October 01, 2004

*Sigh* A Dirty Job, But Somebody Needs to Do It

Sigh.* It's the first day of the new quarter, so it's time for me to take on my share of intellectual garbage pickup. It's a dirty, unpleasant job with no rewards. But somebody leads to lay down markers on the internet to the effect that, as a rule, virtual Paul Krugman stalker Donald Luskin doesn't know what he talks about when he talks about economics.

In the past we have had such wonderful gems as Luskin's misunderstanding of what a real exchange rate is, Luskin's claim that David Brooks is both 100% correct and is a traitor to his party for saying that the Bush administration routinely lies, Luskin's denial that the yield on a bond is an interest rate, Luskin's accusation that Gretchen Morgenstern is a plagiarist, and Luskin's claim that George Soros may try to crash the market on October 31, among others.

This time, however, pickings are slim. I went over to poorandstupid.com and found only two economic analysis mistakes on the main weblog page. First, Luskin attacks the Ludwig von Mises Institute's Robert Blumen for favorably citing Paul Krugman as an authority. Blumen does cite Paul Krugman and set out Krugman's position, but only so that in the next sentence he can attack Krugman. It's not a favorable citation. Luskin simply didn't read what Blumen wrote.

Second, Luskin writes:

GDP -- BACK ON TRACK Today 2nd quarter GDP was revised upward to 3.3% -- a full half percentage point higher than when it was last estimated in August, and three tenths of a percent higher than when it was first announced in July. Good question from reader Mike Tocci:

Now that Q2 GDP has been revised back up, will Krugman recant his "Bye-Bye Bush Boom" column -- which was silly to begin with -- and declare the recovery back "on"?

An 0.3% upward revision in the second quqrter's growth rate will raise the 2004 annual GDP growth rate by 0.075%, and the 2003-2004 average growth rate by 0.0375%. That's not enough to cause anybody to change their image of the strength of the economy under George W. Bush. And this idea of a "Bush boom"... Over his term so far, the economy has grown at an average rate of 2.5% per year. That's a slower rate than economic growth during... Clinton II, Clinton I, Reagan II, Reagan I, Carter (yes, really), Nixon I, Johnson, Kennedy-Johnson, Eisenhower I, and Truman. As measured by the growth of real GDP, the economy has grown more slowly in only three presidential terms in the last 13: Bush 41, Nixon-Ford, and Eisenhower II. As measured by the growth of employment, we have to go all the way back to Herbert Hoover to find something worse.

Only two economic-analytical mistakes--that isn't so bad, you may say. But those are the only two posts on the main weblog page that attempt any economic analysis at all. Luskin bats zero.

Posted by DeLong at October 1, 2004 07:22 PM | TrackBack

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Posted by: texas hold em at December 31, 1969 04:14 PM

Luskin said 0.5% You say 0.3%. Is he wrong on the number as well as the interpretation ? I should know but I don't

Posted by: Robert Waldmann at October 1, 2004 07:35 PM

Second quarter real GDP growth number was 3.0%. Revised down to 2.8%. Now rerevised up to 3.3%...

Posted by: Brad DeLong at October 1, 2004 07:41 PM

i know i shouldn't be so lazy and i should look it up myself, but what accounted for the upward revision?

Posted by: howard at October 1, 2004 08:33 PM

"Bats zero"" If it were possible to have a negative average, Don Luskin would have one. And after "hedonic quality adjustments" and "adjusting for substitution bias," well, son of a gun - Luskin is, in fact, batting -1.000.

Want to read what real people who swing a lot more weight than Luskin are saying? How about Bill Gross, who's the Managing Director of Pacific Investment Management and one of the smartest people in the U.S. fixed-income market? According to Gross, the adjustments made by the BLS for quality improvements alone (made at the urging of Alan "Way Past It" Greenspan) should actually add between 0.5% and 1.1% to U.S. inflation, as measured by the PCE, every year since 1987. And if inflation is that much higher, then real growth must be that much lower.


This con job has three wonderful benefits for the Cheney/Bush administration: It lets them claim that inflation is lower than it actually is; it lets them claim that real growth is higher than it actually is; and it is saving them a boatload of money on Social Security benefits, which - supposedly - are indexed for inflation.

Maybe someday soon people will stop genuflecting at the altar of St. Alan and start thinking about replacing him with someone who's not party to this scam.

Posted by: Uncle Jeffy at October 1, 2004 08:56 PM

This is the first time I'd seen his post denying that the yield on a bond is an interest rate, which tops everything I'd seen before from Luskin. It's so extreme in its idiocy that I have a hard time believing he's sincere. Is it really possible that he believes he's right about this? There must be some other explanation. Could his entire persona and "career" be some sort of elaborate fiction, perpetrated by some top economist somewhere as an inside joke on Krugman and DeLong? I'm puzzled.

Posted by: DonPedro at October 1, 2004 09:27 PM

"If it were possible to have a negative average, Don Luskin would have one."

In baseball sabermetrics there's VORP -- Value Over Replacement Player -- which can be negative.

Posted by: ogmb at October 2, 2004 12:59 AM

OK, I missed the prior post about Soros gaming the market on October 31, so I'd now like to ask, why on Earth would he think the best day to play a market game was on a Sunday, when the markets are all closed?? Perhaps there's some type of market activity that continues even over the weekends which would take full effect on Monday? Or is it just more evidence of how far Luskin will take his delusions, that it must be tied in to Halloween somehow?

Posted by: John Owens at October 2, 2004 02:49 AM

Luskin is a chump. I once took him to task for being so wrong on his market calls on his public message board. He didn't like that and booted me off. Good work Brad.

Posted by: zgveritas at October 2, 2004 07:21 AM

What significant growth we consistently find these years is based on the vibrant housing market. From raw materials consumption to construction to furnishing and repairs to borrowing against equity, the housing market has been robust and given the Federal Reserve much of the growth wished for. There is still no sign of a slowing in the housing market.

Posted by: anne at October 2, 2004 08:02 AM

It amazes me that so many smart right-wing bloggers link to Luskin's senseless drivel. What do they see in him? Is he like the friend that one only keeps around for when one is bored or in need of a good laugh? Surely it can't be for his alleged "expertise" in economics. I'm probably the last person that will claim expertise in economics, but man, he makes me look like Nobel winner.

Posted by: Brian at October 2, 2004 10:05 AM

Isn't referring to Paul Krugman as anything other than the Statist Antichrist grounds for dismissal at the van Mises Institute?

Posted by: psetzer at October 2, 2004 10:34 AM

But here's what the von Mises Institute piece says about Paul:

'...does it matter if stock and bond prices rise relative to consumption goods?  As economist Paul Krugman once wrote, "It's paper gains today, paper losses tomorrow; who cares?" The problem with financial inflation is that investment decisions by entrepreneurs are based on relative prices.  When relative prices are disrupted, as by financial inflation, the entire productive structure of the economy is distorted.  The movement of real savings into real investment is stymied.   As Mises wrote, "The endeavors to expand the quantity of money in circulation either in order to increase the government's capacity to spend or in order to bring about a temporary lowering of the rate of interest disintegrate all currency matters and derange economic calculation." The "financialization" of the economy—the expansion of the financial sector relative to mining, agriculture, manufacturing, transportation, energy, transportation, and retail—is but one example of these distortions.   Various measures of the size of financial assets, such as the stock market capitalization to GDP ratio, and Tobin’s "Q" ratio (which measure total stock market capitalization to replacement cost) reached all-time highs in the late 90s and are still above long-term average values.'

That's a pretty harsh criticism of Paul. That's not a favorable citation.

When Luskin writes "Here's a particularly sad example from the Von Mises Institute promulgating the dangerous myth of "financial inflation," and stooping to cite Paul Krugman -- an economist utterly opposed to Austrian principles -- to back them up." he's being a total ass--too lazy to even read what he's criticizing.

Posted by: Brad DeLong at October 2, 2004 11:21 AM

Please please. Will a kind soul please explain to me what the heck Austrian economics is about. I can make no sense of the stuff.

Posted by: lise at October 2, 2004 12:19 PM

Try reading the Mises Institute description of Austrian economics and understanding more than that it was born with Thomas Aquinas who the Institute wishes would quickly replace the villinous Keynes in all our texts. But, I like Keynes and I still have no idea what the heck Mises was about. Should I care?

Posted by: lise at October 2, 2004 12:29 PM

I don't think he's being lazy, Brad. I just think that as soon as Luskin sees Krugman's name in print anywhere he immediately gets all apoplectic so any hope of comprehension goes right out the window.

I can't wait for when Krugman wins the Nobel. Luskin's going to have an aneurysm. He should probably check himself into the hospital just prior to the announcemnt as a precautionary measure.

Posted by: Barry Freed at October 2, 2004 01:49 PM

I think the idea of Austrian economics is that it's the economics you develop if you're a blind, deaf, disembodied spirit, introspectively developing a theory of human behavior based on your own axiomatic intuitions on how human behavior must be, who is unwilling to use any simplification like turning preference rankings into utility functions through a monotonic transformation.

They're kinda weird: it's like they're very skeptical about whether what we perceive with our senses is right, but have absolute faith that their (rather counterintuitively rational) understanding of our own minds is right. A favorite story of Austrians is this: "An empirical economist goes to a subway stop, and, at around 8:00 and 5:00, sees a bunch of people rushing around randomly, onto and off of trains. He records this as something that happens at certain times of the day, but is unable to go further than that, and say anything about why or what motivates them. A praxeologist (Austrian economist) thinks about people going to work, and what motivates people, and concludes that people are going to and from work from and to their homes. (Actually, if I were an introspective praxeologist, I would guess that highly crowded subway stations at one time of the day would lead to very high prices at that time of the day, followed by very low prices at other times, since the train is a monopolist that can discriminate across time periods. I would then guess that, responding to incentives, some offices would start work at 7, 9, 10, or 11 A.M. and go to 4, 6, 7, or 8 P.M. instead of the bulk of them being 8-5, so as to take advantage of the lower transportation costs. My Austrian prediction leads me astray in the real world: at this point, an Austrian economist blames the government or something.)

Posted by: Julian Elson at October 2, 2004 03:21 PM

Julian Elsan

Absolutely perfect explanation :). I was leaning in just your direction, but wondering if I was not being fair. We are evidently being fair, though not in Austrian terms. I love you.

Posted by: lise at October 2, 2004 03:31 PM

Julian Elson

There, I ought to spell you name properly now that we two are one :).

Posted by: lise at October 2, 2004 03:34 PM


I agree with your take on Austrian economics. Therefore I hardly want to be in a position of defending them. Yet, in the interests of strengthening your criticism I must take issue with this statement:

They're kinda weird: it's like they're very skeptical about whether what we perceive with our senses is right, but have absolute faith that their (rather counterintuitively rational) understanding of our own minds is right.

This could also rather aptly describe much of contemporary physical theory. But i hardly would expect you or any other well-educated modern person to criticize our understanding of physics on this basis. To do so would be a major error.

Posted by: Barry Freed at October 2, 2004 04:03 PM


Do you mean social theory or physical theory?

Posted by: lise at October 2, 2004 04:25 PM


The difference is that the physical theories ultimately get tested against reality, and if they fail, they fail, and are discarded. Anything that doesn't match the real world is necessarily wrong. On the other hand, if the real world doesn't match up with Austrian economics, then it's clearly the world that has made a grave error, probably by regulating something.

Posted by: Jonathan at October 2, 2004 10:18 PM

lise: I thought I said physical theory.

Jonathan: True, however in the case of physical theory, while it is tested against "reality" (was that begging the question?), it is not the necessarily the reality accessible to naive sensory perception.

Posted by: Barry Freed at October 2, 2004 11:00 PM

Thanks, but I do not understand you relation of the term physical theory to the study of our minds.

Posted by: lise at October 3, 2004 03:44 AM

von Mises is actually worth reading and a significant monetary theorist. There are good ideas in Austrian theory and smart people like John Hicks have drawn on and contributed to it. Don't judge the tradition by the behaviour of people who convert scholarship into doctrine.

Posted by: Colin Danby at October 3, 2004 03:01 PM

Luskin's arrogance will be his undoing...or should.

Posted by: lee at October 3, 2004 07:10 PM