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Home Publications Blogs Beat the Press Can't The NYT Find an Economist Who Knows Anything About the Economy?

Can't The NYT Find an Economist Who Knows Anything About the Economy?

Friday, 24 June 2011 22:42

That is what readers are asking after seeing an NYT article in which several economists expressed surprise over the continuing weakness of the economy. What is surprising in this picture? What sector did they expect to give a boost to the economy that fell short?

The special cues to the ignorance of the economists interviewed is the seeming surprise at the continuing drop in house prices. Do these economists still not know about the housing bubble? It almost crashed the financial system and is the cause of the current downturn. Can you actually get paid to be an economist and still not know about the bubble?

Of course if you knew about the bubble then you are not surprised that house prices are continuing to fall. Prices have to fall by about 10 percent in real terms to get back to their long-term trend. This means that the decline in house prices over the last half year should have been entirely predictable.

The economists cited in this article also seemed surprised that consumers aren't spending more. Economists who know about the economy are the surprised that consumers are still spending as much as they are. The savings rate plummetted in the 90s and 00s as a result of the wealth created by the stock and housing bubbles. This is the result of the "wealth effect" whereby more wealth in assets leads to more consumption and less savings. This effect has been a central part of economics for more than 70 years.

With the housing bubble largely deflated, and the ephermal wealth that it created largely gone, savings rates are rising back to their historic level. If anything, the surprise is why consumption is so high, not why it is so low.



Source: Bureau of Economic Analysis. (Click here for a larger version.)


(Sorry about the mess of a graph -- my Microsoft program was updated and in keeping with their proud tradition, the new version is much clumsier than then the old one.)

Comments (11)Add Comment
Ignorance is Bliss When Not a Surprise
written by izzatzo, June 25, 2011 6:13
The special cues to the ignorance of the economists interviewed is the seeming surprise at the continuing drop in house prices.

The explanation for ignorance appears in this quote from the NYT article:

“The likelihood of a negative surprise is bigger than the likelihood of a positive surprise,” said Jerry A. Webman, chief economist at OppenheimerFunds.

Since economists are now predicting surprises as likelihoods, that renders moot the possiblity of a surprise, which means the only explanation for the seeming surprise at the continued drop in house prices is that it wasn't a surprise at all, instead the result of a prediction based on competing ignorances designed to minimize the standard error of the forecast.
written by denim, June 25, 2011 8:53
I haven't found the original source of this chart published by The Nation and Business Insider [http://www.businessinsider.com/facts-about-inequality-in-america-2011-11?op=1], but it is obvious that that information was available to someone. I will bet that someone was not surprised. I am surprised that it was not Bernanke who knew...he is alledged to be Mr. Great Depression Expert.
written by ellis, June 25, 2011 10:46
To say that the crisis just comes out of a housing bust is a joke. the crisis is international in scope. It is the accumulation of 40 years of worsening crises. These crisis are linked together. Each cure for each crisis aims at raising profit levels, through both massive government bailouts and massive cuts in living standards. These then pave the way for the next crisis.
The good thing that comes out of crises is that it destroys illusions and false ideas. It's about time that the economics profession -- yes, even among progressives -- wakes up to their own false ways of looking at things.
written by joe, June 25, 2011 11:03
Anyone see Greenspan on Charlie Rose last week? The interview is on the charlie rose website if you are interested. He argues that the evidence is "overwhelming" that real estate investment is weak because of uncertainty created by the stimulus and other programs to help the economy. It's amazing the guy still feels qualified to talk about real estate and funny that he still does not get that there was a real estate bubble and investment is weak because inventory is high.
written by Jay, June 25, 2011 11:49
The Times have people on staff. It's a personal choice to make it look like nothing can be done about the economy. If people don't develop expectations that something can be done then they won't complain about their circumstances. The real story would be that their sources are consistently overconfident about the economy without expressing why they are so confident even when they are wrong.
new amateur term for reporters
written by bg, June 25, 2011 12:46
As someone who could not get by economic 101 @ university, but growing up in advertising, I have introduced a term in my blog comments elsewhere that most can understand & I hope will amuse you pros.:

Consumer Uncertainty - the lack of consumer spending power due to Supply-Side Stalinomics in which the consumer won't spend because the consumer has no $$ to spend.

When left to fester unattended since 1981/Reagan & unimproved thanks to Greenspan, Gramm, Hank Paulson, L. Summers + Bernanke & Geithner, it may lead to another street term:

Extreme Business Uncertainty which will increase as more companies realize that they don't know large their losses will be since consumers don't have $$$ to buy necessities, much less "luxuries."

We all know how much Markets & Businesses hate uncertainty - even when their own collective actions have caused it.
from amateur alley
written by skeptonomist, June 25, 2011 1:21
Dean always talks about savings rate as if it were determined by the housing bubble, and sometimes the stock-market bubble, but his own graph (data which I have referred to several times before) shows that this is inadequate. Savings rate turned down around 1980, while the stock market did not really take off until 1995 and the housing bubble did not develop until after 2000 - prices were pretty reasonable in the late 90's. By the time the housing bubble got going the savings rate had almost bottomed out. If there is evidence for a wealth effect it is not in this measure of savings rate.

Here's a basic question: did average net worth or other measures of wealth increase 1980-2008? During this time most Americans did not see any increase in real income, nor did most Americans own many stocks - where did the supposed wealth come from?
Consumers are still spending and not saving out of necessity
written by Paul, June 25, 2011 1:22
Economists who know about the economy are the surprised that consumers are still spending as much as they are.

Keynes would not be surprised that consumers are still spending now. With massive unemployment and income reductions, saving is no longer an option for many consumers. Whatever wealth they still have, that was not wiped out by the stock market crash and housing collapse, is now being used to maintain their minimum standard of living. The marginal propensity to consume is much higher at lower income levels - straight out of The General Theory.
The stock bubble began in the mid-90s
written by Dean, June 25, 2011 2:13

The data puts the timing of the bubbles earlier than your post. The stock market started hitting extraordinary PEs by 95-95. Remember Greenspan's irrational exuberance speech was in December of 1996. This is also when I date the beginning of the housing bubble. So most of the decline in the savings rate did follow the growth of these bubbles, although I would certainly agree that it was not the only factor.
don't forget NYC rental conversions -- 1980s
written by bg, June 25, 2011 4:47
In NYC, we saw one of the feelers/prototype runs when landlords started converting rental buildings to co-ops/condos.

Even then, the mismatch between the prices & salary level of most NYC workers started to price people out of short commute neighborhoods. Once Wall ST started the S&L/boom-bust, etc. Manhattan became "Black Car" central & was on its way to 24/7 office hours & the accompanying personnel burnouts, etc. that have also not served our society well in terms of talent lost, injured/ill or disabled.

That price is still paid with the loss of corporate history/culture & internal controls.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.