Pent-Up Nonsense and Other Loopy Ideas from 2015
It's that time of year when those of us who follow the economy and track financial markets look back, select winners and losers, highlight the smart and the silly, resort to verse or find some creative way to convey a point.
As a financial journalist for almost three decades, I am always on the lookout for economic nonsense. Bad ideas never seem to die a quiet death. Instead they keep coming back to haunt us, albeit in slightly altered form. Here are a few of my favorites.
1. Pent-up Nonsense
One can always count on pent-up demand, or a lack of it, to explain the strength or weakness in consumer spending or home sales in any given month. It's as if demand for goods and services were finite.
Do you know anyone who has everything he or she wants? Not needs; wants. As a society, we have unlimited wants for limited resources. Economics is the study of how those scarce resources are best allocated.
For most of us, spending is limited by budget constraints. I'd love to build my dream house on the water. Or travel the world, flying first-class and staying only at 5-star hotels. You get the point.
Many years ago I received a copy of a book entitled "The Death of Demand: Finding Growth in a Saturated Global Economy." While it was a welcome relief from pent-up demand and the usual Malthusian supply-side warnings - remember peak oil? - the idea made no sense.
You will be glad to know the pent-up club is expanding to include pent-up imports, pent-up productive capacity, and even pent-up depreciation pressure on the Chinese yuan. For me, it all contributes to a pent-up sense of frustration.
2. Lower Oil Prices Are Not Like a Tax Cut
It must be the noxious fumes because economists get funny in the head when crude oil prices are on the move. Can you think of any other good or service where a fall in the price is touted as the equivalent of a tax cut?
Lower prices are lower prices, period. Unless we are certain of the cause of the price decline - an increase in supply or a cutback in demand - there is no way to determine the effect. (See Scott Sumner, "Never reason from a price change.")
A decline in oil prices represents a wealth transfer from producers to consumers. No one gets a tax cut. That never stops economists from calculating the effect that every 10-cent decline in gas prices will have on consumer spending.
It has been 18 months since U.S. crude oil started its descent from $107 dollars a barrel to $35 this week, yet the consumer has yet to spend the windfall - hundreds of billions of dollars, we're told - from the advertised "oil-price-tax-cut."
What is easier to discern is the negative effect a 67 percent decline in oil prices is having on producers. The number of active U.S. drilling rigs has fallen by 1,184 to 709 in the past year, according to Baker Hughes. The oil and gas industry, including support services, has shed over 80,000 jobs. Loan delinquencies in the energy industry are rising. Industrial production is unchanged from a year ago.
Former ExxonMobil employees must be wondering where to line up for their tax cut.
3. Inefficient Markets?
How often do you read that the stock market is "poised to rally" once a specific economic report or event is out of the way? I have one question for reporters who favor such poise: Why hasn't the market rallied already since everyone knows it's poised to do so?
4. The Uncertainty Principle
Economists love to point to uncertainty as a reason businesses have been reluctant to invest. That includes uncertainty about the economic outlook as well as tax policy.
When is the future ever certain? Apparently there was no uncertainty in early 2000 because investors were buying stocks of Internet companies that had no profits, no revenue and, in some cases, no real business. It took 15 years for the Nasdaq Composite Index to eclipse its March 2000 high.
A group of academics has even devised an economic policy uncertainty index. Eyeballing the chart, the index appears to lag the business cycle, which would seem to limit its value.
The future is always uncertain. Forecasters exist to make weathermen look good. Today's tax law can be shredded by a new Congress every two years.
What varies is the degree of optimism about the future. Maybe it's time to label uncertainty for what it really is.
5. Two Lumps Are Better Than One
Immigration is a hot topic, even before it became intertwined with the Syrian refugee crisis and recent terrorist attacks. The U.S. unemployment rate may be low (5 percent), but there are still millions of Americans who are underemployed or have stopped looking for work entirely. Mention immigration, and in the next breath some politician will tell you that immigrants are stealing our jobs.
Such an assertion is based on the erroneous notion that the amount of work in an economy is fixed, to be divvied up among available workers. It even has a name: the lump of labor fallacy. It was the misplaced notion behind France's introduction of the 35-hour work week.
The amount of work in an economy is not fixed. New jobs and industries spring up all the time, just as old ones die or move offshore. The U.S. was once an agrarian society. Somehow all those farmers managed to find gainful employment when the U.S. became an industrialized nation.
Lest you think immigrants are the only job stealers, productivity is the enemy, too. President Barack Obama often points to automatic teller machines as an example of technology killing jobs.
This story may be apocryphal, but it bears repeating. Milton Friedman was traveling in a developing Asian nation when his host took him to visit an excavation project that was part of a public works program. Instead of using earth-moving equipment, the workers were using shovels. Friedman asked why. His host told him the aim of the program was to employ as many workers as possible. Friedman quipped: "Why not use spoons instead of shovels?"
Caroline Baum is a contributor to e21. You can follow her on Twitter here.
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