Tuesday, January 5, 2010

Krugman the Politician

From the NY Times:

As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year.

And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that “the economy has finally entered a phase of self-propelled recovery.” In fact, Japan was only halfway through its lost decade.

Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

Krugman is essentially arguing that the current economic news is in fact a "blip" -- good news that is transitory, largely because of the "inventory bounce." He then argues that the good news will all go away soon. But let's look a little further. What's his proof? Notice how there is no mention of a specific set of numbers from the current economic news which bolsters his argument. He is merely saying "it's happened before." Using Krugman's logic we might as well bet on the Florida Marlins to in the World Series this year. Why? They've won it before.

What Krugman is really saying -- and what he should have outright said -- is we're not out of the woods yet and we need to guard against thinking we are out of the woods. That would have been an entirely appropriate argument to make. This is an argument against "getting comfortable" with the current situation when in fact the economy still has a long way to go.

Let me also add, I stand by my statement that the economy is clearly mending. In my 2009 year in review I made the following conclusions:

So in conclusion,

1.) Manufacturing is making a strong recovery.

2.) Housing is on the mend, although there is still work to be done

3.) The consumer is spending again, although weakly

4.) It appears the economy will start to create jobs over the next few months

5.) The economy grew in the third quarter

In short, the recession is clearly over. However, growth is weak. But, considering where we started the year, we're actually doing pretty well.

Click on the link to see the reasoning behind the conclusion. Agree or disagree as you like. But if you disagree -- please provide data instead of your (or someone else's) opinion.