Tuesday, December 23, 2008

The worst economic analysis of the year

2008 is almost over, mercifully so, if the state of the US economy is your point of reference.

The end of a year, I like to think, is a natural moment for reflection. And upon reflection, it takes little to imagine that this column, written by Donald Luskin, is the worst analysis written on the American economy during the year that is now passing. While reading it -- the headline is 'Quit doling out that bad-economy line' -- keep in mind that the column ran in the Sept 14th edition of the Washington Post. The very next day Lehman Brothers went bankrupt, and -- well -- the rest is history of the sort that we get to live right through. Also, keep in mind that a few months later it was announced, officially, that America is in the middle of a recession that began in December of 07. That's right -- the entire 2008 was one big contraction. But you wouldn't know that from reading Mr. Luskin, the author of the worst economic analysis of 2008.

Here's a quick excerpt:

There have been 11 recessions since the Great Depression. And we're nowhere close to being in the 12th one now. This isn't just a matter of opinion. Words -- even words as seemingly subjective as "recession" -- have meaning.

In a new working paper, economist Edward Leamer of UCLA's Anderson School of Management shows that changes in the unemployment rate, payroll jobs and industrial production almost precisely explain every recession as officially determined by the National Bureau of Economic Research. At present, only the unemployment rate exceeds the recession threshold. The other two factors are far from it. According to Leamer's paper, we'll only fall into recession "if things get much worse."

This would suggest that anyone who says we're in a recession, or heading into one -- especially the worst one since the Great Depression -- is making up his own private definition of "recession." And probably for his own political purposes.

McCain campaign adviser and former U.S. senator Phil Gramm was right in July when he said that our current state "is a mental recession." Maybe he was out of line when he added that the United States has become "a nation of whiners." But when it comes to the economy, we have surely become a nation of exaggerators.

Yet Gramm was pilloried for his remarks, and McCain had to distance himself from his adviser by joking that in a McCain administration, Gramm would be ambassador to Belarus. What does it say about our nation that it has become political suicide to state the good news that our economy is not in recession?

Whatever the political outcome this year, hopefully this will prove to be yet another instance of that iron law of economics and markets: The sentiment of the majority is always wrong at key turning points. And the majority is plenty pessimistic right now. That suggests that we're on the brink not of recession, but of accelerating prosperity.

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