● WRONG: Nine Economic Policy Disasters and What We Can Learn from Them
By Richard Grossman
Q&A with the author via Boston.com
Q: You have a book coming out this October that delves into economic policy disasters and what we can learn from them. Can you share more about that?
A: In my research, I’ve identified nine significant economic policy errors from the last couple of centuries. I’ve performed an economic analysis to uncover the reasons behind these mistakes and the common themes that emerged.
Q: What insights did you discover?
A: A recurring theme is that severe problems arise when policymakers get overly fixated on ideology. For instance, when a certain percentage of a political party commits to never voting for tax increases under any circumstances, that stance is driven purely by ideology. My book advocates for an evidence-based, non-ideological approach to economic policy.
What impact, if any, did the recent government shutdown have on the U.S. economy? The true effects will only be revealed in the coming weeks as we analyze post-shutdown data, which will take at least a month or two for reliable figures to emerge across various economic sectors. In the meantime, we can turn to the financial markets and a few recent economic data points for preliminary insights into potential outcomes.
The relationship between asset allocation and rebalancing is well-known, although it is not always given the respect it deserves. This subtle connection has significant implications for risk management and achieving a favorable risk premium over time. While most investors grasp this concept at an intuitive level, it’s not uncommon to find portfolios suffering from what I refer to as subjective neglect.
While concerns about the global economy are present, current asset prices do not reflect severe distress. At least for now, positive momentum appears to dominate. Winning sectors continue to thrive, while those struggling are gradually managing their losses.
The latest nonfarm payrolls report has been released, though its findings may not be particularly encouraging. According to the U.S. Labor Department, private-sector employment saw a modest increase of 126,000 jobs last month on a seasonally adjusted basis. While this is not the slowest growth rate of the year, it is close. July registered the lowest rise this year with only 100,000 jobs added. Although the report does not offer much to celebrate, it does not necessarily indicate an imminent downturn in the business cycle. Despite the disappointing monthly figures, the year-over-year growth rate for private-sector employment remains just above 2%, consistent with the pace we’ve seen throughout the year.
Last week’s announcement of this year’s Nobel Prize winners in economics raised questions and concerns among some commentators. How could two economists—Eugene Fama and Robert Shiller—whose views on asset pricing seem to contradict each other, both be awarded the Nobel? A third winner, Lars Peter Hansen, was honored for his econometric work. Critics have argued that combining these two names in one award suggests a misleading equivalence in their differing methodologies for analyzing markets. Some have even suggested that one of them should have been excluded from the award. However, this viewpoint overlooks the value of recognizing that no single theory can fully explain the intricacies of market dynamics.
In the coming weeks, previously missing economic reports due to the government shutdown will begin to surface, starting with the employment report for September, scheduled for release tomorrow. Meanwhile, let’s examine the existing data regarding the current state of the U.S. business cycle. Preliminary findings indicate that economic risk remains low as of last month. However, key indicators are still outstanding. By this time of the month, we would typically have access to September data covering payrolls, retail sales, industrial production, and new housing starts. While those updates are forthcoming, we must proceed with caution due to the limited information currently available.
● The Confidence Trap: A History of Democracy in Crisis from World War I to the Present
By David Runciman
Summary from Princeton University Press
What accounts for the recurring crises in democracies? The latest financial collapse is merely one of many examples that illustrate how democracies can falter just as quickly as they appear to prosper. In this thought-provoking book, David Runciman explores the evolution of modern democracy against the backdrop of significant crises, from World War I to the 2008 economic crash. Through a global lens, with a particular emphasis on the United States, Runciman analyzes how democracy has weathered an array of threats throughout history, starting with the Great Depression and including events from the Cuban missile crisis to Watergate, and even the collapse of Lehman Brothers. He pays close attention to the actions and ideas of key political figures and thinkers, from Woodrow Wilson and Nehru to Fukuyama and Obama.
The update for the Chicago Fed National Activity Index (CFNAI) has been delayed due to the recent government shutdown. When the data is finally released, September’s three-month CFNAI average is anticipated to slightly increase to -0.14, based on The Capital Spectator’s averaged econometric forecasts. Notably, the four models underpinning this projection use data up to August, meaning the government shutdown hasn’t influenced our CFNAI estimates. In August, the three-month average was reported at -0.18. Values below -0.70 suggest an “increasing likelihood” that a recession has begun, according to guidelines from the Chicago Fed. Based on our estimates, CFNAI’s three-month average is projected to remain at a level historically associated with economic growth, albeit at a rate below the long-term trend.
With the government reopened and the turmoil subsiding (at least until the budget debates reignite early next year), it’s time to begin recovering from the data deficits. This includes the release of the delayed employment report for September, which is now set for publication next Tuesday, October 22, according to the Bureau of Labor Statistics.
