Friday, January 31, 2003

Remora
Prediction fiction

The NYT reports official preliminary figures show fourth quarter growth at 0.7%. Further in the story we come to these two grafs:

Most economists had predicted a weak figure for the fourth quarter, and none interviewed yesterday said they planned to change their forecasts. Though they expect growth to improve slightly this year, it might not be enough to create jobs until the spring or summer.

Many companies hesitate even to bet on a midyear recovery, said Carl T. Camden, president and chief operating officer of Kelly Services, a leading provider of temporary workers. His clients "talk about things turning around in the third quarter," he said, "and then they realize that's the same speech they gave last year"

So, is that what "most economists" had predicted? Wow, somehow we bet those predictions were revised about two weeks ago. Long range, that isn't what most economists were predicting at all. When Business Week did its annual half year business conditions survey in July, 2002, the picture was a lot rosier:


"BusinessWeek's midyear survey of business economists shows that, on average, the forecasters expect real gross domestic product to grow at a healthy, if unspectacular, 3% annual rate during the second and third quarters, with the pace picking up to 3.5% in the first half of 2003 (table)."

Is LI nitpicking? No. The importance of this is that those messages, percolating out into the national subconscious, set the stage for Bush's push-over midterm election. After all, what is there to worry about when the forecasters are showing a pickup? That, in fact, we got a downturn is now going to be written away as, somehow, a bad call. Well, we would like to point out the ideological biases of the bad callers. The professional Pollyannas -- people like James Suriowiecki of New Yorker and the ever erroneous James Glassman of the Washington Post -- have been assuring us that the CEOs are too worried for their own good -- the recovery is just around the corner. Their reasons aren't found in the economy itself, but in a particular, libertarian philosophy -- the same one underlying Bush's Great Giveaway.

In July, while economists were not -- not is the operative word -- within ballpark range of the end of the year's GDP figures, Mr. Surioweicki published a defense of the New Economy paradigm in Wired. It is a rather funny document.. As with all defenders of discredited doctrines, the first order of business is to redefine the semantics of the doctrine to make it work. So, here is how Suriowiecki goes about it:

http://www.wired.com/wired/archive/10.07/Myth_pr.html

"Stephen Roach, chief economist at Morgan Stanley, insists that the US can look forward only to "very subdued growth" until it works off "the bubble-induced excesses of the late 1990s."


Don't count on it. In fact, the overall shallowness of the recession and strong productivity growth during the downturn show that the skeptics are wrong. Call it the myth of the myth of the new economy. The naysayers ignore the economic fundamentals that drove the boom, emphasizing instead the over-the-top rhetorical flourishes - and outrageous stock prices - that accompanied it. Because wild-eyed optimists once said technology would change everything, it must have changed nothing. But if it's 2002 and you're still saying that things aren't fundamentally different than they were a decade ago, you're living in a dream world at least as fantastic as anything a new economy fanatic could conjure. I

n reality, 1995 marked the beginning of a long-lived shift in US economic performance. Productivity growth accelerated due to what economists call secular, rather than cyclical, factors. That is, the pace of productivity growth didn't start rising in 1995 because the business cycle had turned upward. It started rising because crucial aspects of the economy had changed. As a result, today's economy can expand much faster than previously thought possible. Between 1972 and 1995, productivity rose a paltry 1.4 percent a year. Between 1995 and 2000, it rose 2.5 percent a year - an increase of 79 percent. "There has absolutely been a sizable change in the secular growth rate of both labor productivity and total factor productivity," says Harvard economist Dale Jorgenson. Many of the truisms of the boom, it turns out, were true.

Now, what those stats aren't telling you is that they are calculated with the assumption that productivity has to be defined differently -- an assumption that kicked in during the late 90s. That assumption is being tested now. Like a lot of the accounting techniques of the 90s, it isn't looking very good.

Further, the New Economy model implied that this new boom in productivity would create a recession proof economy. That is what the New Economy was all about, in spite of Suriowiecki's smoke screen. And it wasn't just about that for bored pundits -- these were the assumptions that underlay AOL buying Time Warner. Hmm, I wonder how that worked out? And I wonder why Suriowiecki's model sorta forgets the slump in equity value that shows no sign of reversing itself right now. In fact, many of the truisms of the boom turned out to apply to the boom, and the boom only. One of the truisms of the post-boom, though, is certainly true for Suriewiecki -- bs in, bs out. Here, for instance, is the dance he does using the cooked productivity figures:

"Note that information technology's benefits increase over time. If you study the relationship of IT spending to productivity over a single year, you'll find that computers deliver benefits roughly equal to their costs."

That is a perfect New Economy sentence. The metric that you use to measure a firm's performance is no longer anything so plebian as profit and loss. Oh no. It is a 'benefit." And oh, this wonderous benefit -- this rise in productivity due to measuring productivity in a new way that i"incorporates" IT -- why, lo and behold, it equals the cost over a single year. This was the kind of thinking that boosted Yahoo stock to what was it, $300 per share? in 2000.

Behind Suriowiecki's nuttiness is one major fact about the current economy: we are being held up not by IT, but by people buying cars and houses. That's it, folks. There's no magic in the figures. The dream world inhabited by Suriowiecki's skeptics seems to be panning out as the real world, brother. Cooked productivity figures don't compare with 0% financing and the incessant barrage of mortgage offers even LI, who doesn't have a pot to piss in, gets regularly every morning in our email.

Alas, Surowiecki's kind of thinking will be used to justify the disastrous divident tax cut. The pied pipers are still out there, boys and girls.

No comments:

From the Holodomor to Gaza: NYT softfocuses on famine - the spirit of Walter Duranty lives!

  When Gareth Jones, a former secretary of David Lloyd George, made a walking tour in Ukrainian agricultural districts in 1933, he wrote a s...