Luskin Takes on the Bears

Paul Krugman foe Donald Luskin has a new article at smartmoney.com that challenges the rhetoric of those who claim a recession is imminent.

Consider the case of Robert Rosenberg, the celebrated economist for Merrill Lynch. He's been bearish forever (that didn't stop Merrill Lynch from throwing away untold billions on foolish investments in exotic subprime mortgage derivatives — but that's another story). Rosenberg is one of those economists who is very facile at quoting economic statistics — and massaging them to make his bearish case. Unless you're an economist yourself, it's pretty easy to get swayed by his seemingly authoritative arguments.

This week, following the announcement that the unemployment rate has risen to 5% from a low of 4.4% earlier this year, Rosenberg has gotten a lot of publicity "proving" statistically that this means we're heading into recession. He told Merrill clients: "At no time in the past 60 years has the unemployment rate risen 60 basis points (50 bps is the actual cutoff) from the cycle low without the economy slipping into recession..." And he attached a chart, claiming that this was true "100% of the time."

Scary, huh? An indicator that works all the time. Never misses!

But let's look a little closer. Note that Rosenberg cheats a bit by talking about rises in the unemployment rate "from the cycle low." What does that mean? How do you know when you're at the "cycle low," until months or years have gone by and you can identify a particular moment as a "cycle low?"

This is important, because there have been times when the unemployment rate has risen by 50 basis points, or more, when a recession did not follow. But apparently Rosenberg doesn't count those, because those weren't a "cycle low" according to his personal definition. So when you look at all the data, not just the examples that fit Rosenberg's argument, what he claims is not actually true "100% of the time."

One example is February 1986, when the unemployment rate surged from 5.7% to 6.2% in a single month. No recession followed. The next recession was not until 1990.

You can find the full column here.

Are Ron Paul's Libertarian Views Practical?

A column in the Washington Post today by Michael Kinsley examines whether the principles of libertarian candidate Ron Paul are practical.

So what is wrong with the libertarian case for extremely limited government? Economics 101 teaches some of the basic justifications for government interference in the economy. Some things, such as the cost of national defense, are "public goods." We can't each decide for ourselves how much defense we want. We have to decide that together. Then there are "externalities," which are costs (or, sometimes, benefits) that your decisions impose on me. Pollution is the classic example. Without government involvement of some sort to override our individual judgments, we will produce more pollution than most of us want.

There are "market-oriented" solutions to this problem, but there is a difference --often forgotten, especially by Republicans -- between using market forces and leaving something to the market. The point of principle is whether the government should intervene at all. How it chooses to intervene is purely pragmatic.

Libertarians have a fondness for complex arrangements to make markets work in situations where the textbooks say they can't. Hey, let's issue stamps, y'see, and use the revenues to form a corporation that sells stock to buy military equipment, then the government leases the equipment and the stockholders vote on whether to user it -- and so on. The point becomes proving a point, not economic or government efficiency.

See the full column here.

Is Huckabee's Fair Tax Feasable?

Presidential candidate Mike Huckabee is proposing a "Fair Tax" that abolishes the IRS and income tax and replaces it with a national sales tax. Today at Slate.com, economist Steven E. Landsburg calls Huckabee's Fair Tax plan "brilliant." Here is an excerpt.

With an income tax, you pay up front. Earn a dollar in 2008, and you'll pay 20 cents tax in 2008. (Actually, you'll pay more, of course; I'm assuming a 20 percent tax rate for the sake of illustration.) With a sales tax, that 20 cents sits in your bank account earning interest until the day you spend your earnings. Let me say that again: Your pretax earnings sit around collecting interest until the day you withdraw and spend them. Where have we heard that before? It's exactly what happens when you invest in a traditional IRA!
So, one way to mimic the effect of a sales tax is to let you deposit every dollar you earn directly into an IRA. As far as your family—or any family—is concerned, the effects are identical. A sales tax is the exact equivalent of an income tax with a provision for unlimited IRA contributions (and no withdrawal penalties). The merits and demerits of the Huckabee tax plan are identical to the merits and demerits of a vastly liberalized IRA policy.
A lot of economists, myself included, think that there's a lot to be said for unlimited IRAs. Any conceivable tax system discourages work, which is unfortunate but unavoidable. But the current system also discourages saving, which is avoidable. A liberalized IRA policy—or, equivalently, a sales tax—eliminates that problem. The downside is that when IRAs grow, there's less income to tax, so tax rates must be higher—which increases the disincentive to work. But for the past decade or so, the macroeconomics journals have been rife with papers arguing—on highly technical grounds—that the terms of that tradeoff are well worthwhile.

See the rest of the article here.

John Stossel on the Ethanol Myth

No Convincing Evidence For Decline In Tropical Forrests

According to a study to be published today in the Proceedings of the US National Academy of Sciences by Dr Alan Grainger, Senior Lecturer in Geography and one of the world's leading experts on tropical deforestation, there is no convincing evidence for decline in tropical forests.  Using the latest satellite data to survey the forests in 63 countries, Dr. Grainger found 1,181 million hectares of tropical forests, compared to an estimated 1,081 million hectares for the same 63 countries in 1980.

[T]he lack of apparent decline in tropical moist forest area suggests that deforestation is being offset by natural reforestation at a higher rate than previously thought. Dr Grainger uses data from FAO’s latest report, published in 2006, to show that in a few countries, such as Gambia and Vietnam, forest area has actually expanded since 1990, as the reforestation rate has exceeded the deforestation rate. He believes that a rise in natural reforestation is a logical precursor to this switch from net deforestation to net reforestation. It has already been the subject of studies in Brazil, Ecuador and India, but available data are too poor for us to be sure of its exact scale worldwide.

See the full article here at Physorg.com.

Economists Overwhelmingly Predict No Recession

If you listen to the politicians, it sounds as if it is common knowledge that America is headed for a recession. Economists, however, seem less certain. 52 of 54 economists polled by Business Week did not predict a recession.

The bottom line looks like this: The economists project, on average, that the economy will grow 2.1% from the fourth quarter of 2007 to the end of 2008, vs. 2.6% in 2007. Only two of the forecasters expect a recession, although it might feel like one if there's sluggish growth over the next couple of quarters, as many predict. Almost all think the risk of a downturn has risen substantially in recent months.

As a group, the forecasters say slow growth will lift the jobless rate from 4.7% in November to 5.1%, and it will hold down inflation. As oil prices level off or decline, the yearly growth in consumer prices will slide from 4.3% in November to 2.4%, while core inflation, which excludes energy and food, will hold steady at a tame 2.2%. Profits will grow in the low single digits. Home prices will fall about 7%, but housing starts will bottom out by midyear.

To see the results of the survey, go here.

The Myth of the Shrinking Middle Class

Populist politics is all the rage this election year. Jonathon Edwards seems to be channeling the spirit of Huey Long as he vows to "Fight! Fight! Fight!" corporate greed. On the Republican side, Huckabee is making headway with populist rhetoric, winning the Iowa caucus with little financing. Central to the populist argument is the claim that the middle class is disappearing in the United States as a result of being exploited by corporate greed, tax policies that favor the rick, and international trade. Unfortunately for the populists, it is not true. George Will has an excellent article at Real Clear Politics where he gives some interesting facts.

Economist Stephen Rose, defining the middle class as households with annual incomes between $30,000 and $100,000, says a smaller percentage of Americans are in that category than in 1979 -- because the percentage of Americans earning more than $100,000 has doubled from 12 to 24, while the percentage earning less than $30,000 is unchanged. "So," Rose says, "the entire 'decline' of the middle class came from people moving up the income ladder." Even as housing values declined in 2007, the net worth of households increased.

Huckabee told heavily subsidized Iowa -- Washington's ethanol enthusiasm has farm values and incomes soaring -- that Americans striving to rise are "pushed down every time they try by their own government." Edwards, synthetic candidate of theatrical bitterness on behalf of America's crushed, groaning majority, says the rich have an "iron-fisted grip" on democracy and a "stranglehold" on the economy. Strangely, these fists have imposed a tax code that makes the top 1 percent of earners pay 39 percent of all income tax revenues, the top 5 percent pay 60 percent, and the bottom 50 percent pay only 3 percent.

See the whole article here.