Comments (15)

• Sooper Dave

  Is the help wanted index still a reliable measure with the increase of internet job searches? The monster.com employment index is still on the rise.

  Published: November 28, 2006 9:20 AM

• RogerM

  Fascinating analysis!

  The frequency of recessions has declined significantly since 1980, and I'm wondering if financial deregulation has something to do with it. A few years ago, the banking sector controlled just 30% of the total lending industry in the US. It may be even less now. Corporate bond issues and large financial groups like GE Capital and GM took away bank's market share. These companies don't practice fractional reserve banking, so they should have a dampening effect on the Fed's policies. It's just a thought. Any comments?

  Published: November 28, 2006 9:29 AM

• N. Joseph Potts

  I wonder if the AMS growth-momentum series might be more "leading" than real GDP. There's nothing wrong with using a more "leading" series for recognizing cycle phases, but if one accepted the TIMING of the GDP and its content (aggregate outlays, an observable thing), I wonder what would arise from replacing the wholesale-price deflator with the (inverse of the) growth momentum of AMS in calculating a real GDP?

  It might serve even better as an indicator/definer of cycle phases. Somehow, replacing an estimate of current expenditures with an estimate of the money supply seems a radical step, perhaps more radical than necessary.

  Published: November 28, 2006 9:57 AM

• billwald

  The last sentence is the winner, ". . . harder to make ends meet." It just occurred to me that both recession and inflation make it harder to make ends meet. The working class who are the majority of any society need price stability more than the freak chance of winning the lottery or getting rich by some other method because "bird in hand . . . ."

  Not many company towns left so I suppose no one else has noticed that half the when Boeing, for example, announces a layoff the stock price rises. Why is this? Because there are two economies in the world, one for the owner class and one for the worker class. In one sense, it is a zero economy game. The company becomes more efficient so the owners get higher dividends. Doesn't matter that some workers are out on the street.

  You all know that slavery was tried in the New England states but failed? It was only after that experiment that the North became self righteous about slavery. Why did the experiment fail in the North? Because the slaves still had to be fed, clothed, and housed when the factory orders fell. It was much cheaper to hire free white people when the factory had orders and lay them off in the middle of the winter when the river froze and the mill stopped turning. It didn't matter that the worker also froze.

  It was different in the South because the weather was warm. The slaves could grow their own food and make sufficient clothing to stay alive when the fields were fallow.

  On the other hand, thanks to increased productivity, the nature of poverty has changed. My Father-in-Law probably spent 10 times my annual income but I had all the same sorts of consumer goods he did. His toys were of a higher quality but mine did the job. The people on welfare have more consumer goods than we did combined. Neither John nor I had a cell phone or walked around with a music machine screwed into our ears.

  Anyone else remember the old comic strip, "Bringing Up Father," (Maggie and Jiggs)?" In those days the rich people dressed formally and rode in limos. These days the rich are much smarter and less of a target for class rage. Bill Gates dresses like anyone else on a public gold course.

  It is much cheaper for our current owners to supply bread and circuses for the working class. The cost of food has dropped from 50% of one's life energy to less than 10%, and that includes beer and pizza. The circuses are broadcast right into our living rooms, kitchens, and in some cases, bathrooms. There is even enough for the barbarians at our gates.

  I'm not complaining because I like cheap beer, cheap chinese chow, and my favorite residence was a 23 foot travel trailer. But it boggles my mind why most Libertarians want to return to the bad old days when half the working people put cardboard in their shoes in the winter and the middle class had live-in servants.

  Published: November 28, 2006 1:39 PM

• RogerM

  billwald:"But it boggles my mind why most Libertarians want to return to the bad old days when half the working people put cardboard in their shoes in the winter and the middle class had live-in servants."

  Data from the US Census Bureau show that inequality is much greater today than anytime in the past for which we have data. Although the inequality has gotten worse, the people on the bottom and middle have become much richer. To what would you attribute the increased wealth of the poor and middle classes with increased inequality?
  

  Published: November 28, 2006 3:01 PM

• Eric

  billwald:

  It is a mistake to compare the lifestyle of people a century ago, while much freer, to those of us today, much less freer.

  A century ago there wasn't even any electricity etc. It wasn't the loss of freedom, or the growth of government that improved our lifestyles - it was the rise of technology, despite the setbacks of government - big taxes and big wars.

  You are comparing apples to oranges. You need to first determine what life today would be like if we were able to keep the extra 60-70% of our output (compared to a century ago) that is taken in taxes and regulation costs (minus the slim benefits received from government).

  Or you could consider what life would have been like a century ago if people had to live on 1/3rd of what they had at the time. One way to look at that is how they lived during the civil war vs. the years just prior to that war. During the civil war, taxes were higher, people had less freedom, and the government controled everything.

  Either of these comparisons would then be closer to apples to apples.

  Published: November 28, 2006 7:33 PM

• John Hall

  It seems to me that the definition of the AMS is basically M1-Traveler's Checks. And Mr. Shostak's definition of momentum of AMS is the year over year percent change in AMS. I'd really appreciate if someone could correct me if I'm wrong.

  Published: November 28, 2006 9:19 PM

• Mark Anderson

  Thanks to Dr. Shostak for another fine piece.

  I find it breathtaking that prevailing orthodoxy holds the view that the GDP measures economic growth simultaneously with the view that to calculate the "real" GDP it must be discounted for inflation.

  Since when does economic growth need to be discounted for inflation? Either we are having economic growth or we aren't. If the GDP does measure economic growth, then it need not be discounted for inflation, since economic growth need not be discounted for inflation.

  Since all GDP growth is either real or nominal, and since the GDP admittedly has an inflation component that must be discounted for inflation, this means that all GDP growth is nominal. Using indexes such as the CPI - which doesn't capture inflation - to try caclulate how much of the GDP is "real" vs. "nominal" is altogether chimerical. The GDP itself is a much better indicator of inflation than the CPI.

  The other fallacy I have noticed is that many orthodox economics text books define economic growth as nothing other than a rise in the GDP. It seems to me that one should be able to define economic growth before one can measure economic growth. How is it that economic growth can then be defined a rise in the very indicators that supposedly measure economic growth?

  The fact of the matter is that economic growth is a lessening of the unsatisfaction of wants or demands. Wants, or demands, are purely subjective. This means there is no econometric model than quantatively measure economic growth. GDP growth is nothing to be thankful for.

  Published: November 29, 2006 4:36 AM

• Paul Marks

  If government in 1906 had increased the level government spending and taxation to the level (as a percentage of the economy) that is now, there would have been mass starvation.

  The idea that higher taxes, higher government spending, or more government regulations have improved living standards is the exact opposite of the truth. Living standards would be far higher today had the growth of government not occured.

  It is the same with the laws supporting unions (such as the laws forbidding an employer to fire someone who joins a union, or the laws allowing obstruction "picketing"). Far from meaning wages and condiditions are better in the long term (than they otherwise would have been), union power helps cause an industry to decline - leading to long term wages and conditions being lower than they otherwise would have been.

  As for empirical evidence (for people who do not believe in the existance of laws of economics)- their was a vast improvement in wages and conditions in the United States when government was tiny and unions were of no importance.

  On the matter of the credit-bubble. It must be remembered that delaying a "tightening of the money supply" (i.e. stopping the vast increase in credit money) simply makes the eventual recession worse.

  American money supply growth seems to be slowing (especially so called "narrow money") and a recession may result, but this does NOT mean that the money supply should be expanded. Indeed countries where the money supply is still growing rapidly (such as Britain) will suffer a worse recession in due time.

  Published: November 29, 2006 7:43 AM

• Jeroen

  I was very disappointed in the lay nature of Frank's article. This paper read worse than a freshman economist paper. I am very sorry to say this and hope that future articles will be up to par

  Published: November 29, 2006 11:42 AM

• Pantelis

  Jeroen,
  You seem to critisize Frank's "lay nature" of his article however you do not discuss any flaws with regards to the content. I believe someone of Frank's knowledge & stature purposefully writes in a lay & logical manner in order to illustrate the essence of the issue to all readers (not just experts such as yourself). It is a very rare ability these days in order for someone to express in simple & logical terms what they are trying to say & that is a gift which Frank has. Only a person with abundant knowledge of economics has the ability to express such issues in a "lay" nature.
  Pantelis

  Published: November 29, 2006 3:49 PM

• Joe Calhoun

  I have been thinking about this subject for some time. It does seem that recessions, however they are defined have become less frequent and less severe. I generally agree with the analysis that GDP is a poor way to measure economic growth, but that doesn't change the fact that economic cycles seem to be moderating.

  I think the appearance that cycles have moderated is primarily due to globalization, something every libertarian should favor. Certainly we don't live in a perfect world and we are quite far from true free trade, but the benefits of globalization are there for anyone to observe. Unfortunately, the benefits allow our Fed to do what it does best (print money) without having to face the consequences, at least not yet. Here's my abbreviated analysis.

  Since the early 80s we have seen US corporations outsource more and more of their operations - primarily manufacturing. They have retained the design and marketing/sales function which require fewer workers and less capital. The developing world (read China now), being more interested in jobs than profit, creates an oversupply of manufacturing capacity. The (over)supply of cheap manufactured goods creates a deflationary effect on consumer prices as measured by the US (and other developed world) government (how that is done is a whole different argument).

  The deflation in manufactured goods allows the central bank to pursue a more expansionary monetary policy than otherwise without causing consumer inflation. Unfortunately, non tradeables (services, real estate,etc.) are subject to the inflationary policy of the central bank as are assets such as stocks and bonds.

  Our economy seems less cyclical because we have outsourced the volatile part of the production process. If Intel sees weakened demand for chips, they will tell Taiwan Semi to produce less and TSM may lay off workers. Taiwan's economy is volatile because they depend on manufacturing. Intel will not lay off design people or marketing people because they will continue to need them unless sales really plummet.

  As for monetary policy, this also explains why we keep getting asset inflation. Our corporations require less capital (US Corps have record cash on the balance sheets right now) and have higher profit margins because they outsourced the low margin part of their business model. This excess capital becomes part of the pool of capital available for investment (or more accurately, speculation). In addition, the central banks of the developing nations have to invest the excess foreign currency reserves (primarily dollars) that are a natural result of the globalization process.

  So we get asset inflation because the deflationary effect of globalization on consumer prices masks the inflationary effects of Fed policy. I actually think US consumers are rational when they continue to take on more debt. If there is inflation, it makes perfect sense to borrow at what are actually negative real interest rates and pay back in cheap dollars.

  I'm not an economist so I'm sure there are flaws in this, but it makes sense to me. Please correct me where I'm wrong.

  Published: November 29, 2006 5:56 PM

• Dean

  Jeroen
  What's wrong with writing in layman's terms? Frank should be commended for writing in plain English, rather than the obfuscatory language so common in economics.
  If wading through masses of ridiculous terminology and mathematical equations is more to your liking then I suggest you stick to reading The Journal Of Finance.

  Published: November 29, 2006 6:13 PM

• Thomas

  I found the article very interesting, although I admit I am fairly new at this. I would like to know how AMS is calculated. It seems very difficult to get a definition of what "money supply" is these days. Even Greenspan admitted he could not calculate the money supply. Is AMS the most useful number and how is this calculated? I would appreciate any help on this confusing topic. Thanks

  Published: November 30, 2006 8:10 PM

• Rob

  "It does seem that recessions, however they are defined have become less frequent and less severe. I generally agree with the analysis that GDP is a poor way to measure economic growth, but that doesn't change the fact that economic cycles seem to be moderating."

  There are severe problems with long term comparisons of economic time series, for the simple reason that the govt. manipulates how the data is recorded, for its own benefit.

  Buisness cycles haven't been moderated, but defined out of existence.

  For example, the CPI has been changed (some may say manipulated) multiple times to better "measure" inflation.

  If the govt. borrows money, and creates deficits, in the U.S. system, that is tantamount to printing money, at least in the short run.

  As we all are aware, the more money in circulation, the less value each unit holds, and the price of goods and services goes up.

  Are these price changes proportional? The Austrians correctly say no, while mainstream economists don't really pay much attention to the price distortions caused by inflation.

  The law of demand states that when prices rise, quantity demanded for a good falls. Since inflation does not affect all prices equally, consumers will shift to cheaper products to satisfy their wants.

  How do the inflationists (I mean govt. economists) interpret this? They argue that the CPI overstates inflation. If you would have bought steak this time last year, but chose hamburger this year because it is cheaper, then your purchasing power has not been eroded because of this substitution effect.

  If the point of a price index is to measure price changes, than trying to measure the substitution effect biases the measure downward.

  To be fair, there is some justification to weighting any price index by the relative importance (ie. volumes bought/sold), of each good.

  But this weighting procedure points out how arbitrary the price indexes truly are. You can come up with any inflation rate you want to by using the weighting method, by choosing what goods to include or exclude, or by incorporating "hedonic" improvements.

  Lets not forget to consider the manipulations of GNP/GDP. Politicians need numbers to spin, and if that involves manipulating economic data, then so be it.

  I'd say the reporting of economic data has deteriorated significantly in the past 20 years, and appears to be getting worse. Things always look wonderful at a major peak.

  Published: November 30, 2006 10:57 PM