Economic Cheerleaders

Harvey S. Rosen, chairman of President Bush’s Council of Economic Advisers, has an Op-Ed in today’s WSJ. It is either appalling or amusing, depending upon whether you are a “glass half-full or half-empty” type of person.

As readers of this site are well aware, I try to be agnostic, flipping Bullish or Bearish repeatedly — and profitably — as conditions warrant. But I was astonished to read the Princeton professor exhorting readers how terrific things are economically (really), while simultaneously admonishing us to "focus on the long term."

So I decided to do just that. Let’s have a look at what Chairman Rosen has to say, while at the same time remaining cognizant of, as he calls it, "the long term."

A review of his applauding review of the economy reveals an extreme degree of disingenuousness, all shrouded in feel good econo-speak:

"What a difference a month makes. Some pundits were sounding pretty gloomy after a few soft economic data reports about March. But the recent stream of good economic news should lift even the most dismal of spirits: The economy created 274,000 new jobs in April, 100,000 more than expected, and the preceding two months were revised upward by nearly 100,000 as well. Retail sales grew 1.4% in April, bouncing back from a soggy March."

Lets begin with the NFP report for April: As we have discussed several times since its release, this was an extremely “massageddata point. That the CEA Chair would trumpet this number is gravely disappointing.

The cynicism continues:

"The March trade deficit came in $6 billion less than expected. And revisions to all these data show that earlier months were stronger than originally reported. Data aficionados have been running to their models to see what these reports imply about the strength of the economy. Already, there is speculation that GDP growth in the first quarter may have been substantially stronger than the solid 3.1% originally reported."

There is no speculation; The trade deficit data figures prominently into the GDP calculation. This is somehow overlooked in this paragraph. When the next GDP data gets released — likely in the 3.8 – 4.0% — we should not be surprised at the next cheering missive from Mr. Rosen — “Hey! I told you so!” Of course, omitted from this paragraph is that a decrease in imports due to slackening demand is hardly the sign or a robust economy.

The bounce-back in recent data exemplifies that we shouldn’t overreact to individual reports of economic data — or even to a full month of data. The economy has a way of making anyone who puts too much emphasis on a single month look foolish. We should look at the longer record for an accurate view of the state of the economy.

Does anyone else find it ironic when someone warns against a particular methodology error, as they commit that same error themselves? Lord, its the first sentence of the piece: “What a difference a month makes.” Do not read too much into any one data-point, we are advised, as the April’s NFP is then promptly read too much into it.


I do not recall the source of the followng quote, but its apropos: "I cannot hear what you are saying when what you are doing is speaking so loudly."

Back to the text:

That record is strong. Over the past year, the economy grew 3.6%, above historical growth rates, and productivity advanced a robust 2.5%. Our growth and productivity are the envy of the developed world. At the same time, more Americans are finding jobs. The economy added 2.2 million jobs in the last 12 months, bringing total job gains to 3.5 million since the job market turned around in May 2003. The unemployment rate is down to 5.2%, well below the averages of the ’70s, ’80s and ’90s.

1. The economy has been growing, but that growth has been decelerating post 2003 stimulus. We see this in attenuating GDP Data as well as year over year corporate earnings for the S&P 500.

2. I thought China’s growth, which has slowed to 8-9% GDP, down from a red hot 15% — some 3 to 4 times our own — was the envy of the world.

We are doing marginally better than Europe and Japan, but no way near China, Brazil, India, Singapore, Taiwan, South Korea (and much of Eastern Asia). In other words, in a race, we can beat the slowest kids in the class . . . That’s hardly cause for celebration.

3. The economy has indeed added more jobs recently. Unfortunately, they are disproportionately not private sector jobs, but all too many are courtesy of Uncle Sam. And the newly created private sector jobs that have been created are disproportionately McJobs (or Wal-Jobs) that pay less and have weaker benefits then the lost jobs they replace.

As to the low unemployment rate, that’s a function of people leaving the labor force — not more people landing work. By other measures, its much worse than that.

No matter how its spun, this post recession period has created less jobs than any prior post WWII recovery.


Consumers are doing well: Their spending has increased 3.6% over the last year. Businesses are doing well: Investment in equipment and software has increased more than 14% over the last year.

Merely looking at increases in consumer spending — and then declaring they are doing well — is absurd beyond words. One would think that a credible approach would include looking at whether their personal income has risen (not very much), including the real, after inflation dollars (even worse — its been rapidly falling). Then we’d look at their savings rate (non-existent) and examine other cost’s beyond what’s measured in CPI — things like education and health care (both skyrocketing). Finally, we’d review their debt ratio to income — the WSJ did this yesterday, and found they it is at all time and unsustainable highs. 

Doing well defined as spending more despite falling real incomes? Perhaps in a fool’s eye. Is it any wonder the Federal Deficit is as large as it is? I guess the Federal government is "doing well" also.

There’s more:

Even the federal government is doing better: Tax revenues are 14% above the same period in the last fiscal year. Where did this strength come from? Never underestimate our market system, which allows workers and entrepreneurs to realize their potential. Plus the combination of tax relief and the Fed’s interest rate cuts helped our economy recover from recession, corporate scandals, terrorism, and war.

The comparison is easy: 2004 tax revenues, paid in 2005, were are all post stimulus. The comparable Tax period last year (calendar year 2004) included the first half of 2003, which was pre-war, pre-stimulus — and totally anemic. That makes for a very easy compare and contrast. The same data point next year will look at 2 post stimulus periods. That will provide a clearer picture as to how well we are really doing. 

And, note that 2004 had lots of Real Estate activity, thanks to half century low rates (more policy stimulus). If the Federal Tax revenues are anything like NYC’s, they have been going up thanks to an enormous surge in real estate activity. Thanks to these Ultra low rates, Home, Coop and Condo prices are at record highs; Real estate transactions have been taking place at a torrid, record-setting pace. Home Equity Loan Cash Outs (HELCOs) saw consumers treating their homes like ATM machines. Its no surprise that tax receipts are up dramatically across the country.  Recall that we saw a similar phenomenon in the late 1990s, when the stock bubble also generated a spike in tax revenues. You recall how that ended.

“Over the last year, the economy has clearly shifted from a policy-supported recovery to a self-sustaining expansion.”

The first half of that statement is honest, at least. Ever since the market crashed in 2,000, we have been in a post-bubble environment. That typically comes with lots of negatives. A “policy supported recovery” is a polite way to say government managed stimulus: tax cuts, deficit spending, increased money supply, favorable accounting changes (ADCS), ultra low interest rate, capital gains cuts, new dividend tax rate. This is without a doubt the most manipulated economy in recent history.  That’s the “policy-supported recovery” part. Whether we have "successfully transitioned to a self-sustaining expansion" remains to be seen.

"These gains are welcome, but no reason to become complacent. We still have work to do to improve our long-term economic prospects."

The understatement of the year . . .

"Fiscal policy is another opportunity. By controlling spending and keeping taxes low, we can improve growth and fiscal health. Congress has adopted two consecutive budgets that increase discretionary spending at or below inflation."

It sounds good that spending is growing slower than inflation — until you realize that inflation is the strongest its been in decades. And two consecutive years — is that supposed to be some kind of positive?

"And for the first time since 1997, the budget includes savings for entitlement spending as well. Policy makers now need to follow through on these initial steps and take the much bigger step of permanently fixing Social Security’s funding imbalance."

And yet we still do not see even a glimmer of recognition of the more pressing policy issue of Medicaid/Medicare. If Social Security is alleged to be a crisis, going cash flow negative in 32 years, what the hell would you call Medicaid? That’s going into the red in a little more than decade. Which is the more pressing “crisis.” And this is after GM was cut to junk status, in large part based on its legacy obligations for health care.

"So here’s a little insider information from an economist. Economists say many things about short-term movements in the economy, and pundits will tell you even more. March’s economic data were weaker than expected; then the data were stronger than expected for April; and there’s always a chance that this month’s forecasts will be off again. The long term, as always, is the smartest focus."

Yes, let’s think about the long term. About the structural imbalances, the Federal Deficit, the massive debt build up, the current account deficit. The fact that 50% of U.S. Treasuries are now in the hands of foreign holders. The increasingly expensive (and over-stretched) military. The reluctance of Corporate America to aggressively hire or make CapEx investments.


I cannot claim any particular insight into Mr. Rosen personally. His position, however, puts him in the running for Cheerleader-in-Chief — neck and neck with Federal Reserve Chairman Alan Greenspan for the title. Why? A review of his commentary reveals him to be either an adulator or a propagandist. After reading — and rereading — his economic commentary, I cannot
determine which adjective suits him best. (There’s a possibility that
both do). Regardless, neither djective is your first choice in the Council of Economic Advisers’ Chairman.

Its a shame that our national economic policy making has been reduced to waving pom-poms and cheering rah-rahs for the crowd. The heavy lifting — fiscal discipline, responsible spending, intelligent planning, making difficult choices — has been found nowhere in recent policy decisions.

Indeed, the dictionary definition of a cheerleader is “one who expresses or promotes thoughtless praise.” That seems to be the job description for what used to be important economic policy appointments: Treasury Secretary, Chair of the CEA, even Federal Reserve Chair.

Then again, we shouldn’t be all that surprised. Wasn’t the President himself a cheerleader at Yale?


Data Bait
Harvey S. Rosen
WSJ, May 18, 2005; Page A14,,SB111637721128436457,00.html

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What's been said:

Discussions found on the web:
  1. Josh Silverman commented on May 18


    Even that is an exaggeration — only discretionary spending ex-defense and homeland security is growing slower than inflation. Too bad the real (unmassaged) number is not as promising.

  2. Josh Silverman commented on May 18

    The prior comment was intended to quote ” spending is growing slower than inflation”…not sure why it didn’t work.

  3. tim commented on May 18


    “Our growth and productivity are the envy of the developed world.”


    “We are doing marginally better than Europe and Japan, but no way near China, Brazil, India, Singapore, Taiwan, South Korea…”

    Barry, come on. Rosen says that our economy is growing faster than other DEVELOPED countries. To dispute that claim, you cite China, Brazil, India? It’s a lot easier to grow quickly when your base is tiny (India) or the government literally makes up whatever number they want (China). This is a completely ridiculous comparison.

    But the more important point I want to make is that while I respect your insight and your experience, your tone has become completely unbearable. For the last several months, the hubris in your writing has increased, to the point where every point you make is written in words expressing infallability. I think you could use a little dose of humility. Luckily, the markets tend to correct that eventually.

    The American economy has outperformed the rest of the world for over 200 years now. There were many, many things along the way to complain about. While nothing is assured, I would rather bet on continued outperformance in the future.

  4. Barry Ritholtz commented on May 18

    Tim is correct — Rosen did write “Our growth and productivity are the envy of the developed world”

    But is that comparison you really want to make? Sure, I could just as easily have compared the United States to the socialists in Europe, whose economic legacy costs and societal obligations make GM’s look like a picnic. They have done a nice job mishandling their own economies — though not nearly as badly as the performance that Japan has shown, as they come off a 15 year recession following their stock AND real estate collapse, exascerbated by an even more incompetant central bank.

    Is that who you really think we are competing with? Wake up Tim, its 2005, and Japan and Europe are not what should be concerning us. I compared us to rapidly growing economies — the real competition in the world — not the lame, trailing, weak countries of yester year. (Except the UK, who seem to be kicking our asses economically).

    As to my tone, I beg to differ. Not just because I “Expect to Be Wrong” ( — but because I am willing to admit when I am. Today’s “Line is the Sand has been crossed” ( is a good example of that.

    Lastly, while the American economy has arguably outperformed everything else for 200 years — certainly, for the past 60 years — can you imagine a similar conversation taking place in Great Britain, say, 250 years ago? Compare ourselves, the great civilized British Empire, with some rogue start up nation across the Atlantic?!? Are you daft man? In polite companies, we only compare the United Kingdom with the developed countries of Western Europe — not those savages in America.

    “Howd that end,” he asked, mustering all the unbearable hubris and insufferable infallability he could.

  5. tim commented on May 18

    Barry, I appreciate the response. I want to make sure you know that I was not trying to insult you, just to point out that it seems you have been using much stronger language in your various writings lately. For example, from above:

    “Doing well? Perhaps in a fool’s eye.”

    Reasonable people can disagree, but they needn’t assume foolishness is what led somebody else to reach their conclusions.

    As to comparisons between national economies, I certainly agree that Japan/France/Germany are not examples to be followed. I also completely agree that China will be quite formidable competition to the USA economically, politically, and militarily over the coming decades. But it is rather one-sided to point out all of the potential problems that the USA faces, without pointing out that likely none of the banks in China have clean balance sheets. So, time will tell, but I just try to look at every angle I can.

    Finally, I am a long-time subscriber to RealMoney, so I have certainly noticed your recent acknowledgements of changes to your outlook. See, because you are quite an experienced market participant, I know that you must be very humble, or else you would have lost everything. The market punishes hubris above all else.

    Again, thanks for the response, and keep challenging my viewpoint, as well as everybody else.

  6. Progressive Pilgrim Cafe commented on May 18

    Quotes of the Day

    I cannot hear what you are saying, when what you are doing is speaking so loudly.

    Compare and contrast that with:

    Preach the Gospel at all times, and, if necessary, use words.

Read this next.

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