WSJ February Survey of Forecasters

The picture says it all. Based on data from the WSJ:


wsjfeb0.gif

Figure 1: Log real GDP, from 30 Jan 2009 preliminary release (blue), potential GDP (black), WSJ mean forecast from January survey (teal), from February survey (green), mean forecast (red) as related in RTE blogpost (2/11/09). Gray shaded area denotes recession, assuming recession has not ended by 09Q4. Source: BEA NIPA Q4 advance release [link], CBO estimates of 9 Jan 2009, WSJ survey of forecasters from January and February [link], and NBER.

Note the survey was taken mostly before the release of the inventory and trade numbers (Jan 6-10).


I think the downward shift going from January to February is instructive.

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57 thoughts on “WSJ February Survey of Forecasters

  1. Menzie Chinn

    Rich Berger: You really should read the article that accompanies the forecasts. The point is the stimulus bill was too small, and shifted too much to components that did not have a big impact on employment. But you need not take my word for it — please read the article (and the post in RealTime Economics).

  2. Rich Berger

    How could a professional economist not take into account the inexperience of this administration and the economic ignorance and anti-business posture of the Democrat congress?
    Menzie – can you cite me an example of a “stimulus” bill that boosted the economy in a significant (or insignificant way)? Especially considering that this bill is larded with favors to Democrat interest groups, and has relatively little immediate “stimulus”. As many others have noted, you can put lipstick on a pig, but it’s still a pig.
    My interpretation – the markets do not have confidence in this group and do not like the uncertainty that they have caused. I don’t have confidence in Obama – he’s a lightweight.

  3. DickF

    Menzie wrote:
    The point is the stimulus bill was too small…
    I have heard this to the absurd. When questioned on why the New Deal kept unemployment at double digits throughout the entire FDR rule except for WWII (and it is absurd to even talk about unemployment during a world war). The answer is always just a little bit more.
    When you have a religious faith that you are right, yet your solution never works, of course it is because you just didn’t do enough of it.
    What percentage of GDP is enough? And when you put that much in and it doesn’t work do you come back for more? If its your religion of course.

  4. bill

    DickF,
    If you concede that the New Deal had an effect on unemployment (and it did – it may not have broken back into single digits but there were several percentage points of reduction) and that the New Deal was of some size x, why do you think it’s absurd that a stimulus greater than x would have further increased employment? Sure, diminishing returns and all that, but the idea is not absurd.

  5. Larry

    Sorry to ask a dumb question, but I don’t understand the chart. The values in the chart for GDP range from 9.33 to 9.42. Current GDP is approx. 14 trn. What is the chart showing?

  6. Menzie Chinn

    Larry: In the notes to the figure, it indicates “log”. So this is billions of dollar, logged (base e). This means you can read the gap between potential and actual or forecasted GDP and obtain a percentage straight off.

  7. Steven Kopits, Princeton, New Jersey

    Trough remains roughly at mid-year. Just deeper. That’s a positive sign, I think.
    As for Obama, the country signed up for change over experience. That’s what it got. They are way in over their heads right now. That shouldn’t come as a surprise, really. Think back to Clinton, and he really had a better hand to play.
    Obama has to get off TV a bit. He’s over-exposed. Geithner needs shoring up, big time. If I were betting, I would think he’s toast.

  8. MikeR

    Menzie,
    What major changes would you make to the stimulus bill? In terms of the size, target or speed of implementation?

  9. GWG

    I read the WSJ article. And yes, some thought it was too small. But other comments included “too late”, “provides little boost”, “too big”, and my favorite, a “colossal waste of money”.
    But don’t just read the article, download the data and take a look at the Q&A. 44% think it is the right size, 31% think it too large, and only 24% think the bill is too small.

  10. GK

    I still say :
    Recession ends in Q309.
    Jobless recovery persists into 2010.
    Employment bottoms at 131M jobs (so 3.5M more to be lost from this point on).

  11. Menzie Chinn

    MikeR: Without knowing exactly what is in the reconciliation bill, not certain. I would stress infrastructure investment (both roads, buildings, electrical grid and retrofitting), transfers to the states (they’re almost all cash strapped now, and likely to be for years), primary education (including building). Wouldn’t mind adding some money to the FDA — seems like some additional inspectors would be put to good use and as a direct expenditure (instead of transfer) should have a higher multiplier.

  12. Buzzcut

    Stimulus bill too small? Uh… more like this:
    “We’re in trouble,” Mr. Fabbri said. “We don’t have sufficient economic plans at present to resolve the banking system or the financial crisis, and the stimulus package seems loaded for 2010.”
    The “stimulus” is not timely, targeted, and temporary. IT IS NOT A STIMULUS!!!

  13. ed

    I think part of the shortfall of the stimulus package is that it is too late. Every day that we wait more people lose their jobs and the problem grows. And at the rate people are losing their jobs the problem is growing fast. The TARP is the world’s counter example to “trickle down economics.” The model is flawed and go us into this mess. More trickle down will get us nowhere.
    Three things the stimulus package should include to avoid an enormous catastrophe:
    1. Extended and easy to obtain unemployment benefits. This helps to keep foreclosure rates down as well as feed people.
    2. All unemployment benefits must have medicaid or medicare associated with it. This will keep our already too expensive health care system from melting down from a flood of uninsured people.
    3. Innovation funding. The way to grow out of this problem is innovation. Not innovation in finance, innovation in products and production methods. We can develop new technology at a very rapid rate. Just look at silicon valley. If we dump tax payer money into innovation versus banking we will get a huge return on our investment in both dollars and long term economic stability. This means dumping money into schools at all levels. Pay teachers well, give innovation grants to promising graduate students, give innovation grants to promising research labs.
    That is my two cents worth. And when throwing almost a trillion dollars around it seems as though some rational thought should be put into it.
    In the time it took you to read this we probably need to add $1,000,000 in stimulus to the package.

  14. Ben

    DickF:
    Much the same has been said about the Republican drum-beat of tax cutting since 1980. The economic data is cloudy enough you can read into it what you want whichever side you are on. It’s even easier for the non-economist to do so.
    Look at the way that professional economists’ opinions broke out in the article. It appears to me that no one really knows what will happen with once the package goes through.
    I’m of the viewpoint that something is better than nothing. We can bicker endlessly about what is the best plan and where the faults are in the one we have. No one will ever be completely happy with it. I wish there were fewer tax cuts and more education and infrastructure spending. More importantly I wish it would just get out the door.

  15. Mike Laird

    So the moose in the middle of the table that no one is talking about is – what leads these 52 economists to continue in February to think that an up-turn will occur in Q32009, as they did in January? What has not changed (or has changed in a positive direction) that will cause an upturn in GDP, even though their forecast of the bottom is now lower, and their near-term forces of decline are stronger?

    There is, of course, another possibility.

  16. GK

    ed,
    I think all 3 of your points are terrible ideas.
    1. No. Longer unemployment makes people lazier about getting work. It is fine the way it is.
    2. If you are broke, you already have medicare and medicaid. If you are not broke, a basic HMO plan can cost as little as $100/month for a single person, or $300/month for a family.
    3. Innovation is already happening. Governmental meddling will just cause other problems. Teachers are already paid well. The key is, they must be paid for performance, which is what the teacher’s unions don’t want.

  17. wcw

    GK, I love that you exist, because there always needs to be someone to take the other side of my trades.
    Post your ten-year track record and I’ll post mine. And try to recall: crushing the market was really, really easy. Cash did it. Did you?

  18. Menzie Chinn

    Buzzcut: Er, look at the output gap at 2009Q4, and think about the output gap going into FY2010 (which starts at end 2009Q3). I think I’ll be happy to have the government spending indicated for FY2010 going on then… Although too bad they cut out aid to states and education. But I guess in some people’s books, teachers don’t count as worthy of employ…

  19. Jeremiah

    Can the above comparisons with the 1930s experience be relevant if the structure of the US economy is different then versus today? I believe the US was a net exporter back then and manufacturing may have been a bigger component of GDP.
    Does anyone question the rationale of stimulating an economy which is 2/3s consumption with US households already overleveraged up to 132% of GDP?
    There must be logical plan to encourage households to save and build up productive capacity rather than buy another car/computer which they don’t need.

  20. GK

    wcw,
    My 10-year track record totally blows yours away.
    At any rate, my predictions are quite reasonable, and will come true :
    Recession ends in Q309 (NBER definition).
    Jobless recovery persists into 2010.
    Employment bottoms at 131M jobs (so 3.5M more to be lost from this point on).

  21. Ron

    All smoke and mirrors. No one really knows. The dirty little secret is that we need the credit markets because we don’t have any money.
    We have a consumption based economy. When people lose their houses and jobs, or even worry about losing them, they reduce spending. We are even saving money (as a nation) right now. However the needs of the economy are at odds with the needs of the individual. The individual is hunkering down, and holding on to what little cash they have. One reason banks aren’t lending is that people are afraid to borrow.
    Until we put our individual balance sheets back in order, and get our net worths back in the black, spending will be slow. We can’t afford to borrow.
    The stimulus plan should focus on easing the transition to our new economy of pay as you go.

  22. DickF

    Menzie wrote:
    DickF: What I should have said is that the article quotes the business sector economists as saying the stimulus was too small. My error for mis-stating.
    Menzie,
    My comment was not directed at you but at the statement. The statement itself is absurd. It seems that everyone is quoting the statement about insanity being defined as doing the same thing over and over expecting a different result. It is this kind of reasoning that brings out the mantras.

  23. DickF

    bill wrote:
    If you concede that the New Deal had an effect on unemployment…
    I don’t conded your point. Unemployment in a free market is only transitory from one employment to another. To have unemployment there has to be an external force preventing work. Government is the greatest source of this because it is the only institution that can prevent work by force and practically the only one that can give a greater incentive than work.
    Hoover began the unemployment by threatening businesses to keep wage rates at a level that employment could not be sustained. This was the primary source of unemployment during his administration. Then taxes under Hoover and followed by FDR were raised to a point where businesses could not employ workers. Then unemployment payments were greater than workers could make actually working.
    It does not make sense to say that the New Deal fixed unemployment when unemployment was in the double digits for almost 10 years only ended by WWII, forced employment. When the market in the US was relatively free you never saw double digit unemployment.

  24. DickF

    Ben wrote:
    I’m of the viewpoint that something is better than nothing.
    Ben,
    If you have an infection in your finger and the doctor wants to cut off your hand do you say ok because something is better than nothing? What if you get a second opinion and he wants to cut off your whole arm?
    Something is not better than nothing when the something is destructive. Even those who support the bailout admit they don’t know what it will do or if it will help, but they are willing to take and absurdly large amount of other people’s money and try “something.” If you will let me spend your money I will be glad to try something, like join the Keynesian and spend, spend, spend. There are a lot of things I would like to have.

  25. Steve

    Keep gas below two dollars per gallon, reduce folks mortgage payments with guaranteed low interest loans, restart the housing industry and get the banks to open up the credit markets to business’s. This will allow durable goods production to rise as demand for home appliances, fixtures, electronics, etc. goes up with new homes and sales of existing ones. If we are going to be a consumption economy, then let’s get cash to the consumers. We do not need to help the rich, they have money. We do not need to help the poor, their circumstances have not changed, as they are already on the government dole. It is the working class and middle class that needs to be relieved from the triple hit they took in housing, fuel nd reduced access to credit. All this stimulus package has done is set the stage to make the dollar weaker in the future and provide pork to the winners of the last election.

  26. Ben

    DickF wrote:
    If you have an infection in your finger and the doctor wants to cut off your hand do you say ok because something is better than nothing?
    Dick,
    I don’t think you can compare the current downturn to an infected finger. If you put it in those absurd terms then of course taking the wait and see approach is best. Using the human body as an example, we are looking at something more like massive respiratory infection. We could wait and see what will happen. Things will undoubtedly get better no matter what we do. It is a question of how long and with how much pain.

  27. Terry

    I can’t believe that the group of economists the WSJ relies upon for the data reflected in these graphs still sees a recovery beginning in the second half of this year.
    Every time this graph is updated, the recession is projected to go deeper (&, indeed, the consensus didn’t see a recession until late 2008–well after the fact), but it is always going to turnaround in about six months.
    Hmmmm! Wait a minute: The economists the WSJ consults are largely flacks for bankers, brokers, ratings agencies, and their ilk. They sell hope that the turnaround is just around the corner, over the crest of the hill, or that bright light at the end of the tunnel. So, following WS logic, if the turnaround is about six months away, that’s the time for a bull market to begin on WS.
    Get in now before it’s too late!

  28. MikeR

    Menzie,
    How would you transfer cash to the states? Would it be based on need? How do you prevent it from rewarding the most fiscally irresponsible states?
    I think that the states could probably do a better job with the money than the federal government, especially if they compete for the money in some way. I know there is not much time to put in safegaurds.

  29. jult52

    Anyone else have serious conceptual issues with these projections of future “potential GDP”? Recognizing that the CBO has in fact reduced the poetntial GDP growth in the future (to the 2% range), I am at a loss about how anything can be extrapolated from the last 15-20 years of debt-fueled, unbalanced growth in a country with a gradually shifting demographic makeup.
    How about we abandon this pseudo-scientific artefact and consign to the dustbin of failed ideas?

  30. Menzie Chinn

    jult52: That’s hardly constructive. You’ve got to provide an alternative. Do you believe that output equals actual potential, up to a random error? That’s an alternative, and then people can assess whether it’s plausible or not. Or let’s see your demographic shifting potential (as if CBO didn’t understand demographics…) Otherwise, you’re just adding noise.

  31. DickF

    Ben wrote:
    Things will undoubtedly get better no matter what we do. It is a question of how long and with how much pain.
    Ben,
    I had a friend who had emphysema and was on oxygen. He would take a hit of oxygen then he would smoke a cigarette. I guess if he had doubled the number he smoked he would have gotten better.
    What you have to understand is that the economic problems were caused by government and they will not simply get better in time. As long as the government continues policies that damage the economy things will be bad. With Hoover and FDR it took FDR’s death before the government allowed the economy to work again.
    As long as the government is taking over businesses, bringing CEOs up to ridicule them for buying airplanes, or keeping the markets in total confusion about what industry they will attack next we will see no recovery.
    The market can live with a not of government intervention because they simply build it into the price of their product and pass it on, but the market cannot exist with uncertainty and that is what the government is giving us right now.
    Obama has issued an Executive Order limiting corporate officers to $500k per year for any company taking government money. If GE takes money will that apply to the actors and news anchors on their networks? If it applies to CEOs why not others? The truth is, if that happened they would destroy Obama’s reputation overnight. It is okay if it is business CEOs but when it is new anchors “batten down the hatches.”

  32. MikeR

    DickF,
    As far as the government responsiblity for the crisis, I can’t help but think that part of the blame lays in the concept that we can walk away from our mortgage debt.
    If we had some sort of debtor’s prison or incentive to pay, I think the problem would not be so bad. After all, if you are 20% underwater on your house, who cares if you ruin your credit by walking away.
    Everyone complains about the asymtric incentives for CEO’s and hedge fund managers, what about the homeowners?

  33. Ben

    DickF wrote: What you have to understand is that the economic problems were caused by government and they will not simply get better in time.

    My understanding is that the economic problems largely stem from unregulated financial practices where:

    1) financial instrument rating firms did not understand the instruments they were rating (mortgage backed securities containing sub-prime market ratings) and received money from businesses they rated

    2) an unregulated insurance industry in the form of Credit Default Swaps that were underfunded (ie, the institutions backing the CDSs did not have the capital to cover their obligations)

    DickF wrote: The market can live with a not of government intervention because they simply build it into the price of their product and pass it on, but the market cannot exist with uncertainty and that is what the government is giving us right now.

    Obama has issued an Executive Order limiting corporate officers to $500k per year for any company taking government money. If GE takes money will that apply to the actors and news anchors on their networks? If it applies to CEOs why not others? The truth is, if that happened they would destroy Obama’s reputation overnight. It is okay if it is business CEOs but when it is new anchors “batten down the hatches.”

    The markets are not uncertain because of government intervention. They are uncertain because financial and rating institutions knowingly or unknowingly traded on the value of their name. They used the trust that their customers (retail and corporate) had in them to sell bogus product for short-term gain. Now credit is so expensive because no one knows who is sitting on a pile of worthless paper. To pick a couple, Bank of America and Citigroup are both still have an undisclosed amount of bad debt on their books. No one outside the banks know if they will remain solvent if and when they write down the debt.

    The banks that have wrecked themselves came to the government for welfare to the tune of $350 billion so far. I don’t think it is too much to ask that the institutions that take money restrain their bonus programs and perks. How do the banks avoid these caps? Don’t take the money. It should be a hard decision to make. If there is no direct personal penalty to asking government assistance to the executives of corporate America, then what stops anyone and everyone from claiming the need for an immediate rescue? What is the difference between the CEOs and the news anchors? The CEOs of the distressed companies drove them into the ground through mismanagement. Television anchors don’t write company policy nor make investment decisions for their corporations.

    DickF wrote: I had a friend who had emphysema and was on oxygen. He would take a hit of oxygen then he would smoke a cigarette. I guess if he had doubled the number he smoked he would have gotten better.

    That’s two absurd illustrative examples you have used to make a point. Of course increased smoking doesn’t cure emphysema. Everyone with a basic understanding of modern medicine understands that (well, outside of the tobacco industry). We aren’t talking emphysema or infected fingers or any of that. We are talking economics where nothing is clear cut nor easy.

  34. Hitchhiker

    So, the first revised estimate after Mr. Hope and Change went to Washington is downward. I expect further revisions as decisions are made and legislation is passed. Further revisions downward, that is. If the lost decade in Japan didn’t discredit the Keynesians, I guess nothing ever will.

  35. GK

    “If the lost decade in Japan didn’t discredit the Keynesians, I guess nothing ever will.”
    Remember that socialism/leftism is a religion. Results do nothing to turn people away from it – look at how quickly Islam is growing, despite a consistent track record of ensuring poverty and bondage.
    Yes Islam has fervent adherents, just like socialism/leftism does.

  36. jult52

    Menzie: Fine. I’ll quote the CBO itself for you:
    “A spectrum of opinion exists among economists about the usefulness of measures of potential GDP for monetary and fiscal policy and for economic projections. Some economists do not think that the idea of potential output is useful, arguing that:
    The concept is based on a flawed view of the causes of inflation, even in the short run. According to this argument, inflation is determined by growth in the money supply, not by where the economy is in the business cycle.
    Potential GDP is so unstable and varies so much that it is impossible to estimate accurately, especially for recent years, and thus is not a helpful guide for policymaking or forecasting.
    Policies to manage demand generally do more harm than good because of lags, uncertainties, and political pressures. Hence, the size of the gap between actual and potential output ought to be irrelevant to policymakers.
    The experience of the late 1990s supported the position of people making those arguments, because virtually all initial estimates of potential GDP indicated a need for tighter policy to avoid inflation, but higher inflation never materialized. More-recent experience, however, has tended to support the opposite opinion: the fiscal and monetary policies put in place in response to the 2001 recession and its aftermath–which were predicated on the view that demand had fallen below its potential–appear to have been timely and to have helped moderate the downturn.
    In CBO’s view… Carefully estimated, potential GDP can provide the user with a reasonable sense of the economy’s potential for growth.
    Any estimate of potential output, however, has shortcomings of which users should be aware. First, such estimates are based on one or more statistical relationships and thus contain an element of randomness. The uncertainty surrounding an estimate of potential GDP can be reduced–but not eliminated. Second, all of the methods used to compute potential GDP have an “end-of-sample” problem. That is, estimating the trend in a data series is especially difficult near the end of a data sample, making the estimate most uncertain for the period of greatest interest: the recent past. Third, all economic data are subject to revision, and data for recent history are subject to the largest revisions.” (“A Summary of Alternative Methods for
    Estimating Potential GDP,” March 2004.)
    So, the CBO has not found its methodology effective in the late 1990s. Pretty clearly it wasn’t useful in guiding Greenspan in the post 2001 period. And the CBO admits it is error-prone at the end of the sample (2007-2008). Great metric there.
    Admitting one doesn’t fully understand something very complex isn’t a sign of incompetence, but a sign of wisdom and humility.

  37. Hitchhiker

    Ben writes, “They are uncertain because financial and rating institutions knowingly or unknowingly traded on the value of their name. They used the trust that their customers (retail and corporate) had in them to sell bogus product for short-term gain.”
    You obviously have not spent any time at all in a business school. What product do Standard and Poors and Moodys sell?
    Let me help you out with the cigarette analogy. Freedom is oxygen. Cigarettes are government regulation and taxes and spending. Because the patient has both, the quack doctors think more cigarettes might help the problem since they don’t know anything about the actual causal factors involved.
    Some level of economics is as clear cut as the law of gravity. Other parts, not so much. If nothing is clear cut, as you say, then I would say abandon the field altogether and use a crystal ball. Regardless of how much scientific evidence accumulates regarding the danger of smoking cigarettes, there will still be people willing to ignore science because they simply want to smoke. In politics and government spending, we call them democrats.

  38. Menzie Chinn

    jult52: As a former visiting scholar at the CBO, I’m aware of this document. Confusingly you are quoting critics of the potential GDP methodology quoted by CBO, not CBO’s own views (except at the end of your quote)… In any case, if you are a reader of Econbrowser, you know that we have gone through this debate over (and over) again [1], [2], and the comments attached therein. Once again, I ask, what is your alternative? HP filter, band pass, state space, Blanchard-Quah for UE, or just casting stones? I still don’t understand what your point is, in the absence of an alternative.

  39. Ben

    HITCHHIKER WROTE: You obviously have not spent any time at all in a business school. What product do Standard and Poors and Moodys sell?

    “Credit rating agencies, under fire for their alleged culpability in the subprime mortgage crisis and ensuing credit market bust, escaped Washington’s grip last week, at least temporarily…

    “During two congressional hearings at which rating agency executives testified, lawmakers floated a number of proposals but settled on none.

    “Some of the proposals pushed at the hearings would drastically change how credit rating agencies are regulated. Most of the criticism was directed at the agencies’ fee structures: They are paid fees by the very issuers of bonds and structured products they rate. In some cases, agencies act almost like a coach, engaging in what raters have described as a dialogue, in which they tell issuers the reasons they wouldn’t be able to be rated highly and suggest changes that would improve their final grade, critics say.

    “One area in which the SEC may ask Congress for more authority is its ability to strip away the nationally recognized statistical rating agency designation from A.M. Best, Fitch, Moody’s, Standard & Poor’s and several others. Mr. Cox told reporters that the current process requires a lengthy series of procedures and due process. That may need broadening, some say.”

    [FINANCIAL WEEK, OCT 1 2007] Emphasis added

    ANSWER: They sell ways to manipulate their own rating systems. That kind of defeats the purpose of being an impartial rating agency. I don’t think they are all tainted, but enough are to cast doubt on the whole lot.

    HITCHICKER WROTE: Let me help you out with the cigarette analogy. Freedom is oxygen. Cigarettes are government regulation and taxes and spending. Because the patient has both, the quack doctors think more cigarettes might help the problem since they don’t know anything about the actual causal factors involved.

    I don’t need help on the analogy. I just think it is a bad one. Show me proof that government regulation was the cause of the current economic downturn. Draw an actual link with information of some sort, don’t just say that is the way it is. Your assertions of your own correctness and insinuations about my personal knowledge and experience lend your argument the air of dogma.

    BTW, MBA with Concentration in Operations and Japanese language. I am currently an analyst at a medically related IT firm. Don’t make assumptions about who you are talking to.

  40. Gary Semple

    Menzie,
    Do you believe the banks have incorporated the effects of government intervention on the mortgage situation (there will be more foreclosures as gov’t intervention will delay level-setting) in terms of increased foreclosures beyond current projections? Also, what is your projection on commercial paper defaults? Are the banks adequately forecasting this increase in their reserves? What, if any, of the CPFF (commercial paper funding facility) has been used?

  41. MarkS

    It is with great amusement, that I read the partisan bickering regarding the “Stimulous Package”… What is true, is that the banking system is in crisis, with many money center and regional banks in technical insolvancy; a transportation system that is unsustainably fueled by imported oil that we pay for with industrial assets further escallating the current account deficit; and a legal/legislative system that has been captured by legacy corporate interests.
    The primary reason for the “Stimulous” is to reduce the total number of unemployed and total number of failed businesses. It is the least the federal government can do after extracting 30% of worker’s wages for the last 40 years.

  42. GK

    “The primary reason for the “Stimulous” is to reduce the total number of unemployed and total number of failed businesses. ”
    Why is there a belief that the government has the magical ability to do this?
    Many people die each year from falling off of buildings, cliffs, etc. Why doesn’t the government repeal gravity in the area around places from where a person can jump off? It can save lives. It is the least they can do.

  43. Hitchhiker

    Ben writes, “Your assertions of your own correctness and insinuations about my personal knowledge and experience lend your argument the air of dogma.”
    Touche. I can be very dogmatic about my assertions and belief in my correctness. The other side is even more so in its belief that some government bureaucrat is better able to make business decisions than someone with their own money at risk.
    Why don’t we just outlaw rating agencies and let a government department objectively and in a bipartisan manner recommend risk levels for debt instruments and so forth? Personally, I would rather let a monkey throw darts at a board to determine such things. One must always look at the source to determine credibility. Giving the SEC or anyone else more authority over agencies formed to be ‘objective’ analyzers of risk is not going to help, at all.
    After all, it is politicians meddling with risk that got us into this predicament, hence the cigarette analogy which I think fits perfectly. There are many others that could explain it just as well.
    Imo, too many economists are like too many politicians. They have manufactured so many macroeconomic concepts they start believing they can manage things from the top down forgetting the macro numbers are simply mathematical representations of millions and billions of personal voluntary transactions and the forces involved in those transactions ultimately determine the macro situation. Again, in my dogmatic opinion, when economics truly matures as a science, the work of Keynes and Galbraith will be regarded as completely worthless.
    I could get very long winded on this subject but, I happen to believe there is only truly two ways the view the world and it boils down to religion or dogma for the irreligious. We can allow freedom (choice) or not. The not has been the preferred method throughout history and is proven far inferior to overall economic prosperity. Back to cigarettes and oxygen as metaphors. Control of others is intoxicating and addictive to many especially politicians and some economists.

  44. ron

    “The dirty little secret is that we need the credit markets because we don’t have any money.”
    World GDP has been running on cheap available credit, sort of a super size me financial burger. The main players the U.S. and china do not have a plan B so we can expect another 50 years of debate about the size of this and that gov’t program which in the end demand more on political leverage and corruption and meaningless stimulus to increase consumption focused around auto and housing which both are in longterm decline.

  45. gaius marius

    if i may – the most pronounced quasireligious conviction apparent in this dialogue is the demonization of government vis-a-vis other forms of collective action. i would have thought watching deregulated finance commit a suicide almost unrivalled in the annals of government in the zeal with which it was undertaken would have dispelled this staple of simpleton’s wisdom.
    the trouble with government is exactly the trouble with corporations and that is agency. government can be exactly as effective as any corporate entity given proper incentive structure. the trick is constructing that structure. rewards AND punishments, mind you.
    financial deregulation clearly failed to leave intact a balanced incentive structure and thereby loosed the gorgon. government must restrike a balance, as such structures clearly don’t arise spontaneously short of hobbes’ lowest common denominator.
    the difficulty is in ensuring a balanced incentive structure to mitigate agency issues at the government level. this is what worries me intensely about the response to the crisis we’ve thusfar seen. it is doing some things very effectively, but they are not in what anyone would see as the public interest. to what end is government working?

  46. Observer

    Free market believers crack me up. Free markets only exist either at the beginning of a market when the playing field is level for all start ups and whenever the majority player(s) in a market lose market share due to a lack of innovation, a crash in the future of that market or poor business decisions.
    Once a market is mature, there is no such thing as a free market. It is a myth or perhaps even a religion with disciples who refuse to acknowledge facts to the contrary.

  47. Ben

    Hitchhiker,
    I do understand the dislike of government regulation and control. I have seen plenty of examples of good-meaning legislation creating bad business activity. For example, current fair labor standards insinuate that even asking an employee if the need help with a personal condition (say, bad back) puts the employer at risk for lawsuits later on. If the employer has demonstrated an assumption that the employee has an issue and later fires them, that can be grounds for a discrimination suit.
    I think what it comes down to is a question of how much government regulation and control are we willing to tolerate. I am willing to tolerate more if it means a more stable market and real reprocussions for those who cross the line. I also believe that letting distressed financial institutions fail is the best way to do that as long as it did not bring the rest of us to our knees. With the finacial institutions as large and powerful as they are, I fear that kind of collapse would put all of us in a very deep hole. I don’t want to lose my job because a bunch of mortagage brokers decided that giving out money without basic due dilligence was a good business practice. I saw it first hand buying my house. I told the guy on the phone how much I made (truthfully) and I got north of $200k without any more hassle.
    All that is a long winded way of saying I see where you are coming from. I have a different view of the cost-benifit in the situation.
    At the end of the day we will have to agree to disagree. I am sorry if I came of a bit rabid myself. My wife says I am too intense about it sometimes.

  48. jult52

    Menzie – Please don’t resort to arguing via authority. I have no problem with scholars grappling with complex topics like equilibrium growth rates. I do have a problem with the results of such studies being jettisoned into the public arena – without acknowledging that they are likely wrong and based on incomplete understanding. I apologize if I have hit a nerve with you, as I have been reading your posts with interest for years.
    Given the distortions in the US economy in the last 15 or so years (or maybe 25?), we simply have no idea of its potential growth rate, None. And, yes, demographics certainly add an element of uncertainty, because no one has any idea what this generation of aging US baby boomers will do later in life or what the younger generation of Americans will do in the future. Both groups of our fellow citizens have important characteristics that are unprecedented. Calculations of potential GDP growth project statistics on to history and then etrapolate with too much precision.
    Thanks for your responses.

  49. DickF

    Ben,
    Since you cannot understand medical analogies let me use a financial analogy.
    You cannot pay off all you debts by putting them on a new credit card.
    Or Zimbabwe was once known as “the Bread Basket of Africa.” Mugabe nationalized the farms and now people are starving in Zimbabwe.
    Does that help?

  50. Ben

    DickF,
    Fantastic! Thanks for the help!
    It’s not that I don’t understand your oversimplified medical analogies. I think your comparisons associate the relative clarity of medical diagnosis with the utter confusion of the massive economic decline we are experiencing. If we run with your analogies then I am a clear idiot. I think that you imagine no one can disagree with you without being a moron.
    So thank you for clarifying.

  51. Ralph

    Dust Bowl. This recession may be as bad as the 1930’s depression without the dust bowl. I heard 10 million were unemployed then which is around what we are experiencing now.

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