Arnold Kling  

Macro Econoblog

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I was asked to do a WSJ Econoblog on the state of the economy. I do not have strongly-held views on macroeconomics, so there was not much disagreement between me and my "opponent," John Irons.

Guess which one of us wrote

I am very much an optimist, so I think the vibrancy of the American economy will eventually pull us out of the doldrums

and which one of us wrote

The Bush administration's fiscal policy appears to owe more to following a path of least political resistance than to any coherent economic strategy.

For Discussion. What macroeconomic issues did we overlook?

Comments and Sharing

CATEGORIES: Macroeconomics

COMMENTS (9 to date)
Lawrance George Lux writes:

The puzzle that it looked like We will have chronic Unemployment until We run into a chronic Labor shortage. lgl

Ian Lewis writes:

I am surprised that no one mentioned Iraq. I understand that we don't have that many troops over there and that it is no where near as expensive as some past wars, but it still has an effect. Also, nary a mention of either China or India (Asia was mentioned once). Otherwise, good job.

Tim Shell writes:

One thing no one seems to be noticing, with all this talk of trade deficits, is that US exports are at record high levels, both in absolute terms and as a percentage of GDP.

How would we account for record highs in both imports and exports? The simplest explanation is that the global economy is booming, but no one seems to be saying that.

El Presidente writes:

If the global economy is booming why haven't we capitalized on it with more substantial improvements in employment and wages (followed by savings and tax revenue)? I'd certainly like to believe that it's true but, "Where's the beef?" I suppose we could be lagging because we are serving economies with less to offer in the way of profits. We may be doing our part to finance a global boom by decreasing our standard of living and consumption but it isn’t reflected in personal savings. By the way, what are we exporting so much of? I live in the Los Angeles area and we don't seem to have any export industries that have produced noticeable increases in employment lately. Then again, we don't seem to have many export industries. The dollar is low and if there was ever a time when we'd expect exports to surge, its now. With the size of the Los Angeles area economy one might expect to see some real progress as an effect of the global boom. Instead we're cashing out foreign dollars through real estate, which is driving inflation and increasing the wedge in the center of our income distribution. Relative poverty seems to be increasing here.

I think we are in a lull and if we don't get traction soon we might slip into a coma. I work in the real estate market and it has begun to cool. Applications for home loans (purchase and refinance) have dipped recently. Something big had better be on deck when this boom retires. There is already a lot more shady dealing going on in real estate than say a year ago because of the decrease in volume for lenders. They're nervous about their paychecks and it shows. I know several folks who will have to make another difficult employment transition with no savings and very high personal debt. It’s hard to be effective when you’re transitioning from a speculation market to a production market, which is what they’ll likely be in for. God help us if something doesn't happen soon.

I’d say there has been a litany of fiscal and policy missteps at the federal level and we're suffering the consequences by being locked in this never-ending holding pattern. Sooner or later though the plane runs out of gas.

Bill writes:

El Presidente,

Southern California does have (at least) one large export: entertainment in the form of movies, TV shows, and music.

Randy writes:

Good discussion, but I think you overlooked the stock market. In my opinion, that bubble has not yet burst. Some pressure was released, but the DOW probably belongs at somewhere between three and five thousand. The reasoning is the same as your point that we are between booms. A lot of money, waiting for something to do, all sitting on the same tired, overvalued, stocks.

El Presidente writes:


Here's the long answer. Sorry. 90028, the ZIP code commonly known as Hollywood, had median household incomes of $16,871 in 1990 (L.A. City-$30,925, L.A. County-$34,965) and $21,893 in 2000 (L.A. City-$36,687, L.A. County-$42,189). I don't think there has been a noticeable expansion of entertainment exports lately. Any increasing profits from these exports don't seem to have been realized in increased wages or employment by local residents (I'm president of a non-profit in Hollywood and friends with some "industry" folk). To be fair, some of that money has settled down in the Hollywood Hills (different zip code). In fact, there is a large homeless population and roughly 50% relative poverty (60% of median or less) in Tinseltown whether you slice it by city or county. So, while you're right that we export entertainment, it doesn't seem to be an expanding industry in the midst of a suggested global economic boom and the heart of the entertainment industry is suffering greatly, as usual.

I've been scratching my head trying to name another Southern California export industry. Can you think of one? The largest industries I can think of beside real estate and entertainment are futures (Downtown) and securities (West L.A.) trading; both are speculative, not productive. Following that, aviation; Boeing, in Long Beach, is losing to Airbus lately. New home construction is strong for the moment but interest rates are rising. The carrying trade has been active through San Pedro and Long Beach, but not terribly so. There has been a modest increase in international tourism, perhaps due to the declining dollar, but I don't think it is substantial either. L.A. is mostly a low-wage service economy. That's the hard truth. That's why it's precarious for us to ride on this bubble with a seemingly stagnant national economy. But these are, after all, only microeconomic concerns unless the rest of the country follows suit. I can't see how they can avoid our fate though, when manufacturing is rumored to be evaporating across the country. Maybe I'm just being pessimistic.

Erik Kubec writes:

Your discussion hit all of the major points, but broke no new ground in the synthesis of those points.

For example there is ample ASCII code and ink given to theories on dollar valuation, interest rates, housing bubbles, deficits, growth, productivity, export-import, etc. However I have not found many that tackle the connectedness of it all in either a simple to understand or orignally new, but complex, way.

My simple belief is the dominating factor of macro economic landscape is the 25 year credit boom. This has been brought about domestically by a both successful and limited Federal Reserve Board policy (fight inflation) and by the success of foreign (Asian) governments in their goal of boosting their exports by keeping a low exchange rate (by buying Treasuries). This affects interest rates, housing values, exchange rates, import-export deficits, consumer purchases, etc.

The housing boom is really secondary to the credit boom, much as the flooding of low streets is secondary to 10 inches of rainfall in a short period. Its hard to visually capture rain, but the images of cars engulfed in water up to the windows is powerful. Just as all of the rain water must find somewhere to go, so all of the cheap credit must find somewhere to go as well.

My question for those who A) have a higher degree in economics than me, and B) spend more than 10 hours per weak reading and thinking on such matters is: "Assuming the validity of the theory that a 25 credit boom has exisited and is now coming to an end, how are all of those 'micros' of the macroeconomic environment going to shake out?"

Perhaps I need to buy a subscription to a more expensive journal.


Fletch writes:

Economic analysis is classified into two groups: partial equilibrium analysis (the dominant group) and general equilibrium analysis. Partial analysis is that which you criticize in your first point. That is, discussion on how a handful of variables are related to one another (usually, one dependent variable and, say, one to three or four independent variables). For example, how does the value of the dollar affect interest rates?, etc. Because the economy is so complex with hundreds of macro-level variables interrelated to one another, general analysis of the system is very difficult without telling stories, which is what you did. Clearly, without massive and distortionary monetary intervention abroad, domestic interest rates would have been higher, thus depressing investment demand across the board. How these distortionarily cheap credit instruments affect *real* variables is an open question indeed. Will housing prices in the U.S. crash if China and Japan stopped insisting on distorting their foreign exchange levels? Controlling for all the other variables that impact housing values is a near-impossible task to perform. So, story time. Is the credit boom over in America? Well, that depends. For the U.S. Government, probably not. Expect far higher levels of public debt-to-G.D.P. in the coming years as a result of demographic shifts, new health-care technologies, etc. Developed-world governments can run far higher ratios than currently and avoid a crisis (just look at Japan). On privately-held debt, however, the skis are cloudier. I think the era of expanding *consumer* debt is over soon, simply because households are running up against servicing limits. With consumption no longer debt-financed, we can look for help to two other methods: equity-finance or current income. With falling or stagnate wages in only but the most-skilled occupations (a key source of the credit explosion over the last several decades, I would argue), we can only look to equity-finance, particularly in our homes, to support additional consumption.

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