Reader Vijay pointed us to an op-ed today in the Washington Post by Don Luskin, “Quit Doling Out That Bad-Economy Line.” Some of its priceless wisdom:
Things today just aren’t that bad. Sure, there are trouble spots in the economy, as the government takeover of mortgage giants Fannie Mae and Freddie Mac, and jitters about Wall Street firm Lehman Brothers, amply demonstrate. And unemployment figures are up a bit, too. None of this, however, is cause for depression — or exaggerated Depression comparisons.
Overall, the pessimists are up against an insurmountable reality: In the last reported quarter, the U.S. economy grew at an annual rate of 3.3 percent, adjusted for inflation. That’s virtually the same as the 3.4 percent average growth rate since — yes — the Great Depression.
Luskin blames the negative perception of the economy first and foremost on Obama (no I am not making this up) rather than, say, mounting foreclosures. We are in the midst of the worst one-year decline in household wealth in US history, greater than took place in 1929. But Luskin thinks the citizenry is full of irrational gloomsters.
Vijay also provided a link to an assessment of Luskin’s track record at The Cunning Realist:
I got curious about Luskin’s own record. How’d he do on the subprime crash, one of the most important chapters in the history of financial markets? I took a look at his stuff from the past year to find out (note the dates, which are important). As I explain at the end of the post, there’s a special reason why Luskin’s calls deserve scrutiny:
April 27, 2007: This earnings season is especially sweet for me, and not just because I love to see bloviating blowhard bears on television make fools of themselves. …There virtually can’t be a recession on the horizon. The world is awash in financial liquidity. Anything that goes wrong — like the housing slowdown or the subprime mess — is easily absorbed by the massive amount of money available in the world.
June 29, 2007: Through the end of the year, it’s going to be great for stocks. With no contagion from subprime, and the Fed on the sidelines, there’s nothing to stop the economy from growing a lot faster than “moderately,” which means that corporate earnings are going to keep growing, too. So abstracting from the occasional correction here and there, stock prices should pretty much keep making new all-time highs through the end of the year…
December 28, 2007: Bearish expectations that lending will necessarily contract because of damaged bank capital structures suffer from a fallacy of static analysis…
As long as investors, businesses and consumers have good reasons to keep borrowing, I think that the banking system will continue to be fully able to keep lending.
What is remarkable is Luskin’s refusal to change his view in the face of new information, although in January he did issue a mea culpa.
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3.3% GDP growth, and goldilocks.
This is the republican line. In 200 channels of cable TV, very few pixels are spilled discussing the problems afflicting Wall Street. The populace does not understand this crisis (I often doubt anyone does). Optimism is serving many interests. Obama is not breaking through on this issue. (BTW I am a republican, so this is not meant as cynical).
When one is not concerned with facts, one can avoid
the requirement of changing ones opinion. The famous Keynes quote, “When the facts change, I change my mind, What do you do, sir” does not,
therefore apply.
RE: What is remarkable is Luskin’s refusal to change his view in the face of new information
Unbelievable. But isn’t that the new American virtue, “staying the course”… right into the iceberg.
Comparing the 2nd quarter’s 3.3% GDP growth to the average 3.4% growth rate clocked since the Great Depression is tantamount to comparing apples and oranges, and Luskin should know better.
The 3.3% figure is largely the result of a 13.2% increase in exports, and a diminution in imports.
http://www.npr.org/templates/story/story.php?storyId=94076285
NPR piece on 2Q:08 GDP growth
I sincerely doubt that Luskin does not “know better.” Of course he knows better. He is reciting the party line in order to keep the plutocracy in place.
In a humourous vein, here is last night’s “joint appearance” by Hillary and Sarah Palin (Tina Fey) from Saturday Night Live…
http://tinyurl.com/5qvglu
Matt Dubuque
I believe the technical term for Luskin is asshat.
(and I don’t make a practice of calling people names, but he is willfully stupid.)
Four reasons for at least some caution, if not outright skepticism, about the BEA’s headline 3.3% year-over-year rise in preliminary (i.e. early estimates of) real US GDP for 2Q 2008:
1. The second quarter GDP, sans exports, grew at just 0.2% (up from just 0.1% in 1Q 2008), far below the 3.3% headline number. The domestic economy is stagnant. (This is also noted, in various ways, in at least two comments above.)
2. The 3.3% announced GDP significantly diverges from the Gross Domestic Income (GDP), which “advanced just 1.9% at an annual rate last quarter [2Q 2008] after contracting the two previous quarters. … “In a Fed paper released last year, Fed economist Jeremy Nalewaik wrote that ‘real-time GDI has done a substantially better job recognizing the start of the last several recessions than has real-time GDP.'”
3. The gap between the “price deflator” used to calculate real GDP, and the CPI-U, was the largest in 2Q 2008 since 1990. Essentially, baked into the second quarter real GDP estimate is a measure of inflation that is far lower than consumer price inflation (and far, far lower than the various BLS producer price indexes). Although the GDP price deflator is calculated quite differently than the CPI and the various PPIs, that does leave some room for skepticism that the BEA may be understating the effect of inflation in contributing to growth in real GDP.
(Also recall that John Williams calculates current US CPI at between 9% and 13%, using apples-to-apples techniques last used during the Bush I and Carter Administrations, respectively.)
4. The preliminary 2Q 2008 GDP identified that non-financial corporate profits fell by $37.8 billion, but were offset by profits of financial corporations of $24.7 billion. Did the domestic financial sector throw off any profits during 2Q, much less at that level? If so, does that exclude the multi-billion dollar charge-offs at some of the largest commercial and investment banks?
Some sources:
Gross Domestic Income v. GDP:
http://blogs.wsj.com/economics/2008/08/28/dont-turn-off-recession-siren-yet/
The gap between the GDP price deflator and CPI:
http://econompicdata.blogspot.com/2008/08/gap-between-gdp-deflator-and-cpi-widest.html
(the red line in that chart)
Profits of non-financial and financial companies, citing the BEA GDP release:
http://www.pbn.com/stories/34755.html
An excellent discussion of additional issues and perspectives around the 3.3%’ headline GDP for 2Q 2008:
http://economistsview.typepad.com/economistsview/2008/08/gdp-growth-revi.html
John Williams’ “Shadow Government Statistics” of CPI, GDP, and other measures:
http://www.shadowstats.com