Wednesday, 29 June 2011

“Conventional wisdom” was wrong

Guest post by Vedran Vuk of Casey Research 

The current economic crisis has turned a lot of common wisdom about recessions on its head. Hence, I wanted to make a short list of these ideas. Despite the ideas' faults, many are still followed to the detriment of those who follow them. I know that I won't be able to list everything; so if you have some more points to add to the list, please send them over.

1. Hide from a recession in school - Unless one is getting a doctorate, this strategy has completely failed. Anyone entering a Master's degree in 2008 or 2009 should be done with the degree by now. Unfortunately, in the meantime, the employment situation has not improved.
In some ways, the situation for the students could actually be worse than prior to acquiring the degree. These students are now unemployed with huge loans. If this recession continues into 2012 and 2013, even the PhDs will lose on this strategy.

2. Don't hire overqualified workers - This is pretty standard recession advice for companies. Sure, the overqualified person might be great for the job and a good deal for the moment, but as soon as the economy recovers, the employee will leave the company. And the company is left holding the bag without an employee in a more competitive job market. It's a bad deal.
However, in this recession, the companies that hired overqualified workers scored big. The job market hasn't recovered at all. Furthermore, it takes unemployed workers about six months on average to find a job. If one hires an overqualified employee, they likely wouldn't be able to locate a better job searching part-time for a whole year or more. This has been a great time to get some amazing workers on the cheap.

3. Bet on the next boom - Many investors had a textbook version of a recession in their mind. There's a crash followed by yet another roaring boom. Sure, stocks recovered from their lows, but there's no raging boom taking place now. A bunch of folks are holding bank stocks ready for a leveraged play on the economy, but the banks are doing nothing but collecting dust.
This view has kept many investors away from gold as they still believe in an oversimplified version of the business cycle. As soon as the economy recovers, supposedly gold should collapse. Well, where's that recovery?

4. Fiscal and monetary stimulus creates jobs - In my opinion, never has the United States government spent so much money and created so few jobs. The stimulus didn't even put a dent in the unemployment rate, and even the president has admitted that those shovel-ready jobs weren't so shovel-ready after all. Some have called this crisis the failure of capitalism, but with these sorts of results, big government abysmally failed even more so.

5. The effects of monetary policy are relatively quick - Admittedly, this took many free-market types by surprise. The Fed printed tons of money, and it has taken inflation nearly three years to show its ugly face. Many were expecting hyperinflation as early as 2008. Even the textbooks cited two years as the time frame for monetary policy to filter through to the economy. In this case, it's taking much longer.

6. Wait out the real estate market - This one is pretty self-explanatory. No, house prices don't always go higher, but many still hold on to this hope.

Well, that's it for my list. I know that I've missed some things; so be sure to send in your thoughts.


  1. "Some have called this crisis the failure of capitalism, but with these sorts of results, big government abysmally failed even more so."

    That erroneously implied capitalism in some respect failed.

  2. @Greg: Indeed.

    Rather infelicitously constructed.

  3. Ha ha - PC declares capitalist a failure! Can I quote you on that? ;) D.

  4. With such poor comprehension skills I can see why D remained anonymous. PC was agreeing with Greg that it wasn't capitalism that failed but big government.

    Many of the myths hinged on the fact that there has been no recovery; could the author list the reasons and explain why.

    I imagine government taxation and stimulus spending has destroyed wealth needed for a recovery. Suppressing interest rates has kept afloat businesses that should have failed (if, in fact, they weren't otherwise bailed out) and discouraged saving which, together, have seen the pool of real capital continue to shrink. Any other reasons?

  5. Any other reasons?

    Even in the US, unions and minimum wage laws are preventing a necessary rebalancing of the Labour market.

    Corporate taxes, and "expected" corporate contributions to health insurance and 401Ks et al similarly preventing hiring.

    And, of course, continued socialist anti-commerce, anti-growth governments is driving investment away from NZ and the US towards more capitalist-friendly governments, including Canada, Vietnam, and China.

  6. Ironically of course it looks like Greece may be doing some things right:

    * selling all viable state enterprises
    * 15% salary cut for all public service workers
    * 5% income tax increase for all public service workers
    * fire 150,000 public sector workers.

    It's nowhere near enough - either for Greece or NZ - but it is a start!

    Greece of course is significantly better of than NZ: Greece's debt is denominated in its own currency, and there are many other large economies also using that currency whose banks stand to lose if Greece fails.

    NZ's debt is all in other currencies which is why a devaluation will roughly triple NZ's debt burden, and we have no big player to set up and pay our bills.

    (Anyone who thinks the Aussies would buy us out is dreaming)

  7. Wow now that's interesting thank you for posting it

  8. The problem with debating (or at least attempting to) economic issues in NZ is that it is predominantly cradled in either socialist envy-speak or in muddled academic rhetoric.The first alternative generally entails a quest for more government and more government expenditure. This does not mean I favour the latter alternative.

    The typical punter who I deal/trade with each day considers he/she economically fine provided there is household money to expend.

    The reality at this level is that in 2011 there is indeed far more cash washing around in the individual's purse than in 2008 and 2009. The source of this additional cash is seldom queried. Some persons have vague notions of government borrowing etc but do not relate this fact back to their personal and daily needs. While trading in a manner which is oblivious to government debt (seen as someone else's problem) the punter can continue life in a relatively familiar vein and thereby remain content and happy. This contentment seems to be most prevalent in the primary industries sectors. It is not to be lightly ignored or extinguished.

    Economics is not, to my mind, a science, it is barely a discipline, but a common thread of all optimists and doom-sayers is emotional interpretation.

    If NZ wishes to be successful it will be. The ballot-box will not necessarily record this.I perceive governments to be at the sidelines of national well-being other than when they syphon off wealth to profligates and silly follies.(NB 1999 and following...)

    As an amateur economics artiste I believe that NZ's problems do not even closely mirror those of Greece. The reason? Unlike the Greeks we simply do not live extravagant lives! Rightly or wrongly we live modestly and by and large within our means. The current borrowings, reflect past profligacy which the present government has not quickly stemmed, although there are signs (at long bloody last!!!) that over-spending is being staunched.

    I hope this lot is not readily dismissed as a "glass half full/empty" dichotomy, as I truly believe that economic doom-sayers serve only to exacerbate woes. A solution is often a distant cousin to these types.

    Finally, to even ponder a sell-off to Australia is fanciful. If NZ is to measure its success solely against our immediate neighbour then we are limiting the aspirations of our children. Australia's economy is not strong despite its apparent position against the USA and NZ. It is thin, one dimensional and under attack by lunatic socialists. Australia's internal capacity to grow will forever be limited by the tyrannies of distance for traders and its unfortunate aridity. A belief in Australian salvation is foolish.

    Chris R.

  9. Actually PC asked for additions to his list pointing out where conventional wisdom is wrong.

    My contribution is the unwritten rule that says 'be pessimistic', it pervades every nook and cranny of our existence and hinders any sort of recovery. Surely 'be optimistic' would be a better approach and maybe lead to more hiring of those overqualified workers.

  10. "With such poor comprehension skills I can see why D remained anonymous. PC was agreeing with Greg that it wasn't capitalism that failed but big government."

    With such poor ability to detect a joking tone, Andrew B might do good to avoid embarrassing himself by criticizing others on the basis of his miscomprehension. I was poking fun at PC, I obviously don't remotely think capitalism is a failure, but then that should be obvious to anyone with reading skills.


  11. "Andrew B might do good to avoid"
    Might do *well* to avoid.

    Perhaps if your jokes were funny...


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