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November 2006

SF Fed on the chances of recession

News flash from the San Francisco Fed: recessions "appear difficult to predict".

Notwithstanding that, a model based on the yield spread predicts a 47% chance of a recession in the next four quarters. That's pretty high.

But this model might not fully account for the recent strange behavior of long term rates.

If one tries to adjust for that, using a vector autoregression model, the chance of a recession over the next four quarters seems to be no more than 10%. That's pretty low.

But perhaps we should add subjective, expert judgment to the mix. A special survey of the Blue Chip forecasters found the chance was 24.8%, which in context is pretty high.

The Survey of Professional Forecasters, on the other hand, makes the chances between 10 and 19%. That's pretty low.

You should now understand better why Harry Truman famously asked for a one-armed economist. And when two one-armed economists were produced for President Truman--who disagreed--Truman supposedly snapped, "If you laid the best economists in the country end-to-end, they wouldn't reach a conclusion." 

Some miscellaneous things from around the Web that prompt good thoughts on the eve of the holiday.

A proud parent writes to Instapundit that our Marines damn sure understand Semper Fi.

My son is a Marine and is scheduled to deploy to the sandbox this spring. His first time there, but not the first time the fundamentalists have tried to kill him while in uniform.

While going through SOI (School of Infantry) a couple of years ago, one of his sergeants told the class that this would take over 5 years to get the Iraqi army to the point of being able to defend the country. He also told them not to listen to what people predicted about getting out of Iraq quickly. These guys were going to take some time to build up a seasoned fighting force (meaning Non-Coms) This was not “US policy”, just the comments from someone who knew his job and what it was realistically going to take to complete the task. I knew then that it was questionable if we had the stomach for that long of a commitment.

In case you are curious, the Marines do.

David Shribman notes that we are approaching the bicentennial of Abraham Lincoln's birth.

He was a man of faint faith, and yet he is remembered as the greatest believer in American history. He was a man of jokes and gags, and yet he harbored more hurt, more sadness, more loss, than any public man of his time or any other. He was an uncertain man, and yet he is remembered for articulating the great certainties in our national life. He was a humble man, and yet he is acclaimed as the greatest American of all time. . . .

So here is my prescription for how to celebrate Lincoln's 200th anniversary:

Encourage every American to read one book about the Civil War, the pivot point of American history. Encourage every American to look into the eyes of Lincoln in any one of a score of portraits, and to see the faith, courage and charity in those eyes -- and to make that the American vision. Encourage every schoolchild to do what generations of their forebears did, which is to memorize the Gettysburg Address, delivered 143 years ago today, and to get right, word for cherished word, the part about resolving that "government of the people, by the people, for the people, shall not perish from the earth."

And one thing more: Encourage every American adult to read both of Lincoln's inaugural addresses -- it will take less than four minutes -- and to linger, in this time of war, on the very last paragraph of the second inaugural. You will be stunned at how those addresses live for us today. Look them up and you will see what I mean.

Jackie MacMullan tells us about Matt Curtis, Harvard football player, who had the best possible excuses to give up. But who didn't.

He has no money. His father is gone, dead from cancer, and he hasn't seen his mom, who has struggled with addiction most of her life, in years. He has lived in public housing, stood in line at the Salvation Army for breakfast, spent too much of his childhood with his fate hinging on the decisions of strangers from the Department of Social Services. Last summer, when he landed an internship with a law firm, he had to borrow a suit coat and a tie for the interview.

"But every morning I wake up, I feel like I have won the lottery," he said.

Happy Thanksgiving, everybody.

Easterly by a knockout

William Easterly vs. Jeffrey Sachs, Round 2:

Third, Mr. Sachs's attempt to make the case for his best possible society, the Scandinavian welfare state, is a little shaky. . . .

Mr. Sachs's empirical analysis purports to show that Nordic welfare states are outperforming those states that follow the "English-speaking" tradition of laissez-faire, like the U.K. or the U.S. Poverty rates are indeed lower in the Nordic countries, although the skeptical reader (probably an ideologue) might wonder if the poverty outcome in, say, the U.S., with its tortured history of a black underclass and its de facto openness to impoverished but upwardly mobile immigrants, is really comparable to that of Nordic countries.

Then there is the big picture, where those laissez-faire Anglophones in, first, the U.K. and, then, the U.S., just happened to have been the leaders of the ongoing global industrial revolution that abolished far more poverty over the past two centuries than a few modest Scandinavian redistribution schemes. Mr. Sachs apparently thinks the industrial revolution was led by IKEA. . . .

"Mr. Sachs apparently thinks the industrial revolution was led by IKEA."

Down goes Sachs! Down goes Sachs! Down goes Sachs!

Easterly by a knockout.

See also this review of Easterly's new book.

This sort of language, imparting these sorts of lessons, has made Easterly an inviting target for professional economic developmentalists. Jeffrey Sachs, for example, in a recent issue of The Lancet, rejects Easterly's call for lowering our sights, and lists nine major achievements of large-scale international intervention. Eight of the nine achievements concern health care (such as the eradication of smallpox) and the other is "the spread of high-yield variety seeds." Sachs's list is revealing. These are largely feats of technology, accomplished in labs by small numbers of professionals, then paired with field operations that were in many cases either one-time events or involved very precise objectives. None of the nine consumed the huge budgets and bureaucracies that characterize the economic-development industry. None is meant to achieve the sustained economic progress hoped for by development economists, and none involves the grandiose imagery of Sachs's recent book, The End of Poverty (2005). If anything, the nine items on Sachs's list are more consistent with Easterly's message: each involved the use of feasible means to tackle what amounted to small parts of the poverty puzzle.

But the real validation for Easterly—as well as for Edward Banfield, Peter Bauer, the neocons, and the Austrian economists—is in front of our nose. Well, it's in front of my nose: it's the computer screen on which I'm writing these words. The screen is sleek and new, and it was made in a country that just 30 years ago was in economic ruins. I'm talking about China. But after decades of stagnation and disaster, China's economy experienced a striking shift toward rapid growth in the 1980s. This shift coincided with a change in government policies, a change in the direction of economic freedom. It's true that such freedom required a state strong enough to enforce de facto property rights. But the combination of an effective state and economic liberty unleashed tens of millions of "Searchers" in China whose names, until then, were unknown even to themselves. These Chinese citizens have improved their lives—and only coincidentally their country's economy—through one incremental decision after another, decisions concerning employment, risk-taking, education, and much else. In the process, more people in China have been lifted out of dire poverty, and in less time, than in any comparable episode in history. And foreign aid had absolutely nothing to do with it.