which I've paraphrased here):
1.State and federal efficiency standards for buildings and appliances have enabled us to get by with less electricity.
2.Increased use of information and communications technologies have also allowed people to conduct business and communicate more efficiently.
3.Higher prices for electricity in some areas have depressed its use.
4.Structural changes in the economy have reduced demand.
5.Electricity use is being underestimated because of the lack of reliable data on how much energy is being produced by rooftop solar panels. ...

https://law.stanford.edu/publications/electricity-consumption-and-economic-growth-a-new-relationship-with-significant-consequences/

anne -> Fred C. Dobbs... , April 13, 2017 at 05:18 PM
I appreciate these conjectures or hypotheses, which I had read initially and should have set down as well. The problem is there is no clear defining of the hypotheses, or provision for coming to a tentative conclusion as to the effect of any hypothesis.

The matter is of course important, and I will welcome further consideration.

libezkova -> anne... , April 13, 2017 at 04:28 PM
"what "might" it mean?"

It might mean that GDP data are fudged.

[Apr 12, 2017] How corporate profit-shifting distorts measured productivity - Equitable Growth

Apr 12, 2017 | equitablegrowth.org

pgl said... April 11, 2017 at 01:19 AM Nick Bunker ( How corporate profit-shifting distorts measured productivity - Equitable Growth ) reports on a paper from economists at Penn State that should interest Brad Setser:

'By shifting profits overseas, economic output that should be counted in the United States ends up being registered in other countries.

This shifting appears to have happened in part due to the rise in "intangible assets." To borrow an example from the four economists, think of a simplified version of the profits from an iPhone. Employees at Apple Inc. design the phone, which is then produced abroad at a cost of $250 and sold to a customer in the United States for $750. If we assume the reason people buy iPhones is the branding and design created by Apple, then a good portion of the $500 net profit is a return on "intangible assets" produced in the United States. But if a company sells the rights to these intangible assets to a subsidiary in a low-tax country, then the profits will end up there.

The result? An increase in the Gross Domestic Product of the low-tax country and a decline in the GDP of the United States without any real change in economic activity.'

Transfer pricing abuse! Of course that Ryan DBCFT tax deform would allow this tax avoidance on a permanent basis in a way that is all perfectly legal. Reply Tuesday, pgl said in reply to Peter K.... "hey would still be taxed on their sales."

Seriously? Most of Apple's sales are abroad. Same for Coca Cola, Boeing, Caterpillar, the list goes on.

Reply Tuesday, April 11, 2017 at 07:47 AM djb said in reply to pgl... yes sales tax might happen in the united states but pgl is talking about corporate tax on profit

transfer pricing manipulates the situation to show most of the profits as being earned in the low tax country. So that lets say the true cost of the manufacture of the iphone is 250 dollars,

they might say that the American subsidiary of the same company went to the low tax country and paid 700 dollars for the iphone

at least say that on paper

that's what he is talking about

sales tax doesn't affect the tax on profit

besides, sales tax is paid over and above the 750 dollars Reply Tuesday, April 11, 2017 at 11:00 AM pgl said in reply to djb... "pgl is talking about corporate tax on profit". Yep - you get it.

Reply Tuesday, April 11, 2017 at 11:56 AM J Johannes Y O Highness said in reply to Repeal 2 Replace 1...
Do you see how deflation fulfills the Keynesian Dream?

By inducing Keynesian Stimulation from Keynesian Expectations. Here is how works :

A car dealer has contract to buy from auto factory set amount of cars each month. Contract allows factory to churn out Tesla-s at steady rate thus efficient clip.

Unlike his customers, savvy dealer watches deflation rate carefully. He holds onto inventory when he expects less or no future deflation, but when he expects greater deflation, he deftly dumps inventory before price drops, accelerates M2V. Deflation causes dealers of each product and service to stimulate economic expansion. Here is my impression of Tyler Cohen :

When a government hardens its currency most of that currency is held by the citizens serving that government. Each citizen then has more buying power, more wealth because of her/his shrewd rulers.

As deflation allows full reserve, full reserve makes the predictions of Nouriel Roubini irrelevant. Full reserve eliminates uncertainty that nauseates business ventures that hire folks.
Awareness!

Get
it --
Reply Tuesday, April 11, 2017 at 11:17 AM Justin Cidertrades said in reply to Johannes Y O Highness...
How, Howard? How does ruler harden the currency?

By spending less, but taxing more, taxing foreigners by way of import duties. Is that what communist rulers of China are now doing? Import tariff? To harden currency thus enrage 45th President?

Don't worry nothing!
Don't worry!
Be happy!

45th will soon become aware. First aware; then, "company, attenzione!
forward march
!!
" Reply Tuesday, April 11, 2017 at 11:38 AM point said in reply to pgl... It's a terrific article, especially showing aggregate debt exceeds aggregate assets through use of tax havens.

On calculating GDP, it sure seems the standard labor arbitrage maneuver of transferring the production of intermediate goods to a favorable labor rate jurisdiction for importation should have implications beyond transfer pricing abuse.

If I, a US citizen, own a US located factory producing product with entirely US located inputs, then transfer an intermediate production stage to a low wage rate jurisdiction, where I still own the entire chain, this seems insufficiently foreign to account as exporting and importing.

People sometimes create "look through" earnings to consolidate unconsolidated results of minority subsidiaries to get a better look at a parent's full results. Something similar could be worthwhile here where a company's "insufficiently foreign" production would be consolidated into a look-through US production number.
Reply Tuesday, April 11, 2017 at 06:20 AM pgl said in reply to point... It is an interesting paper. Glad you read it. I see that PeterK did not. Reply Tuesday, April 11, 2017 at 07:48 AM

[Apr 04, 2017] The GDP Is a Flawed But Magical Indicator by Leonid Bershidsky

GDP is a classic junk science, some sort of 'economic Lysenkoism" and "cult of GDP is an immanent feature of neoliberal propaganda designed to substitute arbitrary metric for more scientific measurements of the wellbeing of people. That's a neoliberal lie: "That's why per capita GDP is one of the strongest predictors of happiness measured through people's subjective perceptions of their well-being. "
And it is generally connected strongly only with well being of financial oligarchy, which in the USA is at all time high. Preetty much disconned with well being of ordinary people as declining wages signify in the USA>
Sitting regular neoliberal stooges like Feldstein is just Argument from authority - Wikipedia thanks god he did not cite Mankiw.
Notable quotes:
"... GDP calculation isn't an exact science ..."
"... As Federal Reserve Chair Janet Yellen recently pointed out, GDP is "a pretty noisy indicator" at best. ..."
Apr 03, 2017 | www.bloomberg.com

Economists have long argued that the gross domestic product has many flaws as a measure of well-being and policy success. Yet there's a good reason it's still being used: There's a certain magic to it, despite its science being somewhat iffy.

QuickTake GDP: Measuring Income or Well-Being?

On Monday, the National Bureau of Economic Research published a paper by Harvard economist Martin Feldstein detailing an argument he has been making for years -- that GDP calculations underestimate actual growth and productivity. This optimistic argument is based on the difficulty of measuring changes in the quality of products and services, and therefore of life. Feldstein points out, for example, that official measurements, for the most part, only catch quality improvements if a product or service requires more expensive inputs: "If it doesn't cost more to produce a product or service this year than it did last year, there has been no improvement." That way, for example, leaps in the quality of health care -- when a patient who used to need a week in hospital to recover from a cataract operation is now discharged on the day of the procedure -- are not measured. The way official statistics measure the introduction of new products, too, doesn't account for their actual contribution to consumers' well-being or to the economy as a whole.

According to Feldstein, government messaging should be more optimistic to make sure people understand that their savings will buy more in the future. Goods and services are improving lives more than price increases would indicate.

Nobel laureate Joseph Stiglitz has long held the opposite view -- that the GDP as measured today may overestimate well-being. For example, it counts any increase in government spending as positive, even though these increases may be inefficient or even counterproductive. And as for those improvements in health care quality that form the basis of Feldstein's argument, they, too, can be overestimated in the U.S. because health care spending there is higher than other countries while the outcomes are the same or worse.

Some recent work also argues against the theory, supported by Feldstein, that the recent productivity slowdown is due to a failure of measurement. Last year, Chad Syverson of the University of Chicago pointed out that even the most generous estimates of the value added by the growth in digital technology aren't big enough to bring productivity growth to its pre-2004 trajectory. Another analysis by International Monetary Fund economist Marshall Reinsdorf found that their unmeasured effect on productivity could only be small. Statistics fail to record some of the added value because of the tech sector's use of tax havens, he wrote. But even the "free" internet services provided now are counted through the advertising they attract. And some of the improvements that tech created for consumers don't belong in the GDP calculation in the first place: If they save a user some personal time, that stays in the home and doesn't affect economic activity. (Even if it did, it might be canceled out by the time our digital addictions take out of our productive workday.)

All the back and forth about how GDP is calculated is only possible because, despite all the flaws, the measure somehow ends up feeling right. The distortions often end up canceling themselves out.

In 2013, Nicholas Oulton of the London School of Economics' Center for Economic Performance wrote a paper to disprove the notion that U.K. economic growth had been overestimated because official calculations overstated the contribution of banking to GDP. He showed that "if banking output has been overstated, then the output of some other industry or industries must have been understated."

Earlier this year, a team of IMF economists attempted to figure out how GDP numbers would have changed for a number of developed countries had they used an outdated deflation method, still used by China and India. It turned out that the effects wouldn't have been consistently negative or positive for most countries; for Western European countries, on aggregate, the effects would have been small. The team's recommendation was that more countries adopt the more progressive deflation methods now used by most of the G20 -- but their research made it clear that in some cases the difference in the results would be tiny.

As much as GDP calculation isn't an exact science , the results usually make sense. That's why per capita GDP is one of the strongest predictors of happiness measured through people's subjective perceptions of their well-being.

It's fine to argue for better measures of well-being. These measures, however, add even harder-to-measure indicators, such as levels of social support, freedom and generosity. For many countries, these data are either unavailable or subjectively colored. The choice is between engineering and science: The former will accept an imperfect approximation, while the latter will always strive for perfection. As Federal Reserve Chair Janet Yellen recently pointed out, GDP is "a pretty noisy indicator" at best. Yet it remains extremely useful as a reference.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

[Mar 31, 2017] http://www.calculatedriskblog.com/2017/03/weekly-initial-unemployment-claims_30.html

Mar 31, 2017 | www.calculatedriskblog.com

"Weekly Initial Unemployment Claims decrease to 258,000"

by Bill McBride...3/30/2017...08:40:00 AM

The DOL reported:

..... In the week ending March 25, the advance figure for seasonally adjusted initial claims was 258,000, a decrease of 3,000 from the previous week's unrevised level of 261,000. The 4-week moving average was 254,250, an increase of 7,750 from the previous week's unrevised average of 246,500.

The previous week was revised up.

...This was above the consensus forecast.

The low level of claims suggests relatively few layoffs."
Reply Thursday, March 30, 2017 at 05:40 PM libezkova said in reply to im1dc... This "seasonally adjusted" magic is more like another flavor of statistical fraud... Because assumptions behind those adjustments are so wrong they are not even discussed.

Also McJobs and Walmart jobs -- anything paying below subsistence level are not actually jobs.

It's more like slavery. That's another nail in the coffin of "free market" ideology. What is so free in a person taking job in Wal Mart? Or any other McJob? That's neo-feudalism with Wal Mart as a huge feudal landlord and mass of desperate, hungry peasants.


Please note that around $100K jobs in the USA are needed just to accommodate growing workforce.

http://www.economicpopulist.org/content/how-many-jobs-are-needed-keep-population-growth

== quote ==

How Many Jobs Are Needed to Keep Up with Population Growth?

Submitted by Robert Oak on September 8, 2012 - 6:45pm

The press quotes all sorts of figures for the number of monthly job gains needed to keep up with population growth. We see numbers like 80,000, 100,000, 125,000 and 175,000 thrown around like statistical snow as the number of jobs needed each month just to keep up. What's the right one? How many jobs are needed each month just to keep up with population growth?

The actual monthly amount can be calculated and the Atlanta Fed even did us a huge favor by publishing an interactive monthly jobs calculator so you can go check for yourself. This month shows we need 104,116 payroll jobs to maintain the same unemployment rate of 8.1% with all of the other same terrible conditions the state of employment is in.
Reply Thursday, March 30, 2017 at 08:06 PM

[Mar 26, 2017] There is no such thing as a natural rate of interest

Mar 26, 2017 | economistsview.typepad.com
RGC, March 26, 2017 at 07:06 AM
In short, there is no such thing as a "natural rate of interest".

........................

What then? It is difficult to say, exactly, whether the prevalent confusions are the result of sloppy thinking, an incoherent textbook pedagogy, or a deliberate desire to cover for the Federal Reserve and to obstruct potential criticism of the independent central bank. As a next step, let us ask: is there a better theory of interest rates out there, somewhere in the great work of the economists?

In the CEA paper, as in most of this so-called literature, the 20th century British economist John Maynard Keynes is not cited. Yet it is a fact that Keynes did write an influential book with the word "Interest" in the title. It was called The General Theory of Employment Interest and Money, published in 1936. In which Keynes states, of the classical theory of interest – that theory of loanable funds overlying a natural rate – that his own analysis "will have made it plain that this account of the matter must be erroneous" (p. 177). Perhaps it is worthwhile to seek Keynes's counsel at this point?

Keynes's theory of interest does not rest on the capital stock. And in Keynes as in the real world, there is no "capital market" that equates household saving with business investment.

Instead, Keynes's theory of interest is about the market for money – a market that definitely does exist in the real world. He wrote: "The rate of interest is not the 'price' which brings into equilibrium the demand for resources to invest with the readiness to abstain from consumption. It is the 'price' which equilibrates the desire to hold wealth in the form of cash with the available quantity of cash" (p. 167). In other words, interest rates are a portfolio issue. They are determined in the money markets, by how – in what form – people with wealth choose, at any given time, to hold that wealth. You pay interest, in order to get people to hold their wealth in less-liquid forms, such as bonds – and this is what provides firms with a secure source of financing, which then permits them to invest.

Keynes's theory of interest is the pure common sense of how financial markets work. So why is it treated, by our leading liberal economists, as though it didn't exist? Why all this confusing folderol about natural and neutral rates? The apparent answer is damning. In the theories our economists like, a technical theory of interest creates a technical theory of income distribution, since interest rates govern the incomes of creditors against debtors, of the rich against the poor, of profits against wages. Thomas Piketty's recent book is a nice instance of this point, with its argument that the great inequalities of capitalism are due to interest rates higher than the rate of economic growth. If interest somehow reflects the physical productivity of the capital stock, then the consequences may be unfortunate – but they are inevitable and not something of which it is proper to complain.

http://www.paecon.net/PAEReview/issue78/Galbraith78.pdf

RGC -> RGC... , March 26, 2017 at 07:39 AM
"Why all this confusing folderol about natural and neutral rates? The apparent answer is damning. In the theories our economists like, a technical theory of interest creates a technical theory of income distribution, since interest rates govern the incomes of creditors against debtors, of the rich against the poor, of profits against wages..........If interest somehow reflects the physical productivity of the capital stock, then the consequences may be unfortunate – but they are inevitable and not something of which it is proper to complain."

[Is that clear enough?......Galbraith is accusing mainstream economists of acting as apologists for rentiers.]

[Mar 25, 2017] Is productivity metric as problematic as GDP?

Mar 24, 2017 | cepr.net

anne: March 24, 2017 at 05:21 AM

Marketplace Radio Has Not Heard About the Productivity Slowdown

Marketplace radio had a peculiar piece * asking what the world would have looked like if the North American Free Trade Agreement never had been signed. The piece is odd because it dismisses job concerns associated with NAFTA by telling readers that automation (i.e. productivity growth) has been far more important in costing jobs.

"As in, ATMs replacing bankers, robots displacing welders. Automation is a very old story that goes back 250 years, but it has really picked up in the last couple decades.

"'We economic developers have an old joke,' said Charles Hayes of the Research Triangle Regional Partnership in an interview with Marketplace in 2010. 'The manufacturing facility of the future will employ two people: one will be a man, and one will be a dog. And the man will be there to feed the dog. And the dog will be there to make sure the man doesn't touch the equipment.'

"Ouch. But it turns out technology replaced workers in the course of reporting this very story."

Actually, the Bureau of Labor Statistics tells us the opposite. Productivity growth did pick up from 1995 to 2005, rising back to its 1947 to 1973 Golden Age pace (a period of low unemployment and rapidly rising wages), but has slowed sharply in the last dozen years.

[Graph]

While more rapid productivity growth would allow for faster wage and overall economic growth, no one has a very clear path for raising the rate of productivity growth. It is strange that Marketplace thinks our problem is a too rapid pace of productivity growth.

The piece is right in saying that the jobs impact of NAFTA was relatively limited. Certainly trade with China displaced many more workers. NAFTA may nonetheless have had a negative impact on the wages of many manufacturing workers. It made the threat to move operations to Mexico far more credible and many employers took advantage of this opportunity ** to discourage workers from joining unions and to make wage concessions. It's surprising that the piece did not discuss this effect of NAFTA.

* https://www.marketplace.org/2017/03/23/economy/what-if-nafta-were-never-born

** http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1018&context=cbpubs

-- Dean Baker

anne said in reply to anne...

https://fred.stlouisfed.org/graph/?g=d6jh

November 1, 2014

Total Factor Productivity for United States, 1952-2014

(Percent Change)


https://fred.stlouisfed.org/graph/?g=d7LU

November 1, 2014

Total Factor Productivity for United States, 1952-2014

(Indexed to 1952)

pgl said in reply to anne... March 24, 2017 at 06:01 AM

Thanks for the data. It confirms what Dean wrote here:

"the Bureau of Labor Statistics tells us the opposite. Productivity growth did pick up from 1995 to 2005, rising back to its 1947 to 1973 Golden Age pace (a period of low unemployment and rapidly rising wages), but has slowed sharply in the last dozen years.

anne said in reply to pgl... March 24, 2017 at 06:10 AM

Looking internationally, I consider the evidence conclusive that productivity growth has slowed significantly since 2005 in countries that have had limited infrastructure development, regardless of the emphasis in those countries on information technology advance and application.

libezkova -> anne... March 25, 2017 at 09:33 AM

And what is productivity ?

== quote ==

The OECD defines it as "the ratio of a volume measure of output to a volume measure of input".] Volume measures of output are normally gross domestic product (GDP) or gross value added (GVA), expressed at constant prices i.e. adjusted for inflation.

== end of quote ==

If you use GDP the result is suspect for the reasons GDP is suspect. If not, then it is sector/industry based metric.

In this sense growth of GDP in 1990th is not only the result of technological changes (Internet, PCs, cell phones) but also looting of the xUSSR economies

And as looting slowed down after 2000 growth of productivity also allowed down.

libezkova -> libezkova... March 25, 2017 at 10:32 AM

Steve Keen pointed out that all production is driven by energy (mostly oil and electricity). And the energy comes ultimately from the sun.

Either it is turned into production via feeding workers, or by fueling machinery (by burning hydrocarbons or indirectly via electricity supply).

That means that growth of productivity is inversely correlated with the price of oil. As the period of cheap hydrocarbons ended (remember $.99 per gallon of gas in 90th) the period of rapid productivity growth ended as well.

One of the aspects od the idea of "secular stagnation" is that high oil prices hit neoliberal economies like a hammer and the period of high oil prices started to undermine neoliberal globalization by making shipping more expensive.

That also means that without continuation of low oil prices the next debt crisis (aka Minsky moment) is eminent for the USA economy.

BTW none of US shale companies is profitable. They are all up to the neck in debt, and their method of extracting oil includes generating a flow of junk bonds. If financing stops most of them will be bankrupt in one year period.

Obama clever game with Iran helped to produce "Obama recovery" due to the period of "normal" oil prices which started in mid 2015.

It probably can be extended for another year or two. What happens next is completely unknown territory. It is clear that the US shale is a card that was already played. It can't be played again as output probably can be substantially raised (say 2 Mbd/day) only with high or very high oil prices (as in above $70 or higher).

After "Obama recovery" (which depends on continuing low oil prices created by clever political maneuvering in Arab world -- Hail Mary pass that worked) we might well face the period of "elevated oil prices" and increased stagnation of the US economy with noticeably higher level of unemployment.

Much depends on Trump playing his trump card of "détente" with Russia which theoretically could extend this period (Russia has the same level of oil production as Saudis and more reserves), but there were to much sand thrown by neocons and DemoRats for this scenario to work. I thing Russia now is no longer interested in partnership with the USA on the basis of maintaining low oil prices -- like KSA today, and might cut output further to get higher oil prices which are vital for their economy. Of course Russia has strong neoliberal fifth column (including pro-western directors of oil companies and oligarchs who have their wealth transferred to Western banks) but even they are pissed off by the USA now.

DemoRats wiped up Anti-Russian hysteria to the level when even contact with Russian official can be a "career limiting move" in the USA.

This hysteria now has its own self-propagating dynamics and is difficult to stop. It might last for the same period of time as McCarthyism hysteria (roughly from 1947 to 1956).

"... "The principal problem for Democrats is that so many media figures and online charlatans are personally benefiting from feeding the base increasingly unhinged, fact-free conspiracies - just as right-wing media polemicists did after both Bill Clinton and Obama were elected - that there are now millions of partisan soldiers absolutely convinced of a Trump/Russia conspiracy for which, at least as of now, there is no evidence. ..."

It put the Democrats and Republicans in sync as two equally warmongering parties, but what good that would bring for the American people and the world is hard to fathom.

The USA lost the possibility of switching personal car fleet to more economical hybrid models by adopting some drastic measures and now is less prepared for a new period of high oil prices. People are still buying SUV which became the most popular type of personal transportation in the USA, and small tracks.

On the electricity front there are some problems too. The looting of Russia and the flow of cheap uranium stopped. Building of high voltage East -West line necessary for substantial wind and solar production is still on the drawing board.

[Mar 25, 2017] Like most integral metrics (and, especially, like GDP) productivity growth is very suspect. Its importance was artificially amplified under neoliberalism to the sacred cow status

Notable quotes:
"... The long term absence of convergence in productivity growth between developed and developing countries should be of considerable concern, but seems overlooked even in settings such as trade negotiations in which such concerns especially need to be addressed. ..."
"... You need to understand that like most "integral" metrics (and, especially, like GDP) productivity growth is very suspect. Its importance was artificially amplified under neoliberalism to the "sacred cow" status. ..."
"... While the strong earnings growth of US-based corporations might, at least partially, be real and not all accounting tricks, the question arise what part of those gains are coming from improvements in domestic productivity and what part from offshoring. ..."
"... Productivity growth is an important part of the system of neoliberal myths (along with "cult of GDP" ) and this mythology is directed at deceiving the public that it is indirectly benefitting from the neoliberal transformation of the society, while in reality we observe impoverishment of the majority of population. As in " The USA is the country with fastest productivity grown." Rejoice. ..."
Mar 25, 2017 | economistsview.typepad.com

anne -> anne... March 25, 2017 at 10:31 AM

The long term absence of convergence in productivity growth between developed and developing countries should be of considerable concern, but seems overlooked even in settings such as trade negotiations in which such concerns especially need to be addressed.

libezkova -> anne..., March 25, 2017 at 04:42 PM

Anne,

You need to understand that like most "integral" metrics (and, especially, like GDP) productivity growth is very suspect. Its importance was artificially amplified under neoliberalism to the "sacred cow" status.

Government bureaucrats also are afraid to tell the truth. Richard Benson , a well-known critic of government labor statistics, who wrote several insightful papers on the subject, noted "The BLS is mindful of how politically sensitive any reported job data is to the White House, so there is a strong bias for the government bureaucrats to publish a favorable jobs report."

One hidden fact is that it is offshoring that is the driver of corporate profits and it distorts "productivity" statistics.

While the strong earnings growth of US-based corporations might, at least partially, be real and not all accounting tricks, the question arise what part of those gains are coming from improvements in domestic productivity and what part from offshoring.

Rising stratification of the society also affects this metric (via the ratio of "have more" vs "have not")

Productivity growth is an important part of the system of neoliberal myths (along with "cult of GDP" ) and this mythology is directed at deceiving the public that it is indirectly benefitting from the neoliberal transformation of the society, while in reality we observe impoverishment of the majority of population. As in " The USA is the country with fastest productivity grown." Rejoice.

It is also simplifies the adoption of pro financial oligarchy policies masked with technocratic jargon -- policies that destroyed New Deal and hurt the majority of the population ("rising labor costs" is one such usage).

Adopting technocratic posture (economics like Boeing there by using certain controls you can change flight course) serves like anesthetic. Rephrasing Marx we can say "neoliberal economics is the opium for the people". And it is by design. which confirms the iron law of oligarchy in a very interesting, unexpected way.

That's why jargon use by priests of neo-classical economics is almost in-penetrable for an ordinary person. The well known neoliberal stooge Greenspan was a real master of it.

So the importance assigned to such measures as GDP and productivity is, to a certain extent, politically motivated.

For example, in the denominator we have all those hedge funds managers and other members of financial oligarchy bonuses, and top managers exorbitant remuneration within all kinds of firms (which definitely drives productivity growth down ;-)

In the numerator are military expenses and income of financial sector (and now another somewhat parasitic sector close to banking -- medical insurance industry).

Both are essentially money stolen from people and, to a certain extent, from "real" economy.

Of cause, not all money are wasted as military spending in addition to war for neoliberal empire expansion (and related loot) also employs a lot of people and fund fundamental research; the myth about innovation of Silicon Valley is partially a myth; in reality in many cases this is a direct transfer of technology from the military sector.

Among the examples are integrated circuits, laser, wireless, Internet, multiprocessing, etc; even some algorithmic languages :-).

So when you have such fuzzy numerator and denominator, the result is also fuzzy and all conclusions based on them might be not worth electrons with which they are depicted on our screens.

As I mentioned before, productivity should be somewhat inversely correlated with the oil price, as "amount of energy per worker" is what defines at the end worker's productivity (via the level of automation, mechanization of his work). That's were the USA strong (or week, if you wish) point is -- it has the largest consumption of energy per capita in the world. If we normalize productivity via per capita energy consumption we will get a more interesting picture.

[Mar 25, 2017] Is productivity metric as problemtic as GDP?

Notable quotes:
"... The OECD defines it as "the ratio of a volume measure of output to a volume measure of input".] Volume measures of output are normally gross domestic product (GDP) or gross value added (GVA), expressed at constant prices i.e. adjusted for inflation. ..."
"... If you use GDP the result is suspect for the reasons GDP is suspect. If not, then it is sector/industry based metric. ..."
"... In this sense growth of GDP in 1990th is not only the result of technological changes (Internet, PCs, cell phones) but also looting of the xUSSR economies ..."
"... And as looting slowed down after 2000 growth of productivity also allowed down. ..."
"... One of the aspects of the idea of "secular stagnation" is that high oil prices hit neoliberal economies like a hammer and the period of high oil prices started to undermine neoliberal globalization by making shipping more expensive. ..."
"... BTW none of US shale companies is profitable. They are all up to the neck in debt, and their method of extracting oil includes generating a flow of junk bonds. If financing stops most of them will be bankrupt in one year period. ..."
Mar 24, 2017 | cepr.net

anne: March 24, 2017 at 05:21 AM

Marketplace Radio Has Not Heard About the Productivity Slowdown

Marketplace radio had a peculiar piece * asking what the world would have looked like if the North American Free Trade Agreement never had been signed. The piece is odd because it dismisses job concerns associated with NAFTA by telling readers that automation (i.e. productivity growth) has been far more important in costing jobs.

"As in, ATMs replacing bankers, robots displacing welders. Automation is a very old story that goes back 250 years, but it has really picked up in the last couple decades.

"'We economic developers have an old joke,' said Charles Hayes of the Research Triangle Regional Partnership in an interview with Marketplace in 2010. 'The manufacturing facility of the future will employ two people: one will be a man, and one will be a dog. And the man will be there to feed the dog. And the dog will be there to make sure the man doesn't touch the equipment.'

"Ouch. But it turns out technology replaced workers in the course of reporting this very story."

Actually, the Bureau of Labor Statistics tells us the opposite. Productivity growth did pick up from 1995 to 2005, rising back to its 1947 to 1973 Golden Age pace (a period of low unemployment and rapidly rising wages), but has slowed sharply in the last dozen years.

[Graph]

While more rapid productivity growth would allow for faster wage and overall economic growth, no one has a very clear path for raising the rate of productivity growth. It is strange that Marketplace thinks our problem is a too rapid pace of productivity growth.

The piece is right in saying that the jobs impact of NAFTA was relatively limited. Certainly trade with China displaced many more workers. NAFTA may nonetheless have had a negative impact on the wages of many manufacturing workers. It made the threat to move operations to Mexico far more credible and many employers took advantage of this opportunity ** to discourage workers from joining unions and to make wage concessions. It's surprising that the piece did not discuss this effect of NAFTA.

* https://www.marketplace.org/2017/03/23/economy/what-if-nafta-were-never-born

** http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1018&context=cbpubs

-- Dean Baker

anne said in reply to anne...

https://fred.stlouisfed.org/graph/?g=d6jh

November 1, 2014

Total Factor Productivity for United States, 1952-2014

(Percent Change)


https://fred.stlouisfed.org/graph/?g=d7LU

November 1, 2014

Total Factor Productivity for United States, 1952-2014

(Indexed to 1952)

pgl said in reply to anne... March 24, 2017 at 06:01 AM

Thanks for the data. It confirms what Dean wrote here:

"the Bureau of Labor Statistics tells us the opposite. Productivity growth did pick up from 1995 to 2005, rising back to its 1947 to 1973 Golden Age pace (a period of low unemployment and rapidly rising wages), but has slowed sharply in the last dozen years.

anne said in reply to pgl... March 24, 2017 at 06:10 AM

Looking internationally, I consider the evidence conclusive that productivity growth has slowed significantly since 2005 in countries that have had limited infrastructure development, regardless of the emphasis in those countries on information technology advance and application.

libezkova -> anne... March 25, 2017 at 09:33 AM

And what is productivity ?

== quote ==

The OECD defines it as "the ratio of a volume measure of output to a volume measure of input".] Volume measures of output are normally gross domestic product (GDP) or gross value added (GVA), expressed at constant prices i.e. adjusted for inflation.

== end of quote ==

If you use GDP the result is suspect for the reasons GDP is suspect. If not, then it is sector/industry based metric.

In this sense growth of GDP in 1990th is not only the result of technological changes (Internet, PCs, cell phones) but also looting of the xUSSR economies

And as looting slowed down after 2000 growth of productivity also allowed down.

libezkova -> libezkova... March 25, 2017 at 10:32 AM

Steve Keen pointed out that all production is driven by energy (mostly oil and electricity). And the energy comes ultimately from the sun.

Either it is turned into production via feeding workers, or by fueling machinery (by burning hydrocarbons or indirectly via electricity supply).

That means that growth of productivity is inversely correlated with the price of oil. As the period of cheap hydrocarbons ended (remember $.99 per gallon of gas in 90th) the period of rapid productivity growth ended as well.

One of the aspects of the idea of "secular stagnation" is that high oil prices hit neoliberal economies like a hammer and the period of high oil prices started to undermine neoliberal globalization by making shipping more expensive.

That also means that without continuation of low oil prices the next debt crisis (aka Minsky moment) is eminent for the USA economy.

BTW none of US shale companies is profitable. They are all up to the neck in debt, and their method of extracting oil includes generating a flow of junk bonds. If financing stops most of them will be bankrupt in one year period.

Obama clever game with Iran helped to produce "Obama recovery" due to the period of "normal" oil prices which started in mid 2015.

It probably can be extended for another year or two. What happens next is completely unknown territory. It is clear that the US shale is a card that was already played. It can't be played again as output probably can be substantially raised (say 2 Mbd/day) only with high or very high oil prices (as in above $70 or higher).

After "Obama recovery" (which depends on continuing low oil prices created by clever political maneuvering in Arab world -- Hail Mary pass that worked) we might well face the period of "elevated oil prices" and increased stagnation of the US economy with noticeably higher level of unemployment.

Much depends on Trump playing his trump card of "détente" with Russia which theoretically could extend this period (Russia has the same level of oil production as Saudis and more reserves), but there were to much sand thrown by neocons and DemoRats for this scenario to work. I thing Russia now is no longer interested in partnership with the USA on the basis of maintaining low oil prices -- like KSA today, and might cut output further to get higher oil prices which are vital for their economy. Of course Russia has strong neoliberal fifth column (including pro-western directors of oil companies and oligarchs who have their wealth transferred to Western banks) but even they are pissed off by the USA now.

DemoRats wiped up Anti-Russian hysteria to the level when even contact with Russian official can be a "career limiting move" in the USA.

This hysteria now has its own self-propagating dynamics and is difficult to stop. It might last for the same period of time as McCarthyism hysteria (roughly from 1947 to 1956).

"... "The principal problem for Democrats is that so many media figures and online charlatans are personally benefiting from feeding the base increasingly unhinged, fact-free conspiracies - just as right-wing media polemicists did after both Bill Clinton and Obama were elected - that there are now millions of partisan soldiers absolutely convinced of a Trump/Russia conspiracy for which, at least as of now, there is no evidence. ..."

It put the Democrats and Republicans in sync as two equally warmongering parties, but what good that would bring for the American people and the world is hard to fathom.

The USA lost the possibility of switching personal car fleet to more economical hybrid models by adopting some drastic measures and now is less prepared for a new period of high oil prices. People are still buying SUV which became the most popular type of personal transportation in the USA, and small tracks.

On the electricity front there are some problems too. The looting of Russia and the flow of cheap uranium stopped. Building of high voltage East -West line necessary for substantial wind and solar production is still on the drawing board.

[Mar 24, 2017] GDP and statistican charlatans

Notable quotes:
"... With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. [...] ..."
Mar 24, 2017 | economistsview.typepad.com
libezkova -> pgl... Reply Friday, March 24, 2017 at 10:38 AM , March 24, 2017 at 10:38 AM

Do you really think that GDP is "econofact"?

Or is it "econo-opinion" ?

People like you pray on the altar of GDP growth, don't they?

Look at the formula and shake from fear because the formula:

GDP = C + G + I + NX 

or

GDP = consumption + government+ investment + (exports − imports) 

is clearly open to huge machinations (BTW G includes purchase of weapons for the military; you get the idea what I am hinting at). Also all the contribution of financial firms to GDP should probably be counted with negative sign ;-). Because large part of it is either racket or illicit rent extraction from the society which weakens the "real" economy.

The problem with all major statistical aggregates is that "it is better not to see them being made."

And if you measure GDP via

GDP = Compensation of employees + Gross operating surplus + Gross mixed income 

are you sure that you will get the same metric?

The same is true for unemployment, inflation, oil production, and other "politically sensitive" economic metrics.

When I see a person who quotes GDP figures or unemployment without discussing his view of its reliability and margin of error (for example for GDP via inflation, or the method of including "services" part of economy; same for the difference between fake U3 and more realistic U6 for unemployment), I suspect that particular person is either charlatan, or neoclassical economist ( which is basically highly intersecting subsets ).

We probably should introduce the term "statiness" in analogy with "mathiness" (or would "number racket" be a better term?)

As Kuznets told to "statistical charlatans" long ago:

The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria.

With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. [...]

All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known.

And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.

[Mar 24, 2017] The Mechanical Turn in Economics and Its Consequences

Notable quotes:
"... In the same way, neoliberals are no different. They aren't bad people – they just see their policies as right and just because those policies are working well for them and the people in their class, and I don't think they really understand why it doesn't work for others – maybe, like Adam Smith, they think that is the "natural state" .. ..."
"... Read the first sentence of the Theory of Moral Sentiments – it makes an assumption which is the foundation of all of Adam Smith. He asserted that all men are moral. Morality in economics is the invisible hand creating order like gravity in astronomy. Unfortunately, Adam Smith's assumption is false or at least not true enough to form a sound foundation for useful economic theory. ..."
"... But "morality" means different things to different people. Smith only saw the morality of his own class. For example, I am sure a wealthy man would consider it very moral to accumulate as much money as he could so that he would be seen by his peers as a good and worthy man who cares for his future generations and the well being of his class – he doesn't see this accumulation as amoral – whilst a poor man may think that kind of accumulation is amoral because he thinks that money could be better used provide for those without the basic needs to survive ..."
"... "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." ..."
"... Another I remember from Smith was something like, "The law exists to protect those who have much from those who have little." Sounds about right. ..."
"... One of Steve Keen's favourite analogies is astronomy. Neoclassical economics is like Ptolemy's epicycles; assume the Earth is at the centre, and that the planets orbit in circles and simply by adding little circles-epicycles-you can accurately describe the observed motion of the planets. The right epicycles in the right places can describe any motion. But they can't explain anything, they add nothing to understanding, they subtract from it, because they are false but give the illusion of knowledge. Drop the assumptions and you can begin to get somewhere. ..."
"... Steve Keen seems to have latched onto this in the last year or so, pointing out that all production is driven by energy. And the energy comes ultimately from the sun. Either it is turned into production via feeding workers, or by fueling machinery (by burning hydrocarbons extracted from plant and animal remains). ..."
"... I have a question about a similar thing. Simon Kuznetz is credited as someone who has invented modern concept of GDP and he revolutionized the field of economics with statistical method (econometrics). However, Kuznets , in the same report in which he presented modern concept of GDP to US congress, wrote following(from wikipedia): ..."
"... "The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. ..."
"... All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above. Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what." ..."
"... "So , my question is why economists keep treating GDP as some scared metric when its creator himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most of the economists nowadays?"@Vedant ..."
"... That is your explanation right there. Large abstract numbers such as GDP obscure social issues such as "the personal distribution of income." and the effort that goes into creating that income. Large abstract numbers obscure the moral dimension that must be a part of all economic discussion and are obscured by statistics and sciencism. As the genius of Mark Twain put it, "There are lies, damned lies and statistics." Beware the credentialed classes! ..."
"... Interesting. There is a great book by John Dupré called 'Human Nature and the Limits of Science (2001)", which tackles this subject in a general way: the facts that taking a mechanistic model as a paradigm for diverse areas of science is problematic and leads to myopia. ..."
"... He describes it as a form of 'scientific imperialism', stretching the use of concepts from one area of science to other areas and leading to bad results (because there are, you know, relevant differences). As a prime example, he mentions economics. (When reading EConned;s chapter of the science ( 'science') of economics, I was struck by the similar argument.) ..."
"... Soddy was a scientist. He should have written as a scientist with definitions, logic and rigour, but he wrote like a philosopher, full of waffle and unsubstantiated assertions like other economists. It is unscientific to apply universal laws discovered in physics and chemistry to economics without proving by observations that those laws also apply to economics. ..."
"... I get irritated by radical free-marketeers who when presented with a social problem tend to dogmatically assert that "The free market wills it," as if that ended all discussion. It is as if the free market was their God who must always be obeyed. Unlike Abraham, we do not need to obey if we feel that the answer is unjust. ..."
"... Gibbon's Decline and Fall of the Roman Empire ..."
"... The moralistic explanations for the disintegration of the (Western) Roman Empire were long ago discarded by all serious analysis of late antiquity. More practical explanations, especially the loss of the North African bread basket to the Vandals, are presented in the scholarly work these days. ..."
"... That book of Gibbon's is an incredible achievement. If it is not read by historians today, it is their loss. Its moral explanations, out of fashion today, are actually quite compelling. They become more so when read with de Tocqueville's views of the moral foundations of American township democracy and their transmission into the behavior, and assumptions, of New Englanders, whose views formed the basis of the federal republican constitution. ..."
"... The loss of the breadbasket was problematical, too. And it may be that no civilization, however young and virile, could withstand the migrations forever, as they withstood or absorbed them, with a few exceptions, for eight hundred years. But the progressive losses to the migratory tribes may have been a symptom of the real, "moral," cause of the decline. ..."
"... From 536-539AD the entire planet suffered a staggering holocaust. Krakatoa blew up - ejecting so much dust that it triggered a 'nuclear winter' that lasted through those years. ..."
"... It was this period that ended agriculture in North Africa. ( Algeria-Tunisia ) The drought blew all of the top soil into the Med. It was an irreversible tragedy. ..."
"... Economics is not science, simply because economics does not take facts seriously enough to modify flawed theories. ..."
"... In college I couldn't help but notice the similarities between modern economic theory and the control theory taught in engineering. Not such a great fit though, society is not a mechanical governor. ..."
"... " ..."
Mar 21, 2017 | www.nakedcapitalism.com
Yves here. This post takes what I see as an inconsistent, indeed, inaccurate stance on Adam Smith, since it depicts him as advocating laissez faire and also not being concerned about "emotions, sentiment, human relations and community." Smith was fiercely opposed to monopolies as well as businessmen colluding to lower the wages paid to workers. He also saw The Theory of Moral Sentiments as his most important work and wanted it inscribed on his gravestone.

Nor is it true that Smith advocated government not intervening in business. From Mark Thoma , quoting Gavin Kennedy :

Jacob Viner addressed the laissez-faire attribution to Adam Smith in 1928 ..Here is a list extracted from Wealth Of Nations:

"Viner concluded, unsurprisingly, that 'Adam Smith was not a doctrinaire advocate of laissez-faire'.

By Douglass Carmichael, perviously a Professor at University of California at Santa Cruz and a Washington DC based consultant, which clients including Hewlett-Packard, World Bank, Bell laboratories, The White House and the State Department. For the last ten years he has focused on the broad social science issues relevant to rethinking humanity's relationship to nature. Cross posted from the Institute for New Economic Thinking website

With Adam Smith, and hints before in Ricardo and others, economics took the path of treating the economy as a natural object that should not be interfered with by the state. This fit the Newtonian ethos of the age: science was great, science was mathematics; science was true, right and good.

But along the way the discussion in, for example, Montaigne and Machiavelli - about the powers of imagination, myth, emotions, sentiment, human relations and community - was abandoned by the economists. (Adam Smith had written his Theory of Moral Sentiments 20 years earlier and sort of left it behind, though the Wealth of Nations is still concerned with human well-being.) Gibbon's Decline and Fall of the Roman Empire was published in 1776, the same year as Smith's Wealth , but hardly read today by most economists.

In philosophy and the arts (romanticism among others) there was great engagement in these issues economics was trying to avoid. But that philosophy and art criticism have not been widely read for many years.

The effect of ignoring the human side of lives was to undermine the social perspective of the "political," by merging it with the individually focused "interest." So, instead of exploring the inner structure of interest (or later utility or preference), or community feeling and the impact of culture, these were assumed to be irrelevant to the mechanics of the market. Politics, having to do with interest groups and power arrangements, is more vague and harder to model than economic activity.

Those who wanted economics to be a science were motivated by the perception that "being scientific" was appreciated by the society of the time, and was the path to rock-solid truth. But the move towards economics as a science also happened to align with a view of the landed and the wealthy that the economy was working for them, so don't touch it. We get the equation, embracing science = conservative. This is still with us because of the implication that the market is made by god or nature rather than being socially constructed. Since economics is the attempt at a description of the economy, it was more or less locked in to the naturalist approach, which ignores things like class and ownership and treated capital as part of economic flow rather than as a possession that was useable for social and political power.

Even now, economics still continues as if it were part of the age of Descartes and avoids most social, historical and philosophical thought about the nature of man and society. Names like Shaftesbury and Puffendorf, very much read in their time, are far less known now than Hobbes, Descartes, Ricardo, Mill and Keynes. Karl Polanyi is much less well known than Hayek. We do not learn of the social history such as the complex interplay in Viennese society among those who were classmates and colleagues such as Hayek, Gombrich, Popper and Drucker. The impact of Viennese culture is not known to many economists.

The result is an economics that supports an economy that is out of control because the feedback loops through society and its impact of the quality of life - and resentment - are not recognized in a dehumanized economics, and so can't have a feedback correcting effect.

The solution, however, is not to look for simplicity, but to embrace a kind of complexity that honors nature, humans, politics, and the way they are dealt with in philosophy, arts, investigative reporting, anthropology and history. Because the way forward cannot be a simple projection of the past. We are in more danger than that.

Anthony Pagden, in Why the Enlightenment is Still Important , writes that before the enlightenment, late feudalism and the Renaissance, "The scholastics had made their version of the natural law the basis for a universal moral and political code that demanded that all human beings be regarded in the same way, no matter what their culture or their beliefs. It also demanded that human beings respect each other because they share a common urge to 'come together,' and it required them to offer to each other, even to total strangers, help in times of need, to recognize 'that amity among men is part of the natural law.' Finally, while Hobbes and Grotius had accepted the existence of only one natural right - the right to self-preservation - the scholastics had allowed for a wide range of them." -

Pagen also writes, "The Enlightenment, and in particular that portion with which I am concerned, was in part, as we shall now see, an attempt to recover something of this vision of a unified and essentially benign humanity, of a potentially cosmopolitan world, without also being obliged to accept the theologians' claim that this could only make sense as part of the larger plan of a well-meaning, if deeply inscrutable, deity."

But as Pagen shows, that effort was overcome by market, technical and financial interests.

The reason this is so important is that the simple and ethical view in Smith (and many other classical economists if we were to read them) that it was wrong to let the poor starve because of manipulated grain prices, was replaced by a more mechanical view of society that denied human intelligence except as calculators of self interest. This is a return to the Hobbesian world leading to a destructive society: climate, inequality, corruption. Today, the poor are hemmed in by so many regulations and procedures (real estate, education, police) that people are now starved. Not having no food, but having bad food, which along with all the new forms of privation add up to a seriously starved life, is not perceived by a blinded society to be suffering. Economics in its current form - most economics papers and college courses - do not touch the third rail of class, or such pain.

HeadShaker , March 21, 2017 at 11:13 am

Interesting. I've been reading (thanks to an intro from NC) Mark Blyth's "Austerity" and, thus far, seems to imply, if not outright state, that Adam Smith was quite suspicious of government intervention in the economy. The "can't live with it, can't live without it, don't want to pay for it" perspective. The bullet points you've listed above seem to refute that notion.

justanotherprogressive , March 21, 2017 at 11:39 am

Adam Smith tried to make a moral science out of what his class wanted to hear. If he had actually gone into those factories of his time, he might have had a different opinion of what labour was and how there was no "natural state" for wages, but only what was imposed on people who couldn't fight back. If he had gotten out of his ivory tower for a while, he might have had a different opinion of what those owners of stock were doing. He also might have had different views on trade if he could have seen what was happening to the labourers in the textile industries in France. And I could go on. But instead he created a fantasy that has been the basis for all economic thinking since.

In the same way, neoliberals are no different. They aren't bad people – they just see their policies as right and just because those policies are working well for them and the people in their class, and I don't think they really understand why it doesn't work for others – maybe, like Adam Smith, they think that is the "natural state" ..

Sorry, but there needs to be a Copernican Revolution in Economics just as there was in science. We have to realize that maybe Adam Smith was wrong – and I know that will be hard – just as it was hard for people to realize that the Earth wasn't the center of the universe.

Since I am retired, maybe I will go back to school, hold my nose and cover my lying eyes long enough to finish that Economics degree, so that I can get good access to all the other windows in Economics. I can't really believe I am the only person thinking this way – there must be some bright people out there who have come to similar conclusions and I would dearly love to know who they are.

Lyonwiss , March 21, 2017 at 2:49 pm

Read the first sentence of the Theory of Moral Sentiments – it makes an assumption which is the foundation of all of Adam Smith. He asserted that all men are moral. Morality in economics is the invisible hand creating order like gravity in astronomy. Unfortunately, Adam Smith's assumption is false or at least not true enough to form a sound foundation for useful economic theory.

justanotherprogressive , March 21, 2017 at 3:18 pm

But "morality" means different things to different people. Smith only saw the morality of his own class. For example, I am sure a wealthy man would consider it very moral to accumulate as much money as he could so that he would be seen by his peers as a good and worthy man who cares for his future generations and the well being of his class – he doesn't see this accumulation as amoral – whilst a poor man may think that kind of accumulation is amoral because he thinks that money could be better used provide for those without the basic needs to survive

Lyonwiss , March 22, 2017 at 2:29 am

You have not read the first sentence of the book, where he stated what he meant – to me, it is his general statement of universal morality.

lyman alpha blob , March 21, 2017 at 3:03 pm

I've read a fair amount of Wealth of Nations although far from all of it and my take was that Smith was describing the economic system of his time as it was , not necessarily as it should or must be. Smith gets a bad rap from the left due to many people over the last 200+ years hearing what they wanted to hear from him to justify their own actions rather than what he actually said.

I'm cherry picking a bit here since I don't have the time to go through several hundred pages, but I think Smith might actually agree with you about the plight of labor and he was well aware of what the ownership class was up to –

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

Adam Smith – Wealth of Nations

diptherio , March 21, 2017 at 7:00 pm

Yup, wish I would have had that one handy in my intro to micro course

Another I remember from Smith was something like, "The law exists to protect those who have much from those who have little." Sounds about right.

Grebo , March 21, 2017 at 4:58 pm

there needs to be a Copernican Revolution in Economics

One of Steve Keen's favourite analogies is astronomy. Neoclassical economics is like Ptolemy's epicycles; assume the Earth is at the centre, and that the planets orbit in circles and simply by adding little circles-epicycles-you can accurately describe the observed motion of the planets. The right epicycles in the right places can describe any motion. But they can't explain anything, they add nothing to understanding, they subtract from it, because they are false but give the illusion of knowledge. Drop the assumptions and you can begin to get somewhere.

digi_owl , March 22, 2017 at 1:36 pm

And that is exactly what Marx did, but then got himself sidetracked by trying to find (or create) support for his labor theory of value.

Actually most of what he writes in Capital basically refutes said theory, instead hinting at energy being the core source of value (how much food/fuel is needed to produce one unit, basically).

Steve Keen seems to have latched onto this in the last year or so, pointing out that all production is driven by energy. And the energy comes ultimately from the sun. Either it is turned into production via feeding workers, or by fueling machinery (by burning hydrocarbons extracted from plant and animal remains).

mejimenez , March 21, 2017 at 1:41 pm

Since words have somewhat flexible boundaries, it's hard to tell from what perspective this response is looking at the history of science. Characterizing cybernetics as mechanistic would require an unusually broad definition of "mechanistic". Even a superficial reading of Norbert Wiener, Warren McCulloch, W. Ross Ashby, or any of the other early contributors to the discipline will make one aware that they were explicitly trying to address the limitations of simplistic mechanistic thinking.

In the related discipline, General Systems Theory, von Bertalanffy expressly argued that we should take our cues from the organic living world to understand complex systems. With the introduction of Second Order Cybernetics by Heinz von Foerster, Margaret Mead, Gregory Bateson and others, the role of a sentient observer in describing the system in which he/she is embedded becomes the focus of attention. Bateson was an original participant with many of the people mentioned above in the Macy conferences where cybernetics was first introduced. The bulk of his work was a direct attack on the mechanistic view of the natural world.

Of course, many writers treat cybernetics, General Systems Theory, and their related disciplines as pseudoscientific. But those are typically people who are firmly committed to mechanistic explanations.

Vedant , March 21, 2017 at 1:02 pm

Yves,

I have a question about a similar thing. Simon Kuznetz is credited as someone who has invented modern concept of GDP and he revolutionized the field of economics with statistical method (econometrics). However, Kuznets , in the same report in which he presented modern concept of GDP to US congress, wrote following(from wikipedia):-

"The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification.

All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.
Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what."

So , my question is why economists keep treating GDP as some scared metric when its creator himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most of the economists nowadays?

Allegorio , March 21, 2017 at 2:48 pm

"So , my question is why economists keep treating GDP as some scared metric when its creator himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most of the economists nowadays?"@Vedant

" Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income."

That is your explanation right there. Large abstract numbers such as GDP obscure social issues such as "the personal distribution of income." and the effort that goes into creating that income. Large abstract numbers obscure the moral dimension that must be a part of all economic discussion and are obscured by statistics and sciencism. As the genius of Mark Twain put it, "There are lies, damned lies and statistics." Beware the credentialed classes!

Mucho , March 21, 2017 at 1:20 pm

Interesting. There is a great book by John Dupré called 'Human Nature and the Limits of Science (2001)", which tackles this subject in a general way: the facts that taking a mechanistic model as a paradigm for diverse areas of science is problematic and leads to myopia.

He describes it as a form of 'scientific imperialism', stretching the use of concepts from one area of science to other areas and leading to bad results (because there are, you know, relevant differences). As a prime example, he mentions economics. (When reading EConned;s chapter of the science ( 'science') of economics, I was struck by the similar argument.)

Lyonwiss , March 21, 2017 at 2:31 pm

Science does not imply only mechanistic models, which may be appropriate for physics, but not economics. Science is a method of obtaining sound knowledge by iterative interaction between facts and theory.

http://www.asepp.com/what-is-science/

UserFriendly , March 22, 2017 at 1:37 am

Just because equilibrium is shitty mechanistic model to try and stamp onto economics doesn't mean that all scientific modeling of economics futile. Soddy just about derived MMT from the conservation of energy in 1921.

http://habitat.aq.upm.es/boletin/n37/afsod.en.html?iframe=true&width=100%&height=100%

And refined it in a book in 1923.

http://dspace.gipe.ac.in/xmlui/bitstream/handle/10973/21274/GIPE-009596.pdf?sequence=3&isAllowed=y

UserFriendly , March 22, 2017 at 2:00 am

excellent job with the prepositions there. sigh. WAKE UP!

Lyonwiss , March 23, 2017 at 2:50 am

Soddy was a scientist. He should have written as a scientist with definitions, logic and rigour, but he wrote like a philosopher, full of waffle and unsubstantiated assertions like other economists. It is unscientific to apply universal laws discovered in physics and chemistry to economics without proving by observations that those laws also apply to economics.

Soddy needed to have developed a scientific methodology for economics first, before stating his opinions which are scientifically unproven like most economic propositions.

http://www.asepp.com/methodology/

Jim A. , March 21, 2017 at 1:36 pm

I get irritated by radical free-marketeers who when presented with a social problem tend to dogmatically assert that "The free market wills it," as if that ended all discussion. It is as if the free market was their God who must always be obeyed. Unlike Abraham, we do not need to obey if we feel that the answer is unjust.

PKMKII , March 21, 2017 at 1:57 pm

Gibbon's Decline and Fall of the Roman Empire was published in 1776, the same year as Smith's Wealth, but hardly read today by most economists.

Other than as a reflection of the sentiments of the time Gibbon was writing in, historians don't spend much time reading it either. The moralistic explanations for the disintegration of the (Western) Roman Empire were long ago discarded by all serious analysis of late antiquity. More practical explanations, especially the loss of the North African bread basket to the Vandals, are presented in the scholarly work these days.

PhilM , March 21, 2017 at 5:07 pm

That book of Gibbon's is an incredible achievement. If it is not read by historians today, it is their loss. Its moral explanations, out of fashion today, are actually quite compelling. They become more so when read with de Tocqueville's views of the moral foundations of American township democracy and their transmission into the behavior, and assumptions, of New Englanders, whose views formed the basis of the federal republican constitution.

The loss of the breadbasket was problematical, too. And it may be that no civilization, however young and virile, could withstand the migrations forever, as they withstood or absorbed them, with a few exceptions, for eight hundred years. But the progressive losses to the migratory tribes may have been a symptom of the real, "moral," cause of the decline.

After all, the Romans did not always have that breadbasket; indeed, they had to conquer it to get it, along with the rest of the mighty and ancient civilizations of the Mediterranean and beyond, using the strengths derived from the mores of their martial republic. The story of the Punic Wars is a morality play in history, as much as anything else. But the main problem was the dilution of the Roman republican mores into a provincial stew.

And after that nice detached remark, about which historians can surely natter on in the abstract, I'll toss in this completely anti-historicist piece of nonsense: I think it's actually much the same problem the Americans are having today, as the mores of the founders have dissolved into the idea that the nation is about national government, centralized administration, world leadership, global domination through military might, and imperialist capitalism. That is not a national ethic that leads to lasting nobility of purpose and moral strength-as George Washington and Ike Eisenhower both pointed out.

blert , March 21, 2017 at 6:48 pm

Dendrochronology ( tree ring dating & organic history ) has established a wholly new rationale for the termination of the Roman Empire the re-boot of the Chinese and Japanese cultures and the death of a slew of Meso-American cultures.

From 536-539AD the entire planet suffered a staggering holocaust. Krakatoa blew up - ejecting so much dust that it triggered a 'nuclear winter' that lasted through those years.

The Orientals actually heard the blasts recognized that they emminated from the Indonesian islands. ( Well, at least to the south. ) The erruption and the weather was duly recorded by Court scribes.

Roman accounts assert that 90% of the population of Constantinople died or fled. ( mostly died ) The Emperor and his wife were at the dockside ready to flee - when she talked him back off the boat. Her reasoning was sound: it's Hell everywhere. He won't have any authority once he leaves his imperial guard.

It was this period that ended agriculture in North Africa. ( Algeria-Tunisia ) The drought blew all of the top soil into the Med. It was an irreversible tragedy.

This super drought triggered the events in Beowulf - and the exodus of the Petrans from Petra. They marched off to Mecca and Medina both locations long known to have mountain springs with deep water. The entire Arabian population congregated there.

This was the founding population amongst which Mohammed was raised many years later.

The true reason that Islam swept through Araby and North Africa was that both lands were still largely de-populated. The die-off was so staggering that one can't wrap ones mind around it.

Period art is so bleak that modern historians discounted it until the tree ring record established that this trauma happened on a global scale.

Lyonwiss , March 21, 2017 at 2:21 pm

Economics is not science, simply because economics does not take facts seriously enough to modify flawed theories.

http://www.asepp.com/facts-and-economic-science/

justanotherprogressive , March 21, 2017 at 3:00 pm

Or throw them out! I remember the very first thing I was taught in Economics 101 about supply and demand and how they would balance at an equilibrium price. It didn't take much thinking to realize that there is no equilibrium price and that an equilibrium price was exactly the last thing suppliers or demanders wanted, and that the price of a good depended on who had the most power to set the price. Yet, we had to accept the "supply and demand theory" as coming directly from God. It's as if we were taught in Chemistry that the only acceptable theory of bonding possible was the hydrogen-oxygen bond and even though we could see with our own eyes that hydrogen also bonds to carbon, we should throw that out because it is an aberration from "acceptable theory" ..

PhilM , March 21, 2017 at 4:44 pm

Yes, coming from God; Platonic, like a Form. Economics is written in Forms, like "homo economicus" and "the efficient market." But we live in the Cave, where the markets that humans actually make are sad imitations of the Forms in the textbooks.

There's a lot good in the post, I think; noting the important philosophical underpinnings and challenges to Economics, and particularly in making it a moral, and therefore political and "social" science. But it's great to see where people's use of "incantatory names from the past" is called out by the curator. It's a pet peeve.

digi_owl , March 22, 2017 at 1:45 pm

Economics is the last "science" to hold onto the notion of equilibrium. The rest has moved on to complex systems/chaos theory, first demonstrated in meteorology. Trying to apply complex systems to economics have been the goal of Steve Keen's work for several decades now.

Rosario , March 21, 2017 at 2:38 pm

In college I couldn't help but notice the similarities between modern economic theory and the control theory taught in engineering. Not such a great fit though, society is not a mechanical governor.

craazyboy , March 22, 2017 at 7:20 am

Ha. That's the same thing that got economists so excited. Things is, an engineering student attempting to model a simple system with two moving parts cares a great deal about whether the moving parts are connected by a spring, or ball screw, or shock absorber, or lever, or even invisible stuff like a temperature gradient when coming up with the system math model. Economists seem to think wtf is the difference?

Next, if the math gets a bit unwieldy as the number of moving parts increase, which it does in a hurry, they decide to simplify the math. Next, assume they have perfect sensors for everything and system lag can assumed to be zero for talking purposes, and in research papers too. Next, hysteresis effects due to bent parts, leaky valves and stretched springs are assumed not to exist. Congress has the "Highway Bill" thingy to address that.

Next, the guy with the control knob will do the "right thing". Or better yet, a "market" is doing the control knob. There could be "intermediaries", but these are modeled as zero loss pieces of golden wire and gold plated connectors.

Finally, money comes from batteries and there is no such thing in the real world like "shorts", "open circuits", or "semiconductors" with their quantum tunneling properties.

Other than that, it's all good!

knowbuddhau , March 21, 2017 at 5:23 pm

Thanks for this, and especially the heads up about the author's take on Smith. This is exactly what I'm on about. Not only are there more ways of knowing than the infamous mechanical, it itself should've died long ago.

I learned that from this Chomsky lecture I found last year: Noam Chomsky: The machine, the ghost and the limits of understanding; Newton´s contribution to the study of mind" . (Quotes are from Science, Mind, and Limits of Understanding , an essay that seems to me to be the basis of the lecture.) Pretty sure I mentioned it in comments somewhere.

The author stresses economics is stuck in the age of Descartes. The history of Newton's refutation of Descartes's mechanical philosophy is very interesting. Yes, refutation. Descartes's mechanical philosophy is as dead as a dodo. So why does it still plague us? Obviously, because thinking of and acting on nature as if it were all just one great big machine works at getting you paid, much better than that wishy-washy humanism crap. /f (facetious).

I used to go on and on against reducing everything to mechanisms, and I largely blamed Newton. I was wrong.

I've spent an hour trying to boil this down. Ain't happenin. Apologies for the length.

The background is the so-called "mechanical philosophy" – mechanical science in modern terminology. This doctrine, originating with Galileo and his contemporaries, held that the world is a machine, operating by mechanical principles, much like the remarkable devices that were being constructed by skilled artisans of the day and that stimulated the scientific imagination much as computers do today; devices with gears, levers, and other mechanical components, interacting through direct contact with no mysterious forces relating them. The doctrine held that the entire world is similar: it could in principle be constructed by a skilled artisan, and was in fact created by a super-skilled artisan. The doctrine was intended to replace the resort to "occult properties" on the part of the neoscholastics: their appeal to mysterious sympathies and antipathies, to forms flitting through the air as the means of perception, the idea that rocks fall and steam rises because they are moving to their natural place, and similar notions that were mocked by the new science.

The mechanical philosophy provided the very criterion for intelligibility in the sciences. Galileo insisted that theories are intelligible, in his words, only if we can "duplicate [their posits] by means of appropriate artificial devices." The same conception, which became the reigning orthodoxy, was maintained and developed by the other leading figures of the scientific revolution: Descartes, Leibniz, Huygens, Newton, and others.

Today Descartes is remembered mainly for his philosophical reflections, but he was primarily a working scientist and presumably thought of himself that way, as his contemporaries did. His great achievement, he believed, was to have firmly established the mechanical philosophy, to have shown that the world is indeed a machine, that the phenomena of nature could be accounted for in mechanical terms in the sense of the science of the day. But he discovered phenomena that appeared to escape the reach of mechanical science. Primary among them, for Descartes, was the creative aspect of language use, a capacity unique to humans that cannot be duplicated by machines and does not exist among animals, which in fact were a variety of machines, in his conception.

As a serious and honest scientist, Descartes therefore invoked a new principle to accommodate these non-mechanical phenomena, a kind of creative principle. In the substance philosophy of the day, this was a new substance, res cogitans, which stood alongside of res extensa. This dichotomy constitutes the mind-body theory in its scientific version. Then followed further tasks: to explain how the two substances interact and to devise experimental tests to determine whether some other creature has a mind like ours. These tasks were undertaken by Descartes and his followers, notably Géraud de Cordemoy; and in the domain of language, by the logician-grammarians of Port Royal and the tradition of rational and philosophical grammar that succeeded them, not strictly Cartesian but influenced by Cartesian ideas.

All of this is normal science, and like much normal science, it was soon shown to be incorrect. Newton demonstrated that one of the two substances does not exist: res extensa. The properties of matter, Newton showed, escape the bounds of the mechanical philosophy. To account for them it is necessary to resort to interaction without contact. Not surprisingly, Newton was condemned by the great physicists of the day for invoking the despised occult properties of the neo-scholastics. Newton largely agreed. He regarded action at a distance, in his words, as "so great an Absurdity, that I believe no Man who has in philosophical matters a competent Faculty of thinking, can ever fall into it." Newton however argued that these ideas, though absurd, were not "occult" in the traditional despised sense. Nevertheless, by invoking this absurdity, we concede that we do not understand the phenomena of the material world. To quote one standard scholarly source, "By `understand' Newton still meant what his critics meant: `understand in mechanical terms of contact action'."

It is commonly believed that Newton showed that the world is a machine, following mechanical principles, and that we can therefore dismiss "the ghost in the machine," the mind, with appropriate ridicule. The facts are the opposite: Newton exorcised the machine, leaving the ghost intact. The mind-body problem in its scientific form did indeed vanish as unformulable, because one of its terms, body, does not exist in any intelligible form. Newton knew this very well, and so did his great contemporaries.

And later:

Similar conclusions are commonplace in the history of science. In the mid-twentieth century, Alexander Koyré observed that Newton demonstrated that "a purely materialistic pattern of nature is utterly impossible (and a purely materialistic or mechanistic physics, such as that of Lucretius or of Descartes, is utterly impossible, too)"; his mathematical physics required the "admission into the body of science of incomprehensible and inexplicable `facts' imposed up on us by empiricism," by what is observed and our conclusions from these observations.

So the wrong guy was declared the winner of Descartes vs. Newton, and we've been living with the resultant Frankenstein's monster of an economy running rampant all this time. And the mad "scientists" who keep it alive, who think themselves so "realistic" and "pragmatic" in fact are atavists ignorant of the last few centuries of science. But they do get paid, whereas I (relatively) don't.

Vatch , March 21, 2017 at 5:40 pm

Alexander Koyré observed that Newton demonstrated that "a purely materialistic pattern of nature is utterly impossible (and a purely materialistic or mechanistic physics, such as that of Lucretius or of Descartes, is utterly impossible, too)"

I think that Newton considered phenomena like gravity, magnetism, and optics to be non-material, perhaps even spiritual, and separate from matter. Modern physicists would disagree, and would consider gravity and electro-magnetism to be purely material phenomena. Newton didn't prove that the world is non-mechanical; he showed that objects do not need to touch for them to have influence on each other.

It is still quite possible that there are non-material phenomena, but those would be separate from gravity and electro-magnetism, which Newton considered non-material.

diptherio , March 21, 2017 at 7:10 pm

It is still quite possible that there are non-material phenomena

Like love, courage, hope, fear, greed and compassion?

Vatch , March 21, 2017 at 7:37 pm

Sure! The existence of souls is another possibility (even for Buddhists, although I suppose they would have to be pudgalavadins to believe in this).

Plenue , March 22, 2017 at 1:54 pm

Are all products of the brain. I don't see how the results of the interaction of electrical impulses and chemicals are non-material. Magic is not an explanation for anything.

M Quinlan , March 21, 2017 at 7:50 pm

So Newton formulated his theories because of his belief in Alchemy and not, as I had thought, despite it. Discussions like this are what make this site so great.

blert , March 21, 2017 at 7:08 pm

All modern economic thought ( 1900+ ) has been corrupted by the arrogance of Taylor's Time & Motion Studies. The essence of which is that bean counters can revolutionize economic output by statistics and basic accounting.

AKA Taylorism.

Big Government is Taylorism as practiced.

At bottom, it arrogantly assumes that if you can count it, you can optimise it.

The fact is that 'things' are too complicated.

Taylor's principles only work in a micro environment. His work started in machine shops, and at that level of simplicity, still applies.

Its abstractions and assumptions break down elsewhere.

MOST economic models in use today are the grandsons of Taylorism.

They are also the analytic engines that have driven the global economy to the edge of the cliff.

RBHoughton , March 21, 2017 at 7:24 pm

For my penny's worth the sentence "Today, the poor are hemmed in by so many regulations and procedures (real estate, education, police) that people are now starved" reveals the main problem.

Too many of the most lucrative parts of every national economy have been closed off by politicians and reserved for their friends.

Peter L. , March 23, 2017 at 9:55 pm

The introductory remarks on Adam Smith reminded me of a funny exchange between David Barsamian and Noam Chomsky. Barsamian complements Chomsky on his research on Adam Smith :

DAVID BARSAMIAN: One of the heroes of the current right-wing revival is Adam Smith. You've done some pretty impressive research on Smith that has excavated a lot of information that's not coming out. You've often quoted him describing the "vile maxim of the masters of mankind: all for ourselves and nothing for other people."

NOAM CHOMSKY: I didn't do any research at all on Smith. I just read him. There's no research. Just read it. He's pre-capitalist, a figure of the Enlightenment. What we would call capitalism he despised.

People read snippets of Adam Smith, the few phrases they teach in school. Everybody reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division of labor is. But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be.

And therefore in any civilized society the government is going to have to take some measures to prevent division of labor from proceeding to its limits.

And here is a link to Adam Smith's poignant denunciation of division of labour:

http://www.econlib.org/library/Smith/smWN20.html#V.1.178

This mention of division of labor is, as Chomsky points out, left out of the index of the University of Chicago scholarly edition! Of George Stigler's introduction Chomsky claims, "It's likely he never opened The Wealth of Nations. Just about everything he said about the book was completely false."

I recommend reading the entire paragraph at the link above. Smith writes:

"The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it. "

[Mar 24, 2017] Are Empirical Economists Idiot Savants?

Notable quotes:
"... Only the people who understand both the data and its limitations, and not get lost in the illusion of precision ..."
"... Shiller describes many modern economists and market observers as idiot-savants; truth be told, when using that phrase he is only half right. ..."
www.ritholtz.com

By Barry Ritholtz - November 21st, 2010, 8:31AM

The Economist asks: "Fifty years after the dawn of empirical financial economics, is anyone the wiser?"

My short answer: "Only the people who understand both the data and its limitations, and not get lost in the illusion of precision."

Markets are driven by myriad factors, most of which are readily quantifiable. But the small number of inputs that do not lend themselves to easy modeling is how certain empiricists get themselves into trouble. They believe their models accurately account for the real world, when they do not.

One would imagine that the parade of Black Swan events that keep upending their models would convince these economists otherwise, but you would be surprised at how foolishly stubborn these folks are.

The EMH proponents, the VAR analysts, the "stocks for the long run" folks - the grim reality of their performance has not dissuaded them from their beliefs. This has Yale Professor Robert Shiller concerned:

"[Shiller] worries that academic departments are "creating idiot savants, who get a sense of authority from work that contains lots of data". To have seen the financial crisis coming, he argues, it would have been better to "go back to old-fashioned readings of history, studying institutions and laws. We should have talked to grandpa."

Shiller puts his finger on the right pressure point. The factors ignored by the quants were the underlying changes in laws and regulations. That allowed banks to run wild, something the pure quants were not prepared to detect and act upon. The radical deregulation of the past 3 decades was the equivalent of dark matter, undetectable by Newtonian physics - or quant trading funds.

Shiller describes many modern economists and market observers as idiot-savants; truth be told, when using that phrase he is only half right.

Here is the Economist:

IT ALL began with a phone call, from a banker at Merrill Lynch who wanted to know how investors in shares had performed relative to investors in other assets. I don't know, but if you gave me $50,000 I could find out, replied Jim Lorie, a dean at the University of Chicago's business school, in so many words. The banker, Louis Engel, soon agreed to stump up the cash, and more. The result, in 1960, was the launch of the university's Centre for Research in Security Prices. Half a century later CRSP (pronounced "crisp") data are everywhere. They provide the foundation of at least one-third of all empirical research in finance over the past 40 years, according to a presentation at a symposium held this month. They probably influenced much of the rest. Whether that is an entirely good thing has become a matter of debate among economists since the financial crisis.

It is an interesting article worth perusing . . .

Source:
Data birth
Economist Nov 18th 2010
http://www.economist.com/node/17519706?story_id=17519706

34 Responses to "Are Empirical Economists Idiot Savants?"

KentWillard: November 21st, 2010 at 8:51 am

My personal experience has been that most 'quants' in Finance don't have economics degrees. Often a PhD in Physics. Sometimes in Math, sometimes in Finance. Many aren't from the US, or even the West. They don't have an understanding, or often interest in markets. They can sure run a lot of simulations quickly though.

machinehead : November 21st, 2010 at 8:53 am

'Shiller puts his finger on the right pressure point. The factors ignored by the quants were the underlying changes in laws and regulations.'

To these factors, I would add the cyclical analysis described in a Big Picture post about Felix Zulauf a couple of days ago. Quantitative models do a pretty good job of identifying 'late expansion phase' syndrome: bubbly equity markets, loose credit standards, tightening capacity, persistent inflation (properly measured).

But every time, economists as a group say that the Federal Reserve will achieve a soft landing, and recession will be averted. Many of them are saying this now about China, currently manifesting 'late expansion phase' syndrome with a vengeance.

Why are economists so poor at reading the business cycle? I'd contend that most of them are conflicted. Their paychecks come from corporate entities who don't want to hear recession forecasts. Federal Reserve economists certainly aren't going to bite the FOMC's guiding hand. Academic economists should be freer, you'd think, but some have corporate research funding. Robert Schiller at Yale was one of the few (with Irrational Exuberance, January 2000) to get a cyclical peak right.

Behavioral economics says that economists, like every other cohort, will be victims of groupthink at inflection points, always zigging when they should zag. This is the tragedy of the Federal Reserve's interest rate central planners. Never will they succeed at day-trading this vast economy into prosperity. They've spectacularly failed at even the much narrower task of enriching their client banking cartel at the expense of everyone else.

Here's hoping that B.S. 'Benny Bubbles' Bernanke will be history's last Fed chairman.

ToNYC: November 21st, 2010 at 9:02 am

Granpa knew that Moral Authority took care of business and was worth more to effect continuity or change than any manipulation of currency or credit. JP Morgan knew that Lending was all about Character and told Congress that other factors were secondary. Quants know how to manipulate data and the value of nothing.

Opir: November 21st, 2010 at 9:27 am

If we accept, for the sake of argument, that economics is really 90% mass psychology, 10% math, then isn't a large part of the issue that many of its professional practitioners have tried to understand problems though a lens where those percentages are reversed? There is perhaps kind of bias that causes many of these people to only see the world using neat models, and discount that what economics is really about trying to understand (once you get beyond the simple cases where said models and standard ideas about incentives work):

what people do and want to do; how many of them do it; and for how long, modified by:

1) geopolitical events 2) the zeitgeist 3) culture (and subculture)

People may go into the field with a love of numbers and an interest in money; what we may really need, however, are people who care about understanding human behavior as it pertains to resources and power within and between societies. A "sociology for money", as it were.

Go Dog Go: November 21st, 2010 at 9:27 am

Shiller describes many modern economists and market observers as idiot-savants; truth be told, when using that phrase he is only half right.

I just got that. Very funny

Mark E Hoffer: November 21st, 2010 at 9:42 am

funny, the Argument, ~"over-reliance on imperfect Models/questionable Data", is, no doubt, True..

though, substitute "AGW/"Climate Change" for "Econometrics/Financial Engineering" and . ~~

differently, Economists, of course, should be snorting more *Exhaust Fumes, and less Laser Toner..

billkeep: November 21st, 2010 at 9:42 am

There are empiricists and then there are empiricists. A quick look at Reinhart and Rogoff's book "This Time Is Different," shows the incestual limitation of quant jocks (whether trained in econ or physics or math - it's all the same because they use the same tired data) and the power that can come from fresh data, fresh thinking, and an absence of self-interest in the outcome (see Folbre's piece on the ethics of economists in the NYT Economix column).

Bill W: November 21st, 2010 at 9:47 am

Despite our great triumphs of science and advances in understanding, we still don't know jack about the universe. I believe in the constant advance of knowledge, but I also believe in being realistic.

We need to be prudent when we apply our theories about the world to the real world. The results can be disappointing.

What's much worse than a fool? A fool with ambition.

How the Common Man Sees It Says:

November 21st, 2010 at 10:08 am The fact is, if you pay people to look the other way, they usually do.

mhdoc: November 21st, 2010 at 10:14 am

Many years ago I was a biology graduate student when we got our first computer terminal and I discovered the joys of stepwise regression. I spent hours searching out the last 5% of the variance. Then I went on my first field trip of the season to check on the rainfall collectors I had randomly scattered through the forest. We measured the dissolved elements in the water we collected; parts per million potassium, etc.

One of the collectors had gotten plugged, filled with water, and a thirsty chipmunk had fallen in and drowned. In addition, the water was covered with pollen. Suddenly the value of stepwise regression for explaining what was going on took a serious hit. I guess my black swan looked like a chipmunk :)

Bill W: November 21st, 2010 at 10:26 am

billkeep, I like what you said about fresh thinking and and absence of self-interest. How often do "data driven," "open-minded," scientists become high priests of their own theories. They will put down traditional religious beliefs, without realizing the dogma of their own thinking. There will always be religion of some sort in this world, whether the practitioners realize it or not.

I think the quants are probably missing a healthy dose of the applied knowledge of experienced investors. You don't have to be able to mathematically formulate why something works to understand that it does. How do you separate the quack theories from the real ones? If I knew that I'd be considerably wealthier.

farmera1: November 21st, 2010 at 10:34 am

Misuse of statistics by economist/quants is a root cause of our recent meltdown.

Seeing the world and economics as a normal/Gaussian/bell curve world (it isn't in most cases) will lead you to a path of unforeseen and destructive events. You end up making all kinds of risk assessments and predictions that are built upon "facts/Gaussian models/bell curve" that just don't reflect the real world. Some big unpredicted event will get you.

For example thinking (and building an investment house of cards) just because models show you that the real estate market never goes down (nation wide) that it will never happen is a fool's approach, but it built huge bonuses (say a cool $100,000,000/yr for several) for the executives so in that sense it was successful. It also made the Ownership Society possible. It allowed this country to live way beyond its means for years so most benefited. Cut taxes and start wars, no problem, we got this baby humming. Since we were able to predict and control risk so well who needs regulations. Leverage, no problem, we have it under control (aka being fully hedged). RIGHT.

By the way the social sciences do the same thing, in using things like ANV, standard deviations, risk, relative error (?)etc. This misuse is just as big in its' own way as the quants/economists' errors.

Petey Wheatstraw: November 21st, 2010 at 11:12 am

"Markets are driven by myriad factors, most of which are readily quantifiable." _______________

The least quantifiable of which is direct intervention in, and manipulation by, central bankers. The markets are rigged. Quantify THAT, bitch.

(sorry for the last sentence, not aimed at anyone.)

~~~

BR: $600 Billion dollars over 6-9 months.

Mark E Hoffer: November 21st, 2010 at 11:35 am

though, speaking of 'Empiricists', these cats http://www.gapminder.org/ offer some interesting analytics, esp. here http://www.gapminder.org/labs/

as per, YMMV, YOMP ..

louis: November 21st, 2010 at 11:38 am

There are a myriad of factors that set a point spread.

Sechel: November 21st, 2010 at 11:55 am

There's an old joke about the drunk economists looking for his keys by the light post even though they were lost elsewhere, when asked he responded, "because this is where the light is

The market seems intent on assuming the market operates under the efficient market hypothesis, price distribution is normal and that participants always act rationally. Nothing could be further from the truth. Mandelbrot discussed how observations of Cotton price movements disproved this. We know there is information asymmetry in the marketplace.

The market knows what models to use, it just chooses not to. It's beyond fat tails, it requires extreme value theory, knowing that risk scales at the extremes and that bad news comes in threes(dependence).

So why use the failed tools, the answer is simple. If the market gives up on OAS, Black-Scholes and the like, it has to accept being in the dark more than it's used to.

Sechel: November 21st, 2010 at 12:02 pm

Barry, the mortgage market learned that VAR does not work, that OAS is a terrible tool. Many have turned to scenario analysis, but a great deal many like the simplicity of the old failed tools.

daf48: November 21st, 2010 at 12:12 pm

"most of which are readily quantifiable" Really? I'd be careful if that was my point of view. Economic reality is compiled by using data points from thousands of governments, corporate think tanks, independent agencies, etc'. But little work has been done to look at the system as a whole. Or better yet. is there a global economic system?

Uchicagoman: November 21st, 2010 at 12:18 pm

http://en.wikipedia.org/wiki/Dimensional_Fund_Advisors

Uchicagoman: November 21st, 2010 at 12:22 pm

$190 billion under management.

RW: November 21st, 2010 at 12:28 pm

IMO your "short answer" is spot on BR: The illusion of precision is a major problem not only because the data are limited or much more granular than suspected - e.g., the fact that price can be recorded down to the penny does not mean that is where the significant digit is - but also because increased precision cannot significantly improve predictability of system behavior if nonlinear factors are present.*

*this was a key insight of the meteorologist Edward Lorenz, one of the first 'chaos' theoreticians (1963), that and the sensitivity of even the best model simulations to minute changes in initial conditions (butterfly effect).

Uchicagoman: November 21st, 2010 at 12:38 pm

Here's an old (physics?) saying:

"You can either dazzle me with data, or butter me with bullshit."

b_thunder: November 21st, 2010 at 3:16 pm

"[Shiller] worries that academic departments are "creating idiot savants, who get a sense of authority from work that contains lots of data".

I wonder who Shiller had in mind? How about that guy who used to go over massive amounts of data while in his bathtub? Remember the Maestro? And another one who says we're under threat of deflation (according to statisticians) and who doesn't see that other than houses and flat-screen TVs, prices for everything else are rising in the real world. The one who thinks that because cost of gasoline and food are not in his data tables and charts, they do not matter. The one who thinks that in times of 17% U6 un/under-employment and massive outsourcing wages will rise and people will get hired if prices go up.

I also wonder what Barry's buddy "Invictus" thinks about all this. He seems to trust the charts and data more than the real world sentiment.

Sechel: November 21st, 2010 at 4:01 pm

Who can believe anything they say. With one breadth they tell us quantitative easing is meant to spur bank lending, then they pay banks on their reserves encouraging them not to lend those same reserves out. As far as the Fed goes, no credibility.

Julia Chestnut: November 21st, 2010 at 4:02 pm

You know, BR, the best economics class I had during my graduate studies was econometrics. The thing that was so good about it (and so incredibly annoying at the time) was that the prof made us work the matrix algebra from the ground up in building regression analyses. We were going to be using computers to regress the data - but he was adamant that unless you understood the math, and knew exactly what the math was doing with the data we input, you would have no idea what the limitations of the analysis were. He also insisted that we understand the limitations of the data – how it was collected, what it meant. I've used that course at least weekly since I graduated embarrassingly long ago (unlike "finance," where I at least learned that derivatives are for hedging, not investing).

I'd say that either a true statistician or an applied mathematician for a quant is the way to go. I meet loads of economists who couldn't figure their way out of a paper bag. Know what's worse, though? The number of MDs with less than a clue about the math underlying normative numbers in lab tests. I'm less likely to get killed by a quant.

TerryC: November 21st, 2010 at 4:07 pm

"Only the people who understand both the data and its limitations, and not get lost in the illusion of precision."

Barry, I think you mean accuracy.

billkeep: November 21st, 2010 at 4:08 pm

Bill W

Actually if you knew that you wouldn't be wealthy. You would only be wealthy if you knew it first and with enough time to act in your own interests. There is a unreconcilable difference of purpose between public and private interests when it comes to understanding markets. As Sechel says We know there is information assymetry in the marketplace. In fact, we bet on it. The problem we seem to now have is that a few analysts who do understand the psychology of investors or not "public" analysts. As a result, the public analysts lag behind because they have been trained too narrowly in terms of the data and lack the understanding of investor behavior. That is the way it appears to me anyway.

constantnormal: November 21st, 2010 at 5:35 pm

As in most things, the quality of the question says more than the completeness of the answer.

Andy T: November 21st, 2010 at 6:35 pm

Opir@9.27 AM

Amen to that my friend.

What many people lose sight of is the fact that we humans tend to move in "excesses." First there is excessive greed which causes asset bubbles, then comes the excessive fear after the bubble bursts.

This has been going on for several hundred years, regardless of regulatory structure.

And, you know what?

That's OK. It is it what it is

Attempts to "modify" human behavior or attempts to disrupt the natural flow of things will have it's own unintended consequences.

ezrasfund: November 21st, 2010 at 7:21 pm

So right. You can build a giant edifice of precise calculations. But so often that edifice is build on a foundation of vague assumptions such as "housing prices won't go down."

RodgerMitchell: November 21st, 2010 at 7:26 pm

All the mathematical formulas in the world are trumped by the simple fact that the U.S. is monetarily sovereign.

1. It does not need to borrow

2. It can pay for any deficits of any size, without raising taxes

3. It never should engage in "austerity."

4. It cannot be forced into bankruptcy, nor can any of its agencies (i.e. Social Security, Medicare et al) be forced into bankruptcy. .

Spending by the U.S. neither is constrained by taxes and borrowing, nor is it even related to taxes and borrowing. Either can be done or eliminated without affecting the other. That is, taxing does not affect spending, and spending does not affect taxing. They, in fact, are two, unrelated operations. . The sole constraint on federal spending is inflation. We are nowhere near inflation, and it easily can be prevented and cured with interest rate control. . Those who do not understand monetary sovereignty do not understand economics. .

Rodger Malcolm Mitchell

Mark E Hoffer: November 21st, 2010 at 7:35 pm

RMM,

aren't you overlooking http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Federal+Reserve+Act+of+1913 ?

and, because of such, it, actually, "does need to borrow", contra to your first assertion..(?)

soloduff: November 21st, 2010 at 9:50 pm

The author exhibits an elementary conceptual confusion. Financial economics (of the EMH/Modern Portfolio fame) is not "empirical" economics. Rather, it is based upon analogy with 19th century statistical mechanics; hence its fetish of the bell curve ("normal distribution"), which fails as a benchmark in every crisis. B. Mandlebrot and E. Derman have written extensively on this genre of economics; which differs from mainstream ("neoclassical" a la Samuelson et al.) only inasmuch as neoclassical economics takes its metaphor from an even more antiquated department of 19th century physics, namely, "rational mechanics"–remember your Econ 101 text's proud mention of the "production function" (Cobb-Douglas) and the Lagrangian multiplier? About 15 years ago Philip Mirowski wrote an expose of the neoclassical analogy–"More Heat Than Light"–demonstrating conclusively that the luminaries of economics understood neither the physics that they borrowed nor the economics that they data-fitted to their analogy. (Ditto with financial economics in the critiques provided by Mandlebrot and Derman.) –Oh, well, should we expect scholarly accuracy from a mere financial reporter when the scholars themselves serve up such wanton slop? In a word: All idiots, no savants.

CitizenWhy: November 21st, 2010 at 10:32 pm

Empirical economists are idiot savants only in regard to economics. In other things they are probably OK.

[Mar 23, 2017] Cambell law: The more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to

Mar 23, 2017 | economistsview.typepad.com
reason : , March 22, 2017 at 07:25 AM
The most valuable part of Chris Dillow's piece is the link to Campbell's law.

https://en.wikipedia.org/wiki/Campbell%27s_law

I have often referenced this without being aware of it.

My version is that any proxy measure will become less relevant over time as it drifts away from the intended target (the more so if it is used to guide policy).

anne -> reason ... , March 22, 2017 at 07:36 AM
https://en.wikipedia.org/wiki/Campbell%27s_law

Campbell's law is an adage developed by Donald T. Campbell, an example of the cobra effect:

"The more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor."

Campbell's law was published in 1976 by Campbell, a social psychologist, an experimental social science researcher and the author of many works on research methodology: "When a measure becomes a target, it ceases to be a good measure."

JF -> anne... , March 22, 2017 at 07:50 AM
Chris G probably liked this too. I had Campbell's stuff next to my bed for a long long time.
anne -> JF... , March 22, 2017 at 08:18 AM
I had Donald Campbell's stuff next to my bed for a long long time.

[ Do suggest a reading for us. ]

JF -> anne... , March 22, 2017 at 10:31 AM
"Experimental and Quasi-Experimental Designs for Research" - copyright 1963, my version was the tenth printing in 1973
anne -> JF... , March 22, 2017 at 08:23 AM
http://www.nytimes.com/1996/05/12/us/donald-t-campbell-master-of-many-disciplines-dies-at-79.html

Donald T. Campbell, Master of Many Disciplines
By ROBERT MCG. THOMAS JR.

Donald T. Campbell, a nimble-minded social scientist who left his mark on half a dozen disciplines and helped revolutionize the fundamental principles of scientific inquiry common to them all, died on Monday in a hospital near his home in Bethlehem, Pa....

Dr. Campbell, who did his major work at Northwestern University, was by training and his Berkeley doctorate a social psychologist, but it was a tribute to his bewildering range as a master methodologist that when he took up his last academic post, at Lehigh University, in 1982 university officials threw up their hands and simply designated him "university professor," with faculty listings in the departments of psychology, sociology and anthropology and the department of education.

They could easily have thrown in biology, the philosophy of science and market research. For a generation, virtually no respectable researcher this side of the chemistry lab has designed or carried out a reputable scientific study without a thorough grounding in what Dr. Campbell called quasi-experimentation, the highly sophisticated statistics-based approach he invented to replicate the effects of the truly randomized scientific studies that are all but impossible in the slippery and unruly world of human interactions....

JF -> anne... , March 22, 2017 at 10:34 AM
Should have added influence in political science and public administration to itemize the influence this should have on public policy making.
im1dc -> reason ... , March 22, 2017 at 08:59 AM
It is a valid and reliable adage from a Social Psychologist who Economists should take seriously. His adage explains why Economists are so often wrong, i.e., they fail to take into account the nature and thus behavior of people as individuals, groups, and as both sentient and thinking beings who can and do change behavior routinely sometimes for rational reasons but just as often just to do and be different.

That's impossible to predict with statistical models although with statistical models scientists can capture WHEN a change is occurring, even where and sometimes why and how but only after the change has occurred, which makes Prediction most difficult.

libezkova -> im1dc... , March 22, 2017 at 02:08 PM
Add to this what Marxists used to call "class interest" of financial oligarchy and we get closer to understanding why neo-classical economics is so bad.

[Mar 19, 2017] They say when all you have is a hammer, every problem looks like a nail. And the risk is that when every policy adviser is an economist, every problem looks like inadequate per-capita gross domestic product

Notable quotes:
"... Sociologists spend their careers trying to understand how societies work. And some of the most pressing problems in big chunks of the United States may show up in economic data as low employment levels and stagnant wages but are also evident in elevated rates of depression, drug addiction and premature death. In other words, economics is only a piece of a broader, societal problem. So maybe the people who study just that could be worth listening to. ..."
"... "Once economists have the ears of people in Washington, they convince them that the only questions worth asking are the questions that economists are equipped to answer," said Michèle Lamont, a Harvard sociologist and president of the American Sociological Association. "That's not to take anything away from what they do. It's just that many of the answers they give are very partial." ..."
"... For starters, while economists tend to view a job as a straightforward exchange of labor for money, a wide body of sociological research shows how tied up work is with a sense of purpose and identity. ..."
"... "Wages are very important because of course they help people live and provide for their families," said Herbert Gans, an emeritus professor of sociology at Columbia. "But what social values can do is say that unemployment isn't just losing wages, it's losing dignity and self-respect and a feeling of usefulness and all the things that make human beings happy and able to function. ..."
"... That seems to be doubly true in the United States. For example, Ofer Sharone, a sociologist at the University of Massachusetts, Amherst, studied unemployed white-collar workers and found that in the United States, his subjects viewed their ability to land a job as a personal reflection of their self-worth rather than a matter of arbitrary luck. They therefore took rejection hard, blaming themselves and in many cases giving up looking for work. In contrast, in Israel similar unemployed workers viewed getting a job as more like winning a lottery, and were less discouraged by rejection. ..."
"... By and large, 'librul' economists ignore distribution...preferring to concentrate on growth from policies like corporate-negotiated 'free' trade and trickle down monetary policy that favors the Wall Street banking cartel. ..."
"... BTW what happened to Krugman's perfunctory twice a year column on inequality? ..."
"... The nicotine addict cares about as much about 'risk under uncertainty' as Harford. ..."
Mar 19, 2017 | economistsview.typepad.com
Fred C. Dobbs : March 18, 2017 at 03:02 AM

, 2017 at 03:02 AM
What if Sociologists Had as Much Influence as
Economists? https://nyti.ms/2m9yDHL via @UpshotNYT
NYT - NEIL IRWIN - MARCH 17, 2017

Walk half a city block in downtown Washington, and there is a good chance that you will pass an economist; people with advanced training in the field shape policy on subjects as varied as how health care is provided, broadcast licenses auctioned, or air pollution regulated.

Turn on cable news, and the guests who opine on the weighty public policy questions of the day quite often have some title like "chief economist" underneath their name. And there are economists sprinkled throughout the government - there is an entire council of them advising the president in most administrations, if not yet in this one.

But as much as we love economics here - this column is named Economic View, after all - there just may be a downside to this one academic discipline having such primacy in shaping public policy.

They say when all you have is a hammer, every problem looks like a nail. And the risk is that when every policy adviser is an economist, every problem looks like inadequate per-capita gross domestic product.

Another academic discipline may not have the ear of presidents but may actually do a better job of explaining what has gone wrong in large swaths of the United States and other advanced nations in recent years.

Sociologists spend their careers trying to understand how societies work. And some of the most pressing problems in big chunks of the United States may show up in economic data as low employment levels and stagnant wages but are also evident in elevated rates of depression, drug addiction and premature death. In other words, economics is only a piece of a broader, societal problem. So maybe the people who study just that could be worth listening to.

"Once economists have the ears of people in Washington, they convince them that the only questions worth asking are the questions that economists are equipped to answer," said Michèle Lamont, a Harvard sociologist and president of the American Sociological Association. "That's not to take anything away from what they do. It's just that many of the answers they give are very partial."

As a small corrective, I took a dive into some sociological research with particular relevance to the biggest problems facing communities in advanced countries today to understand what kinds of lessons the field can offer. In 1967, Senator Walter Mondale actually proposed a White House Council of Social Advisers that he envisioned as a counterpart to the well-entrenched Council of Economic Advisers. It was never created, but if it had been, this is the sort of advice it might have been giving recent presidents.

For starters, while economists tend to view a job as a straightforward exchange of labor for money, a wide body of sociological research shows how tied up work is with a sense of purpose and identity.

"Wages are very important because of course they help people live and provide for their families," said Herbert Gans, an emeritus professor of sociology at Columbia. "But what social values can do is say that unemployment isn't just losing wages, it's losing dignity and self-respect and a feeling of usefulness and all the things that make human beings happy and able to function.

That seems to be doubly true in the United States. For example, Ofer Sharone, a sociologist at the University of Massachusetts, Amherst, studied unemployed white-collar workers and found that in the United States, his subjects viewed their ability to land a job as a personal reflection of their self-worth rather than a matter of arbitrary luck. They therefore took rejection hard, blaming themselves and in many cases giving up looking for work. In contrast, in Israel similar unemployed workers viewed getting a job as more like winning a lottery, and were less discouraged by rejection.

(When the job search becomes a blame game
http://phy.so/310028844 via @physorg_com)

It seems plausible that this helps explain why so many Americans who lost jobs in the 2008 recession have never returned to the labor force despite an improved job market. Mr. Sharone is working with career counselors to explore how to put this finding to work to help the long-term unemployed. ...

ilsm -> Fred C. Dobbs... , March 18, 2017 at 03:43 AM
I thought they did, and they stay on one side of the shark.
JohnH -> Fred C. Dobbs... , March 18, 2017 at 07:54 AM
By and large, 'librul' economists ignore distribution...preferring to concentrate on growth from policies like corporate-negotiated 'free' trade and trickle down monetary policy that favors the Wall Street banking cartel.

BTW what happened to Krugman's perfunctory twice a year column on inequality?

ilsm : , March 18, 2017 at 03:41 AM
Tobacco survived buying politicians and better lawyers. And Madison Ave.

Inference (what Harford call "fact") may be truth in the confidence band.

The nicotine addict cares about as much about 'risk under uncertainty' as Harford.

Climate change action (the idea that US should park the SUV and move in to the city) is denied in the same way.

"Facts" about the study populations are inferences to one making a 'decision'. If the decision maker is an addict....

Same for Obamacare idolatry.

[Mar 03, 2017] Debunking the NAIRU myth by Matthew C Klein

Notable quotes:
"... If there is such a thing as a NAIRU, it is still a mistake to treat the NAIRU as a "given" rather than a function of policy. ..."
Feb 19, 2017 | ftalphaville.ft.com

By: Matthew C Klein

It's important to try to estimate the unemployment rate that is equivalent to maximum employment because persistently operating below it pushes inflation higher, which brings me to our price stability mandate. –Janet Yellen, January 18, 2017

A little more than half the income generated in America is paid to workers and most of the money spent in America goes to personal consumption. So it's reasonable to think there is some relationship between the health of the job market and other important macro variables.

And, in fact, there is a robust connection between the change in the unemployment rate and the change in the real value of money spent on employee compensation per working-age American since the mid-1980s:

Real COE vs unemployment

That chart shows the link between two real variables that have a logical connection to each other. The question for NAIRU believers is: why should a purely real variable (unemployment) have any bearing on a purely nominal one (inflation)?

In particular, is it reasonable to think there is an unemployment rate below which inflation necessarily gets faster and above which the pace of consumer price increases slows down? And even if there were such an unemployment rate at any point in time, would it be stable enough to be useful for policymakers concerned with smoothing the business cycle?

Many, including Federal Reserve boss Janet Yellen, seem to think the answer is "yes", but the evidence points the other way, particularly since the mid-1980s.

First, some history. In 1926, Irving Fisher found a relationship between the level of unemployment and the rate of consumer price inflation in the US. In 1958, AW Phillips studied UK data from 1861-1957 and found a relationship between the jobless rate and the growth of nominal wages, although the relationship seems to have been an artifact of the gold standard given the vertical line he found in the postwar period:

Phillips Curve 1948-1957 original

Some people (wrongly) interpreted Phillips's data to mean that there was a straightforward trade-off between the inflation rate and the unemployment rate. Policymakers could just pick any spot on "the Phillips Curve" they want. Among a certain set, the big debates in the 1960s were about whether the government should target an unemployment rate of 3 per cent or 5 per cent.

This worked out poorly, but the reaction took the form of an equally dubious idea: the Non-Accelerating Inflation Rate of Unemployment, or NAIRU. In this view, the change in the inflation rate should be related to the distance between the actual jobless rate and some theoretical level. If the unemployment rate were above this "neutral" level the inflation rate would slow down and potentially turn into outright deflation . If the jobless rate were "too low", however, consumer prices would rise at an accelerating rate.

Suppose you believe NAIRU is a real thing. What would be the argument against pushing the unemployment rate as close to zero as possible? In theory, the cost of the policy would be ever-accelerating inflation, eventually perhaps leading to hyperinflation. But the reason to dislike excessive inflation is that it ultimately makes everyone poorer, which should, among other things, increase unemployment. (Just look at Venezuela, for a recent example.)

According to the wacky world of NAIRU, however, hyperinflation can coexist just fine with hyper-employment. Clearly there must be other mechanisms at work, or else we are leaving money on the table by allowing the jobless rate to ever rise above zero.

In case this argument seems strange, consider the following exchange the Fed had on this very topic back in July 1994 (emphasis added):

MR. LINDSEY. If we ran the model out, do we believe that if we applied some social rate of discount, the losses in output later on would be more than, less than, or equal to the gains in output in the short run [from letting inflation accelerate]?

MR. KOHN. The model itself doesn't have, I don't believe, losses in output from higher inflation rates.

MR. LINDSEY. Ever? We never have a net loss in output resulting from a choice to go for inflation?

MR. PRELL. It does not take, in terms of a normal simple cost of capital calculation, a very big inflation differential to get you a net loss in the present value in the long run.

CHAIRMAN GREENSPAN. The argument as to why we get a net loss is "the Federal Reserve will react–do something." But the question is, we are the Federal Reserve and why should we react if that's true?

MR. LINDSEY. If we don't believe that the present value of output in this economy will be lower by letting inflation alone, then we should let inflation go up. It's as simple as that Do we believe that printing money will increase the present value of output?

MR. BLINDER. Yes, I think we would. I believe that printing money will give the economy a temporary high that will not last and therefore in the integral sense that you said, yes, you get a larger integral of output over an historical period, if you never decided to end it–if you never said, when you got to 10 percent inflation, whoops, that wasn't very good, and you went back to lower inflation.

CHAIRMAN GREENSPAN. Yes, but why would you conclude that at that point when, because as Ed Boehne says, 11 percent is still better?

MR. BLINDER. If 11 percent is better than 10 percent, if there's no cost to inflation–I am a little bit surprised at the tenor of this conversation around here! [Laughter] There is some academic content that is–

CHAIRMAN GREENSPAN. In all seriousness, the question really gets to the models. Why would you believe that there is a cost of increased inflation from the models?

Greenspan never got a straight answer to his question but the consensus was that models based on NAIRU are basically wrong. Tellingly, it was none other than Janet Yellen who wrongly worried the unemployment rate was "too low" in the mid-to-late 1990s and would cause inflation to accelerate.

As it happens, the data don't support the idea of NAIRU either, at least not since the mid-1980s. The test would be to compare changes in the unemployment rate against changes in the inflation rate. If NAIRU made sense, there should be a strong inverse relationship between the changes in the two series. And yet:

NAIRU core pce vs unemployment since 1985

Regressing changes in core inflation against changes in the jobless rate gets you an r-squared of 0.11, which is basically meaningless. Moreover, that result is purely a product of the data points in the blue circle, which all occurred during the teeth of the financial crisis and could be blamed on the co-movement of employment and commodity prices. Take those out, and you end up with two perfectly unrelated series:

NAIRU core pce vs unemployment since 1985 excluding GFC

You get similar results if you use headline inflation rather than core inflation.

The intellectual confusion over the relationship between unemployment and inflation was especially salient during the Fed's own policy debates in the aftermath of the crisis. The unemployment rate rose by 5 percentage points between mid-1979 and late 1982. It also rose by 5 percentage points between early 2008 and late 2009. Moreover, the jobless rate stayed above 9 per cent through first nine months of 2011. The Fed staff expected this would produce massive disinflation, or even deflation, yet it never happened.

By the January 2011 FOMC meeting , it should have been clear the old models weren't sufficient. Instead of ditching the NAIRU concept, however, the Fed's staff and many of the regional presidents tried to rehabilitate it by arguing the NAIRU had changed. (There were lots of reasons provided, including the extension of unemployment insurance benefits and skill mismatches.)

With the admirable exception of Richard Fisher at the Federal Reserve Bank of Dallas, the overwhelming consensus was that the crisis had raised the "non-accelerating inflation rate of unemployment" by about 1.5 percentage points :

FOMC 2011 Jan NAIRU estimates table

Moreover, everyone except Fisher and the New York Fed's Bill Dudley thought the crisis produced such long-lasting damage that the NAIRU would still be higher by 2015 (!) than it was before 2007. In reality, of course, the Fed has been forced to steadily revise its NAIRU estimates lower as the unemployment rate gradually normalises and inflation remains quiescent. The net effect was this rather ridiculous chart:

NAIRU fomc midpoint

NAIRU isn't just a useless concept, it's a counterproductive one that encourages policymakers to focus on the jobless rate as a means to an end (price stability) even though there is zero connection between the two variables. The sooner NAIRU is buried and forgotten, the better.

Policy Tensor, 17 hours ago

Matthew, there's strong evidence that what drives US inflation (and more generally DE inflation) is not domestic slack but global slack. See https://policytensor.com/2016/12/17/global-slack-us-inflation-and-the-feds-policy-error/

grputland, Jan 22, 2017

To test the NAIRU hypothesis against historical data, shouldn't we plot unemployment vs. change in inflation? -- instead of CHANGE in unemployment vs. change in inflation?

Be that as it may:

If there is such a thing as a NAIRU, it is still a mistake to treat the NAIRU as a "given" rather than a function of policy. If a certain tax feeds into prices, it leaves less room for wages to feed into prices before (according to NAIRU logic) inflation accelerates. So any tax that feeds into prices will tend to raise the NAIRU. This is especially the case if the tax causes the cost of labor for employers to be higher than workers' take-home pay.

Thus the NAIRU, if it exists, is not a counsel of despair, but rather a counsel to get rid of taxes that feed into prices (especially taxes on labor) and replace them, as far as necessary, with taxes that DON'T feed into prices -- that is, taxes on economic rents.

Drago Jan 21, 2017

@ Ralph Musgrave So according to Galileo Galilei the earth is a perfect sphere. Great news. So presumably he believes there's some magical force of nature that keeps us all from falling into space, and apparently one can travel in a straight line and end up exactly where he departed.

Never read such twaddle.

Ralph Musgrave, Jan 21, 2017

@ Drago @ Ralph Musgrave Totally daft response to my points - but what I'd expect from the anti-NAIRU brigade. But for the benefit of the latter cerebrally challenged brigade, I'll spell out what I mean in more detail. I'd honestly appreciate a detailed and intelligent answer.

NAIRU is the idea that there is a relationship between inflation and unemployment: specifically, when demand rises and unemployment falls, inflation will at some point also rise (assuming the rise in demand continues).

Klein & Co claim that NAIRU relationship does not exist. That means, unless I've missed something, that if unemployment falls and continues to fall, inflation WILL NOT RISE, (because, to repeat, according to Klein & Co there is no relationship between inflation and unemployment).

Ergo it should be possible to implement a very large rise in demand plus a very large fall in unemployment, and according to Klein & Co there will be no automatic rise in inflation. Now what have I missed?

Drago Jan 21, 2017 ;

@ Ralph Musgrave @ Drago MCK perhaps went too far in saying that there is zero connection between inflation and unemployment, but the rest of his points stand.

And regarding my previous reply, I was merely alluding to the fact that what is intuitive is not always what is true.

NeilW@MMT Jan 22, 2017

@ Ralph Musgrave "So presumably he favors bumping up demand to the point where unemployment almost vanishes"

There won't if you hold the level of competition high and using buying power to stop price rises taking hold. The key is for a significant purchaser to refuse to trade at any suggested higher prices which then starves the system of aggregate demand forcing either innovation or failure. And you do that directly rather than trying to do it indirectly by trying, and failing, to price loans higher.

In a tight labour market the capital/labour ratio gets better which forces replacement of jobs with machinery and improved methods. If you can't get the staff you have to get cleverer with the ones you have.

Inflation is people trying higher prices and having them confirmed by market purchases. So you set up the system so it refuses to confirm them which forces time serialisation on the market at a lower price.

Everybody knows that the labour market pricing is controlled by trying to keep a pool of people out of work and not producing. It is a very sick design that impoverishes many, many people. And the policy concept on which it is based is a belief system, not even science. You can't see them. You can't measure them. You just have a bunch of 'Very Clever People' who make them up based upon what they feel and what they believe.

Far better to have a pool of people employed outside the private sector at a fixed living wage which the private sector has to bid against to get any labour. Then the labour market is always 'tight' against the living wage and excess bids of labour wages fall back to the living wage when the businesses fail. Both of which allow you to keep business competition white hot intense - which is what controls prices and drives productivity.

marcus nunes Jan 20, 2017

NAIRU - RIP

https://thefaintofheart.wordpress.com/2015/02/14/why-insist-on-searching-for-the-holy-grail-aka-nairu/

Contrapunctus9 Jan 20, 2017

Many variables contribute to the inflation rate, certainly more than just domestic employment (and how it is calculated). The Fed's dual mandate is inflation and employment, so it makes sense that these are a focus of the Fed's communication. But the Fed tends to focus on the result rather than the cause. It is troubling that there is little discussion from most of the FOMC on inflation factors which are now more important than unemployment (currency values, foreign labor, technology, commodity demand and speculation, labor monopsony, underemployment, labor skill demand mismatch, etc).

Producer and consumer prices are increasing, largely due to China driven commodity prices. Managerial compensation and production hourly wages are increasing. But weekly wages are stagnant due to fewer hours. The Fed is ignoring the latter, even though it is what is more important to sustained core inflation.

JustSmith Jan 20, 2017

Mr Klein, your work is usually excellent, but this, I am afraid, is very poor. Your regression analysis does not test for labour market slack (unemployment minus NAIRU); you do not discuss how the unemployment rate can be an imperfect measure of labour market slack if the structure of the labour market changes; no one has ever assumed the NAIRU is constant and policymakers are well aware of the pitfalls of using an unobservable quality; the Philips curve can shift and indeed monetary policy making is in no small part about trying to judge under what conditions it may shift.

Drago Jan 20, 2017

@ JustSmith Trying and failing....

Observer Jan 19, 2017

Looking just at the U3 unemployment rate for the NAIRU without considering the still high U6 rate and lower labour participation rate in the US may be the issue. There's still labour market slack even though U3 is at its "full" employment level.
Brito , Jan 19, 2017

" The test would be to compare changes in the unemployment rate against changes in the inflation rate."

Wait what? That doesn't test for NAIRU, that simply tests the Philips Curve, but the NAIRU and the Philips Curve is not the same concept.


"zero connection between the two variables."

What? How can there be zero connection? If the labour market becomes very tight, firms have to raise wages to attract workers. Are you saying wages cannot impact prices? That would be a bizarre claim. Wage price spirals are an observable phenomena. And what about simple supply & demand? At some point you're not going to be able to employ enough additional people to supply the rising demand for your product, this increased scarcity is likely to result in higher prices.

NeilW@MMT Jan 22, 2017

@ Brito "If the labour market becomes very tight, firms have to raise wages to attract workers. Are you saying wages cannot impact prices?"

Or do without the person, or invest in capital to replace the labour - because the capital/labour ratio just changed. Both of which drive productivity. Which is what we want.

Tight labour markets drive innovation, and if you keep the level of competition active at the front end then prices remain stable.

grumpy Jan 19, 2017

Models have to be used with caution (they are only tools) and interpreted with awareness of the real world - including for example, the varying wage bargaining power of labour, which is different, post globalisation, to what it was in the '70s.

Who do you think wanted globalisation and liberalisation of trade, and why?

Many economists revere their models excessively.

marcus nunes Jan 19, 2017

Yellen in the 90s and today

https://thefaintofheart.wordpress.com/2015/11/09/yellens-unchanging-beliefs/

marcus nunes Jan 19, 2017

For laughs:

https://thefaintofheart.wordpress.com/2012/07/20/seven-years-on-things-still-look-the-same/

user8347 Jan 19, 2017
What a silly piece. NAIRU, like many economic concepts, requires a ceteris paribus clause. Your unconditional evaluation of hypothesis is naive at best. If you're having a surge in productivity due to, say, tech, or globalization, all else is not equal.
Drago Jan 19, 2017
@ user8347 Regardless, even if such a thing as NAIRU exists, its value can only be estimated post factum, which makes it completely useless for policy purposes.
Ralph Musgrave Jan 23, 2017

@ Drago @ user8347

There's a whole string of other relationships in economics which cannot be estimated with any sort of accuracy. For example it is widely accepted that devaluation will sooner or later improve a country's balance of payments, but no one really claims to know by how much and by when. So what do we do: abandon currency re-alignments as a method of rectifying external surpluses or deficits?

And again, it is widely accepted that interest rate hikes curb demand, but no knows with any great accuracy exactly by how much. What do you suggest: abandon interest rate adjustments?

Postkey Jan 24, 2017

@ Ralph Musgrave @ Drago @ user8347

"What do you suggest: abandon interest rate adjustments?"

Maybe?

"The funny thing is: they haven't. In fact, among the more than 10,000 research articles produced by the major central banks in the two decades prior to the 2008 crisis, none explored the correlation or causation between nominal interest rates and nominal GDP growth. Fortunately, this task is not very demanding, and once we conduct such an examination, we conclude that, in actual fact, there is no evidence to back these assertions whatsoever. To the contrary, empirical evidence shows that the central banking narrative on interest rates is diametrically opposed to the observable facts in two dimensions: instead of the proclaimed negative correlation, interest rates and economic growth are positively correlated. Secondly, the timing shows that interest rates do not move ahead of growth, but instead are either coincidental or even follow it."

https://professorwerner.org/shifting-from-central-planning-to-a-decentralised-economy-do-we-need-central-banks/

yellowbrickroad Jan 26, 2017

@ Ralph Musgrave This is gold standard thinking Ralph. There is no balancing payment of gold to send to China any more.

Instead China's pounds are sitting in an account in London, right alongside yours and mine. What difference does it make to anything if for instance China were to buy something for you and now those Pounds sit in your account rather than China's??

What do you think that changes..?

Your neighbours bought Chinese TV's and now China is sitting on a bunch of Pounds it can't easily spend - except on property, and educating the children of the wealthy. The incorrect thinking that 'we need to get those Pounds back' just means that we're more likely to sell vital infrastructure to China.

How is that a good response? We're NEVER going to export as much to China as China exports to us, and selling them our vital infrastructure is the result the flawed logic of thinking that moving numbers from one account to another account in London is something we 'need' to do in order to balance things up.

What if you could erase your old misassumptions Ralph? Rather than falling back on automatic mistakes.

Viewed correctly, the Pound IS the export, and the trade already balances. It's just that we don't happen to measure it this way.. yet..

Ralph Musgrave Jan 26, 2017
@ yellowbrickroad @ Ralph Musgrave Your comment is totally an completely unrelated to the above article and to my comments. Never mind being right or wrong: you haven't the faintest idea what this debate is about.
Drago Jan 26, 2017
@ Ralph Musgrave @ Drago @ user8347 It's not a binary choice...
doodle Jan 19, 2017
Isn't the point that the NAIRU theory is based on the concept of a wage-price spiral which is only sustainable in a situation where wages are either indexed or there are strong trade unions? With the rise of the precariously employed, in the services sector, even if there are many other minimum wage jobs in town, the threat to leave is not going to result in meaningful pay increases.
Ralph Musgrave Jan 23, 2017
@ doodle

I suggest there is a NAIRU type relationship even absent trade unions: i.e. trade unions just boost or amplify the relationship. In other words, even given no trade unions and no employment protection, if there was a ridiculously large increase in demand (e.g. a ridiculously large helicopter drop), demand for labour would sky-rocket, and you'd get bumper wage increases and inflation as every employer scrambled to get labour to meet demand.

[Feb 25, 2017] NAIRU: Dangerous Dogma at the Fed

This is not a dogma. This is a convenient pretext for suppressing wages, which is part of FED agenda
Notable quotes:
"... When I wrote my piece on NAIRU bashing, I mainly had in mind a few newspaper articles I had read which said we cannot reliably estimate it so why not junk the concept. ..."
"... It conjures up lots of bad associations. ..."
"... Last month, Matthew C Klein wrote an article for Financial Times' blog Alphaville arguing against the concept of NAIRU. ..."
"... Instead of their statutory mandate, these central bankers sought guidance from the so-called non-accelerating inflation rate of unemployment, or NAIRU. Proponents of the NAIRU doctrine claim that some fixed level of unemployment exists that will yield a stable rate of inflation. If the actual unemployment rate surpasses this level, they say, the inflation rate will decline. If unemployment drops below this level, inflation will increase. Most economic research over the last two decades placed the NAIRU between 5.8 and 6.6 percent. ..."
Feb 25, 2017 | economistsview.typepad.com
RGC : , February 25, 2017 at 08:43 AM
Re: The NAIRU: a response to critics - mainly macro

[Simon is catching a lot of heat and is getting a little irritated.]
....................
The NAIRU: a response to critics

When I wrote my piece on NAIRU bashing, I mainly had in mind a few newspaper articles I had read which said we cannot reliably estimate it so why not junk the concept. What I had forgotten, however, is that for heterodox economists of a certain hue, the NAIRU is a trigger word, a bit like methodology is for mainstream economists. It conjures up lots of bad associations.

As a result, I got comments on my blog that were almost unbelievable. The most colourful was "NAIRU is the economic equivalent of "Muslim ban"". At least two wanted to hold me directly responsible for any unemployment at the NAIRU. For example: "So according to you a fraction of the workforce needs to be kept unemployed." Which is a bit like saying to doctors: "So according to you some people have to be allowed to die as a result of cancer."
...........
[PostKeynesians fire back]:
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Simon Wren-Lewis, NAIRU And TINA

Last month, Matthew C Klein wrote an article for Financial Times' blog Alphaville arguing against the concept of NAIRU. Today, Simon Wren-Lewis published a reply to Klein on his blog defending NAIRU. SWL's argument is essentially that there is no alternative (TINA):

http://www.concertedaction.com/2017/02/17/simon-wren-lewis-nairu-and-tina/

RGC -> RGC... , February 25, 2017 at 08:54 AM
[By coincidence I posted this comment by Dean Baker yesterday]:

NAIRU: Dangerous Dogma at the Fed

BY DEAN BAKER

The Full Employment and Balanced Growth Act of 1978 established two goals to guide the
Federal Reserve's conduct of monetary policy: price stability and full employment, defined by
the Act as four percent unemployment. While the central bank has diligently pursued the first
goal, it has often given the second part of its mission short shrift. Indeed, past Fed policy
makers have publicly labeled four percent unemployment unobtainable for practical purposes.
..............
The experience of the last six years has unambiguously repudiated the NAIRU - at least insofar as an economic theory may ever be disproved with evidence.

Die-hard adherents simply proclaim the NAIRU a moving target that has shifted. But none of these advocates has explained convincingly why previous consensus estimates of the NAIRU went so far awry.

http://cepr.net/documents/publications/fmsno00.pdf

anne -> RGC... , February 25, 2017 at 08:57 AM
http://cepr.net/documents/publications/fmsno00.pdf

December, 2000

NAIRU: Dangerous Dogma at the Fed
By DEAN BAKER

The Full Employment and Balanced Growth Act of 1978 established two goals to guide the Federal Reserve's conduct of monetary policy: price stability and full employment, defined by the Act as four percent unemployment. While the central bank has diligently pursued the first goal, it has often given the second part of its mission short shrift. Indeed, past Fed policymakers have publicly labeled four percent unemployment unobtainable for practical purposes.

Instead of their statutory mandate, these central bankers sought guidance from the so-called non-accelerating inflation rate of unemployment, or NAIRU. Proponents of the NAIRU doctrine claim that some fixed level of unemployment exists that will yield a stable rate of inflation. If the actual unemployment rate surpasses this level, they say, the inflation rate will decline. If unemployment drops below this level, inflation will increase. Most economic research over the last two decades placed the NAIRU between 5.8 and 6.6 percent.

The operating differences between a legal target of four percent unemployment and a NAIRU target matter tremendously for the economy and the public....

[Feb 19, 2017] EconoSpeak Krugman, the Gang of Four and the NAIRU Straitjacket

Notable quotes:
"... Second, the empirical evidence for a vertical Phillips curve and the associated hypothesis that lowering unemployment past the NAIRU leads to unacceptable acceleration of inflation is weak, and has become much weaker in the past decade. Third, viewed collectively, attempts to estimate the location of the NAIRU have become a professional embarrassment; disagreements remain on too many basic issues. Fourth, adherence to the concept as a guide to policy has major costs and negligible benefits. Conversely, the risks of dropping the natural rate hypothesis are minor, while the benefits from a sustained pursuit of full employment could be substantial. ..."
Feb 19, 2017 | econospeak.blogspot.com
First is Dean Baker's post about the latest Economic Report of the President's "insight into the question of how fast the economy can grow, and more importantly how low the unemployment rate can go."
Economists have long held the view that lower rates of unemployment would be associated with rising rates of inflation and vice versa. When the Federal Reserve Board decides to raise interest rates to slow the economy it is based on the belief that unemployment is falling to a level that would be associated with a rising rate of inflation.
Most economists now put the unemployment rate at which inflation starts to rise somewhere near the current 4.9 percent rate. (This is called the non-accelerating inflation rate of unemployment or NAIRU.) So does the ERP. But its analysis suggests a somewhat different story.
Second is Jamie Galbraith's 1997 -- that's almost 20 years ago -- Journal of Economic Perspectives article, " Time to ditch the NAIRU "
First, the theoretical case for the natural rate is not compelling. Second, the empirical evidence for a vertical Phillips curve and the associated hypothesis that lowering unemployment past the NAIRU leads to unacceptable acceleration of inflation is weak, and has become much weaker in the past decade. Third, viewed collectively, attempts to estimate the location of the NAIRU have become a professional embarrassment; disagreements remain on too many basic issues. Fourth, adherence to the concept as a guide to policy has major costs and negligible benefits. Conversely, the risks of dropping the natural rate hypothesis are minor, while the benefits from a sustained pursuit of full employment could be substantial.
G. Friedman's projections may well be wrong. But the argument that they are "implausible" is based on uncompelling theory, weak empirical evidence, embarrassing estimates and "a guide to policy [that] has major costs and negligible benefits."

But, hey, you can't criticize the top wonks if the they don't come right out and say it.

UPDATE: John T. Harvey writes, at Forbes:

In the words of Christina Romer, former chair of the Council of Economic Advisors under Barack Obama:
"Just as there is no regularity in the timing of business cycles, there is no reason why cycles have to occur at all. The prevailing view among economists is that there is a level of economic activity, often referred to as full employment*, at which the economy could stay forever."
*Often referred to as full employment? War is Peace. Freedom is Slavery. Ignorance is Strength. NAIRU is full employment.

[Feb 09, 2017] Path-dependence of measuring real GDP

Feb 09, 2017 | worthwhile.typepad.com
Nick Rowe

I normally try to avoid index number theory. Don't trust me on this.

It is well understood that real GDP is a very imperfect measure of welfare. We teach that in first year macro. That is not what this post is about. What I'm worried about is whether real GDP is an imperfect measure of itself. Does it have internal validity?

If better technology enabled producers of new goods to ramp up production more quickly to meet initial demand, would that cause the measured growth rate to fall? Initially an economy produces 100 kg of apples at $1 per kg. Then bananas get invented. After a long slow adjustment, the economy eventually reaches a new long run equilibrium and produces 50 kg of apples at $1 per kg and 50 kg of bananas at $1 per kg.

We know that nominal GDP stays the same at $100. But what happens to real GDP? The answer depends on what happened during the long slow process of adjustment. Was it supply, or demand, or both, that caused the slow adjustment?

To keep it simple, assume the price of apples is always $1 per kg (the central bank targets the price of apples). And assume the quantity of bananas produced and consumed increases slowly and continuously from 0 to 50 kg. And assume the statistical agency that measures GDP has access to continuous time data (so we can ignore the difference between Paasche, Laspeyres, and Fisher price indices ). Remember that Real GDP = Nominal GDP/Price Level. What happens to the price of bananas during the long slow adjustment period?

  1. Assume that supply and demand adjust equally slowly to the invention of bananas. It takes producers time to switch from producing apples to producing bananas, and it takes consumers time to switch from consuming apples to consuming bananas. So the price of bananas is constant at $1 per kg during the adjustment. The weights in the price index slowly change (with a falling number of apples and increasing number of bananas in the basket), but the price index stays constant, because neither price is changing. Real GDP is the same as it was before bananas were invented.
  2. Assume that supply adjusts more slowly than demand. Producers need a high price to give them the incentive to adjust. So the price of bananas starts out above $1, and slowly falls over time to $1. So the price index falls over time. Real GDP ends up higher than it was before bananas were invented.
  3. Assume that demand adjusts more slowly than supply. Consumers need a low price to give them the incentive to adjust. So the price of bananas starts out below $1, and slowly rises over time to $1. So the price index rises over time. Real GDP ends up lower than it was before bananas were invented.

Even if you say that my third case is implausible, and that demand always adjusts more quickly than supply, so the price of new goods (relative to existing goods) always starts out high and falls over time, that does not resolve the problem. The initial price of bananas, when they first appear on the market, depends on how many bananas can be grown in that very first season. Anything that enables producers of new goods to increase production for the initial roll-out will permanently reduce the measured level of real GDP.

The underlying problem is that we do not observe the price of bananas before bananas are invented. Unless you allow a discontinuous jump in real GDP the moment the new good hits the market, even if initial production is negligible, I don't think you can avoid this paradox.

Thanks to commenters (especially louis ) on my previous post, and to Brent Moulton via Twitter and David Rosnick via email. Errors and opinions are mine alone. As this starts as an apple economy, the large effect is to lower apple investment, but apple investment can't fall beneath depreciation (or more accurately, can't fall below depreciation at all) without affecting the price of apples, so there is a limit to how fast banana production can ramp up without causing this. Then there is the matter of relative investment costs, higher investment costs would lower growth while lower investment costs would increase growth and only if these were nearly equal would pricing be significant and even then only as one good among many. I expect pricing would have this effect which would differ depending on whether apples and bananas were treated as substitutes. It would take some time for bananas to even make it into baskets reducing their impact on measurements, missing both any discontinuity or initial change.

Posted by: Lord | February 07, 2017 at 11:52 AM Lord: there's lots of things that could be determining what's happening during the adjustment period. But for the question addressed in this post, the only thing that matters is whether the *relative* price of bananas starts out above one apple or below one apple. Dollar prices won't matter. I made the assumption that the *nominal* price of apples stays at $1 throughout, just to make the discussion simpler.

Posted by: Nick Rowe | February 07, 2017 at 12:48 PM Clarifying question about price indexes.

When a new good is introduced how is it factored int the price index ? For example suppose in period 1 100 apples are produced, and in period 2 50 Apples and 25 Banana. As the price of apples is fixed at $1 and GDP is fixed at $100 we know the price of bananas is $2. But how do we use this information to calculate the change in the price level between period 1 and period 2?

(I can see that once we have sales data and prices for all periods after bananas have appeared the logic that Nick describes kicks in - but I can't see how we deal with the introduction of bananas)

Posted by: Market Fiscalist | February 07, 2017 at 02:26 PM I think you're right. There's a technical literature on path dependence of Divisia indices (see, for example, a paper from Nick Oulton ). The chain indices used for GDP and the CPI are approximations to the continuous-time Divisia indices, so it's clearly relevant. The problem arises whenever new goods are introduced or old ones disappear, and would also be relevant when large shocks (e.g., major wars) take place that result in temporary major changes to consumption patterns. It's a hard problem, and though the literature suggested some potential solutions, they haven't reached the stage of statistical agency implementation.

Regarding your third case, sometimes sellers offer low initial prices for goods or services for which consumption is likely to be persistent -- new social networks, narcotics. So I don't think it's implausible.


Posted by: Brent Moulton | February 07, 2017 at 02:30 PM Your price index doesn't have to rise or fall monotonically with time. If we weight the price of each good by its share of nominal spending, then the starting and ending price indexes are the same – the price level is 1.

What happens in the meantime depends on supply and demand effects.

Imagine we're partway through the transition, and our economy sells 50kg of apples at $1 and 25kg of bananas at $2 (the remaining banana trees are waiting to mature). Nominal GDP is $100 as before, but the expense-weighted price index is 50%*($1 + $2) = $1.50, so real GDP is $66. This is lower than the long-run equilibrium of $100, but so is the actual fruit consumption. It would be accurate to call this economy comparatively depressed.

If banana trees mature quickly but can only be planted slowly, then maybe we're selling 90kg of apples at $1 and 10kg of bananas at $2. Nominal GDP is now $110, and the expense-weighted price index is about 1.18 (9/11*1 + 2/11*2), so the economy still looks depressed (real GDP of 93) but not as badly.

In the other case (apple trees are exogenously converted to banana trees but bananas are an acquired taste), then we might sell 90kg of apples at $1 and 10kg of bananas at $0.50. Nominal GDP is $95, and the price index is about 0.973 (9/9.5 + 0.25/9.5), so real GDP is about 97.6. If the new bana

In both cases, a statistician would observe a fall in real GDP due to a preference shift, followed by a rebound to its prior level. The unstated assumption for meaningful RGDP is that the utility of a price-index basket is approximately the same throughout the interval, and that's what's obviously untrue with preference changes.

Posted by: Majromax | February 07, 2017 at 02:49 PM Nick: You price the value of bananas at a constant $1 over the long period that it takes to ramp production from zero to 50 Kg.

It seems to me that you need to simultaneously recognize that to establish 'price', you need to have two persons trading and agreeing on a commonly accepted value ('price').

Hence, one option is that the banana producer is otherwise unemployed but now producing his first banana. The GDP should increase. OTOH, the buyer may be substituting goods so his contribution to increased GDP is negative, making the final GDP change zero. Further OTOH, the buyer may be borrowing to fund the purchase which would result in a valid GDP increase.

I think I am pointing out that just considering the producer's contribution to GDP is an incomplete exercise. A new product has several tentacles that impact GDP.

Posted by: Roger Sparks | February 07, 2017 at 02:59 PM MF: Brent Moulton (who commented just after you) knows much more than I do about how your question is normally answered by those who actually measure GDP. But I think the short answer is: "with difficulty". I think the point of this post is to say that that the problem posed by new goods does not get very small even if the expenditure share of new goods starts out very small when they are first introduced. The problem gets bigger over time.

Thanks Brent! Glad to hear I'm not totally out-to-lunch on this! Purely speculative, but I'm wondering if this might be part of the productivity growth slowdown puzzle? If new goods don't fall in price nowadays as much as they used to, simply because it's easier to build a big batch of new phones before releasing them (and/or they keep initial prices low because of network effects, as you say).

Posted by: Nick Rowe | February 07, 2017 at 03:11 PM Majro: "Your price index doesn't have to rise or fall monotonically with time. If we weight the price of each good by its share of nominal spending, then the starting and ending price indexes are the same – the price level is 1."

The share of nominal spending before bananas are invented? Or after we get to the new long run equilibrium? If "before", then the price of bananas doesn't matter at all.

Roger: "Nick: You price the value of bananas at a constant $1 over the long period that it takes to ramp production from zero to 50 Kg."

Why? And suppose we have a different example, where the (relative) price of bananas never reaches some constant level, because of ongoing technological improvement in growing bananas.

Posted by: Nick Rowe | February 07, 2017 at 05:03 PM Market Fiscalist: The way the CPI is calculated by statistical agencies, they would simply ignore the bananas in calculating the period 1 to period 2 price change. The "market basket" that is selected in period 1 doesn't have any bananas in it, so the price change from period 1 to period 2 is based solely on apples (no price change).

Nick: The standard (Konus) constant-utility cost-of-living index theory assumes that each period's consumption is on a stable demand curve. If, for your second case, you assume that it takes time for producers to switch but that each period consumers are consuming along their demand curve, I think the continuous time price index should come close to the true Konus cost-of-living index--especially if there isn't any discrete jump in consumption when the item is first introduced. Real GDP increases, and that's what we expect given that consumers prefer consuming A+B to A. Your first and third cases involve adjustment costs for consumers and thus don't fit easily in the standard cost-of-living index model.

Posted by: Brent Moulton | February 07, 2017 at 09:48 PM Brent: I was wondering if something like that would work. We could maybe imagine extending my second case to have a succession of new goods invented.

Posted by: Nick Rowe | February 08, 2017 at 04:09 AM Do they teach students in first year macro that when they later become professors they should say "we teach that in first year macro"? I see that expression a lot these days. It sounds like, this is truth. ;)

I remember Kotlikoff once using it when I suggested to him that it might not be clarifying to say that the "true" debt is 119 gazillion dollars. "I have been teaching my students that for 20 years." Oh, well could you then please stop writing that AND stop confusing your young charges?

More seriously, I am curious how important you think this index number issue might be compared with the more basic issue of measuring and aggregating individual utility. What is GDP supposed to correlate with? Back in the day it was about the flow of nominal demand but then seemed to morph into aggregate real goodness.

I love your work. Thanks.

Posted by: Gerard MacDonell | February 08, 2017 at 08:21 AM At risk of straying too far off topic, let's think of this in a trade context.
Instead of bananas being new to the world, let's say they are just new to a market. Country A can produce only apples, Country B produces both apples and bananas. In country B, one apple is tradeable for one banana.
When country B opens up to trade with country A, suddenly there is a global jump in demand for bananas. The price of bananas in terms of apples rises in country B to induce the people to consume fewer bananas and more apples. A certain number of apples flows to country B in exchange for a smaller flow of bananas back to A.
A's GDP, in terms of apples, shouldn't change -- its apple crop is the same as it was the previous year, although consumers are better off due to trade.
You'd think B's GDP should rise, as the value of the bananas it produces is worth more in terms of apples than it used to be. Or would we just say that's a change in the price level and real GDP is unchanged? Seems like this depends on how you construct the price index.
Gains from trade are real, but it seems they would be tricky to capture in GDP framework

Posted by: louis | February 08, 2017 at 10:24 AM Gerard: thanks!

The main cases where I use that "we teach that in first year" line is (for example, like in this case) some anti-economist says "GDP is a bad measure of welfare!" thinking they are making some devastating new critique of economics.

How important is this particular issue, empirically? I don't know. And I first wanted to make sure my head was straight on the theory. But speculating wildly, I am wondering if the productivity growth slowdown might be caused by something like this? I have no evidence to back that up, but that is what is at the back of my mind about *possible* empirical relevance. It's less about utility per se (which was at the back of my mind in the last post) than productivity.

louis: only a little off-topic. I'm going to be a bit shaky on the answer. I *think* country B's real GDP stays the same, since it is measured in terms of the basket it produces. But its real income *measured in terms of the basket it consumes* will rise or stay the same, depending on whether we use a Paasch or Laspeyres index (old basket or new basket). More simply, if your Terms of Trade improve, real GDP can stay the same, but increase when NGDP is deflated by the CPI.

Posted by: Nick Rowe | February 08, 2017 at 10:42 AM Didn't Hausman address this issue back in the '90s?

Posted by: marcel proust | February 08, 2017 at 11:39 AM "this issue" == valuing newly introduced products.
Briefly (IIRC, and I may well not), the solution he presents for getting the price index right is to estimate a demand curve for bananas (presumably right after their introduction) and set the pre-introduction price to the point where demand is zero. This allows for comparison of the CPI's before and after bananas hit the market.

Posted by: marcel proust | February 08, 2017 at 11:51 AM marcel: yes. But that was a different question (trying to measure utility gains). And that assumes an extreme version of my case 2, where demand adjusts instantly and supply adjusts slowly.

Posted by: Nick Rowe | February 08, 2017 at 12:09 PM Let's get the same result but use the basket brigade model. Instead of a continuous result,m this result is the same but never leaves probability space.

Chiqita introduces bananas, and initially we love them. So the delivery trucks and consumer baskets are fuller than normal. Each time we move goods our cash cards swipe at market price, so the Savings and Loan machine is building the significant probability distribution of cash swipes in (deposit) or out (loan). The S&L machine enforces amortization on the full baskets and everyone pays a suprising 'rate' on their purchases.

As a result of the bananas, the yield curve is steeper. The S&L machine is forcing us to go to work and build bigger baskets, or develop a more granular distribution that we can make more frequent trips and keep our basket from ov er filling. If we choose the latter, we get more term points on the yield curve. Or, we can go home and work out a substitution between bananas and mangos, making our baskets fill normally again.

The key here is our sense of equilibrium, we know when our baskets ate optimally full. We know that because we hate waiting in line, so our sense of frustration stabilizes the queues. When queues ate sable, mean equals variance in our basket. At that condition, then every single person in the monetary zone can independently calculate the probability of the basket overflowing or underflowing. Supply then equals demand and container algebra works, we can pretend to be continuous.

It is Nicks model, fouled up a bit, but just recast as a sequence of probabilistic purchases.

Posted by: Matt Young | February 08, 2017 at 01:41 PM

[Feb 08, 2017] A Utilitarian Welfare Analysis of Trade Liberalization

econpapers.repec.org

The currently established welfare criterion used in international trade theory results in conclusions that are not only intellectually dishonest and deceptively misleading but are not as value free as is commonly believed. Although academic economists have devoted much effort to understanding the distributional effects of trade, the current welfare conclusions of trade basically ignore entirely the distributional effects. This paper argues that trade policy needs to be framed within a legitimate moral framework that moves distribution to the forefront. The welfare effects of trade should be judged by what actually happens, not by what could potentially happen in an idealized world with costless transfers.

In the first section the inadequacy of current international welfare economics is discussed. Second, the justification for using a utilitarian framework is developed along with a brief history of the doctrine and its role in Cambridge welfare economics. Next the properties of a utility function that would be realistic as well as having desirable mathematical properties are discussed. Welfare considerations would not be especially important if trade did not create significant redistributions; therefore the size of the redistributions relative to the efficiency gains from trade liberalization is examined. Finally, the welfare effects of trade liberalization using various trade models and simulations are discussed.

The current approach to the welfare analysis of trade is to follow the recommendation of Hicks and Kaldor and equate national welfare with real national income and ignore entirely how income is distributed. Although admitting that considering distribution involves an unscientific value judgment, numerous economists (such as I.M.D. Little, Frank Knight, Edward Chamberlin) have concluded that distribution is too important to ignore and it is better to consider it even if that makes the analysis less than scientific. As Blaug has stated (1978,p. 626), "the true function of welfare economics is to invade the discipline of applied ethics rather than to avoid it."

The basic objective of trade policy under modern welfare analysis therefore is to maximize national income. This outcome is considered optimal because of the Hicks-Kaldor compensation principle whereby everyone could potentially be made better off than in any other alternative with the appropriate lump sum transfers. For some, the possibility that these transfers could be made is sufficient, regardless of whether any transfers are actually made. For others, there is a naive belief that after all the income maximizing policies are implemented, that the government (or society) then consistently redistributes income in a manner consistent with its specific social welfare function. However, Rodrik (1997, p.30) is correct when he states that in regard to trade policy changes, "compensation rarely takes place in practice and never in full."

Even if society wanted to redistribute income, however, it can not be done in a zero costs lump sum fashion.

[Jan 18, 2017] FRBSF The Current Economy and the Outlook

Jan 18, 2017 | economistsview.typepad.com
libezkova :
Mathiness and "number racket" are two feature of neoliberalism that are especially damaging.

I like how neoclassical economics works: bought economists operate with fake models that use fake data.

It probably would be more interesting to discuss how US government measures unemployment those days. And all those "not in labor force" tricks.

Just seasonal adjustment make winter figures highly suspect.

Only U6 still has some connections to reality and if this measure shows "close to full employment", you can call any half empty glass "full".

http://unemploymentdata.com/current-u6-unemployment-rate/

== quote ==

Current U-6 Unemployment Rate is 9.1% (BLS) or 13.7% (Gallup)

Current U-6 Unemployment Rate:

Unemployment U6 vs U3 For December 2016 the official Current U-6 unemployment rate was 9.1% up from last month's 9.0% but still below the recent low of 9.3% in April and September and October's 9.2%.

On the other hand the independently produced Gallup equivalent called the "Underemployment Rate" was up to 13.7 in December from 13.0% in November nearing the 13.8% of April. The current differential between Gallup and BLS on supposedly the same data is 4.6%!

jonny bakho : , January 18, 2017 at 05:07 AM
"The labor market remains near its sustainable, full employment level."

This is a hope not a fact
There is plenty of slack if the underemployed move into jobs and we return the 20-50 yr olds to pre-recession participation rates.

pgl -> jonny bakho... , January 18, 2017 at 07:28 AM
Yep. Which is why I focus on the employment to population ratio. We are far from full employment.
John San Vant -> pgl... , January 18, 2017 at 09:54 AM
nope,nope,nope. you don't get how employment to population ratio is calculated. it can't rise and should not rise unless the calculations are adjusted.
John San Vant -> jonny bakho... , January 18, 2017 at 09:52 AM
Sorry, but it is a fact. Capital is at full employment.

Underemployed is cost savings adjustment made 30+ years ago and the pre-recession trend is always the end of the expansion.

urban legend -> John San Vant... , January 18, 2017 at 11:09 AM
Let's see:
SUPPORTING the belief that we are "close" to full employment is the U-3 measure of unemployment, a measure with an arbitrary cut-off that excludes from the official labor force as many people as possible who are not employed but do want jobs -- by requiring (1) an "active" search effort only within the last four weeks, based on (2) a definition of "active" that probably does not fit rational behavior by the unemployed who now have access to comprehensive Internet jobs databases that did not exist 20 years ago. (It is not terribly hard to surmise the institutional interests that are served by keeping the size of the labor force for purposes of determining the official unemployment rate as small as possible.)

NOT SUPPORTING the belief that we are close to full employment:

(1) the lowest employment-to-population ratio in almost half a century;
(2) negating the intellectually-lazy demographic excuse that invariably gets raised to point No. 1, the lowest employment-to-population ratio in 30 years in the prime working age group (25-54), a group that is 99.99% unaffected by the phenomenon of voluntary retirement;
(3) a U-6 (that counts many more of the unemployed in the labor force) that is still three percentage points higher than the low point reached in 2000 (three percentage points is a lot, representing about 7.5 million people who want jobs but are not counted in the labor force for calculating the U-3);
(4) an aggregate growth in full-time jobs of only 9% since the relative high point in 2000 even though the working age population has grown by 20%;
(5) average weeks unemployed among those who are counted as part of the labor force (26 weeks) that is still more than twice as high as it was in 2000 (under 13 weeks) and is still 10 weeks higher than it was before the Great Recession;
(6) involuntary part-time employment still 75% higher than it was in 2000, 33% higher than before the Great Recession;
(7) whereas in 2000, the U.S. was near the top in employment rate among the OECD countries, in 2017 it is close to the bottom; most OECD countries have recovered in their employment rates since the depths of the Great Recession, and many have moved to new levels (even supposedly sick France has a higher employment rate in the 25-54 prime working age group than te U.S.).

With this array of negative date to overcome, it takes a lot of wise monkeys who neither speak, hear nor see any evil to expound a belief that we are close to full employment.

RW said... January 18, 2017 at 07:05 AM

Inflation for the 4th quarter of 2016 is zero -- no change Oct through Dec -- and real interest rates remain near the zero boundary. Republican history WRT governing particularly as it pertains to the economy is sufficiently poor that optimism appears entirely unwarranted. I hear a lot of investors are adjusting their portfolio allocations to favor equities over bonds. Two years ago that was a smart move; now, not so much.

mulp said...

"All else equal, tax cuts boost household and business income."

In 2001, I was rif'd from my 100K++ job and got a $20,000 tax cut.

That tax cut did not boost my household income.

That economists have been bamboozled into thinking this way is beyond my comprehension.

Economies are zero sum. For every action, there is a reaction. Tax cuts mean revenue cuts which means spending cuts and spending cuts mean lower household income.

Very few sectors of the economy are subject to demand price elasticity that results in higher revenue from price reduction due to the quantity increasing explosively from a small reduction in price.

For example, cutting the profit tax by 30% on $100 oil so gasoline falls from $4.05 to $4.00 and thus doubles the quantity of gasoline sold to boost profit taxes is an impossibility.

And cutting the tax on economic profits from restricting oil production to drive up prices and profits can only increase tax revenue if oil production is cut further by cutting jobs so gasoline prices can be increased from $4 to $5 to $6 per gallon.

Since Reagan, economists seem to have self lobotomized so they spout totally illogical nonsense like "All else equal, tax cuts boost household and business income."

Might as well say "if you believe, you can fly when tinker bell hits you with pixie dust."


Reply Wednesday, January 18, 2017 at 11:07 AM

[Jan 16, 2017] Even though healthcare spending is nearly 18 percent of GDP, for some reason healthcare comprises less then six percent of the CPI basket

Jan 16, 2017 | www.nakedcapitalism.com
fresno dan , January 15, 2017 at 1:59 pm

https://www.peakprosperity.com/blog/106107/mad-hell

"As explained in the Fuzzy Numbers chapter of The Crash Course, even though healthcare spending is nearly 18% of GDP, for some reason healthcare comprises only 5.85% of the CPI basket:
U.S. health care spending grew 5.8 percent in 2015, reaching $3.2 trillion or $9,990 per person. As a share of the nation's Gross Domestic Product, health spending accounted for 17.8 percent.

Does it make any sense to record something that's nearly 18% of GDP as only 5.8%*** of your inflationary experience? Nope, it sure doesn't. Unless your desire is to mask the actual rate of inflation.

In simple terms, just healthcare's share of inflation alone comes to (0.25)*(0.18) = 4.5%. That's more than twice the rate of the supposed total inflation we are experiencing all by itself. Throw in rising rents, car prices, and energy and it's far more likely that an urban consumer is experiencing total price inflation closer to 6% or more per year."

==========================================================================
AND
and although I have posted this many times before, it is always good for a laugh .or a cry .

https://www.bls.gov/cpi/cpifact4.htm
"Although medical insurance premiums are an important part of consumers' medical spending, the direct pricing of health insurance policies is not included in the CPI. As explained below, BLS reassigns most of this spending to the other medical categories (such as Hospitals) that are paid for by insurance. The extreme difficulty distinguishing changes in insurance quality from changes in its price forces the CPI to use this indirect method."

AND
"The US now routinely subjects its citizens to racketeering, charging excessive prices that are increasingly cumbersome to avoid. One example among thousands; a Viagra pill that costs less than $1 in India, costs over $38 in the US"

I am hoping that when masturbatoriums are popping up like Starbucks, and the population ages, the expanding need for viagra will uh stimulate Galbraiths theory of countervailing power, and the stiff increases in the price of viagra will soften.

***I note that the BLS cpi link I use says healthcare composes about 6.5% of the cpi. Of course, the definition is Medical commodities AND medical services, so this may account for the difference .

[Dec 11, 2016] Twenty percent of US GDP was created from thin air via QE of well over 4 Trillion dollars.

Dec 11, 2016 | peakoilbarrel.com
Watcher says: 12/10/2016 at 4:24 pm
Okay, look.

20% of US GDP was created from thin air via QE of well over 4 Trillion dollars. That doesn't even count whimsical creation over the same time period elsewhere. The ECB just yesterday extended their QE program so that it will add up to about 2 Trillion Euros - which will have taken place over about 18 – 24 months.

There is no economy. That has all gone away, and there is no way in hell these bond and bond packages on central bank balance sheets are going to be retired (thereby extracting that money from the system overall) and so It's Not Coming Back. Probably Ever.

This is critical to oil because we do micro-economic evaluations of what wells are profitable and which are not, and our analysis and conclusions make less and less sense as we've seen from the non profitable activity going on. That's symptomatic of the disease.

Nothing was "fixed" from 2008 onward, and that's not a swipe at Obama. It's not a swipe at anything. It's just reality. When you create 20% of your GDP by whimsy, the measure can't possibly mean anything. And that's global.

We all have to live in the world using money in our own microscopic bubbles of economy, but from the macro perspective, that's pretense, and it's pretense everything depends on. Just keep in mind Fed Governors themselves have been quoted saying "we're in completely uncharted territory. No one knows what is going to happen, and that includes us, despite the superb people we have on staff trying to figure it out."

Trump is the wildcard inserted into a world of wildcards. I can assure you if the administration strongly doesn't want Ford building cars in Mexico, they probably won't.

[Nov 07, 2016] Inside that Great Wage Growth Number

Notable quotes:
"... In our artificial economy real things do not matter so much, but politics and managing the perceptions of the public are of paramount importance. And so the 'Goldilocks' Jobs Report, which is how the business TV channels described that lukewarm piece of dreck, did little to rally the markets except fleetingly intraday. ..."
"... The headline includes ALL employees, but if you take out the top 15-20% of managers, the average hourly earning growth showed a pronounced downward divergence to a lower growth rate. The BLS switched to this number including all employees a few years ago from the non-supervisory number. As a rule of thumb, when someone shows you the 'average' number, find out the median number for the same sample. Especially in these days of historically high inequality. ..."
Nov 07, 2016 | jessescrossroadscafe.blogspot.com

"The wealth of another region excites their greed; and if it is weak, their lust for power as well. Nothing from the rising to the setting of the sun is enough for them.

Among all others only they are compelled to attack the poor as well as the rich. Robbery, rape, and slaughter they falsely call empire; and where they make a desert, they call it peace."

Tacitus


"He who makes a beast of himself gets rid of the pain of being a man."

Samuel Johnson

In our artificial economy real things do not matter so much, but politics and managing the perceptions of the public are of paramount importance. And so the 'Goldilocks' Jobs Report, which is how the business TV channels described that lukewarm piece of dreck, did little to rally the markets except fleetingly intraday.

In the first chart below I take a look inside that 'average hourly earnings growth' number.

The headline includes ALL employees, but if you take out the top 15-20% of managers, the average hourly earning growth showed a pronounced downward divergence to a lower growth rate. The BLS switched to this number including all employees a few years ago from the non-supervisory number. As a rule of thumb, when someone shows you the 'average' number, find out the median number for the same sample. Especially in these days of historically high inequality.

Be that as it may, the markets overall were in a flight to safety as the financiers bowed to their fears of the upcoming presidential election, that something might happen that will upset their status quo.

Not the status quo- theirs.

... ... ...

[Oct 19, 2016] October 19, 2016 at 12:17 PM

Oct 19, 2016 | economistsview.typepad.com

Anon : , 2016 at 12:17 PM

so when people criticize the big deflation in computer/electronics hardware using baseless measures like "if the computer has a processor twice as fast then it has fallen by half in price" they are wackos. but now the real growth that is artificially generated by this way (quality improvements) to keep inflation down is being criticized by Fox. Of course it is completely made up growth. the absurdity of the economists deal with price inflation. now years later, everyone realizes we have all taken a big fall in living standards no matter how many gigahertz my stupid computer is.
Ben Groves -> Anon... , October 19, 2016 at 01:10 PM
Oh please, when RFK was talking about the massive poverty in eastern kentucky in 1968, where was the huge increase in living standards?

Government data is flawed right now, to a extent in needs a total reworking. There is no artificial growth. Just lost growth by outdated models.

pgl -> Ben Groves... , October 19, 2016 at 02:19 PM
Do you have some weird need to spew nonsense completely unrelated to the post every time you comment? Geesh.
DrDick : , October 19, 2016 at 12:20 PM
Color me shocked by this revelation./s
anne : , October 19, 2016 at 12:28 PM
https://fred.stlouisfed.org/graph/?g=7yCj

January 15, 2016

Manufacturing Production Index, 1992-2016

(Indexed to 1992)


https://fred.stlouisfed.org/graph/?g=7OvR

January 15, 2016

Manufacturing Production and Manufacturing Durable Computer and Electronic Indexes, 1992-2016

(Indexed to 1992)

anne -> anne... , October 19, 2016 at 02:03 PM
Using separate axes for clarity:

https://fred.stlouisfed.org/graph/?g=7OBH

January 15, 2016

Manufacturing Production and Manufacturing Durable Computer and Electronic Indexes, 1992-2016

(Indexed to 1992)

anne -> anne... , October 19, 2016 at 02:40 PM
What is the share of manufacturing production of durable computer and electronic manufacturing? I do not know how to graph this.
anne -> anne... , October 19, 2016 at 03:32 PM
Getting closer:

https://fred.stlouisfed.org/graph/?g=7OFU

January 15, 2016

Relative Importance Weight (Contribution to the total industrial production index): Durable manufacturing: Computer and electronic product, 1992-2016

(Indexed to 1992)

anne -> anne... , October 19, 2016 at 03:37 PM
https://fred.stlouisfed.org/graph/?g=7OG5

January 15, 2016

Relative Importance Weight (Contribution to the total industrial production index): Durable manufacturing: Computer and electronic product, 1992-2016

8.8% in 1992
to 11.4% in 1999
to 5.2% in 2014
to 6.1% in 2016.

Ben Groves : , October 19, 2016 at 01:08 PM
Manufacturing hasn't boomed since the 60's. The FRED graphs are garbage and useless in general. They are improperly calculated and they have out right admitted they may have "problems".

Manufacturing is dying out and becoming automated over the decades. There is no such thing as artificial growth either. Demand based on consumption is just as valid as industrial production shipped to other countries.

pgl -> Ben Groves... , October 19, 2016 at 02:21 PM
"The FRED graphs are garbage and useless in general."

No - your comments are garbage and useless. Actually READ the post. He did not get his graphs or data from FRED. Seriously - you need professional help.

Ben Groves -> pgl... , October 19, 2016 at 02:48 PM
poppycock. the garbage on their industrial production chart in the 90's and 00's was stupid bad. The US hasn't had a industrial boom since the 60's when our consumption was surging while we still made most of our products. No wonder inflation surged by the late 60's. The war against communism was having a painful bad side effects to rentiers and bankers, which spread to capital by the late 60's.
pgl -> Ben Groves... , October 19, 2016 at 04:07 PM
"the garbage on their industrial production chart in the 90's and 00's was stupid bad."

Can we focus on the single word "their". You think he used FRED. No jackass, he made his own charts from the source data - BLS. But noooooooo - you are too stupid to get even this simple point. So the rest of your ramblings is nothing more than your usual intellectual garbage.

likbez : , October 19, 2016 at 02:02 PM
Quality adjustments = number racket
jonny bakho : , October 19, 2016 at 03:28 PM
Auto mfg dropped by half post 2008.
It is now back but has nowhere to grow.
Urbanization makes cars less necessary and less desirable
There is not enough room to park them all now.
People who earn MinWage cannot afford them
sanjait : , October 19, 2016 at 03:53 PM
Interesting point but many will overinterpret this. Leave in the expansion of computer and electronics manufacturing value add, and we have manufacturing output slightly expanding. Take it out entirely and we have manufacturing output basically steady.

The difference isn't telling an important macro story.

The important macro story is the major decline in manufacturing employment, and that has two big and one smaller causes.

The two big factors are the increased productivity of manufacturing globally and the declining share of manufactured products as a % of GDP globally. The smaller factor is the US's declining share of global manufacturing output, which itself is only fractionally attributable to trade policy.

This one graph tells most of the story:

http://1.bp.blogspot.com/-JEZXR9XK7vc/Tbr46ReInRI/AAAAAAAAPQ0/HlLXeVin_g0/s1600/worldmfg.jpg

I don't know anyone who says US manufacturing is "booming." It certainly isn't. It's treading water. It's growing slowly as the economy grows, but we can predict with high confidence that it will continue to contract as a share of total output over time, because that has been the secular trend for decades and there's no reason to expect that to change.

The only big question is how we adapt to the world as it actually is.

anne -> sanjait... , October 19, 2016 at 04:23 PM
Nicely done.

Also, I did not realize I was being presented with an argument about Chinese growth and sustainability. I foolishly stopped reading and I am entirely sorry. I have set down data and begun to answer the argument below on Links:

http://economistsview.typepad.com/economistsview/2016/10/links-for-10-19-16.html#comment-6a00d83451b33869e201bb09479d0e970d

October 19, 2016

anne -> sanjait... , October 19, 2016 at 04:26 PM
What is significant though is how China insists on holding to growth targets that are very likely not sustainable. Stability is a worthy aim but when growth is achieved through pushing bad private sector loans, that is ultimately the enemy of stability.

[ For these 39 past years China has been holding to and achieving growth targets that were repeatedly considered unsustainable so I prefer to figure out why Chinese growth targets have been and from my perspective are now sustainable. ]

the forgotten spirit of American protectionism : , -1
YES! Of course US manufacturing isn't booming - how could it? We have horrible economic policies that are focused almost entirely on destroying our industrial base. High overvalued currency, combined with 0% tariffs and we have no VAT, so foreign imports from countries with a VAT receive export subsidies but are not taxed on the US side. That we have even one factory left is amazing and testament to the quality of American workers. Under Clinton, we'll lose what's left. Trump is our only hope. If we don't get Trump's protectionism we will quickly become a country as poor as Armenia or Moldova - stripped of industry and wealth, dependent on remittances from our migrant workers in Asia and Europe.

[Oct 19, 2016] No, U.S. Manufacturing Isnt Really Booming

Notable quotes:
"... Of course it is completely made up growth. the absurdity of the economists deal with price inflation. now years later, everyone realizes we have all taken a big fall in living standards no matter how many gigahertz my stupid computer is. ..."
"... The important macro story is the major decline in manufacturing employment, and that has two big and one smaller causes. ..."
"... I don't know anyone who says US manufacturing is "booming." It certainly isn't. It's treading water. It's growing slowly as the economy grows, but we can predict with high confidence that it will continue to contract as a share of total output over time, because that has been the secular trend for decades and there's no reason to expect that to change. ..."
Oct 19, 2016 | economistsview.typepad.com
Justin Fox:

No, U.S. Manufacturing Isn't Really Booming :...[Is]American manufacturing .. in decline? An answer frequently offered by wonky economics journalists is that, no, U.S. manufacturing output has actually kept growing. ...

There's a catch, though. As economist Susan N. Houseman of the W.E. Upjohn Institute for Employment Research ... points out , about half of the growth in U.S. manufacturing output since 1997 has been in just one sector: computer and electronics manufacturing.

If it weren't for computers and electronics (which includes semiconductors), manufacturing output would still be well below its 2008 peak and only 21 percent higher than in 1997...

The ... way those computers-and-electronics numbers are arrived at is worthy of a closer look. ... Without adjusting for deflation, value added in computer and electronics manufacturing is up 45 percent since 1997. With the adjustments, it's up 699 percent! What's happening here is that the Bureau of Economic Analysis has been trying to account for vast improvements in ... quality... Writes Houseman:

Such quality adjustment ... can make the numbers difficult to interpret..., figures that exclude this industry ... arguably provide a clearer picture of trends in manufacturing output.

As it stands now, those trends don't look impressive. U.S. manufacturing output has held up a lot better than manufacturing employment. But it definitely isn't booming.

Anon : October 19, 2016 at 12:17 PM

so when people criticize the big deflation in computer/electronics hardware using baseless measures like "if the computer has a processor twice as fast then it has fallen by half in price" they are wackos. but now the real growth that is artificially generated by this way (quality improvements) to keep inflation down is being criticized by Fox.

Of course it is completely made up growth. the absurdity of the economists deal with price inflation. now years later, everyone realizes we have all taken a big fall in living standards no matter how many gigahertz my stupid computer is.

anne -> anne... , October 19, 2016 at 03:37 PM
https://fred.stlouisfed.org/graph/?g=7OG5

January 15, 2016

Relative Importance Weight (Contribution to the total industrial production index): Durable manufacturing: Computer and electronic product, 1992-2016

8.8% in 1992
to 11.4% in 1999
to 5.2% in 2014
to 6.1% in 2016.

likbez : , October 19, 2016 at 02:02 PM
Quality adjustments = number racket
jonny bakho : , October 19, 2016 at 03:28 PM
Auto mfg dropped by half post 2008. It is now back but has nowhere to grow. Urbanization makes cars less necessary and less desirable
There is not enough room to park them all now. People who earn MinWage cannot afford them
sanjait : , October 19, 2016 at 03:53 PM
Interesting point but many will overinterpret this. Leave in the expansion of computer and electronics manufacturing value add, and we have manufacturing output slightly expanding. Take it out entirely and we have manufacturing output basically steady.

The difference isn't telling an important macro story.

The important macro story is the major decline in manufacturing employment, and that has two big and one smaller causes.

The two big factors are the increased productivity of manufacturing globally and the declining share of manufactured products as a % of GDP globally. The smaller factor is the US's declining share of global manufacturing output, which itself is only fractionally attributable to trade policy.

This one graph tells most of the story:

http://1.bp.blogspot.com/-JEZXR9XK7vc/Tbr46ReInRI/AAAAAAAAPQ0/HlLXeVin_g0/s1600/worldmfg.jpg

I don't know anyone who says US manufacturing is "booming." It certainly isn't. It's treading water. It's growing slowly as the economy grows, but we can predict with high confidence that it will continue to contract as a share of total output over time, because that has been the secular trend for decades and there's no reason to expect that to change.

The only big question is how we adapt to the world as it actually is.

anne -> sanjait... , October 19, 2016 at 04:23 PM
Nicely done.

Also, I did not realize I was being presented with an argument about Chinese growth and sustainability. I foolishly stopped reading and I am entirely sorry. I have set down data and begun to answer the argument below on Links:

http://economistsview.typepad.com/economistsview/2016/10/links-for-10-19-16.html#comment-6a00d83451b33869e201bb09479d0e970d

October 19, 2016

anne -> sanjait... , October 19, 2016 at 04:26 PM
What is significant though is how China insists on holding to growth targets that are very likely not sustainable. Stability is a worthy aim but when growth is achieved through pushing bad private sector loans, that is ultimately the enemy of stability.

[ For these 39 past years China has been holding to and achieving growth targets that were repeatedly considered unsustainable so I prefer to figure out why Chinese growth targets have been and from my perspective are now sustainable. ]

the forgotten spirit of American protectionism : , -1
YES! Of course US manufacturing isn't booming - how could it? We have horrible economic policies that are focused almost entirely on destroying our industrial base. High overvalued currency, combined with 0% tariffs and we have no VAT, so foreign imports from countries with a VAT receive export subsidies but are not taxed on the US side. That we have even one factory left is amazing and testament to the quality of American workers. Under Clinton, we'll lose what's left. Trump is our only hope. If we don't get Trump's protectionism we will quickly become a country as poor as Armenia or Moldova - stripped of industry and wealth, dependent on remittances from our migrant workers in Asia and Europe.

[Oct 19, 2016] Why distrust data

Notable quotes:
"... **Opinions here are mine and should not to be attributed to anyone with whom I work.** ..."
Oct 19, 2016 | claudiasahm.postagon.com
48% of Trump supporters "completely distrust the economic data reported by the federal government" including unemployment, spending, jobs. https://t.co/5l9GhucBFI
- Justin Wolfers (@JustinWolfers) October 15, 2016

That tweet and the linked article got my attention (no trust of data by 25% of adults!) ... Still why reflect on this? ... so much else to get stuck on these days. First, I use official statistics in my work A LOT; second, I am always on the look out for new survey insights; and finally, I am a bit obsessed lately with models in which people are not acting on the same information. This level of distrust is troubling ... even though I doubt it's new or entirely about the data ... I want us to think about WHY.

I study consumer behavior as an economist, which in 2016 still means reading lots of research with dynamic optimization and Euler equations. This is a typical early morning ritual for me, that quiet time before my kids wake up when I can still imagine a world in which we know everything about everything, including ourselves, and we choose calmly and appropriately. BUT I balance out my openness to such models with a determination to also understand what people ACTUALLY do and think.

Nevertheless, I am picky about the survey insights that I absorb, pass on, and try to understand. My cognate in grad school was survey methodology and I still write survey questions in my research ... thus I understand how much responses can be manipulated, or even carelessly biased by poor methods and human nature. Also I want to know what people think, not what someone writing up the survey results wants me as a reader to think. (I'm not a fan of the tweet, by the way.) So I googled and found the survey's homepage , a Marketplace-Edison Research poll designed to measure economic anxiety. And, I found a description of the methods AND the full survey too (see page 30 for this question). It's not the micro data online, so I can't replicate the statistic in the tweet, but I could see that the "data trust" question was asked before voting intentions or political affiliation. I have learned from pollsters that asking about politics conjures up an identity that can be hard to shake in the rest of the survey. The main roadblock I see in interpreting the data distrust is this survey's short time series; it only began last fall as a quarterly survey. My hunch is that distrust of economic data is nothing new but I can't prove that here. Plus changes in attitudes are often more informative than a snapshot, since subjective questions are tricky to interpret. What does it mean to "trust data" anyway? Do you trust data?

To be clear, I am not justifying anyone's views, but I am also trying not to be judgmental. A key principle of surveying is not to make people feel bad or shameful about their views. Because, guess what, if you do, they are less likely to tell you what they think or did ... then you are fighting blind and may miss the chance to learn why we sometimes see the world differently. I am not in the 25% of adults who have "no trust at all" in economic statistics from the government. In fact, I am in a rare set of adults who spends more time on the Bureau of Economic Analysis ' website sorting through spending data than on Amazon adding to it. So what's up with all this distrust? I have a few hypotheses to take to the data.

Hypothesis 1: government economic data don't match people's life

Sometimes I think the Representative Agent is a frenemy of economists. (Oh, not the Twitter persona , he's great, but the concept.) How can a simplifying assumption ... a focus on the typical or aggregate household ... be an enemy in disguise? Well, sometimes it gives theoretical models the focus they need and other times, especially in empirical work, it glosses over important details. Details, also known as people . So maybe distrust of economic data comes from not seeing your life experience in the numbers that roll across the screen. National aggregates get a lot of attention, so maybe it is minorities that end of distrusting data more, data that doesn't tell their story as loudly.

Not so, at least in terms of data about the economy, minorities are more trusting than whites. Only 15 percent of African-American have no trust at all in economic data almost half the fraction of whites. And among Hispanics, only12 percent have complete distrust of data. With whites comprising over 70 percent of all adults, they are well represented in both aggregate statistics and the distrust of them. Of course, this is just one cut of the data and not seeing your life experience in the data may raise other issues (more below). Government agencies have made a push to improve regional statistics and even make neighborhood data more readily accessible and help improve local decision making. And of course, lots of household level surveys exist too. Another reason to take distrust (or even disinterest) in government economic data seriously is that the quality of the data we have depends on people's participation in our surveys. Response rates on numerous surveys have been falling and research suggests that non response could impact official statistics, making them a less accurate reflection of life experiences.

Hypothesis 2: distrust stems from people being "hurt" by data

One the first Friday of the every month, my Twitter feed is overflowing with chatter about the latest employment report from the Bureau of Labor Statistics . That makes me weird. I firmly believe that few people absorb the government statistics in the way that I and my fellow econos do. Why should they? People confront economic data when it affects them. One example I can think of is the cost-of-living adjustment, such as for Social Security benefits. That came to mind when I looked at data distrust by age.

no cost-of-living adjustment to benefits had led some seniors to "distrust" government data, like the CPI-W? Again, this hypothesis would be a lot better to test with a time series of data, comparing years with benefit increases and without. But feeling shortchanged by the data may be understandable given wide variation relative price changes , few of us exactly consume the representative basket. Alternatively, as risk aversion appears to rise with age, maybe so too does distrust? I wrote earlier that age is more than just a number , the impact of demographic change deserves more study.

Hypothesis 3: it's not the data, it is the way we use them ... the spin

I don't trust data, I trust people. And even then, trust but verify, right? Perfectly measured data (dream, dream), can be still be suspect. In fact, data can codify a lot of the biases and mistakes we have made together in the past. Maybe we should also be concerned for the people who "completely trust" government economic data? (Do read Cathy O'Neil's book on Big Data and algorithms.) Yet, I suspect the distrust in the survey is not about data construction (I've never seen a protest at the ever-interesting BEA advisory committee meetings ) ... or even about the government employees who construct the statistics in excruciating detail, and in line with international standards . I bet the distrust is more about how the numbers are interpreted and how they are used in policy making. Drawing conclusions from data is hard and reasonable disagreement is to be expected. As just one example, the seasonally-adjusted unemployment rate for African Americans was 8.3 in September , which is below its average of 10.8 percent over the past 20 years but is almost double the 4.4 percent unemployment rate of whites. Should we call that 8.3 (or 4.4, for that matter) victory or 'full employment'? And is the unemployment rate even the right statistic to assess? Relative to the past it may well be but the past can be an imperfect guide for the future. Every data point has its shortcoming, especially where there is no clear counterfactual or agreed upon target. My "moderate" growth could easily be your "weaker-than-expected" growth. And, of course, on top of honest disagreements about data, plenty of motivated reasoning is done with numbers. BUT when we start with the same data, there are at least some bounds on the disagreement. In contrast, when government data are wholesale rejected one quarter of adults, it's no surprise that we aren't living in the same world. And we stop trying to understand each other. I would be lost (and bored out of my mind) in my work on consumer behavior without data. You don't want me extrapolating from my tiny circle of experience ... and frankly no one should make decisions with that little information. We can learn a lot from the data, including these attitudinal surveys. And data adds accountability, including in how its collected. Even so, no one likes to feel manipulated or, worse, written off, especially with numbers.

Data can't solve problems but maybe it holds clues to a path forward ... to rebuild trust.

**Opinions here are mine and should not to be attributed to anyone with whom I work.**

Is it just not done to ask people why they distrust Government figures ?
2016-10-17, Stuart Gibson The same thing happened here in Italy with Silvio Berlusconi. He got a lot of reforms but a lot of people ignored facts.
2016-10-17, pietro No one 'trusts' data. We all have confidence intervals.
This combined with your point number 3 is the main issue I suspect.
Point number 1 is also in play, I think point 2 is essentially irrelevant, it might be true for some data, but not for data.
As far as economics goes, people intuitively understand that economics attempts to push the envelope and use data to draw conclusions that are not really addressable with the data. Economists don't even have agreement on how data is used - thinking mostly of macro. I see no reason to puzzle on this until you can get economists to all agree. I don't mean this as a challenge, just a description of the situation.
2016-10-17, Dan The headline unemployment number is obviously false, and this affects confidence in the other numbers.
There is no particular mystery about what is going on.
2016-10-17, Dave Chapman Because your aggregated statistics does not reflect the experience of the individuals:
"But several underlying factors also appear to have contributed to the closeness of the race. For starters, many Americans are economically worse off than they were a quarter-century ago. The median income of full-time male employees is lower than it was 42 years ago, and it is increasingly difficult for those with limited education to get a full-time job that pays decent wages.
Indeed, real (inflation-adjusted) wages at the bottom of the income distribution are roughly where they were 60 years ago. So it is no surprise that Trump finds a large, receptive audience when he says the state of the economy is rotten. But Trump is wrong both about the diagnosis and the prescription. The US economy as a whole has done well for the last six decades: GDP has increased nearly six-fold. But the fruits of that growth have gone to a relatively few at the top – people like Trump, owing partly to massive tax cuts that he would extend and deepen. "
https://www.project-syndicate.org/commentary/trump-candidacy-message-to-political-leaders-by-joseph-e--stiglitz-2016-10
2016-10-17, PSteele

[Oct 12, 2016] Interesting read on the history of the Nobel Prize in Economics and its ideological tendency

Notable quotes:
"... In the West, the priority accorded to the individualist self-regarding norms underlying the Washington Consensus created a nurturing environment for growth in corruption, inequality, and mistrust in governing elites – the unintended consequences of rational-choice, me-first premises. With the emergence in advanced economies of disorders previously associated with developing countries, Swedish political scientist Bo Rothstein has petitioned the Academy of Sciences (of which he is a member) to suspend the Nobel Prize in economics until such consequences are investigated." ..."
Oct 11, 2016 | economistsview.typepad.com

JohnH : October 11, 2016 at 06:58 AM

Interesting read on the history of the Nobel Prize in Economics and its ideological tendency:

Avner Offer: "a group of center-right economists captured the process of selecting prizewinners...The prize kingmaker was Stockholm University economist Assar Lindbeck, who had turned away from social democracy. During the 1970s and 1980s, Lindbeck intervened in Swedish elections, invoked microeconomic theory against social democracy, and warned that high taxation and full employment led to disaster. His interventions diverted attention from the grave policy error being made at the time: deregulation of credit, which led to a deep financial crisis in the 1990s and anticipated the global crisis that erupted in 2008.

Lindbeck's concerns were similar to those of the International Monetary Fund, the World Bank, and the US Treasury. These actors' insistence on privatization, deregulation, and liberalization of capital markets and trade – the so-called Washington Consensus – enriched business and financial elites, led to acute crises, and undermined emerging economies' growth.

In the West, the priority accorded to the individualist self-regarding norms underlying the Washington Consensus created a nurturing environment for growth in corruption, inequality, and mistrust in governing elites – the unintended consequences of rational-choice, me-first premises. With the emergence in advanced economies of disorders previously associated with developing countries, Swedish political scientist Bo Rothstein has petitioned the Academy of Sciences (of which he is a member) to suspend the Nobel Prize in economics until such consequences are investigated."

https://www.project-syndicate.org/commentary/economics-nobel-versus-social-democracy-by-avner-offer-2016-10

[Sep 14, 2016] Yes, Donald Trump is wrong about unemployment. But hes not the only one

Spirited defense of the establishment from one of financial oligarchy members. " The economy overall is doing just fine." Does this include QE? If the Fed is pouring billions of new money into the economy, how accurate is it to say that the economy is doing just fine?
Notable quotes:
"... "That was a number that was devised, statistically devised, to make politicians - and in particular, presidents - look good. And I wouldn't be getting the kind of massive crowds that I'm getting if the number was a real number." ..."
"... In the 1950s and 1960s, for instance, organized labor was fairly convinced that the government was purposely underestimating inflation and the cost of living to keep Social Security payments low and wages from rising. George Meany, the powerful head of the American Federation of Labor at the time, claimed that the Bureau of Labor Statistics, which compiled both employment and inflation numbers, had "become identified with an effort to freeze wages and is not longer a free agency of statistical research." ..."
"... Employment figures are sometimes seen as equally suspect. Jack Welch, the once-legendary former CEO of GE, blithely accused the Obama administration of manipulating the final employment report before the 2012 election to make the economic recovery look better than it was. "Unbelievable jobs numbers … these Chicago guys will do anything … can't debate so change numbers," he tweeted ..."
"... His arguments were later fleshed out by New York Post columnist John Crudele , who went on to charge the Census Bureau (which works with BLS to create the samples for the unemployment rate) with faking and fabricating the numbers to help Obama win reelection. ..."
"... The chairman of the Gallup organization, Jim Clifton, sees so many flaws with the way unemployment is measured that he has called the official rate a "Big Lie." In the Democratic presidential campaign, Bernie Sanders has also weighed in, saying the real unemployment rate is at best above 10 percent. ..."
"... What a useless article. The author explains precisely nothing about what the official statistics do and do not measure, what they miss and what they capture. ..."
"... I had the same impression as well. Notice he does not mention that the Gallop number is over 10% and is based on their polling data. ..."
"... But never mentioned that Reagan changed how Unemployment was figured in the early 80's. He included all people in the military service, as employed. Before that, they was counted neither way. He also intentionally left out that when Obama, had the unemployed numbers dropped one month before the election, from 8.1% to 7.8% --because it was believed that no one could be reelected if it was above 8%. ..."
"... U6 is 9.8% for March 2016. We still have 94 million unemployed and you want to say its 5 % what journalistic malpractice. ..."
"... Trump has emphasized that he is looking at the percent of the population that is participating in the workforce - and that this participation rate is currently at historical lows -- and Trump has been clear that his approach to paying down the national debt is based on getting the participation rates back to historical levels ..."
"... "The government can't lie about a hundred billion dollars of Social Security money stolen for the Clinton 'balanced budget', that would be a crime against the citizens, they would revolt. John, come one now. " ..."
"... I didn't say it first, Senator Ernest Hollings did, on the Senate floor. ..."
"... And here is how they did it: http://www.craigsteiner.us/articles/16 ..."
"... There is plenty of evidence the figures are cooked, folks, enough to fill a book: Atlas Shouts. Don't believe trash like this article claims. GDP, unemployment and inflation are all manipulated numbers, as Campbell's Law predicts. ..."
"... I can't believe the Washington Post prints propaganda like this. ..."
"... I do remember when the officially-announced unemployment rate stopped including those who were no longer looking for work. That *was* a significant shift, and there's no doubt it made politicians (Reagan, I think it was) look better; of course, no President since then has reversed it, as it would instantly make themselves look worse. ..."
"... Working one hour a week, at minimum wage, is 'employed', according to the government. No wonder unemployment is at 5%. ..."
"... Add in people who are working, but want and need full time jobs, add in people who have dropped out of the labor market and/or retired earlier than they wanted to, and unemployment is at least 10%. Ten seconds on Google will show you that. ..."
"... The writer should be sacked for taking a very serious issue and turning it into a piece of non-informative fluff. Bad mouthing Trump and Sanders is the same as endorsing Hilly. ..."
Apr 08, 2016 | The Washington Post
Yes, Donald Trump is wrong about unemployment. But he's not the only one. - The Washington Post

Listen to President Obama, and you'll hear that job growth is stronger than at any point in the past 20 years, and - as he said in his final State of the Union address - "anyone claiming that America's economy is in decline is peddling fiction."

Listen to Donald Trump and you'll hear something completely different. The billionaire Republican candidate for president told The Washington Post last week that the economy is one big Federal Reserve bubble waiting to burst, and that as for job growth, "we're not at 5 percent unemployment. We're at a number that's probably into the 20s if you look at the real number." Not only that, Trump said, but the numbers are juiced: "That was a number that was devised, statistically devised, to make politicians - and in particular, presidents - look good. And I wouldn't be getting the kind of massive crowds that I'm getting if the number was a real number."

It's easy enough to dismiss - as a phalanx of economists and analysts did - Trump's claims as yet another one of his all-too-frequent campaign lines that have little to do with reality. But with this one, at least, Trump is tapping into a deep and mostly overlooked well of popular suspicion of government numbers and a deeply held belief that what "we the people" are told about the economy by the government is lies, damn lies and statistics designed to benefit the elite at the expense of the working class. The stubborn persistence of these beliefs should be a reminder that just because the United States is doing well in general, that doesn't mean everyone in the country is. It's also a warning to experts and policymakers that in the real world, there is no "the economy," there are many, and generalizations have a way of glossing over some very rough patches.

Since the mid-20th century, when the U.S. government began keeping and compiling our modern suite of economic numbers, there has been constant skepticism of the reports, coming from different corners depending on economic trends and the broader political climate. In the 1950s and 1960s, for instance, organized labor was fairly convinced that the government was purposely underestimating inflation and the cost of living to keep Social Security payments low and wages from rising. George Meany, the powerful head of the American Federation of Labor at the time, claimed that the Bureau of Labor Statistics, which compiled both employment and inflation numbers, had "become identified with an effort to freeze wages and is not longer a free agency of statistical research."

Over the decades, those views hardened. Throughout the 1970s, as workers struggled with unemployment and stagflation, the government continually tweaked its formulas for measuring prices. By and large, these changes and new formulas were designed to make the figures more accurate in a fast-changing world. But for those who were already convinced the government was trying to paint a deliberately false picture, the tweaks and innovations were interpreted as a devious way to avoid spending money to help the ailing middle class, not trying to measure what was actually happening to design policies to help address it. The commissioner of BLS at the time, Janet Norwood, dismissed those concerns in testimony to Congress in the late 1970s, saying that when people don't get the number they want, "they feel there must be something wrong with the indicator itself."

Employment figures are sometimes seen as equally suspect. Jack Welch, the once-legendary former CEO of GE, blithely accused the Obama administration of manipulating the final employment report before the 2012 election to make the economic recovery look better than it was. "Unbelievable jobs numbers … these Chicago guys will do anything … can't debate so change numbers," he tweeted after that last October report showed better-than-expected job growth and lower-than-anticipated unemployment rate. His arguments were later fleshed out by New York Post columnist John Crudele, who went on to charge the Census Bureau (which works with BLS to create the samples for the unemployment rate) with faking and fabricating the numbers to help Obama win reelection.

These views are not fringe. Type the search terms "inflation is false" into Google, and you will get reams of articles and analysis from mainstream outlets and voices, including investment guru Bill Gross (who referred to inflation numbers as a "haute con job"). Similar results pop up with the terms "real unemployment rate," and given how many ways there are to count employment, there are legitimate issues with the headline number.

The cohort that responds to Trump reads those numbers in a starkly different light from the cohort laughing at him for it. Whenever the unemployment rate comes out showing improvement and hiring, those who are experiencing dwindling wages and shrinking opportunities might see a meticulously constructed web of lies meant to paint a positive picture so that the plight of tens of millions who have dropped out of the workforce can be ignored. The chairman of the Gallup organization, Jim Clifton, sees so many flaws with the way unemployment is measured that he has called the official rate a "Big Lie." In the Democratic presidential campaign, Bernie Sanders has also weighed in, saying the real unemployment rate is at best above 10 percent.

Beneath the anger and the distrust - which extend to a booming stock market that helps the wealthy and banks flush with profit even after the financial crisis - there lies a very real problem with how economists, the media and policymakers discuss economics. No, the bureaucrats in the Labor and Commerce departments who compile these numbers aren't a cabal engaged in a cover-up. And no, the Fed is not an Illuminati conspiracy. But the idea that a few simple big numbers that are at best averages to describe a large system we call "the economy" can adequately capture the stories of 320 million people is a fiction, one that we tell ourselves regularly, and which millions of people know to be false to their own experience.

It may be true that there is a national unemployment rate measured at 5 percent. But it is also true that for white men without a college degree, or white men who had worked factory jobs until the mid-2000s with no more than a high school education, the unemployment reality is much worse (though it's even worse for black and Hispanic men, who don't seem to be responding by flocking to Trump in large numbers). Even when those with these skill sets can get a job, the pay is woefully below a living wage. Jobs that don't pay well still count, in the stats, as jobs. Telling people who are barely getting by that the economy is just fine must appear much more than insensitive. It is insulting, and it feels like a denial of what they are experiencing.

The chords Trump strikes when he makes these claims, therefore, should be taken more seriously than the claims themselves. We need to be much more diligent in understanding what our national numbers do and do not tell us, and how much they obscure. In trying to hang our sense of what's what on a few big numbers, we risk glossing over the tens of millions whose lives don't fit those numbers and don't fit the story. "The economy" may be doing just fine, but that doesn't mean that everyone is. Inflation might be low, but millions can be struggling to meet basic costs just the same.

So yes, Trump is wrong, and he's the culmination of decades of paranoia and distrust of government reports. The economy overall is doing just fine. But people are still struggling. We don't have to share the paranoia or buy into the conspiratorial narrative to acknowledge that. A great nation, the one Trump promises to restore, can embrace more than one story, and can afford to speak to those left out of our rosy national numbers along with those whose experience reflect them.

the3sattlers, 4/8/2016 1:05 PM EDT

" The economy overall is doing just fine." Does this include QE? If the Fed is pouring billions of new money into the economy, how accurate is it to say that the economy is doing just fine?

james_harrigan, 4/8/2016 10:14 AM EDT

What a useless article. The author explains precisely nothing about what the official statistics do and do not measure, what they miss and what they capture.

Derbigdog, 4/8/2016 11:40 AM EDT

I had the same impression as well. Notice he does not mention that the Gallop number is over 10% and is based on their polling data.

captdon1, 4/8/2016 5:51 AM EDT

Not reported by WP
The first two years of Obama's presidency Democrats controlled the house and Senate. The second two years, Republicans controlled the Senate. The last two years of Obama's term, the Republicans controlled house and Senate. During this six years the national debt increase $10 TRILLION and the Government collected $9 TRILLION in taxes and borrowed $10 TRILLION. ($19 Trillion In Six Years!!!) (Where did our lovely politicians spend this enormous amount of money??? (Republicans and Democrats!)

reussere, 4/8/2016 1:43 AM EDT

Reading the comments below it strikes me again and again how far out of whack most people are with reality. It's absolutely true that using a single number for the employment rate reflects the overall average of the economy certainly doesn't measure how every person is doing, anymore than an average global temperature doesn't measure any local temperatures.

One thing not emphasized in the article is that there is a number of different statistics. The 5% figure refers to the U-3 statistic. Nearly all of the rest of the employment statistics are higher, some considerably so because they include different groups of people. But when you compare U-3 from different years, you are comparing apples and apples. The rest of the numbers very closely track with U-3. That is when U-3 goes up and down, U-6 go up and down pretty much in lockstep.

It is unfortunate that subpopulations of Americans are doing far worse (and some doing far better) than average. But that is the nature of averages after all. It is simply impossible for a single number (or even a group of a dozen different employment measurements) to accurately reflect a complex reality.

Smoothcountryside, 4/8/2016 12:04 PM EDT

The alternative measures of labor underutilization are defined as U-1 through U-6 with U-6 being the broadest measure and probably the closes to the "true" level of unemployment. Otherwise, all the rest of your commentary is correct.

southernbaked, 4/7/2016 11:02 PM EDT

Because this highly educated writer is totally bias, he left out some key parts, I personally lived though. He referred back to the late 70's twice. But never mentioned that Reagan changed how Unemployment was figured in the early 80's. He included all people in the military service, as employed. Before that, they was counted neither way. He also intentionally left out that when Obama, had the unemployed numbers dropped one month before the election, from 8.1% to 7.8% --because it was believed that no one could be reelected if it was above 8%.

Then after he was sworn in--- in January, they had to readjust the numbers back up. They blamed it on one employees mistakes-- PS. no one was fired or disciplined for fudging. Bottom line is, for every 1.8 manufacturing job, there are 2 government jobs, that is disaster. Because this writer is to young to have lived in America when it was great. When for every 1 government job, you had 3 manufacturing jobs.

I will enlighten him. I joined the workforce -- With no higher education -- when you merely walked down the road, and picked out a job. Because jobs hang on trees like apples. By 35 I COMPLETELY owned my first 3 bedroom brick house, and the 2 newer cars parked in the driveway. Anyone care to try that now ??

As for all this talk about education-- I have a bit of knowledge about that subject-- because I paid in full to send all under my roof through it. Without one dime of aide from anyone. The above writer is proof-- you can be heavily educated, and DEAD WRONG. There is nothing good about this economy. Signed, UN-affiliated to either corrupted party

Bluhorizons, 4/7/2016 9:43 PM EDT

"we're not at 5 percent unemployment. We're at a number that's probably into the 20s if you look at the real number." Trump is correct. The unemployment data is contrived from data about people receiving unemployment compensation but the people who's unemployment has ended and people who have just given up is invisible.

"It may be true that there is a national unemployment rate measured at 5 percent. But it is also true that for white men without a college degree, or white men who had worked factory jobs until the mid-2000s with no more than a high school education, the unemployment reality is much worse "

The author goes on and on about the legitimate distrust of government unemployment data and then tells us Trump is wrong. But the article convinces us Trump is right! So, this article its not really about the legitimate distrust of government data is is about the author's not liking Trump. Typical New Left bs

Aushax, 4/7/2016 8:24 PM EDT

Last jobs report before the 2012 election the number unusually dropped then was readjusted up after the election. Coincidentally?

George Mason, 4/7/2016 8:15 PM EDT

U6 is 9.8% for March 2016. We still have 94 million unemployed and you want to say its 5 % what journalistic malpractice.

F mackey, 4/7/2016 7:57 PM EDT

hey reporter,Todays WSJ, More than 40% of the student borrowers aren't making payments? WHY? easy,they owe big $ money$ & cant get a job or a well paying job to pay back the loans,hey reporter,i'd send you $10 bucks to buy a clue,but you'd probably get lost going to the store,what a %@%@%@,another reporter,who doesn't have a clue on whats going on,jmo

SimpleCountryActuary, 4/7/2016 7:57 PM EDT

This reporter is a Hillary tool. Even the Los Angeles Times on March 6th had to admit:

"Trump is partly right in saying that trade has cost the U.S. economy jobs and held down wages. He may also be correct - to a degree - in saying that low-skilled immigrants have depressed salaries for certain jobs or industries..."

If this is the quality of reporting the WaPo is going to provide, namely even worse than the Los Angeles Times, then Bezos had better fire the editorial staff and buy a new one.

Clyde4, 4/7/2016 7:34 PM EDT [Edited]

This article dismissing Trump is exactly what is wrong with journalism today - all about creating a false reality for people instead of investigating and reporting

Trump has emphasized that he is looking at the percent of the population that is participating in the workforce - and that this participation rate is currently at historical lows -- and Trump has been clear that his approach to paying down the national debt is based on getting the participation rates back to historical levels

The author completely ignored the big elephant in the room -- that is irresponsible journalism

The author may want to look into how the unemployment rate shot up in 2008 when the government extended benefits and then the unemployment rate plummeted again when unemployment benefits were decrease (around 2011, I believe) - if I were the author I would do a little research into whether the unemployment rate correlates with how much is paid out in benefits or with unemployment determined through some other approach (like surveys

dangerbird1225, 4/7/2016 7:25 PM EDT

Bunch of crap. If you stop counting those that stop looking for a job, your numbers are wrong. Period. Why didn't this apologist for statistics mention that?

watchkeptoverthewatcher, 4/7/2016 6:27 PM EDT

Ya with a labor participation rate of 63%

http://data.bls.gov/timeseries/LNS11300000

AtlasRocked, 4/7/2016 5:12 PM EDT

"The government can't lie about a hundred billion dollars of Social Security money stolen for the Clinton 'balanced budget', that would be a crime against the citizens, they would revolt. John, come one now. "

I didn't say it first, Senator Ernest Hollings did, on the Senate floor.

"Both Democrats and Republicans are all running this year and next and saying surplus, surplus. Look what we have done. It is false. The actual figures show that from the beginning of the fiscal year until now we had to borrow $127,800,000,000." - Senate speech, Democratic Senator Ernest Hollings, October 28, 1999

http://www.c-span.org/video/?c3319676 at 5:30

And here is how they did it: http://www.craigsteiner.us/articles/16

rgengel, 4/7/2016 5:03 PM EDT

Go to New Orleans Chicago Atlanta Los Angeles Detroit stop anybody on the street and ask if unemployment is 5% and that there is a 95% chance a guy can get a job.

Then you will have a statistic reference point. Its not a Democratic or republican issue because both of them have manipulated the system for so long its meaningless. Go Trump 2016 and get this crap sorted out with common sense plain English

AtlasRocked, 4/7/2016 4:37 PM EDT

There is plenty of evidence the figures are cooked, folks, enough to fill a book: Atlas Shouts. Don't believe trash like this article claims. GDP, unemployment and inflation are all manipulated numbers, as Campbell's Law predicts.

I can't believe the Washington Post prints propaganda like this.

TimberDave, 4/7/2016 2:23 PM EDT

I do remember when the officially-announced unemployment rate stopped including those who were no longer looking for work. That *was* a significant shift, and there's no doubt it made politicians (Reagan, I think it was) look better; of course, no President since then has reversed it, as it would instantly make themselves look worse.

astroboy_2000, 4/7/2016 1:28 PM EDT

This would be a much more intelligent article if the writer actually said what the government considers as 'employed'.

Working one hour a week, at minimum wage, is 'employed', according to the government. No wonder unemployment is at 5%.

Add in people who are working, but want and need full time jobs, add in people who have dropped out of the labor market and/or retired earlier than they wanted to, and unemployment is at least 10%. Ten seconds on Google will show you that.

The writer should be sacked for taking a very serious issue and turning it into a piece of non-informative fluff. Bad mouthing Trump and Sanders is the same as endorsing Hilly.

Manchester0913, 4/7/2016 2:12 PM EDT

The number you're referencing is captured under U6. However, U3 is the traditional measure.

Son House, 4/7/2016 2:24 PM EDT

The government doesn't claim that working one hour a week is employed. Google U 3 unemployment. Then google U 6 unemployment. You can be enlightened.

Liz in AL, 4/7/2016 7:21 PM EDT

I've found this compilation of all 6 of the "U-rates" very useful. It encompasses the most restrictive (and thus smallest) U-1 rate, though the most expansive U-6. It provides brief descriptions of what gets counted for each rate, and (at least for more recent years) provides the ability to compare at the monthly level of detail. U6 Unemployment Rate Portal Seven

[Mar 16, 2016] GDP never measures economic efficiency of the country

Notable quotes:
"... Energy intensity of the World economy has decreased from 1970 to 2014. This is probably due to deindustrialization of the Western countries. Aka "growth of service economy." ..."
peakoilbarrel.com

Dennis Coyne , 03/15/2016 at 6:56 pm

Energy intensity of the World economy has decreased from 1970 to 2014. Energy intensity is energy consumed by the economy divided by the real GDP produced.
In 1970 314 tonnes of oil equivalent(toe) were needed for each million 2005$ of GDP produced and by 2014 energy intensity had fallen to 225 toe per million 2005$ of GDP.

SRSrocco , 03/15/2016 at 9:46 pm
Dennis,

While you produce some fine charts, I hope you don't believe GDP and energy consumption will continue higher indefinitely. Also I hope you realize GDP figures are overstated due to understated inflation rates.

For example the policy of substitution says if top sirloin beef is too expensive, then we switch to eating ground chuck. If chuck becomes too high, then its plain ole ground beef. Once ground beef becomes too costly, then we switch to ground rat.

Lastly, why don't you add the debt into your equations and see what the trend lines look like.

Steve

Dennis Coyne , 03/16/2016 at 8:16 am
Hi Steve,

No inflation is not understated, the Shadowstats stuff is not believable. If you believe the Shadowstats CPI adjustment and us those numbers to find the real oil price from 1970 to 2012 and do the same using the BLS CPI we get the following chart. Does the Shadowstats estimate for the real oil price in 1980 look reasonable?

You cannot be serious. :-)

likbez , 03/16/2016 at 12:01 am
Dennis,

Energy intensity of the World economy has decreased from 1970 to 2014. This is probably due to deindustrialization of the Western countries. Aka "growth of service economy."

Ulenspiegel , 03/16/2016 at 2:26 am
"This is probably due to deindustrialization of the Western countries. Aka "growth of service economy.""

The GLOBAL industrial production did not decrease, therefore, your argument does not make sense. It is only useful in a national e.g. US-centric discussion.

Or if you actually check data for developed countries with quite different share of industry to their GDP you do not see the correlation of low share of industry = low energy intensity!

Dennis Coyne , 03/16/2016 at 8:20 am
Hi likbez,

As Ulenspiegel says correctly, for the World your point does not apply. The World Energy intensity has fallen as I have used Global GDP and Global energy consumption.

As long as we don't do a lot of interplanetary trade, this estimate will be close enough. :-)

likbez , 03/16/2016 at 7:21 pm
Ulenspiegel ,

GDP does not reflect only production (compare with GNI). It is completely different metric which takes into account the "value" produced by financial services, prostitution (yes in some countries income from prostitution is included into GDP; GB (3-4% or ~£10 billion) and Italy (2% of national GDP) are two examples: https://www.rt.com/news/161140-italy-drugs-prostitution-economy/ ) and like.

GDP is defined as the total value of final goods and services produced within a territory during a specified period (or, if not specified, annually, so that "the UK GDP" is the UK's annual product). GDP differs from gross national product (GNP) in excluding inter-country income transfers, in effect attributing to a territory the product generated within it rather than the incomes received in it.

So the country with zero production in which people just wash dirty linen for each for remuneration or trade on stock market has a positive GDP. Other classic example: if somebody marries his secretary and she stays home to look after children GDP drops.

GDP never measures economic efficiency of the country; it measures the level of economic activity. Healthcare is a classic example. The USA spends 20% to subsidize maladaptive behavior between producers and consumers in the medical food chain. Another example is sales of high sugar context flavored water called Coca Cola and Pepsi Cola. It is negatively affect children health leading to obesity and early diabetes, but it is positively reflected in GDP. And then medical expenses for treating diabetes further increase GDP. That brings us to the problem of conspicuous consumption or consumption for the sake of status. Which in the USA is a real national epidemics (Keeping up with Jones). Many other components of GDP (especially FIRE - finance, insurance and real estate) are partially anti-social and their fast growth is a sign of the problems inherent in neoliberal societies rather then social progress of the particular country. This is especially true for the USA, which in this sense is the most wicked (aka neoliberal) country in the world.

This voodoo cult of GDP that dominates US economic discourse since 1991 is just a sign of the level of degradation of economic science under neoliberalism.

See http://www.bloomberg.com/news/articles/2014-05-23/counting-drugs-and-prostitution-in-gdp-makes-a-mockery-of-budget-rules

[Dec 17, 2015] GDP Forecasts Have Consistently Been Too High

cepr.net

December 17, 2015

GDP Forecasts Have Consistently Been Too High

In an article * on the Federal Reserve Board's decision to raise interest rates, the Washington Post referred to the 2.4 percent median growth forecast of the Fed's Open Market Committee. For example, last December their median forecast for growth in 2015 was 2.8 percent. It now appears growth will be around 2.2 percent for the year. The Fed was not out of line with other forecasts. For example the Congressional Budget Office, which quite explicitly tries to be near the middle of major forecasts, forecast 2.9 percent growth for 2015.

* https://www.washingtonpost.com/news/wonk/wp/2015/12/16/federal-reserve-launches-campaign-to-raise-interest-rates-and-return-u-s-economy-to-normal/

-- Dean Baker

[Dec 08, 2015] GDP often is not a good measure of a society's wellbeing

Notable quotes:
"... The international Commission on the Measurement of Economic Performance and Social Progress, which I co-chaired and on which Deaton served, had earlier emphasized that GDP often is not a good measure of a society's wellbeing. These new data on white Americans' declining health status confirms this conclusion. The world's quintessential middle-class society is on the way to becoming its first former middle-class society. ..."
Project Syndicate

When Inequality Kills by Joseph E. Stiglitz - Project Syndicate

The basic perquisites of a middle-class life were increasingly beyond the reach of a growing share of Americans. The Great Recession had shown their vulnerability. Those who had invested in the stock market saw much of their wealth wiped out; those who had put their money in safe government bonds saw retirement income diminish to near zero, as the Fed relentlessly drove down both short- and long-term interest rates. With college tuition soaring, the only way their children could get the education that would provide a modicum of hope was to borrow; but, with education loans virtually never dischargeable, student debt seemed even worse than other forms of debt.

... ... ...

The international Commission on the Measurement of Economic Performance and Social Progress, which I co-chaired and on which Deaton served, had earlier emphasized that GDP often is not a good measure of a society's wellbeing. These new data on white Americans' declining health status confirms this conclusion. The world's quintessential middle-class society is on the way to becoming its first former middle-class society.

[Dec 05, 2015] The Real Stuff Economy Is Falling Apart Zero Hedge

www.zerohedge.com
What is the service sector? Mostly software, restaurants, banks, construction companies, retailers, doctors and hospitals.

Can an economy thrive if it doesn't make or move physical things? Intuitively the answer is no, because most of the services mentioned above either maintain the status quo (like healthcare and restaurants) or (like houses) consume rather than build capital. As for banking, in its current incarnation it's almost certainly a net negative, draining capital from productive uses and funneling it to trading desks and political action committees.

The US, in short, is engaged in an experiment to see how long an economy can function with services growing and manufacturing contracting. As with so many of today's monetary and fiscal experiments, no one knows when definitive results will come in. But the data so far aren't encouraging.


Noplebian

History shows when the fiat currency system reaches it's end cycle, there is always a call for war. This one however, will wipe out billions!

http://beforeitsnews.com/conspiracy-theories/2015/12/road-to-ww3-time-to...

Eyeroller

"The US, in short, is engaged in an experiment to see how long an economy can function with services growing and manufacturing contracting."

Should read:

"The US, in short, is engaged in an experiment to see how long an economy can function with services growing and manufacturing contracting while the MSM tells us how awesome everything is."

toady

Another "oldy-but-a-goody". This "transition from a manufacturing to a services economy" has been going on since before NAFTA, and it's now almost finished we'll finally get to see what the Reagan-Bush1 voodoo economics hath wrought.

Good times!

Amish Hacker

In politics, "definitive results" do not exist. Causes and effects can be, and are, argued and denied ad infinitum , in spite of overwhelming evidence to the contrary. For example, Cheney & the neocons still claim they did the right thing in Iraq & Afghanistan, and proudly boast that they would do the same thing again today. Keynesian economists will argue that they made no mistakes over the last 8 years, we just didn't apply their prescriptions aggressively enough. And so on.

In politics, confirmation bias is the leading cause of blindness.

[Dec 04, 2015] The alleged 'decoupling' of GDP from energy

peakoilbarrel.com
Don Stewart, 12/01/2015 at 12:25 pm

Dear Ron and Others
Relative to the alleged 'decoupling' of GDP from energy. Please see:
http://www.pnas.org/content/112/20/6271.full
The material footprint of nations

The apparent decoupling turns out to be mostly a mirage. It is true that rich countries outsource some of the more energy and materials intensive operations to poor countries, but if you count back from consumption, the rich countries are essentially as energy and materials dependent as they ever were. For fossil fuels, the coefficient is 90 percent…a 90 point increase in fossil fuels is needed for a 100 point increase in GDP.

Part of what happens can perhaps be understood by thinking about beef imports. If England imports beef from Africa, then there is a great deal of materials and energy consumed in Africa to produce the beef. Only a small percentage of the resource used gets exported to England. If you start with the steak in England and look back at the supply chain, you find that the consumption of the pound of steak in England was responsible for the consumption of lots of energy and materials in Africa.

I think that 'decoupling' is not the same as energy efficiency. Suppose, for example, that we look at the efficiency with which firewood is burned in an ordinary house. Back in the olden days, the wood was burned in a fireplace, which is inefficient. Then Franklin invented the Franklin stove and heating became more efficient in terms of calories of usable heat per cord of wood. But the stove wasn't necessarily any less or more expensive than the fireplace. Since GDP essentially measures cash outlay, the increased efficiency doesn't necessary have any direct impact on GDP.

Recently, we have begun to adjust GDP for 'hedonic factors'. Suppose, for example, that one has an old radio with lots of static and poor sound quality. Then one buys a new radio with better sound quality. But suppose that the price you pay for the new radio is the same as it was for the old radio. GDP would be the same for both radios. But, recently, the US government has begun to make adjustments for the quality of the sound.

Whether the hedonic adjustments make any sense depends on what sort of question you are trying to answer. If you are asking 'will my radio company be able to pay our debts?', then all that matters is your actual income. The fact that you had to improve the sound quality in order to remain competitive is an ancillary fact. If you are not getting any more income, then paying your debts doesn't get any easier.

Don Stewart

Fred Magyar, 12/01/2015 at 1:41 pm
Why the GDP Is Not An Good Measure of A Nation's Well Being
https://goo.gl/xKKHZx

In their book, The Spirit Level: Why Greater Equality Makes Societies Stronger (link is external), Professors Richard Wilkinson and Kate Pickett, present data taken from multiple credible sources that show the gap between the poor and rich the greatest in the U.S. among all developed nations; child well being is the worst in the U.S. among all developed nations; and levels of trust among people in the U.S. among the worst of all developed nations.

The Subcommittee on International Organizations, Human Rights and Oversight of the U.S. Congress' House Committee on Foreign Affairs stated, after examining the issue of the U.S.'s declining image abroad, "the decline in international approval of U.S. leadership is caused largely by opposition to the invasion of Iraq, U.S. support for dictators, and practices such as torture and rendition. They testified that this opposition is strengthened by the perception that our decisions are made unilaterally and without constraint by international law or standards-and that our rhetoric about democracy and human rights is hypocritical."

The US ranks 114th out of 125 countries in international peace and security.

http://www.goodcountry.org/

To those in power who believe that only strength counts, and that people are always self-interested, I say "We tried it your way, and it didn't work. Let's try something new."

Simon Anholt

Ves, 12/02/2015 at 8:49 am
Hi Dennis,
I see up there little discussion about GDP and what it means.
Let's say:
Country A: use washable rags to clean kitchen counter-tops.
Country B: use paper towels to clean same kitchen counter-tops.

As result they both have clean kitchen counter-tops but Country B has higher GDP due to use of paper towels.

So GDP means absolutely nothing or anything depending what you want to present.

GDP is like looking at the sunset and your mind is thinking that you are actually looking at the sunset. But it takes 8 minutes for sunlight to reach the earth and that sun that we think we are looking at is already gone. (Since this site is loaded with scientist they can correct me with if that 8 minutes is more or less correct )

Anyway, mostly GDP is used by some "smart" people we call economist to tell us some "story". For example they tell us: "You see sunny boy that GDP is big number this year, bigger than one from last year. So you should be content and happy. Not convinced? Don't worry we will "super size" that GDP for you next year. Isn't your tummy already feeling full and content?"

This kind of storytelling is usually printed as financial news about GDP. Meaningless if you ask me from the point of average citizen.

I have to go now because I have whole day of work planned for me by this economy and I will catch you later tonight to see your thoughts. Another thing that crosses my mind is how come that we work more or at least the same now when oil is at $40 compared to when oil was $100 last year? Wasn't the official meme that use of oil as our biggest invention beside sliced bread, made our life easier so we actually work less and spent more time with family & friends and doing odd staff like canoeing How come I don't feel that I did not get 60% discount due to price of oil in terms of work load from the last year Who is pocketing that 60%
How about employed folks who bought kiwi Leaf? Do they work less and have more time with family and friends or they are paddling in the same hamster wheel we call economy?

Dennis Coyne, 12/02/2015 at 12:39 pm
Hi Ves,

I agree GDP is a poor measure of well being. Another example would be World War 2 where a lot of output was created to destroy stuff (tanks, bombs, planes, ships, guns, etc), then stuff was destroyed, cities and other infrastructure in Europe and Asia and then it was rebuilt leading to a lot of economic growth. Were we better off? Probably not, especially the millions who died and their families.

GDP has many problems, beyond paper towels and paper plates and other wasteful (in my opinion) uses of resources.

I did a different chart using the human development index (HDI) from 1980 to 2013 which shows World primary energy use per unit of HDI(a dimensionless number) has been increasing roughly linearly, not decreasing as is the case for energy intensity.

The HDI is also far from perfect as a measure of human welfare, but probably better than GDP.

[Dec 03, 2015] GDP and energy

Notable quotes:
"... A paper published earlier this year in Proceedings of the National Academy of Sciences proposes that even the relative decoupling we claim to have achieved is an artefact of false accounting. ..."
"... GDP is about as decoupled from energy about as much as a dog's tail is decoupled from his ass. ..."
"... I'm with Ron on this one. If for example GDP units are produced at a ratio of 1:1 for every unit of energy consumed then a graph representing this trend could perhaps have 2 superimposed lines. If efficiency gains then begin to create 2 units of GDP for every unit of energy consumed then the 2 lines on the graph will diverge. There is no decoupling. ..."
"... Javier's suggestion about debt is not correct. Really, really not correct. Debt is just accounting for various kinds of ownership and obligations. If this were the old Soviet Union, construction would happen based on a central plan, and there would be no debt at all, but there would still be GDP. ..."
peakoilbarrel.com

VK, 11/30/2015 at 4:10 pm

So much for decoupling…

http://www.theguardian.com/commentisfree/2015/nov/24/consume-conserve-economic-growth-sustainability

"A paper published earlier this year in Proceedings of the National Academy of Sciences proposes that even the relative decoupling we claim to have achieved is an artefact of false accounting. It points out that governments and economists have measured our impacts in a way that seems irrational.

Here's how the false accounting works. It takes the raw materials we extract in our own countries, adds them to our imports of stuff from other countries, then subtracts our exports, to end up with something called "domestic material consumption". But by measuring only the products shifted from one nation to another, rather than the raw materials needed to create those products, it greatly underestimates the total use of resources by the rich nations.

For instance, if ores are mined and processed at home, these raw materials, as well as the machinery and infrastructure used to make finished metal, are included in the domestic material consumption accounts. But if we buy a metal product from abroad, only the weight of the metal is counted. So as mining and manufacturing shift from countries such as the UK and the US to countries like China and India, the rich nations appear to be using fewer resources. A more rational measure, called the material footprint, includes all the raw materials an economy uses, wherever they happen to be extracted. When these are taken into account, the apparent improvements in efficiency disappear."

BC, 11/30/2015 at 4:37 pm
VK, precisely. The US has been in a net-exergetic deficit in debt-money-based terms per capita since the mid- to late 1960s to mid-1970s to mid-1980s, having compensated by increasing to an unprecedented level to date debt to wages and GDP.

Moreover, the BEA-determined industry requirement costs as the basis of estimated gross and real value-added output (what we refer to as GDP), adjusted for our net-exergetic deficit in debt-money terms, the US has been in recession/"slow-motion depression" since Q4 2000-Q1 2001, and the world since 2005-08.

Senior BEA, BLS, Commerce, White House economic advisors, CIA, NSA, military intelligence, and Pentagon planners all know this in varying degrees as it relates to their imperatives and prerogatives.

However, the mass public and most political leaders are utterly unaware, or in the case of the latter, have no incentive to know or to share with the public what they know because they will not be able to raise a nickel thereafter for reelection if they do share.

And so it goes . . .

Ron Patterson, 11/30/2015 at 5:02 pm
Thanks VK, I suspected as much.

He told me that he and his colleagues had conducted a similar analysis, in this case of the UK's energy use and greenhouse gas emissions, "and we find a similar pattern". One of his papers reveals that while the UK's carbon dioxide emissions officially fell by 194m tonnes between 1990 and 2012, this apparent reduction is more than cancelled out by the CO2 we commission through buying stuff from abroad. This rose by 280m tonnes in the same period.

GDP is about as decoupled from energy about as much as a dog's tail is decoupled from his ass.

Jimmy, 12/02/2015 at 11:38 am
I'm with Ron on this one. If for example GDP units are produced at a ratio of 1:1 for every unit of energy consumed then a graph representing this trend could perhaps have 2 superimposed lines. If efficiency gains then begin to create 2 units of GDP for every unit of energy consumed then the 2 lines on the graph will diverge. There is no decoupling.

Only a divergence due to more units of GDP produced per unit of energy consumed. When somebody can create units of GDP and consume no energy at all then we will have decoupling. Coupling and decoupling are all or none terms/states of being. You're either coupled or your decoupled. Any arguments to the contrary are pedantic and uninformed.

Ron Patterson, 12/02/2015 at 11:58 am
Thanks Jimmy, with all the Pollyannas on this site I need all the support I can get.
Dennis Coyne, 12/02/2015 at 1:56 pm
Hi Jimmy,

Look up the meaning of decouple it is reduce or eliminate the effect of one part of a circuit on another. In this context the appropriate meaning is reduce.

Doesn't really matter, nobody thinks that energy inputs can be eliminated, that would be absurd.

Dennis Coyne, 12/01/2015 at 8:07 am
Hi VK,

The problem is solved by looking at World output and World primary energy use.

Energy intensity for the World has improved, though during the Chinese rapid expansion from 2000-2010, the progress stopped for a decade as energy was not used very efficiently in China over that period, since 2010 the progress has continued. Energy intensity is energy per unit of GDP produced.
Chart below for 1965 to 2014 using World Bank(from FRED), UN, and BP data.

Left vertical axis is in metric tons of oil equivalent (toe) per millions of 2005$ of real GDP (M2005$).

Javier, 12/01/2015 at 9:23 am
Hi Dennis,

That graph shows several things mixed that have co-evolved independently, so not many conclusions can be extracted.

We don't know the contribution of each to that graph (at least I don't), but given the magnitudes involved I would guess that the real efficiency improvement is small. This is supported by how the graph reacts to recessions (not the Chinese expansion as you claim), indicating that the main factor is economic, not energetic.

Now we know that debt has a limit, and once debt saturation is reached the economy, and specially the tertiary sector would be very badly affected. If that happens we might very well see that graph turn around and energy intensity increase.

Dennis Coyne, 12/01/2015 at 1:56 pm
Hi Javier,

GDP only increases if your money is spent on goods or services. It is output of goods and services. On a World level the debts and liabilities balance, so if I save my money and lend it to you, I spend less and you spend more. You should review your economics. At a World level, the debt has no effect, assuming we don't have ant interstellar debts. There was a World recession from 2000 to 2010? I hadn't heard about that.

Yes services might have increased, if that is what people want to spend their money on, then the share of services in the economy will increase. I don't have figures on the "non-service economy". Part of this increase reflects women entering the labor pool in greater numbers, some of the work cleaning the house or taking care of the garden are now part of GDP when before they were taken care of by the family. We may not have good data for the World on this effect.

Javier, 12/01/2015 at 2:21 pm
Dennis,

I think I do understand. If I go to the bank and ask for a 200,000 $ mortgage loan, that money is created from thin air, and when I go and pay for the house, GDP jumps by 200,000 $, so yes, increasing debt increases GDP as soon as the debt money is used. Since no oil was used to create the money, it counts as a reduction in oil intensity. Of course if I return the money to the bank the operation is reversed (they do keep the interests), but since on average debt is always expanding, except during crisis periods, oil intensity is always decreasing, except during crisis periods. Debt that is used to buy stocks or companies or to extract oil from the ground is the same.

Dennis Coyne, 12/01/2015 at 3:16 pm
Hi Javier,

The point is that you purchased a $200,000 house. That house was not created from thin air, not my house anyway. :)

It is not the debt, it is building a house that creates the GDP.

Rune Likvern, 12/01/2015 at 3:26 pm
So what comes first; The debt that allows for building the house, or first building the house and then creating the debt?
Dennis Coyne , 12/01/2015 at 3:47 pm
Hi Rune,

In most cases the debt will come first if the home is purchased with financing. It is possible to build a home using savings, in which case there would be no debt.

So the debt is not a requirement for GDP, just creating a new house, car, or other good or service.

Would GDP be lower if there were no debt, of course!

As long as debt grows at reasonable rates (similar to GDP growth at full employment), when there is a recession debt will initially grow faster than GDP and then will slow down until GDP growth catches up and surpasses the debt rate of growth.

Dennis Coyne, 12/01/2015 at 4:25 pm
Hi Rune,

I am curious. Do you think what Javier is saying is correct? Energy intensity has decreased because Debt to GDP ratios have increased? I am pretty sure Javier is not right, but you are very knowledgeable about economics. Perhaps you can explain it to me, if I am mistaken.

If all GDP was created with no debt (all of it was based on savings and income with no new borrowing) in year 1. And in year 2 50% of income was borrowed from banks to create the same level of GDP, would that mean in year 2 we have 150% of the first year because of the debt?

I don't think so, but I may be missing something.

Nick G, 12/02/2015 at 2:14 pm
Dennis,

Javier's suggestion about debt is not correct. Really, really not correct. Debt is just accounting for various kinds of ownership and obligations. If this were the old Soviet Union, construction would happen based on a central plan, and there would be no debt at all, but there would still be GDP.

Let's say there two houses on an island, and 2 residents, 1 in each house. One owns both houses, the other rents from the 1st. Then the renter borrows from the owner, and buys the house he/she lives in. Their monthly payment was rent, now it's a mortgage payment. The renter is now leveraged.

But, has anything "real" changed? No. Same amount of wealth, same amount of income, with different kinds of ownership, and different obligations (the renter now has to fix his own roof!).

Dennis Coyne, 12/01/2015 at 4:16 pm
Hi Javier,

You should read up on national income accounting. Debt does not really come into play, and more or less debt says absolutely nothing about the energy intensity of GDP. The chart I created is primary energy in metric tons of oil equivalent divided by real GDP in millions of 2005$. Debt plays no role.

Try the following link for a detailed introduction to national income accounting:

http://grizzly.la.psu.edu/~bickes/nia.pdf

Javier, 12/01/2015 at 7:06 pm
Dennis,

I still disagree. It is well known that the increase in debt has a positive effect on GDP, while the total outstanding debt can become a drag on GDP if too high. It is difficult to sustain that debt plays no role in GDP in light of the evidence.

For example China has had a phenomenal rate of growth accompanied by the highest rate of debt growth that the world has seen.

I think it is easy to understand.

Both countries use the same oil so both report the same oil intensity. However country B has brought half of the wealth used to increase the GDP from the future without bringing any future oil. That wealth will have to be repaid eventually, detracting from future GDP but at that point no oil will be recovered.

So in reality country B is reporting half of its real oil intensity. With present wealth it would have grown GDP by only 1% yet it has spent the same amount of oil than A.

Net effect is that debt reduces oil intensity when it is created and it increases oil intensity when it is payed. We have not seen that yet because we have not paid any debt yet. Debt is always increasing.

Dennis Coyne, 12/01/2015 at 10:17 pm
Hi Javier,

Many problems with your example.

First we need the GDP level of countries A and B, not just their growth rate. If we only talk about the incremental increases in GDP and energy use for each country it makes a little more sense.

So in reality country B is reporting half of its real oil intensity. With present wealth it would have grown GDP by only 1% yet it has spent the same amount of oil than A.

What you say above is incorrect.

For simplicity I will assume if output grows by 2%, that energy use also grows by 2%, I will further assume each country has the same GDP, we will say it is $100 million before the 2% growth in your example.

If country B does not take on any debt and its GDP grows by 1%, then its energy use will also grow by 1% (not by 2%) as the energy use is proportional to GDP. So the energy intensity would remain the same. There is no reason for it to change, it depends on technology and the structural features of the economy (proportion of agriculture, manufacturing, and services).

Another basic fact of economics is that the loans taken out by a business are to take advantage of a business opportunity and they will tend to lead to higher growth, so your example is flawed.

If countries A and B are of similar size and similar levels of development (twins as it were), then if country A and country B both shunned any borrowing they will both grow at the same rate, say 2% and have the same energy intensity (energy use also grows by 2%). Let's now assume both countries are the same except that country A's culture is such that they think debt is bad, but country B does not have the same aversion to debt.
Country B borrows at 2% interest to take advantage of an investment opportunity which will have a rate of return of 4%, so country B grows faster than country A at 3% and its energy use also grows at 3% (energy intensity remains the same). The extra income earned is used to pay back the debt and the individual businesses come out ahead earning a net profit of 2% after paying back the interest. This is how rational businesses operate, they borrow money to make money.

Javier, 12/02/2015 at 8:54 am
Dennis,

I also have lots of problems with your example, so let's take a step back to look at the big picture.

That an increase on debt increases GDP is not in doubt. It is not only supported by evidence, but the basis for an entire economic theory that supports fighting recessions with debt-based stimulus.

So the question is if an increase in debt increases also GDP without oil consumption as to reduce oil-intensity. The answer is a resounding yes. Financial services are proportional to debt increase. Net interest expenses in the financial sector are seen as production and value added and are added to GDP. Any service charged by financial companies also increases GDP, and none of this economic activities uses oil, and very little energy.

I believe that a significant part of oil intensity reduction has come from the financialization of the economy linked to debt-increase, and therefore oil intensity is a fake measure of oil decoupling. If you look at energy-intensity you see the same phenomenon as with oil. It seems that we are decoupling from energy because we are moving towards a fake economy based on financial instruments. Finanzialization also appears linked to raising inequality as it effect is to increase the wealth only of owners of financial instruments.

I do not doubt that some oil and energy efficiency is real, after all it is a process that has been going on forever since the first oven was built to cook. But I seriously doubt that it is a process significant enough to solve an energy deficit problem which is what peak oil is going to bring. And to me oil intensity is a fake measure of increases in oil efficiency, that I do not doubt are real but much overstated.

Gail Tverberg has a lot more to say about decoupling GDP growth from energy growth in her article at TOD for anybody interested in the matter:

http://www.theoildrum.com/node/8615

Javier, 12/02/2015 at 9:23 am
Or to put it more clearly:

Dennis Coyne, 12/02/2015 at 10:43 am
Hi Javier,

Yes the financial sector has increased to a small degree from 4% of GDP to 8% based on the chart you posted (which is only for the United States rather than the World).

This has probably increased to some degree (more or less than the US is unknown) at the World level as well. This might explain a very small slice of the decrease in energy intensity, but I doubt it accounts for most of the change.

I agree with you that changes in the structure of the World economy (higher proportion of services) has probably decreased energy intensity, but I doubt that accounts for all of the change. The bottom line is that the World economic system is becoming more service oriented with services accounting for a larger share of GDP. At some point, services may reach some maximum level, in percentage terms, beyond which they cannot go. I don't know where that level is, debt levels will also reach some maximum level (in percentage terms) beyond which they cannot rise (maybe total debt of 300% to 350% of GDP at a World level as a potential maximum).

When those points are reached growth may be limited by how much more efficiently we can use energy and how quickly we can ramp up alternative energy as fossil fuel output declines. There is much that is unknown about the future.

Dennis Coyne, 12/02/2015 at 10:51 am
Hi Javier,

Note that you keep talking about oil, the chart shows primary energy (all forms of energy used by the economic system.)

Can you explain why country B in your example uses the same amount of energy whether it grows at 1% or 2%. One would expect that the energy use would be proportional to GDP, as that is what the World data shows.

Javier, 12/02/2015 at 11:55 am
Dennis,

That is not what I said or meant. Country B by increasing GDP 1% through an increase in debt is in essence bringing GDP from the future to the present. That borrowed GDP is using present energy.

The financial sector has increased from 2% to 8%, a 4x increase. This is not small peanuts. Specially considering that only a minor part of the financial transactions are considered towards GDP. Probably only Luxembourg and perhaps Switzerland and other banking paradises have a bigger share.

Dennis Coyne, 12/02/2015 at 2:01 pm
Hi Javier,

You said:

So in reality country B is reporting half of its real oil intensity. With present wealth it would have grown GDP by only 1% yet it has spent the same amount of oil than A.

You say above without the borrowing country B would grow by 1% (why does it grow less than country A?) but it uses the same amount of oil as country A, why if it grows more slowly?

Dennis Coyne, 12/02/2015 at 5:57 pm
Hi Javier,

Look closely at your chart in 1970 (when energy intensity started to decline) it was 4% and the most recent points on the chart are about 8.4%. I used the data from your chart (even though it is for the US rather than the World) and did an exponential trend from 1970 to 2010 for 4% to 8% and then extended to 2014 (8.5%) for financial GDP of World economy (probably not correct, but this is an illustration). Then I found the Energy intensity of the non-financial sector by assuming the financial sector has zero energy inputs (I expect they are low, this is an approximation). The Non-Financial Energy intensity is in the chart below.

Finally, Aggregate Demand is increased when there is more debt, but consider the Aggregate supply of goods produced to meet that demand. Whether the aggregate demand is because of private or public debt or not does not change the amount of energy needed to produce the supply of goods and services, it only changes how much demand there will be for those goods and services. I really cannot make it any simpler than that. Oh one more thing, do you think the energy needed to build a car (total energy embodied in all processes used to create the car and its components) changes if someone pays cash for the car vs financing the car?

Rune Likvern, 12/01/2015 at 2:23 pm
Dennis,

Bank of England has a different take on this;

" This article explains how the majority of money in the modern economy is created by commercial banks making loans.

Money creation in practice differs from some popular misconceptions - banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they 'multiply up' central bank money to create new loans and deposits."

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

Dennis Coyne, 12/01/2015 at 3:37 pm
Hi Rune,

Yes that is correct. The banks create money by lending and borrowers destroy money as they pay back their loans. The money supply is controlled by the Central Bank buying and selling bonds.

The debt is only a problem if it grows too quickly. If the rate of debt growth slows or the rate of GDP growth increases there will not be a problem. There are differing views on how much debt is too much.

For public debt there is:

http://www.economist.com/blogs/freeexchange/2015/06/public-debt

http://www.forbes.com/sites/michaellingenheld/2015/10/22/the-world-needs-more-debt/

Rune Likvern, 12/01/2015 at 5:45 pm
Dennis,

Did you read the document from Bank of England?

Dennis Coyne, 12/02/2015 at 8:30 am
Hi Rune,

Yes I did. Under normal circumstances the supply of money is primarily influenced by the interest rate that is paid by commercial banks for money borrowed from the central bank. When the economy is in a severe recession and this interest rate falls to the "effective lower bound" (about 0.5%), the central bank loses its ability to increase the supply of money through lower interest rates.

Under these circumstances the central bank will buy assets (government bonds) to increase the money supply, it does not sell assets to reduce the money supply, it simply raises the interest rate it charges the commercial banks.

Dennis Coyne, 12/02/2015 at 8:18 am
Hi Rune,

Thanks for that link, it is a nice review of how central banks influence the supply of money by setting the interest rate which banks must pay on money borrowed from the central bank, which feeds through to interest rates throughout the economy and affects saving and borrowing through market interest rates set by banks.

I would encourage Javier to read that link as it addresses many misconceptions about money.

Glenn Stehle, 12/01/2015 at 10:00 am
Dennis,

You are comparing apples to oranges. GDP is determined using a price, or market, theory of value. So you are comparing a value determined using a market theory of value to a value determined using an intrinsic theory of value - the toe of energy.

If you want to compare apples to apples, then you have to compare GDP to the market value of the energy used.

Dennis Coyne, 12/01/2015 at 1:41 pm
Hi Glenn,

If we are concerned the energy constraints will limit real GDP, then the amount of energy consumed per unit of GDP produced is very relevant in my view.

It is not a comparison, it is a measure of energy intensity and how it has changed over time. See

https://en.wikipedia.org/wiki/Energy_intensity

I have simply charted the World Energy Intensity from 1965 to 2014.

Glenn Stehle, 12/01/2015 at 10:17 pm
Well again, Dennis, a valid comparison is one which compares dollars and cents to dollars and cents, not dollars and cents to toe.

There was a time (1970 to 2010) when the EIA published the total amount spent in the United States on energy. I have plotted the ratio of total spent on energy to total nominal GDP for those years. This is a true measure of "energy intensity," as it compares apples to apples, and does not omit the price of energy as your graph does.

I have added YOY growth in real GDP (calculated using constant 2009 dollars).

I don't want to draw too many conclusions from the graph, but it paints a far bleaker picture than your graph does. When energy intensity goes over .08 - as it did in 1974 and 2008 - then the economy began having convulsions.

The period from 1983 to 2006 is what is known as "the Great Moderation." It is also a period of low and generally declining energy intensity. When energy intensity began increasing again, as it did in 1999, surpassing .08 in 2006, then this marked the end of the Great Moderation. Is this mere coincidence?

Botton line: In my opinion not only is the quantity of energy (measured in toe) important to the performance of the economy, but the price of that energy is also important.

Using your graph, which makes no allowance for the price of energy, it is easy to see how you have come to believe that the economy is decoupling from energy.

Dennis Coyne, 12/02/2015 at 8:52 am
Hi Glenn,

It is not a comparison of money spent, energy intensity is defined as energy consumed per unit of output (measured in dollars) as there are many different goods and services and their monetary value is measured in constant dollars.

The difficulty with using price is that there are many different forms of energy (oil, coal, natural gas, nuclear, hydro, solar, wind, geothermal, and biofuels) which are included in the "primary energy" category. Note that your chart shows only one country not the world. I would present a chart for the World if I had it, I am using the data I have for primary energy divided by real GDP. I think it is useful because it is energy contraints we are concerned about, currently some forms of energy (fossil fuels especially) have very low prices so in monetary terms money spent on Energy divided by real GDP would be quite low.

Energy prices are quite volatile so I like the Energy intensity measure better as it shows energy needed to produce a unit of GDP, which has in fact declined since 1970 by about 30%(or an average annual decrease of about 0.8% per year).

Glenn Stehle, 12/02/2015 at 12:28 pm
Dennis,

I suppose price doesn't matter as long as one can get somebody else to pick up the tab.

For instance, we can compare a new $40,000 Chevy Bolt ev to a new $20,000 Honda HRV. There's no way the Bolt can compete on price. But if you can get somebody else to pick up the tab for the Bolt? Well then, no sweat!

As part of its COP21 coverage, CBS did a puff piece on their Evening News last night about how EVs are sweeping Norway.

http://www.cbsnews.com/videos/how-electric-cars-are-taking-over-norways-roads/

They interviewed one fellow who said he "had done the math" and will be able to drive his new EV "for free."

So I did a little bit more digging, and sure 'nuf, it looks like he's right.

According to the Wall Street Journal, Norway currently has 54,000 EVs on the road. Last year their owners received $540,000 in various forms of rebates, tax breaks and other perks from the Norwegian state. That's a cool $10,000 per car per year. So at that clip, it would only take 4 years to recover the cost of a $40,000 EV. And then after that one can enjoy almost free driving, all on the government's tab.

http://www.wsj.com/articles/electric-car-perks-put-norway-in-a-pinch-1442601936

But it looks like there's trouble in paradise. The WSJ says the government give-a-ways are set to end. The day of reckoning is still up in the air, but the latest date for phasing out the government largess is 2020. So the Norwegian government is taking the punch bowl away. The EV crowd, of course, isn't taking this horrible injustice lying down:

Christina Bu, secretary-general of the lobbying group Norwegian Electric Vehicle Association, said the 25,000-member association has been stalking political parties and government officials to ensure the main incentives remain in place, at least until 2020.

"If you cut all the incentives overnight, sales will plummet," she said.

Weaning buyers from such purchase incentives could add new headwinds to sales of vehicles already undercut by cheap fuel prices in some markets. In the U.S., the state of Georgia halted its $5,000 tax credit on July 1. Electric cars were about 2% of purchases in the state in 2014, estimates Washington-based think tank Keybridge Research LLC. It forecasts a 90% decline, or 8,700 fewer sales annually, as a result of the loss.

Glenn Stehle, 12/02/2015 at 1:06 pm
Edit

Last year their owners received $540 million in various forms of rebates, tax breaks and other perks from the Norwegian state.

Dennis Coyne, 12/02/2015 at 2:06 pm
Hi Glenn,

Do you have the price of primary energy from 1965 to 2014? I would be happy to do the chart you would like, but I don't know the appropriate price of energy, which has many different forms and prices throughout the World.

I agree price matters, as does the amount of energy available to purchase (which is what is in my chart).

Nick G, 12/02/2015 at 2:32 pm
Glenn,

You're looking at something different.

The original study in question was asking about whether an economy can grow without increasing it's inputs of oil, steel, etc.*

That's a very different question than whether an economy will be hurt by a sudden increase in the price of a key commodity, like oil. If the price of oil spikes, that can create a shock for the economy (e.g., people wait to see what happens with prices before they buy their next vehicle, and that delay causes a recession), but an increase in prices doesn't mean energy consumption has gone up.

-----------------
* (it can, of course, but that's separate issue from whether our societies have chosen to do so).

Ralph, 12/02/2015 at 8:46 am
I am far from convinced that GDP growth is a good way of measuring progress in a society. Let's take an example from the UK economy. (btw I am not worried about the genders here, I would happily be a house husband if my wife's earning potential was close to mine).

Today, nearly 70% of women of working age work. Families need both incomes to meet a reasonable standard of living. As a result, a large majority of UK children grow up in families with both parents working. Many parents end up sending young children to child minders and crèches so that they can work. This employs a lot of people, mostly women. More wealthy families then employ house cleaners and gardeners and handymen etc. to clean, garden and repair their homes that they don't have time to do themselves. Poorer people do without. This employs a lot more people. All the working women and the people employed by the working women pay taxes which means that people end up working more hours to afford to pay someone else to do these jobs than it would take to do the jobs themselves. Unless your own rate of pay is significantly higher than the people you pay to do the jobs, you would be financially better off doing it yourself. The government and the economists are delighted because tax take and GDP rise. All these extra people in useful employment driving around from low skilled job to to low skilled job, consuming extra resources, especially fossil fuels, when they would be a lot less stressed, more free time and financially better off, just doing all these activities for themselves.

It is a major mistake to professionalise low skilled domestic work. All it does is free up time for the rich and increases government tax take. Society as a whole is worse off.

Dennis Coyne, 12/02/2015 at 10:14 am
Hi Ralph,

I agree GDP is by no means a perfect measure, just a measure that is available at the World level. There are other measures such as the social progress index, but this is not available at the World level. There is also the United Nations Human Development Index(HDI), but again these measures are not published at the World level (or I couldn't find it). Actually I found some World data for the HDI from 1980 to 2013. The measure is not perfect see link below for data:

http://hdr.undp.org/en/content/table-2-human-development-index-trends-1980-2013
Discussion of HDI at

https://en.wikipedia.org/wiki/Human_Development_Index

Also from UN document:

Human Development Index (HDI): A composite index measuring average achievement in three basic dimensions of human development-a long and healthy life, knowledge and a decent standard of living. See Technical note 1 (http://hdr.undp.org/en) for details on how the HDI is calculated.

Chart below with World Primary energy (ktoe) divided by World HDI from 1980 to 2013. Based on the HDI, more energy is needed to improve well being and GDP is not a good measure of human welfare.

There is also an index for HDI that takes account of inequality, but the index (called IHDI) is only available from 2010 to 2013.

[Oct 24, 2015] How The U.S. Government Covers Up 72% Inflation Before Your Very Eyes

Notable quotes:
"... The Modern Survival Manual: Surviving the Economic Collapse, ..."
Zero Hedge

scatha

...Look at basic staples eggs, beef, chicken and other foods, rent/housing, education, even transportation and telecommunication cost are "effectively" raising, not to mention medical care, all those things people need to live are raising precipitously.

Even those 1%-ters facing massive inflation forced to buy risky bonds at unbelievable high prices to get any yield at all. The global inflation bubble is here while global demand is dying and commodity nominal prices are collapsing as we speak since with such a high "real" prices everybody expects loss or severe decline of income or profit in the future expressed by a dead body of CapEx and consumption.

On the top of it typical the inflation hiding maneuvers of the retailers producing serving size inflation, quality collapse inflation, component substitution inflation, choice narrowing inflation, package cost and quality inflation, air conditioning, freezing/heating power limitation inflation, shopping experience quality collapse inflation, and other manipulations to keep so called nominal "at the store" price marginal increase of few percent only per year but even that was impossible in 2015 so far.

.. ... ...

More on the scam of evaluating inflation in various forms including CPI I found at:

https://contrarianopinion.wordpress.com/2015/01/29/invisible-hand-and-ot...

nosam

The reduction in product sizes and quality is not so much a measure of inflation as a measure of the declining wealth of the population. People can afford less so the manufacturers change product size/quality to match.

The area I live in now has high inflation but salaries are growing at a faster pace. So I notice a gradual increase in quality and size of products. That said, if you can afford to pay premium prices, you can get good quality pretty much anywhere.

Canoe Driver

American culture is based on financial rape of the working class by a criminal elite. Always was. Part of the system is the illusion fed the common man that his interests are represented by the political class, who in reality are merely business agents for the rich. This illusion dies hard.

ebworthen

"1/2 gallon" of ice cream now 3 pints instead of 4 pints, canned vegetables going to 14 oz instead of 16 oz, "1 pound" bacon now transforming to 12 oz "healthier" packages with a "great price".

I swear to God they are going to sell a "bakers dozen" of 10 eggs instead of 12 for the same price 'ere long.

TeamDepends

It's nuts, sometime over the summer the cans of tomatoes we buy went from 14.75 oz to 14.0. Are they going to start making the cans thicker? Will the cans shrink to G.I. Joe size? Times is tough, people!

Whodathunkit

Buy the imported brand from Europe. They haven't caught on to the smaller size package same amount of $. YET

Escapeclaws

Not true that Europe doesn't have the same problem. Just look at tuna: smaller can, half-full, higher price. Same with everything. Inflation gets going because of corporate greed, which they "justify" by saying their costs are going up. It's a scam through and through. About time someone does a study to analyze when their costs really go up as opposed to them "claiming" their costs are going up.

This inflation is a form of SYSTEMIC PRICE FIXING. Because it is systemic it is not considered price fixing as such from a legal point of view, so they get away with it. Like everything the elite does, they have total control and we are obliged to accept it.

Same story with "gotcha capitalism". They pump a bag of potato chips full of air and then use the excuse that the the chips, which are cozily nestled in the bottom quarter of the bag, are being protected that way. Kind of like the mafia killing one of your kids and then offering to protect the others for a small stipend.

The Yurpeans also pay much higher prices due to how things are packaged. I buy dried beans and pressure cook them, but even there, you cannot buy beans in bulk. Instead you must pay an arm and a leg for a small package. It has gotten to the point that if a bean falls to the floor, I search for it like the widow searching for her lost penny. Pretty soon they will be packaging single beans. I figured that out using mathematical induction.

Eventually, we former middle class people will enjoy the same standard of living as the poor in the third world.

Normalcy Bias

This reminds me of Ferfal's The Modern Survival Manual: Surviving the Economic Collapse, written by a guy who lived through the collapse in Argentina. There are so many paralells to what's going on in the US, they're hard to count. Highly recommended...

http://www.amazon.com/The-Modern-Survival-Manual-Surviving/dp/9870563457

seek

That's "Ferfal." For what it's worth, he's super accessible via his own website forums and a couple of the larger survival forums (I think the ones on ar15.com and ovet at survivalistsboards.com) He's got a recent posting with information from people in the Ukraine that's especially interesting.

If anyone has any doubts about these adjustments, just buy a roll of TP and compare it to the size of the TP holder in any house older than 10 years, it's quite obvious. I have TP that predates the '08 collapse of the identical brand and product line, and it's at least 1/2" wider and wrapped more densely as well.

There is substantial inflation, and it's covered up, and there's no interest being paid by banks but they're charging the average credit card holder something around 14.9 percent. Meanwhile 51% of workers in the US now make under 30K a year. The financial system is absolutely raping the common people in the US, in part due to greed and in part in a desperate attempt to save itself from collapsed caused by their greed accumulated over the past 100 years.

TBT or not TBT

I am shocked, shocked, to find stealth inflation going on in this establishment!

Supernova Born

Every ZH'er should support FerFAL's books (it is the 7.62x51 rifle his "name" is referencing, FAL being an acronym for Fusil Automatique Léger ("Light Automatic Rifle"), and the first three letters are from his first name, Fernando).

Surviving the Economic Collapse is filled with great insights and has proven prophetic.

First thing I think when I see shrinking retail packaging and lowered quality (diluted in the case of SodaStream) was FerFAL said this would happen...

OceanX

Ya'll slam Castro and what he did was kick out the banksters you profess to hate. The way I see it, what happened to Cuba was the retalliation of the banksters. He was blocked from global trade and financing.

In addition, the conservation of their natural resources have preserved Florida's fishing waters!

http://www.amazon.com/Deep-Cuba-American-Oceanographic-Expedition/dp/082...

When therre is an offshore oil spill in Cuba, it will be carried by the Gulf Stream all across the Atlantic and destroy a lot of Florida beach.


[Oct 18, 2015] What Prosperity Is, Where Growth Comes from, Why Markets Work

Notable quotes:
"... In 1959, noted American economist Moses Abramovitz cautioned that "we must be highly skeptical of the view that long-term changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth of output." ..."
"... In 2009, a commission of leading economists convened by President Nicolas Sarkozy of France and chaired by Nobel laureate Joseph Stiglitz reported on the inadequacies of GDP. They noted well-known issues such as the fact that GDP does not capture changes in the quality of the products (think of mobile phones over the past 20 years) or the value of unpaid labor (caring for an elderly parent in the home). The commission also cited evidence that GDP growth does not always correlate with increases in measures of well-being such as health or self-reported happiness, and concluded that growing GDP can have deleterious effects on the environment. ..."
"... Our issue isn't with GDP per se. As the English say, "It does what it says on the tin"-it measures economic activity or output. Rather, our issue is with the nature of that activity itself. Our question is whether the activities of our economy that are counted in GDP are truly enhancing the prosperity of our society. ..."
"... Robert Shiller of Yale University, who ironically shared this year's Nobel with Fama, showed in the early 1980s that stock market prices did not always reflect fundamental value, and sometimes big gaps could open up between the two. ..."
"... And therein lies the difference between a poor society and a prosperous one. It isn't the amount of money that a society has in circulation, whether dollars, euros, beads, or wampum. Rather, it is the availability of the things that create well-being-like antibiotics, air conditioning, safe food, the ability to travel, and even frivolous things like video games. It is the availability of these "solutions" to human problems-things that make life better on a relative basis-that makes us prosperous. ..."
"... This is why prosperity in human societies can't be properly understood by just looking at monetary measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems. ..."
December 1, 2014 | Democracy Journal ( also reprinted in Evonomics )

The Price of Everything, the Value of Nothing

The most basic measure we have of economic growth is gross domestic product. GDP was developed from the work in the 1930s of the American economist Simon Kuznets and it became the standard way to measure economic output following the 1944 Bretton Woods conference. But from the beginning, Kuznets and other economists highlighted that GDP was not a measure of prosperity. In 1959, noted American economist Moses Abramovitz cautioned that "we must be highly skeptical of the view that long-term changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth of output."

In 2009, a commission of leading economists convened by President Nicolas Sarkozy of France and chaired by Nobel laureate Joseph Stiglitz reported on the inadequacies of GDP. They noted well-known issues such as the fact that GDP does not capture changes in the quality of the products (think of mobile phones over the past 20 years) or the value of unpaid labor (caring for an elderly parent in the home). The commission also cited evidence that GDP growth does not always correlate with increases in measures of well-being such as health or self-reported happiness, and concluded that growing GDP can have deleterious effects on the environment. Some countries have experimented with other metrics to augment GDP, such as Bhutan's "gross national happiness index."

Our issue isn't with GDP per se. As the English say, "It does what it says on the tin"-it measures economic activity or output. Rather, our issue is with the nature of that activity itself. Our question is whether the activities of our economy that are counted in GDP are truly enhancing the prosperity of our society.

Since the field's beginnings, economists have been concerned with why one thing has more value than another, and what conditions lead to greater prosperity-or social welfare, as economists call it. Adam Smith's famous diamond-water paradox showed that quite often the market price of a thing does not always reflect intuitive notions of its intrinsic value-diamonds, with little intrinsic value, are typically far more expensive than water, which is essential for life. This is of course where markets come into play-in most places, water is more abundant than diamonds, and so the law of supply and demand determines that water is cheaper.

After lots of debate about the nature of economic value in the nineteenth and early twentieth centuries, economists considered the issue largely settled by the mid-twentieth century. The great French economist Gerard Debreu argued in his 1959 Theory of Value that if markets are competitive and people are rational and have good information, then markets will automatically sort everything out, ensuring that prices reflect supply and demand and allocate everything in such a way that everyone's welfare is maximized, and that no one can be made better off without making someone else worse off. In essence, the market price of something reflects a collective judgment of the value of that thing. The idea of intrinsic value was always problematic because it was inherently relative and hard to observe or measure. But market prices are cold hard facts. If market prices provide a collective societal judgment of value and allocate goods to their most efficient and welfare-maximizing uses, then we no longer have to worry about squishy ideas like intrinsic value; we just need to look at the price of something to know its value.

Debreu was apolitical about his theory-in fact, he saw it as an exercise in abstract mathematics and repeatedly warned about over-interpreting its applicability to real-world economies. However, his work, as well as related work in that era by figures such as Kenneth Arrow and Paul Samuelson, laid the foundations for economists such as Milton Friedman and Robert Lucas, who provided a devastating critique of Keynesianism in the 1960s and '70s, and recent Nobel laureate Eugene Fama, who pioneered the theory of efficient markets in finance in the 1970s and '80s. According to the neoclassical theory that emerged from this era, if markets are efficient and thus "welfare-maximizing," then it follows that we should minimize any distortions that move society away from this optimal state, whether it is companies engaging in monopolistic behavior, unions interfering with labor markets, or governments creating distortions through taxes and regulation.

These ideas became the intellectual touchstone of a resurgent conservative movement in the 1980s and led to a wave of financial market deregulation that continued through the 1990s up until the crash of 2008. Under this logic, if financial markets are the most competitive and efficient markets in the world, then they should be minimally regulated. And innovations like complex derivatives must be valuable, not just to the bankers earning big fees from creating them, but to those buying them and to society as a whole. Any interference will reduce the efficiency of the market and reduce the welfare of society. Likewise the enormous pay packets of the hedge-fund managers trading those derivatives must reflect the value they are adding to society - they are making the market more efficient. In efficient markets, if someone is willing to pay for something, it must be valuable. Price and value are effectively the same thing.

Even before the crash, some economists were beginning to question these ideas. Robert Shiller of Yale University, who ironically shared this year's Nobel with Fama, showed in the early 1980s that stock market prices did not always reflect fundamental value, and sometimes big gaps could open up between the two. Likewise, behavioral economists like Daniel Kahneman began showing that real people didn't behave in the hyper-rational way that Debreu's theory assumed. Other researchers in the 1980s and '90s, even Debreu's famous co-author Arrow, began to question the whole notion of the economy naturally moving to a resting point or "equilibrium" where everyone's welfare is optimized.

An emerging twenty-first century view of the economy is that it is a dynamic, constantly evolving, highly complex system-more like an ecosystem than a machine. In such a system, markets may be highly innovative and effective, but they can sometimes be far from efficient. And likewise, people may be clever, but they can sometimes be far from rational. So if markets are not always efficient and people are not always rational, then the twentieth century mantra that price equals value may not be right either. If this is the case, then what do terms like value, wealth, growth, and prosperity mean?

Prosperity Isn't Money, It's Solutions

In every society, some people are better off than others. Discerning the differences is simple. When someone has more money than most other people, we call him wealthy. But an important distinction must be drawn between this kind of relative wealth and the societal wealth that we term "prosperity." What it takes to make a society prosperous is far more complex than what it takes to make one individual better off than another.

Most of us intuitively believe that the more money people have in a society, the more prosperous that society must be. America's average household disposable income in 2010 was $38,001 versus $28,194 for Canada; therefore America is more prosperous than Canada.

But the idea that prosperity is simply "having money" can be easily disproved with a simple thought experiment. (This thought experiment and other elements of this section are adapted from Eric Beinhocker's The Origin of Wealth, Harvard Business School Press, 2006.) Imagine you had the $38,001 income of a typical American but lived in a village among the Yanomami people, an isolated hunter-gatherer tribe deep in the Brazilian rainforest. You'd easily be the richest Yanomamian (they don't use money but anthropologists estimate their standard of living at the equivalent of about $90 per year). But you'd still feel a lot poorer than the average American. Even after you'd fixed up your mud hut, bought the best clay pots in the village, and eaten the finest Yanomami cuisine, all of your riches still wouldn't get you antibiotics, air conditioning, or a comfy bed. And yet, even the poorest American typically has access to these crucial elements of well-being.

And therein lies the difference between a poor society and a prosperous one. It isn't the amount of money that a society has in circulation, whether dollars, euros, beads, or wampum. Rather, it is the availability of the things that create well-being-like antibiotics, air conditioning, safe food, the ability to travel, and even frivolous things like video games. It is the availability of these "solutions" to human problems-things that make life better on a relative basis-that makes us prosperous.

This is why prosperity in human societies can't be properly understood by just looking at monetary measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems.

These solutions run from the prosaic, like a crunchier potato chip, to the profound, like cures for deadly diseases. Ultimately, the measure of a society's wealth is the range of human problems that it has found a way to solve and how available it has made those solutions to its citizens. Every item in the huge retail stores that Americans shop in can be thought of as a solution to a different kind of problem-how to eat, clothe ourselves, make our homes more comfortable, get around, entertain ourselves, and so on. The more and better solutions available to us, the more prosperity we have.

The long arc of human progress can be thought of as an accumulation of such solutions, embodied in the products and services of the economy. The Yanomami economy, typical of our hunter-gatherer ancestors 15,000 years ago, has a variety of products and services measured in the hundreds or thousands at most. The variety of modern America's economy can be measured in the tens or even hundreds of billions. Measured in dollars, Americans are more than 500 times richer than the Yanomami. Measured in access to products and services that provide solutions to human problems, we are hundreds of millions of times more prosperous.

[Oct 03, 2015] Reflections on Ten Years Deficits, the Financial Crisis, Textbook Economics and Data Paranoia

Oct 03, 2015 | Econbrowser

"When so many think the numbers are manipulated to some nefarious end, it is no wonder that empirical observations carry so little weight in informing thought on how the economy works."

[Sep 21, 2015] The Mystery Of The Missing Inflation Solved, And Why The US Housing Crisis Is About To Get Much Worse

For the last 20 years, realistic US inflation rate was probably higher then official figures considerably. Some estimate it between 4% to 5% a year. Medical expenses rose probably 200%. Cost of higher education skyrocketed. We can say that rent alone from 1995 to 1996 rose probably 60% (assuming 3% a year official figure). Food prices are highly correlated with oil and they rose more (but they do not represent major expense item in most budgets).
"... Absolute shit one bedroom apartments rent for $800 a month. A decent two bedroom apartment goes for $1600. A FUCKING APARTMENT. Not in the city of Boston or suburbs like Cambridge, but 40 miles west. A "three" bedroom 1100 sq ft house in a crap city like Fitchburg can rent for $1400. ..."
Sep 21, 2015 | Zero Hedge
We hinted at the key features of this unprecedented conversion in June, when we wrote the following:

... by now everyone knows that the artificially suppressed, "hedonically-modified" and seasonally-adjusted inflationary readings is what has permitted the Fed to not only grow its balance sheet to $4.5 trillion but to keep rates at 0% for 8 years. Because "how will the economy recover if there is no broad inflation", the Keynesian brains in the ivory tower scream, demanding more, more, more easing just to push inflation higher.

There is only one problem with this: it is all a lie - just ask any average American whose cost of living has soared in the past decade.

Still, with reality diverging so massively from the government's official data, reality just had to be wrong somehow.

Turns out reality was right all along, as revealed by the latest "State of the Nation's Housing" report released by the Center for Housing Studies at Harvard, which showed that while inflation among most products and services may indeed be roughly as the Fed and BLS represent it, when it comes to rent - that most fundamental of staple costs - things have never been worse.

According to the report, for American renters 2013 marked another year with a record-high number of cost burdened households - those paying more than 30 percent of income for housing. In the United States, 20.7 million renter households (49.0 percent) were cost burdened in 2013.

It gets worse: a whopping 11.2 million, or more than a quarter of all renter households, had "severe cost burdens, paying more than half of income for housing." The median US renter household earned $32,700 in 2013 and spent $900 per month on housing costs. Renter housing costs are gross rents, which include contract rents and utilities.

... ... ...

And since there is an unprecedented demand for rental units across the US (as the "owning" alternative has become inaccessible), the median asking rent not only soared at an annual rate of over 6%, it has never been higher, with the Census Department recently reporting that the Median US asking just hit an all time high $803.

... ... ...

What is odd is that according to the BLS, rent inflation is far less: at just 3% in the most recent print. One wonders what seasonal adjustments American renters should use to make their monthly paycheck smaller, the way the BLS perceives it. Still, at 3.6% this is the highest annual rent inflation since 2008.

And herein lies the rub: because it is not so much what the real, honest inflation growth rate of rent is, it is what the offsetting income growth. Unfortunately, while the BLS can seasonally adjust rent payments to make them as low as a bunch of bureaucrats want, the bigger problem is that US household income is not only not keeping up with rent inflation, it is far below it. In fact, as reported last week, real income is now back at 1989 levels!

And here is the punchline:

"in the years following 2000, gains in typical monthly rental costs exceeded the overall inflation rate, while median income among renters fell further and further behind (Figure 3). As a result, the share of renter households facing severe cost burdens grew dramatically, reaching a new record high of 28 percent in 2011 before edging down to 26.5 percent in 2013. Adding in those with moderate burdens, just under half of all renters were cost burdened in 2013. These rates are substantially higher than a decade ago and roughly twice what they were in 1960."

... ... ...

Furthermore, rent inflation isn't going anywhere - in fact, it will only get worse: "as of 2013, the median rent of a newly constructed unit of $1,290 was equal to about half the median renter's monthly household income, underscoring the urgent need for policy makers to consider enhanced levels of support for rental housing particularly for lowest income households but across a range of income levels."


Hype Alert

Housing and healthcare are severely under reported on inflation. How healthcare can triple and not set off flashing red lights on inflation is unreal.

Never One Roach

I don't know how seniors who relied on SS benefits to survive are living when their COLA has been 0.01% the past several years despite soaring food, health costs, utinilites, etc.

AGuy

"I don't know how seniors who relied on SS benefits to survive are living when their COLA has been 0.01% "

Simple: many still work while collecting SS. Some have part-time jobs (aka Wallmart) others maintained their full time jobs. If you look at the employment chart, Employment for those 55 and older has risen considerably. I believe employment for the 70+ group has also increased.

However, many 65+ have a lower cost of living. (ie no mortgage payments, no college loans, lower healthcare -on Medicare, etc). They can afford to take on one part time job to meet ends since they have SS.

Consuelo

"The reason for this is a simple, if dramatic one: the U.S. transformation from a homeownership society, to one of renters."

All well & good in the context of officialdom's lies and deceit, but there's just a ~tiny~ bit of clarification needed here...

Home 'ownership' is a misnomer, and just a plain bald-faced Falsehood in reality. You don't 'own' ~anything~ until that last mortgage payment is made - assuming you're not a $cash buyer. And even then, try skipping a property tax payment... And didn't we just find out a few years back, the real meaning of 'home ownership' to the ball & chain tied schlub paying (or not) his mortgage...?

WTF_247

Wage growth has lagged most other costs for at least a decade or more. Inflation and other cost increases are compound functions. The correction will take care of itself. Healthcare and rent are taking more and more of peoples $$ You can only stretch it so far - at some point there is no more money.

Either incomes will rocket up OR housing, including rent, will crash huge. You cannot get renters to pay for something they have no money for. No one is going to rent and choose not to eat or to eat ramen noodles permanently. You cant even get rid of health insurance now or the IRS comes after you - no matter how much it increases each year (estimated 15-20% increase next year). You can get 1 roommate, then 2. But most cities limit the number of renters based upon the number of bedrooms - this only goes so far.

The solution is to stop working or only work a bare minimum - get benefits. Section 8 housing. EBT. Free healthcare. Welfare benefits.

Something is wrong in the US when a working mother making 29k has a better standard of living that someone making 69k per year. If anyone thinks this is not lost on the population as a whole, they would be mistaken. As costs keep going up it is more lucrative to NOT fight anymore. Let the govt pay for it.

novictim

Tyler! "Missing Inflation" is not a mistake or a misunderstanding or an accounting glitch.

Inflation really is low. People have insufficient money.

Do not confuse asset inflation with real inflation. Stock overvaluations and real estate over-evaluations do not create real inflation because prices drop when people sell. Assets are self correcting and non-inflationary.

adr

I shouldn't have to worry about affording somewhere to live with the job I have, yet because of where the job is I have to.

The entire Northeast is fucking insane.

Absolute shit one bedroom apartments rent for $800 a month. A decent two bedroom apartment goes for $1600. A FUCKING APARTMENT. Not in the city of Boston or suburbs like Cambridge, but 40 miles west. A "three" bedroom 1100 sq ft house in a crap city like Fitchburg can rent for $1400.

I posted a three bedroom ranch that was renting for $3200 a month a little while ago. What do millionaires rent shitty 1950s ranch homes in a hick town?

Then you have property taxes. Up 100% in five years in almost every town even though assessments are actually down. I saw a home listed with a 2009 value of $364k and property taxes of $2800 a year. The current assessed value is $289k but taxes are $5200.

How are you supposed to live?

[Sep 09, 2015] The Fed Must Act Soon Why

"...You're an econ prof, no? In the first year macro I just finished, it was explained that inflation is a tax on the rentiers class. Thus the power elite hates inflation."
"...The Fed does absolutely nothing to require that the money it creates pays workers to build anything. Instead the only thing the Fed money does is cause existing asset churn which inflates asset prices to a bubble as seen by the bubbly stock price indexes globally. Dollars are abundant and being spent buying old labor in hopes that the value of the decades old labor will be worth more tomorrow."
Sep 08, 2015 | Economist's View

JohnH -> to pgl...

pgl still hasn't demonstrated the iron economic law that says that inflation increases must necessarily be passed along to labor, not stolen by capital.

The precedent of productivity increases stolen by capital over the past 40 years is not encouraging, but there are economists like Janet Yellen who still disingenuously are that productivity increases get passed along! And despite the evidence, pgl chooses to believe her!

mulp said...

But printing more money just forces the exiting money to be spent paying workers slower and slower.

The national economic policy selected by We the People is clearly:

DO NOT PAY WORKERS TO BUILD ANYTHING.

The Fed does absolutely nothing to require that the money it creates pays workers to build anything.

Instead the only thing the Fed money does is cause existing asset churn which inflates asset prices to a bubble as seen by the bubbly stock price indexes globally. Dollars are abundant and being spent buying old labor in hopes that the value of the decades old labor will be worth more tomorrow.

We the People understand that paying labor to build new assets will crater the prices of all the inflated asset prices, eg, creating the kind of excess supply we see in fossil fuels which will cause cratering prices, profits turning to losses, and the asset price bubble popping in a big way.

The 21st century has proved to me that I was totally wrong to believe in monetary theory based on the arguments and data of Milton Friedman, and that led me to reexamine the policies of FDR in the face of a populist Congress.

Insight one: deep crisis is required to motivate We the People.
Insight two: the only way to create a better economy is to pay more workers to work more
Insight three: the only way to pay more workers more to work more is for taxes taking money from those who have money which is basically everyone in the upper half who will then demand benefits NOW for all their taxes

Doing the liberal thing to prevent massive poverty in 2008 was the wrong thing. Democrats should have made demands that Bush and Republicans would totally refuse to agree to, so all the money market funds experienced runs and 50% of the depository banks got taken over by the FDIC, and half the businesses in the US stopped paying workers because they could get their cash in their banks because the banks were taken over by the FDIC. And in 2009, Democrats should have kept increasing demands and demanding ever higher tax hikes every time Republicans fought to block Democratic budget bills keeping the economy sinking deeper and deeper making more and more people poor.

The ideal outcome of 2009 would have been corporate tax rates of 50% on business profits of 5% ROIC or lower and 90% on all profits in excess of 5% ROIC, but with 100% deduction for all capital investment excluding buying existing corporations or partnerships. And 90% income tax rates in excess of twice the median income, excluding buying tax exempt infrastructure construction bonds or investing in energy efficiency capital assets.

Or a carbon tax that was set to rise every year until tax revenue was zero with all the tax revenue used to repay Federal debt.

Tax dodging is the biggest incentive to pay workers to build stuff that lasts and that is productive.

The Fed can't do anything but prevent the required crisis to force the required political change.

Or cause the crisis that will create change.

The Fed needs to jack up interest rates to, if nothing else, increase the Federal deficit rapidly by increasing the interest costs.

One of two things would happen: Republicans would win in 2016 and crash the economy by massive spending cuts driving tens of millions into poverty, homelessness, etc.

Or taxes rates would be greatly increased to reduce the deficit but the high tax rates would make hiring workers the cheapest way to cut taxes due and get some benefit.

If I were in the Fed I'd be calling for a 1% hike every year (.25% a quarter) for the next three years.

likbez said...

The USA now reminds me the USSR in a sense that government figures are not using open verifiable methodology. Some thing that those metrics became yet another "number racket". Some measures like inflation and GDP are definitely politicized.

That gives an impetus for sites like http://www.shadowstats.com

Those people who operate using pure government statistical figures without questioning their error range are just another brand of highly paid charlatans. And their papers and articles should be viewed as exercise in "tail wags the dog"

Actually that can be viewed as another dimension of mathiness.

For example government announced that GDP is 3.7%. And everybody jumps in admiration. And nobody asks what was GDI released for this period. Suckers...

Peter K. said in reply to likbez...

"The USA now reminds me the USSR in a sense that...

Republicans are dynamic scoring in order to massage the numbers to that their favored policies look better?

likbez said in reply to Peter K....

My point is the USA now reminds the USSR with its tendency to "beautify" economic data.

Think about all those birth-death adjustments, substitution of U6 with U3 (concepts of "discouraged workers" and "marginally attached workers"), redefining full employment metric (which no longer means 40 hours a week employment), hedonic adjustments/substitutes, "managing" inflation by changing the way it is calculated, price anomalies that bump GDP up, like tremendously overpriced military hardware, etc.

Please don't throw the baby out with the bathwater

Dan Kervick

"Finally, why the huge fear over a little bit of inflation rather than huge fear over higher than necessary unemployment?"

It is a good question, and frankly I have trouble believing that people like Fisher actually *are* worried about a little bit of inflation. Fisher set out his fuller position over a year ago, and I doubt it has changed much:

http://www.dallasfed.org/news/speeches/fisher/2014/fs140716.cfm

He's mainly afraid that the Fed might blow a bubble, and he's afraid that the independence of the political Fed is being compromised by it's being dragged into service to compensate for the lack of fiscal and regulatory action by Congress.

I would suggest that, on the second point at least, everyone should get used to the fact that central bank policy is inevitably a response to politics. That's because central bank policy is always based on general economic conditions, and general economic conditions are always to a substantial extent a function of government policy. So central bank policy has to be responsive to government policy. Tough cookies for all of those believers in an "independent" central bank. There is no such thing as an autonomous "economy" that is independent of political choices.

Other not fully acknowledged factors driving the recent debate are equally political. The Fed is worried that if normalization is delayed, then some time next year the Fed will *have to* reverse course, one way or another. If that takes place after the parties have chosen their nominees and the political race is in full gallop, the Fed will be accused of intervening (in some way, on behalf of someone) in the campaign, and will become a political football. (As far as I'm concerned that would be great, because the US central banking system needs radical reform - but the Fed guys wouldn't like it.)

The other thing they are obviously worried about is a recession. If the US experiences a recession for any reason over the next 18 months, and the Fed is still stuck down close to the zero bound, then it will not be able to exert a substantial stimulative impact - at least not without radical new measures like helicopter money. Again, that's something that wouldn't both me personally, but Independent Fed establishmentarians would freak.

John said...

You're an econ prof, no?

In the first year macro I just finished, it was explained that inflation is a tax on the rentiers class. Thus the power elite hates inflation.


[Aug 30, 2015] The Scary Number Hiding Behind Today's GDP Party

"...Hmm. Which to believe? As the old joke goes: "A person with one clock always knows what time it is. A person with two is never quite sure.""
Aug 30, 2015 | Bloomberg Business

The federal government today released two very different estimates of the U.S. economy's growth rate in the second quarter. The one that got all the attention was the robust 3.7 percent annual rate of increase in gross domestic product. Not many people noticed that gross domestic income increased at an annual rate of just 0.6 percent.

That's a big discrepancy for two numbers that should theoretically be the same, since they're two ways of measuring the same thing: the size of the economy. If you believe the GDP number, you're happy. If you believe the GDI number, you're thinking the U.S. is skating close to a recession.

The Bureau of Economic Analysis always gives more prominence to the GDP number in its quarterly press release. But today, for the second time in a quarterly report, it released an average of GDP and GDI growth rates. That average came in at 2.1 percent after rounding-and in this case, that's probably closer to the truth than either number alone.

There is no name for the new hybrid data series, which was described rather prosaically as "the average of real GDP and real GDI." President Obama's Council of Economic Advisers nicknamed it gross domestic output in a July issue brief. Here's what it wrote:

GDP tracks all expenditures on final goods and services produced in the United States, whereas GDI tracks all income received by those who produced that output. Conceptually the two should be equal because every dollar spent on a good or service (in GDP) must flow as income to a household, a firm, or the government (and therefore must show up in GDI). However, the two numbers differ in practice because of measurement error.

[Aug 30, 2015] Under the Hood of U.S. GDP Was Divide Between Growth, Incomes

Aug 30, 2015 | Bloomberg Business

Here's one key takeaway from the Commerce Department's report on gross domestic product Thursday in Washington: Gross domestic income climbed at a 0.6 percent annualized rate, well short of the rebound in growth.

* The increase in GDI last quarter followed a 0.4 percent advance in the first three months of the year, marking the weakest back-to-back gains since mid-2012

* The 3.1 percentage-point gap between GDI and GDP, which climbed at a 3.7 percent rate, was the largest in favor of GDP since the third quarter of 2007

* While GDI and GDP should theoretically match over the long run, they can diverge from quarter to quarter. There has been a debate about which is more accurate, with some Federal Reserve researchers finding incomes give better signals

[Aug 29, 2015] Great Recession Job Losses Severe, Enduring

Nothing particularly surprising here -- the Great recession was unusually severe and unusually long, and hence had unusual impacts, but it's good to have numbers characterizing what happened:

Great Recession Job Losses Severe, Enduring: Of those who lost full-time jobs between 2007 and 2009, only about 50 percent were employed in January 2010 and only about 75 percent of those were re-employed in full-time jobs.
The economic downturn that began in December 2007 was associated with a rapid rise in unemployment and with an especially pronounced increase in the number of long-term unemployed. In "Job Loss in the Great Recession and its Aftermath: U.S. Evidence from the Displaced Workers Survey" (NBER Working Paper No. 21216), Henry S. Farber uses data from the Displaced Workers Survey (DWS) from 1984-2014 to study labor market dynamics. From these data he calculates both the short-term and medium-term effects of the Great Recession's sharply elevated rate of job losses. He concludes that these effects have been particularly severe.

Of the workers who lost full-time jobs between 2007 and 2009, Farber reports, only about 50 percent were employed in January 2010 and only about 75 percent of those were re-employed in full-time jobs. This means only about 35 to 40 percent of those in the DWS who reported losing a job in 2007-09 were employed full-time in January 2010. This was by far the worst post-displacement employment experience of the 1981-2014 period.
The adverse employment experience of job losers has also been persistent. While both overall employment rates and full-time employment rates began to improve in 2009, even those who lost jobs between 2011 and 2013 had very low re-employment rates and, by historical standards, very low full-time employment rates.
In addition, the data show substantial weekly earnings declines even for those who did find work, although these earnings losses were not especially large by historical standards. Farber suggests that the earnings decline measure from the DWS is appropriate for understanding how job loss affects the earnings that a full-time-employed former job-loser is able to command.
The author notes that the measures on which he focuses may understate the true economic cost of job loss, since they do not consider the value of time spent unemployed or the value of lost health insurance and pension benefits.
Farber concludes that the costs of job losses in the Great Recession were unusually severe and remain substantial years later. Most importantly, workers laid off in the Great Recession and its aftermath have been much less successful at finding new jobs, particularly full-time jobs, than those laid off in earlier periods. The findings suggest that job loss since the Great Recession has had severe adverse consequences for employment and earnings.

[Aug 28, 2015] Q2 GDP Revised up to 3.7%

Aug 28, 2015 | Economist's View

anon

The Fed wants to raise interest rates:

- in the hope of preserving there institutional economic significance,

- out of a sense of loyalty to the Fed's history of financial influence using interest rates,

- because using rates to influence economic events increases their professional comfort,

- and because their economic grad school training was to fear wage push inflation above all else (they seem to believe that if inflation exceeds 2% it is a harbinger of hyper inflation).

Economists are post-industrial shamans whose witch doctor modeling impedes macro economic understanding. The precision of models is ersatz, more or less inversely proportional to its real world relevance. The delusion of being a scientist is critical to their professional self-respect.

Dan Kervick -> lower middle class...

A 3.7% quarter with several hands tied behind our backs by a don-nothing government. Think about what we could do if we were really trying.

pgl -> Dan Kervick...

YEA! Let's build that Mexican wall. Let's wage war on China. Lord - the stupidity here is multiplying!

Dan Kervick -> pgl...

This is an area in which you seem to be persistently incapable of avoiding lies.

You know very well that are a large number of ambitious long-term projects the US could do that are non-military, have nothing to do with immigration and could boost output tremendously.

You're becoming part of the LPTS crew: "liberal pundits terrified of socialism."

That's why Brad DeLong has an embargo on any talk about Bernie Sanders and his ideas.

That's why Paul Krugman is also avoiding Sanders like the plague and using daily red meet partisan servings to keep Democrats' attention riveted on the foibles of the Republicans.

That's why Brendan Nyhan has yet another column warning us all about the dangers of "Green Lanternism".

You're all pants-wetting terrified that the American people are tired of do-nothing neoliberal government, and will figure out that with a more assertive and economically engaged central government dynamic growth and social transformation are possible, and that the stagnation, predatory exploitation, cruel subjugation and social destruction wrought 40 years of neoliberalism was a horrible and completely avoidable mistake.

40% of this country has household income of under $40,000 per year. If we remove the plutocratic capitalist stranglehold on this economy, use government to more efficiently distribute and invest our national wealth, and demote private enterprise to its proper subordinate place, we could double that rapidly and drive a wave of high-growth social transformation with all of the liberated economic energy.

This is going to happen. Take your pick: we're either going to get the somewhat fascistic and racist Trump version on strong government or democratic socialist version. The Ivy League twits hanging on for dear life to their established networks, revolving doors, tit-for-tatting, sinecures and don't-rock-the-boat regime of stagnant managerialism are going to butts handed to them by history.

pgl -> Dan Kervick...

Blah, blah, blah. I guess we could employ more economists at the BEA to do what they are already doing at Census.

Dan Kervick -> pgl...

The Census doesn't and can't combine income distribution numbers with growth numbers on a monthly and quarterly basis. The BEA could collect this data, but doesn't, because it is part of their mission to pretend class conflict doesn't exist.

The top quintile in the US pulls down about 50% percent of the income. That means we could get 3.7% annualized growth if their income grew by 6% while everybody else's income grew by less than 1/2 a percent.

Is that what's happening? Inquiring minds want to know. It seems like a natural mission for the BEA to track this. But they don't.

pgl -> Dan Kervick...

You have no clue what these people do or the task you are whining about. With all you incessant babbling and whining - your keyboard is likely ready to just rot away.

Me? I'm headed down to the Starbucks to whine that they don't make tacos. Duh.

Dan Kervick -> pgl...

I know what they do, and I know what they don't do. Their mission should be expanded.

likbez -> Dan Kervick...

Dan,

I think you are mistaken about "a natural mission for the BEA to track this". Our elected officials and Wall Street executives all have a vested interest in keeping the perception of a robust economy alive. The economy growth numbers and the employment data announced are critical to this perception, but a thorough analysis of the data suggests something quite different that what we are told.

Statistics now became more and more "number racket" performed, like in the USSR, in the interest of the powers that be.

The net result of this tricks is that the error margin of government statistics is pretty high. And nobody in economic profession is taking into account those error margins.

So in no way we can accept this 3.7% annualized growth figure. This is a fuzzy number, a distribution from probably 2.7% to 3.7%. Only upper bound is reported. And if you delve into the methodology deeper this range might be even wider. What is actually the assumption of quarterly inflation in the USA used in calculation of this number?

Which is another factor that makes neoliberal economics a pseudoscience, a branch of Lysenkoism.

JohnH -> Dan Kervick...

This is very revealing...nobody provides regular statistics on distribution. That lack of interest makes it blatantly obvious that policy makers only care about the top number--GDP--and are totally uninterested in knowing whether most Americans are prospering or not.

There is one source that updates Census data on a monthly basis. It shows that real median household income is still 3.8% below where it was in 2008 or in 2001. In fact, it's back where it was in the 1980s.

Of course, the 'recovery' has trickled down a bit, just as you would expect from trickle down monetary policy. Real median household incomes are no longer 9.6% below where they were in 2008...they're now only 3.8% below.
http://www.advisorperspectives.com/dshort/updates/Median-Household-Income-Update.php

Meanwhile, Saez and Montecino have pointed out that the 1% got 58% of the gains from the 'recovery,' while the 99% got 42%.

Of course, pgl doesn't even care enough about this to know where the data is...and, apparently, most 'liberal' economists are just as indifferent to distribution as he is.

Dan Kervick -> JohnH...

If it weren't for Piketty and Saez, we'd still be fumbling around in the dark on income and wealth distribution.

JohnH -> JohnH...

There's more here: real median household income by quintile 1967-2013
http://www.advisorperspectives.com/dshort/updates/Household-Income-Distribution.php

It shows the dramatic the separation between the top quintile and the bottom 80% during the Clinton years. Separation was even greater for the top 5%.

Yet the only thing that most economists ever notice is GDP growth...

pgl -> JohnH...

"Yet the only thing that most economists ever notice is GDP growth".

There you go again. Clueless as can be and lying your ass off.

likbez -> pgl...

And what you actually know about methodology of calculation of this GDP number. Inquiring minds want to know.

Correct calculation of nominal GDP depends on correct calculation of inflation, which is the most politicized of economic metrics and as such subject to tremendous level of manipulation.

Simon Kuznets, the economist who developed the first comprehensive set of measures of national income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses of National Income Measurements":

=== Start of quote ====
The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. [...]

All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.

JohnH -> JohnH...

Another look at the ineffectiveness of trickle down monetary policy: all but the top decile have suffered decreases in wages and compensation since 2007.
http://www.epi.org/publication/pay-is-stagnant-for-vast-majority-even-when-you-include-benefits/

[Jul 29, 2015] Using Math to Obfuscate - Observations from Finance

Notable quotes:
"... then from Romer's assumptions the rival inputs cannot be earning their marginal product. ..."
"... The "mathiness" comes from authors trying to elide the fact that they are abandoning (1) or (2). ... ..."
"... Four-fifths of the "Economy" is a Complete Waste of Time ..."
"... I repeat, NO NORMATIVE CONNOTATIONS. What part of "no" do people not understand? It's neither good nor bad that the economy ACTUALLY produces wasteful output. ..."
"... The amount of wasteful output "serves as an index" for the amount of useful output that could be produced if the economy wasn't producing wasteful output. ..."
"... "In a perfect free market world where the price mechanism adjusts production to our wishes and all externalities are priced in, GDP measures economic happiness." ..."
"... On the Bagehot question, economists were initially caught flat-footed, for two reasons: failure to realize that shadow banking had recreated the risk of bank runs, and failure to appreciate the problems of leverage because there is no room for such problems in representative-agent models." ..."
"... why do economies grow vulnerable over time ..."
"... On the Bagehot question, economists were initially caught flat-footed, for two reasons: failure to realize that shadow banking had recreated the risk of bank runs, and failure to appreciate the problems of leverage because there is no room for such problems in representative-agent models. ..."
"... Keynesian theory is based in part on the premise that wages and prices do not adjust to levels that ensure full employment ..."
economistsview.typepad.com
More from Paul Romer on "mathiness" -- this time the use of math in finance to obfuscate communication with regulators:
Using Math to Obfuscate - Observations from Finance: The usual narrative suggests that the new mathematical tools of modern finance were like the wings that Daedalus gave Icarus. The people who put these tools to work soared too high and crashed.

In two posts, here and here, Tim Johnson notes that two government investigations (one in the UK, the other in the US) tell a different tale. People in finance used math to hide what they were doing.

One of the premises I used to take for granted was that an argument presented using math would be more precise than the corresponding argument presented using words. Under this model, words from natural language are more flexible than math. They let us refer to concepts we do not yet fully understand. They are like rough prototypes. Then as our understanding grows, we use math to give words more precise definitions and meanings. ...

I assumed that because I was trying to use math to reason more precisely and to communicate more clearly, everyone would use it the same way. I knew that math, like words, could be used to confuse a reader, but I assumed that all of us who used math operated in a reputational equilibrium where obfuscating would be costly. I expected that in this equilibrium, we would see only the use of math to clarify and lend precision.

Unfortunately, I was wrong even about the equilibrium in the academic world, where mathiness is in fact used to obfuscate. In the world of for-profit finance, the return to obfuscation in communication with regulators is much higher, so there is every reason to expect that mathiness would be used liberally, particularly in mandated disclosures. ...

We should expect that there will be mistakes in math, just as there are mistakes in computer code. We should also expect some inaccuracies in the verbal claims about what the math says. A small number of errors of either type should not be a cause for alarm, particularly if the math is presented transparently so that readers can check the math itself and check whether it aligns with the words. In contrast, either opaque math or ambiguous verbal statements about the math should be grounds for suspicion. ...

Mathiness–exposition characterized by a systematic divergence between what the words say and what the math implies–should be rejected outright.

Posted by Mark Thoma on Wednesday, July 29, 2015 at 10:52 AM in Economics, Financial System, Methodology | Permalink Comments (2)

[Jul 20, 2015] The Rivals (Samuelson and Friedman)
Jul 19, 2015 | Economist's View

pete said...

I always loved Boulding's somewhat critical review of Samuelson, discussing the limits of the mathematicization of economic theory. Of course Samuelson was the tip of the iceberg, and since then many overconfident economic mathematicians have led to very serious financial problems. I had one stats professor who called a complex theory on the blackboard "graffiti."

http://www.jstor.org/stable/1825768?seq=1#page_scan_tab_contents

pgl -> pete...
Samuelson did not do math for math's sake. He figured out first what the real world issue was and then used math to help explain his insights.
likbez -> pgl...
You need to distinguish "math" from "mathematical masturbation", or as they are now more politically correctly called "mathiness".

Many economic works that use differential equations belong to the latter category ;-). A lot of pitiful clowns pretending to be mathematicians do not even bother to understand what is the precision and error bounds of the input data. As in "garbage in, garbage out".

This is probably a unique case when mathematic equations are used to support particular political ideology. Support via "scietification" (as in Church of Scientology) of essentially political statements. Especially about unemployment and poverty.

anne -> anne...

All in all, the past 7 years have been a very good time for old-fashioned macroeconomics. But of course nothing will make the Germans, or the U.S. right, concede that Keynesian ideas have worked.

[ Keynesian ideas have worked? Influential among policy makers in general or not, Keynesian ideas have worked. ]

pgl -> anne...

Keynesian theory explains what happened. But what happened was the our policy makers failed to do the right thing. Had they listened to Keynes - the recoveries would have been much faster.

likbez -> pgl...

"Had they listened to Keynes - the recoveries would have been much faster."

This was impossible. There is such thing as "Intellectual capture". As Keyes noted

"The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist."

[Jun 15, 2015] What Assumptions Matter for Growth Theory
Jun 15, 2015 | Economist's View
Dietz Vollrath explains the "mathiness" debate (and also Euler's theorem in a part of the post I left out). Glad he's interpreting Romer -- it's very helpful:
What Assumptions Matter for Growth Theory?: The whole "mathiness" debate that Paul Romer started tumbled onwards this week... I was able to get a little clarity in this whole "price-taking" versus "market power" part of the debate. I'll circle back to the actual "mathiness" issue at the end of the post.
There are really two questions we are dealing with here. First, do inputs to production earn their marginal product? Second, do the owners of non-rival ideas have market power or not? We can answer the first without having to answer the second.
Just to refresh, a production function tells us that output is determined by some combination of non-rival inputs and rival inputs.
Okay, given all that setup, here are three statements that could be true.
  1. Output is constant returns to scale in rival inputs
  2. Non-rival inputs receive some portion of output
  3. Rival inputs receive output equal to their marginal product
Pick two.
Romer's argument is that (1) and (2) are true. (1) he asserts through replication arguments, like my example of replicating Earth. (2) he takes as an empirical fact. Therefore, (3) cannot be true. If the owners of non-rival inputs are compensated in any way, then it is necessarily true that rival inputs earn less than their marginal product.

Notice that I don't need to say anything about how the non-rival inputs are compensated here. But if they earn anything, then from Romer's assumptions the rival inputs cannot be earning their marginal product.

Different authors have made different choices than Romer. McGrattan and Prescott abandoned (1) in favor of (2) and (3). Boldrin and Levine dropped (2) and accepted (1) and (3). Romer's issue with these papers is that (1) and (2) are clearly true, so writing down a model that abandons one of these assumptions gives you a model that makes no sense in describing growth. ...
The "mathiness" comes from authors trying to elide the fact that they are abandoning (1) or (2). ...

[There's a lot more in the full post. Also, Romer comments on Vollrath here.]

Paine

Excellent

Lots of conclusions are per determined by simple assumptions like constant returns to scale

If by scale we mean replication of the existing production system on a larger scale

Where say we triple every plant and highway etc

The model nicely captures the reality of a static production system
Where all factors are expandable even if at a cost

This is a very narrow notion of scale effects

If for example markets for oust expand and a different technique is optimal
Then there's a dynamic transition
Where residuals emerge.

anne -> Paine ...

I assume this is the reference which the writer is too inconsiderate to mention:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/06/are-ideas-really-non-rival.html

June 13, 2015

Are ideas really non-rival?
By Nick Rowe

Paine -> anne...

Rowe thinks he is making a great joke

But in actuality there is nothing but assertion of various hypothetical entities behind the entire neo classical construct

No matter how carefully these atoms are defined they remain figments

That one can conjure like epicycles

Example

Advertising Is a production factor -- Once we move away from he material basis of production lots of spirits dance in the air around us

Once a non rival good has been discovered or invented or created etc it's cost to replicate is nearly zero

To lay the bulk of profits at its feet is ridiculous of course. But intellectual property none the less is a growing means of exploitation...

Paine -> Paine ...

My definition of non rival is wrong of course. The meaning of non rival is castlessly inexhaustible

Nothing fits this description exactly. And almost is as bad as not at all.

Non rival -- Example of belief in the divinity of Jesus. I can believe as much whether you believe or not

anne -> Paine ...

All exchange value flows from labor time. Even if in complex patterns easily mystified by simple definitions. Of imaginary objects like non-rival production factors

[ I understand and am pleased. ]

Sandwichman said...

Four-fifths of the "Economy" is a Complete Waste of Time

"There are really two questions we are dealing with here. First, do inputs to production earn their marginal product? Second, do the owners of non-rival ideas have market power or not?" -- Dietz Vollrath "What Assumptions Matter for Growth Theory?"

"Dietz Vollrath has a new post that goes a long way toward clarifying the battle lines in the fight over the foundations of growth theory." -- Paul Romer, "The Assumptions in Growth Theory"

Huh? These fellows omit the main assumption, the analogy -- "growth is a concept whose proper domicile is the study of organic units..." (Kuznets, 1947). Kuznets cited with approval Sidney Hook's discussion of the dangers of the use of this analogy.

"As an argument it is formally worthless and never logically compelling. An argument from analogy can be countered usually with another argument from analogy which leads to a diametrically opposed conclusion.... The belief that society is an organism is an old but fanciful notion. It can only be seriously entertained by closing the eye to all the respects in which a group of separate individuals differs from a system of connected cells, and by violently redefining terms like 'birth,' 'reproduction,' and 'death.'"

Growth "theory" gets around this objection to the uncritical use of analogy by ignoring it -- by 'closing the eye' to explicit caveats in the seminal contribution to the measurement of growth. Let's pretend that the economy really is an organism that grows perpetually but never dies.

Name one.

Carry on, growth theorists.


anne -> Sandwichman...

http://econospeak.blogspot.com/2015/06/the-chimerical-analogies-of-growth-and.html

June 6, 2015

The Chimerical Analogies of Growth and Distribution


http://econospeak.blogspot.com/2015/06/four-fifths-of-economy-is-complete.html

June 14, 2015

Four-fifths of the "Economy" is a Complete Waste of Time

-- Sandwichman

Sandwichman -> Sandwichman...

1. "growth is a concept whose proper domicile is the study of organic units..."

2. "The belief that society is an organism is an old but fanciful notion."

3. ?

4. Growth!

Sandwichman -> anne...

"the meaning of per capita growth in China over these last 38 years of 8.6% yearly"

It means, literally, that if you ate one bowl of rice for dinner in 1977, in 2015 you would eat 23 bowls of rice for dinner. Of course it doesn't *really* mean that. The "measurement" is actually a figure of speech.

Figuratively, it means something more like: many more Chinese own cars today than 38 years ago and those cars are worth hundreds of times what the old bicycle was worth. Never mind that the car is used to commute to work, that it takes as long to drive to work through congested traffic as it once did to ride a bike to work and that the air is unbreathable so it would be suicide to go back to riding a bike.

Still, growing 8.6% per year for 38 years is a prodigious achievement even if we don't know what it means.

Sandwichman -> anne...

A large part of that gain in life expectancy is attributable to an enormous decline in infant mortality. Expenditures on improved infant health care would be only a miniscule portion of the total economic growth.

When I say "prodigious" I mean remarkable or immense without attaching any value judgement about whether it is a good or a bad thing. There have obviously been some good things associated with that growth -- see infant mortality. There has also been an explosion of GHG emissions. If 2/3 of that growth was good things (reduced infant mortality, improved nutrition etc.) and 1/3 bad things (police surveillance, cost of commuting to work, etc.) then China would have been better off with a 6% growth rate.

Can't we just forget about the confounded aggregate and get on with promoting the good? No, apparently not. Two pieces of pie is better than one if it's cherry pie but not if it's "dirt" pie.

anne -> Sandwichman...

Can't we just forget about the confounded aggregate and get on with promoting the good?

[ Surely so, but if a part of the good is life span, well, that of India is 66 years which shows how far China has come and I really do know of the problems. ]

anne -> Sandwichman...

Again, I am waiting for an explanation of or a description showing what the past 38 years of per capita growth in China represent. What does the past 38 years of astonishing gains in Chinese productivity represent and how to depict these gains?

Paine -> anne...

We need a welfare index. And that greatly increases the degree of difficulty over a simple output index

Sandwichman -> Paine ...

"If the GDP is Up, Why is America Down?" Clifford Cobb, Ted Halstead, and Jonathan Rowe, The Atlantic, 1995.

http://www.theatlantic.com/past/politics/ecbig/gdp.htm

And do you know what the overwhelming response of economists was to that article? "Nothing new here." "We know GDP is not a measure of welfare. But it's useful because it tells us about the capacity to produce goods that could enhance welfare."

Or to paraphrase Orwell, "If this boot wasn't stamping on your face, you could put it on your foot and it would keep your toes warm -- FOREVER!" Paul Samuelson's version, "Evaluation of Real National Income":

"Production possibilities as such have no normative connotations. We are interested in them for the light they throw on utility-possibilities. This is why economists have wanted to include such wasteful output as war goods in their calculations of national product; presumably they serve as some kind of an index of the useful things that might be produced in better times."

I repeat, NO NORMATIVE CONNOTATIONS. What part of "no" do people not understand? It's neither good nor bad that the economy ACTUALLY produces wasteful output.

The amount of wasteful output "serves as an index" for the amount of useful output that could be produced if the economy wasn't producing wasteful output.

anne -> Sandwichman...

http://econospeak.blogspot.com/2015/06/some-kind-of-index-no-normative.html

June 14, 2015

Some Kind of an Index -- No Normative Connotations

-- Sandwichman

Julio -> Sandwichman...

A question for you folks in this subthread:

"In a perfect free market world where the price mechanism adjusts production to our wishes and all externalities are priced in, GDP measures economic happiness."

Proposition: That myth underlies our world.

Conclusion: In our world, "GDP is not correlated to happiness" is, therefore, a subversive statement.

Is this sensible, and if so, does it make alternative measures of economic well-being difficult to construct?

Julio -> Sandwichman...

Aggregate is not the same as average.

The "prices as the driver" argument is that you will buy a yellow car and I a green one, and Detroit will make just enough of each, and that's the closest we'll ever come to an economy that reflects our wishes, and that's in turn the closest we'll ever come to (economic) happiness.

But this may be an aside: is your point that a "welfare index", as paine proposes, is unrealistic and so irrelevant?

We could measure economic decisions by using economics as far as it takes us to evaluate their consequences, and then using our moral compass to do the measuring.

A more ad-hoc method which, for our collective decisions, has political pitfalls; but politics is the appropriate forum for those fights. We would no longer know (or care) what "progress" is, as a national aggregate.

Sandwichman -> Julio...

"is your point that a "welfare index", as paine proposes, is unrealistic and so irrelevant?"

No, it's not entirely unrealistic and irrelevant but it IS very limited and, like GDP subject to misinterpretation as more substantive than it is.

The thing about GDP that won't be gotten away from is that it does provide information that is useful for projecting revenues for business and for government.

A welfare index wouldn't do that. You can tax income but you can't tax happiness -- at least not literally.

anne -> Sandwichman...

The measurement of economic well-being is inherently difficult (impossible) because it involves the aggregation of subjective judgments....

[ Agreed. ]

anne -> Sandwichman...

The sort of growth-happiness surveying referred to is to my mind no more than pseudo research. As empirical as bumble bees.

Sandwichman -> anne...

anne, I tend to agree with your skepticism about happiness surveying. However, I have also worked on so-called real survey research -- Canadian census. If you saw how the sausage was made...

The Case of the Missing Minsky by Paul Krugman
"...On the Bagehot question, economists were initially caught flat-footed, for two reasons: failure to realize that shadow banking had recreated the risk of bank runs, and failure to appreciate the problems of leverage because there is no room for such problems in representative-agent models."

NYTimes.com

Gavyn Davis has a good summary of the recent IMF conference on rethinking macro; Mark Thoma has further thoughts. Thoma in particular is disappointed that there hasn't been more of a change, decrying

the arrogance that asserts that we have little to learn about theory or policy from the economists who wrote during and after the Great Depression.

Maybe surprisingly, I'm a bit more upbeat than either. Of course there are economists, and whole departments, that have learned nothing, and remain wholly dominated by mathiness. But it seems to be that economists have done OK on two of the big three questions raised by the economic crisis. What are these three questions? I'm glad you asked.

As I see it, it makes sense to think of what happened in terms of three phases.

The questions then are how and why each of these things can/did happen. I think of these as the Minsky question - why do economies grow vulnerable over time ; the Bagehot question - why does all hell break loose now and then; and the Keynes question - how economies can stay depressed, and how such depressed economies work.

On the Keynes question, it's true that we haven't had a radical change in thinking, but that's mainly because the old thinking still works pretty well. That is, the answer for people asking who would be the new Keynes turns out to be that Keynes is the new Keynes. Or maybe that's Hicks - anyway, IS-LMish analysis worked well, and the economists who made fools of themselves were those who rejected the time-tested approaches.

What is new is that we have had a flowering of empirical work, and have much more econometric evidence on monetary and especially fiscal policy, price behavior, and more than we used to. Look, for example, at Nakamura/Steinsson's survey, or at the Blanchard work on multipliers in the euro area. So this is a happy story: the existing framework worked fairly well, and is now buttressed by a lot of really good empirical evidence.

On the Bagehot question, economists were initially caught flat-footed, for two reasons: failure to realize that shadow banking had recreated the risk of bank runs, and failure to appreciate the problems of leverage because there is no room for such problems in representative-agent models. But it wasn't very hard to fix these problems, or at least apply workable patches. Once you realized that repo was the new bank deposits, the basic crisis framework was already there; and there was already enough existing analysis of balance-sheet constraints and all that to make creation of a somewhat messy, inelegant, but usable set of models quite easy.

And here too we have seen a flowering of empirical work, e.g. Mian and Sufi on household debt.

Where we have not, as far as I can tell, made much progress is the Minsky question. Why did the system become so vulnerable? Was it deregulation (or failure of regulation to keep up with institutional change)? Simple forgetting, as memories of past crises faded? Excessively loose policy? I have views, but I have to admit that there isn't a lot of either fresh thinking or hard evidence here.

Why is Minsky still mostly missing? Partly because asking how we got here may be less urgent than the question of what we do now. But also, I'd guess, because it's hard. Bubbles, excessive leverage, and all that probably have a lot to do with the limits of rationality, and behavioral economics doesn't provide anything like as much guidance as it should.

Still, I'm relatively positive in my assessment of the state of macroeconomics. Against mathiness and political ideology, the gods themselves contend in vain, but that's not a problem with the models


kbaa, The Irate Plutokrat

It is good to see Krugman write in opposition to 'mathiness', economists' misuse of mathematics to justify their pet theories. And his suggestion that 'behavioral economics doesn't provide anything like as much guidance as it should' is probably as close to an admission as we are ever likely to get from an academic economist that it's human psychology that drives the economy after all, and that all of the various high minded macroeconomics theories are nothing more than propaganda to be used by lobbyists who present them as scholarship.

Economics is a subject that is driven by data, i.e. numbers. Wherever there are numbers there is always the possibility of misusing mathematics to intimidate. Any paper that cites game theory or the Euler consumption equation to promote public policy should be regarded as fraudulent until shown to be otherwise. Mathematics serves the same function for academic economists as Latin theology did for medieval clerics: both provide an aura of erudite wisdom where there is no wisdom at all to be found.

NB For those who have never studied Calculus, "Euler" is pronounced "oiler", but there's no connection with the price of oil or any other commodity, and don't let any academic economist try to tell you otherwise.

Book Review "Keynes The Return of the Master"
WSJ.com

Yet Mr. Skidelsky chooses to make Mr. Lucas sound like some kind of idiot savant, more interested in playing with mathematical models than in trying to understand how the world actually works. Mr. Lucas, we are told, is following in the tradition of the "French mathematician Leon Walras [who] pictured the economy as a system of simultaneous equations." The very idea is made to sound slightly crazed.

This brings us to the biggest problem with "Keynes." Mr. Skidelsky admits to being poorly trained in the tools that economists use: "I find mathematics and statistics 'challenging,' as they say, and it is too late to improve. This has, I believe, saved me from important errors of thinking."

Has it, really? Mr. Skidelsky would like to think that his math-aversion allows him to focus on the big ideas rather than being distracted by mere analytic details. But mathematics is, fundamentally, the language of logic. Modern research into Keynes's theories-I have conducted such research myself-tries to put his ideas into mathematical form precisely to figure out whether they logically cohere. It turns out that the task is not easy.

Keynesian theory is based in part on the premise that wages and prices do not adjust to levels that ensure full employment. But if recessions and depressions are as costly as they seem to be, why don't firms have sufficient incentive to adjust wages and prices quickly, to restore equilibrium? This is a classic question of macroeconomics that, despite much hard work, is yet to be fully resolved.

Which brings us to a third group of macroeconomists: those who fall into neither the pro- nor the anti-Keynes camp. I count myself among the ambivalent. We credit both sides with making legitimate points, yet we watch with incredulity as the combatants take their enthusiasm or detestation too far. Keynes was a creative thinker and keen observer of economic events, but he left us with more hard questions than compelling answers.

[Jun 04, 2015] The Case of the Missing Minsky

Jun 01, 2015 | Economist's View

Paine said in reply to Paine ...

The Minsky mess is the whole endogenous pathology. No attack on that and we are sure to face crisis again. And knowing a policy path to fast and full recovery from a Minsky moment
doesn't mean we will follow it

Political economy not macro has failed us says Simon Templar. Call it class politics going unexposed and I agree. Talk of inequality muffles the sharper edged conflict between the job class and their employer class in the corporate glass towers

[Jun 04, 2015] The Case of the Missing Minsky by Paul Krugman

Jun 01, 2015 | NYTimes.com

Gavyn Davis has a good summary of the recent IMF conference on rethinking macro; Mark Thoma has further thoughts. Thoma in particular is disappointed that there hasn't been more of a change, decrying

the arrogance that asserts that we have little to learn about theory or policy from the economists who wrote during and after the Great Depression.

Maybe surprisingly, I'm a bit more upbeat than either. Of course there are economists, and whole departments, that have learned nothing, and remain wholly dominated by mathiness. But it seems to be that economists have done OK on two of the big three questions raised by the economic crisis. What are these three questions? I'm glad you asked.

As I see it, it makes sense to think of what happened in terms of three phases.

The questions then are how and why each of these things can/did happen. I think of these as the Minsky question - why do economies grow vulnerable over time ; the Bagehot question - why does all hell break loose now and then; and the Keynes question - how economies can stay depressed, and how such depressed economies work.

On the Keynes question, it's true that we haven't had a radical change in thinking, but that's mainly because the old thinking still works pretty well. That is, the answer for people asking who would be the new Keynes turns out to be that Keynes is the new Keynes. Or maybe that's Hicks - anyway, IS-LMish analysis worked well, and the economists who made fools of themselves were those who rejected the time-tested approaches.

What is new is that we have had a flowering of empirical work, and have much more econometric evidence on monetary and especially fiscal policy, price behavior, and more than we used to. Look, for example, at Nakamura/Steinsson's survey, or at the Blanchard work on multipliers in the euro area. So this is a happy story: the existing framework worked fairly well, and is now buttressed by a lot of really good empirical evidence.

On the Bagehot question, economists were initially caught flat-footed, for two reasons: failure to realize that shadow banking had recreated the risk of bank runs, and failure to appreciate the problems of leverage because there is no room for such problems in representative-agent models. But it wasn't very hard to fix these problems, or at least apply workable patches. Once you realized that repo was the new bank deposits, the basic crisis framework was already there; and there was already enough existing analysis of balance-sheet constraints and all that to make creation of a somewhat messy, inelegant, but usable set of models quite easy.

And here too we have seen a flowering of empirical work, e.g. Mian and Sufi on household debt.

Where we have not, as far as I can tell, made much progress is the Minsky question. Why did the system become so vulnerable? Was it deregulation (or failure of regulation to keep up with institutional change)? Simple forgetting, as memories of past crises faded? Excessively loose policy? I have views, but I have to admit that there isn't a lot of either fresh thinking or hard evidence here.

Why is Minsky still mostly missing? Partly because asking how we got here may be less urgent than the question of what we do now. But also, I'd guess, because it's hard. Bubbles, excessive leverage, and all that probably have a lot to do with the limits of rationality, and behavioral economics doesn't provide anything like as much guidance as it should.

Still, I'm relatively positive in my assessment of the state of macroeconomics. Against mathiness and political ideology, the gods themselves contend in vain, but that's not a problem with the models


kbaa, The Irate Plutokrat

It is good to see Krugman write in opposition to 'mathiness', economists' misuse of mathematics to justify their pet theories. And his suggestion that 'behavioral economics doesn't provide anything like as much guidance as it should' is probably as close to an admission as we are ever likely to get from an academic economist that it's human psychology that drives the economy after all, and that all of the various high minded macroeconomics theories are nothing more than propaganda to be used by lobbyists who present them as scholarship.

Economics is a subject that is driven by data, i.e. numbers. Wherever there are numbers there is always the possibility of misusing mathematics to intimidate. Any paper that cites game theory or the Euler consumption equation to promote public policy should be regarded as fraudulent until shown to be otherwise. Mathematics serves the same function for academic economists as Latin theology did for medieval clerics: both provide an aura of erudite wisdom where there is no wisdom at all to be found.

NB For those who have never studied Calculus, "Euler" is pronounced "oiler", but there's no connection with the price of oil or any other commodity, and don't let any academic economist try to tell you otherwise.

Book Review "Keynes The Return of the Master" - WSJ.com

Yet Mr. Skidelsky chooses to make Mr. Lucas sound like some kind of idiot savant, more interested in playing with mathematical models than in trying to understand how the world actually works. Mr. Lucas, we are told, is following in the tradition of the "French mathematician Leon Walras [who] pictured the economy as a system of simultaneous equations." The very idea is made to sound slightly crazed.

This brings us to the biggest problem with "Keynes." Mr. Skidelsky admits to being poorly trained in the tools that economists use: "I find mathematics and statistics 'challenging,' as they say, and it is too late to improve. This has, I believe, saved me from important errors of thinking."

Has it, really? Mr. Skidelsky would like to think that his math-aversion allows him to focus on the big ideas rather than being distracted by mere analytic details. But mathematics is, fundamentally, the language of logic. Modern research into Keynes's theories-I have conducted such research myself-tries to put his ideas into mathematical form precisely to figure out whether they logically cohere. It turns out that the task is not easy.

Keynesian theory is based in part on the premise that wages and prices do not adjust to levels that ensure full employment. But if recessions and depressions are as costly as they seem to be, why don't firms have sufficient incentive to adjust wages and prices quickly, to restore equilibrium? This is a classic question of macroeconomics that, despite much hard work, is yet to be fully resolved.

Which brings us to a third group of macroeconomists: those who fall into neither the pro- nor the anti-Keynes camp. I count myself among the ambivalent. We credit both sides with making legitimate points, yet we watch with incredulity as the combatants take their enthusiasm or detestation too far. Keynes was a creative thinker and keen observer of economic events, but he left us with more hard questions than compelling answers.

[May 29, 2015] Goldman goes astray on Grand Theft Auto and productivity by Matthew C Klein

May 27, 2015 | FT Alphaville


Goldman goes astray on Grand Theft Auto and productivity


There's always a danger, when you question official statistics, that you come off sounding like a nutter.

But some forms of scepticism are more respectable than others. At one end of the spectrum, we've previously indulged the possibility that seasonal adjustment algorithms inadvertently distorted the GDP and employment figures. At the other, you have people who add fixed constants to the reported growth rate of consumer prices because they disagree with methodological changes from the 1980s and 1990s, but speak as if they are uncovering a conspiracy.

Somewhere in the middle is a group of people we're going to call "inflation deniers". These people - often, but not exclusively, affiliated with the tech industry - think the government fails to fully capture improvements in living standards. In other words, they believe this chart of underlying total factor productivity growth is deeply misleading, at least for the last few years...

... ... ...


By contrast, consider Microsoft Excel, one of the greatest computer programmes ever created, and among the most integral to global business. It would be ludicrous to think that increasing the number of cells in a worksheet increases the value of new versions by a comparable amount. In fact, many of the most active Excel users prefer the 2003 version, presumably because the genuine improvements are outweighed by various hidden costs. Similarly, many companies still prefer to use Microsoft's Windows 7 because the newer versions have features that aren't particularly useful for workers sitting at desks.

We wouldn't go so far as to say that a "quality" adjusted price measure would report more inflation than is currently being captured in the official statistics, but the constant share of nominal spending devoted to business investments in software suddenly seems less odd.

Goldman concludes by noting that "if true inflation is even lower than measured inflation-and especially if this gap is bigger than it has been historically-the case for keeping monetary policy accommodative strengthens further." We tend to be sceptical that the growth rate of consumer prices is necessarily a good guide to monetary policy either way, but it seems like a bit of a stretch to cite the quality storytelling in one video game to justify calls to alter the path of rate hikes in one direction or another.

Related links:
Lady Gaga for Free Online Shows Boom Missed by U.S. GDP: Economy - Bloomberg
Technology, inflation, and the Federal Reserve - Gavyn Davies
The Big Meh - Paul Krugman
The role of hedonic methods in measuring real GDP in the United States - BEA
How much of the value of the internet is not captured in GDP? - Tyler Cowen

[May 15, 2015] Mathiness in the Theory of Economic Growth

May 15, 2015 | Economist's View

Paul Romer:

My Paper "Mathiness in the Theory of Economic Growth": I have a new paper in the Papers and Proceedings Volume of the AER that is out in print and on the AER website. A short version of the supporting appendix is available here. It should eventually be available on the AER website but has not been posted yet. A longer version with more details behind the calculations is available here.

The point of the paper is that if we want economics to be a science, we have to recognize that it is not ok for macroeconomists to hole up in separate camps, one that supports its version of the geocentric model of the solar system and another that supports the heliocentric model. As scientists, we have to hold ourselves to a standard that requires us to reach a consensus about which model is right, and then to move on to other questions.

The alternative to science is academic politics, where persistent disagreement is encouraged as a way to create distinctive sub-group identities.

The usual way to protect a scientific discussion from the factionalism of academic politics is to exclude people who opt out of the norms of science. The challenge lies in knowing how to identify them.

From my paper:

The style that I am calling mathiness lets academic politics masquerade as science. Like mathematical theory, mathiness uses a mixture of words and symbols, but instead of making tight links, it leaves ample room for slippage between statements in natural versus formal language and between statements with theoretical as opposed to empirical content.

Persistent disagreement is a sign that some of the participants in a discussion are not committed to the norms of science. Mathiness is a symptom of this deeper problem, but one that is particularly damaging because it can generate a broad backlash against the genuine mathematical theory that it mimics. If the participants in a discussion are committed to science, mathematical theory can encourage a unique clarity and precision in both reasoning and communication. It would be a serious setback for our discipline if economists lose their commitment to careful mathematical reasoning.

I focus on mathiness in growth models because growth is the field I know best, one that gave me a chance to observe closely the behavior I describe. ...

The goal in starting this discussion is to ensure that economics is a science that makes progress toward truth. ... Science is the most important human accomplishment. An investment in science can offer a higher social rate of return than any other a person can make. It would be tragic if economists did not stay current on the periodic maintenance needed to protect our shared norms of science from infection by the norms of politics.

[I cut quite a bit -- see the full post for more.]

Sandwichman said...

Ceteris paribus, mathiness is only the symptom of a deeper, long-standing disconnect between ideology and pretense.

Sandwichman said in reply to anne...

Yep, Syaloch got my drift. When push comes to shove, economists' ideological priors trump. Not that there is anything wrong with having convictions. It's fine to have convictions.

The problem arises with the methodological bobbing and weaving that goes on when the evidence doesn't confirm those convictions. ANY evidence can be made to fit ANY theory if you're willing to play fast and loose enough with weasel words and cherry-picked evidence. Even if somebody proves you wrong, just stonewall and pretend nothing happened.

I'll have to take another look at just what Romer has to say lately about growth theory. Last time I looked, I objected to the absence of "land" [i.e., natural resources] in his canonical 1986 article, "Increasing Returns and Long-Run Growth."

http://ecologicalheadstand.blogspot.ca/2012/10/endogenous-growth-theory-and.html

In my book, one element of "land" is the capacity of the atmosphere to absorb greenhouse gases. They're not making any more atmosphere.

"Growth" is a stock/flow question. The standard analysis equates growing income with growth, which is wrong at a very fundamental systems conceptual level. See the work of Booth-Sweeney and Sterman. If the "outflow" of nature services exceeds the inflow of produced goods and services then there hasn't been growth.

Is Romer up to speed on bathtub dynamics?

mulp said in reply to Roger Gathmann...

Capitalism is required to explain economics just as matter is required to explain nature. And like nature now explains matter as just energy in another state, capital is labor in a different state, and one can produce energy from matter and produce work from capital.

Energy in matter gets locked up and "owned" by individual bits of matter, just as labor locked up in capital is "owned" by an agent of the economy.

Free lunch economists have tried to redefine nature (no human caused climate change) and capitalism: I own a gun which is capital which entitle me to take money from you: your money or your life! The Islamic State qualifies under free lunch economics as capitalists - they have capital they use to make money and take capital which they sell to pay gunman to take more capital. I don't see a fundamental difference between coal mine operators and Islamic State.

anne said...

http://www.counterpunch.org/2015/05/15/how-should-economics-be-taught/

May 15, 2015

Podemos and the Economic Future of Spain
How Should Economics be Taught?
By VINCENT NAVARRO

Interview by students at the Barcelona Graduate School of Economics:

Q. There is little doubt that neoclassical economics has contributed to a very large extent to the study of economics and social sciences. Nevertheless, it seems that this neoclassical school of thought has monopolized the economic syllabus in top Universities around the United States and Europe, leaving alternative economic perspectives ignored.

You suggest in a number of articles that many of the economic policies that are being implemented currently in Europe come from specific power relations within the Eurozone (European Central Bank and the IMF against antiausterity movements in Greece, Spain, etc.). In relation to the study of economics, how does the lack of teaching about institutions and politics in the economic curriculum, as well as the lack of debate against the foundations of neoclassical theories are limiting our understanding of today's economic and political scene?

Navarro: One of the major problems we encounter in the production of economic knowledge is its excessive disciplinary approach. Actually, the academic institutions are usually divided by departments based on disciplines, one of them being economics. The reality that surrounds us, however, cannot be understood following the disciplinary approach. The understanding of our realities, including the economic ones, calls for a multidisciplinary analysis, with the understandings of the historical, political and social forces that shape and determine that reality. In order to understand the current Great Recession, for example, we have to understand how power-class power, race power, gender power, national power-is produced and reproduced through political institutions, as well as social and cultural ones. In other words, we have to comprehend how power relations shape the governance of our societies, including their economies.

The current economics, for the most part, do not do that. They specialize in branches of the tree without understanding, or even less, questioning, the nature of the forest. Moreover, they have given great emphasis to the methods, depoliticizing the realities of the economic phenomenon. Today, modern economics is used as a way of confusing and/or ignoring the political realities that shape the economy. Currently, most of the major economic problems we face are basically political.

You cannot understand, for example, the current crisis in Europe without understanding the decline of labor income, and, thus, of domestic demand; this is the result of the changing power relations-primarily class power relations-that have occurred in the last thirty years. You can also not explain the crisis without understanding the enormous influence of financial capital on the European Central Bank. To try to explain reality by referring to the working of the financial markets as a point of departure is profoundly wrong and naïve. Financial markets have very little to do with markets. It was enough for Mario Draghi, the President of the European Central Bank, to speak a sentence, to reduce the interest rates dramatically.

The absence of the study of the political and social context, determined historically, makes current economics an apologetic message for current power relations, mystifying, hiding, and/or confusing the understanding of the economic phenomena. It is not surprising, therefore, that the critical traditions within economies are completely ignored or marginalized. It is predictable that current economists did not perceive the arrival of the current recession, which is a Great Depression for millions of Europeans. Only analysts from critical traditions were able to predict it. And we did it....


Vincent Navarro is professor of Public and Social Policy in The John Hopkins University USA and the Pompeu Fabra University Catalonia, Spain and also the Director of the JHU-UPF Public Policy Center in Barcelona, Spain.

mulp said in reply to anne...

"You cannot understand, for example, the current crisis in Europe without understanding the decline of labor income, and, thus, of domestic demand; this is the result of the changing power relations-primarily class power relations-that have occurred in the last thirty years."

So, Navarro is saying that the class power struggle has been about reducing GDP.

Presumably the people with the power, the corporations, want lower and lower GDP.

And conversely, the masses are blindly seeking exponential growth in GDP.

For this to be false, the Navarro is a free lunch economist in believing that it is rational to believe that slashing wages will lead to higher GDP growth instead of sharp decline in GDP.

From "You cannot understand, for example, the current crisis in Europe without understanding the decline of labor income, and, thus, of domestic demand..." it is clear that profits are causing recession and economics must return to the 60s when economists called profits a sign the economy want inefficient, not working, reducing welfare.

Why U.S. Economic 'Statistics' Get More and More Absurd

April 7, 2015 | InvestingChannel/Zero Hedge

..........Written by Jeff Nielson (click for original)

Many recent commentaries have noted a distinct devolution in the numerical lies which the U.S. government calls its "economic statistics". Numbers which used to be mere exaggerations (i.e. used to somewhat mirror the real world) have now become literally perverse: opposite to reality.

As U.S. "retail sales" collapsed at the end of last year (and now into this year) with a string of negative numbers, we're told that somehow U.S. "consumer spending" surged by 4.3% in the fourth quarter of 2014, something which is mathematically impossible, since the two numbers must mirror each other.

With the U.S. economy showing even more obvious weakness than in previous years of this fantasy "recovery", we're supposed to believe that the U.S. economy just enjoyed its strongest quarters of growth in well over a decade. The economic lies are not merely far-fetched, they are totally ludicrous.

This begs the question, why pervert these "statistics" to such silly extremes? The answer will come immediately to readers the moment they turn on their business news, and hear about yet more "record highs" in the U.S.'s bubble-markets.

At this point, it's necessary to turn the attention of readers to the themes of two previous commentaries which are of particular significance. The first commentary concerns the method by which all our markets are marched up and down like yo-yo's, in near-perfect synchronicity – something which is absolutely/mathematically impossible in legitimate markets. Indeed, even in "rigged" markets there is only one means by which these markets can be led-by-the-nose, ever hour of every day: via a computerized Pied Piper.

The second commentary of note concerns the most likely time these bubble-markets will be torpedoed, allowing the sheep to be fleeced, and allowing Warren Buffett to 'invest' his hoard of money, which is now well in excess of $60 billion. Even in the Wonderland Matrix, no bubbles can be inflated forever. At some point the bubbles must be "popped", or they will simply burst on their own – in an uncontrolled/uncontrollable manner/

[Apr 16, 2015] Bill Black How the "Super Crunchers" Became the "Super Torturers" of Finance Data

"...the financial crisis has demonstrated that financial CEOs and Super Crunchers have introduced the most characteristic financial traits of Wall Street and the City of London – greed and the desire for a "sure thing" – into our financial models. It is true that the model will "arrive at the same answer before and after lunch" – the answer that enriches the CEO and the Super Torturers. (This is a variant on the old joke that the accountant who gets hired is the one who responds to the question "what's 2 + 2" with the answer "what would you like the answer to be?")
The danger of hidden biases is, of course, exactly what believers in behavioral economics warn about – when it is in their financial interest to do so."
April 16, 2015 | naked capitalism
Yves here. Many of the concerns about Big Data focus on the surveillance apparatus used to collect it, or on the naive modeling approaches, like attributing causality to mere correlations. Here Black addresses an established problem: that of deliberate abuse of models.

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives

Some books have spectacularly bad timing, like Moral Markets: The Critical Role of Values in the Economy, which was published in 2008 as a celebration of market and their nourishment of high ethical values. The book has many interesting chapters and I recommend it, but even lifelong market apologists now refer to the "corrupt culture of banking." Ian Ayres, a brilliant professor of law and economics at Yale, published his book Super Crunchers: Why Thinking-By-Numbers is the New Way To Be Smart to critical acclaim on August 28, 2007. Ayres' book is an ode to how much better decision-making becomes when it is made empirically on the basis of very large data rather than through human judgment. There is a great deal of support in the literature for that thesis, and the result is one of the reasons why behavioral economics has become increasingly dominant. The general idea is that humans bring significant, unexamined biases to our decisions and that systems that rigorously examine the data are superior because they avoid these biases. That general idea continues to have considerable support and I have no personal problem with the general idea.

I write, however, to raise several cautions that arise from the disastrous performance of the Super Crunchers in finance during the financial crisis. Finance quants purported to be the best Super Crunchers in any commercial context. We are examining therefore a series of hundreds of catastrophic failures at our most elite financial institutions by those who claimed to be the best Super Crunchers in existence. (Physicists and the NSA's top Super Crunchers always considered these claims to be laughable, but I will let them express that view.)

This article was prompted by reading a January 1, 2009 article entitled: "Irrational Expectations: How statistical thinking can lead us to better decisions" by "Deloitte University Press." Deloitte, of course, is "talking its book," trying to sell its consultants as Super Crunchers, but the article is lively and worth reading. The authors rightly consider the neoclassical model of decision-making a farce.

If you look at economics textbooks, you will learn that homo economicus can think like Albert Einstein, store as much memory as IBM's Big Blue, and exercise the willpower of Mahatma Gandhi. Really. But the folks that we know are not like that. Real people have trouble with long division if they don't have a calculator, sometimes forget their spouse's birthday, and have a hangover on New Year's Day. They are not homo economicus; they are homo sapiens.

Because they are, ultimately, quants incentivized to be sales guys, they oversell their quant products.

"But unlike a human decision-maker, a predictive model has the ability to optimally combine these and many other factors to efficiently estimate the employee's relative likelihood of leaving. And unlike the human decision-maker, the predictive model will arrive at the same answer before and after lunch, takes virtually no time to draw conclusions, and is not affected by prejudices, pre-conceived ideas or cognitive biases. In short, predictive models can help us better approximate the ideally rational homo economicus."

Here, two of the authors in Moral Markets could have helped protect the Deloitte authors from error. The ringing phrase in Moral Markets is that "homo economicus is a sociopath." The Deloitte authors are businessmen who sell to other businessmen (and a very few women). They apparently think that homo economicus is superior to a human – "ideally rational" and not "affected by prejudices" – or love, empathy, mercy, justice, or Tikkun Olam, but they are in fact describing a sociopath.

I explain that the financial crisis has demonstrated that financial CEOs and Super Crunchers have introduced the most characteristic financial traits of Wall Street and the City of London – greed and the desire for a "sure thing" – into our financial models. It is true that the model will "arrive at the same answer before and after lunch" – the answer that enriches the CEO and the Super Torturers. (This is a variant on the old joke that the accountant who gets hired is the one who responds to the question "what's 2 + 2" with the answer "what would you like the answer to be?")

The danger of hidden biases is, of course, exactly what believers in behavioral economics warn about – when it is in their financial interest to do so. Deloitte's authors illustrate that Super Crunchers are capable of writing odes to behavioral finance on p. 2 and ignoring those odes on the next page and pretending that "predictive models" are not designed by humans to have biases that will aid the humans. Indeed, there is nothing as dangerous as someone who thinks (and tells senior managers) that their "Super Torturer" models are "not affected by prejudices, pre-conceived ideas or cognitive biases."

But the Deloitte authors were still saying things at this point that were not in the heart of my work. Then I hit this passage.

Many of Ayres' examples are valuable in that they encourage one to think creatively about new ways in which predictive analytics can be applied. Everyone knows that credit scores outperform loan officers at assessing mortgage default risk.

The remainder of the paragraph goes on to describe predictive analytics models that the Deloitte authors consider relatively more esoteric, and therefore "creative." The second sentence is treated as a "duh" example – of course "everyone knows" (even your innumerate and nearly illiterate near do well cousin) that "credit scores outperform loan officers at assessing mortgage default risk." Remember that this sentence was published on January 1, 2009 – after the crisis had reached the acute phase. The Deloitte Super Torturer disciples should have been inclined to caution in proclaiming that their financial models "approximate the ideally rational" rather than N. Gregory Mankiw's famous illustration of "Mankiw morality" – "it would be irrational for operators of the savings and loans not to loot." (Another example of the "ideally rational" – the bank CEO as rational looter – made possible and amorally immoral by economic modelling of perfect rationality.)

The Deloitte authors, of course, knew that the financial "predictive analytics" had just produced results that purported to accurately value assets five digits to the right of the decimal point – but failed to come close to the actual values seven digits to the left of the decimal point that the models assigned to large pools of mortgage paper. The models' illusion of precision and objectivity also breeds complacency, creating a deadly mix that breeds recurrent financial crises. The Fed's longtime head of supervision, Richard Spillenkothen, gave an example of this problem in his memorandum to the Financial Crisis Inquiry Commission (FCIC).

Basel II was viewed by its most ardent Fed devotees with a quasi-theological reverence and as a sine qua non for assuring financial stability in an increasingly complex global financial system (p. 16).

Spillenkothen was talking about the Fed's economists in that sentence, but he later makes the point that even skeptical Fed supervisors assumed that the credit rating agencies' models couldn't be systematically producing farcically inflated values.

Supervisors were not naïve enough to believe that external ratings were perfect, and they understood that downgrades were always possible – but going from triple A or super- senior to "junk" status or worthless overnight was simply never given serious consideration (p. 17).

The Deloitte authors have been well trained to see financial catastrophe as a marketing opportunity "in these tumultuous times."

Consumer business: We have helped companies use analytics to better understand their customers and sales patterns. While it is true that some companies make extensive use of their data to segment, target and cross-sell to their customers, we have found that many others use their data only to generate business metrics and fairly stale management reports. The situation is to a surprising degree similar to what we have found in the emerging field of workforce intelligence: the data exist but are not being used to refine decisions rooted in intuition and mental heuristics. Analytics and predictive models can therefore be brought to bear to exploit the resulting market inefficiencies.

Mortgage triage: We are assisting mortgage lenders to use predictive modeling to better identify potentially troubled loans before borrowers fall behind on their payments or default. In these tumultuous times, traditional reactive and subjective loan management methods are proving unsatisfactory. We are helping to bring predictive analytics to bear for mortgage lenders to design proactive loan and credit-line portfolio management strategies. Loans can be saved – and mortgagees can be kept in their homes – by strategically offering mitigation strategies before borrowers default.

(I leave the reality of how lenders and servicers created over 100,000 fraudulent affidavits to conduct foreclosures to the reader to consider.)

Ayres' book gives an example of how bankers "exploit the resulting market inefficiencies" that arise when they can use data "to segment, target, and cross-sell to their customers."

While most consumers now know that the sales price of a car can be negotiated, many do not know that auto lenders such as Ford Motor Credit or GMAC, often given dealers the option of marking up a borrower's interest rate. When a car buyer works with the dealer to arrange financing, the dealer normally sends the buyer's credit information to a potential lender. The lender then responds with a private message to the dealer that offers a "buy rate' – the interest rate at which the lender is willing to lend. Lenders will often pay a dealer – sometimes thousands of dollars – if the dealer can get the consumer to sign a loan at an inflated interest rate. For example, Ford Motor Credit tells a dealer that it was willing to lend Susan money at a 6 percent interest rate, but they would pay the dealership $2,800 if the dealership could get Susan to sign an 11 percent loan. The borrower would never be told ….(p. 143).

Ayres is famous for a study showing that auto dealers gave much worse deals to women and African-Americans. I trust that at this juncture the reader understands that Deloitte's gushing praise for this analytical technique as representing an "ideal" is overstated. These techniques, absent effective regulation, will be used to detect "market inefficiencies" (aka, human weaknesses) and then to "optimally" "exploit" that inefficiency to enrich the bankers at the expense of the "inefficient" humans. As Ayres helped show, the typical American "target[s]" that banks "exploit" are African-Americans, Latinos, and women. But not to worry, the banks are using these techniques to seek to identify and "exploit" each of our weaknesses. As Michael Corleone assured his brother in The Godfather, "It's not personal, it's strictly business." (The context was Michael's plan to commit a double murder.) Various organized criminals, while sociopaths, do have recognized restraints. Those restraints may not be strictly moral, as Don Corleone explains in the movie he avoids the drug trade because joining it would make it harder to corrupt politicians.

Charles Keating, who professed to be a devout Catholic, deliberately targeted widows to exploit through the sale of worthless junk bonds of his insolvent holding company out of Lincoln Savings' branches located near retirement communities. Keating's team figured out that that ultra-clean cut, well-dressed, and polite young men aged 18-20 were ideal to sell this toxic junk (which James Grant aptly labeled the worst security being sold in America) to the widows. This was the first professional job for most of them so they had never been mentored to treat customers properly and they lacked both the experience and expertise to understand that what they were selling was worthless. They were so callow that they sometimes enlisted their relatives to buy the worthless bonds. But they looked great and sounded sincere when they repeated the sales pitches worked out by their seniors. They looked like the grandsons the widows wished they had. The worst banksters represent the sociopaths' sociopath.

As for the glories of cross-selling, by the time Deloitte wrote its ode to maximizing cross-selling the practice was infamous in the UK banks. UK banks cross-sold grotesquely improper products to their borrowers to an extent that is astonishing even if you have my background and interests in elite bank fraud. Here are the primary takeaways that even regulators appointed by the Tories emphasize about the scam. (The UK authorities religiously avoid using the "f" word to describe the bank abuses, even when they were clearly fraudulent.)

In sum, the paramount business strategy of the massive UK bank (and many smaller ones) was to systematically and repeatedly rip off their customers. The banks' compensation systems and informal and formal forms of discipline forced employees to rip off their customers on a daily basis. One strategy was to force an employee whose ethical restraints caused her to "fail" to cross-sell to keep a cabbage (signifying in the UK a dumb, useless person) on her desk until she joined in ripping-off customers. The purpose was to humiliate the employee and force her either to act unethically or resign.

Models Can Be Crafted to Aid Fraud

And then there is the, vastly larger, home lending analog to Ayres' example of how auto dealers and lenders corruptly conspire to rip off their customers. Ayres, of course, is not supporting the auto dealers and lenders' conspiracy to rip off the customers. But he is not immune to the lies they tell. Consider how Ayres phrased the matter: "When a car buyer works with the dealer to arrange financing," That is the exact phrase that the dealer uses to deceive his or her customer – "I'll work with you." As Ayres explains, however, this is a cynical lie. The dealer is working against, rather than "with" the customer. The lender bribes the dealer to deceive and "exploit" the customer.

Precisely this same scam was used by fraudulent lenders to corrupt loan brokers by creating intense, perverse incentives for the broker to do five things. The bribe from the lender to the broker was called the "yield spread premium" (YSP). The lenders' controlling officers intended the bribe to create five perverse incentives among mortgage brokers.

  1. Hustle relentlessly to find induce people, to buy a home and arrange a loan through the broker regardless of whether the borrower could afford to repay the loan.
  2. Induce them to take out a liar's loan, so that the borrower would have to pay a higher interest rate
  3. Induce the broker to inflate the borrower's income to make the loan look prudent
  4. Induce the broker to extort the appraiser to inflate the appraised value of the home in order to make the loan look prudent
  5. Induce the broker to charge the borrower a materially higher interest rate.

In fairness to real estate brokers, the fact that they have been bribed was actually typically disclosed due to federal mortgage disclosure requirements. However, only someone sophisticated in real estate would understand that the disclosure indicated that the customer had been ripped off. Most borrowers relied on their broker to direct them on how to fill out the forms and what the RESPA disclosures meant. Brokers had powerful incentives not to disclose that "this YSP figure here means the lender bribed me and my brokerage firm to induce you to pay an excessive interest rate."

Krystofiak Tries to Save America (and the Fed) and Shows How the Models Torture Facts

All of this would have been clear to the Fed (which had unique authority under HOEPA – since 1994 – to ban all liar's loans), Ayres, the Deloitte authors, and Attorney General Eric Holder had they ever read Steven Krystofiak's 2006 testimony to the Fed about liar's loans. Here is how his written statement began:

"My name is Steven Krystofiak, President of the Mortgage Brokers Association for Responsible Lending. The MBARL is an advocacy group protecting consumers and the loan industry from outlandish and counter-productive loan programs. Currently we see stated income and stated asset loans as the largest problem in the real estate industry."

Krystofiak was trying to save the Nation. He went to the regional Fed hearing (mandated by Congress) as an uninvited participant. He was given a few minutes to speak and asked no questions by the Fed. All the quotes here are from his written statement to the Fed. The Mortgage Bankers Association (MBA) chose as its spokesperson at the hearing (who was invited – and praised lavishly by the clueless Fed Governor) – a senior officer from one of the largest specialty lenders of fraudulent "liar's" loans. Note that the MBA chose this S&L, IndyMac, to provide its official spokesperson on the issue of liar's loans to the Fed. In 2006, reporting on Krystofiak's study, the MBA's own anti-fraud experts (MARI) warned every member of the MBA in writing that the loans were 90% fraudulent.

Krystofiak's got right to the point. His next statement was:

"A stated income loan is a loan where the income that is put on a home loan application is not verified at all by the banks. The banks simply take your word for it. Home buyers might be unaware of the fraudulent income that is being stated on the loan application because the loan officer, or bank representative have the power to falsify the income on the application."

While Krysofiak did not use the famous industry phrase that "a rolling loan gathers no loss" he explained the concept to the Fed.

"This cycle is the reason why currently there is a small default rate on stated income loans. Once appreciation goes flat the cycle of "cashing out" [mortgages through refinancing] will no longer keep default rates low. Stated income loans need to stop now before thousands of new home buyers buy property that they cannot afford."

Krystofiak then demonstrated that the banks were "accounting control frauds."

"3. Fraud is encouraged by the banks

A large problem as to why these loans have become so prevalent is because the first line of defense against stated income loan fraud are individuals who are commission based; the loan originator, the bank representative, and in many cases the managers for the bank reps have a large portion of their income derived from bonuses based on loan production. Bank employees, i.e. underwriters and bank processors, return applications back to mortgage brokers with instructions to send back an application with a higher stated income. The mortgage industry has become comfortable with stating incomes higher on loan applications."

It is, of course, the bank's and loan brokerage's controlling officers who shaped there perverse incentives and continued them even as they received myriad reports of endemic fraud.

Krystofiak then explained the reality of the "ideal" model that Deloitte claimed "arrive at the same answer before and after lunch, takes virtually no time to draw conclusions, and is not affected by prejudices, pre-conceived ideas or cognitive biases …." Well, that's true if (a) no one devises the model to game it, (b) no one changes the model to game it, and (c) no one changes the inputs. Krystofiak implicitly addressed the first two points by explaining that the values were Super Tortured by the lenders' agents to inflate values and the losses were hidden by refinancing. He now explained how inputs were gamed – and that the models were designed to allow them to be repeatedly gamed.

"Online underwriting systems that are used by Fannie Mae and some banks are being exploited by bank representatives and loan officers wanting to obtain a loan with stated income underwriting standards but with fully documented interest rates. The systems allow mortgage brokers to "play" with different incomes more than 15 times until they get the results they want."

The reality is that the answer varied up to 15 times – because the model was designed to be gamed.

Krystofiak realized something that economists did not recognize (or pretended not to) about the interconnection between the rise in liar's loans, the hyper-inflation of the real estate bubble, and the delayed recognition of massive losses on the pervasively fraudulent liar's loans. One must imagine the Fed economists choking as a young mortgage broker dared to explain real estate economics and reality to them. He also introduces the role of more sophisticated real estate speculators.

"6. Stated income loans are why home prices have skyrocketed. They have caused a large demand in the US housing supply.

Many economists are currently unaware of how prevalent stated income loans are. They attribute high home prices to low interest rates, low to zero percent down payments, speculative purchasing, and interest only loans. What economist[s] fail to realize is that popular stated income loans are what have led have home prices to skyrocket in recent years. Traditionally banks told consumers how much money their maximum monthly payment could be, based on their income and outstanding debts. With stated income loans the consumer is in the driver's seat to tell the bank how much they want to spend every month on their home payments. This is dangerous and unproven over time and is the reason [housing prices] have doubled while the median incomes in the respective areas have remained relatively flat since 2001. Loose underwriting guidelines caused by stated income loans have allowed individuals to speculate on 3, 4, and in some cases over 5 homes at once.

Homes have a unique situation where demand is directly related to whether or not someone can receive a loan from a bank or lender. With banks loosening their guidelines for the home buying process we have experienced a huge surge in demand for homes over the past few years."

Krystofiak added the fact that appraisal fraud was endemic – and created overwhelmingly by lenders and reiterated the FBI's warnings about mortgage fraud. He then made two points – the Fed needed to stop liar's loans now – and if they failed to do so it would blow up in their faces. To do so, he resurrected the lead data he had buried.

"13. Stated income loans must stop now

Stated income loans might be more convenient for a small portion of the home buying population, but it is a sleeping plague on the financial integrity for the rest of us. Federal regulators must end stated income loans now. Greed by mortgage brokers, banks, and real estate developers must not be encouraged by keeping this issue unaddressed and silent. Stated income loans are being used fraudulently in alarmingly high rates and are hurting consumers. If federal regulators don't act on this now, they will be dealing with the consequences of their lack of actions later.

Data Collected by the Mortgage Brokers Association for Responsible Lending

58. A recent sample of 100 stated income loans which were compared to IRS records (which is allowed through IRS forms 4506, but hardly done) found that 90% of the income was exaggerated by 5% or more. MORE DISTURBINGLY, ALMOST 60% OF THE STATED AMOUNTS WERE EXAGGERATED BY MORE THAN 50%. These results suggest that the stated income loans deserves the nickname used by many in the industry, the 'liar's loan' (emphasis in original). "

Note that the Fed could have ordered the lenders it regulated (including those it regulates as part of holding companies) to conduct the Krystofiak test at their institutions because nearly all borrowers signed the 4506-T form to get their loans. For obvious reasons, people rarely deliberately inflate the income they report to the IRS. Form 4506-T allows the bank to get a "transcript" of the borrower's tax return, allowing an easy, inexpensive, and highly accurate means of preventing the inflation of the borrower's income in a loan application. Lenders making liar's loans, however, virtually never used their ability pursuant to the 4506-T to obtain the transcript of the borrower's tax return and verify the borrower's income. Doing so would have inhibited their fraud schemes.

The Fed and Folly of the Models

The Fed's ignoring of Krystofiak's warnings was nonsensical but consistent. If the Fed's senior leadership were to admit that liar's loans were pervasively fraudulent it would have no choice but to recognize an imminent economic catastrophe. Here is what the Fed leadership knew (no later than 2005) about the extraordinary (and growing) prevalence of liar's loans at the largest banks.

Sabeth Siddique, the assistant director for credit risk in the Division of Banking Supervision and Regulation at the Federal Reserve Board, was charged with investigating how broadly loan patterns were changing. He took the questions directly to large banks in 2005 and asked them how many of which kinds of loans they were making. Siddique found the information he received "very alarming," he told the Commission. In fact, nontraditional loans made up 59 percent of originations at Countrywide, 58 percent at Wells Fargo, 51 at National City, 31% at Washington Mutual, 26.5% at CitiFinancial, and 28.3% at Bank of America. Moreover, the banks expected that their originations of nontraditional loans would rise by 17% in 2005 to 608.5 billion. The review also noted the "slowly deteriorating quality of loans due to loosening underwriting standards." In addition, it found that two-thirds of the nontraditional loans made by the banks in 2003 had been of the stated-income, minimal documentation variety known as liar loans, which had a particularly great likelihood of going sour.

The reaction to Siddique's briefing was mixed. Federal Reserve Governor Bies recalled the response by the Fed governors and regional board directors as divided from the beginning. "Some people on the board and regional presidents . . . just wanted to come to a different answer. So they did ignore it, or the full thrust of it," she told the Commission.

Within the Fed, the debate grew heated and emotional, Siddique recalled. "It got very personal," he told the Commission. The ideological turf war lasted more than a year, while the number of nontraditional loans kept growing…. (FCIC 2011: 20-21).

Yes, that was the Fed under Alan Greenspan and Ben Bernanke. They had all kinds of models telling them everything was wonderful. The models produce faux data that is massively inflated. Then they had actual data, interpreted by experienced examiners and supervisors that caused them to warn that a disaster was coming. Guess which source Greenspan and Bernanke chose to rely on and which it chose to assault the messenger?

In my most recent article I cited portions of Richard Spillenkothen's written memorandum to the FCIC about the Fed's economists' insane efforts to virtually eliminate capital requirements for the largest banks through their Basel II (Super Cruncher) models. I was responding to a Cato author's claim that Basel II demonstrates the insanity of regulation. I made the point that the problem with the Fed was that its key economics decision-makers shared Cato's key anti-regulatory dogmas. I did not quote this portion of Spillenkothen's explanation that discusses both the Fed economists' dogma and their faith-based models.

"Over the last 15 years, professional economists have played an increasingly important role in the Fed's supervision function – with respect to both policy formation and program execution – and it seems clear that this role will expand further in the years ahead.

[Fed] economists' overarching intellectual commitment to the ideal of efficient and self-correcting markets, abiding faith in counterparty and market discipline, inherent skepticism of supervision and regulation, and penchant for solutions based on complex modeling or arcane quantitative risk measurement methodologies were significant contributing factors to some of the major regulatory policy errors since the mid 1990s.

Going forward, it will be important to structure and manage supervision in a way that garners the important benefits of economists' perspectives, techniques, and expertise – without diluting the quality of hands-on, micro-prudential financial oversight; without basing policies on philosophical aspirations or theoretical constructs at odds with the realities of risk management or the lessons of history; and without diverting supervisory resources from critical safety and soundness priorities" (p. 29).

Bank and S&L examiners have repeatedly proved their ability to outperform the models – to identify the frauds while the models' results are still praising the frauds. George Akerlof and Paul Romer emphasized this point in their famous 1993 article on "looting."

"The S&L crisis, however, was also caused by misunderstanding. Neither the public nor economists foresaw that the regulations of the 1980s were bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself" (Akerlof & Romer 1993: 60).

Spillenkothen makes a related point.

"[S]upervisors, economists, and researchers have spent decades trying to develop improved surveillance tools, early warning systems, and better predictors of future bank performance. During my career, the evidence suggested that surveillance tools, even those that incorporated market information, were useful in reflecting a bank's current condition; but were not necessarily good predictors of future performance. And experience also suggested that examination findings and supervisory judgments consistently identified problems before they were reflected in market indices, which tended to be lagging indicators.

Earlier this decade, in connection with an effort to explore ways to make greater use of public information in the supervision process, an attempt was made to find examples of where the market identified problems before they were noted in supervisory examinations. To the best of my recollection, no examples were found" (p. 22).

Remember, this study included Fed economists devoted to the dogma that regulators are useless and private market discipline is elegant, reliable, and robust – yet they could find no examples of their dogma having any basis in reality. The Fed economists, of course, did not abandon their dogmas in response to reality.

Human Underwriters Were Mighty Good When They Had Honest Leaders

Deloitte's assertion, without benefit of argument or citation, that: "Everyone knows that credit scores outperform loan officers at assessing mortgage default risk" is not true because I don't know any such thing. I will simply note in passing that two significant problems demonstrated during the crisis were that credit scores can be gamed and falsely attributed to the wrong person. Empirical studies confirm a suspicious pattern with undue numbers of credit scores just above the cutoffs used by many lenders.

The point I emphasize here is that while a credit score is useful and underwriters' review them, a credit score inherently cannot evaluate one of the "C's" essential to successful underwriting – the borrower's "capacity" to repay the loan. This was precisely the problem with liar's loans, because they did not verify the borrower's income and were pervasively fraudulent as Krystofiak warned the Fed and the Nation. Further, the fact that "a rolling loan gathers no loss" means as Krystofiak explained that the tests that purport to prove that relying on the credit score provides a superior default prediction to also evaluating "capacity" are unreliable for the reasons Krystofiak explained. This is why models proved so embarrassing in massively understating the losses inherent from liar's loans. It also explains why our (Office of Thrift Supervision – West Region) examiners' conclusions in 1990 that liar's loans should be banned that led us to begin driving out of the S&L industry in 1991 were so superior to the banksters' claims that they could rely on high credit scores to "compensate" for failing to verify the borrower's actual income. What we actually know is that relying on credit scores to make liar's loans is vastly worse than relying on honest, competent underwriters.

For example, Countrywide had a Super Cruncher model (that did not rely fully on credit scores). One could argue that it performed in a way that was superior to Countrywide's loan officers for the model called for the rejection of hundreds of thousands of loans (most of them terrible) that were actually approved by humans as "exceptions." But the comparison is not reliable. The model was a Potemkin model designed (at least from the perspective of Countrywide's controlling managers) to fool the regulators and other outsiders. Exceptions were endemic because Countrywide was following the accounting control fraud recipe and it is essential that the leaders gut the underwriting function and suborn the controls. The comparison of model v. human becomes nonsensical in such situations because the models are (to stay with my Russian theme) a Maskirovka designed to hide the truth. The humans running the fraud will insure that the models fail or are ignored.

How good were human underwriters when they did not suffer from the perverse incentives created by their fraudulent bosses? Exceptionally good is the answer. Vastly better than the performance of the models about the liar's loans – even if those models had not been ignored when they called for loan rejection. I note for purposes of potential bias that I was once an active member of the Federal Home Loan Bank of San Francisco's (FHLBSF) credit committee. Before Fannie was privatized, and before Freddie was created, Fannie created a national system of high quality underwriting.

A study by the FHLB Chicago examined charge-offs on mortgage loans made by FHLB Chicago thrifts and Fannie and Freddie in this earlier era. Figures 2 (Fannie and Freddie: 1975-1998) & 3 (the FHLBs: 1994-1998) on p. 33 are the keys. The average annual loss at Fannie and Freddie for this 23 year period was 5 basis points (0.05%). The most extreme loss for the entire 24-year period was 16 basis points.

The FHLB Chicago thrifts' average annual loss from (1994-1998) was 3 basis points. The FHLB thrifts were relatively small and were particularly unlikely to have fancy models. Humans can be taught, particularly in a well-run bank with effective internal controls and honest managers, to make conventional home loans that will rarely default.

Fraud Epidemics and Models that Rely on Distributions

What we should have learned from the crisis is a number of cautions about financial models. I'll leave the non-ergodic nature of the data feeding the models to the quants and concentrate on an understandable, critical point. There is no fixed distribution of bad events in business. One of the most important reasons this is true is control fraud epidemics. This is the importance of the concept of a "criminogenic environment." If the incentives are sufficiently perverse, such frauds can become epidemic, particularly if they create "Gresham's" dynamics in which bad ethics drives good ethics out of the markets and professions.

Here is the Free Dictionary's example of a symmetrical distribution. It illustrates a situation in which most of the distribution (say of the height of 15 year-old females) is clustered fairly close to the average (mean) height. To either extreme side are the "thin" "tails" of the distribution – a small percentage of females at age 15 are above 6'5" or below 4'8." In finance, it is usually the tail that kills your company. This would be the very unlikely event that caused extreme losses.

wb1

A static distribution is not obviously insane for a characteristic like height, though if one examines the substantial increases in average height in regions within countries in Asia that have been most effective in reducing childhood malnutrition it would be clear that the distribution of height is dynamic rather than fixed (static). Many forms of crime, including accounting control fraud are extremely dynamic. We understand this in the street crime context. If we leave a nice car in a "bad neighborhood" unlocked with the key in the ignition and park it far from any street lights the chances of it being stolen go up enormously. If you go out drinking in seedy bar in a "bad neighborhood," brag about how much money you have, flash a fat bankroll, get drunk, stagger out the door and walk into a dark alley the chances of getting robbed go up dramatically.

If accounting control fraud becomes epidemic the likelihood of a bubble hyper-inflating (absent vigorous regulatory intervention) goes up greatly. Because "a rolling loan gathers no loss" the loss recognition will be greatly delayed as long as the bubble expands. Models that rely on recent performance will seriously understate risk (and in finance that means overstate market values). The three "sure things" of accounting control fraud include "severe losses." All financial bubbles end and when they end the fraudulent loans can no longer be hidden by refinancing. Extreme losses in these circumstances are not improbable, but virtually certain. (In jargon, there is no true exogenous distribution of accounting control fraud. Our public policies determine the likelihood of an epidemic of accounting control fraud developing and hyper-inflating a bubble.

Conclusion

The finance models tend to be lagging indicators of crises. Indeed, they are so bad and so biased that they contribute to causing the crises. As I have explained in prior articles, standard econometric studies are criminogenic if there is an epidemic of accounting control fraud because the studies rely on reported profits or stock prices (which are heavily affected by reported profits). Economists consistently recommended policies on the basis of such econometric studies that produced disastrous results. In a regression analysis, whatever policies most aid accounting control fraud will show the most powerful correlation with higher reported profits.

Examiners have a far better track record of being the first to warn of developing systemic risks. Naturally, our response to the crisis was to put economists, and their models, in charge of identifying systemic financial risk. Economists and their models are expert at creating severe systemic risk and impeding regulators from stopping such risks.

Bernanke put one of the Fed's most anti-regulatory, failed economists in charge of Fed supervision to ensure that Fed supervision would be further degraded. In a very funny line for an agency utterly dominated by anti-regulatory economists in which Spillenkothen was the only seriously different voice that Greenspan and Bernanke heard, Bernanke claimed that appointing an economist with no supervisory experience the head of Fed supervision was a great leap forward because it would make supervision multi-disciplinary. Instead, as Bernanke intended, appointing an anti-regulatory economist as the Fed's top supervisor removed the only major source of multi-disciplinary thought among the Fed's senior staff.

[Apr 12, 2015] The American Consumer Will Never Be Back

Under neoliberalism most Americans became debt slaves ("What is normal for many everyday Americans is crippling debt levels, and no such thing is recognized in these theories. ")...
Quote: " I decided to look up how the US personal savings rate is calculated. Turns out, it's another one of those whacky goal-seeked government numbers. At least, that's what I make of it. Mainly, though not even exclusively, because of things like this, from a site called Take A Smart Step: "[The personal savings rate in] November 2012 was 3.6%, this is not even close to where we need to be for financial health. This savings rate barely gives us enough to handle emergencies, and makes us as a nation weaker. The government calculates the personal savings rate as the difference between the after tax income and consumption of Americans. So they include not only retirement savings, but debt repayments, college savings, emergency fund savings, anything that was not spent. " "
Apr 11, 2015 | Zero Hedge

Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

That title may be a bit much, granted, because never is a very long time. I might instead have said "The American Consumer Won't Be Back For A Very Long Time". Still, I simply don't see any time in the future that would see Americans start spending again at a rate anywhere near what would be required for an economic recovery. Looks pretty infinity and beyond to me.

However, that is by no means a generally accepted point of view in the financial press. There's reality, and then there's whatever it is they're smoking, and never the twain shall meet. Admittedly, my title may be a bit provocative, but in my view not nearly as provocative, if not offensive, as Peter Coy's at Bloomberg, who named his latest effort "US Consumers Will Open Their Wallets Soon Enough".

I know, sometimes they make it just too easy to whackamole 'em down and into the ground. But even then, these issues must be addressed time and again until people begin to understand, and quit making the wrong decisions for the wrong reasons. People have a right to know what's truly happening to their lives, and their societies. And they're not nearly getting enough of it through the 'official' press. So here goes nothing:

US Consumers Will Open Their Wallets Soon Enough

People are constantly exhorted to save, but as soon as they do, economists pop up to complain they aren't spending enough to keep the economy growing. A new blogger named Ben Bernanke wrote on April 1 that there's still a "global savings glut." Two days later the Bureau of Labor Statistics announced the weakest job growth since 2013, which economists quickly attributed to soft consumer spending.

The first problem with Coy's thesis is that even if people open their wallets, far too many of them will find there's nothing there. And Bernanke simply doesn't understand what savings are. His ideas through the past decade+ about a Chinese savings glut were always way off the mark, and his global – or American – savings glut theory is, if possible, even more wrong. In the minds of the world's Bernankes, there's no such thing as people opening their wallets to find them empty. If they don't spend, they must be saving. That there's a third option, that of not having any dollars to spend, is for all intents and purposes ignored.

The U.S. personal savings rate-5.8% in February-is the highest since 2012. "After years of spending as if there were no tomorrow, consumers are now saving like there is a tomorrow," Richard Moody, chief economist at Regions Financial, wrote to clients in March. Saving too much really can be a problem when spending is weak.

The little man inside, when I read things like that, tells me this is nonsense. So I decided to look up how the US personal savings rate is calculated. Turns out, it's another one of those whacky goal-seeked government numbers. At least, that's what I make of it. Mainly, though not even exclusively, because of things like this, from a site called Take A Smart Step:

[The personal savings rate in] November 2012 was 3.6%, this is not even close to where we need to be for financial health. This savings rate barely gives us enough to handle emergencies, and makes us as a nation weaker. The government calculates the personal savings rate as the difference between the after tax income and consumption of Americans. So they include not only retirement savings, but debt repayments, college savings, emergency fund savings, anything that was not spent.

Making paying off your debt (i.e. money you've already spent) count towards your savings is a practice fraught with questionable consequences. But useful for economists, and accountants alike, no doubt. The problem with it is that it hides reality behind a veil. Because debt repayments are not really savings at all; people are not free to spend what they put into paying off debt, on something else, like iPads, cars or trinkets. Not even on hookers or crack cocaine, for that matter.

For the vast majority of what is paid off in debt, there's no such thing as free choices. People pay off debt because they must. Or, to look at it from another, wide lens, angle, Americans would have to stop servicing their debt payments if they want to 'start spending' again.

Going through the numbers from various sources, I can see that the US personal savings rate is presently some 5.8% of pre-tax income, and debt repayment is close to 10% of disposable -after tax – income. I'm still trying to make those stats rhyme. But no matter how you read and interpret them, it should be clear that debt repayments are a large part of 'official' savings. Even if they really shouldn't be counted as such.

Of what remains in real savings, retirement/pension savings must necessarily be a substantial percentage, and it would be weird to call those things 'saving like there is a tomorrow', if only because they are about, well, tomorrow. But that seems to be the new normal: creating the impression that saving any money at all is somehow detrimental to the economy. A truly crazy notion, if you ask me. Let's get back to Bloomberg's Coy:

There are only two things you can do with a dollar, after all: spend it or save it. If you spend it, great-that's money in someone else's pocket.

In someone else's pocket, but no longer in yours. Why would that be so great? It's only great if that someone has added value to something by doing productive work, not if you simply swap paper assets.

If you save it, the financial system is supposed to recycle your dollar into productive investment with loans for new houses, factories, software, and research and development.

That notion of 'the financial system is supposed to' refers to theories such as those that Bernanke and his ilk 'believe' in. Theories that have no practical value. What is normal for many everyday Americans is crippling debt levels, and no such thing is recognized in these theories. After all, according to them, whatever amount of dollars you get in, you either spend or save them. And if you use them to pay off previously incurred debt, you're supposedly actually saving, even though you no longer have possession of the money in any way, shape or sense, nor a choice of what to spend it on.

But if no one's in the mood to invest more and interest rates are already as low as they can go (as they are in much of the world), the compulsion to save can sap demand and throw people out of work. For the U.S. economy, the good news is that the jump in the personal savings rate is probably no more than a blip. Three economists from Deutsche Bank Securities in New York explained why in a March 25 report called 'U.S. Consumers: Still Shopping, Not Dropping'. While noting a "deceleration" in consumer spending, they wrote, "we think that concerns about the outlook for the consumer are overstated." Their model of the U.S. economy predicts the savings rate will fall to 3% to 3.5% by 2017.

Oh sweet lord. Now a falling savings rate has become a beneficial thing, even when and where savings are very low. Not saving will allegedly save the economy. How did that happen? If we may presume that debt repayments will continue virtually unabated, and there seems to be little reason to think otherwise, this means that by 2017 there will be just about nothing saved at all anymore in America. Which means there'd be very little left of the 'If you save it, the financial system is supposed to recycle your dollar into productive investment'.

The only 'growth' perspective America has left is to grow its debt levels continually, continuously and arguably exponentially.

Other economists have also concluded that the spending dropoff is temporary, which is why the slowdown in job growth, to just 126,000 in March, didn't set off many alarm bells. "Consumer spending is starting to look more and more like a coiled spring," says Guy Berger, U.S. economist at RBS Securities. One sign that consumers aren't retrenching: On April 7 the Federal Reserve reported that consumer credit rose $15.5 billion in February, in line with the recent past.

They got deeper into debt, and this is a sign they're not 'retrenching'? A coiled spring? Really?

According to Deutsche Bank Securities, the first reason to think consumers will resume spending is that their incomes are rising. Annual growth in average hourly earnings has averaged about 2% since 2010, which isn't great but does exceed inflation. With more people working as well, aggregate payroll outlays are up 4.9% from the past year, according to Bureau of Labor Statistics data.

The rises in stock and home prices should make consumers more willing to live a little, say the Deutsche Bank authors. They calculate that households' net worth is almost 6.5 times consumers' disposable personal income. That's the highest ratio since before the housing crash.

But that last bit is arguably all due to QE induced asset bubbles. Not an argument the author would make, I know, but nevertheless. Coincidentally, another Bloomberg article published the same day as the one we're delving in here is called:Why Your Wages Could Be Depressed for a Lot Longer Than You Think. Perhaps the respective authors should have a sit down.

No question, the high savings rate depresses spending in the short run. Purchases of durable goods, from cars to couches, remain well below their 60-year average share of GDP. But all that saving helps consumers get their finances in order, which will allow them to satisfy pent-up demand for that sweet new Ford F-150.

No no no: they just paid off part of their debts. How can that possibly mean they'll go out and get a new F-150? In real life, they spent their money instead of saving it. Either way, they don't have it any longer to spend on a F-150. It would mean they need to get into new debt. On top of what they still have left over even AFTER paying down part of it.

Fed data show that financial obligations including debt service, rent, and auto leases are about their lowest in comparison to disposable income since 1981.

Hmm. According to Wikipedia, "Household debt as a % of disposable income rose from 68% in 1980 to a peak of 128% in 2007, prior to dropping to 112% by 2011." It's about 105% today. So that's just a very weird statement. Someone's wrong, very wrong, and I think I know who that would be. Maybe Peter Coy conveniently ignores mortgage payments when he talks about "financial obligations including debt service, rent, and auto leases"?!

When consumers are ready to borrow more, it won't hurt that, according to the Fed's survey of banks' senior loan officers, banks are easing lending standards.

See? That's what I said: they can only spend if they acquire new debt. They're just getting rid of the last batch, and it's going mighty slowly at that. Lest we forget, when debt as a percentage of income falls, that is due to quite an extent to people failing to make any debt payments at all, and losing their homes and cars. This is a dead economic model. This model is pining for the fjords.

These factors add up to an optimistic consumer.

Oh, c'mon. What is that statement based on? That 'sky high' savings rate that is really just poor slobs paying off what they can in debt repayments so they won't get hit with even more fees and fines?

What I think these factors add up to, is a delusional reporter. There is no excess saving. It's ludicrous. As far as people have any money at all, they're using it to pay down their previously incurred debts. And that gets tallied into their savings rate by the government's creative accounting methods. That's all there is to the whole story. But it will, regardless, induce a few more poor souls to sign up for more mortgages and car loans and feel like happy American consumers on their way down into the maelstrom.

It's sad, it really is. Maybe we should first of all stop referring to the American people as 'consumers'. That might help.

[Apr 05, 2015] Sitting On Top Of the World

Apr 02, 2015 | Jesse's Café Américain

Speaking of things that never seem to change, tomorrow we will see the Non-Farm Payrolls report for March. It would not be unusual to see it accompanied by the usual shenanigans, that are often a favored choice for the insiders and plutocrats.

A favorite trick of perception management is to put out a good number, and revise it lower, even sharply so, in the next couple of months, thereby rolling over the material obtained to the more current month, whether it be jobs, or factory orders, or whatever is on display. We saw an example of this today with the Factory Orders.

They do it so regularly that is only remarkable that the mainstream commentators seem to fall for it every time. Thereby we obtain a rolling enthusiasm of improvement, while in the midst of a secular stagnation.

[Jun 19, 2013] The mathematical menace By Martin Hutchinson

Asia Times Online

Far from being tools to increase knowledge and understanding, mathematical models are tools of obfuscation.

The brouhaha about the spreadsheet error in Carmen Reinhart and Kenneth Rogoff's 2010 paper "Growth in a time of debt" brings home an important economic truth. Not that Reinhart and Rogoff were in error; their overall conclusion is clearly true, not to say obvious, and correction of the error in their spreadsheet merely softened the conclusion without invalidating it. However the economic truth is that the invention of computer modeling has for the last 40 years allowed charlatans to peddle spurious models in the service of their political agendas, and policymakers and the general public are all too ready to be fooled by these devices.

The attempt to model mathematically complex scientific and sociological interactions is popularly thought to have begun with the computer model of nuclear interaction used in the 1942-45 Manhattan Project, but the techniques and thought processes involved go back well beyond this. Perhaps the most significant pre-computer use of model theorizing came from Rev Thomas Malthus, who postulated that the increase over time in food supply was arithmetical, that in population geometrical, and therefore population would always outrun the food supply.

The fate of Malthus' theory illustrates both the value and the downside of mathematical modeling. On the one hand, a neat mathematical demonstration can make a theory infinitely plausible to voters and policymakers. (Malthus later became a key advisor to the great Lord Liverpool, helping in the design of the Corn Laws.) On the other hand, outside factors, not contained in the model, can make its conclusions false - in Malthus' case, his otherwise plausible conclusion (which may well turn out prescient in the very long run, if global population is not controlled) was at least for 200 years falsified by the Industrial Revolution, which hugely increased the productivity of agricultural labor and, through crop improvements, agricultural land.

The first misguided economic forecast to use a computer was the Club of Rome's effort in 1971. ("The Limits to Growth" was published in 1972, but the model was showcased in the autumn of 1971, when I attended a presentation thereof.) The presentation described an econometric model of the world economy, including such factors as environmental problems and the possibility of starvation through overpopulation, which was then projected iteratively 40 years forward, to about today.

The Club of Rome made one huge error compared with their climate change successors; they made apocalypse inevitable. Every simulation, including those that were run with completely unrealistic assumptions like an immediate 80% decrease in pollution or resource usage, ended with the collapse of the global economy and eco-system within 40 years. There was thus no expensive program of redemption that we could undertake; whatever we did, however ecological we became, we were doomed anyway. Unsurprisingly, the Club of Rome had little effect on practical politics, even in the 1970s.

Its model was in any case erroneous. When I saw it at the presentation, I realized that the modelers had made the same mistake I had struggled with in Cambridge's first, embryonic computer modeling course six months earlier: they had extrapolated a set of equations containing exponential terms forward through 40 iterations, without taking care of the rounding errors in the simulation (in those days models were limited to six or seven significant figures, owing to constraints on computer capacity).

Pushed 40 times through a simulation containing exponentials, the error terms exploded in size, forcing the graph catastrophically off the page, in one direction or another. (I tried to explain this in the presentation's question period, but without success - bringing the light of truth to a distinguished professor's model and his prejudices simultaneously was beyond me.)

Thus the Club of Rome's multiple, inevitable disasters were purely the result of computer errors. Had they fixed the errors, they might have produced a more plausible (though doubtless still erroneous) result in which simulations where pollution decreased by 80% or population growth stopped failed to produce economic collapse, while only those with "naughty" policies resulted in disaster. For the Club of Rome's backers, that would have been a much more useful outcome, giving them license to nag policymakers for the next decade about the evils of the unconstrained free market.

"Value at risk" had the advantage over the Club of Rome's model that it wasn't faulty in its execution, as far as I know. However its underlying premise was flawed, that financial instruments obey strictly the laws of Gaussian random motion, in particular that their returns have the extremely thin "tails" typical of Gaussian distributions.

When Goldman Sachs chief financial officer David Viniar wailed in August 2007 that he was seeing "25-standard deviation events, day after day" it should have caused everyone using value-at-risk models to bin them, because under Gaussian theory 25-standard deviation days are effectively impossible, being 1 million to 1 against in the entire life of the universe. However, extraordinarily, it was later revealed that JP Morgan was still using value at risk at the time of the London Whale trading fiasco four years later.

Value at risk's prevalence reflects another problem with computer models: their results reflect the prejudices and economic interests of the modelers. In the case of value at risk, traders and mid-level managers want the apparent risk of positions to be minimized to top management and especially to regulators in order that they can take the largest positions possible and thereby maximize their profits and bonuses.

Furthermore, they like a system that undervalues the risk of "exotic" products such as credit default swaps and collateralized debt obligations, as well as highly engineered options positions, because those products are generally more profitable than "vanilla" products such as bonds, futures and interest rate and currency swaps. When banks are "too big to fail", top management's risk/reward profile is aligned with those of their traders, since failure means only a taxpayer bailout. Needless to say, with flawed models such as value at risk available, that situation has an exceptionally unfavorable risk profile for taxpayers.

Global warming models suffered from the problems of both the Club of Growth model and value at risk: they were attempting to describe a poorly understood system with forward extrapolation over a long period, and they were being designed by scientists with both a philosophical and an economic interest in the outcome (since additional global warming fears brought them increased resources).

Professor Michael Mann's notorious "hockey stick curve", for example, was designed to demonstrate that global warming in the 20th century was more extreme than in the entire previous millennium; it suffered both from faulty data and from a skewed algorithm designed to produce a hockey stick curve out of almost anything.

In all three of the above cases, the most surprising factor was the ability of a discredited model to remain salient in the argument as a whole. As a former mathematician, I would naively imagine that faulty mathematics would immediately get my work discredited, and that a model whose underlying assumptions or methodology had been demonstrated to be wrong would be effectively useless.

In practice this appears not to be the case; constructing a faulty mathematical model of something is a useful activity, since even after its faults have been discovered and demonstrated it remains salient in the argument. The reality of course is that few of us are comfortable discussing the arcana of mathematical models, and so continue to be convinced by them even after they have been proved to be erroneous.

In the world of mathematical models, Reinhart and Rogoff were thus mere innocents. Their mistake was both accidental and elementary, and was easily discovered by another researcher with an axe to grind. Then, because their error was so easy to understand, it discredited their model more thoroughly than much more egregious errors discredited the Club of Rome, value at risk and hockey stick models. After all, even after the Reinhart/Rogoff error was corrected, the model continued to show their conclusion to be generally valid, which was not true in the other cases.

The conclusion to be drawn is thus a depressing one. The output from mathematical models depends crucially on the assumptions used to construct them, so even when no error is involved those assumptions color the models' results to reflect the policy preferences or economic interests of their designers.

To take a simple example, gross domestic product (GDP), as designed by Simon Kuznets in 1934, includes government spending at full cost, even when it produces no economically useful output. Thus Maynard Keynes' economic recommendation to cure a recession, of using the unemployed to dig holes and fill them in, is a self-fulfilling prophecy. It will automatically increase GDP because of the definition of GDP, since the useless government spending will be counted as output.

Yet, except for any health benefits for the unemployed forced to spend all day digging holes, no increase in welfare has resulted; indeed welfare has decreased because the government has incurred more debt, the unemployed presumably have other things they'd rather do than dig holes, and some of them might have found self-employment that produced genuine economic output.

In short, mathematical models, far from being tools to increase knowledge and understanding, are tools of obfuscation. They take propositions that would be rejected by intelligent observers based on qualitative reasoning, and add a dense fog of error, producing spurious results that even an intelligent observer cannot easily deconstruct.

Keynesian economics, expensive environmental boondoggles and economically destructive trading activities all rely on mathematical models for their justification. Until we have invented software that can deconstruct other people's models and find their flaws, we should thus disbelieve any proposition that is bolstered by such spurious artifacts.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.

(Republished with permission from PrudentBear.com. Co)

Book Review - Proofiness - By Charles Seife - By STEVEN STROGATZ

September 17, 2010 | NYTimes.com

Charles Seife is steaming mad about all the ways that numbers are being twisted to erode our democracy. We're used to being lied to with words ("I am not a crook"; "I did not have sexual relations with that woman"). But numbers? They're supposed to be cold, hard and objective. Numbers don't lie, and they brook no argument. They're the best kind of facts we have.

Proofiness- The Dark Arts of Mathematical Deception

By Charles Seife

295 pp. Viking. $25.95

And that's precisely why they can be so powerfully, persuasively misleading, as Seife argues in his passionate new book, "Proofiness." Seife, a veteran science writer who teaches journalism at New York University, examines the many ways that people fudge with numbers, sometimes just to sell more moisturizer but also to ruin our economy, rig our elections, convict the innocent and undercount the needy. Many of his stories would be darkly funny if they weren't so infuriating.

Although Seife never says so explicitly, the book's title alludes to "truthiness" - the Word of the Year in 2005, according to the American Dialect Society, which defined it as "the quality of preferring concepts or facts one wishes to be true, rather than concepts or facts known to be true." The term was popularized by Stephen Colbert in the first episode of "The Colbert Report." The numerical cousin of truthiness is proofiness: "the art of using bogus mathematical arguments to prove something that you know in your heart is true - even when it's not."

Seife emphasizes that numbers impress us. They carry authority. Joe McCarthy, for example, didn't simply allege that the government was infested with Communists; he held up a sheaf of papers and claimed it contained the names of 205 members of the Communist Party working in the State Department. The specificity of the accusation made it seem more believable. So what if the number soon went up to 207, then shrank to 57 a day later when McCarthy wrote to President Truman? What mattered is that the numbers intimidated McCarthy's critics. As it turned out, he never had any list and couldn't identify a single Communist working in the State Department. None of that stopped him from rising to national prominence on the back of his numerical lies.

Falsifying numbers is the crudest form of proofiness. Seife lays out a rogues' gallery of more subtle deceptions. "Potemkin numbers" are phony statistics based on erroneous or nonexistent calculations. Justice Antonin Scalia's assertion that only 0.027 percent of convicted felons are wrongly imprisoned was a Potemkin number derived from a prosecutor's back-of-the-envelope estimate; more careful studies suggest the rate might be between 3 and 5 percent.

"Disestimation" involves ascribing too much meaning to a measurement, relative to the uncertainties and errors inherent in it. In the most provocative and detailed part of the book, Seife analyzes the recounting process in the astonishingly close 2008 Minnesota Senate race between Norm Coleman and Al Franken. The winner, he claims, should have been decided by a coin flip; anything else is disestimation, considering that the observed errors in counting the votes were always much larger than the number of votes (roughly 200 to 300) separating the two candidates.

"Comparing apples and oranges" is another perennial favorite. The conservative Blue Dog Democrats indulged in it when they accused the Bush administration of borrowing more money from foreign governments in four years than had all the previous administrations in our nation's history, combined. True enough, but only if one conveniently forgets to correct for inflation.

Seife is evenhanded about exposing the proofiness on both sides of the political aisle, though we all know who's responsible for a vast majority of it: the other side.

He calls Al Gore to task for "cherry-picking" data about global warming. Although Seife doesn't dispute that the warming is real and that human activities are to blame for a sizable portion of it, he chastises Gore for showing terrifying simulations of what would happen to Florida and Louisiana if sea levels were to rise by 20 feet, as could occur if the ice sheets in Greenland or West Antarctica were to melt almost completely. That possibility, while not out of the question, is generally considered an unlikely "very-worst-case" scenario, Seife writes.

Meanwhile, the Bush administration committed a more insidious form of proofiness when it crowed, in 2004, that its tax cuts would save the average family $1,586. This is technically correct, but deliberately misleading - a trick that Seife calls "apple polishing." (Again with the fruit!) The average is the wrong measure to use when a set of numbers contains extreme outliers - in this case, the whopping refunds received by a very few, very wealthy families. In such situations, the average is far from typical. That's why, paradoxical as it might seem, most families received less than $650.

In one of the book's lighter moments, Seife even looks askance at the wholesome folks at Quaker Oats, who in addition to selling a "bland and relatively unappetizing product" once presented a graph that gave the visual impression that their "barely digestible oat fiber" was a "medicinal vacuum cleaner" that would reduce your cholesterol far more than it actually does. For the most part, though, he is deadly serious. A few other recent books have explored how easily we can be deceived - or deceive ourselves - with numbers. But "Proofiness" reveals the truly corrosive effects on a society awash in numerical mendacity. This is more than a math book; it's an eye-opening civics lesson.

Steven Strogatz is a professor of applied mathematics at Cornell and a contributor to the Opinionator blog on NYTimes.com. He is the author, most recently, of "The Calculus of Friendship."

[Sep 10, 2010] Sheehan on Michael Boskin By Frederick Sheehan

Boskin is simply a political operative. In a way, he has never been an economist.
January 19th, 2010 | The Big Picture

pander

Frederick Sheehan is the co-author of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve.

His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.
;

~~~

On January 14, 2010, an academic economist took a rare stance. Tenured professors rarely lift the veil from numbers that governments invent. In "Don't Like the Numbers? Change 'Em," Michael J. Boskin, Ph.D., formerly, an economics professor at Harvard and Yale; formerly, chairman of the Counsel of Economic Advisers in the George H.W. Bush administration; currently, T. M. Friedman Professor of Economics at Stanford University; research associate at the National Bureau of Economic Research; senior fellow at the Hoover Institution; and board member of the Exxon Mobil Corporation, Oracle Corporation and Vodafone PLC (among others), wielded his sword.

The Wall Street Journal devoted a half page to Boskin's list of offenders. Politicians are interfering with the Gross Domestic Product calculations in France and Venezuela. They have toyed with the inflation rate in Argentina. In the U.S., the Obama administration has taken the phony numbers game "to a new level." Here, Boskin is writing of the current adminstration's calculations of jobs "created or saved" from its stimulus bill.

The "created or saved" job calculation is nonsense, but the very last person one would expect to decry the miscarriages is Michael J. Boskin.

In the early 1990s, Senator Patrick Moynihan from New York warned his fellow legislators about rising social security commitments. Then the worm crawled out of his hole, so to speak. Federal Reserve Chairman Alan Greenspan testified before the Senate and House Budget Committee on January 10, 1995. He told the Committee the inflation rate was probably overestimated by 0.5% to 1.5%.

If Greenspan was correct, this was a godsend. Social security payments are increased each year at an inflation rate calculated by the federal government: the change in the Consumer Price Index (CPI). If the CPI could be increased at a lower rate in the future, benefits would rise more slowly, without Congressional action. This would reduce government spending and delight politicians, who knew of the looming crisis in social security but did not want to imperil their careers by reducing benefits, or, in this case, by cutting the rate at which social security benefits were raised each year.

The Boskin Commission was duly formed. Michael Boskin was the right man for the job. He had served as chairman of the President's Council of Economic Advisers (CEA) from 1989 to 1993, a post previously held by such government functionaries as Arthur Burns and Alan Greenspan.

Jumping to the conclusion, the Boskin Commission's Report, as it was known (formally, the "Advisory Commission to Study the Consumer Price Index") found that inflation was overstated by 1.1%. Several recommendations were made by the Commission to the Budget Committee. These were instituted with great efficiency by the Bureau of Labor Statistics.

The changes have lopped off far more than 1.1% in most years since 1997. From the time the changes were instituted through 2008, the compounding of an artificially low Consumer Price Index reduced payments to social security recipients by about half (according to John Williams, author of the newsletter Shadow Government Statistics).

How the CPI calculation was changed is not important here. (Chapter 12 of my book Panderer to Power is devoted to the Boskin Commission.) One adjustment may help to understand Boskin's contribution to the impoverishment of older Americans. "Hedonic adjustments" by government number crunchers substitute imaginary prices for prices actually paid. Hedonic adjustments (purportedly, the "quality improvement" of an item) reduce the CPI. (Hedonic adjustments had been employed before the Boskin Commission, but sparingly. Afterwards, even the prices of textbooks – if they had color graphics – were adjusted for quality.)

Steve Leuthold, founder and chief investment officer of the Leuthold Group, calculated the price of a new car in the U.S. had risen from $6,847 in 1979 to $27,940 in 2004. Using hedonic adjustments, the government calculated the price of a new car had risen from $6,847 in 1979 to $11,708 in 2004.

The Boskin Commission was one scandal that economists actually denounced. Greg Mankiw, chairman of George W. Bush's Council of Economic Advisers from 2001-2003, said at the time "the debate about the CPI was really a political debate about how, and by how much, to cut real entitlements."

Barry Bosworth of the Brookings Institute called the revised CPI an " 'immaculate conception' version of deficit reduction in which spending is cut without Congress taking the blame."

Jack Triplett of the Brookings Institute extended the argument: "What I liked least about the Commission Report was exactly what made it so influential – its guesstimate of 1.1 percentage points of bias….The Commission (and others that have followed) used ad hoc reasoning to come up with a number…."

Jacob Ryten, from the Canadian statistical office, wrote in the same vein: "Without the guesstimates, the Commission Report was just another dry, academic study to be perused by professionals… Conversations with Committee members suggest that some, at least, were ill at ease themselves with guesstimates…. My personal preference is to resist the seductive blandishments of politics and politicians…."

Jack Triplett chided the Report as succumbing "to the lure of political statements in its choice of language to describe the effect of CPI measurement errors on Social Security expenditures…. Professionals at any rate, should understand that improving the accuracy of the CPI is not the same thing as improving the basis for allocation to the dependent population…."

Professionals, at any rate, have seen fit to keep Michael Boskin at the summit after he succumbed to "seductive blandishments of politics and politicians." It cannot be said that Boskin dishonored his profession, since he is still a superstar. Other professions institute bodies such as the American Bar Association and the American Medical Association that take action against negligence.

Federal Reserve Chairman Ben S. Bernanke, another pliant alumnus of the CEA, sits before the Senate claiming there is no inflation in the economy. He uses the CPI as his measure, taking the additional step of removing food and energy costs.

Near the end of his Wall Street Journal effort, Boskin wrote of the Obama job numbers: "One piece of good news: The public isn't believing much of this out-of-control spin." He's probably correct, but spinning the number of jobs "created or saved" has no consequence, other than to increase the public's distrust of government. The distortion of the CPI should have been censured by his profession, if it is that.

Frederick Sheehan is the author of Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession

[Sep 9, 2010] When Economists Collide – Part II The Big Picture What is the composition of "personal consumption" and how big discretionally spending portion

Only 25% of personal consumption is discretionary spending. It is important to understand that personal consumption reflects bloated health care expenses. The other interesting question and what is wealth composition of the consumers (for example what percentage of the total is consumed by top 10% of wealthiest Americans).
The Big Picture

Invictus is a street insider, a long-suffering "lifer" whose close work with Wall Street research teams gives him unique insight into the current strategist spat.

Enjoy:

~~~

It was noted back in October that a feud seemed to be simmering between the former Merrill Lynch Chief North American Economist David Rosenberg (now at Gluskin Sheff) and those who succeeded him, Economist Ethan Harris and Strategist David Bianco (who replaced Rich Bernstein).

Often nuanced in nature and discernible only to those who read the research from both shops, the differences occasionally bubble to the surface, as they have in the past few days. The nub of it, obviously, is that Rosenberg's outlook is decidedly dour, in sharp contrast to his successor(s), who are much more bullish.

So nuke another bag of popcorn, as the gloves appear to be coming off.

In a research note last week, Bianco asserted that it is an "investor misperception" that the consumer (PCE) is really 70% of U.S. GDP:

Personal Consumption Expenditures (PCE) do indeed make up about 70% of US GDP, making total US PCE or household spending about 15% of the global economy and bigger than the entire Chinese economy (Chart 2). How then can the US economy and the rest of the world grow with the US consumer in retrenchment? To answer that, we take a closer look at the composition of PCE.

Only 25% of personal consumption is discretionary spending

What many investors fail to realize is that the majority of PCE is not made up of iPods, handbags and dinners at the local Outback Steakhouse. Instead, about 75% of household spending is non-discretionary in nature, such as housing, healthcare, energy, food eaten at home and other household staples. We think it is worth noting that most of these non-discretionary items are made in the US.

While there is certainly room to reduce non-discretionary spending, the areas of consumer spending feeling the brunt of higher household saving rates are cars, travel, apparel, restaurants and other discretionary items that make up about 25% of PCE, equivalent to 20% of US GDP (Chart 3) or less as many of these nondiscretionary items are imported. 20% of US GDP is still significant, but far less than the 70% figure that makes the headlines. Another figure sure to make the headlines this time of year is retail sales. The contribution to US GDP from retail sales has actually been declining for over ten years. Excluding supermarkets, retail sales are under 40% of total consumption, or about 25% of GDP.

Bianco's piece was referenced in last Saturday's Barron's.

On Monday, Rosenberg was having none of it:

The "Streetwise" column in the current edition of Barron's (It's Still Too Early to Worry Too Much) runs with a series of assertions otherwise dubbed "common misperceptions" - one of them being that the U.S. consumer is really not 70%+ of the economy because "only a quarter of it is truly discretionary."

We'll get back to this in a second, but the fact of the matter is that much of what appears to be non-cyclical is in fact, cyclical (like elective surgery in health care; veal chops in the food category, etc). Second, even if this assertion is correct that 'only' 25% of consumer spending is economic-sensitive, it begs the question as to why that is important in anyone's analysis. Is 25% small? If it is, then what is going to be the driver for the economy going forward; government spending? If 25% is small, then how is it that on average consumer spending manages to generate 300 basis points of growth for the economy coming out of recessions - because they are buying more soap and toothpaste with the other 75%? Maybe that 25% (and that number is not correct but it doesn't matter in any event) is a huge swing factor in recessions and expansions for overall GDP growth. Once again, this is a classic failure to assess the economic shifts at the margin.

Even if consumer discretionary spending is just 25% of the total expenditure pie (and hence 17.5% of GDP), that would still make it the largest cyclical component of the economy - almost double capital spending and exports, just as an example, and almost eight times larger than housing and commercial construction.

Stay tuned. I expect this one's not over by a longshot.

Byno:

This debate is long on bluster and short on rigor.

25% of whom? Is that an average ala Bill Gates and the bar full of firemen? [BR: All US Consumers]

75% of American families make less than 75k/yr according to the census bureau. Furthermore, the BLS tells me that the average American family spends 17k/yr just for housing. In fact, food, transportation, housing and healthcare account for 75% of the average family's annual expenditures. What about insurance and hair cuts and clothing and student loans and cable and 401ks and cell phones etc ad nauseum?

It's not enough that this duel is vapid; it's also lazy research on the authors' parts.

Rob Dawg:

It is over. Rosenberg wins by knockout. At that he is being kind to accept 25% of PCE as being discretionary at face value. As the mortgage lenders and municipalities have learned most painfully the modern consumer seems to treat even debt repayment and taxes as being discretionary. Even healthcare. Our plan changes in January are causing my family to switch from top tier to second tier. Technically between contributions employer+employee we will be paying less thus showing there is elasticity to be found in the 75% Bianco considers a fixed cost. Don't even get me started on cars, washers, other consumer durables.

Mannwich:

@Rob Dawg: My wife and I did the SAME thing with our health plan – we traded down. We're also holding off on several big purchases like a car, refrigerator, oven, and dishwasher (the latter three being very old too, but still functional) for the foreseeable future.

The only thing we did do was replace all of our second floor windows using the $1,500 Energy Star tax credit. Thank you very much, Timmay-bucks.

bsneath:

I'm leaning towards the Rob Dawg conclusion.

I too have reduced a number of "fixed costs" myself, mainly in the insurance, finance, telecom and household services sectors and plan more. It turns out that many fixed costs really are not that fixed.

An interesting read on the real economy is railroad car loadings – chart over at CR. Both total loadings and inter-modal loadings are about 85% of 2007 levels. This indicates to me that the real economy, even with the artificial stimulus measures, is about 85% of what it once was. And once the artificial stuff goes away?????

Transor Z:

First of all, retail ex groceries is moronic.

A lot of what Bianco wants to characterize as non-discretionary are household expenses that are scaled to income. True, consumption of things like oxygen, water, food calories, shelter and heat are non-negotiable below a certain threshold. But that's stupid disingenuous analysis.

As Rosie shorthands it, food scales between Kraft Easy Mac and veal cutlets. Housing choices scale between steam heat-included/ absentee-slumlord/firetrap family of four crammed into 1 BR and less than 1000 sq feet to nicer digs. Energy costs are closely associated with housing choice.

As Manny notes, health care choices are scalable and indeed most large employers offer different choices, scaling from VPI Pet Insurance to blue chip PPO.

Household sundries, same thing: generic vs name-brand. Clothing? Same.

I am so sick and tired of these motherfucking snakes on this motherfucking plane bad-faith analyses that never start with a model household budget.

Bokolis:

I grew up across the street from the PJs, so I know that location and square footage are discretionary, I know the type of shit you buy at the supermarket- to say nothing of whether you choose to clip coupons and pack one of those club cards- is discretionary, and what type of coverage you get, unless mandated, is surely discretionary…to say nothing of whether you rock Canali or Karako suits; True Religion or Levi jeans.

Bianco must have had someone sit in for him in Sociology 101…you know, where they took all those things you thought were natural and showed that they are choices you make based on your indoctrination (I don't know what was said after that because I was in the quad playing soccer for most of the rest of the semester). For that matter, it looks like Bianco was doing the same during his Economics classes. Granted, the way they teach it renders it junk science. But, as Carlito explained, if you can't see the angles no more, you're in trouble.

That said, I've always thought that the average wage slave (not unlike myself…I wasn't just ditching Soc; I was at the track during Poli Sci) is hemmed into about 90% (hence, the slavery) of his expenditures. In my own defense, I save 30% of my take-home (excludes the non-Roth portion of my 401k); I'd overshoot on the other side. But, I am an expense manager, not your average wage slave.

FrancoisT:

Even if consumer discretionary spending is just 25% of the total expenditure pie (and hence 17.5% of GDP), that would still make it the largest cyclical component of the economy - almost double capital spending and exports, just as an example, and almost eight times larger than housing and commercial construction.

By factoring in the relative importance instead of the absolute number, we hereby declare this round a win for Rosie.

J'ai dit!

Mannwich:

I would add the personal spending habits are sticky. People won't change their habits until reality is FORCED upon them (generally), but it's quite surprising to find out just how much one can "do without" or trade down when they really take a good look at one's expenses. Bye bye cable TV, home phone (have a cell now, who needs a home phone), expensive wine and beer, eating out, ballgames, those extras at the grocery store, that new winter coat (the ones in the closet look just fine, thanks), new boots, hats, gloves, scarves, sneakers, yada, yada, yada, the list goes on and on and one.

Understanding Seasonal Adjustments By Barry Ritholtz

October 24th, 2009 | www.ritholtz.com

Following my rant about the putzes at the NAR, a few people asked me to better explain the Seasonality Adjustment issues.

Here goes nuthin:

I certainly understand that we have to do seasonal adjustments. One cannot report that Retail Sales fell 80% in January (for obvious reasons) but most of all, because to do so would be misleading. The sources of data report information to inform the public, media repeats what is said, and we pass along interpretations to make things clearer, to get at an objective truth.

The NAR does the opposite.

Let's look at the specifics of the adjustments this year and see where they went awry.

Whenever we have an outlier year - like Sept 2009 - then we know that seasonally adjusted results will be utterly misleading. That is an issue when we seasonally adjust, as every statistician, economist and number cruncher is well aware. An honest broker of information recognizes that, and reports it the data in a way that is not misleading.

The NAR is no such honest broker (pun intended).

Most people are unfamiliar with what goes into the methodology of Seasonal adjustments, and how they are performed. When people misunderstand statistical methods, it allows folks like the NAR to make major misrepresentations, and get away with their misrepresentations. It is incumbent on the people who are "numerate" - who understand mathematics - to explain it.

There is a mathematical assumption in SA that the annual seasonal changes will occur around the same time each year. There is also a presumption that the month-to-month changes will be approximately equal, or at least of similar magnitude, from season to season. This forms the baseline for the seasonal adjustment.

Hence, when we are discussing EHS, the prior years' monthly August-to-September drops are the basis for making the newest seasonality adjustment.

As Rex pointed out, the past decade of August to September EHS changes were:

This range was 10% to 28.9%. That averages to 17.2% in the typical September. This is the key element in impacting any subsequent seasonal adjustment (different SA methodologies may use differing time periods).

This year, the fall was 5.3%. Hmmm, that was highly aberrational - I wonder why? We (and the NAR) know the reason: Due to ZIRP and the soon to be expiring 1st time home buyers $8,000 Tax credit, the drop was minor – much smaller than it usually is when we go from August to September in EHS.

The tax credit very likely extended t