Brad DeLong's Semi-Daily Journal (2004)

Prof DeLong writes, "There is another scenario: one in which a weak labor market keeps the bulk of wages stagnant..."

What are the political changes needed to prevent free-trade from just weakening the American labor market (and consumer)? I read this over in salon today:
(http://www.salon.com/tech/feature/2004/01/27/amy_dean/index.html)

We have all sorts of protections in our trade laws to protect intellectual property. We have all sorts of rules in our trade laws to protect compact discs.

If we had one-quarter of the same rights for a human being as we do for compact discs, we'd see a huge breakthrough in trade policy.

this writer suggests:
"Let's just simply make as a condition of trade the right for employees to freely associate with one another... [This would be] very consistent with the foundation of our country. It's a very Madisonian concept that people should be allowed to freely associate for purposes of advancing their own interests. You couldn't ask for a more Western or American value.

And to be able to extend those values into our trade agreements, I think, is much more respectful of other countries. On the one hand, it protects our interests, but it also protects the interests of workers in those countries.

It's a much more respectful approach to harmonizing trade relations from a workers' rights perspective than creating some kind of international minimum wage, which the developing world sees as a largely American labor strategy to protect and insulate jobs.

"There is another scenario: one in which a weak labor market keeps the bulk of wages stagnant, but rising profits and high-wage incomes propels consumption demand growth at a reasonable pace. Profits continue to grow, and growing profits trigger enough additional investment demand to pull the economy into a relatively impressive (if still relatively jobless) recovery."

Darn darn darn.
- Agreed.

Consumerism saves Capitalism from Overproduction Crisis:

"but rising profits and high-wage incomes propels consumption demand growth at a reasonable pace."

OK, OK, But:

"Tiffany's same-store Christmas sales were up 16% this year, while WalMart's rose by only 3.9%."

So there is difference between consumption and consumption, between consumers and consumers!? Isn't it a risk then that frictions in transferring production factors from low-end to high-end goods may cause inflation and bottleneck-problems in the high-end sector, layoffs and overcapacity in the low-end sector? Risks large enough to make B.Tree skip this scenario?

In that Salon article, the interviewer makes a comment to the effect of 'we can't police the flow of code on the internet across borders, can we?'.

The author points out that that's precisely what intellectual property laws are for.

This is not necessarily a good idea, but it's an excellent example of the fact that when people talk about 'free markets', they are usually assuming the laws and regulations that they want.

WHY OH WHY CAN'T WE HAVE BETTER MACROECONOMISTS? PART XXXVI

Hmmm... so let me get this straight: you have two diametrically opposed forecasts---one calling for recession, the other for recovery---but you can't shed any light on which is more likely?

Sort of makes you wonder what macroeconomists are for.

The article contains the common fallacy: that cost-cutting margin expansions are unsustainable. Obviously, the opposite is the case. Once companies GENERALLY lose their focus on cost control and start relying on the top line, it is only a matter of months before the Fed must kill the process and set in motion a margin compression. But the foolish, illogical, empirically-unsupportable idea dies a hard death. It is endlessly asserted by those who have no fear or recollection of being wrong. Like, The Economist.

The notion that the US economy is inclined to run out of aggregate demand is next up in the parade of Roachian improbables. The article suggests that a fluke into higher inflation will cause a bond market over-reaction leading to a deflationary shock. Yeah right, that's a good base case.

Dr. Delong seems brilliant when he writes his own stuff. His choice of outside writing ....

It seems to me that the key to the outcome depends on how the European Central Bank and the Community resolve the problem of the German and French fiscal deficit. If they break their own law and monetize it, one would expect the European economy to grow faster. If it grows faster, it will improve investment prospects in Europe. If that happens, US interest rates ought to rise, and the recession scenario ensues. Does this make sense?

I just want to agree with Anne. As the prof has been sketching out his notion of an extended period of decent GDP growth, good profit growth, modest inflation, and poor job growth as the likely outcome of all of this, i nod my head more and more in agreement.

I still slightly think the odds of stagflation emerging by early 2005 are better than this thesis, but only slightly....

I call this sitting on the fence. A sharp picketted fence too.
Either there is a Nemesis or not.
No question about it for me. BushCo is not extending the tax cuts for nothing . GM's recent lottery gimmick is not for nothing. Demand is precarious and if crude doesn't get back under $30/barrel soon, present disposable income won't be able to buy those widgets.
The present dip in mortgage rates might keep the refi market smouldering for a few more months but that's all. (I mean check the stats on how many folks have already moved to ARMs and/or refinanced in the last year). Then we can say good-bye to the residential housing market. No Nemesis? Check the insider buy/sell ratio for the last few months. The insiders are demonstrating like never before that they have no confidence in the future.
But then what do they know--this ratio was even above 40:1 before the real surge in last year's market.

But does Brad really believe in the second scenario? He points out that it's conceivable such a muted recovery could occur, but he stops short of saying that Buttonwood is wrong and he never actually endorses the recovery scenario.

I call this efficient forecasting. Now, no matter what happens, Brad can say he saw it coming.

I strongly suspect that the good professor is taking out his galloping case of anglophobia on an innocent and rather good financial columnist. When all is said and done, Buttonwood marshalls a fair bit of evidence to support his viewpoint. Brad brings forward one fact: Tiffany's Christmas sales vs. WalMart's.

Me? I'm a Buttonwood man.

"The power of a popular econometrics test is irrelevant."
"An econometrics test that is never used has no power."
Heteroskedasticity by Michael McAleer

http://www.futuresworld.com/
There's only the Quick...and the Dead.
The rest is just murmuring by the grave.

So, if we don't know whats going on in the economy, that's ok, because if we all knew what's going on; the economy would just confuse us again directly.

In spite, I will provide my own theory. Too much short term paper chasing long term paper.
Long term outlook is confused because the U.S. Treasury department is playing chicken with Asia, a short term game. Business development prefers a stable long term outlook.

Come on, Non-economist--DeLong (and Buttonwood too, for that matter) is an economist, not a haruspex. Neither one of them is predicting the future. Buttonwood put forth a possible scenario, and DeLong said "Yes... but..." and put forth another one for the same data.

There's no more certainty in economics than in meteorology. But I don't accuse the Weather Channel of hedging its bets in order to seem prescient just because they tell me there is a "chance" of rain. If you want augury, there are plenty of other options--I find tarot cards work as well as anything, and involve less mess than entrails.

Using Tiffany's and Wal-Mart growth year on year to demonstrate a separation between the rich and poor is wrong. How about this explanation: Everyone is buying 10% more, but 6% of last year's Wal-Mart shoppers moved on to Tiffany's? (We take "Tiffany's" as referring to all higher-end stores.) Besides, is 3.9% year on year growth in spending really that small? I'd love to see GDP replicate itself doing that year after year. Or is it the 16% that you find offensive? Wouldn't gift spending (which is most of what one does at Tiffany's) be more cyclical than staples purchases ?(Wal-Mart, home of the cheap detergent.) ANY recovery should increase spending at a gift/luxury store more than a "needs" place like Wal-Mart.

rvman, when wal-mart's tells you that the increase in Xmas sales came in at the very low end of their expectations, it's worth paying attention. WalMart's knows more about consumers than you and me (and prof delong) put together.

More broadly, no, your thesis doesn't ring true. More than half of American households take in less than $45K; something like 80% of American households take in less than $85K; a recovery doesn't drive these people to Tiffany's. It means they can buy the better goods at WalMarts.

Alsafi, you've got me stumped. What do you find so obnoxious about the idea of asking Brad to forecast the future? I sort of thought that was one of the key goals of any macroeconomist. After all, if an economist has no ability to foresee the future, you have to conclude that his science really isn't much of a science at all.

At the moment, Brad is like a weatherman who insists on telling us that, yes, there may be sun tomorrow, but then again it may rain or snow. True, no doubt, but hardly helpful.

You should only trust a meteorologist who can put a number on his forecasts---"there's a 30% chance of rain tomorrow." Similarly, you should only trust an economic prognosticator who's willing to assign a probability to his forecast. Otherwise, he's just blowin' smoke.

non-economist, economics is about understanding, not about prognosticating.

@Gerard MacDonell
Don't know if anyone is still checking the comments on this post, but here is the link to the Buttonwood article:
http://www.economist.com/agenda/displayStory.cfm?story_id=2382773

You say: "The article suggests that a fluke into higher inflation will cause a bond market over-reaction leading to a deflationary shock. Yeah right, that's a good base case.

Dr. Delong seems brilliant when he writes his own stuff. His choice of outside writing ...."

However, the actual article does not mention inflation at all. It's about how the growth of corporate profits is not likely sustainable, contrary to the expectations of US equity investors. So you're citing Brad's "worse case scenario" rather than The Economist's (which actually does not give one).

It is good to see Professor de Long contemplate a rosy scenario for the American economy that would actually help the Bush administration return to office. He has not let his bitterness come in the way of an open mind. Sincere applause for that.

In his alternative rosy scenario, there is no mention, however, of how much fiscal deficits would rise (after all, he has made clear that the Bush administration is not really serious about tackling the budget deficits and might actually increase them), whether the bond market would stay quiescent if they do so. If they do not, what would happen to the debt-servicing capabilities of households and also to valuation in the housing market that has made the erosion in household networth less severe.

If the fiscal deficit continues to rise, what happens to the current deficit? With a still job-less recovery, does the personal sector manage to improve its balance sheet or does it stay as bad as it is now, or does it get worse?

If the current account deficit rises, is there any contemplation of the risk of over-reaction of exchange rates (whether or not the above scenario sketched in the previous paragraph materialises) and possible countermeasures from other countries that cannot bear currency strength beyond a point.

It seems to me that, whether or not the Buttonwood scenario materialises, Professor de Long's scenario is too perfect to be possible.