Economy Losing Its Cushion - WSJ.com

Q&A - ON STRAW AND CAMELS AND ECONOMETRIC ANALYSIS: Economy Losing Its Cushion - WSJ.com

Question:
Is anyone really saying, "gee, who knew?"

Answer = Yes

The economists, WH, Reuters and NBCCBSABCMSNBCCNN are all finding this horribly "unexpected".

Answer:

I don't know how familiar you are with econometric analysis - but, it is based on inputs of past data in order to make correlations.

We now have a changed correlation matrix and there wouldn't be any easy inputs.

The clearest comparison would be the 1937-38 downturn experience using a Laffer-type interpretation.

It goes to his 'Laffer Curve' (or, as I can also think of it - the story about the straw on the camel's back). There is too much government spending (and here, the tax increases are partly built in vis-a-vis ObamaCare, etc. and partly anticipatory and advertised to hit the 'rich' (making over $250k, etc.)).

Obama's Keynesians would discount the importance of those straws on the camel's back. Laffer wouldn't.

Since those regulatory and tax constraints (two big ones are the corporate tax rate and the inability to bring back overseas profits with 'no' tax cost - as can be done in all other countries) have past the tipping point, the current models are fatally flawed.

When they are run against the 30's, most probably still follow the Chicago School monetarist thinking about tight money causing the downturn. All of which would seem to have been disproven by QE1 and 2.

It's rather amazing more people aren't picking up on this.

It's also interesting to recall that, as was well shown in the 1970's and in the reflections upon that era and interest rates even up though the 1980's, people were shown to always look back to their most recent experience to make a forecast for the future.

Thus, people in the 70's always asked less in interest than the next round of inflation. Likewise, in the 80's, having learned their lesson before, they asked more interest than inflation.

The parallel now in forecasting is perhaps most evident in the inability to read the tea leaves of the camel.

It will be interesting to see when this is talked about more. It should be soon.