Thirty years and counting, but reasoning doesn´t change!

Maybe this “analytical calamity” comes from “price and quantity-based” reasoning.

In 1984 Alan Reynolds wrote “Mainstream Voodoo Revisited”:

The quality of public debate on economic issues is rapidly degenerating to the level of intellectual barbarism. Contradiction has become the mark of sophistication, evidence is dismissed as irrelevant, and “experts” are defined as anyone who advised the government during some economic catastrophe. Indolent journalists lean on an imaginary consensus, claiming that “most economists agree” about this or “Wall Street worries” about that.

Most economists are said to be concerned that a growing economy must raise interest rates, which will prevent the economy from growing. The solution, it seems, is for the Fed to raise interest rates to slow the economy, so that interest rates can fall and thus speed up economic growth…

And concludes

Economic policy has never before been so thoroughly dominated by ever-changing economic theories and forecasts. Economists who can’t predict the next month now propose to fine-tune the 1989 budget or the 1986 inflation rate. There is a panicky political impulse to fix things that are not broken and ruin things that were almost fixed. Always, the rationale is that “most economists agree” that “something” must be done. If economists were actually guilty of believing half of the strange ideas that are attributed to them, it would be safer to base economic policy on astrology.

One good paragraph and two awful ones!

In his conclusion to “The Idolatry of Interest Rates Part I: Chasing Will-o’-the-Wisp”, James Montier writes:

This paper has sought to tackle two forms of idolatry surrounding interest rates. First is the idolatry of the “equilibrium/natural/neutral” rate of interest displayed by central bankers around the world. This is a make-believe concept with no foundation in the way our financial world really works. It is scary to think that this is the topic that central bankers are debating. Talk about a massive exercise in navel gazing!

The second idolatry I’ve sought to tackle is the modern-day belief in the world’s greatest con: that monetary policy matters. There is precious little evidence that monetary policy matters for the major components of demand (investment and consumption look pretty immune to the shifts in interest rates over time).

Perhaps it is time to recall that we have another tool in our economic kit: fiscal policy. This is a political pariah of a policy, but offers a potential way out of the low growth we find ourselves facing.

The first paragraph is perfect. “Talk about a massive exercise in navel gazing”, indeed!

(Update) Picture of “navel gazing”:

Navel Gazing

But Montier loses it badly thereafter. If he only went and asked FDR, or Paul Volcker, or Kuroda, to name only a few “operatives”. In 1933, despite the large depreciation of the dollar, the trade balance went into deficit, the same happening when Kuroda got a huge yen depreciation in 2013. Volcker whacked inflation with? You guessed, monetary policy.

He´s right that “there´s precious little evidence that monetary policy matters for the components of demand. That´s the implication of the “never reason from a GDP component change” principle! What matters is AD (NGDP).

And fiscal policy, without an adequate monetary policy, certainly does not offer a way out!

Reasoning from GDP component changes – A media macro favorite

In “The U.S. Economy Just Had Its Worst Month Since the Recession”, the WSJ reports on Macroeconomic Advisers explanation, or better “hand waving”, of “potholes” in the way of the economic recovery:

Macroeconomic Advisers on Thursday said its monthly estimate showed GDP fell an inflation-adjusted 1% in March, the largest drop since December 2008, “when the U.S. economy was in the throes of recession,” the firm said. Monthly GDP had climbed 0.3% in February and ticked up 0.1% in January after falling 0.4% in December, the firm said (and shows a version of this chart).

Macro Advisers Media Macro_1

The key reason not to worry too much: The contraction reflected a drop in net exports related to the resolution of a labor dispute at West Coast ports, the firm said.

“Because the decline in monthly GDP was driven by a surge in imports that was probably unrelated to current production, we are suspicious of it and believe it overstates the underlying weakness in the economy,” Macroeconomic Advisers said in a note to clients.

Note on the chart above the presence of multiple “potholes” of similar size. I bet that for each there was a convenient “explanation”. I don´t recall their “explanation” for the “jumps”, but maybe it went along the lines “the economy has finally found its ‘foothold’”.

But when you go beyond the noisy high frequency data, and look at accumulated growth which gives a better feeling for the underlying trend, what you see is the picture of a “brain at rest”, and that´s because of the “low level stable stimulus” being provided by nominal spending (NGDP) growth!

Macro Advisers Media Macro_2