The winter solstice marks the end of dark’s dominion. Each day now brings more sunlight and the end of the calendar year promises a fresh start with the new.
The cold will remain, of course, and it is the time of year when people tend to gather together around a heat source and discuss important things like sports and weather.
The practice was almost an institution at one time in America, when rural residents would gather around the woodstove in the general store and talk, often, about the national pastime, baseball. Memorialized in a Norman Rockwell painting, sports writers called it the “hot stove league.” It lives on to this day, expanded to include other sports and with the Internet and talk radio substituting for the woodstove.
Economists have their own hot stove league, including the Internet and even, to a certain extent, talk radio, although safety authorities might warn that too much economics on car radios could cause drivers to doze off.
The featured event of economists’ hot stove league, though, is not an Internet chat or webinar but a face-time event: the annual meeting of the American Economic Association. Previously held between Christmas and New Year’s, it is now convened in early January during the nameless cold and gloomy period between academic quarters.
This season’s meeting is scheduled for Jan. 3-5 in Philadelphia, and there will be no shortage of important things to talk about. At the moment, economics has more unresolved issues than the New York Yankees, Seattle Mariners, and the Dallas Cowboys combined.
At the top of that list is — no surprise here — money.
The economy seems to be gaining strength gradually after all these years, and there are some encouraging signs in the employment picture. To confirm this optimistic view, the Federal Reserve has announced that it will be scaling back its Treasury debt purchases.
That all sounds wonderful, but there is one little thing to be concerned about. The Fed’s debt purchase program had a whopper of a side effect: huge bank reserves, unspent money.
At the present time, banks have nearly $2.4 trillion on deposit with the Federal Reserve that they could withdraw and lend to businesses and consumers at any time.This is an unprecedented amount and represents a huge financial system overhang that is unstable and capable of setting off inflation that could sabotage our economic recovery.
The Federal Reserve believes that this situation can be unwound gradually under control as the economy recovers, and that it has the tools needed to do this. Others are not so sure. We have never had to deal with anything of this magnitude before. In any case, it there is no doubt that it will be talked about – probably with the intensity that surrounds A-Rod’s drug suspension battle, Robinson Cano’s budget-eating contract with the M’s, or Tony Romo’s effectiveness.
Economists are already debating whether the slow job growth we’ve experienced shows the limitations of monetary policy or is caused by other factors. One hot stove topic that is getting interesting about this is something called “statistical drift,” the tendency of familiar economic statistics to drift away from what they were originally designed to measure and become less useful.
The two most prominent examples of this are the financial market statistics such as the Dow Jones Industrial Average and the unemployment rate.
From an economics perspective it has become extremely difficult to define the relationship between the financial markets and the real economy, the link between Wall Street and Main Street. Stock and bond prices, as John Maynard Keynes pointed out, are based on expectations more than past behavior, but the performance of the market has seemed increasingly distant from the reality of the economy. This allows plenty of room for hot stove disagreements about what an “efficient market” means in terms of factual information shared and absorbed by participants.
The unemployment rate has lost a considerable amount of its meaning and relevance during this recession and recovery. Structural factors such as long-term unemployment, workplace skills mismatches and workforce participation continue to color the unemployment picture so much that the familiar and straightforward “unemployment rate” no longer tells us what we need to know.
Instead the monthly jobs report has become a sort of contemporary art exhibit where the key to understanding the meaning is buried in some other statistics that only experts and insiders seem to know how to interpret. As a result, the monthly report has become more political rhetoric than reality.
All of this makes for great hot stove talk, of course, and it says a lot about economists that they are actually looking forward to it. Happy New Year.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.