Not really stupid, but just sham science. Nothing makes a scientist look worse than abandoning the scientific method. Yet for economists, abandoning the scientific method is somewhat of a badge of honor and could win you a Nobel Prize.
We'll start with an actual research paper brought to my attention by Dean Baker purporting to find a relationship between high homeownership rates and future unemployment. As a general tip for laypeople and reporters on economic issues, the FIRST thing you should do when evaluating suspicious research is to check the source. Economics was called "Political Economy" for years FOR A REASON. It turns out this particular research was published by a researcher from the Peterson Institute and another researcher from someplace in the UK called "Centre for Competitive Advantage in the Global Economy". Now, the Peterson of the Peterson Institute is none other than Peter George Peterson, so read his bio and decide for yourself whether the institute he funds with $1 billion of his money from working for Lehman Brothers and founding the Blackstone Group is more about scientific inquiry or more about collective circle-jerking. (For extra credit, you might want to find out the political leanings and qualifications of the "seminar participants who provided valuable input". To start you off here's the first one.)
Anyway, the paper has all the classic indicators of lazy research and bad analysis. First of all, they take two aggregated data series: homeownership rates and unemployment rates and regress the two together, and are shocked, SHOCKED!, to find that somehow periods of high homeownership rates precede periods of high unemployment rates. This provides all the evidence they need to determine that somehow homeownership is causing unemployment.
Now, hopefully some of you are thinking: "Now, how can a scientist possibly come to such a sweeping conclusion from a single, simple correlation?", especially since they say as much in their own paper (last sentence of the introduction). Well, when you have a particular viewpoint to support, it's really easy.
But basic logic suggests that if there are many things that influence homeownership rates, and there are many things that influence unemployment rates, then there are many * many permutations of relationships between the many that influence the former and the many that influence the latter. For example, if many means 100, then many * many is 10,000 possible correlations between the reasons, going in both directions. If you were scientific, you would have to eliminate the 9,999 false ones to prove the one real one (or at least show that one is more significant than the others). But economic researchers typically don't do that. They choose one that suits their prejudices and just stop.
They also tend to ignore that many correlations just might have to do with the cyclical nature of the economy and have no causal relationship at all. Without looking at the data, I'd make a bet that homeownership rates tend to rise as the economy is growing, people's incomes are rising and their perceived creditworthiness is better; so they have a much better chance to afford to buy a house. I'd also tend to bet large sums of money that unemployment rates tend to rise when the economy is not doing good. Well, here your correlation is nothing more than the natural order of recession following boom. It's not surprising you find it in every country. I'd be really surprised if you didn't!
Anyway, the political thrust of the article is that homeownership is bad because it hurts labor mobility. I mean, if you let people own houses they might have kids and then put them in school and then you couldn't just fire them on a whim because they might not be able to find another job in their school district, or ask them to move to Toledo cause that's where they gave you the best tax breaks. Homeowners might want to not have a giant polluting factory in their backyard, and thus "hold up development through zoning restrictions". And...you know, in cough, certain sectors /cough of public-sector housing there are very high unemployment rates, too. Don't you know.
And there might be externalities, too! It might be good for people to fear for their job and therefore not buy housing...uh, wait. I got the causality reversed a little there. Anyway, I hope you can see that all it takes is a little bigotry and political money to fund reams of bad science. I just hope the reader can now read this type of crap with less credulousness and more humor. I actually giggled at this paper halfway through, reading it in sort of a mock-dramatic tone. A great stress reliever.
Anyway, we move on to another article from the other end of the narrow political spectrum. Here's one in the Atlantic about how Washington saved the economy yet permanently destroyed the labor market. Anyway, the second half of that title doesn't make sense at all, given that net employment has increased about 600,000 jobs over the past three months and unemployment has decreased by 673,000 since January. As the rate of job growth and the decline in unemployment seem to have been increasing in speed in recent months (they are historically weak for this point in the business cycle, yes, but that is not the point). The point is it doesn't seem to make much sense to claim the labor market is "permanently destroyed".
But when you think about it, the first part of the article doesn't seem to make sense either. Washington saved the economy? You mean Congress? You mean the stimulus from 2009? This one? The two problems with this explanation are, first, the obvious one, that the recession ended in June 2009, when the vast majority of the stimulus package was not yet spent. The second problem, usually overlooked by economists (but they will admit to this if you poke them enough with a stick) is that recessions are NOT CAUSED BY PEOPLE NOT SPENDING MONEY.
Let me repeat: recessions are not caused by people not spending money. Therefore, you cannot solve recessions by simply giving people money to spend. Recessions are caused by people not spending money fast enough. GDP is what is called a "flow" variable in the technical jargon. We compute GDP by hitting a stopwatch on January 1 of a year and hitting it again on December 31. We then measure a totally new GDP the next year. If you were meaning to spend $10,000 on the New Year's Eve sale on December 31, but got sidetracked (drank too much) and didn't get to spend it until the next day when you sobered up, your contribution to GDP would not be counted in the previous year not because you didn't spend it (you did), but because you weren't fast enough whipping out the wallet.
People spend money slower in a recession because they aren't getting enough income to spend. Since through a property called the "circular flow" (which isn't circular nor flowing but that's another story for another day) people spending slower tends to propagate the shortage of income, recessions have a self-reinforcing dynamic. If you were able to pump $1 trillion into today's economy by any spending program, yes that would seem like a lot (it's about 7% of GDP). However, if people were spending money just 7% slower, that would cancel out the entire stimulus assuming you could get every recipient the entire amount in the same year AND get them to spend it all in that year (and not do silly things like pay off their credit cards). Hopefully, you can see that even in theory, fiscal spending does not have a chance to work, much less take credit for it. (Now, just because it doesn't work like you want it to, doesn't mean it doesn't have benefits, like keeping people from homelessness and starving and all that, but again, future blog entry...)
It turns out, however, that's not what the article is all about. The Washington they speak of is primarily the Federal Reserve. Monetary policy taking credit for fixing the economy has the opposite problem as fiscal policy. Not that it was implemented too late to have possibly worked in the way its proponents say it did, but because it was being tried, and failing for nearly two years before all of a sudden the economy rallied on its own to validate it.
In theory, monetary policy should not work. The Fed does not print money, despite what a certain well-known representative Keynesian bloggers alleges. What the Fed "prints" is a very specific type of electronic balance sheet entry called a reserve balance. In order to get money out of a reserve balance, the bank will need to lend the reserve balance out to a party that will spend it so it becomes money by entering the circular flow. Of course, anyone with a lick of awareness knows that banks tend to slow down their lending during recessions, and you already know people tend to spend money more slowly. An increase in reserve balances during a recession is likely to either get lent out to really safe credits, like the Federal Government, or just sit on the books as an unlent "excess reserves". The current amount of excess reserves is about $1.5 trillion. This is the majority of what the Fed "printed" since 2008.
Furthermore, as has been already discussed, people are spending money slower in a recession, so even if the banks could find some consumer to lend to, they probably wouldn't turn it into money quick enough to make a difference. Anyway, don't take my word for it. The causation between money supply and GDP has been repeatedly found to be the reverse of economic theory (GDP growth causes the money supply to increase, rather than vice-versa), since economists have had enough data to run the correlations in the early 1950s. So it wasn't the Fed that saved us with quantitative easing, lowering interest rates to zero, or bailing out hedge funds. However, economists are generally content to ignore the painful truths for job security. Why would any rational person say the entity most likely to hire you is useless? Well, that, and he has a nice beard.
Okay, that should hold me for awhile. I'll be back after level 90.
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