Bad News That Isn’t “New”

The revised rate of real GDP growth for the 4th quarter of 2008 was released this morning.

This is the second of 3 releases of this number. Every quarter gets 3 announcements, coming 1, 2, and 3 months after it ends.

This revision to –6.2% is much worse than the first estimate of –3.8%. That’s bad. The –3.8% was the worst in 26 years, and the –6.2% is still the worst in 26 years (although it is a lot closer to the –6.4% we registered in 1982 I).

Keep in mind that the media likes to push this as new news. It is new, but not really that new. We tend to hear about these later revisions more when they change the estimate up or down substantially (like this time around). And, the news business being what it is, we hear more about this when the revision is downward.

For example, this news item was at the top right of the headlines on Drudge Report when I got up this morning, and it was listed in red instead of black. In other quarters, where there is less change, I sometimes forget about the announcement date (which I know by heart) because the news sites don’t put it up front like this.

Pessimism Porn

Pessimism porn is the meme of the new year, eh?

Paul Kedrosky, in an op-ed in the Globe and Mail has the best description:

People are revelling [sic] in sending one another scary stories about the awfulness of the current awfulness.

Even better:

The Greater Depression!

Kedrosky has a very good finance/macro blog and has even used pessimism porn to title some posts (here and here).

The original source was an article in The New York Times Magazine, entitled, what else, “Pessimism Porn: A Soft Spot for Hard Times”.

There are lots of players in this mini-industry, but the biggest is probably Nouriel Roubini – a very bright NYU professor whose been preaching financial doom and gloom for … well … since before the last recession. Who knows – maybe he’s right.

So, why the porn metaphor?

I searched for a site that would list the warning signs of porn addiction. I don’t know if they’re good, but they seem reasonable. Here they are:

1. Time - looking at porn is taking up more time and more time. It is no longer just a means to an end.

2. Cost -  looking at porn is beginning to cost you because you are neglecting other areas of life (for example, you're not doing your job properly or your relationships are deteriorating.)

3. Objectification - after a porn session you're looking at everyone in a sexual, porn-filtered way. (In the Friends episode The One With The Free Porn, Chandler realises [sic] he and Joey have to turn off their free porn channel when he goes to the bank and is surprised the teller doesn't ask him to 'do it with her in the vault.' Funny but it reflects the truth.)

4. Desensitisation - in some cases, people find themselves looking at harder and harder porn, even at material which conflcits [sic] with their personal values.

5. Acceptance of the message - wanting to take what you have seen in the fantasy of porn into the reality of your life. (For example, wanting to suggest it to your partner or wanting to join a club or chat room could well be warning signs.)

Now, to turn this around, the signs that someone has a problem with pessimism porn are:

1. Spending a lot of time reading and talking about the bad economic news.
2. Focusing on bad economic news is interfering with other parts of life.
3. Surprise that others aren’t quite as obsessed with the bad economic situation as they “should be”.
4. Worse economic news is rush.
5. Acting on the bad economic news when there isn’t need to.

Does this sound like anyone you know? It sounds like quite a lot that I know.

Poseurs

Most people go to TV news for information on macroeconomic issues.

So, you’d think it would be really important to have macroeconomists on those shows.

Not!

Media Matters did a study of this and found that only 6% of the pundits on TV discussing the current economic situation and the stimulus package were economists.

Media Matters purposefully used a broad definition of "economist" to be inclusive, coding as an economist any guest who has a master's degree or doctorate in economics or who has served as an economics professor at a university or college, as best as we could determine.

Note that this is economists; macroeconomists is a subset that is no doubt smaller still.

I don’t think you can get those kind of numbers by accident. I think it is useful to ask why it is so important for the legacy media to misrepresent their talking heads as economists.

N.B. If you don’t know the meaning of the word in the title, this is a good time to plug in the keywords “define” and “poseur” into Google.

Policy and the Ongoing Financial Crisis

The problem with a lot of policy is that it is like holding a water balloon: if you see a problem and respond to it, another problem is created somewhere else (just like pinching a water balloon in the spots where it is bulging).

I bring this up for two reasons, and bear with me while I explain.

First, about a month ago I remarked casually that everyone is supposed to know that primary residential real estate (a home you own and live in) is a lousy investment. Many people – including some of you – don’t know that.

Second, Peter has brought up a book he is reading for Harrop’s class called The Wealthy Barber. Peter noted that the book confirms part of what I said (and adds other arguments that I didn’t make, but don’t disagree with).

People get fooled into thinking that primary residential real estate is a good investment by not recognizing or understanding the leverage involved. For example, if you buy a $100K with 20% down, and the value of the house goes up by 10%, you now owe $80K on something worth $110K. That gain is yours, not the lenders, so you’ve made a 50% profit on a 10% appreciation. What leverage does is amplify gains and losses - you get higher returns because you’re taking on extra risk.

So what does all this have to do with policy and water balloons?

After the Great Depression, our government set in place laws and regulations to strongly discourage the use of leverage in the purchase of stocks. This was felt to be a big contributing factor – through margin calls – to the huge stock market (and wealth) declines that started in 1929.

In its place, they created an industry out of thin air – the now defunct savings and loan industry – whose role it was to facilitate the leveraged purchase of primary residential real estate.

So … the economy is the water balloon, and government sanctioned leverage investing is the hand squeezing it. Moving the hand doesn’t change the problem. You’d think they learn.

Michelle Muccio’s Policy Suggestion

A video about a policy suggestion by Michelle Muccio has been getting a lot of airplay on the internet (and she got interviewed on the legacy media the other day).

In short, her idea is a tax holiday for FICA taxes.

The pros are that it is simple, transparent, and cheap to implement.

The cons are … well … um … you can’t make people spend the money they get to keep, and you can’t control what they spend it on. Cafe Hayek has a good quote about this:

If ordinary Americans truly are struggling to pinch pennies these days, there should be little worry, even for a Keynesian, that the extra money workers get from a suspension of their payroll taxes won't be spent.  However, if you're a politician, the ways private citizens will spend these monies are not under your control -- a fact that renders the political class terribly allergic to Michelle's plan.

I mentioned this in class on Friday: the real conflict with the stimulus package is not between Democrats and Republicans, it is between centralizers and decentralizers. The Republicans voted against the stimulus package because they are out of power. When they were in power, what they did was pretty much constantly centralize and stimulate the economy (and the Democrats were against their policies).

More broadly, I think you should recognize how problematic this is: Ms. Muccio is connected in the D.C. political scene, and yet to get anyone to talk about this as an alternative she has to promote it as a viral video. That’s twisted.

Urban Myths

After most of you left on Friday, I grabbed Mike Terry and said we should look his e-mail right then and there.

So, we put a few keywords that roughly fit the e-mail he mentioned into snopes.com and quickly found information that supported the points I’d made in class. I’d like to repeat this experiment in class today.

In the future, if you hear something about the macroeconomy that seems odd, there are other sites that collect and check urban legends like this: about.com urban legends page, the AFU archive, and scambusters.

In macroeconomics, urban legends come up in two contexts.

First is innumeracy (just like illiteracy, but with numbers). If people can’t or won’t do the math for the sort of numbers we talk about in macroeconomics, then they are more open to manipulation by the unscrupulous.

The second context is related to critical thinking. Research on critical thinking shows that the problem when this doesn’t occur is not usually that people can’t think critically about an issue, but that they have certain issues for which they “turn off” their critical thinking ability. A broad term for that is “faith”. A lot of political issues boil down to faith, and when they do, there is a lot of room for urban myths: politically faithful Republicans will believe all sorts of nonsense about Democrats, and vice versa.

Definitions

I recommended that you look up “hyperbole”, and its adjective form “hyperbolic”. I can’t remember the context for using those words, but there’s cause to use them a lot when talking about policy.

I also recommended you look up “ossified”. That’s a medical term, but one often borrowed to describe how bureaucracy works in practice.