Friday, July 11, 2008

Welcome to Oz

In politics, some obvious lies must be told--the truth would be political suicide. No, I am not talking about, "My secretary and I have a strictly professional relationship."

I am talking about the emperor's new clothes. Every advisor of every candidate must lavish praise on the emperor's clothes, though everyone can see that he is not wearing any. They must tell baldfaced lies.

Phil Gramm, a PhD economist, former U. S. Senator, and current advisor to McCain pointed out that we are not in a recession. He said that though the economy is not strong, the only recession is in people's minds. He also said we are a nation of whiners and, by the way, the emperor is buck nekkid.

John McCain had to quickly rush out and disavow Gramm's remarks, reassert that we are in a recession, and that the emperor's A-line skirt is breathtaking.

McCain could not tell the truth here. Straight talk would have been suicide. Obama was quick to pounce on Graham, saying that it shows that McCain does not see that there are economic problems and that people are suffering. Obama acted as if it were Gramm who was not living in reality.

I certainly do not blame Obama for his fiction. The "out" party must always say the ins have messed everything up and cannot fix things. And with a news media that loves a tragic story, economic bad news is always exaggerated, so the out party has an ally.

Everyone must lie! Gramm did not get the memo. But Gramm is an economist (that is, a nerd of the highest order). We economists often forget to pick up our memos from the inbox. No one gives us a clue and we forget to buy them while we're shopping.

I am well aware that the economy is not in great shape. The latest figures tell us that economic growth was an anemic 1% in Jan-March. Were we in a recession then?

The most common sense economic definition of recession is clear cut. A recession is two consecutive quarters of negative growth. Note: 1% is not negative. Hence, we have no clear evidence we are in a recession.

My own sense of the economy is that the second quarter exceeded the first, so that we will get through this period was a stumble and not a fall. If we are in recession in July 2008, we will probably find out in October 2008, when the second and third quarter growth numbers are in. Gramm's statement reflects our best evidence. *

I previously wrote about Baum's The Wonderful Wizard of Oz. In particular I wanted to amplify this: The wizard says to himself, "How can I help being a humbug [fraud], . . . when all these people make me do things that everybody knows can't be done?" That is the politician's problem. The people demand that the government solve all their problems. The politician can solve hardly anything.


*Sometimes you do not know that you were in a recession until long after it has ended. In 2001, the first quarter had negative growth, the second quarter slight positive growth, the third quarter (9-11) had negative growth, but since the fourth quarter, growth has been positive. Because the first and third quarters of negative growth had a positive second quarter sandwiched between, the period did not meet the usual definition of recession. BUT later the Bureau of Economic Analysis revised the second quarter numbers from slightly positive to slightly negative, so we went from a near recession to a three quarter recession.

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