Wednesday, January 14, 2009
Wenzel vs. Murphy
Over at his blog, Robert Wenzel recently made the "Case for Optimism (Sort of)," in which he predicted that Bernanke's showers would soon bring apparent growth back to the traditional indicators. Wenzel's momma didn't raise no fool; he isn't saying this will be a good thing, since he shares my concerns about price inflation in the medium-term.
Even so, I disagree with even the case for short-term optimism. In the comments I wrote:
In a follow-up post Wenzel clarified:
Now folks, this is not based on a formal study or anything like that, but here goes: I would be very surprised if there is net job creation in the private sector in the next six months. Unfortunately, it would be tricky to do this right, since we can quibble about whether a new job making solar panels is really "private sector" if it's dependent on massive subsidies. So fine, let's just keep it simple and say that I predict the official unemployment rate in both 6 months and 12 months will be higher than it is right now.
Also, I predict that there will be no net growth in real GDP during 2009.
Finally, I predict that--barring some major methodological change that any neutral observer would agree is completely BS--the CPI (urban one) will rise at least 8% over the course of 2009.
Go ahead, Mr. Wenzel.
Even so, I disagree with even the case for short-term optimism. In the comments I wrote:
Well good, since you and I normally enthusiastically agree with each other, I'm glad we finally have a way to separate the man from the boy. I think the economy over the next 3 years is going to be absolutely awful. The government has literally taken over large chunks of the financial sector, and now the Fed is engaging in discretionary injections of hundreds of billions of dollars to specific firms. The gross federal debt already went up by over $1 trillion in 2008, and we've got an incoming president who openly called for wealth redistribution and just nominated an explicit socialist to oversee the nation's energy markets.
And you're saying what again? "Sure, but Bernanke is flooding the system with a bunch of paper money." :)
In a follow-up post Wenzel clarified:
I think what is going on is that I am being a little more specific than Murphy. That is why I put "recovery" in quotes. The "recovery" will show up in the numbers most watch, such as a reversal in the downward trend in unemployment and an uptick in GDP, while brewing underneath will be a vast inflationary fury that will ultimately cause major, major havoc for the economy,---inflationary havoc, not recessionary havoc....So Bob, over to you. Let's see how close, or far apart, we are. What do you see happening to unemployment over the next 6 to 12 months?
Now folks, this is not based on a formal study or anything like that, but here goes: I would be very surprised if there is net job creation in the private sector in the next six months. Unfortunately, it would be tricky to do this right, since we can quibble about whether a new job making solar panels is really "private sector" if it's dependent on massive subsidies. So fine, let's just keep it simple and say that I predict the official unemployment rate in both 6 months and 12 months will be higher than it is right now.
Also, I predict that there will be no net growth in real GDP during 2009.
Finally, I predict that--barring some major methodological change that any neutral observer would agree is completely BS--the CPI (urban one) will rise at least 8% over the course of 2009.
Go ahead, Mr. Wenzel.
Comments:
Bob,
I don't know if I've heard this discussed too much, but what happens at the end of the stimulus? If it creates 4 million jobs, where will those people work after the money ends? If we are dropping $20B on solar panel installation, won't there be a glut of those skills afterwards? Won't there be 4 million people needing to find new jobs? Won't businesses fail en masse after the subsidies go away?
This won't be politically palatable. If American ends up rebounding as quickly as Japan did after it's "too late" stimulus it will be politically impossible. The stimulus will have to drag on to wean these people off. This is, of course, assuming that these people will ever be weaned.
I don't know if I've heard this discussed too much, but what happens at the end of the stimulus? If it creates 4 million jobs, where will those people work after the money ends? If we are dropping $20B on solar panel installation, won't there be a glut of those skills afterwards? Won't there be 4 million people needing to find new jobs? Won't businesses fail en masse after the subsidies go away?
This won't be politically palatable. If American ends up rebounding as quickly as Japan did after it's "too late" stimulus it will be politically impossible. The stimulus will have to drag on to wean these people off. This is, of course, assuming that these people will ever be weaned.
Mr. Murphy,
do you know What Mr. Reisman thinks? It seems to me more viable than just the declines in activity all this year. Let me cite:
"The government today has unlimited powers of money creation. And so it is highly likely, given its evident willingness to use those powers, and the overwhelming public support that exists for using them, that the increase in the supply of money it brings about will ultimately outweigh the present increase in the public’s demand for money for holding. When and to the extent that that happens, and business sales revenues and profits begin to rise and employment and wage rates begin to rise, the public’s demand for money for holding will once again begin to fall.
At that point the massive increase in the quantity of money the government is currently bringing about will fuel sharply rising prices and give birth to a new crisis.
If it chooses to stop inflation quickly, we’ll be back to the situation that prevailed in the early 1980s and have to undergo a fresh economic contraction, though probably one of much greater size than then, because of the unfinished business left over from the present crisis.
"
Jozef
do you know What Mr. Reisman thinks? It seems to me more viable than just the declines in activity all this year. Let me cite:
"The government today has unlimited powers of money creation. And so it is highly likely, given its evident willingness to use those powers, and the overwhelming public support that exists for using them, that the increase in the supply of money it brings about will ultimately outweigh the present increase in the public’s demand for money for holding. When and to the extent that that happens, and business sales revenues and profits begin to rise and employment and wage rates begin to rise, the public’s demand for money for holding will once again begin to fall.
At that point the massive increase in the quantity of money the government is currently bringing about will fuel sharply rising prices and give birth to a new crisis.
If it chooses to stop inflation quickly, we’ll be back to the situation that prevailed in the early 1980s and have to undergo a fresh economic contraction, though probably one of much greater size than then, because of the unfinished business left over from the present crisis.
"
Jozef
# posted by 
: January 16, 2009 at 4:51 AM
: January 16, 2009 at 4:51 AM
I really enjoyed this comment. I appreciate the fact that you would go out on a limb with your predictions. But, of course, I agree with you.
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