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Category: macroeconomics

Published on Leave a comment on Your Daily Dose of Spin

The February employment report shows a net increase of 227,000 payroll jobs.  Combined with continued sub-400k weeks for initial unemployment insurance claims, it looks like the labor market is finally on a solid upswing.  (For more, see this presentation from last month.)  This is going to give President Obama some of the election-year momentum that he needs.

Here's how Rep. Kevin Brady (R-TX), Vice Chairman of the Joint Economic Committee, spun the numbers this morning:

“While I am pleased that the economy is at long last adding more than the approximately 130,000 jobs necessary to keep up with the growth in population, Brady said,” “we still have a long way back to where we were before the last recession.”

“The recession ended in June 2009, more than 32 months ago,” Brady continued. “I do not think those still out of work or looking for work will take much comfort in today’s job numbers.”

“I find it incredible that the Obama administration is attributing this all too slow increase in payroll jobs to its policies,” Brady said. “This is the crowd that told us that its stimulus proposals would hold the unemployment rate below 8% and that it would be cut to nearly 6% by February 2012. A more accurate description of the economic news is that, any improvement that we are seeing is the result of the hard work of the American people and the resilience of the American economy, not from the administration’s policies, but in spite of them.”

Shorter version?  You are making inadequate progress getting us out of the hole we dug for you despite our opposition to every program you propose.

Published on Leave a comment on More Bad Public Policy

I am with my friend Chuck Blahous on this one -- payroll tax cuts and continued extensions of them are just bad policy.  Chuck cites seven reasons, all of them worth your consideration.  If this story in the Washington Post is correct, then the breakthrough came when Republicans agreed to allow the payroll tax cuts to proceed without an offset, while the extended unemployment insurance and continued "doc fix" would be offset (in ways to be named later).  When will we have a parade to celebrate?

We are now over four years into the downturn and weak recovery, and we are still engaged in short-term policy measures.  These policies focus almost entirely on consumption and very little on investment, which drives the business cycle.  Wrong in 2008.  Wrong in 2009.  Wrong in 2010.  Wrong in 2011.  Wrong in 2012.

Published on Leave a comment on The Economy in the 2012 Election

I made a presentation to the Dartmouth Club of the Upper Valley on Saturday morning, "The Economy in the 2012 Elections."  In addition to many of the themes I have blogged in recent years, I made the point that the recent dip of the Initial Unemployment Insurance claims below 400,000, if it is sustained, signals the beginning of a robust job market expansion.  I also suggested that the failure of policy makers to recognize how important investment is to the beginnings and ends of business cycles is one of the reasons why we have been stuck in a lackluster economy for longer than we needed to be.  The slides are included below. Samwick DCUV 20120204

Published on Leave a comment on An Unhappy Anniversary

Friday marked the four-year anniversary of my op-ed in The Washington Post, "A Better Way to Deal With Downturns."  Written in protest of the tentative deal for the first $150 billion stimulus of the last recession, I offered the following two changes to budget policy to have a better menu of fiscal options available:

First, we should rule out deficit spending to finance a consumption binge. As the economy slows, the deficit will widen even without changes in fiscal policy. But an honest budget policy would be calibrated to balance the budget over a complete business cycle. Years of cyclical deficits will be offset by years of cyclical surpluses. As a corollary, we must not waive pay-as-you-go rules that require spending that increases the current deficit to be offset later, when the economy is stronger.

Second, we can plan well in advance. The federal government has a critical role in maintaining and developing public infrastructure, whether in transportation, telecommunications or energy transmission projects. A sensible capital budget would include a prioritized list of projects that need attention. Some would be slated for this year, some for 2009 and so on, over the useful lives of the projects. When economic growth falters, the government would be in a position to move some of the projects from later years into the present year.

This approach to counter-cyclical fiscal policy has several advantages. Perhaps most obvious is that it forces the government to establish priorities for capital projects. It reduces overall expenditures by doing more of the work in times of economic slack, when costs are lower. It also abides by pay-go rules, since projects moved up to 2008 need not be done in 2009. With a little forethought, short-term economic concerns and long-term budget goals need not be in conflict.

In fact, we have gotten the opposite in both cases, with inadequate short-term boosts to economic activity and a worsening long-term budget picture.  As Paul Krugman noted today, in the context of continued declines in investment by state and local governments:

It’s hard to overstate just how wrong all this is. We have a situation in which resources are sitting idle looking for uses — massive unemployment of workers, especially construction workers, capital so bereft of good investment opportunities that it’s available to the federal government at negative real interest rates. Never mind multipliers and all that (although they exist too); this is a time when government investment should be pushed very hard. Instead, it’s being slashed.

 
If only someone had mentioned this years ago ...

Published on Leave a comment on Are We in a Recession?

The honest answer is that we cannot provide an answer in real time.

The rule of thumb is that a recession is two or more consecutive quarters of negative growth in real GDP. The latest estimate of 4th quarter GDP was 0.6%. Not negative, but certainly not great. So to say that we are in a recession, according to this rule of thumb, is to say that we have knowledge that the current quarter's growth rate is negative and either or both of the following:

  1. 4th quarter GDP growth from 2007 will be revised below zero when the next estimate is released on March 27.
  2. 2nd quarter GDP growth from 2008 will be negative.

I don't see how anyone could be sure of this. The starting point for 2nd quarter GDP itself is not known and will not be officially estimated in advance form until late April. There is already considerable monetary and fiscal stimulus in the pipeline that will begin to have an impact over the second quarter.

Then NBER has a broader defintion of a recession than the rule of thumb:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion.

So to assert that we are in a recession is a claim that a peak has occurred, that the subsequent decline is significant, that the decline will last more than a few months, and that the decline will be evident in many if not all of the indicators listed in the definition. What do the indicators say?

  • The Real GDP growth has been positive thus far according to official estimates (as noted above).
  • Real personal income less current transfers, with data available through January, peaked in September 2007 (see Table 1 for income and transfers and Table 9 for the price deflator) but has fallen only 0.3% since then. We get February data on March 28.
  • Employment peaked in December 2007 and has fallen by less than 0.1% over the subsequent two months.
  • Industrial production fell from September to October 2007 and then rebounded to achieve the same index value in January as it had in September. We'll learn about the February value on Monday.
  • Wholesale-retail sales. Wholesale trade fell slightly between November and December but more than made up the decline in January. (February data are released on April 9.) Retail sales fell between January and February.

Each of these indicators seems to be some version of flat. It is premature to be making pronouncements like this these, from Congressman Frank and Senator Dodd:

“We are in a recession now that has an unusual cause. It is not your usual cyclical problem… This is a structurally caused recession,” Mr. Frank told reporters at a press conference. Mr. Dodd, also appearing at the press conference, had an even gloomier take.

“This is the worst housing crisis in our lifetime. We are in a recession. People want to talk about ‘Are we?’ — we’re in one. The question is: how deep is this going to go? How long lasting will it be? The underlying economic conditions in our country are not good for resolving this. Almost every other recession we can talk about lasted eight months. When you’ve got deficits running as high as they are — The value of the dollar… inflation going up, unemployment going up, these are not great underlying economic circumstances to respond to the situation.”

They are right that the present period is different from past recessions--first, because we cannot assert that it is a recession, and second, because we have already stretched our policy responses just about as far as they will go.

Published on Leave a comment on What the Unemployment Rate Misses

In his Economic Scene column in today's New York Times, David Leonhardt discusses the challenges of measuring unemployment and using the unemployment rate to assess the state of the labor market. In a nutshell, we have a fairly low official unemployment rate and yet many people not working. In this excerpt, he focuses on a distinction that his colleague Paul Krugman once glossed over (to much fanfare in my first month of blogging):

There are only two possible explanations for this bizarre combination of a falling employment rate and a falling unemployment rate. The first is that there has been a big increase in the number of people not working purely by their own choice. You can think of them as the self-unemployed. They include retirees, as well as stay-at-home parents, people caring for aging parents and others doing unpaid work.

If growth in this group were the reason for the confusing statistics, we wouldn’t need to worry. It would be perfectly fair to say that unemployment was historically low.

The second possible explanation — a jump in the number of people who aren’t working, who aren’t actively looking but who would, in fact, like to find a good job — is less comforting. It also appears to be the more accurate explanation.

As we discussed briefly then, the BLS does collect measures of unemployment that progressively relax the condition that individuals have to be actively looking for work. Leonhardt characterizes them as "broader but not especially useful." I don't think they should be dismissed so readily. They are found in Table A-12 of the monthly employment report. You can get the historical data here. Let's go to the picture.

The 4 curves are as follows:

  • Blue: The conventionally measured unemployment rate, currently at 5 percent and low by historical standards. This is the number unemployed divided by the total number in the labor force (employed plus unemployed).

  • Red: Add people classified as discouraged workers--those who have given a job-market related reason for not currently looking for a job--to the unemployed. The increase is very slight--historically between 0.1 and 0.4 percentage points.

  • Yellow: Add people classified as marginally attached (beyond being discouraged)--those who currently are not looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. This currently adds 0.8 percentage points to the unemployment rate, which is typical of the full 14 year time period.

  • Green: Add people classified as employed part time for economic reasons--those who want and are available for full-time work but have had to settle for a part-time schedule. This number is currently 9 percentage points of the labor force (augmented to include those marginally attached or employed part time for economic reasons).

The last measure seems to be a pretty good measure of labor underutilization. What does it tell us about what the conventional unemployment rate misses? In April 2006, the gap between the two shrank to 3.4 percentage points, compared to 4.1 percent today. The latter figure is about the size of the gap that prevailed around the recent peak in the unemployment rate in 2003. The gap was greater than 4.1 percent in most of the months shown prior to 1997. The gap was as narrow as 3 percentage points as the unemployment rate reached its lowest values in 2000.

The more comprehensive measures of labor underutilization are available and are consistent with the story being told in the article, though you have to get to "employed part time for economic reasons" to get much of a gap. I think they would be more "useful" to journalists if journalists chose to report them.

Barry Ritholtz also comments on the story and refers back to a measure of the "augmented unemployment rate," which doesn't include the economic part timers but also doesn't require that those who want a job have actually looked for one. (This information can be calculated from Table A-1 of the monthly employment report.) At present, there are about 5 million who "want a job" among the roughly 80 million who are not in the labor force, or about 6.25 percent. This proportion has stayed around 6 percent for several years.

Published on Leave a comment on Nickel and Dimed at Dartmouth

Last evening, the Ethics Institute and the Dartmouth Centers Forum hosted a public lecture by Barbara Ehrenreich, "Working for Change," based on her book, Nickel and Dimed: On (Not) Getting By in America.

She's a compelling story teller. Here's an example of something that I had not previously appreciated--paying rent. For the working poor, the monthly payment isn't the only or even the main challenge. Coming up with the first and last month's payments is more than most can manage. So this puts them into a different type of housing--the residential motel, which is less cost effective but allows more of a day-to-day payment. These facilities often lack a refrigerator and a microwave, which in turn means that nutrition suffers as well, with fast food taking the place of better meals. Problems cascade, and keeping it all together becomes more of a struggle, to say nothing of actually getting ahead. The Dartmouth has more of a recap of her talk.

She's also an occasional blogger. Here's her rather unconventional take on the economic stimulus plan, from a month ago.

Published on Leave a comment on I Have Been Outflanked

By A Red Mind in a Blue State:

As I posted before, if we are going to insist on burdening our children and grandchildren with more debt, the least we could do is build or repair some roads, or bridges, or help end our dependency on foreign oil by building more refineries or by slapping solar panels on every flat roof in America-- something that will help the next generation.

Anyone receiving this check should know what it is-- a welfare check drawn on our children's checking account.

Read the whole thing.

Published on Leave a comment on A Capital Idea

Thinking more about how to use fiscal policy as economic stimulus, I hold forth in the current issue of the Ripon Forum. Here's a teaser:

The agreement reached by the House and White House in January addressed two problems that the United States does not have.

First, the nation does not have an underconsumption problem. The personal saving rate hovers around zero. The government’s budget has been in surplus in only four of the last 35 years. The nation has run current account deficits with the rest of the world for the last 15 years. If we are looking for additional economic activity, consumption is a poor choice.

Second, we do not have an underinvestment problem in the private sector. Interest rates have been very low by historical standards, and the Federal Reserve intervened immediately to lower them even further. With or without additional tax-based incentives, corporations have plenty of access to cheap credit to expand their capital stocks.

Where our country does have an underinvestment problem is in our public infrastructure. The failed levees of New Orleans. The collapsed bridge in Minneapolis. Those are but two recent examples of an area where the federal government is falling down on the job. Regrettably, they are not the only examples. In 2005, the American Society of Civil Engineers released a report card in which it estimated that $1.6 trillion would be required over a five-year period to restore the nation’s physical infrastructure to good condition.

Because infrastructure projects are in many cases public goods or natural monopolies that can be provided more efficiently with government regulation or implementation, the government should bear responsibility for them. Looking ahead, the country faces potential bottlenecks in network infrastructures in broadband and alternative energy that could be added to the ASCE report’s recommendations.

Read the whole thing.

Published on Leave a comment on Public Infrastructure and Fiscal Stimulus

It doesn't happen very often, but I agree with much of what Paul Krugman writes in his column today, "A Long Story." Here's the key part:

Meanwhile, Congress and the Bush administration have reached agreement on a much-hyped stimulus package. But the package, while probably better than nothing, is unlikely to make a noticeable dent in the problem — in part because the insistence of the administration and Senate Republicans on blocking precisely the measures, such as expanded unemployment insurance and food stamps, that are most likely to be effective.

Still, by January the White House will have a new occupant. If the slump is still going on, which is likely, this will offer a chance to consider other, more effective measures.

In particular, now would be a good time to think about the possibility of going beyond tax cuts and rebate checks, and stimulating the economy with some much-needed public investment — say, in repairing the country’s crumbling infrastructure.

The usual rap against public spending as a form of economic stimulus is that it takes too long to get going — that by the time the money starts flowing, the recession is already over. But if this turns out to be a prolonged slump, which seems likely, that won’t be a problem.

On the radio show yesterday, I argued that one month of job loss and an unemployment rate of 5 percent was a little early for extended unemployment insurance benefits. Initial UI claims have jumped in the past few weeks--we've got several months before that wave of entrants will exhaust their benefits. And these benefits can be made available as needed.

Krugman's last paragraph is a good counterpoint to those who argue that public infrastructure projects are not feasible for stimulus, if his thesis about the length of the downturn is correct. But as I argued in The Washington Post last month, the reason to do the infrastructure projects is that they are needed. The reason to accelerate their timing is that in an economic downturn, we can do them more cheaply. Quoting from that op-ed:

The federal government has a critical role in maintaining and developing public infrastructure, whether in transportation, telecommunications or energy transmission projects. A sensible capital budget would include a prioritized list of projects that need attention. Some would be slated for this year, some for 2009 and so on, over the useful lives of the projects. When economic growth falters, the government would be in a position to move some of the projects from later years into the present year.

This approach to counter-cyclical fiscal policy has several advantages. Perhaps most obvious is that it forces the government to establish priorities for capital projects. It reduces overall expenditures by doing more of the work in times of economic slack, when costs are lower. It also abides by pay-go rules, since projects moved up to 2008 need not be done in 2009.

I've got another column in the works that maps this out in more detail. See Mark Thoma for additional commentary.