I saw this article going viral How does the economy work? A new Fed paper suggests nobody really knows
It’s not that hard to understand: an economy is a set of inputs: government spending, personal consumption, innovation/technology, private investment, etc. and then based on these inputs the economy either grows or shrinks, and then this can be indexed to some baseline such as CPI. The understanding of this stuff dates back to the 50s. Just because recessions cannot be predicted does not mean the economy is a black box.
For example, a major variable is technology. This is important because technology allows an economy to grow and living standards to rise (specifically, per capita wealth) without having to grow the population or having to create new businesses, by raising productivity. That’s what happened after Covid: Google, Tesla, Amazon, Walmart and other major tech and retail firms boosted productivity, hence more GDP growth even if many businesses closed. Technology is also why the U.S. economy pulled way ahead of the rest of the world over the past few decades and even as far back as the past half century. The divergence began after WW2, with the rise of IBM, the space race, mainframes and microprocessors, and the personal computer industry, in which the U.S. all dominated. Then by the early ’90s with the world wide web, although not technically developed in the U.S., the U.S. seized on it for commercial purposes. All of the largest tech, retail, and financial firms in the world originated from the U.S.
The role of government spending is harder to quantify. Whether government spending can create ‘net wealth’ is a matter of debate. Government spending goes into the private sector, but the question is if the interest paid on the debt is still a net-loss after accounting for private sector growth. I believe it can in some instances, if the capital is well allocated to high-ROI industries such as tech. The current approach of funding endless Covis stimulus and infrastructure boondoggles, seems wrongheaded.
Even if macroeconomics is hard to fully understand conceptually, in terms of outcomes, to the contrary, this stuff is ridiculously easy to predict.
For example, in June 2021 I predicted a v-shaped recovery in rent and home prices despite Covid:
-Rising home prices. Home prices, especially in high-income suburban areas such as the Bay Area, surged after Covid, again, continuing the pre-Covid trend of rising home prices in spite of the media’s insistence since 2012-2013 of housing being a bubble. Same for rent. I predict that any purported decline of rent prices in SF and NYC will be short-lived. Already, rents in major metro areas are rising again.
And in October 2020 as well:
Supposedly, Covid has hurt Airbnb and the rental market, but I predict it will be temporary and things will quickly go back to how they were pre-Covid. There is simply too much demand and not enough supply in many of these urban areas.
Fast-forward to September and home prices are higher than ever:
Same for New York City rent prices, which recovered all of pandemic losses and then some:
Landlords are jacking up rents — often by 50, 60 or 70% — on tenants who locked in deals last year when prices were in freefall. Some renters are being forced to move at a time when the market is roaring back to nearly pre-pandemic levels. And concessions are slipping away.
And elsewhere too:
After falling for much of 2020, rents are now rising much faster than before the pandemic. Since January, the national median rent has increased by 16.4%. From 2017 to 2019, a more typical rent increase during those months was 3.4%, according to the report.
In September, rents remained below pre-pandemic levels in just five large cities: San Francisco, Oakland and San Jose, California, as well as Minneapolis and Washington, DC.
The housing shortage situation has been debated to death online. The general agreement is that it does not cost much to build a home, but the biggest cost and restriction is the land. As long as the usual factors remain in place: cheap mortgages, strong economic growth, scarcity, demand, etc.–there is no reason to expect things to change. The notion that Covid would suddenly make housing and rent affordable when the underlying structural factors were still intact, was laughable.
And then second, Tesla reported yet another quarter of blowout deliveries.
Despite ongoing supply chain woes, Tesla’s delivery numbers were all fine and dandy in the third quarter of 2021. This weekend, the automaker announced it delivered a total of 241,300 cars from July through September, a new record for the company. It surpassed Q2’s number, its previous record, when Tesla said it delivered 201,250 vehicles.
I guess that huge rally in 2020, which all the ‘experts’ dismissed as a bubble, in hindsight was not so irrational after all. I correctly predicted Tesla stock would go higher and the gains would hold. It’s already at almost $800, on its way to being worth in excess of a trillion dollars.
These aren’t macro predictions in the sense of of GDP, but I correctly predicted those too.
The media is like “omg this stuff is so hard to understand…what do we do? It’s hopeless!!” We’re not talking about understanding the merger of a binary system of black holes a million light years away, but just simple trends and inputs. Although recessions are hard, if not impossible, to predict, understanding why recessions happen or how an economy grows is well understood, and not outside of the grasp of average people. These pundits are trying to turn economics into something of a priesthood or religion, in which only the initiated can understand it. It does not have to be this way.