← Autodidact Archive · Original Dissent · SteamshipTime
Thread ID: 18193 | Posts: 1 | Started: 2005-05-11
2005-05-11 10:03 | User Profile
Gary North explains how the econometrists are full of crap:
[url="http://www.lewrockwell.com/north/north371.html"]http://www.lewrockwell.com/north/north371.html[/url]
[left][font=Times New Roman, Times, serif][color=black]History buffs will recognize the roots of this phrase. Marie Antoinette, wife of King Louis XVI, is supposed to have said "Let them eat cake" when informed in 1789 that the Parisian masses had run out of bread. There is no reliable evidence that the ill-fated queen ever said this, but it has made good propaganda since 1789. The sign of the insensitivity of the successful to the suffering masses is some version of "Let them eat cake."[/color][/font][/left]
[left][font=Times New Roman, Times, serif][color=black]In our day, the public no longer worries about bread, except as a source of unwanted carbohydrates. The free market had made us all so rich that our concern is with too much bread and too much cake. Twinkies celebrated its 75th birthday recently ââ¬â cost-conscious Americansââ¬â¢ favorite substitute for cake. Our waistlines reveal that ours is a world very different from Marie Antoinetteââ¬â¢s.[/color][/font][/left]
[left][font=Times New Roman, Times, serif][color=black]But every society has its worries. Our worries center around official statistics. This includes stock market indexes. Newspapers run reports on how the Dow Jones did yesterday. Websites monitor this statistic constantly. TV anchormen do not let a broadcast get by without a reference to the Dow, usually with a line chart behind them. Up 6 points, down 9 points; it doesnââ¬â¢t matter how minuscule the change is from the day before. It will make it onto prime-time news.[/color][/font][/left]
[font=Times New Roman, Times, serif][color=black]The Dow is regarded as monitoring the pulse of the American economy. It is seen as the mark of Americaââ¬â¢s success or failure. "As goes the Dow, so goes America." Individually, we would not admit in private that we believe this, but the evening news indicates that millions of us do. We say we donââ¬â¢t believe in astrology, either, but what newspaper would dare to drop its astrology column?[/color][/font]
[font=Times New Roman, Times, serif][color=black]Yes, yes: thatââ¬â¢s for all those other people. Well, I hope so, but the reality is this: all those other people are eligible to vote. Upset them, and the incumbent political party is in trouble. "Itââ¬â¢s the economy, stupid," 1992ââ¬â¢s formula for national electoral success, still resonates with the voters.[/color][/font]
[font=Times New Roman, Times, serif][color=black]POLITICAL NUMBERS[/color][/font]
[font=Times New Roman, Times, serif][color=black]Official indexes tend to calm down the electorate. They are designed to calm down voters. This is why governments have the statisticians jiggle and juggle the official statistics. For example, we feel better when the Bureau of Labor Statistics announces that job growth increased in the previous month. On May 6, the BLS announced that job growth was up 274,000 jobs in April.[/color][/font]
[font=Times New Roman, Times, serif][color=black]Sometimes, this sort of statistical optimism leads to verbal speculation that the economy is stronger, so inflation will rise, so the Federal Reserve will raise interest rates, which will strengthen the dollar, which will make exports more difficult, which will slow the economy. The Dow drops. Or doesnââ¬â¢t.[/color][/font]
[font=Times New Roman, Times, serif][color=black]How does the BLS know that there were 274,000 new jobs? Not by counting them. It has a statistical formula which includes the likely creation of new businesses and the likely demise of old businesses. This is called the birth-death ratio. [/color][/font]
[font=Times New Roman, Times, serif][color=black]Let me assure you, the journalists who report the employment figures do not report the following. Thatââ¬â¢s because hardly anyone knows about it, and of those who do, hardly anyone understands it, and of those who do understand it, hardly anyone knows what the BLS formula is or how the samples are made. [/color][url="http://www.bls.gov/web/cesbd.htm"][color=black]The Bureau of Labor Statistics does publish a page about the birth-death ratio[/color][/url][color=black]. [/color][/font]
[font=Times New Roman, Times, serif][color=black]I have never met anyone who can explain it. Here, we read:[/color][/font][indent][left][font=Times New Roman, Times, serif][color=black]To account for this net birth/death portion of total employment, BLS is implementing an estimation procedure with two components: the first component uses business deaths to impute employment for business births. This is incorporated into the sample-based link relative estimate procedure by simply not reflecting sample units going out of business, but imputing to them the same trend as the other firms in the sample. [/color][/font][/left]
[/indent][left][font=Times New Roman, Times, serif][color=black]Got that? Good. Now it gets complicated.[/color][/font][/left]
[indent][left][font=Times New Roman, Times, serif][color=black]The second component is an ARIMA time series model designed to estimate the residual net birth/death employment not accounted for by the imputation. The historical time series used to create and test the ARIMA model was derived from the UI universe micro level database, and reflects the actual residual net of births and deaths over the past five years. The ARIMA model component is updated and reviewed on a quarterly basis.[/color][/font][/left]
[/indent][font=Times New Roman, Times, serif][color=black]We assume that the same formula is maintained from month to month, so that we can compare apples and apples, or whatever the statistical fruit is. We assume lots of things in trying to make sense of the economy. We should also assume that three months later, there will be a revision of this monthââ¬â¢s statistics. There probably will be. These revisions tend to be downward. They also tend to be ignored by the press.[/color][/font]
[font=Times New Roman, Times, serif][color=black]The good news regarding jobs may be better-than-expected (by whom?) good news or less-than-expected (by whom?) good news. It depends on how the reporters want to pitch the statistic.[/color][/font]
[left][font=Times New Roman, Times, serif][color=black]When people feel secure in their jobs, they tend to save less. They spend more. They assume that whoever is managing their retirement funds knows what he is doing. They donââ¬â¢t worry about the future.[/color][/font][/left]
[left][font=Times New Roman, Times, serif][color=black]Recessions rarely last long. During recessions, Americans worry about their jobs. They worry a little about their pension funds. But, as we saw in 2001, they donââ¬â¢t worry much. They buy. They especially buy nicer homes. They borrow. They especially borrow mortgage money.[/color][/font][/left]
[left][font=Times New Roman, Times, serif][color=black]THE WEALTH EFFECT[/color][/font][/left]
[left][font=Times New Roman, Times, serif][color=black]Economists speak of the wealth effect. When people think they are doing well ââ¬â jobs, investments ââ¬â they tend to save less. They assume that good times will take care of retirement portfolio growth. A rising market will let them retire in comfort. The self-discipline of thrift today can be deferred. Besides, thrift is so uncomfortable.[/color][/font][/left]
[font=Times New Roman, Times, serif][color=black]This same attitude afflicts corporate America. [/color][url="http://shurl.org/pinch"][color=black]In a story published in Business Week[/color][/url]color=black, the authors commented on what they called the pension pinch. Because of the downturn of the market after November, 2000, corporate America was facing a new reality. Its pension funds were not being automatically funded by stock market indexes.[/color][/font][indent][font=Times New Roman, Times, serif][color=black]Amid the wreckage of the worst bear market in at least three decades, hemorrhaging corporate pension plans are rapidly becoming Wall Streetââ¬â¢s biggest new worry. They have lost hundreds of billions of dollars, and now companies face the end of their long-running holiday from writing checks to the plans. Over the next 18 months or so, companies ranging from General Motors to United Technologies face having to pump billions into their plans to comply with federal laws to protect pensioners. [/color][/font]
[/indent]
[color=black][font=Times New Roman, Times, serif]The authors were correct. This is exactly what large corporations had to do. General Motors, as the authors mentioned, was most at risk. Little did they know![/font] [/color][indent][color=black][font=Times New Roman, Times, serif]General Motors Corp., which has the biggest pension plan of all, with $80 billion in obligations, disclosed July 16 that it expects to put $9 billion into its plans by 2007.[/font] [/color]
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[left][font=Times New Roman, Times, serif][color=black]Ha! [/color][url="http://www.msnbc.msn.com/id/7564816/site/newsweek/"][color=black]General Motors had to float a $17 billion bond sale in 2003 to meet its pension fund obligations.[/color][/url][color=black] Then, in 2004, it had to add another $13 billion. Yet it is still $57 billion in the hole.[/color][/font][/left]
[left][color=black][font=Times New Roman, Times, serif]The company has recently been reduced to junk bond status by Standard & Poorââ¬â¢s. So was Ford. Legally, many investment funds cannot hold junk bonds. Legally, fund managers will have to sell GM and Ford bonds. This should have begun last week. It didnââ¬â¢t. We shall see if the fire sale, or any sale, takes place. We shall see if Federal regulators or fund investors force them to do so... [/font][font=Times New Roman][Continued at link][/font][/color][/left]