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US GDP Growth: NOT What It Seems!

By   Shlomo Maital

I recently wrote a column titled: Why Can’t Economists Talk Straight?, in the Jerusalem Report. It was a book review of a book by a friend, an expert on behavioral economics. It explains why economists befuddle, use impenetrable jargon, and in general confuse and obfuscate.

     Here is a recent example.   US First Quarter GDP figures were headlined as: US economy growth surprises!   3.2% growth. Way above what was expected. It was predicted that a recession was on the way. But it’s not!   Yeeayyy!    This is what journalists wrote. I can understand that. They are not trained to read the economic X-Ray data. But economists?   Where ARE they?   Nowhere.

     The first quarter GDP news is BAD BAD BAD! Not good.   Here is why.

       A large part of that 3.2%   growth was “inventories”. Nearly a quarter. Without that, growth would have been 2.5%. Much worse ….. But what IS that inventory thing???

        Here is the straight talk.   GDP growth reflects what is PRODUCED   — not what is SOLD.   Some of GDP is sold. Some is NOT. So it is put into warehouses. This is then called ‘inventories’ or ‘inventory change’.  

       A whole lot of stuff was produced in the first quarter – but companies couldn’t sell it.   So cars, fridges, computers, motorcycles, appliances, etc. went into warehouses.  

       That is bad news. Because in the 2nd quarter, companies will sell off that inventory rather than produce new stuff. That will greatly reduce GDP growth rate.   In 2nd quarter, we will see numbers that begin to herald a recession. Trust me.   Set aside some money – we ARE heading for a slowdown.

      Now, is that bad news? Or good?     As we head toward elections in November 2020, a recession will help defeat Donald Trump.   People DO vote their pockets, to some degree. And the likely Democratic candidate Joe Biden is running a campaign to enlist support of working people.   Trump has not even begun to deliver on his promises to them. And they are beginning to get it. Moreover, Biden has pulled Trump’s chain, and got Trump to attack unions (dues-sucking!).  

       So bottom line:   NOT 3.2% growth, but 2.5% growth (subtracting inventories), to reflect what people actually BOUGHT. They are buying less. This is a slowdown signal.   I can find nowhere where this is widely and clearly reported. A great shame.

 

 

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One-Armed Nobel Candidate Economist Is Fired

By Shlomo Maital

           

        Paul Romer                              Paul Krugman

 

       Every day, members of my profession, economists, find new ways to make me deeply regret I ever became one. The latest episode is a story of two economists named Paul.

       President Harry Truman, the US President who suddenly and unexpectedly took office when President Roosevelt died in 1944, once said famously: “Give me a one-handed economist! All my economists say, ‘on the one hand…and, on the other’”.  

       Economists respond: “Give me a break, Truman!   We are objective professionals. Our job is to offer alternatives and explain the implications of each. YOU are an elected official. We are your servants. YOU are the one elected by the democratic process to choose and decide, not us! We simply show you the choices.”

         I myself used to repeat that mantra, during a year as head of an Israeli government planning body. But I soon learned – reality is different.   When economics is a value-free zone, it is useless to political leaders. State your values, state your position, clean up the jargon, speak in ordinary language, and keep one hand anchored deeply in your pocket.

     The Guardian now brings us a shocking, infuriating episode in which a future Nobel economist is fired for demanding clarity and truth. The economist is Paul Romer. In his Ph.D. dissertation, he built a powerful new theory now widely accepted, called “endogenous growth theory”. But another Paul, Paul Krugman, a Nobel laureate, has for over two decades been a beacon of clarity and one-armed economics.

       In brief: Since MIT economist Robert Solow, we’ve known that half or more of all economic growth is caused by technological change. But Solow treated it as ‘exogenous’, outside the system. Romer observed that technological change is endogenous – it is created by what we do, in education, innovation, and R&D, etc.   His two Journal of Political Economy articles published in 1986 and 1990, respectively, started endogenous growth theory and changed the world.   He will win a Nobel Prize soon for this. It has changed the way everyone thinks about pro-growth policies and plans.

The Guardian: “The chief economist at the World Bank has stepped down from its research arm after staff were vexed by demands to write succinctly, including cutting superfluous uses of the word “and” in reports or emails. Paul Romer, 61, will leave the Development Economics Group (DEC), according to a staff announcement reported by Bloomberg. He had asked for shorter emails, while also cutting staff off if they talked for too long during presentations, it said. In response to press inquiries about internal “objections to my insistence on clearer writing,” Romer published writing guidance he had issued to DEC staff on a blog on Thursday.   He said he suffered from dyslexia, making writing hard, but added “everyone in the Bank should work toward producing prose that is clear and concise. This will save time and effort for a reader. Thinking about the reader is an example of what I mean when I say that we should develop our sense of empathy.” Romer cut more US$1 million in annual expenses from the DEC budget, a body of more than 600 economists. But it appeared to be his attacks on convoluted, lengthy reports of that researchers took cause with. In an email to staff, Romer argued that the bank’s flagship publication, World Development Report, would not be published “if the frequency of ‘and’ exceeds 2.6 percent,” according to Bloomberg. He reportedly cancelled a regular publication that did not have a clear purpose.”

     “Romer is credited with the quote “A crisis is a terrible thing to waste,” which he said during a November 2004 venture-capitalist meeting in California. Although he was referring to the rapidly rising education levels in other countries compared to the United States, the quote became a sounding horn by economists and consultants looking for a positive take away from the economic downturn of 2007–2009.”

     Paul Romer wanted one-handed economists, who speak clearly, and paid the price. But is there a role-model for clear-thinking clear-speaking economics? There is. New York Times columnist Paul Krugman.

       The Economist: “From a mono-manual perspective, at least, Harry Truman would have loved Paul Krugman, an economist who rarely hesitates to take a bold position—even when the subject is himself. In recounting the transformation of his twice-weekly New York Times column from a genial discussion of the “New Economy” into a widely read broadside against the Bush administration, the Princeton professor recently described himself as “a lonely voice of truth in a sea of corruption.”  

     Krugman has blasted Trump and the Republicans, and identified their scorn for economic truth.

     In the 1930’s economics took a wrong turn. Influenced by the London School of Economics, economists decided to become like physicists and deal with only ‘pure science’, without ethical value judgments. At that moment, economics became irrelevant. And it remains so.

       I hope Romer wins the Nobel Prize later this year. In his acceptance speech, I hope he tears several strips off the moribund walking-zombie economists there, hundreds of them, a whole building full of them at 1818 H Street in downtown Washington. That building is a wasteland desert, even though it is in the heart of Washington.

Paul Krugman: How Economists Got It VERY Wrong

By Shlomo Maital

economist

Paul Samuelson was arguably the great economist of the 20th C., and certainly one of the greatest of all time. He was a professor at MIT, where I taught for 20 summers, and invariably could be found on weekends working away in his office, even after officially retiring. His book Foundations of Economic Analysis (1947)   (his Ph.D. thesis) reconstructed economic theory, using clever mathematics. But Samuelson was not deceived by his keen mathematical skill. “Elegance is for tailors”, he once said, in describing elegant, but empty, economic theories.

Alas the Economics profession did not heed him. UK Economist Geoffrey Hodgson reminds us of Paul Krugman’s 2009 New York Times article, analysing where economists went wrong in missing the 2007-8 financial collapse, and in some ways actually causing it with their gung-ho free market enthusiasm.

At that time, Krugman (a Nobel Prize winner, it should be recalled) wrote:

“As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations.” …..the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.

I feel a personal sense of loss and defeat as I read those words. I chose by mistake to study economics. I never did have the mathematical ability to excel in research. But I did have an insight, that behaviour was more important than math, in understanding how people choose and decide. But that idea was like aging wine, ‘before its time’. Behavioral economics has now replaced math as mainstream, helped by the tailwind of economics’ massive failure in 2007/8.

Will this help economists avoid culpability in the next financial crisis?

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
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