Ms. Baum, if the supply side argument is so compelling, why do you need to fabricate a specious opposition?

Bloomberg's Caroline Baum is a gifted writer with an impressive financial lexicon. To be sure, she has the ability to take a grab bag of quotes - from the likes of James Glassman and Paul Kasriel - and form a coherent and usually enlightened point of view. She put this talent to good use in 2000 and 2001 when, as the markets crumbled, she consistently wrote intriguing articles that attacked the Fed while seeming to suggest that those in the Austrian school may have some genuine economic insights to offer.

"While most economists and analysts have cheered the Fed's rapid response, the Austrian School of economists thinks printing money in response to a burst bubble is exactly the wrong prescription. When the bubble bursts, assets need to re-price. Holding interest rates too low prevents the necessary adjustment and delays the cleansing process whereby certain businesses or industries fail and capital can be re-allocated to more productive ones. Low interest rates encourage spending at the expense of investment, which means that the capital stock and economy's future growth potential isn't enhanced…In short, if cheap credit caused the problem, how can cheap credit be the solution?" Caroline Baum, Bloomberg 12-19-2001

Incidentally, the word 'suggest' should be remembered, because it isn't very often that Ms. Baum explicitly pens her own opinion and conclusions on the markets. Rather, in an attempt to make her opinions palatable enough for mainstream consumption, Baum's journalistic endeavors usually follow the vice that is equivocation. Such was the case when she suggested in October 2001 that the Fed could simply buy long-term Treasuries to combat economic weakness (she quoted Bob Laurent, professor of economics and finance at the Illinois Institute of Technology's Stuart School of Business), but that such purchases [or lower interest rates] would still not guarantee economic recovery, as the example of Japan demonstrates (Baum used Kasriel to back up this opinion). Suffice it to say, Baum has historically touched on many provocative ideas - the Treasury example being articulated well before the mainstream press got hold of the idea in late 2002 - but, in fact, she holds very few absolute convictions when it comes to the economy itself.

These days Baum is still interrogating the Fed while also writing contrarian viewpoints suggesting that inflation is understated (Nov 19), and that Bush's protectionism is a bad idea (Nov 20). Clearly, she is not politically motivated ala Krugman, or as unsuspecting of government statistics as say the average Street economist.

Nevertheless, Baum - after incorrectly suggesting that an inventory led recovery in 2002 was underway (one of her few bouts of sustained enthusiasm before 2003) - is no longer giving the Austrians the time of day. Rather, she has switched gears and adjusted her tone accordingly. You could say that she has unshackled herself from Austrian handcuffs, and gleefully lifted her supply side pom-poms.

Some of you may be asking by now - what is the big deal? What is wrong with Baum changing her tune if she believes something different? Well, if it were that simple then there would be no debate. However, the question is what has changed to make 2003 appear more auspicious than 2001 in her eyes? Has not the U.S. consumer been continually asked to save less money and spend more credit to support the U.S. economy? Has not the inevitable cycle of creative destruction largely been avoided because of the Fed's easy money policies and Bush's spending? If these issues were acknowledged as problematic in the past, than why are they no longer an economic danger despite their increasing magnitude. Sadly, while Baum doesn't appear to find these trends troubling any longer the exact reasons why are lost in the rhetorical ether.

Embracing All That is Supply Side

Baum's first full fledged breakdown in logic was suffered on November 14, 2003, in 'Gloomsters, Ship Sinking, Hold on for Dear Life'. In this commentary Baum attacks the 'Gloomsters' (notably Stephen Roach) for not cheering job creation while claiming that 'our chroniclers of all things negative' were citing spurious employment figures. In fact, Baum goes so far as to say 'It's intellectually dishonest to cite the augmented unemployment rate, which is not seasonally adjusted, without mentioning that it's always several percentage points higher than the official unemployment rate…'. Baum makes an interesting point - statistical indicators can be compared in a methodologically suspect fashion to produce, on the surface, irrefutable arguments. Unless apples are compared to apples, what results is patently biased. Nevertheless, in her assail of Roach she conveniently forgets to mention the party that is being 'intellectually dishonest' by name. Given that Roach did not highlight the numbers Baum is referring to, we wonder if this statement is itself intellectually dishonest, being included for rhetorical effect only.

Next, on November 24, 2003 Baum wrote 'How I Learned to Stop Worrying About the Dollar'. Using a plethora of quotes, Baum takes the slant that since the dollars going overseas to purchase cheap Chinese goods will forever be recycled in the United States via security purchases, "The only negotiable item is the price". Again, she gets in a dig at those Roach enthusiasts/Austrians that might be weary of a weakening greenback by suggesting that she now understands the relationship between the current account and capital account, though "it probably won't make a difference to the dollar bears."

Incidentally, we stumbled upon an interesting correlation between Baum's argument in this piece and the argument of another, more obvious, huckster that was published shortly before Baum's own; Lawrence Kudlow's 'A Bull's Eye View'. Kudlow's opinion may be more belligerent in tone, but it is nonetheless similar to that of Baum: a weakening dollar is not a threat, and/or "The onus is not on the U.S." (Baum) to fix its current account imbalance:

"Currency mavens may rant and rave over trade deficits, but these phony and opaque numbers have nothing to do with currency value. The U.S. has strong political leadership, a strong foreign policy, and strong economic growth. You want to buy yen or euros? Go ahead. It's a free country. But it's a sucker's bet. Buy dollars. In fact, the cheapest currency in the world right now is the U.S. dollar. Watch the greenback strengthen significantly in the years ahead…" Kudlow

Finally, in three recent commentaries - entitled 'Boom Arriving Late Stop Sorry for Delay Stop', 'Tax Cuts Evanesce in One-Off School of Economics', and 'Weak Jobs Report? Only Relative to Expectations' - Baum offers a trifecta of optimism. Rather that dissect each article, we will borrow a technique directly from Baum and use some isolated quotes:

"If you believe what you read, tax cuts are a one-shot deal. They have no staying power, no behavior-changing incentives, no thrust past the initial first-round effect…In the meantime, other forces have been set in motion. Increased spending has spilled over to profits, investment and hiring, which is the route to a self-sustaining expansion."

In the above quote and commentary, Baum, once again, neglects to name those that she is attacking. In fact, she seems to believe that it is sufficient to rely upon her trusty grab bag of quotes and witticisms rather than confronting serious objections to her point of view. As if to hammer home our point Baum argues 'Whatever your preferred school of economics, be it Keynesian, monetarist, supply-side or eclectic, tax cuts aren't a one-time event…' Apparently the realm of Austrian economics has been deleted from her vocabulary entirely. In a move reminiscent of Stalin's purging of the historical record, legitimate opposition to the claims of the ruling Party (or in this case the Street) are crudely expunged from the discourse as if they do not exist.

Suffice it to say, it is clear to us* that Baum has either given leave to her critical faculties or has been taken hostage by supply siders. In her writings Baum accepts the current recovery as cyclically sustainable, she is unafraid of the potential pitfalls a falling dollar brings with it, and she believes the employment picture will brighten considerably in the coming year. The problem of government deficits, overcapacity, and capital misalignment, and the arguments of those who treat such issues seriously are nowhere to be found.

* Baum has responded to previous FallStreet articles. Since directly referencing an e-mail exchange without prior consent is not a practice we condone, it will have to suffice it to say that Baum believes a 1% Federal Funds rate is a real problem, and that the unwind of the carry trade will be "ugly." The problem here is that you wouldn't know that this was her opinion from reading any of her latest commentaries. Not unlike an analyst who rates a company a strong buy while at the same time noting in private emails that the company is 'garbage,' there is an ethical problem here. We believe every investor should view uncritically optimistic takes on the U.S. economy and stock market with a high degree of skepticism - those from Baum included.

Brady Willett & Todd Alway
BWillett@fallstreet.com
www.wallstreetwishlist.com

December 15, 2003