A double dip prediction

The Economic Cycle Research Institute says we are heading for a new recession:

Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off.
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Why should ECRI’s recession call be heeded? Perhaps because, as The Economist has noted, we’ve correctly called three recessions without any false alarms in-between.
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A new recession isn’t simply a statistical event. It’s a vicious cycle that, once started, must run its course.
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It’s important to understand that recession doesn’t mean a bad economy – we’ve had that for years now. It means an economy that keeps worsening, because it’s locked into a vicious cycle. It means that the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar. 

Predictions

James Taranto considers some predictions:

there are no signs of a dramatic rebound for the party, and the chance of Republicans winning control of either chamber in the 2010 midterm elections is zero. Not "close to zero." Not "slight" or "small." Zero.

Making predictions is risky, which is why I try to avoid them. However, when someone makes a prediction that turns out correctly, that person deserves to be taken more seriously in the future. The correct prediction shows that they have understanding. Obviously when a person's predictions are completely wrong, that person should lose credibility because the failed prediction shows that their understanding of the situation is flawed.

What economists do not know

Reuters reports on "Obama Counters Republican critics on jobs agenda":

Republicans say Obama's policies have failed to dent unemployment, a political sore spot for the president that has helped drag down his approval rating to 50 percent or lower.

Obama's $787 billion stimulus package approved last year by the Democratic-controlled Congress was largely rejected by Republicans. However, many independent economists have said the measures helped avert an even deeper recession.

Recalling the stimulus fight, Obama said he refused at the time to give in to "partisan posturing."

Why did the reporter throw in the sentence that I have highlighted? Why not put in this sentence: "However, many independent economists have said that the measure did little or nothing to fight the recession"? Economists are divided on the effect of the so-called stimulus package, with some believing that it helped and others believing that it did nothing or even made the recession worse. The only information this sentence contains is that the reporter believes the president and the Democrats are the good guys in this dispute and the Republicans are the bad guys.

Economists do not and cannot know what would have happened if the stimulus package had not been passed. Economists are not using current events to test their theories, but are using their theories to interpret current events. Those economists who believe that the stimulus measure helped hold that belief because their theory tells them that fiscal policy works. Hence, they conclude that without the stimulus the economy would have done worse. However, there are other economists who believe that fiscal policy is either ineffective or unpredictable in its effects, and they see no reason to believe that the economy would have done worse without the stimulus package.

Because economists cannot re-run history several times to see what would have happened with various policies, macroeconomics has long been an area of considerable disagreement among economists. However, the field is not totally without progress. Occasionally the results of policies are so dramatic that a theory loses plausibility. For example, the unemployment and inflation results of the 1970s killed the idea that there is a stable Phillips Curve. Sometimes examination of data from many years shapes what is plausible. For example, no one still believes that fiscal policy multipliers are anywhere near what the economists of the "New Economics" thought they were in the 1950s and 1960s. Even the Obama administration's economists were using government spending multipliers that were under two.

On a non-economic note, when has this president ever refused to give in to partisan posturing? Campaigning is the one thing he does really well.

Betting against recovery

On the Corner at National Review a reader writes:

And since we on Wall Street have all seen this movie before, what comes next has been highly predictable. I’m a portfolio manager at a large hedge fund so I make my living predicting results not hoping for growth. That has made Obama a boon for me personally.

As an American I’d love it if he’d embrace the free market reality and start doing things that would actually help create jobs. But the economy will recover eventually no matter what he does. In the meantime, as a professional investor I’m delighted to see him embrace the bat guano. It’s bad for America but good for me personally.
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I have a friend who is a currency trading legend (and also a major AEI money man) whose conservative credentials are beyond doubt. He’s a little older and can remember what it was like to trade the markets during the Carter administration. When I was lamenting Obama’s impending election with him last year he said to me, in a glass half full fashion which is typical of him:

“It’s never easier to make money in the markets than when there is a Democrat in the Whitehouse who thinks he’s smarter than everyone else”.

So far he’s been dead on, but I think it would be better for all of us if he wasn’t.

How does one invest in a way that bets against the economy? What are they doing?

Intrade political market

It is very early to be betting on what will happen in 2012, but some people want to do that. The Intrade market is now open for bets on the 2012 Republican presidential nominee. It is hard to get an exact price because there is a gap between bid and ask, but Romney seems to be leading the field with a last sale of 27. Palin is by far the most active contract, with a last price of 21.7. The high volume suggests that there are a lot of people who think she has a very good chance and a lot of people that think she has very little chance. Pawlenty is the only other with a recent price above 20 at 24.9.

Mitch Daniels on the the future of state government

In The Wall Street Journal Mitch Daniels writes that states face serious problems in the next few years because revenues will not recover for some time. He especially thinks the tax-and-spend states faces a bleak future:

The "progressive" states that built their enormous public burdens by soaking the wealthy will hit the wall first and hardest. California, which extracts more than half its income taxes from a fraction of 1% of its citizens, is extreme but hardly alone in its overreliance on a few, highly mobile taxpayers. Both individuals and businesses are fleeing soak-the-rich states already. Those who remain in high-tax states will be making few if any capital gains tax payments in the years to come. Even if the stock market comes roaring back to life, the best it could do is speed the deduction of recent losses.

Doom and gloom

Mark Steyn notes that the message of sub-replacement fertility rates seems to be slowly spreading. He is such an optimist:

For much of the developed world, the "credit crunch", the debt burden, and the rest are not part of a cyclical economic downturn but the first manifestations of an existential crisis.

Joseph Schumpeter argued that even though capitalism is economically successful, it might not be socially successful. However, his story of decline does not seem to be what is happening. If we wanted to re-make his story for the decline of capitalism, we could argue that only a heavy reliance on markets creates wealth, but once people are wealthy, they increasingly worry about risk. To some extent private markets, including insurance markets and financial markets, allow them to reduce risk, but people also use the political process to try to reduce risk, which creates the welfare state. Wealth plus the welfare state then create the incentives that reduce fertility rates below replacement, making the welfare state, and perhaps wealth itself, unsustainable in the long run.

Why aren't people more worried about the long-run demographic trends? Why are there people still running around worrying about overpopulation in the developed world? My guess is that one reason, but an important reason, is that part of the intellectual elite is unable to process numerical data, that is, they do not "get" numbers. It is mastery of verbal skills, not of numerical skills, that makes one a member of the intellectual elite. I have met enough Ph.D.s in the humanities who have a hard time reading a graph to make me suspect that a lot of people we think are very intelligent are lost when it comes to anything involving interpretation of numbers.

(Related--people judge the intelligence of politicians largely on their verbal skill. George Bush was judged a bozo and Barack Obama a genius because of the way they spoke. I wonder what they and other politicians would look like if we could see them trying to do a variety of numerical tasks.)

The future of the Republican party

They seem to have died down now, but for a while there was a bumper crop of articles speculating on the future of the Republican Party, and how it should reposition itself if it wanted to prosper in the future. Many of these articles were written by people who rarely if ever vote Republican. It was an interesting and revealing phenomenon.

There has rarely been as much euphoria over the results of an election as there were with the victory of Barack Obama. Progressives were quite confident that his election would usher in a new age for American. If you really believe that, you do have to wonder what the future holds for the party that stood in the way of that new age. Further, if the progressives are correct, there is no need for the Republican Party and it should fade into oblivion. Clearly many of those writing articles about the future of the Republicans came from that perspective.

On the other hand, many of those on the right are convinced that the Obama Administration will be a disaster. The problems in foreign affairs will not be solved with clever rhetoric--American power has not been a problem for the world but a blessing, and renouncing that power will result in more wars rather than fewer. The economy suffers not from a lack of government involvement, but rather from too much government involvement. Talking about more regulation and more taxes and more government control of the economy will depress economic activity, not stimulate it. Excessive monetary growth will cause inflation a year or two later. From the point of view of those on the right, the Republicans need only to regain their conservative positions, some of which were lost during the centrist Bush Administration, and wait for the inevitable collapse of Obama.

The Obama Administration is the closest thing to an economic experiment that we have seen in some time. It has embraced Keynesianism and rejected the supply-side view of economics. If it results in bringing peace and prosperity, it deserves to remain in power and the Republicans should become a minor political force. However, if it ushers in an age of inflation and slow growth plus world-wide instability, it deserves to be repudiated and the Democrats should become a minor political force. Neither of these may happen--the results may be somewhere in between. We do, however, live in interesting times.

Laffer on inflation

Writing in The Wall Street Journal, Arthur Laffer joins the list of economists who are worried about inflation in the future.

Alas, I doubt very much that the Fed will do what is necessary to guard against future inflation and higher interest rates. If the Fed were to reduce the monetary base by $1 trillion, it would need to sell a net $1 trillion in bonds. This would put the Fed in direct competition with Treasury's planned issuance of about $2 trillion worth of bonds over the coming 12 months. Failed auctions would become the norm and bond prices would tumble, reflecting a massive oversupply of government bonds.

If we do not see any inflation in the next two years, monetarists will be challenged to explain why. On the other hand, they will look pretty good if we do see it. It is as if the Fed was conducting an experiment to test economic theories. Plus the Obama administration is conducting another experiment about supply-side economics.

Falsifiability

This afternoon I stumbled on a set of speakers on CSPAN discussing the future of progressivism (though under the title of the future of conservatism). What struck me was the their position was non-falsifiable. They had great faith in the ability of government to serve the people provided that the right people control government. The right people are the progressives and the wrong people are the conservatives. The present triumph of progressives opens up the possibility of a long reign of progressive rule that can only be stopped by mistakes of the progressives. Hence, if the policies of the Obama administration are disastrous resulting in electoral reversal, it will not be that the progressive policies were flawed. It will be that the people who implemented them were not good enough. True progressives will continue to advocate these policies, arguing that they will work next time provided that better people are carrying them out.

Everyone holds beliefs that are non-falsifiable. However, we should be able to recognize that that these beliefs are not scientific, but rather non-scientific and religious. It does strike me as a bit strange that the progressives seek to discredit conservative policies on empirical grounds (i.e., the present recession shows the failure of laissez-faire policies), but are unwilling to submit, a priori, their policies to similar empirical tests.

A supply-side experiment

A comment I left elsewhere:

The Obama administration is conducting an economic experiment on supply side economics. When Reagan entered office, his approach to recovery was to focus on making it more attractive to produce with lower taxes and less regulation. Obama is pursuing the opposite course, to increase taxes and regulation on producers and to make contracts less certain, thereby increasing risk. If we have a vigorous recovery next year and unemployment drops down to what it averaged in the Bush years, the supply-siders will have a hard time making a case for their theories.

The sky is not falling (yet)

In the past two days I have been to two events in which they swine flu (or the H1N1 virus) has intruded. In both cases events that previously had been self-serve now became events in which a person served the guests. It slowed everything down and was inconvenient.

I will be shocked if this virus leads to be a serious pandemic. My rule is that once the news media starts hyping a story, you can ignore it. The media almost always over-reacts one way or the other.

I do not like making predictions because it is dangerous--one can be wrong. However, I am confident enough in this case to take the risk.

There are risks and problems that I am worried about a lot, but none of them are things that the news media pays attention to.

Asymmetry and government failure

Imagine that the TARP program had not passed in early October, 2008, and that in the months following the unemployment rate had soared to 8.1% in February with further rises expected, on March 9 the Dow Jones Industrial Average had dropped below 6650 in the most severe bear market since the Great Depression, and that the GDP had declined at a 6.3% rate in the fourth quarter of 2008. Do you doubt that those who voted nay on the bill would be blamed for the disastrous course of the economy and the financial markets followed? So why are we not damning those who voted for a bill that obviously did not meet the expectations of those who advanced and implemented it? It is because they can always reply that in the absence of action, the situation would be even worse. But there is no evidence for that and there cannot be because we do not know what would have happened if the bill had not passed. Logically if the bill had not passed and the same things had happened in the economy, those who had opposed the bill could say that if the bill had passed, things would be even worse. However, few would believe them. We live in a world that has great faith in the ability of government to right wrongs.

Asymmetry of this sort, in which there is risk in only one direction, causes bad decision. I have no idea of how to right this, but it should be mentioned when the topic of government failure is discussed.

Predictions

Here is a prediction that the Obama administration will be a failure, written by a British journalist. We can check back in four year. Or maybe six. I would like to find equivalent predictions that the will be a success, and if I do, I will add them. Again, in four years, we will know who was right and who was wrong.