Monday, September 15, 2008

A Tale of Two Cities – Something Donald Luskin Must Not Have Read

So why does Brad DeLong think Donald Luskin is the Stupidest Man Alive? Maybe because Luskin cites Charles Dickens without even understanding what The Tale of Two Cities was all about:

I imagine that's what Charles Dickens would conclude about the current condition of the U.S. economy, based on the relentless drumbeat of pessimism in the media and on the campaign trail … unemployment figures are up a bit, too. None of this, however, is cause for depression -- or exaggerated Depression comparisons. Overall, the pessimists are up against an insurmountable reality: In the last reported quarter, the U.S. economy grew at an annual rate of 3.3 percent, adjusted for inflation. That's virtually the same as the 3.4 percent average growth rate since -- yes -- the Great Depression.

In case Luskin failed to grasp the theme of social injustice in my favorite Dickens novel – might I suggest he read John H. Hagan, Jr even if this was about a different Dickens novel. So why does Luskin focus on the aggregate macroeconomic picture failing to acknowledge that income inequality has risen over the past several years?

Even on the aggregates, comparing what real GDP growth for one quarter to the historical average is silly. Luskin fails to mention the fact that real GDP growth for 2007 was only 2.0 percent and that the annualized growth rate for the first quarter of 2008 was less than 1 percent. Finally, he fails to note that the average growth rate for the 2001 to 2006 was also anemic compared to the average growth rate for the second half of last century. Maybe that is why the employment-population ratio was only 63.4 percent in December 2006 as compared to 64.4 percent as of December 2000. Of course, it dropped even further to 62.1 percent as of August 2008 but Luskin says unemployment rose only a bit.

On the political side, is the following something we should praise John McCain for or ridicule him for?

Obama is flat-out wrong when he frets on his campaign Web site that "the personal savings rate is now the lowest it's been since the Great Depression." The latest rate, for the second quarter of 2008, is 2.6 percent -- higher than the 1.9 percent rate that prevailed in the last quarter of Bill Clinton's presidency. Full disclosure: I'm an adviser to John McCain's campaign, though as far as I know, the senator has never taken one word of my advice.

While having Luskin as an advisor strikes me as insane, at least McCain is smart enough not to take any of us his advice. After all, comparing personal savings rates during a period of government budget surpluses to personal savings rates during a period of government deficits misses the point that it is national savings that drives long-term growth in a standard Solow model.

Update: Cunning Realist takes a look at the type of investment advice provided by Donald Luskin during the subprime crash. Let’s just hope you did not heed his advice.


Jack said...

Both Luskin and McCain woould do well to read Dickens well beyond Two Cities. Oliver Twist may provide a more accurate view of where we've been heading these past two decades. Yes, that includes Mr. Clinton, every one's favorite liberal Republican. Isn't that really what he represented. Georgie Boy simply built upon that move tow the right of center to take a more extreme position. Now McCain and the media jerks who earn their keep parroting the party line will tell us that we're living in Shangrila.
Now that was indeed a fantasy. Dickens is, on the other hand, deeply rooted in the reality of his time. We won't benefit by bringing back that era. said...

This column by Luskin must be one of the stupidest by anybody claiming to be an economist for a long time. Nobody claims that we are now in anything like the Great Depression. What has been claimed is that some stats are worse than anything since the Great Depression, particularly the housing and banking situation, although in general the recession of 1974 still looks worse. Luskin's dismissal of the decline of employment is especially egregious.