Posted by: Marshall Sponder | February 16, 2008

Defining a problem – The Economy – Paul Krugman

I’m really liking that Paul Krugman has a blog now and posts to it a couple of times a day – I think this is a real plus and he puts in a lot more stuff that he can fit into 2 Op Ed’s at the New York Times each week.

I’m referring to his post today on Defining the macroeconomic problem where Paul Krugman shows a chart (Web Analysts love charts too):

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Deviations from the norm

“…Basically, I’d say, the problem is twofold. First, in the mid-00s the U.S. economy got badly unbalanced — too much dependence on housing and housing-inflated consumer spending, too big a trade deficit. This figure shows “deviations” in share of GDP — it’s the difference, in percentage points of GDP, between 2007 and average 1980-2000 spending on consumption (C), nonresidential investment (NR), residential investment (R), and net exports (NX). Notice that even with the housing collapse in progress, residential investment was still running a bit high — this year it will surely be well below “normal.” But the main thing at this point is high consumption offset by a high trade deficit.”

“…Second, in the process we also got a credit bubble that’s now bursting, and threatening to take down spending that wasn’t all that high to begin with — like business investment.

What we want, and will eventually get, is a rebalancing: smaller trade deficits, consumer spending more in line with income, more normal housing spending. The trouble is in getting there.

Paul Krugman is doing exactly what Web Analysts should do – get an overall understanding of the problem as a hypothesis, and then finds evidence to support his ideas.

But his ideas are also good, and give us a framework for which to evaluate which Presidential candidate would be better for the Economy because Krugman defined, perhaps for the first time, the dynamics of the current economic crisis we face.

If we accept Paul Krugman’s understanding of what the current economic problems facing the United States are today – which party and which candidate is most able to deal with this problem?

What would be needed is to create enough public spending to stimulate the economy enough to make up the difference between the housing bubble deflating along with the Credit Bubble blowing up.

We need more imports and more investment but the problem is – we’re running out of money to spend because a large part of it was created by the housing bubble.

So the government – in it’s real function – needs to help make up the difference – and for that we need more than tax breaks because many of us don’t have any money left period, so a tax break doesn’t actually help that much, and my actually hurt.

Therefore, if you accept the model Krugman puts forth – forget the Republicans (though McCain may end up winning, believe it or not – if the Iraq War is the issue as he’s seen as a War Hero and is not “George W. Bush“).

Now we’re down to Obama and Hillary – which one would be better for this situation that we’re in now? Forget about ideology – forget about which one makes you feel better to listen to – look at the record.

Well, when look at Barack Obama, he doesn’t really have much of a record and almost no real experience but he’s more likable and he seems open to new ideas which means he doesn’t have that many or any of his own.

But …. he’s also boxing himself in with promises he can’t keep if he could actually confront the issues with more public spending.

Hillary Clinton looks to be the better candidate for the Economy – but she’s less likable – less of a personality cult figure – I guess.

The problem is that Americans tend to vote on emotional gut feeling more than pragmatism – look what happened 8 years ago – George W. Bush really didn’t have much experience either – but he appeared to be more like-able and he took positions he could afford to take because he had not really done that much as Texas Governor.

Look where that got us.

Sure, the last two presidential elections were manipulated – voting processes in Florida and Ohio were tampered with – I do believe that – but even so, the country was fairly closely split – but in both cases, they were trying to reject Bush – still, somehow, he’d get re-elected.

But the first time, in 2000, voters were looking at the fact he had not really had any experience (that he wasn’t Bill Clinton) as a plus – but is it?

And now, Barack Obama is generating a personality cult around him that is similar, to a certain extent, to the personality cult that people felt about George W. Bush.  After all, wasn’t it his wife that said that she’d question voting for Hillary Clinton if she was the Democratic Nominee?

That’s not to say that Barack Obama would not be vastly better than Bush the Second –  but the fact of the matter is we’re selecting candidates based on emotion when we really should be looking at models like what Paul Krugman has put before us and judging them by what they commit to do about it – in light of understanding the issues.

McCain – forget it – he doesn’t know or care much about Economics but he’d probably listen to more ideas than Bush ever did.

Barack Obama – no experience – total liability – very like-able – but it will depend more on who he appoints to his cabinet and how much he’s willing to expend political capital once he’s elected.

Hillary Clinton – probably the best of the three – but comes with a host of other baggage and problems from the past.

But the right way to look at this is by understanding the economic model of what is happening to the country and world and then finding the candidates and positions that best address it (if any of them do) – and Clinton, I think, would be better to support and vote for if you accept Krugman’s model.

That’s all I have to say about this for now.

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Responses

  1. Great post, Marshall! As a Krugman fan and part-time web analyst, it’s good to see you tying the two worlds together. I don’t know that I entirely support your conclusion…but that would make for a LONG comment.

    So, I’ll just pick a little nit with your statement that “Paul Krugman is doing exactly what Web Analysts should do – get an overall understanding of the problem as a hypothesis, and then finds evidence to support his ideas.”

    Specifically, I’d be in wholehearted agreement if you replace “support” with “test.” The effective Web Analyst (and economist) needs to maintain a level of objectivity. And, in my experience, actually be as happy to disprove a hypothesis and fail to disprove it. Otherwise, you’re teetering on the brink of the cliche: “You can make the data say whatever you want it to.”

    In the limited time that I’ve started to get to know you, I’m pretty sure this was simply an unfortunate word choice and nothing more!

  2. Agreed Tim, maybe I should point out objectivity more.

    One thing I’ll say – at “work” my role is usually more defined – and it’s often been my role to figure out a hypothesis from what they want to know and present it to them along with the data.

    With my own clients, I’m often left to create both the hypothesis and it’s meaning all on my own – with little information outside of that.

    As an example of the first case, when I was at IBM.com I supported the Virtual Business Center in Second Life and created metrics around that. One thing IBM wanted to know is how effective “punch through” from images presented in the VBC to the IBM.com site were.

    Jared and my hypothesis was that Punch Through would be a small amount of traffic with no conversions. IBM was hoping they could sell more by generating traffic in the virtual world that carried over to the 2D site.

    The results – for the first couple of months – hardly anyone punched through to the site from the VBC and when they did, they left after viewing the page – it took more than 2 months to get someone who’d even start filling out a lead gen form. The data showed, against my employers hope, that punch through to the web site didn’t work well.

    In the second case, I’m often asked to work with clients who have no real idea of what they want – in that case, objectivity takes a different form – it has more to do with what kind of ideas I come up to prove and disprove, in the first place. From that standpoint, the word “objective” doesn’t really come into the top of my mind – since I’m just starting somewhere and working outward – coming to some kind of answer on what this client needs to do.

    Good point – objectivity needs to be part of the process – and if we were testing Paul Krugman’s ideas – we’d need to see if the data supported his conclusion (and which candidate is closer to coming up with a solution that works – objectively).

    Thanks again,
    Marshall


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