Heavily Biased Reporting

Our goal here is to bring critical thinking and rational analysis to the world of economics and finance. One way to accomplish this is the highlight how others use the language of economics to promote ideology instead of honest assessment of ideas. My hope is to enable people to strip out facts from opinion.

Given the heated election coupled with a financial crisis, there is no shortage of biased reporting. Today's example comes from Forbes magazine. It is no secret that Steve Forbes, publisher, is a dyed-in-the-wool, free-market Republican and that his magazine is his soapbox. In opening any Forbes issue, one must be prepared for spin, yet sometimes it is rather hidden under the presentation of facts.

Take the article "Back to the 1970s" by Rich Karlgaard in the November 10th, 2008 issue (p.33). Mr. Karlgaard uses this article to highlight some fantastic entrepreneurs who created phenomenal businesses when times were really tough while noting the importance of innovation. Nothing dubious about that to be sure. There is a section in the middle of the article though that discusses how the '70s were a dreadful decade for stocks (it was indeed) and blames inflation as the primary reason (OK, but inflation was one reason, not necessarily the whole reason.)

After describing why high taxes encouraged entrepreneurs (which I don't necessarily disagree with), he ends the article with:

If Barack Obama wins the presidency with large majorities in the House and Senate, we know that taxes on income, savings and investment will go up. We know that inflation will quickly follow any economic recovery. High taxes and inflation! Which means, like in the 1970s, some of the better career paths will be found in entrepreneurship.

Did you spot the misdirection? First, Karlgaard overtly implies that higher taxes equal high taxes. Second, he implies that a recovery will bring inflation and probably high inflation. Finally, he inferred that Obama/Democrats will bring high taxes, high inflation and another lost decade like the 1970s. It's a nice sleight of words, but it reeks of partisanship.

On the contrary to Karlgaard's conclusions, a rational examination of the facts illustrates that: raising taxes ("higher") from the current 15% on capital gains and 35% on income to something like Obama's proposal of 15-28% on capital gains and 39% on income is hardly "high" taxes by historical comparison. In the '70s, the top capital gains rate was 49% and the top income tax bracket was 70%! If you are shocked, further consider that Karlgaard omitted tax rates before 1970 in his chart which were even higher, averaging over 80% in the 1960s and over 91% in the 1950s!!! (How many exclamation points can I use?) Gee, the economy did just fine for two decades with higher taxes, didn't it? (for historical marginal tax rates, see here.)

Next, the implication that recovery will bring inflation and by his tone, serious inflation, is also false. Generally speaking, growing demand increases upward price pressures. Simple supply and demand and Karlgaard is right in direction. But not all recoveries result in rampant high inflation. In fact, few have. Consider that a large part of the inflation we experienced in 2006-1H2008 was driven by high commodity prices, artificial demand due to leverage and a weakening dollar. High commodity prices caused real "demand destruction". In other words, despite $2.50 gas, we are all looking to be more fuel efficient. The recovery will take place in a world where individuals and companies are looking to use resources more efficiently creating less demand than otherwise would have been. In a world with a stronger dollar and excess capacity in everything from autos to housing to office space to retailers, supply/capacity will exceed demand for a long time. The leap to assuming a recovery will certainly result in troublesome inflation is bombast and rhetoric only.

Furthermore, the lost decade has been the past decade and not likely to be the next decade. Think about it: the S&P 500 stands today where it was in 1997, 11 years later. The S&P in 1980 was the same level as 1968, 12 years earlier. Want to bet where the lost decade will be?  Warren Buffett is buying and I'll bet he is much wiser than Karlgaard. (That isn't to say the next few year won't be bad and stocks can't or won't go down, just that the odds favor the next decade).

To be clear, we are not hear to defend a candidate or any ideology. We will call nonsense from wherever it comes. Have no doubt that the Democrats will propose (already have) or enact things on faulty logic or that their surrogates will espouse misleading analysis. When they do, we won't hesitate to call them on it. Forbes just happened to catch my eye as a good example. Just like using very specific statistics or selective quoting is misleading, so can economic analysis written from a partisan view.