Written by Steven Hansen
Expect the political rhetoric and unsupportable statements to increase as we continue in this USA Presidential election cycle. The USA economy sucks (my technical word), and every Presidential candidate has the solution.
But here is the problem – economics has a lot of theories but is void of real scientific proof any theory will work in a given situation. As a consumption based economy – the primary measure of economic health is consumer spending which contributed (weakly) to the very weak USA expansion cycle. The Cleveland Fed summed up the situation best.
Policymakers are concerned that consumption has not fully recovered this long after the Great Recession. Demyanyk et al. (2015) contribute to a body of literature that tries to uncover the determinants of consumption growth.
During the 2000s, the impact of some factors like income growth and unemployment was fairly stable over time, but the impact of other factors was quite heterogeneous across periods. This poses a unique challenge for economic policymakers. If, for instance, house price appreciation was an important determinant of consumption growth throughout, policymakers could stabilize the economy with policies aimed at supporting house prices. However, as Demyanyk et al. (2015) found, the statistical relation between house-price appreciation and consumption growth is unstable, sometimes important, other times not. This result implies that economic policy needs to rely on economic models which depart from more fundamental determinants of consumer behavior. Pinning those down is still a major challenge for economic research.
Politically motivated pundits – say Nobel Laureate Paul Krugman – try to point out truth and fiction in political positions.
… But Jeb Bush – who is still attempting to justify his ludicrous claim that he can double our rate of economic growth — says that Americans “need to work longer hours and through their productivity gain more income for their families.” …
… on display in Hillary Clinton’s planned Monday speech on the economy – that workers need more help, in the form of guaranteed health insurance, higher minimum wages, enhanced bargaining power, and more. Republicans, however, believe that American workers just aren’t trying hard enough to improve their situation, and that the way to change that is to strip away the safety net while cutting taxes on wealthy “job creators.”
Forbes published a takedown of Professor Krugman’s post for misleading hyperlinks (this is far from the first time Professor Krugman has done this). My concern over this post relates to unsupported remedies for improving the economy. I personally would love to have scientific evidence proving that no one needs to do anything but play video games with the government handing everyone a large paycheck monthly with money created out of thin air – and the economy would improve ad infinitum. I do not think this is true, but it is not absolutely impossible it could be true – or it could be partially true in certain circumstances. Certain areas needing “improvements” may have economic benefits (or may be economically destructive) – but are really social engineering rather than fact based on scientific data gathering:
- pay inequality
- minimum wage
- universal health care
- profit sharing with workers
Economists need to be engineers of the economy. They should provide guidance to the best methods to execute political / social engineering – doing their best to execute in a manner to optimize the effect.
But there is a big difference between thinking something is true and having the scientific proof something is true. And it may be wonderful to learn that even two diametrically opposed theories can be proven as true. But for now, I have not heard any politician of any political persuasion come up with an economic plan that has a scientific basis to provide noticeable long term economic improvement. Quoting an economist (or a panel of economists) who creates proposals based on modeling is not what I call science.
Politicians are not long term thinkers – their vision ends at the next election cycle. And the USA economy therefore reflects a patchwork of laws and regulations which are short term “patches” to long term problems.
Listening to the political solutions to improve the economy makes me feel dirty, and even showering does not remove the dirt.
Other Economic News this Week:
The Econintersect Economic Index for July 2015 strengthened partially reversing last month’s decline. Still, the tracked sectors of the economy remain relatively soft with most expanding at the lower end of the range seen since the end of the Great Recession. Thinking through the reasons for this month’s increase, it was the improvement in a few areas from terrible to marginal growth.
The ECRI WLI growth index is now in positive territory but still indicates the economy will have little growth 6 months from today.
Current ECRI WLI Growth Index
The market was expecting the weekly initial unemployment claims at 265,000 to 295,000 (consensus 282,000) vs the 281,000 reported. The more important (because of the volatility in the weekly reported claims and seasonality errors in adjusting the data) 4 week moving average moved from 279,250 (reported last week as 279,500) to 282,500. The rolling averages generally have been equal to or under 300,000 since August 2014.
Weekly Initial Unemployment Claims – 4 Week Average – Seasonally Adjusted – 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line), 2015 (violet line)
Bankruptcies this Week: Berau Capital Resources Pte (chapter 15), Sino Clean Energy (SCEI), Sabine Oil & Gas,Walter Energy (fka Walter Industries), MIlagro Oil & Gas
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