The Mythology of Economics - March 27 2019 EconVue Spotlight

For the great enemy of truth is very often not the lie—deliberate, contrived, and dishonest—but the myth— persistent, persuasive, and unrealistic. Too often we hold fast to clichés of our forebears. We subject all facts to a prefabricated set of interpretations. We enjoy the comfort of opinion without the discomfort of thought.”   John F. Kennedy, Yale University Commencement Address June 11, 1962

In this newsletter, we have tried to present economic views that are unexpected, but evidence-based. I love to discover unconventional thinking that challenges the conventional wisdom to share with our readers. As an editor, I have attempted to do this in a politically balanced way.  That is not because I don't have my own personal political beliefs, but because I don't think they should be a starting point for economic debate.  Certainly economic research can and should lead to policy choices which are by their very nature political. But that is not where the conversation should begin.

A case in point would be Nobel-prize winning economist Paul Krugman. I have difficulty reading his articles because I need to disentangle his politics from any economic arguments he presents. The recent announcement of the nomination of Stephen Moore to the Federal Reserve Board troubles me for the same reason. I know what his political agenda is and I don't trust his neutrality in terms of policy decisions. 

On the other hand, as economists love to say, I do believe that there are broad themes that emerge from good economic research over time. One that is of particular interest to me is de-urbanization. Although we might suppose that urbanization will continue at its current pace, there are signs that this is no longer true in places where it has grown fastest, such as China. If this continues throughout the 21st century, implications for both investment and policy are enormous.  You’ll find more examples in the links below.

My goal is to bring this kind of information and original thinking to our readers, and soon our listeners.  We will be starting a series of podcasts this spring, which will give me the opportunity to enter into a more interactive discussion with some of our own EconVue experts as well as leading economists and thought leaders. I believe there is a place in the very narrow space of non-partisan debate that needs to be more fully occupied. So to end where I began, with JFK’s New Haven address:

"Mythology distracts us everywhere--in government as in business, in politics as in economics, in foreign affairs as in domestic affairs. But today I want to particularly consider the myth and reality in our national economy. In recent months many have come to feel, as I do, that the dialog between the parties--between business and government, between the government and the public--is clogged by illusion and platitude and fails to reflect the true realities of contemporary American society."

RESEARCH BY OUR EXPERTS

Data Round-Up: Big Upside Surprises in Existing Homes Sales, Wholesale Inventories
Michael Lewis

February Existing Homes Sales posted their highest level since this past March. That was clearly encouraging. The hefty increase in wholesale book-value inventories should partially offset the considerable headwinds against first quarter real GDP, though the resulting inventory-to-sales ratio will lean against the expected 19Q2 rebound in real growth.

Why Healthcare Is Spinning Its VBR Wheels
David Johnson

It’s like preparing and serving a seven-course meal that your biggest customer ordered only to have the entire menu change between the salad and the main course. That’s what it must feel like for hospitals and doctors dealing with the ever-changing value-based reimbursement programs from Medicare.

Europe's Slowdown Prompts ECB to Action
Karim Pakravan

The European Central Bank replicated the Federal Reserve Bank’s earlier U-turn on monetary policy at its latest meeting.  Barely three months after the central bank announcing an end to Quantitative Easing (QE), Mario Draghi, the ECB president, pulled the alarm over the sharp economic slowdown and announced a two-pronged approach. 

The U.S. Military in Support of Strategic Objectives in Latin America and the Caribbean
R. Evan Ellis

An article that explicitly examines the contribution of the US military to strategic objectives in Latin America through security assistance and security sector assistance, as part of whole-of-government efforts to build relationships and strengthen governance in the region.  

STORIES IN OUR SPOTLIGHT
Asia & the World 

Almost one-third of Chinese Cities are Shrinking, but Urban Planners Told to Keep Building
Sydney Leng 3/19/2019 South China Morning Post

De-urbanization will be one of the key trends of the 21st century. It’s already started in China, but building policies haven’t kept pace and are going in the opposite direction. 

Reevaluating China's Water Crisis
Sarah Rogers, Jiang Min, Shi Chenchen and Zhang Wenjing, 11/8/2018 China Dialogue

Water availability is not threatening north China’s development but careful management is still essential.

China Trade War Update: Does Anybody Know What's Going On?
Kenneth Rapoza 3/10/2019 Forbes

China and the U.S. battling over trade is like watching the New England Patriots play the New York Yankees. What on earth is this game?

A forensic examination of China’s national accounts
Wei Chen, Xilu Chen, Chang-Tai Hsieh, and Zheng (Michael) Song 3/7/2019 Brookings Institute

Research says China’s GDP is 2% lower than officially stated.

The Problem With Xi’s China Model
Elizabeth C. Economy 3/6/2019 Foreign Affairs

Always worth reading Liz Economy on China.

US

Scared of Stock Market? Buy a House Instead
Tyler Cowen 3/21/2019 Bloomberg

Is buying a house better than buying stock? Equity investments are not location dependent, don’t require the same initial investment, and have no carrying costs.

Has the Labor Share Declined? Maybe, maybe not.
Alex Tabarrok 3/19/2019 Marginal Revolution

Has the labor share declined? Not if you take intellectual property into account.

Seattle upzones 27 neighborhood hubs, passes affordable-housing requirements
Daniel Beekman 3/19/2019 the Seattle Times

Seattle is at risk of becoming the new San Francisco.

Rock and Roll, Economics, and Rebuilding the Middle Class
Alan Krueger 6/12/2013 The White House Archives

Using rock and roll industry as an example is one of the best ways to explain economics -- many of the forces that are buffeting the U.S. economy can be understood in the context of the music industry.

Like Alexandria Ocasio-Cortez’s Green New Deal? You’ll Love What Illinois Wants To Do.
Mark Glennon 3/18/2019 Wirepoints

Illinois politicians continue their self-imposed march down the road to self-destruction.

The Interview: David Kotok on GSIBs, Markets and Central Banks
R. Christopher Whalen 3/10/2019 The Institutional Risk Analysis

About that Fed move in December: “Well, they sure were focused on a lighthouse or what they thought was a lighthouse but it turned out to be a pile of rocks. “ But has the Fed pivoted too quickly?

Why the Fed Should Create a Standing Repo Facility
David Andolfatto and Jane Ihrig Federal Reserve Bank of St. Louis

Digital Abundance and Scarce Genius: Implications for Wages, Interest Rates, and Growth
Seth G. Benzell, Erik Brynjolfsson  NBER Working Paper No. 25585 February 2019

Another clue to solving the productivity puzzle? And also income inequality.

Another clue to solving the productivity puzzle? "Digital Abundance and Scarce Genius: Implications for Wages, Interest Rates, and Growth"

Europe

Brexit has devastated Britain’s international reputation — and respect for its democracy
Anne Applebaum 3/12 2017 Washington Post

I wonder if at least half of the turbulence over Brexit is due not to British institutional weakness, but to an EU determined to make an example of the UK.

Why ‘Japanification’ looms for the sluggish eurozone
John Plender 3/12/2019

It is perhaps more serious than John Plender is saying. Europe might become an active source of global weakening.

World

The US, China and the return of a two-bloc world
Gideon Rachman 3/11/2019 Financial Times

Nothing about this bifurcated scenario is inevitable. Technology has a way of jumping over political boundaries, and politics always overshadows trade.

Democracy Matters in Global Health
Thomas J. Bollyky 3/14/2019 Council on Foreign Relations

Thought provoking-democracy doesn’t matter when it comes to improvements in infectious diseases, but it does matter as non-communicable diseases become more prevalent.

The underrated role of fear in economic development
Andrew Batson 3/10/2019 Andrew Batson Blog

Did most economic miracles follow major catastrophes, and were they driven by fear? I’m not convinced. The catastrophes cited were basically all wars. Base conditions lowered by conflict, then rebuilding begins. More of a prolonged relief rally, built on new political certainty.