Dow Drop

As I Was Saying

The market turned over a week ago. It was a sell the rallies market. Some short covering this morning, not conviction buying.

One of the things that is making the market turn is the way the mainstream economists have calculated GDP. Here is a much more in depth academic discussion of what I blogged about. Fair warning, the link is very academic.

They give high marks to government spending for creating economic activity.

Classical economists do not. One of my fav blogs back in the day was the Becker-Posner blog. Both are deceased now. Becker is deceased, Posner has dementia, unfortunately. Becker said “the effect of government spending on GDP is close to zero or even negative.” His statement is echoed by plenty of others.

For a window into the backyard of economic research, read this.

One young researcher (not at this conference) told me, in response to a similar complaint, “yes, I completely agree. You’re right. I’d love to do it this way. But I need to get papers published, and if I put in the standard Taylor rule nobody will object. If I use the King rule or, God forbid, FTPL, I’ll never get the paper published.”

I see something of that quandary when I referee a paper. I have refereed plenty of papers with these standard ingredients. I feel mighty grumpy writing “well, this is a beautifully executed paper, but I think equation 1 is silly.” I feel grumpier still when I recognize that the journal publishes may other papers with the same equation 1. It feels unfair that this paper got me, who will stand up and object to the naked emperor. But are we about being fair or about being right? Something happened in 1975 that referees felt emboldened to write “well, I know your journal has published 1000 ISLM papers, but it’s wrong and it’s time to put a stop to it. I’m sorry for this author.”

I have that quandary at conferences. I really do try to be polite, and complaining about equation 1, which the author can’t do anything about at this point, is not very polite. I’m also worried about becoming one of those old guys who keeps pushing his own particular hobby horse and haranguing young scholars over methodology while they roll their eyes. In this case, I see enough grudging agreement that the emperor has no clothes, and only a lack of coordinated social will to start doing something about it, that I hope I’m not falling in to that trap. Still, if you agree, it would be nice for someone else to object to equation 1 from time to time!

The academic backyard bickering over how to calculate GDP isn’t going to help your portfolio. But, at least it will help you sift when you hear the news. The talking heads on the business channels aren’t going to do it for you. They just want your blood pressure high and want clicks.

Another thing to remember is the mainstream press will run to highlight the economic releases that it wants to highlight to burnish the topics it wants to talk about. If your assumption is that the mainstream press is that Trump is an evil person who must be defeated, you also have to assume that they will highlight the things in the business world that make Trump look bad. Because of the way the mainstream has always looked at and reported GDP, the cuts in government spending being proposed by Trump are going to lower GDP and make him look bad.

I was thinking about this in relation to the 1987 crash. Merchandise Trade became “the number” for a while. It made Reagan look bad because we were importing much more than we exported. A bad Merchandise Trade number along with fears about the Japanese broke the markets back.

I’d watch for that number to make a comeback in breathless reporting under Trump since his slogan is “Make America Great Again.” Even though Trump is trying to restart American manufacturing, we will still import more than we export.

Deregulating business and manufacturing along with a tax decrease will do a lot more than tariffs to jumpstart American manufacturing. Going to a consumption tax system will be a boon for American manufacturing.

For their part, the Democrats want to encourage chaos. They are doing everything in their power to do just that. My X feed is filled with lies about how Republicans are going to kill Social Security and other federal programs. They aren’t but they are laying off people, which God forbid will have an upward effect on unemployment.

If the only reason we had a strong economy was government spending and government employment, we didn’t have a strong economy.

Trump made a gigantic mistake this morning by criticizing Thomas Massie. Massie voted against the spending bill in the House because it increased spending. Trump wants a deal. Massie has libertarian principles. Let’s hope Trump finds a way to wiggle out of the mistake.