The Stink Test

Pulling up next to a red, jacked up Hummer2 yesterday, it was hard not to think that there is a fundamental disconnect between the thought processes of common people, such as the gentleman driving this vehicle, and those of today's economists.

After having just waded through a number of EconoBlogs in an ongoing attempt to further enlighten my engineering mind, the sight of many bold decals plastered over all sides of this monstrous vehicle, advertising the driver's home loan business, momentarily overloaded my sensory system. There quickly ensued a failed attempt to capture this spectacle using a powered off camera phone as the light turned green.

It was quite a spectacle and spoke volumes about today's economy.

Macroeconomics

As an engineer whose parents were educators in the public school system, who stressed the liberal arts and humanities as their son gravitated toward the cold and calculated field of science and engineering, macroeconomics has become a great fascination in recent years.

Fascinating because of the charts and numbers as well as for the human behavior driving the charts and numbers.

Just the absurdity of it all since the late 1990s - trying to explain what just happened, and what might happen next in a financial world that seems to spin faster and faster - much more interesting than engineering.

After quickly learning that CNBC economists are not to be trusted, a few macroeconomics programs on PBS were found, and these have been helpful. But when graphs about aggregate global demand are shown, thoughts of empty shipping containers on their way back to China quickly come to mind, followed by images of newly unemployed textile workers in the Carolinas.

The PBS economist seemed to be so fascinated by the charts and the numbers that maybe he was missing things that are equally important. Things that don't lend themselves to charts and numbers - people. Maybe he should watch this PBS documentary, or look into the eyes of an unemployed Carolina textile worker who just wants to have what their parents had - a decent job, an uncomplicated life, and the hope of a brighter future for their children.

Despite the charts and numbers used by today's economists, and conclusions which are drawn from them, there appears to be something that is not quite right about the guy in the Hummer and the Carolina textile worker. Things just don't add up.

Despite what many economists say, this economy just doesn't pass the stink test.

More Discussion

It is nice to see more discussion about the state of today's economy - beyond the headline numbers and the combined spin from the financial media and the government. Blogs are helpful in this regard. On Wednesday, first quarter final GDP came in at 3.8% - tops in the western world. But, Barry Rithholtz over at The Big Picture questions that number.

He thinks something smells funny.

And, yesterday the Fed Policy statement said, "Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually." But, really, how firm can this expansion or labor market be when so much of it is based on the real estate madness now infesting almost every burgh in the country - when almost half of all new jobs nationwide are real estate related, and when home-equity financed consumer spending drives domestic growth.

That's got a bit of a smell to it, doesn't it?

At least more interesting questions are being asked these days. In Backstopping the Economy Too Well, Nell Henderson wonders if risky overconfidence is the result of having too much faith in Alan Greenspan:

For many home buyers, it's the sense that house prices will keep going higher in a U.S. economy blessed with healthy growth, low interest rates and tame inflation -- thanks in part to Fed policies under Chairman Alan Greenspan.

For many lenders, it's the assumption that borrowers in the stable, vibrant Greenspan Economy will have no trouble repaying increasingly risky home mortgage and home-equity loans.

But according to some Fed observers, this confidence is a worrisome legacy after Greenspan's nearly 18 years helping to steer the economy through a variety of storms. As Greenspan prepares to step down early next year, they say, he leaves behind a widespread perception that people can take bigger financial risks because the chairman can and will save them if their bets go sour.

But to this economist, it's all Phillip's curves and Taylor rules. There are people in this story - people buying overpriced homes and borrowing against these overpriced homes to buy more overpriced homes. And these people believe that nothing bad will happen because of the faith they have in the world's chief economist, Alan Greenspan.

In Alan Greenspan, Wizard or Villain?, BusinessWeek economics editor Christopher Farrell questions monetary policy under the Greenspan Fed:

Still, Greenspan's most vehement critics go a lot further than this. They're convinced he has made a fundamental error as a monetary economist. Call it the hairshirt economists vs. the cheerleaders for growth-is-good. The hairshirts believe that for the health of the economy to be restored, the inevitable bust that follows a boom must be at least as great as the boom. Growth proponents -- and there's none greater than Greenspan -- believe that it's better to limit the fallout of a bust and get the economy growing again as quickly as possible.

Shortly after its publication, there quickly ensued an EconoBlog Ph.D. free-for-all here, here, and here.

While it's not clear if anything was resolved, it is indicative of how economists view the world. A world full of charts and numbers and theories - but very few people. To common people the economy might smell foul, but economists apparently have an entirely different sense of smell. And, policy decisions are made based on what economists smell, not what ordinary people smell.

That stinks.