A reason to be scared of economists

Business Money
1

In another thread this sweet nonsense showed up:

Well, nothing new - another so called economist who thinks “GDP” means “economy”.

But this is not the end of the story: in a reply i had posted these links
nationalreview.com/corner/26 … ue-de-rugy
outsidethebeltway.com/japan- … w-fallacy/
thevolunteer.ca/2011/03/japa … w-fallacy/
to be rebuked thusly:

I couldn’t be bothered looking at those links. They were written by journalists, not economists with any real standing. I say this as a matter of fact, because it just so happens that I work for and am citing sources that I will not/can not name, unless you happen to have the minimum US$50 million in funds to trade with us.[/quote]
Oh dear. Now all this is seriously off topic on that other thread, so that’s why it’s here now (and just in case any moderator thinks this is better put into the “business” section: please feel free to move it there).

So what about this idea that disasteras are good for the economy?
Here is what is happening in NZ, another country hit by a major earthquake recently:
“New Zealand government picks up the pieces”
bbc.co.uk/news/12834145

And here are a few more comments:
msnbc.msn.com/id/9271060/ns/ … e_economy/
amateureconblog.blogspot.com/201 … anese.html
economist.com/blogs/freeexch … cal_policy
Still no “economist of standing” there to weigh in? Maybe they keep mum about this, because they ar worried about their jobs? After all, by extension, if disasters are good for the economy, so must be wars - destruction galore…!

The quest contineus: maybe this is why there are still people hanging on to that dumb idea: even some “economist of standing” - Paul Krugman - apparently said so:
newkindofmind.com/2009/10/kr … omist.html

Are we to conlude that logic is in short supply among economists? Or what’s the deal?

The quest continues…

:popcorn:

2

No, the clear conclusion is that people who know jackshit should probably keep their mouths shut. By the way, how is your portfolio compared to Hathaway’s? Just out of interest, of course.

http://www.gtglobaltrader.com/opinions/billionaire-buffet-backing-japanese-buys

[quote]“If I had Japanese stocks,” he said, “I would certainly not be selling them.” He added he was not looking at Japan’s economic future differently than from before the quake.

“Extraordinary events offer a buying opportunity,” he said, while acknowledging that it was a massive blow to Japan and that it would take time to rebuild.

When Warren speaks, the world listens, and his words helped the Dow Jones and the Asian markets rally, which is the sort of influence only world leaders normally manage.

But even without Warren’s economic flag-waving, it seems that Asia would probably come through this unscathed, with growth still expected at 8 per cent on average. Even Japan’s economy, after initial shrinkage, is expected to grow again in the coming quarters, which is beyond mind-boggling, given the scale of what’s happened there.[/quote]
HG

3

I get what you’re on about, yuli, but you’re being awfully silly about it.

[quote=“yuli”]So what about this idea that disasters are good for the economy?
Here is what is happening in NZ, another country hit by a major earthquake recently:
“New Zealand government picks up the pieces”
bbc.co.uk/news/12834145[/quote]From the article you cite: “Authorities in New Zealand believe it could take at least 10 years to rebuild the quake-damaged city of Christchurch.” Yes, the quake was bloody awful, but, if you’re a construction worker in New Zealand, you know you’re a whole lot less likely to be out of work during the next ten years. That’s the tangible economic reality for you and your family. The higher costs, here and there, that you’ll pay to generate the funds paying for that reconstruction is no less real, but not tangible in the same way: it’s a nip here, nibble there. Assuming your house didn’t collapse, assuming grandma wasn’t caught in the quake, you’re not going to be happy about what happened, and you’re not going to enjoy living with the eyesores and the historic and cultural losses, but your family’s going to enjoy a higher standard of living than it otherwise would have, because you’re going to have at least ten very solid years of employment. And the spinoffs of that may mean better years for a number of others, too.

None of which means you want things like this to happen. None of which means there won’t be costs as well. I imagine a fair number of projects that would have otherwise been funded – by gov’t or privately – won’t happen. But those activities won’t likely have the same multiplier effects as more basic reconstruction inputs.

4

No offense, HG, but I’m not sure I’d pick Buffett as support for the proposition that economists know what they’re talking about.

[quote=“Buffett, in his latest letter to shareholders”]Both Charlie and I believe that Black-Scholes produces wildly inappropriate values when applied to long-dated options. We set out one absurd example in these pages two years ago. […] We continue, nevertheless, to use that formula in presenting our financial statements. Black-Scholes is the accepted standard for option valuation – almost all leading business schools teach it – and we would be accused of shoddy accounting if we deviated from it. . .

Buffett swiftly moves on to lambast university economics departments . . . Buffett cannot believe that so many clung onto the “efficient markets hypothesis” . . . even when powerful facts emerged that proved it to be hogwash.

Buffett said the university economics departments response was to dismiss the new facts as “anomalies”. (For good measure, the 80-year-old value investor extraordinaire adds that: “I always love explanations of that kind: The Flat Earth Society probably views a ship’s circling of the globe as an annoying, but inconsequential, anomaly.”)[/quote]
qfinance.com/blogs/ian-frase … economists

5

You’re probably right, but it’s still a step above what else has been offered.

Anyway, he was talking about the buying opportunity on over sold stocks, the comments about the Japanese economy are from the author of that article. And, say what you will, the man’s portfolio is pretty damned enviable. He’s certainly had some misses, but overall, the reason he moves markets is because his successes outweigh the misses, and by a considerable margin.

HG

6

[quote=“Jaboney”]I get what you’re on about, yuli, but you’re being awfully silly about it.

[quote=“yuli”]So what about this idea that disasters are good for the economy?
Here is what is happening in NZ, another country hit by a major earthquake recently:
“New Zealand government picks up the pieces”
bbc.co.uk/news/12834145[/quote]From the article you cite: “Authorities in New Zealand believe it could take at least 10 years to rebuild the quake-damaged city of Christchurch.” Yes, the quake was bloody awful, but, if you’re a construction worker in New Zealand, you know you’re a whole lot less likely to be out of work during the next ten years. That’s the tangible economic reality for you and your family. The higher costs, here and there, that you’ll pay to generate the funds paying for that reconstruction is no less real, but not tangible in the same way: it’s a nip here, nibble there. Assuming your house didn’t collapse, assuming grandma wasn’t caught in the quake, you’re not going to be happy about what happened, and you’re not going to enjoy living with the eyesores and the historic and cultural losses, but your family’s going to enjoy a higher standard of living than it otherwise would have, because you’re going to have at least ten very solid years of employment. And the spinoffs of that may mean better years for a number of others, too.

None of which means you want things like this to happen. None of which means there won’t be costs as well. I imagine a fair number of projects that would have otherwise been funded – by gov’t or privately – won’t happen. But those activities won’t likely have the same multiplier effects as more basic reconstruction inputs.[/quote]

In context where the OP was originally posted, I don’t think the NZ example can be used. I would suspect that if the region concerned in NZ had the radiation problem that Japanese currently face, the economy over there wouldn’t really look that good in the next ten years. Contaminated arable land and oceans simply can’t be fixed or rebuilt, and as such, it doesn’t stimulate the economy and it doesn’t procure people with better living standards. Quite the opposite in fact as people lose their bread and butter permanently.

7

A quick look at the economy in Christchurch, New Zealand.

[quote]The agricultural industry has always been the economic core of Christchurch.

Other agribusinesses in Christchurch have included malting, seed development and dressing, wool and meat processing, and small biotechnology operations using by-products from meat works.

Dairying has grown strongly in the surrounding areas with high world prices for milk products and the use of irrigation to lift grass growth on dry land. With its higher labour use this has helped stop declines in rural population. Many cropping and sheep farms have been converted to dairying. Conversions have been by agribusiness companies as well as by farmers, many of whom have moved south from North Island dairying strongholds such as Taranaki and the Waikato.

Tourism is also a significant factor of the local economy. The closeness of the ski-fields and other attractions of the Southern Alps, and hotels, a casino, and an airport that meet international standards make Christchurch a stopover destination for many tourists. The city is popular with Japanese tourists,[41] with signage around Cathedral Square in Japanese. en.wikipedia.org/wiki/Christchurch [/quote]

We are not talking about a farmer or two that would lose everything. We are talking an entire community that live off this industry. This is just to reiterate that the model applied to the Christchurch disaster doesn’t compare with what is happening in Japan, in my opinion.

8

Good point. Let’s address the journalistic crap you quoted.

[quote]http://www.gtglobaltrader.com/opinions/billionaire-buffet-backing-japanese-buys
“If I had Japanese stocks,” he said, “I would certainly not be selling them.” He added he was not looking at Japan’s economic future differently than from before the quake.[/quote]

The big ‘IF’: He doesn’t own any and he would never sell on a low due to a short blip in the market.

Good opportunities for short term trades. If you want to trade long, expect a couple of generations to make a few percent. I bet he ain’t buying any.

An aspiring journalist overawed by the light of one of the wealthiest men on the planet. Warren Buffet is not a world leader, he is just rich. Einstein was a world leader.

Yes, exactly.

Of course it will grow in the next quarter or two during reconstructiion from the big destruction in an otherwise flaccid economy with nowhere left to go.

Mr Buffet doesn’t work with short-term trades, he trades long. I bet he hasn’t changed his position at all.

See, me and Mr Buffer agree.

Buffer’s long time view on Japan:

http://www.5min.com/Video/Warren-Buffett—Insight-on-Japan-11337

9

You are quite right: somebody benefits from the disaster! :slight_smile: In fact, nobody who is aware of the broken window fallacy questions that somebody will benefit from the consequences of a broken window or an earthquake. :slight_smile:

Where the fallacy comes in is when someone concludes that since somebody benefits (is better off), everybody (the collective, society, the economy) benefits (is better off) - that conclusion is unwarranted (wrong, logically false). But apparently even certain “economists of standing” never seem to have sat down and done the arithmetic that would show them why and how that conclusion is wrong.

It is, of course, true that the money flow associated with re-construction work is counted in a country’s GDP, and so it is possible to see a rise in the GDP after a disaster if there are no other factors pulling it down. But “GDP” does not equate “the economy”.

Consider this scenario:

[quote]Here’s my perspective: I register the amout of money that you spend day after day, and i call the average of that flow over a given time period your “GPP”. I notice that a few weeks after an earthquake hits the town where you live, the amount of money you spend noticeably increases, that is to say, your GPP goes up quite a lot. I find out that the reason for this increase is that you have hired contruction workers to have your house rebuilt, since it was badly damaged in the eartquake. On account of your increased GPP i consider your economic situation to be benefitting from the earthquake.

Here’s your perspective: you were about ready to retire when an earthquake struck and badly damaged your house. You decided to rebuld the house but had to borrow the money needed to do that. As a consequence you will have to postpone your retirement by 15 years to pay the borrowed money back, and although you will have your house back in a few weeks, you will now be in debt.

You tell me about your situation in the hope of finding a sympathetic ear, and although i acknowledge that the damage to your house was, of course, most regrettable, i can’t possibly feel any sympathy with you: i have to point out to you that not only are the construction workers who are rebuilding your house so much better off now, you yourself should also not complain, since your GPP is up now, meaning your economy has improved. Wait… why are you getting upset? What do you mean: “you can stuff that GPP to where the sun never shines”? Why are you swinging that baseball bat at me? Help…![/quote]

Now, we can see that Larry Summers, on the other hand, is not as dense as i make myself out to be in the scenario above: he is quite aware that “GDP” is not the same as “the economy” - but he, too, manages to succumb to the broken window fallacy. Talk about subtle!
communities.washingtontimes.com/ … d-economy/

10

You know, Yuli, despite not being particularly enamoured by classical economists* and their twee little metaphors, if you were talking about anywhere else in the world, I’d probably agree with you.

Yes, obviously in dollar and human terms this is by no other definition a disaster and a godawful tragedy. And in GDP terms, almost certainly a mere blip before we’re back at the sort of trajectory the country was on before this event. Obviously that’s a measure, and an inefficient complete measure of the financial impact. That is understood.

Why I think this isn’t quite the zero sum game suggested in the tale of the window smashing vandal is that I believe the Japanese government has the sorts of levers and latitude to look after it’s people and to minimise the pain. Not all of it, obviously, but a shitload more than the people of say, Sichuan could expect. There will be a collective cost for this, and it will be felt by global consumers, which obviously offsets some of the immediacy for Japan, in general.

In terms of the share price markets. I think it was and is a gutsy and good call to jump back in after the scare off, and restore some support for that market - yes, all valuation metrics are inefficient, but for stock markets. the fundamentals for Japan shares are mostly pretty damned good. Obviously that’s selective, and it’s going to be a rough ride.

From the man that suggested you buy a farm, learn to drive a tractor and stockpile a shotgun, Dr Doom:

Charlie Phillips. No date on that video on Buffet. I would very much doubt that was current.

HG

  • For the record. I’m not a great believer in the “dismal science” full stop. And especially any of the hard and fast “rules” of its thinkers or proponents. Possibly with the exception of Marc Faber’s advice to buy a farm and get to know a shotgun.
11

[quote=“Charlie Phillips”][quote]http://www.gtglobaltrader.com/opinions/billionaire-buffet-backing-japanese-buys
“If I had Japanese stocks,” he said, “I would certainly not be selling them.” He added he was not looking at Japan’s economic future differently than from before the quake.[/quote]

The big ‘IF’: He doesn’t own any . . . .[/quote]

Wrong. See below.

True.

True again.

[quote]Sep 22, 2008

TOKYO (Reuters) - IMC International Metalworking Companies, a unit of Warren Buffett’s Berkshire Hathaway Inc (BRKa.N), will buy Japanese machine tool maker Tungaloy Corp in a deal one newspaper said would total $1 billion.[/quote]

[quote]Mar 20, 2011

Warren Buffett’s tool-making unit Iscar Metalworking Cos. said sales may decline in Japan after the company evacuated most of the 1,400 employees from its local headquarters as radiation leaks from a nuclear plant.

Iscar’s Tungaloy Corp. subsidiary halted work at its factory in Iwaki, Fukushima prefecture, and postponed opening a second plant in the area after the record-strong earthquake and tsunami . . .

Iscar Chairman Eitan Wertheimer said in an interview yesterday . . . “We may sell a little bit less,” he said. “But we’re going to keep on sailing. Japan will come out stronger. . . [/quote]

Of course, to a certain extent that’s putting on a good face, but Buffett – as always – bought the company because he believed it was an exceptional company, with good figures, good management, good prospects for the future, and he was able to buy it at a good price, with the intention of holding on to it for the long term, so it does seem extremely unlikely he’d be significantly phased by this unfortunate, temporary setback. Sure it’s tragic for the thousands who died and the many more who lost their homes. But the families, communities and the nation will definitely bounce back just fine.

[quote]Billionaire investor Warren Buffett said Japan’s record earthquake is a buying opportunity and he won’t sell his shares in the country as its future hasn’t been changed because of the temblor. . .

“If I owned Japanese stocks, I would certainly not be selling them because of the events of the past 10 days or so,” said Buffett, speaking to reporters in the South Korean city of Daegu, where he arrived yesterday to attend a ceremony for a new factory being built by TaeguTec Ltd. “Something out of the blue like this, an extraordinary event, really creates a buying opportunity.” [/quote]
utvmoney.mangopeople.com/news/20 … unity.html

12

Economists and investors/traders are not the same.

“An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen.” (Quote by - Earl Wilson)

The smart investor is one that not only has the intellect but emotional intelligence and discipline to take positions, or liquidate positions while the overall majority of sheeple are running the other direction. The majority is almost always wrong. It takes someone with a strong disciplined mind to trade against the doom and gloom or “irrational exuberance” displayed by the common masses.

Look at the terrible doom and gloom experienced in late 2008. The few that had the discipline to invest in companies like AIG have made out like bandits. If you remember, the world was ending, it was all over, stocks, the whole financial system, insurance, housing, the world was ending. It looked very very bad and only those with the brains and the strength to match it, started investing heavily at that time. AIG could’ve been picked up for nothing at that time.

The one real danger is explained with the old “don’t catch a falling knife”, as you never really know how far it will fall. Timing is everything.

Japan will rebuild. period. They will not give up. Today the high commodity prices will surely play a factor, but one way or another Japan will eventually rebuild.

13

Exactly. Buffett is perhaps the most skillful/successful investor ever. He has strong disdain for the hocus-pocus dealings of economists, making all sorts of predictions about things that can’t be predicted. He does not play their games and he does not rely on their speculations. Instead he researches to find good strong companies available at a good price.

Agreed. Look how they bounced back after Hiroshima and Nagasaki. Surely the quake and tsunami and nuclear threat are only minor speed bumps for them. Chiayo!

14

I disagree. Entire communities are swimming in radiation. You just don’t bounce back from that. If we were talking about the quake and the tsunami, I would almost agree. But add radiation to this mess and you have a completely different beast on your hands. The Fukushima prefecture relied on fishing and agriculture. There is no bouncing back for them.

[quote]Agreed. Look how they bounced back after Hiroshima and Nagasaki. Surely the quake and tsunami and nuclear threat are only minor speed bumps for them. Jiayou![/quote]It depends what you consider “bouncing back.”

[quote]As of January 2011, Japan’s public debt was more than 200 percent of its annual gross domestic product, the largest of any nation in the world.[/quote]They never bounced back. They got in debt up to their eye balls, is what.

15

I disagree. Entire communities are swimming in radiation. You just don’t bounce back from that.[/quote]

Really?

Hiroshima THEN

Hiroshima NOW

Why is this worse?

16

No one is “swimming in radiation”, well aside from three workers that ‘waded’’ through a noxious pool.

There are difficulties, to be very sure, and they are not all about the damned nuke. Take a look at this, for example. The tsunami and quake has done much more damage and will ultimately kill far more people than the nuke is ever likely to. You can mention your gamma whatevers out to the wazoo, and it does make for extremely freaky reading, but meanwhile, this is what people are actually contending with, not what they might have to contend with. http://edition.cnn.com/2011/WORLD/asiapcf/03/25/otsuchi.japan.quake/index.html?hpt=C1

HG

17

Nice pictures but I think it’s a bit misleading. Someone else can explain this better than me, but the radiation released by an atomic bomb is not the same as what is released by a failing nuclear reactor. It’s not that simple.

Chernobyl in 1985

Chernobyl in 2010, 25 years later.

18

:slight_smile:

Just for clarification:

If someone writes a post to suggest that now may be a good time to profit from the nuclear accident in Japan by investing in shares in the power company that owns the damaged plant, then some people may find that perhaps distasteful, but it is certainly not a view open to challenge on logical grounds. (The suggestion to buy shares in a company that one perceives as having good value even if it has suffered a setback that have driven its share price down seems to me like “Investment 101”.)

If someone joins a discussion about the consequences of the recent nuclear accident in Japan and suggests that the damaged reactors don’t pose any danger to people, that the talk about nuclear radiation is just a distraction from another, larger problem (homeless tsunami victims, etc.), and that, anyway, Japan’s economy will be better off because of all that happened, then it is obvious to me that someone has serious trouble with logic. It would have been different if it had been suggested that Japan’s economy is strong enough to recover from what happened relatively quickly, but the notion that Japan’s economy is better off because of what happened is pure acrid BS, regardless how many “economists of standing” subscribe to that view.

This thread is not about the question of whether TEPCO shares are a good buy (a question i am neither interested in nor qualified to comment on) but about that particular BS about how disasters are good for the economy (keyword: “broken window fallacy”).

Two few smilies in this post? OK, let’s fix that: :fume: :loco: :unamused: :roflmao: :wink: :slight_smile: :bow: (take your pick)

19

So we’ll just assume that I’m right.

No, I’m afraid your strawman doth protest here. I continue to believe that while there are obvious risks from a nuke situation like Fukushima, the real impact of what has already happened, and continues to happen, as a result of the quake and tsunami will outweigh anything Fukushima throws at us, or has thrown at us already. and this will be pretty much isolated to the local area. I have family in Fukushima, so this isn’t something I’ve considered lightly.

So we’ll just assume that i was right again, although what i said was essentially short hand, because I obviously assumed a higher knowledge of the circumstances in Japan, ie, its strong economy can deal with it. [quote=“yuli”]This thread is not about the question of whether TEPCO shares are a good buy (a question I am neither interested in nor qualified to comment on) but about that particular BS about how disasters are good for the economy (keyword: “broken window fallacy”).[/quote]
What can I say? Beware the hidden hand. It will almost certainly form a fist through your argument, and possibly patch a window or three in the process.

I seem to have misplaced my play dough, probably around 40 years ago. But it is nice to see people being creative with colours and pictures. Perhaps a little disconcerting among adults, but I’m an old fashioned hippie type and I will continue to publicly salute all forms of creativity, although I’m also old and crotchety enough to reserve my own personal opinions on their real merit or otherwise.

HG

20

Oh, you can assume what you like :slight_smile: This thread is not about things people may be right about (i think it is only fair to acknowledge those things) but about the BS that you and certain economists have been spouting about how what has happened is good for our economy. :doh: (I mean the Japanese economy) .
(And since i am not looking for an investment advisor or broker, i also won’t need to wonder about whether your lack of some very basic economic understanding might have a bearing on your work - i mean, if i was you i’d be a bit more circumspect about what i was posting in a public forum).

Your version of this BS is on record here and here and in a few more places, while the versions of people who are more famous than you can be found in other places on the web like here or here to mention a few). :wink:

But before you let it get to your head that i 've mentioned you more than once in the context of Krugman and Summers, let me say that your comments were only the last straw: i’ve been meaning to post something about the broken windows fallacy since the time it had been trotted out again in the context of the Christchurch earthquake. So relax, relax, this thread is mostly not about you. :slight_smile: