Wishful-thinking economists ignored abundant evidence of trouble ahead

Gary Lamphier
The Edmonton Journal

Saturday, January 19, 2008

"The only function of economic forecasting is to make astrology look respectable." -- John Kenneth Galbraith

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EDMONTON - Frankly, I'm surprised Galbraith had such little regard for the likes of Nikki, Psychic to the Stars.

After all, last year the comely Nikki correctly predicted Britney's split with Kevin, and Keith Richards' health problems, long before his tragic fall from a coconut tree.

That said, if a big brain like Galbraith felt compelled to poke fun at his own profession, I figure your local biz columnist should have the right to do likewise, as circumstances dictate.

And right now, circumstances dictate that most economists have a lot of 'splainin' to do.

Barely three weeks ago, as practictioners of the dismal science gazed into their crystal balls, a rare few -- such as David Rosenberg, Merrill Lynch's chief economist -- saw a recession looming. (Rosenberg has since declared that it has already begun.)

According to Business Week magazine's year-end survey, for instance, just two of 54 forecasters expected the U.S. economy to skid into the ditch in 2008.

Do the math, folks. That's less than one per cent -- roughly the same odds I'd give yours truly of going top shelf on Roli The Goalie in a shootout.

Now, just 19 days into the new year, the world's biggest economy is apparently in such a frightful mess that Dubya himself is promising $145 billion US worth of emergency bailout dough to keep the whole thing from crashing.

And that wee bit of stimulative pocket change -- equivalent to roughly one per cent of the U.S. gross domestic problem, er, product -- would be on top of the three-quarter-point rate cut that Wall Street now expects from Ben and the boys at the Fed later this month.

Call me nuts but there's something wrong with this picture. Either most U.S. economists have been guilty of wishful thinking or they've apparently been saying one thing in public and something else in private -- not unlike the junk paper peddlers at Goldman Sachs, it seems.

While it's true that hard evidence of rising U.S. jobless numbers, slowing retail sales and a shrinking U.S. manufacturing sector have only come to light since Jan. 1, the train wreck warning lights have been flashing red for half a year.

The toxic economic fallout from the subprime mortgage debacle, the credit crunch, the depression in the U.S. housing market and the plunging greenback were all clear and present dangers as early as last summer.

So should it really be a shock to the bean counters that retail sales over Christmas stunk, that U.S. housing starts have fallen to the lowest level in 16 years, that U.S. credit card defaults are soaring, or that inflationary pressures are heating up even as the world's biggest economy flirts with recession?

I'm not an economist -- or a psychic -- but I think not. And judging from the ongoing meltdown in the stock markets, investors aren't waiting for the ambulance to arrive before fleeing the scene of the accident, either.

By Friday's close, despite Bush's proposed economic Band-Aid, the S&P 500 Index was down 9.8 per cent on a year-to-date basis, marking its worst annual start ever, and its biggest weekly loss in five years. Not to be outdone, the Dow Jones Industrial Average fell four per cent this week, bringing its decline since Jan. 1 to 8.8 per cent.

Meanwhile, the tech-laden Nasdaq Composite Index shed another 4.1 per cent, bringing its year-to-date loss to 11.8 per cent.

Here in Canada, where high commodity prices have failed to reassure nervous investors that a U.S. recession won't spill north of the border, Toronto's benchmark index closed Friday with a weekly loss of 895 points, or 6.6 per cent. That brings its decline since Jan. 1 to nearly 1,100 points, or 7.9 per cent.

While there's no guarantee Congress will pass Bush's planned bailout package quickly, and there's sure to be considerable horse-trading between the Democrats and Republicans before a deal is reached, the politicians aren't likely to dawdle in a presidential election year, either.

Indeed, according to U.S. press reports, Bush held a conference call Thursday with Democratic leaders, during which he stressed his eagerness to reach agreement quickly on the key elements of the package.

Democrats are reportedly already drafting measures including a proposed one-time tax rebate for workers and richer unemployment benefits, mainly targeted at those mid- and low-income workers hurt most by the

crisis in the housing and credit markets.

Based on the total estimated value of the bailout package, The New York Times reports, the tax rebates will be capped at about $800 per person, or $1,600 per household.

But here's the thing. Even if the package is passed, it's likely to carry some big risks. One, it's inflationary, and it will demonstrate yet again the complete lack of fiscal discipline that is at the very root of the U.S. economic crisis.

Secondly, even if it does work, the impact is sure to be temporary. And once the spending binge ends, the U.S. could be back to square one.

Finally, there's an even bigger risk. What happens if the package is implemented, but the U.S. economy remains dead in the water? That's a scenario no one wants to think about. Not even Nikki.