Debating Economics with Donald Luskin
Max Sawicky asks a good question:
Why do so many bloggers engage in online debates with Jonah Goldberg? He’s a gigantic honking ignoramus. He doesn’t know anything about anything. I don’t get it.
The same applies to Donald Luskin who should never be confused with an economist. OK, we had some fun with the debate between Barry Ritholtz and Luskin. But I have to regretfully report that this was only Round One. CalculatedRisk covers Round Two and Kash covers Round Three. Could someone tell James Pethokoukis that Luskin is not an economist? If one just considers the babbling in this Three Round match that should have been ruled a TKO a long time ago, you can see just how stupid this Ronald Luskin (OK, Kash misspelled his name but this may have been a Freudian slip as in Ronald McDonald aka a Clown) truly is.
Let’s start with this from Luskin:
First, there are no authoritative statistics on MEW; no reliable agency really claims to know what fraction of mortgage volume went into cash extraction. Second, even if we overlook that, nobody knows what fraction of that cash went into consumption. Third, even if we overlook that, we have no idea what consumption funded by other sources would have been if there had been no MEW. For the MEW analysis to have any meaning, it has to connect to consumption. It’s consumption that is a component of GDP – MEW is not, any more than the stock market is. MEW is nothing more than a hypothetical explanation for consumption.
Don asserts there are no “authoritative statistics on MEW.” This is wildly incorrect. The impact of mortgage equity withdrawal on consumer spending was calculated via the “Greenspan-Kennedy” method, a statistical system developed by Fed economist James Kennedy and former Fed Chair Alan Greenspan. Kennedy/Greenspan determined that 51 percent of MEW flowed through to personal consumption. There is also a small Wall Street shop – Goldman Sachs – whose methodology calculated that 68 percent of mortgage withdrawals was converted into consumer spending. (See Jan Hatzius’s “Housing Holds the Key to Fed Policy,” Global Econocs Paper No. 137, Goldman Sachs, February 2006).
Even if one never heard of James Kennedy or Jan Hatzius, one would have to wonder how Luskin could make such a claim. After all, his National Review buddies such as Lawrence Kudlow keep reminding us that we should monitor the Federal Reserve’s Flow of Funds accounting of household net wealth. My problem with Kudlow’s monitoring of this, however, is that he doesn’t realize that the increase in real per capita net worth over the past seven years has been quite modest. Also – if Luskin does not realize that changes in net worth affect consumption, maybe he should check out the Ando and Modigliani life cycle model of consumption.
Luskin does have a habit of ignoring economic research preferring his own meaningless correlation, which CR calls Rorschach inkblot test. And as Kash points out, Luskin seems to be playing around with the various definitions of “core GDP”:
The evidence that Luskin cites when he makes that assertion comes from last quarter’s GDP numbers. They show that the fall in residential investment (i.e. new house construction) subtracted 1.2% from the nation’s overall real GDP growth. But one could just as easily exclude any other disliked portion of GDP, and come up with the opposite conclusion. How about “real GDP actually grew by 2.5%, but was propped up by the large rise in government spending, without which economic growth would have only been an anemic 1.9%,” or “falling imports (which may well signal falling consumer demand) artificially boosted GDP growth, which would otherwise have been only 2.0%.” The point is a simple one: it makes no sense to exclude portions of the economy when trying to discern its direction, since all sectors of the economy contribute to its overall performance.
That was the point that I tried to make about Round One. Brad DeLong had a good comment on this a while back:
Because they have no idea what “nominal core GDP” would mean. What they have calculated is nominal private absorption – not nominal core GDP.
Brad was having fun with my shrillness after reading some garbage from Michael Darda and from Lawrence Kudlow. Absorption is the sum of private consumption, general government consumption and gross domestic investment. If one removes government purchases, one has the sum of private consumption, business investment, and residential investment, which is how Darda defines core GDP. Luskin is following the Kudlow tradition of defining core GDP as the sum of private consumption and business investment. But Luskin is adding back in government purchases and net exports.
I think I know why Darda and Kudlow wanted to talk about absorption over the past few years. It’s because the decline in net exports led to a situation where real GDP growth was less than the growth in absorption as our net exports continued to decline. OK, net exports grew by a tiny amount in 2006. But let’s graph the growth rates of private consumption and government purchases as well as the growth rates of business fixed investment and residential investment.
Our first graph shows that the early kick from fiscal stimulus seems to have been from increases in government purchases but in the last couple of years, it has been from increases in consumption. Maybe there is more to this MEW than Luskin thinks. But also notice that as business investment demand was weak during the 2002 and 2003 period of a very slow recovery, it was residential investment that was giving the economy a boost. Now that residual investment demand is declining – Luskin says we should just ignore all of that?
If James Pethokoukis wants to feature more debates that include Barry Ritholz, that’s great. But could he be given a worthy opponent and not some arrogant clown like Donald Luskin?