Michael Darda: Framing the Economic Debate

by: Davy Bui

Michael Darda is chief economist at MKM Partners and a frequent guest on CNBC, Bloomberg, etc. He makes regular appearances on Aaron Task's Real Story podcast from thestreet.com, which is how I usually come across his views.

Throughout the first part of the year, Darda was consistently bullish on the US economy, saying that growth was strong and rate hikes would be coming. When we had the bond sell-off in early summer, Darda took his bow as it appeared his view was correct. Then the mid-August credit crisis hit followed by the September rate cuts. Darda came on Task's show again after the Fed cut and this time, he sounded noticeably disappointed, angry even, as he derided the Fed's move as irresponsible and inflation-courting.

I'm listening to him now on Bloomberg and nearly a month after the cut, his tone is striking. He still sounds exasperated, to say the least, at the Fed's audacity in cutting rates in the face of obvious inflationary pressures (core rates be damned).

I'm not trying to poke at Darda for being 'wrong' but rather pointing out a subtle shift in his tone. Before the market correction, Darda sounded very much in the mainstream, bullish on the economy and the markets and really, you could not have distinguished him from any other bullish analyst. Nowadays, Darda sounds like some old-time goldbug when he's talking about rate cuts and the US dollar -- basically calling out the Fed for sacrificing the currency.

It's fascinating, really. Darda may prove to be a control case in the gradual realization of economic reality dawning upon mainstream analysts. As it stands, Darda still believes the economy will show good growth and no recession looming. If you choose to believe the government statistics, that view will probably be borne out.

There is an excellent analogy in the political world -- there, we call it framing the debate. People like Frank Luntz and George Lakoff have built their reputations in this field. Political strategists found that if you can control the words and terms of the debate, the argument is half-won. Words, in themselves, embed many of our biases, perceptions, etc. Dictating which words are used can inflame or moderate the response to an issue, depending on the desired effect.

You can see this dynamic in play with several prominent issues. Most liberals will use the traditional term of "estate tax" while conservatives push to rebrand it the "death tax." On the flip side, pro-life advocates (pro-life, itself, a masterstroke of framing) use the term "abortion rights" while pro-choice supporters try to soften the issue as "women's rights." Almost any issue will see this tug-of-war in framing the debate.

In economics, this dynamic plays out in the very government statistics we use to judge economic growth, inflation, etc. These statistics, such as the CPI, PCE deflator, productivity, etc., embed a certain set of assumptions by their very definition. Perhaps the most famous instance of this is the "core" CPI rate, which purposely excludes food and energy prices. Even including food and energy, the general CPI embeds a whole host of assumptions: substitution effects (consumers will stop buying beef and substitute chicken), hedonic adjustments (your TV costs twice as much but is three times better so obviously, you're spending less on TVs), etc. The jobs report makes many assumptions about the work force -- from who's actively looking for work to the number of jobs created by companies that theoretically exist. You can go down the list.

Bringing it all back home, it will probably be very difficult to get a recession reading by using the government statistics as those numbers embed all of the assumptions and biases of the bureaucracy -- biases, I might add, that do not want to see a recession or bad news. If framed properly, it is possible to come to a conclusion of a low inflationary environment despite high costs in oil, gold, food, healthcare, education, etc. Now doesn't that sound familiar? How come it already feels like a recession for a large number of Americans even if the numbers don't confirm it?

Counting is very hard, especially counting something as large and complex as the US economy. It's funny how most of these financial folks wouldn't trust the government with any task but they'll blindly swallow these economic figures.

Eventually, analysts like Darda will come around to the view that the numbers are junk. It'll be interesting to hear what he says at that point.