Remember last fall when a bunch of Nobel economists assured us that gobs more spending by Joe Biden wouldn't have serious inflationary impacts?

 Here's what the ring leader of Tom Nichols' vaunted expert class of economists had to say at the time:

Some, however, have invoked fears of inflation as a reason to not undertake these investments. This view is short-sighted. ... We need safe school buildings and bridges, and affordable child and elder care, whether inflation is 2% or 5%. With the investments being financed by tax increases, the inflationary impacts will be at most negligible ...

The Build Back Better package ... would transform the U.S. economy to be more efficient, equitable, sustainable, and prosperous for the long run, without presenting an inflationary threat.

From Joe Stiglitz' letter last September, here. Robert Shiller of all people signed on to this load of hooey. Carl Schramm unloaded on all this yesterday, here.

Stiglitz wrote that with a straight face when inflation had already soared to 5.3% in July. The orgy of coronavirus spending in 2020-2021 was already stoking the inflation engine, but the experts then simply ignored it, and called for more! more! more!

Now look where we are, even without more.

Government spending in the United States hasn't been financed by tax increases in decades. We wouldn't be $30 trillion in the hole if it were. It's financed by borrowing, and the interest payments on that borrowing progressively accumulate to crowd-out other spending. One day soon interest payments on the debt will become the biggest part of the budget, severely limiting our ability to allocate resources responsibly.

 

 

Robert Shiller: Great Depression tariffs did not plausibly, directly affect economic growth in a major degree

Everywhere we turn we hear the opposite. It's standard operating procedure to blame protectionism for the Great Depression. Shiller knows it can't be demonstrated from the data. Hence the psychological argument. 

Quoted here:

Shiller said he did not believe there would be a significant inflationary effect to the U.S. from steel and aluminum tariffs, but he warned that heated trade rhetoric from both sides could send the American economy reeling into a recession.

"When you ask about the size of the impact on the economy, I think a lot of it is more psychological than direct, unless they really slam on tariffs," he said. The Yale economist pointed to the "most famous tariff war of all" during the Great Depression, which he said did not "plausibly, directly" affect economic growth "in a major degree," but it may have helped "destroy confidence" and willingness to plan for the future.

"It's exactly those 'wait and see' attitudes that cause a recession," he explained.

Robert Shiller blames housing bubbles on get rich quick flipper narratives, still completely misses the tax angle

Here, in The New York Times:

There is still no consensus on why the last housing boom and bust happened. That is troubling, because that violent housing cycle helped to produce the Great Recession and financial crisis of 2007 to 2009. We need to understand it all if we are going to be able to avoid ordeals like that in the future.

Ordinary Americans were suddenly able to make a lot of money by flipping their homes because of the tax law changes of 1997. Capital that was previously locked-up in housing by the rules of the New Deal until 1997 was suddenly unleashed to slosh around in the economy when lawmakers gave homeowners the right to avoid most capital gains on the sale of their homes as long as they lived in them only two years. Until 1997, if you didn't buy a more expensive home after you sold yours, you were exposed to a tax hit, unless you took the option of a once in a lifetime exclusion on the gain. The old arrangement had insured, along with the 30-year mortgage, that housing capital built up over a long period of time, creating forced savings for the middle class which could be safely liquidated in retirement without adversely affecting the housing market.

The Republican and Democrat geniuses who ran our government in 1997 changed all that, and within ten years the dang thing blew up. Yeah, I'm talking about you, Bill Clinton, and you, Newt Gingrich.

Too bad Robert Shiller still doesn't get it.

It would probably be unwise to turn back the tax clock now that the damage has been done, but the reinflation of the housing bubble after the crisis wasn't inevitable. The Fed's unprecedented zero interest rate policy has been responsible for that.

When the next housing crash comes, we'll probably not understand it either.

Meanwhile, the median sales price of homes in the aggregate has never been higher, or more unaffordable, and remains the primary driver of wealth inequality in America. 

Housing is a store of value, not an investment

Catherine Rampell for WaPo puts the long term real compound annual gain from housing at 0.3%. For the 100 years up to 1990, i.e. before the housing bubble, Robert Shiller has put it at 0.2% per annum, 33% less!

Here is Rampell:

Over the past century, housing prices have grown at a compound annual rate of just 0.3 percent once one adjusts for inflation, according to my calculations using Shiller’s historical housing data. Over the same period, the Standard & Poor’s 500-stock index has had comparable annual returns of about 6.5 percent.

---------------------------------------

Housing's ability to retain its value has made it an attractive target for securitization as mortgage-backed securities which have been highly liquid and trade in large denominations just like US Treasury securities, facilitating transactions.

The Swiss Overwhelmingly Want To Be Home Owners But Aren't

And the famous Robert Shiller really doesn't care, here:

Consider Switzerland, which by several accounts has had one of the lowest rates of homeownership in the developed world. In 2010, only 36.8 percent of Swiss homes housed an owner-occupant; in the United States that same year, the rate was 66.5 percent. Yet Switzerland is doing just fine, with a gross domestic product that is 4 percent higher, per capita, than that of the United States, according to 2011 figures produced at the University of Pennsylvania. It’s not that the Swiss inherently prefer renting. A 1996 survey asked a sample of Swiss whether, if they could freely choose, they would rather be homeowners or renters. Eighty-three percent said homeowners.

---------------------------------------------------------------------------------

To hell with what people want, right? Just keep property values so high only the likes of David Niven, William F. Buckley, Jr. and Tina Turner can afford to own there.

"Invest" In Housing? Real Home Prices Up 0.2 Percent Per Annum 1890-1990.

So warns Robert Shiller, here:

"Home prices look remarkably stable when corrected for inflation. Over the 100 years ending in 1990 — before the recent housing boom — real home prices rose only 0.2 percent a year, on average. The smallness of that increase seems best explained by rising productivity in construction, which offset increasing costs of land and labor."

Robert Shiller Says The Problem Is Insufficient Demand. It's Not.

The estimable Robert Shiller wants the problem to be insufficient demand, when the real problem is everyone in government is doing everything they possibly can to prevent what insufficient demand causes: a lowering of the general price level. In a free market we permit, yeah laud, failure. In ours we loathe it. 

Picked up by Slate, here:

"The fundamental economic problem that currently troubles much of the world is insufficient demand. Businesses are not investing enough in new plants and equipment, or adding jobs, largely because people are not spending enough—or are not expected to spend enough in the future—to keep the economy going at full tilt."

Shiller wants to create demand by raising taxes, whereas free-marketeers want demand to develop the natural way, by letting prices fall. Prices falling means some go bankrupt, except for savers who have wisely prepared for such an eventuality by having NOT spent too much in the past. They survive and are rewarded with cheaper goods and services. If they have saved enough they acquire directly the businesses which produce them. Or if not enough, indirectly through purchase of stocks at lower prices.

Preventing such failure, which is really preventing opportunity, is job one in a credit-driven economy, which is why unleashing capital stored in housing was critical in the 1990s, and why the Fed is doing what it is doing now to keep things "at full tilt" in the hollowed out economy. If it didn't, it would expose all the spendthrifts for what they are, and the entire thing would fail.

One can always hope.

The Shiller Price to Earnings Ratio in the News

From Jack Hough for The Wall Street Journal, here:

The plain old trailing P/E—the one that suggests stock prices are normal—is at least based on known earnings, so it's a good place to start in deciding whether stocks are affordable. But it has a flaw: If the past year's earnings were unsustainably high, today's P/E might be deceivingly low.

One fix is to take an average of many years of trailing earnings. Yale economist Robert Shiller advocates using 10 years, adjusted for inflation. His "cyclically adjusted P/E" is 20.8, versus an average since 1881 of 16.4.

Mr. Shiller's measure suggests stocks are a bit pricey, and another signal agrees. According to government statistics, after-tax corporate earnings are near a record high relative to worker wages. In the past, similar readings have foretold sharp earnings drops.

Today, that scenario isn't certain, because companies make more of their money overseas than in the past. "The government data might be a warning," says Mr. Shiller.

So it is time to be cautious, but not necessarily to flee stocks. U.S. ones are priced to deliver long-term inflation-adjusted returns of 4 percent a year, including dividends, reckons Mr. Shiller, about double what the 10-year Treasury bond pays.

The Keynesian Moment: "Markets Can Stay Irrational Far Longer Than You Can Stay Solvent"

Very thoughtful and wise words of warning today, making sense of the nonsense, from Barry Ritholtz over at The Big Picture. For the original as it appeared go here.

What Does the Economy Have to Do with the Market?

Posted By Barry Ritholtz On October 6, 2009 @ 7:33 am

“There’s a lot of risk going ahead of some big bumps. There’s a very big risk that markets have been irrationally exuberant.”

-Nobel Prize-winning economist Joseph Stiglitz

Far be it from me to challenge the 2001 economics Nobel prize winner, but sometimes, indeed, quite often, markets decouple from the economic fundamentals.

I can show you many eras in history when the economy was awful, and nonetheless markets rallied strongly.

There have also been times when earnings did not matter, and profitability was irrelevant. There are times when animal spirits run the show, when irrational exuberance was in charge.

Such is the result of giving two million primates lots of money and keyboards and a belief they can make a living based on numbers and letters moving around — on a screen, in a futures pit, on an exchange floor, or even under a buttonwood tree.

Most mainstream economists — with notable exceptions like John Maynard Keynes, Richard Thaler, and Robert Shiller — have traditionally paid little attention to this reality. To a trader or investor, rationality matters far less than what the tape was doing.

Indeed, prices matter a great deal more to traders than theories or annoying things like “Objective Reality." To a trader, prices ARE the objective reality; to them economic theorists are peripheral players trying to rationalize reality.

I believe you can describe and explain what the market is doing, but in doing so, we must acknowledge Keynes' terribly accurate observation that “Markets can stay irrational far longer than you can stay solvent.”

I’ll have more on this later in the week . . .