Compare these two paparagraphs—the first from todays WSJ and the second from my review of Bob Woodward’s Maestro:
Mr. Greenspan has often reached outside economics to hone his insights, at times drawing on history, physics, Mozart and even Sherlock Holmes creator Arthur Conan Doyle for inspiration. In 1999, he tackled a key economic mystery with an analogy to the discovery of the planet Pluto. Scientists inferred Pluto’s existence from the unexplained behavior of Uranus’s and Neptune’s orbits, he told colleagues that year. Similarly, he inferred from the fact that both the inflation rate and unemployment were falling that productivity growth must be much higher than economists had thought.
***
We learn [from Bob Woodward's Maestro]that Greenspan studied the theory of relativity and regarded his hypothesis that productivity had increased as analogous to Einstein’s hypothesis that light would bend (p. 151), that his research staff considered their assignment to measure the change in productivity as “the economist’s equivalent of the Manhattan Project” (p. 173)
{ 3 comments }
What’s interesting in the WSJ analogy is that Pluto in no way explained the discrepancy originally calculated in the orbits of Neptune/Uranus. It turns out that the calculations were incorrect — and if they were, Pluto is not close to massive enough to account for the variances. A much larger gas giant-class planet would need to be found.
It is unintentionally fitting, then, that “higher productivity” is Greenspan’s Pluto, since both inflation and unemployment calculations are incorrect. And even if they were, real productivity increases could not account for it – the unincluded asset price inflation figures would be needed. That’s the missing gas giant in our bespectacled gasbag’s theorycraft.
Maybe someone can send Mr. Greenspan a copy of Stephen Hawking’s book “the universe in a nutshell” he can then rediscover all of economic theory again, with the help of Big Bang theory, time travel theory and superstring theory. Interest theory is often called “the black hole” of economics, well he can really make it so.
Funny, what I inferred from the fact that both the inflation rate and unemployment were falling was that the government had changed the definitions of CPI and unemployment. Upon research, I found that they had!
I’ve covered CPI on the board before. Unemployment was changed by removing the long-term unemployed (who have given up looking for work) from the calculation. Sine they make up a bigger portion of the numerator (unemployed) then the denominator (“labor force”) this reduces unemployment considerably.
If one reconstructs an unemployment number by taking the complement of the total number of employed persons divided by the total population of employment age, one gets a slightly different picture of the situation than “Easy Al” does.
Comments on this entry are closed.