Self Awareness

Brian Wesbury and Robert Stein have a post at Forbes.com about a recent inteview with Gary Becker in the Wall Street Journal. Here’s a link to the Becker interview if you want to read it. Becker is a free market guy and its an interesting interview. Wesbury and Stein’s article is basically a nothing; Becker is positive and they are too which isn’t much of a surprise since Wesbury has been bullish as long as I’ve known him. That doesn’t make him a bad economist by the way; I read his commentary regularly and get good stuff from it. But it is hard to describe him as anything but a perma bull.

Anyway, what is interesting is not the article itself but a comment by Mark Sadowski:

Wesbury and Stein are proof of recent research that shows that evidence will always be interpreted as supporting one’s preexisting belief system.

Changing MTM accomplished nothing. It was supposed to free up lending. However according to the Federal Reserve Flow of Funds reports net lending declined still further following the change in MTM.

There was one other thing that happened in March 2009. The discretionary fiscal stimulus went into effect. We know it worked because the private forecasting models of Goldman Sachs, J.P. Morgan Chase, Macroeconomic Advisors, IHS/ Global Insight, Moody’s economy.com etc. all have credited the recovery to it. (emphasis added)

Wesbury and Stein not only have built an MTM castle in the sky, they’ve moved in.

I run across Sadowski all the time on economics blogs and he’s a nice enough fellow. We don’t agree on a lot but he’s middle of the road enough that he doesn’t make me spit. I think he was once a democrat but now considers himself independent. I’d say he’s a bit left of center. As for his economics, well the above comment kind of lets the cat out of the bag. As he says, recent research shows that evidence will be interpreted as supporting one’s own preexisting belief system. If you believe that Keyensian stimulus works, then a bunch of supporting models from Wall Street forecasters is enough to “prove” that the stimulus worked. Sadowski proves his own point better than Wesbury and Stein.

I don’t mean to pick on Mr. Sadowski – as I said he’s a nice enough guy – but I do want to make the point he was trying to make. We have to be careful when viewing the markets and the economy because it is easy – very easy – to let our personal biases cloud our analysis. I know a lot of people who over the last year have let their political views affect their view of the markets and the economy. I don’t put any faith in government spending as stimulus but I didn’t let that stop me from calling a bottom in the economy – and the markets – last March. I know a lot of people who ignored the monetary factors and the natural resiliency of capitalist systems that I relied on to make that call because they were trying to score political points. In a way they wanted the stimulus plan to fail because they wanted President Obama to fail. 

The economy is recovering although there is still a long way to go. I don’t believe as Mr. Sadowski does that it is recovering because of the stimulus package. The only part of the stimulus that has been effective to any degree in my opinion are the tax credits and other income supports which may have marginally raised disposable income. I believe the recovery is more creditable to the Fed’s credit easing program and the normal recovery process that is inherent to capitalist systems. But it is a matter of debate and neither Mr. Sadowski nor I can prove our side of the argument (although if he happens to show up here I’m sure he’ll try like hell). But the way this works is that if the economy is still recovering through the summer and into the fall midterm elections, the Democrats will take credit. It may or may not be true but it doesn’t matter because most people see things in simple terms. The economy is recovering, Democrats are in charge, they get the credit. That’s the way it goes and the same thing happens when Republicans are in charge. The President – and to a lesser degree the party in control of Congress – owns the economy good or bad.  

For now I am still bullish on the economy and stocks. I have long term concerns but at least over the near term, the economic momentum seems likely to continue. The fact that I don’t agree with the administration on some policies is irrelevant. As an investor I have to work with the way things are, not the way I wish they were. I’m not perfect and I have my biases like anyone else but I try to analyze things as honestly as I can. Ultimately, I am judged by results so I’ll let my record speak.

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