Who is Right: Professionals or the Populace ?
Portfolio has an interesting discussion on what they term the "He-Said-She-Said" economy:
"Inflation, energy, home prices, and tax rebates. Ordinary Americans and Wall Street professionals are at odds on issues like these and others at the center of the current economic malaise, according to the CNBC/Portfolio Wealth in America survey. And these differences have implications for both the Federal Reserve and this year's congressional and presidential candidates.
For example, while Wall Street forecasters predict inflation will be fairly tame in the next year, at about 2.5 percent, 71 percent of the report’s respondents think prices will rise by at least 4 percent, and 50 percent expect inflation to run at or above 6 percent.
In the past month, the Federal Reserve has been trying to put a lid on inflation expectations, culminating last week with what was seen as a benign outlook for price pressures in the statement following its monetary policy meeting. Still, Americans don't seem to be hearing that message."
>
I heard Steve Liesman discuss this poll on CNBC. Steve, like so many other economists, is having a hard time with this conflict. Many of the dismal scientists believe in the wisdom of crowds, but they also are somewhat compelled by training to buy into the methodologies of their profession.
When the two schools of thought are directly opposite, you end up with a form of cognitive dissonance. This has accelerated as prices continued to go higher, even with relatively modest core inflation.
I have been surprised by how many reality-based economists -- including those on the left like Professor Brad DeLong and NYT columnist Paul Krugman -- were so reluctant to embrace elevated inflation as a genuine threat. There was a bit of a circle-the-wagons mentality about economics as a discipline. That seems to have faded in the face of elevated food prices and $143 Crude Oil.
Here's a suggestion: If the professional economists' data states that inflation is contained and unemployment modest, and at the same time the population sentiment is screaming as if neither were the case, perhaps its time we consider that it might be the data, and not the population, that is the source of our dispute.
Sentiment is now at levels last seen during deep ugly recessions. Perhaps the fault lies not with us American whiners -- but with the way the data is gathered, massaged and reported.
Something else to mullover: We have "enjoyed" practically full
employment (i.e., very low unemployment levels) for several years now
-- but wage pressure has been non-existent. That seems to be unusual to
say the least.
As someone who has been skeptical about the artificially low inflation and unemployment rates for quite sometime now, the public's reaction makes a whole lot of sense. If we believe the negative sentiment of the American people, then its likely that Inflation has been much more pervasive than reported by either the top line or the core. And the same thinking likely applies to the low unemployment rate. If we judge by sentiment, perhaps its not as low as advertised. Ignoring widespread distress in the population is a recipe for major electoral changes.
Regardless of who wins in November, its time for a major rethink of the methodology behind BEA/BLS data . . .
Previously:
Consumer Sentiment Hits 28 Year Lows (June 17, 2008)
http://bigpicture.typepad.com/comments/2008/06/consumer-sentim.html
Are We Too Gloomy? (June 19, 2008)
http://bigpicture.typepad.com/comments/2008/06/are-we-too-gloo.html
Source:
The He Said, She Said Economy
Zubin Jelveh
Portfolio, Jun 29 2008
http://www.portfolio.com/news-markets/national-news/portfolio/2008/06/29/The-He-Said-She-Said-Economy
~~~
Monday, June 30, 2008 | 09:00 AM | Permalink
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We've become culturally immune to reality. We accept that a huge, indebted populace is the status quo and SOP during the history of the world. It's like reading a story about a starving man - we feel for him, but we don't feel the hunger.
Reality will grind fiction and group-think into the dirt, regardless of the depth of one's belief in the fiction.
Posted by: Marcus Aurelius | Jun 30, 2008 9:16:25 AM
"While Wall Street forecasters predict inflation will be fairly tame in the next year, at about 2.5 percent, 71 percent of the report’s respondents think prices will rise by at least 4 percent, and 50 percent expect inflation to run at or above 6 percent."
Wall Street forecasters are predicting the official CPI -- that's the game they play. Ordinary Americans are predicting the actual increase in their living expenses, which they are fully qualified to do. Any relation between the CPI and their actual living expenses is purely coincidental.
"Perhaps its time we consider that it is the data, and not the population, that is likely wrong."
Hear, hear! More evidence is provided by the rising inflation rates in most of the world. India and China, whose inflation we import, are running at around 11%. Europe, whose currency has been stronger than the dollar, just saw its inflation rise to 4%. It does not stand to reason that the U.S., with its weak dollar, would be running a 2.5% inflation rate, as the Wall Street forecasters predict.
Bottom line, economics postures as a science when it is not. Statistical boilerplate is appended to economics papers to provide a phony gloss of corroboration, when the substance is entirely lacking. After a couple of dozen credit-driven Bubbles over the past few centuries, Greenspan and Bernanke still think you can't identify a Bubble in real time. They are the economic equivalent of sun-worshipping, loincloth-clad flat-earthers, shaking their spears at the sky in alarm when an eclipse comes. Have you tried sacrificing a goat, Ben?
Posted by: Jim Haygood | Jun 30, 2008 9:28:37 AM
Vox populi vox Dei!
Barry Sussman wrote that politicians regard public opinion as "the great gorilla in the political jungle, a beast that must be kept calm."
And Daniel Yankelovich observed that "the denigration of public opinion is implicit whenever one defines opinion in opposition to knowledge and then identifies knowledge as the possession of the select few and as imbued with moral authority."
"[Elites] think they know better than the public because they are well educated and articulate. They have superior knowledge, and because they do, they assume in the great classic tradition that they are, therefore, endowed with superior moral virtue."
Americans have seen this "moral virtue" on display for the last six years. Here's a short list of some of these morally superior elites:
George Bush
Dick Cheney
Don Rumsfield
Richard Perle
Scooter Libby
Paul Wolfowitz
William Kristol
John Woo
Paul Bremmer
Condoleza Rice
Tommy Franks
Thomas White
Douglas Feith
James Woolsey
Charles Krauthamer
George Will
William Saffire
Are you beginning to see why people don't believe the "experts" anymore?
Posted by: DownSouth | Jun 30, 2008 9:34:52 AM
As we look at the difference between the professional or the populace let us not forget that the populace pays the true cost of inflation each and every day. This cost is frequently vastly different then the skewed economic data that the professionals rely on.
Additionally, the professionals have failed to recognize that the populace has replaced income with debt. Debt has propelled the economy forward and has kept the consumer resilient not the increase in real wages. Real wages have stagnated for many years. Affordability, is now and has always been the key to consumption.
Contracting credit and expanding inflation have and will continue to destroy demand because these factors in the face of stagnant wages have destroyed affordability.
Affordability, is the key to purchasing power. Tax rebates and falling real wages do not increase affordability.
It is no mystery that the populace has negative attitudes. Quite simply, the core rate of inflation has little effect on the psych of the populace when they are paying more than the headline rate of inflation. Particularly, when the headline is far less than the real rate of inflation.
Wall street has decoupled from main street. The populace wins this debate hands down.
Posted by: Ella | Jun 30, 2008 9:36:34 AM
A correction here: Liesman is not an economist. He's an English major with a master's degree in journalism (from Columbia).
Posted by: Carmen | Jun 30, 2008 9:42:33 AM
Barry,
Rightly or wrongly, I just don't buy the premise of:
---
We have "enjoyed" practically full employment (i.e., very low unemployment levels) for several years now -- but wage pressure has been non-existent. That seems to be unusual to say the least.
---
In my mind, this is rationalized because a lot of unemployed people just aren't counted in Government jobless statistics any more. They never found a comparable job,... the Government just methodically dropped them from the jobless rolls regardless of their employment situation.
IMO the reason wage pressures have stayed down is because of all of those marginally employed/unemployed (~desperate) people having to take anything that is available, i.e. the least-desireable job not yet filled.
It makes perfect sense to me. I bet the true unemployment rate is at least twice what the Government reports.
Just my 2-cents worth.
Posted by: BG | Jun 30, 2008 9:45:06 AM
Carmen,
I was just about to say the same thing. He is a journalist and as journalist who covers the street he went straight to those who regarded as experts. It is highly unlikely the Mr. Liesman can tell you the difference between an Austrian, post-Keynesian, or a Public Choice theorist. I would argue the Mr. Liesman is nothing more than a cipher.
Regards,
TDL
Posted by: TDL | Jun 30, 2008 9:47:05 AM
Correction.
Thomas White should not have been included in the above list.
"In 2003, White refused to publicly rebuke GEN Eric Shinseki for his statement to the Senate Armed services committee that it would take 'something in the order of several hundred thousand soldiers' to occupy Iraq after invasion. This, combined with White's actions on the Crusader and his distracting association with Enron, prompted Rumsfeld to demand White's resignation. White resigned on April 25, 2003."
I mistakenly believed White to have been one of the dozens of retired generals the White House used as military "experts" in its propaganda blitz to misinform the American public.
Posted by: DownSouth | Jun 30, 2008 9:47:40 AM
This split of opinion comes at a time when the split between the income groups in the US also increases. It is quite true that the 'uppers' are getting more 'upper'.... and therefore more detached from daily reality.
You can see this trend, and the outcome, at various points in history. It has never been pretty.
Posted by: wally | Jun 30, 2008 9:50:47 AM
Barry,
I think you are on to something, i.e. rethinking how we compile the data. GIGO has been a truism for a long long time. The real issue is how does anyone overhaul the methodology in such a partisan environment. This brings up the true problem and that is lack of leadership and this is on both sides of the aisle.
Posted by: larster | Jun 30, 2008 9:59:59 AM
The difference between the professionals and the populace is that they are talking about two different things. Professionals are talking about inflation in the classic definition - money supply - while the populace is talking about inflation in the method that we sloppily try to measure money supply - prices.
Prices for some things that we buy regularly (gas, milk) are going up. Prices for others (housing, SUVs, businesses) are going down. The impact of price movements are felt differently, depending on what you are buying most.
As for the money supply, it is contracting. There's this thing called a credit crisis going on. Professionals are attuned to this moreso than joe sixpack, and understand the consequences.
Posted by: E | Jun 30, 2008 10:05:26 AM
Barry,
The problem most economists aren't seeing is that for the first time this is not a "wage-price spiral"...this is simply a price spiral...and it is evident that wages don't have to follow prices up in order for inflation to take off...all you need is higher oil, higher hard commodities, higher soft commodities, in short higher demand...most economists apparently think of wages AND prices, and all you need is prices to increase to produce what has happened here....
"It is different this time"......
Bruce in Tennessee
Posted by: Bruce | Jun 30, 2008 10:13:56 AM
There's a saying, something to the effect that generals are always fighting the last war, meaning that the lessons drawn from past wars influence the decisions made about present ones, but that doesn't work well when the present conflicts are qualitatively different.
Krugman, DeLong, Bernanke, etc. betray their age because they are still fighting the economic battles of the 70's, when inflation driven by an upward wage-price spiral was the gorilla in the room.
To Keynesian economists of their age, the wage price spiral is the only important piece of inflation. That's why they don't complain about how bogus CPI is. Everything else outside the "core CPI" is thought of as sort of one time adjustments that are not self-sustaining.
So, ironically, the rest of us are stuck with stagnant wages (if we're lucky enough to keep our job) and a soaring cost of living, and Krugman, Delong, Bernanke, et.al. are quite happy about it.
It's this focus on the wage price spiral that led everybody to think Greenspan was such a genius because he inflated the money supply while 90% of the country couldn't get a raise. Meanwhile they massage the unemployment figures to make themselves feel better.
But it's the completely wrong way of thinking about the current state of affairs. We have global inflation caused by soaring global demand for commodities (think China and India), a precipitously falling dollar caused by a surfeit of treasury bonds floating around the world, and a credit crisis.
The old Keynesian playbook just doesn't work anymore.
Posted by: RedCharlie | Jun 30, 2008 10:17:41 AM
Is it volatility if the error is consistently in one direction?
So, perhaps food and fuel are no longer volatile, but there is political will against correcting the formula, because it will put the current administration in a bad light.
Now, with an administration that has lied more than one too many times, the trust in honest professionalism of government numbers is paper thin.
Posted by: gc | Jun 30, 2008 10:23:33 AM
Consumer confidence data sending an accurate signal
This is why the consumer confidence data are probably sending out an accurate signal. To date, Uncle Sam has handed out $71 billion in rebates, which is a stunning $576 billion in extra income when taken at an annual rate, and despite that, consumer confidence is imploding –down to 1992 levels in the Conference Board survey and to 1980 levels in the University of Michigan polls. For the first time in the 40-year history of the Conference Board survey, there are more people who expect their incomes to go down in the next six months then there are people who expect an increase in their pay, and we are talking about nominal, not real incomes here. The University of Michigan survey on Friday showed that in May and June, 20% of respondents expect to see their incomes cut in nominal terms. Not only is this the highest since the question was first asked 32 years ago, but is completely off the charts and about double what a normal figure is in this survey.
Posted by: David Rosenberg | Jun 30, 2008 10:25:33 AM
BR asked
Who is Right: Professionals or the Populace
Conjecture: Professionals vote their career and the populace votes their pocketbook. Their interests rarely intersect and both ignore most of what they see.
The professionals ignore what isn't good for their careers. You're dealing mostly with lazy 'C' students who know how to get along better than anything else. Image is everything. Substance can get you in trouble.
The populace just doesn't give a shit about anything that doesn't affect them with the same intensity as a sharp stick in the eye.
Ask someone from either group to think and they will probably want to punch you.
Practically everyone lies and will steal whatever they can if they believe they can get away with it. You expect people to give. They may tithe, they may donate a few bucks or old clothes to charity, but they don't give very often.
Posted by: cinefoz | Jun 30, 2008 10:28:31 AM
Debate Over: It's Hyperinflation ( and US Economic Collpase )
Posted by: who knew | Jun 30, 2008 10:28:55 AM
Much of the confusion arises from the fact that there is effectively a two track economy in the US. For example the top 20% spend more than the bottom 60% and the top 20% have a collective income as large as the remaining 80%. It doesn't take a big leap to realize that someone modestly well off with a net worth of say $3million including home equity and annual income of say $250k is not going to be as affected by $4 gas and 9% food inflation as someone with a net worth of say a $100k and income of $50k. Once one starts to push the net worth and income calcs up higher the disparities are even more pronounced. It's also not hard to guess in which group all the pundits, pontificators, economists, journalists and shills belong and even if they haven't got an agenda it colors their views. This problem has been looming for years and has got worse during the Bush Administration when income inequality has accelerated dramatically. Cheap credit disguised the situation by allowing much of the 80% to continue spending like the 20% even though their cash flow was not rising to accomodate greater consumption. Now comes the great deleveraging which is coinciding with a dramatic spurt in inflation. As for the stats the man in the street gave up believing those years ago because they are so obviously out of touch with reality because of some bizarre distortions created by the modelling.
Posted by: John | Jun 30, 2008 10:30:58 AM
Is it just me, or was Dow Chemical saying something about 25% price increases?
The difference in opinions comes from the way the data is interpreted. You and I look in our wallets. The experts consult their models. The models say our wallets are full. Our wallets say the experts are full of it.
We also look at our electric bills, medical bills, education bills, and taxes. And the fact is, none of these items is going up at anything resembling 2.5%. Even if the "experts" have more degrees than a thermometer, we look at what's costing us actual money, and what we see tells us that the experts are crazy.
Anecdotal? Sure.
But in the end, the mob will define reality. Go ask Paul Wolfowitz.
k
Posted by: Kents | Jun 30, 2008 10:32:02 AM
I agree with Bruce. Economists do not see these price rises as "proper" inflation because they are not driven by rising wages and are unlikely to be in the foreseeable future, given rising unemployment. And the decline in the average household's purchasing power, which has been going on for quite some time now, appears to be of little interest to them.
In all fairness, economists might be right when they forecast moderate inflation in the medium-term (after a short-term spike), as the likely slowdown in global growth should dampen commodities price rises. Whether wages keep up with even that moderate level of inflation is another issue...
Posted by: David | Jun 30, 2008 10:36:27 AM
Oh, I think this is easier to explain. Economics and Financial Analysis look at the economy as a whole and mostly in the aggregate.
Meso-America looks at its bank balance, its home equity, its savings, and how many friends are out of work. Their weekly costs of food and gasoline/diesel are a quick reminder.
And it isn't just what the press says, but how often it says it.
If you stand on my toes, but tell me you like me, I might not believe you. Right now, the economy and press are standing on the toes of most American consumers.
Posted by: Mark S | Jun 30, 2008 10:36:36 AM
Economics is a very complex (and dismal) science indeed, which leads to such a wide range of conclusions of where we are and where we are going. The problem is that it seems an increasingly large number of economists are practicing the field as a religion and not a science, burdening it with strict dogma. What they don't realize is that there is no physical underpinning to economic reality. If you know the velocity and direction a ball is traveling, the air friction, wind direction, and gravity, you can with almost complete certainty, know where to ball will land. There is no economic equivalent to this. As such, a trained economist or financial professional's prediction on what will happen X amount of time out is only marginally better (and sometime worse) than your average armchair economist [They, however, are probably more qualified to receive a Nobel Prize than you or I]. You certainly can't say that about fields like nuclear physics, brain surgery, or auto repair (Incidentally, there is a great discussion on fields with real experts vs. fields with no real experts in Nassim Taleb's 'Black Swan').
-HCF
Posted by: HCF | Jun 30, 2008 10:47:08 AM
BR asked
Who is Right: Professionals or the Populace
Sorry, I never answered the question. Personally, I think it is best to avoid both groups whenever you can. Most people aren't worth a damn and they sure don't care about you, unless it is their job to do so.
If you want things done, emulate Radar O'Reily on MASH. Just sneak around, make a few friends, and build a base that people have to use. Sounds like Karl Rove's tactics, too. (Separated at birth?)
Posted by: cinefoz | Jun 30, 2008 10:47:21 AM
Despite the bearish sentiment, it is very nice to see a triple bottom in the S&P500 which I think is very important for the future.
Posted by: MM | Jun 30, 2008 11:03:26 AM
I heard that business activity rose "unexpectedly." Take that you grassy knoll economists. You wish that the economy would crash, but to quote Monty Python, "It's not dead yet."
~~~
BR: It didn't rise unexpectadly, you silly kiiiinniget -- it contracted less than expected:
"The June Chicago PMI was a better than expected 49.6 vs the consensus of 48 and it's up from 49.1 in May. The components were mixed as New Orders fell to 52 from 56.1 and Backlogs dropped to 42.3 from 46.8 but the Employment index rose 5.5 pts to 46.7.Bottom line, the data still points to sluggish activity in the manufacturing sector (with continued price pressures) but not to the same extent as in the last recession which was cap ex led. The lows in that cycle in this # was 35.5 in Mar '01. The low in the current contraction was 44.5 back in Feb."
Now, go away, or I shall be forced to taunt you a second time.
Posted by: Aaron | Jun 30, 2008 11:08:08 AM
