Predictions for 2011

Part 1:  They told you so!

Last summer the economic recovery was clearly going nowhere.  I argued that monetary stimulus was our only hope.  In September and October there were a series of speeches by top Fed officials that made it seem increasingly likely that monetary stimulus would be forthcoming.  It didn’t happen in September, partly because two of Obama’s appointees hadn’t been seated yet.  And that was because he waited 15 months before even nominating them.  And that’s because almost no liberal politician, advisor, or pundit was telling him in early 2009 how absolutely important it was to get his own people onto the board.  And Obama doesn’t read any quasi-monetarist blogs.

The Fed didn’t do all that was needed, but what they did do had a significant effect on the markets.  And now we are already seeing the results:

Faster growth in retail sales.

Much stronger auto sales.

Much stronger service sector.

Even an uptick in construction.

Then there’s the ADP jobs number.  Last summer we were looking at 2% to 2.5% real growth in 2011.  Now I’m seeing 3.5% to 4.0% forecasts.  The Fed should have done twice as much, pushing growth up to 5.0% to 5.5%.  But this is better than nothing, and better than Dr. Doom at the NYT expected from QE2.  That’s because his model says QE2 will only work if it is believed that it will work, and there is no reason for anyone to believe anything the Fed says; after all, they are conservative central bankers.

Of course I’m exaggerating a bit, Paul Krugman did say QE2 was worth a shot, and I suppose his supporters will claim that the recent positive data reflects the afterglow of the recent fiscal stimulus announcement.   And they’d be right, as the cutting edge research in Keynesian economics suggests that the expansionary effect of fiscal stimulus comes when the policy is announced (actually expected) not when the money is actually spent.  So it could explain the stronger real economy in the last few months of 2010 (although obviously not the strongly positive response of equity markets and TIPS spreads to rumors of QE2.)

I fervently hope Krugman claims that the fiscal stimulus already started working when the deal was announced.  It would be true, and it would also blow out of the water all the excuses made for the fact that fiscal stimulus did not work in the first half of 2009.  Remember all those Keynesians saying “but the money hasn’t yet been spent.”

I’d love to say “I told you so.”  But of course I don’t do forecasts.  All I can say is “they told you so.”  The markets told us QE2 would work somewhat, but not as much as we really needed, and now it seems to be working somewhat, but not as much as we really needed.  My hunch is that the recent upswing in stocks suggests that things were already improving in December, and this will show up in future government data releases with a lag.  The market observes the world in real time; we economists see everything through government statistics with a one month lag, or even longer for GDP.

BTW, I just read that Obama is at over 50% approval.  Two year in office, millions of jobs lost, unemployment has risen from 7.8% to 9.8%, and most people still approve?  I made money betting on him in 2008, maybe I’ll make some more in 2012.  If he’s popular now, just imagine how popular he’ll be in 2012, after a few years of recovery.  Unless the GOP can re-animate the Gipper, I don’t see them having much chance.

Part 2:  Il sorpasso:  It’s closer than you think

In previous posts I’ve argued that China will catch up to the US in GDP much quicker than anyone believes.  Lester Throw says it won’t be until the 22nd century.  Some of the major private sector forecasters have been throwing out numbers like 2030 or 2040.  Recently The Economist did some calculations and came up with 2019, that’s barely 8 years away.  But keep in mind that even this forecast was based on current market prices.  In PPP terms it’s much closer than that, because most estimates show Chinese prices are only half US levels, and they seem even less than that to me.  You can eat out for a third the cost of the US, and grocery prices are also quite low.  A haircut in a nice place in Beijing is $2.25, it’s probably 25 cents in the countryside where half the people live.  If China’s NGDP reaches one half US levels their economy will probably be bigger using any sort of apples for apples comparison.

China’s a hard country to grasp, because it is so diverse.  It needs to get as rich as Mexico to surpass the US.  But Mexico is also quite diverse, so even though I’ve travelled many times to both countries, I have a hard time making mental comparisons.  The backward parts of China seem poorer than the backward parts of Mexico (although it’s been a few years, which is a generation in Chinese terms.)  The cities seem more futuristic. Consider this description of a new rail line about to open in China:

The Beijing-Shanghai High-Speed Railway, also known as the Jinghu High-Speed Railway is a 1,318 kilometres (819 mi) long high-speed railway that will connect two major economic zones in the People’s Republic of China: the Bohai Sea Rim and the Yangtze River Delta. [2] Construction began on April 18, 2008, [3] and a ceremony to mark the completion of track laying was held on November 15, 2010. [1] The line is scheduled to open in October 2011. [1]

The railway line is the first one designed for 380 km/h commercial running. Once in operation, its train services will become the world’s fastest — the position currently occupied by the trains of the Wuhan-Guangzhou line, which opened in December 2009. The non-stop train from Beijing South to Shanghai Hongqiao is expected to finish the 1305 km journey in 3 hours, 58 minutes, [4] averaging 329 km/h.

The Beijing-Shanghai High-Speed Railway Co., Ltd. is in charge of construction. The project is expected to cost 220.9 billion yuan (about $32 billion). An estimated 220,000 passengers are expected to use the trains each day, [2] which is double the current capacity. [5] During peak hours there should be a train every five minutes. [5]1060.6 km, or 80.5% of railway will be laid bridges. There are 244 bridges along the line. The 164-km long Danyang-Kunshan Grand Bridge is the longest bridge in the world. [6], the 113.69-km long viaduct bridge between Langfang and Qingxian is the second longest in the world, and the viaduct between Beijing’s Fourth Ring Road and Langfang is the fifth longest. The line also includes 22 tunnels, totaling 16.1 km. 1196 km of the length is ballastless.

Imagine getting on a train in NYC, and just over 4 hours later arriving in Chicago for lunch.  Do some shopping, have dinner, and return on the same train.  That’s why it’s so hard to get a grasp on the Chinese economy.  Mexico doesn’t have anything like that, indeed Japan and France don’t really have anything as good.  And it’s not just Beijing and Shanghai, other lines are already open, and an entire network is being built connecting all the major cities across China.  As far as the US, we have our 60 mph Acela between NYC and Boston.  And they don’t leave every 5 minutes.

Over the next 5 years there will be a steady increase in articles claiming China is already number one, perhaps starting as soon as next year.  I’ll say 2015.

Part 3:  The coming decade of Hollywood mediocrity

The teens will produce few if any great Hollywood movies.  I know of no young directing talent that can re-energize the industry.  When I think of talented young directors I think of David Lynch, and he’s old.  In the teens no director will produce 4 masterpieces like Coppola did in the 1970s, or the amazing Kubrick films made in the 1960s, or the sublime Hitchcock films of the 50s.  The well has run dry.  Ambitious directors are always looking for new ways of expressing themselves, but the easily accessible commercial techniques have all been tried.  Great films will continue to be made in Taiwan, Thailand, and Turkey, but not in Hollywood.

I guess all art forms split at some point, with the pop art continuing to amuse the masses, and high art becoming increasing esoteric and inaccessible to the average reader/viewer/listener.  But I’m not too discouraged.  There are enough great films around to keep me amused for the rest of my life.  And as Howard Hughes discovered, even Hollywood films are better than real life.  (Anyone for Ice Station Zebra?)

Because of my blog I saw few films last year.  I seem to recall The Prophet (France), Mother (Korea) and Air Doll (Japan) as the standouts.  But no masterpieces.

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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