Nobel Laurelates on the Economy
CNBC had three Nobel winners on Friday morn -- Joseph Stiglitz, Robert Engle and Edmund Phelps -- discussing Housing, Credit, and the state of the US economy. It was terrific television, and showed how good the medium can be when it sets its mind on it.
Incidentally, longtime readers may remember our amusing encounter with Prof Robert Engle back in 2003. If you haven't seen that, its definitely worth reading.
Joseph Stiglitz, 2001 Nobel Prize winner and Columbia University professor
"The real important point from an economic perspective is the gap between the economy’s potential growth and its actual growth. And without a doubt, there’s a big gap. I think we’re probably in a recession. The real concern is how long, how deep. This is one of the worst—clearly going to be the worst ... downturns since the Great Depression.”
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Robert Engle, Nobel Laureate Economist winner 2003 and New York University professor
"I think that we've got a lot of strength that's going to come out of the export sector, the technology sector. We've seen good earnings reports from some of them. They're thriving on this weak dollar. It's giving them a chance to sell goods all over the world. And I think that's going to probably pull us out."
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Edmund Phelps, Nobel Prize winner in economics 2006
"The rise of the unemployment rate has been mild, and it started from a very, very low level of 4.3 just ten or twelve months ago. By that metric, this is a mild downturn.”
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Related:
A funny thing happened to me on the way to the studio tonight . . . http://bigpicture.typepad.com/comments/2003/11/a_funny_thing_h.html
Source:
Where's the Economy Going? Nobel Winners Weigh In
CNBC.com 25 Apr 2008
http://www.cnbc.com/id/24313079/site/14081545
Sunday, April 27, 2008 | 09:30 AM | Permalink
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The most amazing part of the discussion was the opinion that no wage inflation mitigated the the asset inflation. I think this is the very cause of the current problem.
FED policy that exacerbates inflation while benefiting wall street will make the problem signifantly worse.
I think anyone who doesn't understand this should visit a shopping mall.
In south west Florida in Naples, Sarasota and Tampa - the stores are having half price sales and the stores are still empty!
Sears is going to offer a 30% discount on Kenmore appliances and that still won't clear inventory.
How is it that economists of this stature don't seem to recognize that the bottom 60% (perhaps higher...I am guessing about this) of wage earners contribute significant amounts to GDP through their purchases and they are out of money.
My brother in law is selling a trailer/camper and has put an add in the paper. His phone is ringing off the hook from people that want it to have a place to live!
Posted by: Sailorman | Apr 27, 2008 10:12:41 AM
Barry,
FWIW, in contrast to Stiglitz and Phelps, it would not be unfair to say that Dr. Engle is discussing a subject in which he is neither more or less an authority than any economist down the street at CUNY.
Yeah, I know the validity of a claim doesn't necessarily flow from the source, but if I wanted to know the gap between Y and E, it doesn't get better than Dr. Stiglitz; if I want a discussion on unemployment I'd start with Dr. Phelps.
Dr. Engle is a brilliant statistician, and if you want to discuss volatility, he's the man, but otherwise he's a quant jock who happens to have a PhD in economics (not necessarily a bad thing otherwise). As such, I wouldn't put any more stock in his opinions on tech and the weak dollar and exports than I would in any other economist's.
Posted by: Byno | Apr 27, 2008 10:23:06 AM
Well, its the old saying, you get 3 economists in a room and you get 6 opinions. What is interesting to me is the strong dollar versus weak dollar arguements. One the one hand, you hear that the weak dollar will save us by driving exports. On the other hand you have the crowd that claims it will be the ruin of our economy. Who do you believe?
From my perspective if it is not going to be exports driven by a weak dollar that drive the economy going forward, it is hard to point at any particular factor that will. The last two recoveries were driving by a technology and productivity boom and then a credit\real estate boom. So, either we go back to being an agrarian economy (all growing corn and wheat), or we export. Look at the earnings reports, almost all large corporations have verbage to the effect that "The U.S. market sucks but exports rock!" So, if the dollar rises, then what happens?
Without massive credit expansion, what exactly keeps this economy going? Although I am extremely skeptical, the export thing seems to be the only catalyst in sight. Anyone care to give an opinion on another possible solution to the slowdown?
Posted by: Rich Shinnick | Apr 27, 2008 10:23:19 AM
Oh, and I wasn't trying to disparage CUNY in any way, just making the point that Engle is no more accurate on the subject than anyone else at NYU, or CUNY, or Fordham, etc.
Posted by: Byno | Apr 27, 2008 10:27:05 AM
Wednesday is make or break day with respect to the economy for the next few months and years.
The commodity bubble that is now building has to be burst at all costs. Only the most ignorant among us can rationalize how this or any economy can grow if the basic necessities of life are so expensive that purchasing them crowds out the discretionary spending required for economic growth. The gains from higher prices are not being used to build additional capacity. They are only speculator gains.
I've heard rumors of new stripper oil wells in the US being drilled and capped. Additional capacity is being withheld, either because it isn't required or because higher prices are expected down the road (aka inflationary expectations). This is said to be somewhat common right now.
Combine basic inflation for necessities with stagnant real wages, a lowered velocity of money accentuated by a growing malaise, the expectation of continuing price increases, a weak dollar, and an apparent embracing of ignorance by reporters, economists, and government officials and there is nothing good to look forward to.
The FOMC need to revive the concept of 'inflation hawk', and do it with extremism. Counter intuitively, it will build a base that we will build on. Growth is possible only if the commodity bubble bursts immediately. Markets may drop for a couple of months, but they will recover because the economy will recover, albeit slowly. I suspect oil will fall to the $80 range within a couple of weeks if the FOMC does the right thing and, possibly, even raises rates by 1/4%
The next crop of politicians must figure out how to encourage real investment that creates jobs, and not empty suit investment that only encourages the trading of stocks an other paper based capital assets.
Posted by: cinefoz | Apr 27, 2008 10:31:53 AM
The Economy is clearly in trouble.
Banks got into a mess with mortgages and are lending big-time to the commercial sector.
I have posted graphs illustrating how each dollar of Commercial & Industrial Loans generates less and less output.
Nevertheless, Core Capital Equipment as % of Durable Goods has been rising lately. Consequently, despite the slowing in the economy, you have to favor the Business sector over the consumer sector.
See
http://wrahal.blogspot.com/2008/04/business-loans-less-bang-for-buck.html
Posted by: Will Rahal | Apr 27, 2008 11:22:39 AM
You know who else had a couple of Nobel-Prize-winning economists?
Long Term Capital Management.
Posted by: steve | Apr 27, 2008 12:06:13 PM
Patrice Hill in The Washington Times reports:
Quote: "Costco and other grocery stores in California reported a run on rice, which has forced them to set limits on how many sacks of rice each customer can buy. Filipinos in Canada are scooping up all the rice they can find and shipping it to relatives in the Philippines, which is suffering a severe shortage that is leaving many people hungry.
While farmers here and abroad generally are benefiting from the high prices, even they have been burned by a tidal wave of investors and speculators pouring into the futures markets for corn, wheat, rice and other commodities and who are driving up prices in a way that makes it difficult for farmers to run their businesses.
'Something is wrong,' said National Farmers Union President Tom Buis, adding that the CFTC's refusal to rein in speculators will force farmers and consumers to take their case to Congress.
'It may warrant congressional intervention,' he said. 'The public is all too aware of the recent credit crisis on Wall Street. We don't want a lack of oversight and regulation to lead to a similar crisis in rural America.'" End Quote.
Note to Tom Buis: You cannot stop crack-up boom behavior with price controls any more than you can stop a tsunami with a sandbar.
Military Keynesianism this year will pour (US)$1.1 trillion down the black hole of non-consumption, non-investment that is the military industrial complex. We have been building this monstrosity for the past 60 years, so no one person is to blame. But combined with lack of savings, military Keynesianism causes a massive shortage in trade balance, requiring massive debt to sustain.
Commodity prices are displaying symptoms of George Soros's "reflexivity theory", where the participants' biases alter the fundamentals, which reinforce the bias, creating a mismatch between perception and reality. In my view, reflexivity is a good description of crack-up boom behavior, as well.
When you peel back the curtain on Oz, you discover that all the magic has been created through the illusion of inflation from utilizing the dollar as the world's reserve currency coupled with massive deficit spending on non-consumption, non-investment.
And like Oz, once the curtain has been pulled back and the reality exposed, the magic disappears.
Posted by: Winston Munn | Apr 27, 2008 12:24:03 PM
I was really interested in Shiller's discussion of innovation in the mortgages themselves.
I'm not knowledgeable about economics but the others seem to be confined primarily to analysis while he is looking for solutions. Coming up with comprehensive long-lasting solutions, as opposed to fixes, is always much more difficult in my humble opinion.
Posted by: kateNC | Apr 27, 2008 12:24:48 PM
It's amazing to see these clowns hoping that inflation doesn't spread to wages when middle class wage stagnation is the root of the problem.
Mexicans are already heading back south of the border and immigrants aren't flooding in as they had been. Hopefully after we get rid of Bush the producer economy will strengthen more. It seems wages are sticky kind of like house prices but will be increasing gradually in the near future with some trickle up effect of minimum wage increases.
Posted by: Clowns | Apr 27, 2008 12:32:39 PM
☺☺"You know who else had a couple of Nobel-Prize-winning economists?"
"Long Term Capital Management."
Posted by: steve | Apr 27, 2008 12:06:13 PM
Economics=sciene.
What a ridiculous notion.
The abstractions of scientific materialism illuminated one aspect of physical reality that helped seventeen-century physics and chemistry to fructify. But when we come to the truths of human experience, these abstractions are utterly inappropriate. They have been a total disaster in the scientific study of mental and social processes such as economics.
The problem with all these nonsensical models these economists is that they focus too exclusively on a severely limited aspect of relity. They are not a faithful and full description of the stubborn irreducible facts as they occur in experience but a narrow abstraction often systematically misapplied by those who use them. Thus the tendency to mistake an abstraction for a concrete reality without realizing that it is an abstraction.
Most economists are nothing but ideologues trying to pass their pet nostrums off as fact. They have demonstated almost no ability to distinguish between their opinions and fact.
This nonsense will continue until they forsake, or are forced to forsake by overwhelming failure, the narrow objectivist strategy that has led them to develop massive blind spots to areas of life where an exclusive preoccupation with the measureable facts distort reality and twist judgment.
Posted by: DownSouth | Apr 27, 2008 12:49:08 PM
"It was terrific television,
and showed how good the medium can be when it sets its mind on it."
Then perhaps a nod to the hosts might be in order. Two of the more professional CNBC personalities. Now imagine how much those segments would have sucked if Kudlow or Kneale had been involved.
Posted by: Al Czervic | Apr 27, 2008 12:52:51 PM
I think the kneejerk reaction of the economist is always that equilibrium re-asserts itself. Thus, the notion that exports are the benefit to the falling dollar. The problem, of course, is that the U.S. has intentionally shrunk the manufacturing sector, and has also long ago lost its reserve of oil - which means that when you look at the trade deficit, the falling dollar has not put a dent in it. Just as the oil shocks of the 70s made devastated LDCs, because they did not have big countering export sectors, so, too, the U.S. has long depended on its internal market and its services sector for growth. Caterpillar might be having a bust up year, but it pales in comparison to, say, Exxon, and those profits are all made on the steady leaking away of U.S. money, purchasing less all the time.
This, after all, is the logic of globalisation. Suddenly the same economists who touted it are pretending that it didn't happen, and didn't have the results we see all around us. The same crowd that applauds John McCain telling Michigan workers that the jobs aren't coming back are saying, oh, but our exports are going to take us out of the hole. Something isn't right here.
Posted by: roger | Apr 27, 2008 1:56:04 PM
I guess it's true then.
That sitting in a cage and throwing feces at the spectators, will win you a Nobel Prize.... :-)
Just kidding. I agree with Joe Stiglitz, "This is one of the worst—clearly going to be the worst ... downturns since the Great Depression.” If not worse....
Best regards,
Econolicious
Posted by: ECCONOMISTA NON GRATA | Apr 27, 2008 2:04:42 PM
I also like the analogy that economists are like weathermen, they predict but are never held to the predictions. If we burned 'em at the stake if they got it wrong, they would either shut up (becuase they really don't know) or they would try a little harder.
Posted by: austincompany | Apr 27, 2008 2:29:27 PM
roger: Exactly. If we don't make anything here anymore, what are we exporting?
Posted by: steve | Apr 27, 2008 2:50:26 PM
One more comment before I go out to watch my $8 wheat ripen.
Winston has it about right. Tom Buis is one funny fellow. Bitching about evil speculaters and hedge funds in farm commodities and wanting Congress to do something may go down as the most inane diatribe of the year. What he is angry about is the difference between cash prices paid to farmers and the cash settled prices in the futures market. He was not argueing that the price of corn was too high. It is a technical problem that will be addressed.
If there is a bubble in farm commodities, why are most markets in backwardation? Why aren't the futures prices in contango with steep outward curves?
The price of a box of cereal goes up by 10% and everyone is now a commodities expert. Why don't these experts bemoan the 50% reduction in the interest paid on my money market account. Gee, you thing savers may be paying for the bank bailout???
Posted by: Ross | Apr 27, 2008 3:26:04 PM
If I'm not wrong, they all endorsed Obama as well.
Posted by: Dave | Apr 27, 2008 3:39:13 PM
I just came back from a shopping trip. The parking lot at a Best Buy was 1/2 empty. The parking lot at a Marshall's was also 1/2 empty and the store was less active. Sam's Club parking was quite open. A lot of empty spaces were close in. The lines were short and everyone was buying food. No computers or LCD tvs. My impression is that people are hunkering down.
Ross, normally I would buy into the scarce resource argument. At this time, I think you grossly underestimate how oceans of credit being poured into hard assets are affecting prices. At this time, 'scarcity' is the argument used by snake oil salesmen. Ditto 'the falling dollar'. Too many people with influence are making money to stop the bubble. It's really an intelligence test, and a lot of people appear to lack even minimum common sense.
Extrapolate out a few months and imagine how the average person will afford to live, and how that will affect profits that don't depend on currency effects, if oil is $150 by the end of the year.
It's time for those who can make a difference to grow brains, and do it now. This plundering has to stop.
Posted by: cinefoz | Apr 27, 2008 3:52:53 PM
To: squawk@cnbc.com
Subject: question for Doc Stiglitz
Date: Friday, April 25, 2008 4:26:30 AM
Business nature is to look for lower costs of production.
IMO it started as moving the industrial north south, then abroad globally.
Do you have a solution in mind for a quick rebalancing ie: USA economy with global economys?
Is quick the dread word? And just realize where you are in the hurricane and wait it out?
Is near slavery a requirement for profitable capitalism?
To: squawk@cnbc.com
Subject: exactly why save
Date: Friday, April 25, 2008 5:46:17 AM
I was a union HVAC worker.
Our raises into pension funds FUNDED globalization shooting my factory creating abilities into Asia.
WHY SAVE!!!!!!!!!!!!!!!
To: squawk@cnbc.com
Subject: ps on ship'g depots
Date: Friday, April 25, 2008 5:52:01 AM
> our area building shipping depots? a crane flys in a package unit sitting on roof spill'g into condition'd space
> a story in the woods to the east of me ... the Indians were starved to death by supply chains cut off
Posted by: Greg0658 | Apr 27, 2008 3:56:40 PM
Will Rahal,
Further to the expansion of C&I lending, it's important to take the contraction in ABCP and LBO lending into consideration. At least some of the bank lending expansion is accomodating the severe contraction in short term non-bank lending that happened last year.
Posted by: Estragon | Apr 27, 2008 4:06:29 PM
ps - CNBC picked some really good questions to air
and yes, they did, some relunctantly endorse Obama, hopefully not out the door if its one of the other two or no election at all
... but still its time to begin referendum government and skip dictatorship republics ... true freemarkets should expand humanity, eventually, even if some sects are forced into dissolvement or retribe'g
I believe in collective thought, as long as folks are not totally brain dead
Posted by: Greg0658 | Apr 27, 2008 4:28:38 PM
Rick Shinnick: "One the one hand, you hear that the weak dollar will save us by driving exports. On the other hand you have the crowd that claims it will be the ruin of our economy. Who do you believe?"
Not a problem. In a couple of hundred years there will likely be enough data to answer this question.
Posted by: Ritchie | Apr 27, 2008 4:41:44 PM
steve: "...what are we exporting?"
airplanes, arms, food, entertainment
Those last two have traditionally been called Bread & Circus.
Posted by: Ritchie | Apr 27, 2008 4:49:42 PM
If I'm not wrong, they all endorsed Obama as well.
Posted by: Dave | Apr 27, 2008 3:39:13 PM
Bingo !
Nobel Laureate Economists Stiglitz and Phelps Endorse Obama
http://tpmcafe.talkingpointsmemo.com/talk/2008/04/nobel-laureate-economists-stig.php
Posted by: km4 | Apr 27, 2008 5:35:44 PM
