“Anyone who confuses this entertaining film with valid history should resolve to read “Missing the Point: Lessons from ‘The Big Short,’ ” by American Enterprise Institute senior fellow Peter Wallison, an essay published in June 2010 when the book came out…
…And for a real perspective on what actually happened, read Wallison’s recently published Hidden in Plain Sight.”, Gene Epstein, New Year’s Economic Resolutions, Barron’s, January 2, 2015
New Year’s Economic Resolutions
Our editor has one for himself, and a bunch for others to follow
By Gene Epstein
Keeping New Year’s resolutions may be difficult, but making them is easy, especially when we impose them on others. Herein a few relating to the economy.
Renaissance Macro Research economics head Neil Dutta would have the Federal Reserve resolve to “stop focusing on abstract concepts such as Nairu as a rationale to keep rates low. Instead, just focus on the numbers as they come to us.” As Dutta says, “Growth has certainly been running strong enough to push the unemployment rate down, with both wages and underlying inflation on the increase.”
Nairu, in case you forgot, stands for “non-accelerating inflation rate of unemployment”—the unemployment rate at which inflation remains steady. With unemployment at 5%, there is disagreement about whether Nairu has been achieved. Dutta would have Fed officials resolve to forsake these irresolvable disputes.
Economist Mark Skousen, author of The Structure of Production, would have analysts resolve to “stop perpetuating the myth that consumer spending drives the economy, based on such demonstrably false statements from Yahoo Finance that consumption ‘accounts for more than two-thirds of U.S. economic activity.’ ” As Skousen points out, the more valid measure for tracking economic activity is not gross domestic product, but gross output, which captures all the business-to-business transactions that GDP omits. Against GO, consumer spending doesn’t even account for half of economic activity.
More to the point, Skousen is right that the real drivers of the economy are investment and entrepreneurship. The focus on consumer spending amounts to the absurd idea that we can consume our way to faster growth. This has been the slowest expansion on record, not because of slow consumer-spending growth, but because of below-par investment and entrepreneurship.
Consumption does help determine short-term decelerations and accelerations in growth. Right now, for example, I believe an acceleration will help propel growth to better than 3% in 2016, a growth rate that would still be consistent with the below-par expansion. But as a columnist, I must doubly resolve to avoid leaving the false impression that consumer spending is the main driver.
ECONOMIST SKOUSEN, who is also the editor of the investment newsletter “Forecasts & Strategies,” urges investors to resolve “not to succumb to the ever-present doom-and-gloom promotions that are constantly predicting that the economy and the stock market are about to fall off a cliff. Many investors have seen their portfolio lose up to 70% of their value in gold, mining stocks, and other ‘safe havens.’ ”
I take his point. Too many bears are stopped clocks, right twice a day. But I resolve to stand up for short sellers, those stalwart vigilantes who risk their money by putting sand in the wheels of bull markets that might be overdone.
My resolution is prompted by having seen the popular film The Big Short, based on the Michael Lewis best seller of the same name, about traders who shorted the mortgage market leading up to the bursting of the housing bubble of 2008. Anyone who confuses this entertaining film with valid history should resolve to read “Missing the Point: Lessons from ‘The Big Short,’ ” by American Enterprise Institute senior fellow Peter Wallison, an essay published in June 2010 when the book came out. And for a real perspective on what actually happened, read Wallison’s recently publishedHidden in Plain Sight.