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Why Can’t Economists Get It Right? Because They Don’t Go To Las Vegas

If econ­o­mists are going to add value, they need to change how they do their jobs. Instead of stay­ing in their “Ivory Tow­ers”, econ­o­mists need to mix it up with the “reg­u­lar peo­ple” and do orig­i­nal, fun­da­men­tal, on-the-ground research. And, Las Vegas is where they should be going to gather data. Few econ­o­mists view Las Vegas as a valid research site even though every week tens of thou­sands of busi­ness peo­ple go to Las Vegas to sell their goods and ser­vices in orga­nized indus­try spe­cific trade shows and mar­ket­places. Las Vegas is where an enor­mous amount of North Amer­i­can trade occurs and busi­ness activ­ity in Las Vegas is a lead­ing indi­ca­tor for the entire U.S. econ­omy. What takes place in Las Vegas doesn’t stay in Las Vegas; orders for goods and ser­vices that are placed in Las Vegas rip­ple through­out the econ­omy and are a very accu­rate pre­dic­tor of the U.S. economy.

The meth­ods taught and used by econ­o­mists have failed to pre­dict future eco­nomic activ­ity with any level of accu­racy. Econo­met­ric mod­els failed to pre­dict the cur­rent eco­nomic cri­sis and are fatally flawed and some­what use­less. The prob­lem is that most econ­o­mists are applied math­e­mat­i­cal tech­nocrats who run ster­ile mod­els based upon stale gov­ern­ment data. Their work is dis­con­nected with real­ity and often lacks prac­ti­cal appli­ca­tion. On the other hand, Las Vegas is a messy Petri dish of eco­nomic real­ity. Econ­o­mists who stay in their aca­d­e­mic office and don’t see what is going on in the real world can’t do a good job.

I have been attend­ing Las Vegas trade and indus­try con­fer­ences for more than 25 years and have never heard of a seri­ous econ­o­mist who went to Las Vegas to gather eco­nomic data in an orga­nized and dili­gent manner.

For exam­ple, last week’s World of Con­crete trade show (the annual inter­na­tional trade show for the con­crete and masonry indus­try) pro­vided a glimpse of future activ­ity in the con­struc­tion indus­try. Accord­ing to the Las Vegas Sun, this year’s show drew 70,000 peo­ple which was approx­i­mately 15,000 peo­ple less than in 2008 and more than 21,000 peo­ple less than in 2007. And, the World of Con­crete show used only 825,000 square feet of con­ven­tion space as com­pared with more than 900,000 square feet of space in 2007. The rea­son these sta­tis­tics are impor­tant is because they indi­cate increased risk that cement and masonry sales are going to con­tinue to trend down in 2009. If buy­ers and sell­ers don’t come to the trade show, less cement and masonry will be sold and less will be pro­duced. Atten­dance at the World of Con­crete trade show is a lead­ing indi­ca­tor that com­mer­cial con­struc­tion will con­tinue to drop from its already reduced levels.

Later this month Las Vegas will be host­ing the MAGIC show, which is the semi-annual trade con­ven­tion where retail­ers place apparel orders for the upcom­ing sea­son. If econ­o­mists want to know what 2009 spring/summer apparel sales are likely to be, they should go to the Feb­ru­ary MAGIC show. If goods aren’t ordered at the Feb­ru­ary MAGIC show they won’t be on the shelves in the sum­mer. 2009 atten­dance is antic­i­pated to be down 30% and the show is one day shorter than in pre­vi­ous years. Guess what my pre­dic­tion is for spring/summer retail sales and retail bankruptcies?

This week I am at the Amer­i­can Secu­ri­ti­za­tion Forum meet­ing in Las Vegas. The secu­ri­ti­za­tion and struc­tured finance indus­try make up a large seg­ment of the “shadow bank­ing” indus­try that is talked about so fre­quently in the press and by econ­o­mists. In 2006, the atten­dees at this con­fer­ence pro­vided more credit to Amer­i­can con­sumers than the entire bank­ing indus­try com­bined. And, with­out a restart of the secu­ri­ti­za­tion mar­ket, banks do not have the finan­cial capac­ity to pre­vent fur­ther eco­nomic decline. The Fed­eral Reserve is try­ing to restart this mar­ket and Trea­sury and the Fed­eral Reserve are announc­ing poli­cies to help investors buy secu­ri­tized debt. Yet, there appears to be no econ­o­mists at this con­ven­tion, just like there were no econ­o­mists here in 2006 when they could have noticed that this indus­try was out of con­trol. This year’s ASF con­ven­tion is about 40% smaller than in 2007 and has a dif­fer­ent com­po­si­tion and agenda than in pre­vi­ous years. ASF’s first day (which was Sun­day) didn’t give me a warm and fuzzy feel­ing that the secu­ri­ti­za­tion mar­kets are about to unfreeze and today’s ses­sions made me feel that the indus­try was almost totally dis­con­nected with real­ity. Unless secu­ri­ti­za­tions restart there won’t be liq­uid­ity for auto­mo­bile loans, credit cards, stu­dent loans, home equity loans and other con­sumer and com­mer­cial loan facil­i­ties. But there are no econ­o­mists here in Las Vegas try­ing to fig­ure out whether or not the secu­ri­ti­za­tion mar­ket is restarting.

There are lit­er­ally hun­dreds of con­ven­tions and trade shows that come to Las Vegas every year. The Las Vegas Con­ven­tion and Vis­i­tors Author­ity keeps a cal­en­dar of events and the larger trade shows pro­vide a good cross sec­tion of U.S. indus­try, com­merce and bank­ing. Of course, Las Vegas isn’t the only place that trade shows take place. There are numer­ous trade shows in Asia, Europe and the Mid­dle East. As an exam­ple, in early Jan­u­ary the toy show in South­east China was a dis­as­ter with many no show’s and low atten­dance. It wasn’t hard to pre­dict what was going to hap­pen to toy indus­try exports and employ­ment in China; in late Jan­u­ary the indus­try crashed. But, again econ­o­mists were absent from this and other trade shows and have been unable to pre­dict the depth and sever­ity of the Chi­nese recession.

Econ­o­mists need to change their meth­ods and get “into the game” if they want to remain rel­e­vant and restore their cred­i­bil­ity. And, a great place to start chang­ing is in Las Vegas.

Posted in: Economic Statistics, economy, Finance, Fiscal Policy, Politics

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