Thursday, June 19, 2008

Dude, where's my recession?

Glenn Reynolds has a run several posts in the last few months titled, "Dude, where's my recession?" The clear implication being that the media coverage doesn't match the actual economic conditions, that things are actually better, or at least significantly less bad, than the media tends to report. I have long felt that to be the case, and frankly, have taken it as an article of faith that the economic reporting is significantly influenced, if not actually determined, by the party designation of the occupant of the White House. Particularly as we approach Presidential elections.

Well, someone has actually looked at it, and guess what? There's evidence to back up that suspicion. Kevin Hassett at the American Enterprise Institute writes that
Economist John Lott and I studied thousands of economic news stories written over the past 30 years or so, and found that coverage tended to be far more negative when there was a Republican in the White House as there is now.

The bias has an easy explanation. Yale University economist Ray Fair has shown that a weak economy hurts the incumbent party. If a Democratic-leaning press can convince everyone that the economy is in recession, then it can influence the election.

Our analysis indicates that the treatment of the economy would be much different if there were a Democrat in the White House today. If so, then the headline of each bad piece of news would be, more accurately, "Economy Hovering Above Recession."

But instead of that, we get doom and gloom.

Well, imagine that. As BJ Honeycutt once said, "you could have knocked me over with a sledgehammer."

A couple of weeks ago, someone in a business strategy class that I'm taken wrote a message about Exxon's Board of Directors debating various "green" strategies.

Now consider this... what if this is just an ingenious way to delay/deny political action by Washington on the largest public oil company who has been declaring obscene profits in order to prevent a windfall profit tax from being enacted?

This was my response:
Before I'm willing to consider that, I have to ask this - what, exactly, is it that qualifies Exxon's profits as "obscene?"1 They made $40B in 2007 on total revenue of $390B. Is that more "obscene" than the $22B, for example, that GE made on $172B of total revenue? (It's worth noting that Exxon also paid $29B in taxes, too, as well as paying 107,000 employees and distributing nearly $7B of that profit to shareholders, including, very probably, some of the people in this class.) Their gross margin, profit margin, RoE, RoI, RoA, operating margin were all down from 2006, and their effective tax rate was up. (There were 21 US companies that made over $5B on higher profit margins than Exxon last year. There were 119 more that made $1B to $5B in net profits with higher profit margins.)

Given that, I ask, again, what qualifies Exxon's profits as "obscene?" Obscene is a pejorative - what has Exxon done wrong?

1 - If I may rant for a moment, I am of the opinion that news coverage of the economy in this country is bad, incomplete, inaccurate, slanted, twisted and biased. On its good days. I said in another post that "context is king" - I believe that the US mainstream press does a woefully inadequate job providing context for ANY economic news. So when an oil company announces results during a period when gas prices are rising [due entirely to government regulations and supply/demand] it is presented to the public as a shock value. Far, far too many "journalists" started their careers with the desire to "change the world" or "comfort the afflicted and afflict the comfortable" when what they are theoretically supposed to be doing is distributing information. That's the mind set which labels profits as "obscene" and then it becomes the working narrative.

I stand by every word, and think that Hassett and Lott's work is likely identifying an all-too-real phenomenon.

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