The 60/40 Model and The Elephant in the Room

As economists and financial market forecasters, we are constantly amazed at how so many people analyze, forecast, research, and discuss important topics without ever addressing the elephant(s) in the room.

While this is not the highlight of today’s missive, economic research and academic model building is a perfect example of what we are talking about. Economists (especially academics) spend a lot of time working on “General Equilibrium Theory,” attempting to build models of the macro-economy where supply and demand are in balance.

While these models are sold as brilliant, they actually do a terrible job. For example, many economists have argued that the US entered a “Great Stagnation” in 1973, when productivity and wage growth slowed.

The question is: Why? And explanations vary. Some say things like “you can see the computer age everywhere but in the productivity statistics” – the argument being that there are winners and losers from technology, but little net gain. Many forecast a coming boom from technology, but real GDP has averaged just 2% growth per year in the past 20 years…about half of its growth rate from 1950-1973.

Others blame inequality, the lack of education, and less powerful unions. Some of these analyses, of equilibrium and economic growth, dip into inefficiencies of the tax system, or certain subsidies, like for agriculture, or the mortgage interest deduction. But none of them deal with the elephant.