The study of economics usually reveals that the best time to buy anything is last year. ~ Marty Allen
With 2012 fast approaching, here are some notions that provide me with a bit of guidance for living in this tumultuous, tenuous time.
· Because everything is ultimately related to everything else, it's wise to remember that the Law of Unintended Consequences reigns supreme. All other economic "laws" – such as the Law of Demand, of Supply, of Diminishing Returns –pale in significance.
· Make sure to distinguish between correlation and causality. Failure to do so is called the "post hoc fallacy," the mistaken notion that just because one thing happens after another, the first event was a cause of the second event. Post hoc reasoning is the basis for many erroneous beliefs and superstitions that are espoused all too often.
· Daily "explanations" in the media of what caused yesterday's changes in some stock/bond market index are vacuous. At best, they reflect flawed post hoc reasoning about the index (Dow Jones or whatever) and some prominent, but essentially unrelated event(s) during the day. As one trader put it, "I cannot explain today's action in the market… it's head-scratching." So much for verbal efficiency of markets.
· Objective data and analysis don't exist (and never have). All data and analysis contain some bias either explicitly or implicitly. Remember this apt saying, "Why are statistics like a bathing suit? Because what they reveal is enticing, what they hide is essential." Or this one by Paul Krugman, "All economic statistics are best seen as a particularly boring form of science fiction." You don't believe that objective data and analysis have been extinct? See, "The Myth of Objectivity" in The Atlantic .
· Doddering Democrats and truculent Republicans have emasculated fiscal policy mechanisms (changes in govt spending and/or taxes) to counter macro-economic imbalance (like the current, continuing recession). Total political dysfunction has removed one of the two most effective and proven mechanisms of Federal macro-economic policy. With no meaningful fiscal policy possible, what's happened? The Federal Reserve, home of monetary policy (the other principal macro policy mechanism), has had to step into the fiscal vacuum. Thus the Fed has been forced to continue its essential and very aggressive expansionary monetary policy to get the economy moving forward. Is this good? Time will tell. But don't be fooled, the Congress (and the President) have abdicated their roles as purveyors of timely, appropriately expansive fiscal policy during this period of deficient aggregate demand – the stubbornly high unemployment rate (8.6% in Nov) is but one prime indicator. In this time of mounting need, politicians won't meaningfully increase govt expenditures and/or meaningfully reduce taxes (for the lower 99% of us anyway – 2 months of payroll tax cuts, wow!) due to fallacious, unyielding political ideology. I hope Ben Bernanke and his cohorts can, with a moderate amount of luck, pull it off. As one of the millions of concerned voter plankton, I'm counting on him.
· Whenever you hear that some semi-important person is leaving his/her job to "spend more time with my family," should you believe it? Not for a nanosecond. The real reason(s) for the departure have nothing to do with family interests. Sorry kids.
· The more emphatically and more often an official denies (or agrees) with a particular position – e.g., Nixon stating "I'm not a crook" or the head of the National Association of Realtors saying "Housing prices are now headed upwards." – the more likely that stated position is bogus and/or soon to change.
· The 80/20 rule holds true in a wide variety of circumstances. For example, in many markets 20% of customers account for 80% of revenues. Why is it that this 20% minority really rules? And should we be glad it's 20% and not 1%, like it is in income or wealth "markets"?
· The process of becoming educated is akin to flowing down a funnel: you begin at the widest-top by knowing virtually nothing about everything, you end up (especially those of us with PhD's) by knowing pretty much everything about next to nothing. And yet, I remain exhilarated by again being part of this dynamic, necessary process for personal and economic growth.
· Temporary is forever. Despite their rhetoric, politicians never, ever allow "temporary" tax cuts or subsidies to be transient. Witness what's now happening (once again) in Congress with President Obama's desire to "extend" the "temporary" payroll-tax cut. Thus, "temporary tax cut" is one of the highest-order political oxymorons. A close variant of this principle is allegedly short-term subsidies offered to "infant" (new) industries – e.g., ethanol, solar and oil & gas producers. Like virtually all other interim subsidies, these folks (remember, corporations are now people) continue to enjoy the benefits of sizeable taxpayer-provided funding for years and years and years. Subsidies, like tax cuts, are forever even when they stop making economic sense.
· The "good old days," although rarely as uniformly superior as we romantically remember, nevertheless offer a nostalgic foundation for progress.
On that note, I hope the days of 2012 prove to be good for you and everyone else. Happy New Year!
