Archive for December 2011
Negative Economic News Over the Top
If you have been watching the news and reading the newspapers obviously you have seen the heavy handed negative press when it comes to the economy. Generally in an election year we have a good economy.
So why are we getting such bad reports? Well much of it is a created reality, perhaps to assist a certain candidate and political agenda. But why would anyone drag down the entire economy just to impose a change of power?
Personally, I think such negative economic titles in the newspapers are irresponsible and add to the consumer confidence issues, which appears to be 1/3 of the problem in the first place. Our economy is around +1-2% and – 1-2% and to me that’s flat. Business cycles occur and this time they have been assisted by bad choices in the banking sector and higher energy costs. But, entrepreneurs adapt or they die, it’s survival of the fittest, competition and the best continue, this is a good thing, it makes us strong.
In 1993, I was interviewed by a local paper about my business. They asked about the recession and I said; “I don’t participate in recessions!’ and went on to grow my company in the middle of a decline when everyone else had emotionally destroyed themselves through this negative bio-feedback. There is more opportunity in downturns than up-cycles.
When it’s a little tougher, you need to cut your teeth and figure it out, no big deal. Before you allow yourself to buy into the negative press about the economy, you may wish to consider how great things are here in the US compared to the rest of the world.
Economic News – The Hype Versus the Reality
No wonder most people don’t understand the economy. Often what might seem good on one hand, has bad side effects on the other. For example, the stock market rises- one would think that was good! But that was mostly due to the rising price of oil- bad news. But, often the price of oil rises because the “experts” believe the economy is improving and thus more oil will be needed in production- good news! But that rise in oil prices causes the cost of living to increase- bad news. But that helps the Gross Domestic Product (GDP)- good news! But that then causes inflation- bad news. But that inflation means the economy is improving- good news! But then the Fed becomes concerned about inflation and raises interest rates- bad news! Which causes the value of the dollar to improve- good news! But that hurts exports because now American products cost more overseas- bad news! But that means foreign products cost less in the US- good news! But that hurts American companies competitiveness- bad news!
If we think that political analysis and political chatter is often more hype than anything else, the same can certainly be said about analyzing economic news! You can readily see why economic news often seems co confusing. Economic news often seems confusing because it is – - what is good for one consumer, might be bad for another- what is good for one company, bad for another- what might be good for one sector of economy- bad for others.
The stock market is often the most confusing. On days when there is “bad news,” the market often goes up, while on some “good news” days, the market sometimes goes down! While the Dow, or the S&P, etc., might go up, it does not mean that the stock(s) you own, will follow suit.
Too often, for the sake of a sound-byte, the media tries to over-simplify economic news. Yet the economy is by definition quite complex. The one issue there should be some agreement on is that high unemployment is not good. Yet even in that case, the “experts” can’t agree upon, nor act upon a viable solution.
The best way to think about the economy is this– the difference between a recession and a depression is that it’s a recession when it happens to someone else– it’s a depression when it happens to you!
It is my belief that a healthy economy requires certain factors to be in place – - low joblessness; high consumer confidence; a strong manufacturing sector; and reduced government deficits. That is what we must demand!
The Evolution of Economic Understanding and Postwar Stabilization Policy
In introduction, I will be expounding on the evolution of economic understanding and postwar stabilization policy from the perspective of Christina D. Romer (Professor, University of California at Berkeley) and David H. Romer (Professor, University of California at Berkeley) throughout the paper. In detail, I will cover the time periods of the 1950s to the 1990s. Finally, I will comment on the commentary and discuss the general discussion as presented by Thomas J. Sargent, Professor, Stanford University and Senior Fellow, Hoover Institution.
The evolution of economic understanding in the 1950s was realistic as it pertains to the relationship between capacity and full employment. The 1950s model held that there was a positive long-run relationship between inflation and unemployment (summarized from Romer). In other words, monetary policymakers believed if the economy should rise above full employment that inflation would occur. Thus, the monetary policies would create a domino effect by negatively impacting long-term growth, and worst, causing a recession. In addition, Federal Reserve Chairman William McChesney Martin shared a common view (depicted in Minutes, August 19, 1958, p.57) that the inflation that would result from overexpansion would eventually raise unemployment, not lower it.
In the 1950s, monetary and fiscal policymakers were ‘on the same page’ in regard to how the economy worked. For example, the 1956 Economic Report stated: “As a Nation, we are committed to the principle that our economy of free and competitive enterprise must continue to grow. But we do not wish to realize this objective at the price of inflation, which not only creates inequities, but also is likely, sooner or later, to be followed by depression.” (EROP, 1956, p. 28.) The 1958 Economic Report warned against mortgaging the long-run health of the economy for the sake of applying measures to provide a spurt in activity. The 1959 Economic Report discussed the mechanisms by which inflation hurt economic growth.
The evolution of economic understanding in the 1960s took an optimistic turn from the economic understanding in the 1950s. For example, policymakers adopted a view of the levels (higher than the levels of the 1950s) of output and employment that could be reached without triggering inflation. Eventually, policymakers in the 1960s came to believe in a long-run tradeoff between unemployment and inflation, in stark contrast to policymakers in the 1950s. (As per Romer and Romer.)
The fiscal policy makers of the 1960s depicted the most dramatic departure from the policymaking of the 1950s. For example, “in discussing the further rise in inflation in the second half of 1967 (when unemployment was 3.9 percent), the Economic Report stated: Demand was not yet pressing on productive capacity-over-all or in most major sectors. The period of slow expansion [from mid-1966 to mid-1967] had created enough slack so that production could respond to increasing demand without significant strain on productive resources.” (EROP, 1968, p. 105.) The preceding quote lends to the fiscal policymaker’s, in the 1960s, strong confidence in their estimates of the sustainable rate of unemployment that they consistently attributed inflation that arose before unemployment reached this level to sources other than excess demand. (Paraphrased from Romer and Romer). The Romers gave other supporting documentation to the preceding paraphrase such as the 1962, 1966 and 1967 Economic Reports.
The monetary policymakers in the 1960s proved to be more conservative, if not ambiguous than the fiscal policymakers in the 1960s. Nonetheless, monetary policymakers were optimistic about the sustainable levels of output and employment, which reflected the views of fiscal policymakers. However, monetary policymakers did not view the high levels of activity as unsustainable. To the contrary, monetary policymakers were mainly concerned that inflation might continue, not that it would rise. (RPA, March 5, 1968, p. 117 – 123 expounded on the preceding issues.) Both monetary and fiscal policymakers expected inflation to fall although monetary policymakers were less optimistic about inflation. In other words, although monetary policymakers’ view was ambiguous (like an Alan Greenspan’s speech…pun intended), it was on the same page as the views of fiscal policymakers.
The evolution of economic understanding in the 1970s shifted again, especially in the early 1970s. The emergence of the Friedman-Phelps natural-rate framework was brought about by the adoption of both fiscal and monetary policymakers. The Romers continued, “Throughout the decade, policymakers believed that the change in inflation depended on the deviation of the unemployment rate from its normal level. However, the 1970s saw considerable swings in both the estimates of the natural rate and in views about the downward sensitivity of inflation to economic slack.”
In the early 1970s, the policymakers adopted the natural-rate framework. In the middle part of the 1970s, policymakers returned to more conventional views of the dynamics of inflation. Thus, the optimism, in the 1960s, of views concerning sustainable output and unemployment was dampened over the early and mid-1970s. Both fiscal and monetary policymakers underwent a similar evolution.
In the late 1970s, the natural rate framework was not emphasized or utilized, effectively, in policymaking. The preceding trend is a slight reversal of the model used in the early and mid-1970s. For example, President Carter’s signed section of the 1978 Economic Report underlines the difference.
The evolution of economic understanding in the 1980s and 1990s is termed ‘The Modern Consensus’ by the Romers. The Romers described ‘the modern consensus’as a new consensus of beliefs with four critical elements beyond the central place of he natural-rate hypothesis. First, policymakers in the early 1980s had substantially higher estimates of sustainable unemployment than many of their predecessors over the previous two decades as illustrated by the 1982 Economic Report. Second, policymakers returned to the view that aggregate demand policies did provide a means of reducing inflation as illustrated by the early Economic Reports of the Reagan Administration. Third, the agreement that means other aggregate demand policies were not viable cures for inflation as illustrated by the 1982 Economic Report. Fourth, the agreement that the costs of inflation were substantial as illustrated by the 1982 and 1983 Economic Reports. Both Monetary and Fiscal policymakers shared the same view.
There was continuity and change in the 1990s. As a matter of fact, in the 1980s and 1990s, there was little change in the views of policymakers as it pertains to ‘harm to inflation’ as illustrated by Federal Reserve Chairman Alan Greenspan (Greenspan, 1997, p. 1.) In addition, a natural-rate framework continued to be a core element of policymakers’ beliefs illustrated by George H. W. Bush Administration. (EROP, 1990, p. 177.)
The postwar stabilization policy in the 1950s was an early commitment to aggregate demand management. Both fiscal and monetary policymakers reacted to macroeconomic conditions and make adjustments to stabilize the economy.
The postwar stabilization policy in the 1960s as it relates to the macroeconomic beliefs affected was two-edged sword, especially on the fiscal policy. The 60s witnessed a large-scale tax cut, which was similar to George W. Bush’s tax cuts of the 2000s. Ironically, the 1964 Economic Report argument that fiscal expansion was necessary because the current unemployment rate was above its normal, sustainable level is similar to President Bush’s argument for a tax-cut rate because of our current unemployment rate in 2003. Moreover, George W. used a clip of JFK speaking about the early 1960s tax cut in his Presidential campaign. In a state of D