Scotland is set to vote next week on independence from the United Kingdom and a new poll gives the pro-independence supporters a small edge for the first time. What’s interesting, and perhaps tragic, about the growing preference for breaking free of Britain is the apparent dismissal of the economic consequences that may arise from independence. The macro risks are quite stark. In fact, we’ve had a real-world test that’s ongoing of just how bad things can get when a small economy is on its own with fiscal matters but remains tethered to a currency that’s controlled by another government. This could work out, but just ask officials in Spain or Greece–or the (unemployed) man on the street, for that matter–about the downside to a shared currency while shouldering any fiscal fallout and you’ll get an earful.
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● Economics: The User’s Guide
By Ha-Joon Chang
Review via The Guardian
It is a mark of where we are in our political discourse that even to say “neoclassical economics is not the only school” seems radical. This is where Ha-Joon Chang starts, in a book that is more sober and less effervescent than his bestselling 23 Things They Don’t Tell You About Capitalism, but is just as page-turning.
Since no single economic theory has beaten the others, it follows, Chang writes, that there is no objective truth on which every economist is agreed. Economics can never be a science in the way that physics is; it cannot reach a consensus on its fundamental questions, let alone what the answers are. This isn’t some extended handwringing, a trashing of his discipline dressed up as a mea culpa. Chang isn’t looking for a formula: fundamentally, he argues, economics is politics. As such, we shouldn’t be thinking in terms of an ideal answer – the discussion should never close.
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Ouch! That stings. The private sector created substantially fewer jobs in August than expected, according to this morning’s monthly update from the US Labor Department. Private payrolls increased 134,000 last month, far below the consensus forecast that anticipated a gain of 220,000, according to Econoday.com’s estimate. Even worse, the August rise is the weakest so far this year. Compared with July’s 213,000 gain, the tepid advance in August looks troubling. But there are several reasons for reserving judgment on whether today’s release warrants a radical downsizing of expectations.
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There’s a spirited debate raging among economists about the long-run potential for growth in the US economy. Among those who expect that the future will suffer a lesser rate of growth is Robert Gordon, an economics professor at Northwestern and a member of the Business Cycle Dating Committee at the National Bureau of Research. In a series of papers recently (here, for instance), he argues that a number of trends (demographics, wealth inequality, falling educational results, rising debt levels) will squeeze the average annual growth rate of GDP in the decades ahead.
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Private nonfarm payrolls in the US are projected to increase 230,000 (seasonally adjusted) in tomorrow’s August update from the Labor Department, according to The Capital Spectator’s median econometric point forecast. The expected monthly rise is moderately higher than the previously reported increase of 198,000 for July.
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Today’s data updates on the labor market continue to inspire confidence that the US economy will expand at a moderate pace in the foreseeable future. The ADP Employment Report for August was a bit softer than the crowd was expecting for the monthly comparison, but the year-over-year growth trend held steady last month in the low 2%-plus range. Meanwhile, today’s weekly update on new filings for unemployment benefits shows that initial claims remain close to a post-recession low. In short, the latest numbers suggest that the economy will continue to mint jobs at a healthy pace.
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There’s a growing chorus of warnings from the punditocracy that the US stock market is at risk of correcting. It’s easy to understand what’s motivating the advice: a powerful bull market that’s been pushing higher for five years with few sustained declines of late. The market’s also fairly valued, perhaps over-valued to a degree. It stands to reason that the longer the market rises, the bigger the risk that equities may suffer a sizable setback. Adding to the potential for trouble: various geopolitical risks (think Ukraine and the ISIS threat in Iraq) and a new phase of macro weakness in Europe. No one should dismiss these factors, but for the moment the US market draws strength from a fundamental source: economic growth.
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The August update shows a moderate increase in the long-run expected risk premium for the Global Market Index (GMI), an unmanaged, market-value weighted mix of all the major asset classes. GMI is projected to earn an annualized 4.7% return over the “risk-free” rate. That’s up from last month’s 3.9% estimate.
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Private nonfarm payrolls in the US are projected to rise 223,000 (seasonally adjusted) in tomorrow’s August update of the ADP Employment Report, based on The Capital Spectator’s median econometric point forecast. The expected gain is slightly higher than the previously reported increase for July.
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Most markets around the globe bounced back in August after July’s drubbing. Although there’s still plenty of risk percolating around the world, there were few signs that investors were becoming cautious last month.
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