Economists | timiacono.com - Part 13

How Not to Fight “Inflation”

[I used to write about "owners' equivalent rent" and how it distorts the inflation statistics on a weekly basis a few years ago. Here's a piece from June 15th, 2006, back before it became common knowledge that the Fed had been duped by this measures of the cost of home ownership. BTW - I'm still up there pretty high on a Google Search of the term.]

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The ongoing debate about the significance of owner’s equivalent rent within the consumer price index is yet another example of how hapless the nation’s dismal scientists are as they continue to formulate monetary policy based on flawed measures of “inflation”.

As you’ll recall, most economists restrict the usage of the word “inflation” to mean “core inflation”, which excludes things like energy and food, and since 1983 has utilized Owner’s Equivalent Rent (OER) in lieu of actual costs of home ownership.

To determine OER, instead of measuring what homeowner’s costs actually are – items such as principle, interest, taxes, insurance, upkeep, etc. – the Bureau of Labor Statistics asks homeowners, “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

So, “core inflation” today is made up of about 38 percent housing rental costs – 30 percent OER and another 8 percent reflecting the prices paid by people who actually rent.

If you’re a central banker in an Anglo Saxon country this is a great deal because you can have home prices skyrocket and these costs don’t show up in the consumer price indices. High home prices boost the economy in many ways – many new mortgage lending and construction jobs are created and consumption increases dramatically through easy home equity withdrawal – but they don’t hurt the banker’s bottom line of price stability.

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Mulishly Squabbling Economists

In Newsweek is a fine column by Michael Hirsh about the general failings of economists in recent years and their lack of critical introspection (what some argue is an unchangeable personality trait for dismal scientists), a piece that is highlighted by the following:

Recently, the National Science Foundation sent out a query asking economists and social scientists to draw up “grand challenge questions that are both foundational and transformative”—a request that one recipient, Andrew Lo, a highly regarded financial economist at MIT, says is a first in his experience. But one problem is that the economics profession “has gotten much more intolerant of divergence from orthodoxy,” says Philip Mirowski, an economic historian at Notre Dame. “The range in which dissent happens is so narrow. In a sense they still cannot imagine the system can operate to undermine itself. That is not a position that is allowed anywhere in the economics profession. The field got rid of methodological self-criticism. This Great Moderation stuff was just arrogance, hubris.” Indeed, the joke on economists, says one of them, Rob Johnson, is that they create simplistic models that depend on people behaving as rational actors motivated by self-interest, yet “they have a blind spot regarding themselves.” The way they squabble mulishly to defend now-indefensible positions is itself evidence of how flawed those rational-actor models are.

It’s a mystery to me how one could write a lengthy article such as this one without once mentioning the Federal Reserve, the body that serves as the overlord for the economics profession, often times playing a critical role in career advancement in academia and elsewhere. But, that’s what Hirsch did…

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German Economist Claims Muslims Inferior

Leave it to an economist to start a book tour to promote his views that Muslims are genetically second class citizens at a time when the world seems to be one big powder keg of religious tension. The Washington Post reports on one Thilo Sarrazin who may or may not know about a certain preacher in Florida who may or may not burn the Koran tomorrow.

The most talked about man in Germany is a 65-year-old economist whose hot new book and sudden groundswell of popular support have the media dubbing him a folk hero. But that is not the only thing they are calling Thilo Sarrazin these days.

Some are also calling him dangerous. Sarrazin, a board member of the German Central Bank until he resigned under pressure Thursday, has divided the nation by postulating the theory that Germany is being “dumbed down” by Muslim immigrants and their children. Wielding statistics and scientific arguments both in his book and in public comments, he delves into territory largely taboo here since the Holocaust, suggesting that “hereditary factors” are at least partly to blame. Turks and Kurdish immigrants, he asserts, are genetically predisposed to lower intelligence than Germans and other ethnic groups, including Jews.

His statements have shocked many in Germany not only because of a national sensitivity to anything remotely smacking of genetic superiority claims in the post-World War II era. What has also shocked many is that so many Germans have rallied to his side as the central bank and his political party have sought to oust him for his pronouncements.

The title translates to “Germany Does Away with Itself”, now closing in on the half-million mark in sales, and Thilo now has 21,000 Facebook friends. While he is no stranger to controversy, you have to wonder whether he thought he was writing the German version of Freakonomics, never anticipating what his political in-correctness might produce.

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Krugman on the Need for More Stimulus

Princeton economics professor and Nobel Laureate Paul Krugman laments the smallish $800 billion stimulus of last year and says we should now double down with another $800 billion.

On what’s going through the mind of fixed income investors, Krugman says:

The bond market is telling us not to worry about the current deficits. They’re happy to lend the federal government money at very low rates. What the bond market is telling us is they’re terrified of deflation and of a weak economy for a very long time.

They’re also terrified of the stock market…

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