Hackonomics in action

Larry Kudlow is one of America's premier "hackonomists" - a bunch of people with little or no economics training who blather on and on authoritatively as if they know something about the subject, but actually are just Republican political tubthumpers (other prominent examples include Kevin Hassett, Donald Luskin, and Megan McArdle). These are far, far worse even than politically biased academic economists like Ed Prescott. They squawk endlessly on CNBC and in the Wall Street Journal, purporting to explain every stock market zig and zag as the success of Republican policy and the foolishness of Democratic policy. Brad DeLong has repeatedly awared the "Stupidest Peson Alive (TM) Award" to each of them (except McArdle, who for some reason gets off lightly), but they just keep coming.

Here , via Ry, is a great example - a Larry Kudlow column. Let's peruse it and see exactly how it's Teh St00pid:

How do you explain it when jobs plunge and stocks surge? That’s what happened Friday as the January employment report revealed a disastrous 598,000 drop in payrolls...[T]here’s no sugar coating it: It was a terrible report.

However, stocks traded strong on Friday, with the Dow Jones finishing up over 200 points. Broad stock indexes are up 15 to 20 percent from their November lows. How can this be? Well, the stock market is telling us that the economy’s future is a lot brighter than its past. The stock market looks ahead; the employment report looks behind.

This is, in theory, true. Of course, if markets were perfectly forward-looking we wouldn't have bubbles and crashes and such. There's a reason we have terms like "sucker's rallies" and "dead cat bounces".

And a one-day 200-point swing is not much, considering the level of volatility we've seen recently. Stocks soared 425 points the week of January 20th, only to collapse 430 points the following week. If the Dow falls 300 on Monday, do you think Kudlow will immediately take back everything in this column? Already we know that Kudlow is not being serious or scientific.

Mustard seeds planted a while back are now pointing to economic recovery. The huge energy tax cut is one such mustard seed. The related inflation collapse is another.

Not sure why Kudlow likes mustard so much, but this argument is pretty patently false. Those things happened months ago. Kudlow himself declares that investors are forward-looking. So if investors knew those things would end up helping the economy, stocks would have gone up months ago, not last Friday...unless the jobs report somehow gave us some new information that enegry tax cuts or reduced inflation had had some kind of positive impact. Did Friday's report give us any such information? Absolutely not. So this argument is total BS.

Then, of course, the Federal Reserve has been pumping in money to offset credit and asset deflation. The old Milton Friedman M2 money measure has grown by $590 billion since early September for a 20 percent annual rate of increase.

See above argument. Did the employment report give any new information about a positive impact of the money-supply increase? No. So why was Friday's stock rally based on the M2 increase, but not Wednesday's plunge?

So stocks may now be telling us that the gloom-and-doom crowd -- and its pessimistic economic prognostications that cover all of 2009 and in some cases 2010 -- is about to be proven wrong.

This is head-pounding-against-the-wall stupid. Stock markets now are much lower than a year ago. Thus, investors ave lower expectations for our future economic performance than they did a year ago. Why is one day's 200-point swing - a 2.7% change - more important than the 40% loss stocks have taken since their peak?

The commodity markets -- among the first asset sectors to respond to money stimulus -- are stabilizing. Broad commodity indexes are 6 percent or so above their lows. Ditto for energy. The Baltic Dry Index, which measures shipping volume around the world (those commodities are in the cargoes), has mounted a big rally, up almost 100 percent off its bottom. Gold is up more than 20 percent. (Investors call this the “reflation” trade.) And long-term Treasury rates have moved from 2 percent to around 3 percent in the 10-year market, another sign that the future economy will be stronger than the past.

I am running out of synonyms for "nonsense." All of the changes Kudlow cites are good if they are effects of output changes and bad if they are causes of output changes. Rising commodity and shipping prices choke trade. Rising gold reflects reduced confidence n major world currencies. Rising Treasury rates indicate an increased cost of borrowing. In other words, these could just as easily be signs of the apocalypse as of recorvery, and Kudlow does not know which they are. Period.

[A]s Art Laffer has taught us all, taxes also matter -- a lot. In fact, the only real stimulative part of the behemoth stimulus package is the simple fact that marginal tax rates will not be raised.

The nonsense here is obvious even to someone who knows nothing about economics. If tax rates are permanently cut every time there is a recession, but not raised during expansions, eventually you will hit a 0% tax rate, and run out of ammo. Brilliant plan.

So cheaper energy, bundles of new money creation, zero inflation, and no tax hikes could very well combine to produce a stronger economy as the year progresses -- to the great surprise of the majority of economic pundits. That may well be the message of Friday’s stock market rally, which shrugged off yesterday’s painful slide in jobs.

Or the message may be the complete opposite. Kudlow is casting bones, reading tea leaves, doing a witch-doctor dance. Or, rather, that's what he's pretending to do; actually he's assuming that Republican economic policies are good, and interpreting ambiguous facts as evidence of that. He is the Republicans' court charlatan - a pet soothsayer who is paid well to predict victory before the troops march out.

He is a pathetic hack, and his continued success in pretending to know something about economics speaks volumes about the sorry state of the economics profession itself.