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.Â 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.Â (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.Â 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).Â 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!).Â 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.Â Mark & Patricia were optimistic.Â (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!)Â Â 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.Â Mark and Patricia are examining mostly financial market performance, and are starting to become more optimistic.Â 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).Â 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.Â (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.Â Mark and Patricia listed mostly financial variables (stock markets, interest spreads, credit flows, etc.).Â 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.Â 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.Â 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).Â When they see it, they jump in with both feet.Â 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).Â But those bounces are based purely on the hopes and greed of speculators, rather than on any evidence of a real turnaround.Â And the bounces themselves cannot usher in the real recovery: a mere uptick in any financial market, in other words,Â cannot by itself cause the economic rebound that its boosters are hoping for.Â 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.Â 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.Â Mark said he ignores the unemployment rate.Â (Employment is more relevant, he conceded — but unemployment, which continues to rise for some time after the recovery sets in, is not.) Patricia, meanwhile,Â 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).Â 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,Â 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.