Economist Quotes

''I am often considered almost not a part of the profession of Establishment economists. I am even referred to as a sociologist. And by that economists usually do not mean anything flattering."

- Gunnar Myrdal

Credibility

This is a funny book. I haven't read it, but the cover is so hilarious that the rest of the book has to be[1]. It’s easy with hind-sight, but I can’t imagine how this could have ever been a reasonable theory.

The only way for the Dow to reach 36,000 in the time the authors gave (closer to 36,000 than 10,000 by 2010) would be if the economy was about to experience explosive growth or a massive bubble the developed world has, still, never seen. The Dow currently stands between 13,000 - 14,000[2]. The book was written in 1999; the authors were arguing that stocks were cheap at precisely the time they were overvalued due to the dot-com bubble. 

A common measure of stock valuation is the Price to Earnings (P/E) ratio. It is the price of a share over the annual earnings one would receive from owning the share[3]. A high P/E ratio means either profits will increase in the future or there is a bubble. As the graph below shows, the long run average P/E ratio is around 16.

At the end of 1999 the P/E ratio for the S&P 500 was around 30, for the Dow it was around 27. On top of that record setting overvaluation the authors thought stocks could only go up.

I bring this up because one of the authors, Kevin Hassett, is now a Romney adviser, and recently criticized the Tax Policy Center (TPC) for explaining[4] that Romney’s tax plan would result in a higher tax burden for the poor and middle class, and a much lower tax burden for the rich. For some reason, I just don't trust him to be correct.

July Jobs Report

Better than last month but not good pretty much sums it up. 163,000 non-farm jobs were added in July. Previous months were little revised and the labor force shrank slightly. It's further evidence that this is just what the pace of recovery will be; the jobs market has produced these results for three years now.

It is almost uncanny how repetitive the process has been. Encouraging job growth over the winter followed by months of disappointingly low numbers, followed by a upward blip in late summer before diminishing until winter. This is the late summer blip, last year it came in August, the year before in September. It's slightly good news in that following months shouldn't be as disappointing as previous months, until next spring.

What this means for policy is that nothing will change there either. Policy has remained essentially unchanged since the recovery started. In fact, job growth is slightly higher. Since February 2010 job growth has averaged around 138,000 per month, while in the past year it has averaged 153,000 per month. This certainly means that the Fed won't act, if conditions aren't changing their policies won't change. But the Fed does expect growth to pick up next year, not that their forecasts have been all that accurate. Generally speaking that puts the unemployment rate reaching 2008 levels in 2016.