Macroeconomic Patterns and Stories A Guide for MBAs
Edward E. Leamer
Dr. Edward E. Leamer
University of California
UCLA
Anderson School of Management
Global Economics & Management Area
110 Westwood Plaza
Los Angeles CA 90095-1481
edward.leamer@anderson.ucla.edu
ISBN 978-3-540-46388-7 e-ISBN 978-3-540-46389-4
Library of Congress Control Number: 2008933370
c
2009 Springer-Verlag Berlin Heidelberg
Part I Introduction
1 Introduction: We Are Pattern-Seeking, Story-Telling Animals . . . . . . . 3
1.1 Advice: Do Both Patterns and Stories . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2 We Can Also Analyze . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.3 Pictures,Words, and Numbers: In that Order . . . . . . . . . . . . . . . . . . . 9
1.4 Analytical Thinking: I think I Can Help . . . . . . . . . . . . . . . . . . . . . . . 10
1.4.1 Forecasting Is a Participant Sport . . . . . . . . . . . . . . . . . . . . . 10
1.4.2 Tell Someone About It: It Will Help You More
Than Them. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.5 What Now? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.6 Preview: The Key Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.7 Data Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.7.1 Updated Displays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.8 Appendix: Statistical Science Is Severely Limited
in Its Applicability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.8.1 Was that 1969 Draft Lottery Random? Was It Fair? . . . . . . 13
1.9 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Part II Four Key Variables: Growth, Unemployment, Inflation and
Interest Rates
2 Gross Domestic Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.1.1 GDP Is an Imperfect Measure of Economic/
Material Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.1.2 What Do Those Three Letters Stand For? . . . . . . . . . . . . . . 22
2.1.3 What’s “Gross” About Gross Domestic Product? . . . . . . . . 24
2.1.4 What’s “Real” About “Real GDP” and What Is
“Nominal” About “Nominal GDP”? . . . . . . . . . . . . . . . . . . . 24
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20 The Ups and Downs of Real Estate Values . . . . . . . . . . . . . . . . . . . . . . . . . 329
20.1 Household Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329
20.2 It Is Not Real Until You Realize It . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332
20.3 What Determines the Price and What Determines
the Value of Your Home? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335
20.3.1 The RentalMarket and the OwnershipMarket . . . . . . . . . . 335
20.3.2 Do not Confuse the Rental Market and the
OwnershipMarket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336
20.3.3 Survivor Investing Can Temporarily Disconnect
Earnings and Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337
20.3.4 Survivor Investing Requires a Good Story . . . . . . . . . . . . . . 337
xvi Contents
20.3.5 Fundamental Valuation Depends on the Growth
of Earnings and the Discount Rate . . . . . . . . . . . . . . . . . . . . 339
20.3.6 A House Has a p/e Ratio, Too . . . . . . . . . . . . . . . . . . . . . . . . 341
20.3.7 The p/r Ratios in US Cities . . . . . . . . . . . . . . . . . . . . . . . . . . 341
20.4 Some Realities of a Very Imperfect Ownership Market:
The Very Persistent Gap Between Values and Prices . . . . . . . . . . . . . 343
20.4.1 Home Appraisals: Bob’s $1 Million Tie . . . . . . . . . . . . . . . . 343
20.4.2 Hormones and Housing: It’s a Volume Cycle
Not a Price Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344
Appendix: Homework re the LA Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349
Appendix: Home Ownership Data from the Survey
of Consumer Finances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350
Appendix: Rents or Asset Prices in the CPI? . . . . . . . . . . . . . . . . . . . . . . . . . 351
Owner-Equivalent Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351
Appendix: There Is no Such Thing as a Housing Shortage . . . . . . . . . . . . . . 352
Supply Restrictions Do not Guarantee that Prices Can
Only Go Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355