The US economy

[ikitov]

I would have thought a decreasing availability of more staff would push up wages and inflation – especially in service industries.

Well, your guess contradicts observations.
It might happen that the trick with interest rate works like a labor force control device. I can not sya that from the observations. What I can say is that the trick is not constructed to really control labor force. there are more powerful tools availble and to be used.
I've managed to convert the paper into html. Easy to download now. Figures lost some quality, however.

[Ironman]

sandid wrote:

I would have thought a decreasing availability of more staff would push up wages and inflation – especially in service industries.

Not necessarily. The greatest increases in productivity in the US have been occurring in the service sector, particularly in those services that are past the initial introduction of new information technology and are well into automating their business processes. Combined with a general trend toward outsourcing basic work to various international markets where labor is in ample supply, there has been surprising little in the way of inflationary forces acting in the service sector, which I would expect to continue for quite some time.

[sandid]

Well, we’ll have a good experiment to test this soon if Congress succeeds in the plan to build a 700 mile fence along the border with Mexico to stop illegal immigration.

My guess is that, if the plan works, the labour supply shock will push up wages/inflation and there will be a transfer of wealth from investors to workers. The US can’t really outsource all the service jobs that low-paid Mexicans do at present. Then again, the fence plan probably won’t work.

But what the situation will be like in 2012 is another matter. Will the US still be able to attract immigrant workers given global demographic and growth changes or will the US innovate away the need for them?

It probably depends on the industry. The US hasn’t been very successful at keeping medical service inflation in check. Also, it’s generally easier to create a cartel/monopoly in service industries (compared to manufacturing) to push up prices.

And what do we mean by inflation and growth anyway? Although the technical CPI and GDP figures stay within target ranges they seem to have less relevance to the income and expenses of ordinary people as time goes by.

[ikitov]

A good experiment in my sience imeans that one can give a number and then validate it. As I found , this is not the case in economics, or at least it was not the case before. People around play with words and assumptions not caring about any validation. The ultimate example for me is the NPL Prescott paper. Citing:
"Inductive or empirical inference was productive in the natural sciences. Good inductive practice involved model estimation and testing. This raises the question why inductive or empirical inference proved sterile in business cycle research. This sterility was not due to the incomeptence or the researches who pursued the inductive approach. The group who pursued this research program included a disproportionate number of the best minds in economics. The reason these inductive attempts failed, I think, is that that the existence of of policy invariant laws governing the evolution of an economic system is inconsistent with dynamic economic theory"
E.C.Prescott, FRB of Minneapolis, WP 950, 1998
In physics, this person would have been disqualified in ten seconds. Nobody would consider him as a scientist for such a statement. He survived in economics because everybody around is like him.
If you look deeper in your assumptions and statements, you will find that there is nothing to check in future numerically. Any outcome is fine. I have no problem with this.
So, I stop.

[Ironman]

ikitov,

In physics, this person would have been disqualified in ten seconds. Nobody would consider him as a scientist for such a statement.

This is exactly why I've come to the conclusion that today, engineers are the real economists - too many PhD-level economists just don't seem to understand that empirical data always trumps theory. Then again, there is the brand new field of econophysics, so maybe there's hope for the dismal set yet....

[sandid]

As a professional geophysicist I have a lot of sympathy with the data analysis approach. The great thing about economics is that’s there’s lots of free data out there that people try to keep accurate. I have tried using my signal processing experience here but there are limits. A lot of economic data is not sinusoidal; there are discontinuities.

However, as someone interested in economics I have to say I have always seen it as a social science, not a natural science. Human behaviour is involved. And with human behaviour, experience trumps data modelling.

In 2002 a lot of people were saying that a depression was coming because of the similarities (in the data) with 1929 and what followed. Well, a depression didn’t happen. Personally, I think the human factor intervened - learning from past mistakes and taking action to avoid them.

More significantly, at the moment there are people saying the US is heading for an inflationary bust and the only safe haven is gold. A proponent of this is Dr. Marc Faber. His articles are here. ‘Buy gold to hedge US dollar downside risk’ is a good example. Even better is to watch Marc’s interview with Michael Levy here.

Personally, I don’t buy the gold story. I think it’s another speculative bubble. More importantly I think people will act to avoid the problems Marc is talking about because they’ve learned from the past. But I’ll be watching to see if they do and I’ll change my mind if they don’t.

Predicting GDP and inflation from past data is fine but I think you have to translate that into a prediction of what banks, consumers, employees, businesses and politicians will do to see if it makes sense. They may just decide not to go along with it.

[ikitov]

As a matter of fact I am also a professor for geophysics and doctor for physics and mathematics. I do not use any processing tools, however. You can do that only if you have a good theory underlying your measurements (either seismic or economic).
My point is to develop an economic model similar to those in natural sciences. By chance, I have chosen a geomechanical model developed in our institute.
You can appreciate results which show that your assumption on unpredictability of human behavior is wrong. I have numerically demonstrated that some variable actually evolve through time according to simple laws. Among the variables: persional income distributuion (PID), GDP per capita, GDP, inflation, etc., i.e. measurable variables.
I do not have an explanation of that as nobody has an explanation of the second Newton's law. But I guess that any developed economy has a structure (like the Earth) which responds to some external and internal forces, accomodates the released "energy" and recovers the structure at the new energetic level . At least PID demonstartes such a behaviorduring last 40 years in the USA.
Since any theory pretending to be a scientific one has to describe past and foresee future in numerical way, I predcited some parameters couple years ago. It takes a long time to prove , however.
Similarly, to econophysics I call my theory mec[h]onomics in order to stress that underlying (very simple) equations are borrowed from geomechanics - a model of a solid with inhomogeneous inclusions.
Concluding, economics is a simple natural science when we are talking about aggregate values. Individual behavior is unpredictable as an earthquake time and size. Indivividual parameters and acts are distributed according to simple laws, however, like thet the earthquake recurrence law (Guttenberg-Richter Law) works very well throughout the world despite. To prove these statements I wrote a number of papers you can find at my web-site or Internet. Here I can not give any figure, but as a geophysicist you can find it convenient to look through figures not words.

[sandid]

The paper’s fine, Ivan. I guess you have to feel the numbers to be really convinced.

Unfortunately my interest in the future of the US economy isn’t academic. I have to decide how to invest my pension fund. Is it gold, stocks, bonds or property?

On a lighter note, I can only leave you with this quote from Monty Python and the Holy Grail:

Lancelot: Look, my liege!
[trumpets]
Arthur: Camelot!
Sir Galahad: Camelot!
Lancelot: Camelot!
Patsy (a serf): It's only a model.
Arthur: Shh!

[ikitov]

Sandid, you are right, macroeconomics just a small input parameter for the funds. Never played in this field before. Have no clue except general information.

Lancelot: Look, my liege!
[trumpets]
Arthur: Camelot!
Sir Galahad: Camelot!
Lancelot: Camelot!
Patsy (a serf): It's only a model.
Arthur: Shh!

[/quote]

Everything artificial in this world is made according to some model. Nuclear power plants and space shuttles is just examples of that statement. Models are the tools we imagine the outer world with.
Another example is the risk management of your pension fund portfolio. A complicated model underlays any change. The model can be wrong in some parameters (macroeconomic prediction!). Still, you go for it.

[sandid]

Thanks, Ivan.

[ikitov]

One more reason to panic?

Soros forecasts -
http://news.ft.com/cms/s/2979434e-80ec- ... e2340.html

[David Smith]

He hasn't had a great track record recently - and perhaps unwisely entered the political fray with his attempt to prevent Bush's re-election. But there's an interesting topic here we haven't covered - is the inversion of the US yield curve a recession indicator? Here's a piece which touches on the basic argument but there's plenty more out there http://money.cnn.com/2005/12/27/news/economy/inverted_yield_curve/

[ikitov]

I can not see any recession during the next 5 years. Thus agree with your definition of the value of the forecast given by Soros.

There is no indicator to predict a recession except one based on population.

Question. Is it possible to have a healthy real economic growth and deflation?
If yes, such a combination can potentially provide the inverted yield curve.

[David Smith]

Conventional wisdom would suggest not --- see Japan for a recent example, although Japan is only now coming out of deflation and last year's recovery (ahead of the end of deflation) was pretty good.

[ikitov]

There was such a thing in the USA in 1955. Moreover, if you plot real GDP per capita growth rate vs. CPI in the USA, you will find that the data demonstrate a negative trend, i.e. the lower inflation, the higher real GDP per capita growth rate. The problem is only that deflation is a very rear guest in the USA. May be it is time to visit.