Saturday, December 27, 2014
An Entire YEAR of Incompetent Economic Analysis From Powerline
The guys at Powerline Blog amaze me. Never has a group of individuals been so consistently wrong on the economy, yet continue to write about it as though they have something of substance to say. For example, John Hinderaker was one of the many conservatives who argued that QE and government stimulus would lead to soaring interest rates and rampant inflation. As he wrote in 2009:
I’ve assumed that the profligate spending and borrowing planned by the Democrats in Congress and the White House will run up a debt that we and our children just can’t pay, so, in the time-honored tradition of banana republics, the Obama administration or its successors will inflate our currency and repay its creditors (China, mostly) in devalued dollars. Thus, I’ve been buying gold. I’ve assumed that an actual default by the United States government is unthinkable.
See also here and here. Hinderaker was not alone. A year later, a group of conservative economists signed a letter to the Federal Reserve arguing that QE would lead to inflation, largely using the same logic as Hinderaker. Earlier this year, Bloomberg did an analysis of this prediction and determined that if you had followed their advice, you would have lost $1 trillion dollars. And, now you know why I now refer to Hinderaker as “Trillion Dollar Loss.” His economic incompetence can be quantified with a very large and quite unflattering number that shows the extremely negative ramifications of buying into his analysis.
But, Hinderaker is not alone at Powerline. He shares his blog with several others who, like him, are just as incompetent at basic economic analysis. And their collective posts from 2014 highlight the amazing breadth and depth of economic ignorance. This is not a case two people debating finer points of a particular discipline. Instead, it's a group of people who literally have absolutely not one clue about what they're talking about, yet continuing to do so.
The First Quarter GDP Contraction
US real GDP contracted in the 1Q at a 2.1% annualized pace. Most economists attributed this to the inclement weather. For example, the March Beige Book noted:
Reports from most of the twelve Federal Reserve Districts indicated that economic conditions continued to expand from January to early February. Eight Districts reported improved levels of activity, but in most cases the increases were characterized as modest to moderate. New York and Philadelphia experienced a slight decline in activity, which was mostly attributed to the unusually severe weather experienced in those regions. Growth slowed in Chicago, and Kansas City reported that conditions remained stable during the reporting period. The outlook among most Districts remained optimistic.
CNN reported that Janet Yellen made the same observation:
"Part of that softness may reflect adverse weather conditions. But at this point it's difficult to discern exactly how much," Yellen told the Senate Banking Committee in a hearing Thursday. (Ironically, the hearing, originally scheduled for two weeks ago, had been postponed due to a snow storm in Washington.)
Steve Hatward tried to show his capabilities in this post, in which he argued that we're in for "Japan style problems."
And according to John "Trillion Dollar Loss" Hinderaker:
This morning, as Steve noted, the Commerce Department revised its estimate of 1st quarter GDP to show a shocking 2.9% annualized decline. The White House tried to spin the awful numbers, arguing that the drop was largely accounted for by cold weather
He then quoted from Senator Jeff Sessions press release, which stated:
The American economy is the victim of a tragic collision with reality. We are living out the truth that no amount of political rhetoric, professional spin, or expedient demagoguery can create a single job, produce a dime of prosperity, or boost opportunity for a single working person.
However, a simple look at two publicly available indicators would have revealed just how wrong Hinderaker's and Hayward's analysis was. These numbers are the leading economic indicators and coincident economic indicators, both available for free from the conference board. Both numbers are composites of a broad number of economic statistics that are universally accepted as, well, leading and coincident indicators. Neither of this numbers showed any signs of a contraction before the number was released, indicating that weather was most likely the primary reason for the contraction. And, considering the US economy has been hitting its stride in the two subsequent quarters, it's a good bet that bad weather was in fact the main reason for the 1Q contraction.
The part time work issue.
On several occasions, the boys at Powerline have commented that all the job growth has been part-time. Paul Mirengoff observed the following on July 15: “In reality, full time jobs decreased by 523,000 according to the Bureau of Labor Statistics — a shocking number that is obscured, but hardly offset, by the addition of 800,000 part time jobs.” John Hinderaker made the same comment on November 2 with this chart:
Looking at that, you’d probably think that part time work was simply taking over!
But if you look at the historical data, you will notice a distinct trend:
Part time work always advances in the early part of a recovery as shown in the chart above. And – just to add insult to injury – under Bush II, the economy had the exact same problem: part-time work rose after the recession was over, and then stayed high for a bit longer then usual. Funny, but I seem to remember that Hinderaker though that economy was just "awesome! Awesome I tell you." Yet when the exact same things happens under a Democratic president, it's a sign of extreme economic mismanagement.
So, the whole part-time canard from Powerline can be explained by going to the St. Louis Federal Reserve’s FRED page and simply pulling up two charts which clearly explains that what is happening is normal. You’d think that the guys at Powerline -- all of whom hold advanced degrees -- would know how to do that.
The stock market is really just a giant bubble.
I love this argument for several reasons. Ever since the Fed engaged in QE, there has been a continual chorus of detractors arguing it was only inflating the stock market, not creating real and meaningful growth. But, what else should the Fed have done? Nothing? That is an absurd statement on its face. And, you can rest assured that if the Fed had taken that tact, the same people would have been complaining about the Fed doing nothing.
The best explanation and defense of the Fed's policy came from Steve Poloz, head of Canada's Central Bank:
Let’s walk through a thought experiment together. What would our world look like today if, instead of keeping interest rates low to stimulate the economy, both Canada and the United States had moved their policy rates back up to neutral at the beginning of 2011? We estimate that the neutral rate of interest today is between 3 and 4 per cent for Canada, and use a similar number for the United States, so our thought experiment is to raise rates to about 3 1/2 per cent in both countries.
Such a move would of course allow those headwinds we talked about earlier to blow us backwards. We estimate that, under this hypothetical scenario the output gap in Canada would have been around 5 1/2 per cent today, instead of around 1 per cent. Unemployment would have been around 2 percentage points higher than it is today, and core inflation would be running somewhere between 0 and 1 per cent.
Most of the impact would be felt in reduced housing construction and renovation and auto production, as these were the sectors that responded to the policies put in place after the crisis. Moreover, these estimates do not capture the range of confidence effects that would permeate the rest of the economy under such a difficult scenario, so the story could even be worse.
From this monetary policy-maker’s perspective, that’s an unattractive alternative. Our primary job is to pursue our 2 per cent inflation target, with a degree of flexibility around the time horizon of its achievement; that flexibility permits the Bank to give due consideration to financial stability risks, provided they do not threaten macroeconomic performance.
Put more bluntly, not doing anything would have done, at minimum, just as much damage and potentially more by forcing the economy to work against itself. This is, at best, a very poor policy option.
On several occasions the boys at Powerline have argued that QE has led to a stock market bubble (see here and here). The most obvious question to ask here is, have all of the individual authors making this argument taken their profits and placed their gains into money market accounts? Or, are they still participating in the market against their own advice?
However, let's also note that corporate profits -- the mother's milk of stock market gains -- are also at record highs which supports the market's current valuation. Scott Grannis noted as much on
December 5 of this year:
Today's revision to Q3/13 GDP gives us our first look at corporate profits for the quarter, and they just keep on growing. Nominal after-tax profits are at a new all-time high, and have risen almost 9% in the past year. This is very impressive no matter how you look at it.
Record high corporate profits indicate that not only is there justification for the stock market rally, but that the underlying economy is in fact growing. In fact, one could also argue the Fed's ZIRP policy has in fact been successful based on this economic metric alone.
But, at bare minimum, the corporate profits picture indicates that the "we're in a stock market bubble caused by the Fed" is -- like most other Powerline observations -- a pure canard.
Continually comparing this expansion to the 1981 expansion
Conservative commentators and economists have continually compared the economic results of this expansion to that which occurred after 1981. They've done this for several reasons, the first of which is the 1981 recovery was far closer to a "v" recovery where the post-recession expansion picks up speed quickly. The exact opposite happened post 2008. Secondly, in using 1981 for comparison, conservatives get to invoke the name "Reagan," and, in doing so, allowing conservatives to get a nice case of warm fuzzies.
Powerline has made this comparison on multiple occasions (see here, here, and here). However, this comparison couldn't be more inappropriate -- a fact which is more than obvious to anyone who knows economic history and has a basic understanding of economics. Reagan's recession was caused by the Fed raising interest rates to slow inflation. That means that, once inflation was moving lower, the Fed could simply lower interest rates to stimulate growth. On the expansion side of a Fed-induced recession is faster growth.
But this expansion followed the popping of an asset bubble, which leads to a balance sheet recession, which can be explained thusly:
A balance sheet recession is a type of economic recession that occurs when high levels of private sector debt cause individuals or companies to collectively focus on saving (i.e., paying down debt) rather than spending or investing, causing economic growth to slow or decline. The term is attributed to economist Richard Koo and is related to the debt deflation concept described by economist Irving Fisher. Recent examples include Japan's recession that began in 1990 and the U.S. recession of 2007-2009.
As a result, on the other side of a balance sheet recession, consumers and businesses are diverting more of their income to debt repayment than consumption. This leads to far slower growth, which is exactly what we've seen.
And, as noted above, to anyone who knows economics as claimed by the boys at Powerline, this should be obvious.
Continually focusing on the labor force participation rate
Conservatives discovered a new economic statistic starting about 2008: the labor force participation rate, which shows the percentage of the population that is actually "participating" in the labor force. This number started to increase around 1970 as two demographic changes started to occur: women entering the labor force and the baby boomers hitting their prime earning years. Those two trends are apparent in this long term chart:
The boys at Powerline have blamed the post 2008 drop on this recovery in several posts (see here and here). What's notably absent from their posts is any citation to the myriad reports done on this topic since 2008. Thankfully, Invictus over at the Big Picture Blog has done the work the boys at Powerline should have done. Here's the general economic consensus about the drop in the LPR:
Of note is the fact that the drop in the labor force participation rate was just 0.6 percentage point during the 2007–2009 economic downturn whereas, between 2009 and 2012, since the end of the recession, the rate declined by another 1.7 percentage points. A major factor responsible for this downward pressure on the overall labor force participation rate is the aging of the baby-boom generation.
If Powerline were in fact as adept at economic analysis as they claimed, this should have been obvious.
The sum total of the above points is clear: Powerline's economic analysis has been completely wrong on numerous occasions throughout the entire 2014 year. And their degree of ineptness is severe. For example, they couldn't even go to the Fred system to draw a graph comparing part-time employment to total employment; they couldn't do a simple google search of LPR research, nor could they be bothered to understand what a balance sheet recession is even though that's the exact economic situation we're in. This degree of ineptitude is beyond a minor disagreement but instead rises to the level of abject incompetence.
Put more directly, no one at Powerline has any clue about economics. Period.