Monday Smackdown/Hoisted from 2008: Why We Called Donald Luskin "The Stupidest Man Alive"
Cargo-Cult economics. Or perhaps "TV economics". Going through motions sorta-kinda like what economists do without understanding why or what the calculations mean: Hoisted: Donald Luskin: Stupidest Man Alive: I remember a similar mistake from the past: Luskin's attempt to compute the real exchange rate produced this:
on which Luskin commented:
The chart... shows the real exchange rate of the US dollar for a decade before the 1982 memo, and then through the end of the Reagan presidency. It did drift slightly lower for the first couple of years after the memo. But then it took off to new highs—nothing resembling anything like [Summers's and Krugman's late 1982 prediction of] a "return to approximately their historical levels."
in fact the actual real exchange rate was:
(Parenthetically, Paul and Larry look pretty smart and dead on: after one more upward leap in the exchange rate bubble of 1984-85, the real exchange rate did indeed go back to its historical level. There's a reason that people pay attention to them.)
It looks like what Luskin did was to simply not understand what a real exchange rate was.
He took the nominal price of a basket of foreign currencies in nominal dollars and then multiplied that by the U.S. price level—I think.
He should have taken the value of the dollar in terms of foreign countries and then multiplied that by the U.S. and divided that by the average foreign price level.
He thus (i) starts the inverse of what he wants, (ii) does a transformation that turns the measure he is using into total garbage, and (iii) forgets that you have to adjust for changes in foreign price levels as well.
This demonstrates a truly rare degree of confusion between nominal and real magnitudes...
#shouldread
