The Recession is Over!

Or is it?   NBER announced today that our recession ended in June 2009.

NBER panelist and the author of the macro text I use in class had this to say:
"At least half of them excoriate us for saying that the recession is over, But we are only saying that things started to get better in June 2009, not that times are good."


My question to Robert Hall would be, "What are these things you speak of?"  If you mean corporate profits and overall GDP, yes.  If you mean base wage levels, benefits, raises, or employment, then I would further ask:


"Can I have some of the dope you are smoking?"


I am one of those that thinks we need to examine how we 'call' recessions and expansions.  Or perhaps we should just stop using the terms altogether.  Just call it like it is: GDP is growing and benefiting some, unemployment is still very high and not really budging and it is hurting others....


The Federal Reserve Bank of Richmond sees huge benefits in maintaining the status quo:
"Recession dates are useful because they combine
a great deal of information into a single variable
reflecting an informed judgment that the economy,
broadly defined, was contracting at a certain point
in time." 


For me, the aggregation of such data points, which by themselves are just aggregates of other disaggregated data, means you lose sight of what's really going on.  You end up not making an informed judgement on the economy, but rather you lose sight of reality - such are the problems with the assumption of aggregation in macroeconomics.

What Should Have Been Done

My last post was rather bleak.  It paints a picture of our economy that is structurally problematic.  But that doesn't mean government has tools to reduce the structural unemployment problem.  

Monetary policy won't do. Monetary policy has done much to help stabilize the financial sector but it will do nothing substantial to reduce our structural unemployment issues.  

The fiscal stimulus was poorly designed - it's been too bureaucratic, slow, bloated, and not targeted to the problem at hand.  Demand stimulus old-Keyenesian style throws a lot of money at various sectors in the economy that have been previously known to add employment with the increased spending.   As such, much of the stimulus was aimed at a hodge-podge of things: infrastructure, health care, education, tax cuts, unemployment benefits, etc.   IE-the goal was to increase spending and not employment - with the idea that the employment would follow.  And I admit, at the time, I even bought in to this old line a little - I was hopeful.  I was also a sucker.  I'm not anymore. Surely, the stimulus helped a little, but to me the negatives of waste outweigh the nominal employment retention benefits. 

What we should have done with that money is spent the bulk of it on one thing: retooling the workforce.  We should have spent billions on new teachers, temporary work transition programs, partnered with our academic institutions and funded them new monies to create new transitional jobs programs.   That not only would reduce our structural unemployment problem - by speeding up the retooling of our workforce, but it would also invest in the skills of Americans - benefiting the long-run private sector.   Ironically, we instead threw billions out the window while our States' budgets faltered.  As State budgets fail, so do education institutions that receive State funding.

The trouble of unemployment

In my intro macro class, I teach about unemployment and of course I teach using the severely limited tools of AD-AS model and Keynesian cross etc.... Such models would have students believe that reducing our current cyclical unemployment now at 9.6% is just a factor of 2 things that need to happen:

 *Allowing for inventories to properly readjust and for spending to get back to 'equilibrium' with production.
 *Allowing for prices and wages to properly readjust to allow for supply and demand to get back to 'equilibrium' with respect to 'full' employment of resources

Now, such insights are useful.  We in fact did need to have an inventory realignment (as well as a financial-sector realignment).   And indeed, the state of our financial sector and of our production levels have bounced back to a significant degree.  The second insight regarding prices and wages have taken hold as well.  Prices have stagnated for many quarters, as have wages.

So the question is, why hasn't employment bounced back?  Theory would have us all believe that producers would bounce back as input costs are low and as the economy improves and they would regain hiring.  There are a few flaws in the real world however that make this not a very useful observation:

1.  Producers don't make decisions largely based on present conditions, but rather they make decisions based on future conditions (of profits, of interest, of prices, etc).

2.  Not all recessions are the same:  many of our recent recessions did not require significant shifts in the makeup of our industries.  This recession has meant a complete retooling of our industries (our manufacturing is becoming 'greener', our financial industry is re-making itself, etc).  This retooling means significant increases in structural unemployment which necessarily means we will maintain this rate of unemployment for a significantly long period of time.

Further, this recession has been met with conflicting answers:  the private sector's answer has been to become more conservative, to do more with less, to increase productivity of the average worker while maintaining less workers.  The public sector's answer (our government) has been to spend, and spend some more, in hopes to rejuvenate the economy Keynesian style.   Whenever the public and private sectors act in such diametrically opposed ways, it breeds uncertainty.  Add to this the government's schizophrenic message: let's spend money, but let's cut the deficit, let's create huge housing subsidies, and then let's take it away, let's extend unemployment, let's not extend unemployment.... Uncertainty means perceptions of the future (see point 1 above) will vary widely and all of that contributes to our present situation, where one month things look good (in the labor market and in the housing market) and the next it looks bleak.  Of course, none of this added uncertainty is good for the economy in the short or the long-run.

This brings me to my point(S):
1.  Textbook macro teachings regarding the relationship b/w spending-employment-production should be taken with a grain of salt by students (and teachers that don't point out the numerous assumptions in the models are doing the world a huge dis-service).

2.  The Obama administration has been a huge failure if for the only reason that it has lacked clear decisive message and vision.  I agreed with aspects of the stimulus, but much of it has been a huge failure both in terms of message and in terms of results for reasons I've discussed before.   The administration has helped breed uncertainty which is the last thing we need right now.  (Note:  that's  not to say Republicans would have been any better - they don't really even have any message of their own it seems).  I should caveat this point by saying that I don't think there's  much the government can do about this recession anyway given the structural nature of it, but the fact that he thought he could apply (poorly) old-school Keynesian methods and call it "change" and expect huge results is appalling to me.   I'm just as tired as the next guy of the old Keynesian response of throwing money at problems and hoping it sticks.   It never works.

3.  I don't expect the unemployment rate to budge, now, or much at all even next year.  I suspect we now have a structural unemployment problem that could last years (ie., I suspect our new 'full' employment rate is probably above 7% now).

Obama: The Wizard of Oz President

Obama passed his ARRA stimulus at a tune of nearly $800 billion.   Unemployment skyrocketed beyond most predictions to 10% - where it has roughly hovered now for months.   Now, Obama - on a downward PR spiral, has decided to tell America to close their eyes, click their heels and repeat, "there's no place like hope, there's no place like hope."   Oh, and, take $50 billion and call me in the morning.  

...So let me get this straight, $900 billion didn't do the trick, but an extra $50 billion will make us prosperous again?  Surely our 'academic' President doesn't believe his own nonsense.  He probably figures it's something he can tack on in time for the November elections... and if things do start turning around in the employment department, it's one more thing he can point to....   I can't nevertheless help but feel a little 'talked down' to.  

Can this President do anything right?  Why did I vote for this ninny.  Bush was a complete idiot but at least he had conviction and a decisive goal - Obama just makes a wish upon a star (and by star I mean the US Treasury) and 'hopes' for the best.   I hope that in 2012 the American voters say to him:  "there's no place like home... and that is where we are sending you."

A Stupid Question

Where does the Laffer Curve bend?

My answer: Who gives a care.

The Laffer curve (or blob as I often call it in my econ class) is a dead concept (and has been for years).  There is no magic number.

Let's think about this logically.  A person has the first choice:  "should I work or should I not?"  Given that most people enjoy being productive and given that living costs money and given that people like living, then the answer in the vast majority of cases will be "yes."

Great, so the decision to work is independent of a change in income but rather is a function of wanting SOME income at all versus none.

Ok, so the next decision is, if tax rates skyrocket to really high levels, will I purposely seek to work less or at a lower paying job to get a lower tax rate?  On this question, the conservative assumption has always been yes.  But this is certainly far from obvious in my mind.  If I make a million bucks a year, unless I'm taxed 100% at that level, I'm not going to start flipping hamburgers at McDonalds for $10 an hour.   There is something to be said for the intrinsic satisfaction of utilizing ones skill set to the fullest.   Might I seek to work less hours?  Maybe, but for many Americans the decision to work less hours is not an option at that high level of pay.   You may be a CFO and go to the executive of your company and say, "I'd like to work 10 hours less a week".  And he'll say:  "K bye!  Don't let the door hit your ass on the way out."  Because guess what, there's always that OTHER person who's willing to take $800K instead of $1 million take home pay for the chance to work at that level full-time - especially in this market.

Credit Card "Miles" Scam

We've all gotten them in the mail from various credit card companies -  letters that read something to the effect of:
"Hey, you are so special that we are going to rip you off by misleading you into getting a card with a balloon interest rate of 10-20% by redefining the word 'mile'."  ... Or something like that.

In fact, I just got one in the mail this week:

I got a nice shiny letter with a statement in big bold letters saying: ..."earn 1.25 miles for every $1 you spend on any purchase...."

Really?  Well then you read the fine print (which may be too small for you read) written on this giant small-print fold-out brochure, tucked neatly away on panel 3 of 8, which says, "the number of miles you need for travel varies, and depends on the cost... simply multiply your travel purchases by 100...."

Oh...ok.  So, I want to go on an 800 mile trip that costs me $200.  I have earned 800 miles, but wait, we can't use the normal definition of a mile, we have to use this credit-card-created definition of 'mile' which is ticket cost multiplied by 100.  So I have earned 800 miles, but need 20,000 miles to travel 800 miles.  Sure, yeah, that makes sense.

Just to be clear, if you wanted to buy a $10 flight across town (just for a silly example) you'd need to have 1,000 fake miles saved up - which means you'd need to have spent $800 on the credit card just for that.  Call it what you will - fake miles, 'points', whatever... but they are not real miles and therefore it should be illegal to use that term in such a way as to mislead the public.

Of course most of us know this scam, but it is just an example of a simple marketing ploy designed to get quick-judgement people, teenagers, and senior citizens signed up for a credit deal that could ruin their lives.  Yeah, that's all.   The fact that every major credit card company does it should bother you.  Doing away with this nonsense is something that should have been part of the credit card reform bill that passed congress last year.

Neo-Chartalism, Part III

A question to MMT'ers.

Let's ignore the issue of insolvency, inflation, hyperinflation...all that jazz from Krugman/Wray....
My question is:

In this brave new world where the government spends, numbers are added to a bank account and that spending provides income to the under-capacity private sector to indirectly create some jobs [X], or, contrarily, let's assume the idea of a 'full employment' government guaranteed wage/job at $8 an hour or whatever is provided during a moderate recession to maintain employment - that income is provided by the government (labor spending) to hire that worker to do some job X.

Point is: deficits don't 'matter' (given underemployment) because inflation, stability, politics, perception, credit rating... aren't a concern (which I disagree with to a degree from my last post - but this isn't about that). ...

So the question is: what is "some job [X]?"  And, why do you suspect, in aggregate, that X people that would be otherwise underemployed / unemployed are better off working in a government created job (indirectly or directly) as opposed to some alternative?  I suppose my concern here has a bit of an Austrian tinge to it along the lines of inter-temporal missalocation of capital (and I'll extend that to include labor).  Why assume that the government won't create dynamic inefficiencies?

What happens to these jobs when the recession ends?  Who determines what these jobs are?  Would these jobs create unfair externalities on other private industries?  What about the capital investment created to support the public jobs?  Could these things and the ability to speculate on them create a different kind of government led bubble?  Surely some capital stock would already exist (the under-utilized stock) but certainly not all of it, and that which does exist would need significant retooling - capital purchased from private suppliers.  I recognize that Minsky (who I'll admit I was unaware he was a proponent of this) viewed this as not a real problem provided the employment would be in labor-intensive service type public jobs.  Though, to me, this 'program' just seems riddled with issues.   Though, I'd love your feedback MMT'ers.

But then let us assume that, beyond that question, the employment itself creates a perverse incentive to expect to just work a low-paying, low-skill public works job every recession as opposed to doing what people SHOULD be doing during recessions (re-tooling, continuing education, increasing skill sets, chasing dreams...)  Is that not problematic?

I thought that part of the heterodox tradition was not to blindly say, "it's the spending, stupid" but to anticipate outside the box economic concerns.  I see no real answers in your literature to these concerns.  I understand, from a paper provided to me that Minsky thought that it was 'unfair' to have workers tool to their jobs, rather, particularly in hard times, jobs should tailor to workers - but this strikes me as being a bit one-sided.  Is there not room for development and aid of the worker?   Maybe it's the heterodox in me, but this almost seems to take it to the opposite extreme from Austrianism.   I find that typically, the best policies are those incorporating ideas from numerous fields of thought - which typically means a meeting in the shades of gray.

I await your responses...cordially please....calling me 'sophomoric' is hardly a response.