CBC “Bottom Line” Panel: Paper & Reality

I have enjoyed being one of the three economists appearing on the occasional “Bottom Line” panel which CBC TV has been running on its National News.  My fellow panelists (Patricia Croft from RBC Securities and Mark Mullins of the Fraser Institute) are personable, informed, and for the most part non-dogmatic about things.  (I know it will surprise many PEF readers to hear me say good things about Mullins — but he’s behaving very honourably in this particular role!)

Last night’s panel, however (April 7), was very interesting in how it highlighted the differences between those who focus on financial markets (what I’ve been calling the “paper economy”) and those who focus on the economy where actual people produce actual stuff that has actual value (the “real economy”).

Here’s the web link if you want to watch it:


The whole theme of the panel (following a set-up piece from Havard Gould) was whether or not there any signs of “hope” out there that the economy is turning around.  The thesis was a bit forced, I thought, since there wasn’t any particular news hook to hang it on (global financial markets declined yesterday, and there was no obvious news connection to that cheery storyline).  Maybe the CBC just needed a break from the doom-and-gloom tone of most economic stories these days (including all the doom and gloom we’ve been reading about the CBC itself!).  And it’s certainly relevant to ask whether and when the recession is bottoming out, and how we will know when it happens.

I was pessimistic on this score.  Mark & Patricia were optimistic.  (The fact that Patricia sells securities for a living no doubt predisposes her to the sunny side of the street — just as my job with the CAW puts me firmly on the other side these days!)   Of course, this might simply reflect honestly different judgments among us: after all, you can lay all the economists in the world end-to-end and still not reach a conclusion.

But last night these differences also clearly reflected differences in our fundamental “lens” as economists.  Mark and Patricia are examining mostly financial market performance, and are starting to become more optimistic.  I am examining indicators from the real economy, and if anything I am becoming more pessimistic (since we’re still in early days, in my judgement, in terms of the recession’s impact on corporate earnings, business investment, consumer spending, trade, and other real-world indicators).  This deep difference in perspective reflects the schism between the financial and real economies that has been a defining feature of neoliberalism, and (obviously) a key ingredient in the current crisis.  (The paper vs. reality schtick has also been my personal hobby-horse, dating back to my 1999 book Paper Boom.)

Peter Mansbridge asked the panelists what 3 things they are looking at to indicate whether the economy is turning back up.  Mark and Patricia listed mostly financial variables (stock markets, interest spreads, credit flows, etc.).  I listed three real variables (employment, real GDP, and consumer spending).

Then Peter asked us what indicator we each would ignore, as not being very relevant to whether the economy is turning around.  I said I largely ignore stock markets: there is a lot of hot money parked on the sidelines right now, with speculators anxiously looking to time the bottom of the market.  They scan the horizon every day in search of signs of life in some asset price (whether equities, bonds, derivatives, commodities, foreign exchange, or even dare I say it the Baltic Dry Index — which bears as much relationship to the state of real global trade as the futures contract for WTI does to the state of real oil supply and demand).  When they see it, they jump in with both feet.  Because of that speculative impulse (and remember, it’s that kind of thinking, ratified by the hands-off stance of financial regulators, that got us into this mess), we are likely to see some substantial “bounces” in particular asset markets (like last month’s mini rally in stock markets).  But those bounces are based purely on the hopes and greed of speculators, rather than on any evidence of a real turnaround.  And the bounces themselves cannot usher in the real recovery: a mere uptick in any financial market, in other words, cannot by itself cause the economic rebound that its boosters are hoping for.  Rather, these anticipatory bounces reflect the forward-looking hopes of speculators, without any real evidence of real rebound, and for that reason we should (as a rule of thumb) ignore them.  Yes, markets will eventually rebound, but it will take a real economic recovery to give that rebound any firm foundation.

In answering the same question, Mark and Patricia were both refreshingly blunt in identifying which indicators they ignore in trying to decide whether the economy is rebounding or not.  Mark said he ignores the unemployment rate.  (Employment is more relevant, he conceded — but unemployment, which continues to rise for some time after the recovery sets in, is not.) Patricia, meanwhile, ignores real GDP, since the data come in too slow (January 2009 is our most recent snapshot on Canadian GDP) and it’s a lagging indicator anyway.

Both points are right if your goal is trying to quickly determine exactly when the economy is starting to turn around (and in the business of financial speculation, trying to beat the rest of the market is indeed the only goal).  But if your goal is trying to enhance the material living standard of real people, then whether or not you are working, and how much you are producing in your time at work, is the essence of economic reality.

This exchange, therefore, was a fascinating insight into the extent to which most conventional economists are so infatuated with the ups and downs of finance, the reasons for their obsession … and the risks that if we follow their way of thinking, we will miss the real economic forest for the paper trees.


  • How can GDP be a lagging indicator? I thought GDP was the key indicator that other indicators where lagging or leading.

    If not GDP, what is the indicator that all the other indicators are relative to?

  • I too am amazed that unemployment is ignored. Sure employment is the preferred measure within that space but without the unemployment how can one tell the degree of adjustment or off the tracks the economy has fallen.

    You know what, I guess that is why I could never be a mainstream economist- just the thought that this guy would turf unemployment in favour of some financial measure makes me sick to my stomach. No wonder my anxiety is the way it is.

    It is no wonder poetry and economics are a hard mix, if your emotional sensitivity is anywhere near the norm or more, you had better think twice about becoming an economist, cause your in for an awful ride.

    My of my, no wonder we are in the back woods, with banks ruling the landscape and people like that at the helm, I am totally amazed that the power of materialism.

    How could anybody ever know that materialism within a culture could be as loud and powerful as the one we have going.

    Unemployment to me is the complete and utter failure of any system and as history shows, when the goods are no longer delivered, you had better have some stronger gates built. Potentially the power of consumerism has taken the neo-cons so far into some revisionary historical-future, that indeed the economic forest sure has big trees that get in the way of these people perspectives and their abilities to see.

    I recall a native friend of mine, who always knew from the markings and disruptions of the forest, how many moose were in the vicinity. He knew it intuitively, his own survey and reports could tell him when it was time to move onto a new hunting ground. This is after thousands of years of socialization and teaching.

    With all the information we have, you would think that somehow we could move forward from the hunter gatherer ability to know when we need to change.

    I guess not though.


  • I watch “The Bottom Line” almost religiously. It’s great that you are on the panel. Although I am also a fan of the “At Issue” panel, Lawrence Martin is completely correct that it lacks a voice from the left. “The Bottom Line” panel is far more balanced, both because you are there and because Croft and Mullins have been quite reasonable.

    Marc also raised the paper vs. reality issue a week ago. As I commented on his post, I completely agree that we should be far more concerned about labour markets than financial markets. However, this priority should not cause us to ignore financial markets as an indicator of where the real economy may be headed.

    The present recession in the real economy was heralded by the worst stock-market crash since 1929. The revival of capitalist confidence needed for renewed capital investment in the real economy (and hence employment) is unlikely to occur without a rebound in the stock market. I would not argue that “paper” gains are a sufficient condition for a real economic recovery, but they may well be a necessary condition.

    (My unstated assumption is, of course, that we will continue to live in an economic system where private corporations make the major investment decisions. I believe in a far larger role for government in making investments, but cannot see it displacing the private sector anytime soon.)

  • Whether listening to a panel of three economists, three religious leaders or three politicians, I come to the same conclusion. When all nine speak with the same voice, if it is not already too late to recover, humanity may have a chance to survive, for it will only be then that they know what they are talking about.

  • I think Erin, you need to go back and have a look at the linkages between finance investment capital and brick and mortar capital.

    One of the fundamental reasons we are in this crisis, is due to the great and widening disconnect between financial capital circulating within casino type speculative investments. Its almost as though, investment capital within the traditional “real economy” just cannot generate the “value”or should I say return on investment rates that the speculative bubbles have within recent history. We have undergone some substantive cultural change in how money is made.

    Given the investment decisions ahead that are required to transform the economy towards a sustainable green oriented economy, I would not be so sure that traditional investment incentives are on the horizons.

    Ultimately it comes back to innovation and the investment required to get the productive assets transformed. Potentially this is the wall that capitalism finally runs up against and does not steam roll. The shoulders we stand on are seemingly a lot lower than many suspected just a few months ago.

    At the heart of this crisis, we are talking about a fundamental crisis in capitalism. Investment, capital stocks and flows, consumption imbalances and a large does of degradation of the environment.

    Another major plank ripped from the decks of capitalism is the institution of credit. Without the bubbles, combined with some long years of poor oversight in financial investment vehicles, we have a complete bust in credit and faith. It cannot be solved over night, and it cannot be solved with small arms fire like we have witnessed. For all the talk of bazookas and such, the G20 ove rthe past week was about as close to mounting anything close to the coordination and global assault needed to start congealing a response to counter.

    So in one way you are correct, we will not see any turn around without the markets turning around. However that is if you want to go back to where we came from.

    several trillion dollars would have went a long way in changing the productive assets and decision making of the economy, yet we still see a sputtering, quite anxious market that is has credit locked and trust hiding in the shadows. Fighting over valuation of a toxic asset. How about fighting over a toxic environment instead.


  • When people stop asking “when is the economy going to turn around?” then, and only then, will the economy turn around.

  • Also, I am not su sure that the market crashed before the employment started turning sour. I do recall the manufacturing sector taking a beating for the last 2 years. So to me Erin you might have the cart before the horse.

    It was the inability of the housing market and the sub-prime that created this crisis which ultimately goes back to financiers, selling mortgage backed securities 10 and 15 times over on a pile of housing assets that were unstable and with poor documentation and suspect ratings, distributed throughout the global economy.

    This whole mess rested upon and even messier uneven polarized income distribution and labour markets where the American dream was no longer affordable at its housing bubble prices combined with a highly precarious, less high wage based economy.

    Between 2004 and 2007 the US economy suffered some of the largest losses in manufacturing in its history.

    People say the China- USA trade agreements were symbiotic, however, I would tend to argue that what you were actually seeing was a host being hollowed out by a much lower cost, peg you dollar to my begger they neighbor growth based Chinese economic strategy.

    So I would actually state that it was the malfunctioning within the real economy that tripped up the financial “paper economy”.

    I still think one of the best books I have read in some time was Jim’s Paper Boom. It’s more relevant than ever, and what I have written here is basically Jim’s argument back in 1999.


    The electric bike is charging, what a handy little bike.

    Have look


    funny that the day after I posted my ebike, GM announced it segway styled 2 seater. Guess what one of the biggest critiques of it was, 35km top speed, is too slow.

    Similar to the above bike 32 km top speed is a bit slow.

    Hmmm… gonna have to juice this up somehow.

  • Jim, while I can understand that employment indicators are more significant to your CAW members, since many of their jobs are likely at risk these days, I’m wondering why you feel it’s appropriate to separate what you call the real economy from the financial economy. Don’t they affect each other? If stocks are plummeting, people’s retirement funds go down and they’re more likely to spend in the real economy, which can result in lower sales and cause companies to lay off workers. Likewise, if companies start laying off workers or face declining sales, it may result in changes in their stocks.

    I agree with you that as a policy goal, minimizing unemployment is probably a better goal than maximizing the value of the S&P 500. But since the financial economy and real economy are intertwined, I think the financial economy can probably provide useful information about where the economy is headed.

    In fact, wouldn’t we expect the financial economy to be a better indication of where the real economy is headed than the real economy itself? With stock prices, the financial economy responds to expectations almost instantly. On the other hand, most real economy indicators are only measured monthly, and since it is more costly for employers to hire and fire workers than it is for people to buy and sell stock, we would expect employment to be a lagged indicator.

  • Oops, I made a mistake in my post above. I meant to say “if stocks are plummeting, people’s retirement funds go down and they’re LESS likely to spend in the real economy…”

  • I am surprised that some of the posters here seem to have such a poor grasp of “leading” and “lagging” indicators. Of course employment is a lagging indicator!

    Consider the pattern in the current recession: credit dries up — orders dry up — production dries up — employment dries up. An employer keeps employing workers while there is production to do (since it’s the workers who do the producing) and they keep producing while there are orders to fill (and usually somewhat beyond — thus the run up in inventories). They only start letting people go when they no longer need as much production because they aren’t getting the orders. So unemployment is one of the last series to take a negative turn. Similarly, employers are also slow to bring back workers. They wait until production demands — to fill orders — are high enough that they absolutely have to have more workers. Unemployment is one of the last series to recover.

    So if you’re trying to get a sense of where things are going — which is the point of forecasting — unemployment rates are not a very useful guide. Unemployment rates, certainly, come close to being the bottom line of our economy’s health — though I’d say the actual bottom line is rising real wages for those with wages below the median — but it’s hardly the first thing to look for. To extend the “health” metaphor, it’s like waiting to see a corpse before pronouncing the patient ill, waiting for the last sniffle to disappear before pronouncing the patient on the mend.

    I’d like to comment on the larger question of “paper” and “real” economies, but I’ll do that in a separate post.

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