Perspective on Depression and Recession

The piece entitled “How a Modern Depression Might Look – if the U.S. Gets There” from the March 30 issue of The Wall Street Journal has some good graphs showing how far we off from what happened in 1929-33.

The graphs give you a pretty good idea that to get to that level we’d need to perpetuate the last few months for about 30 to 40 more (a point I’ve made in class more than once).

It also shows that the serious downturn in the statistics for the current recession really doesn’t start until several months after it started (a point I made in class about 3 weeks ago).

The article also has some good interview research with people who lived through the depression. I particularly liked the quote using the word “threadbare”. That’s just not a word that you hear any more because even homeless people’s clothes aren’t threadbare any more.

The Not-So Pervasive Recession

Recessions aren’t supposed to be bad everywhere (although they can be). Rather, the standard is that they be reasonably nationwide.

From the start, this recession hasn’t been that way. Big swaths of the country have been bordering on OK. Not good or even fair, but OK.

A case in point of this is the map in the article entitled “Many Smaller Cities Dodge Crunch In Consumer Lending” from the March 30 issue of The Wall Street Journal.

The map purports to show the many small cities around the country that are doing OK on this point. This borders on a lie.

The map shows clearly in red the major urban areas that are struggling on this count: Los Angeles, San Diego, San Francisco, Las Vegas, Kansas City and Detroit. And that’s it. OK … I’ll throw in some of the other places in California – like the OC, Riverside, Santa Barbara, Oakland, Berkeley, and Bakersfield.

In green are the “small” cities that are doing OK. You know, small places like New York City, Chicago, Philadelphia, Boston, Washington, Atlanta, Dallas, Houston, San Antonio, Phoenix (!!!), Seattle, Orlando, Miami, Nashville, Cleveland, Pittsburgh, Cincinnati, Columbus, Indianapolis, Minneapolis/St. Paul, Milwaukee, St. Louis, Memphis, Denver, Salt Lake City, Portland, Austin, Charlotte, Richmond, Raleigh-Durham-Chapel Hill, Buffalo, Rochester, Syracuse, Baltimore, Birmingham, Mobile, Montgomery, Huntsville, Jackson, New Orleans (!!!), Little Rock, Oklahoma City, Omaha, Anchorage, and so on. Gosh … eventually … by squinting … I did get to some small metropolitan areas.

The take-away from this is that there’s probably no way I can instill in you a BS filter strong enough to deal with the inability of journalists to report macroeconomics accurately.

U.S. Government Violates Mexican Law

Mary Anastasia O’Grady points out an interesting issue in her Monday column in the March 30 issue of The Wall Street Journal. Our government now owns a third of Citibank, which in turn owns Mexico’s 2nd largest bank (Banamex), and Mexico has a law against foreign government ownership of its banks. Big problem …

Part of what makes macroeconomic policy so difficult in practice is that the decision makers in most countries aren’t on the ball enough to catch stuff like this.

The AIG bonuses that were specifically approved before they were more generally disparaged is a case in point.

What makes it worse is that neither one of these was a secret. The government could have found this stuff out if it wanted to. In retrospect though, it doesn’t even seem like they made an effort. That’s not a recipe for success in spending $800B in stimulus money.

Of course, perhaps it wasn’t success they were after: maybe it was just spending.

The CBO’s Real GDP Forecasts

The Congressional Budget Office is a pretty good - but not completely nonpartisan –source of macroeconomic information. This agency tends to line up with the party that controls Congress, but not very strongly. In practice, they many times end up pointing out the unrealistic assumptions of policies.

Its director, Doug Elmendorf, has an (official) blog. Go check out his forecasts for where real GDP is going to go over the next 10 years.

Even though there are variations in the forecasts, they all show substantial growth, and they all turn this terrible, horrible, no good, very bad recession we’re in into just another hiccup.

You Say No One Predicted this Financial Crisis?

It’s popular for pundits on TV to remark that no one predicted any of this. (Recall that 94% of them aren’t economists.)

Here’s a good one: Larry Summers predicted something like this 20 years ago. Is he no one? That’s just for starters.

I think if we put our aluminum foil hats on to filter out the garbage, and wrote down what we thought of a statement like “no one predicted this” coming from someone paid to make predictions, we’d probably come up with two points: 1) someone did predict it, and 2) it wasn’t the person talking.

Having said that, forecasting the economy isn’t easy, and each recession is different from all the others, so a lot of this is akin to predicting that the Jazz will win the championship this season … at the beginning of every season.

Government Spending and Taxation

Amounts for government spending and taxation, by categories, at all levels.

One especially useful thing about the spending site is that it explicitly lists the transfers from the federal government to the states. About 10% of the federal budget is transferred to the states, most of it for healthcare.

A useful thing about the taxation site is that it makes it readily clear how little of the government is financed from corporate taxes. Many people seem to think that if we only taxed them a bit more we’d be OK. Try this for an experiment: ask them by what percentage we should increase corporate income tax revenue. The idea that we’d need to increase it by 400% to get rid of the personal income tax isn’t on most folks radar screens.

Final 2008 IV Real GDP Growth

The third and last take on the real GDP growth rate came out Friday morning. It showed a small downward revision: so the numbers have gone –5.8% to –6.2% to –6.3%,

Friday’s Spreadsheet

It’s updated and finished on G. Do take a look because I added a discussion of a “worst case scenario”.

“A Smoot-Hawley Moment”

As a rule I don’t like to put editorial pieces out in front of students, but I did mention this one in Wednesday’s class in response to Anthony’s question, so I should post about it so that you can form your own opinion. This was in the March 23 issue of The Wall Street Journal.

When does a single policy blunder herald much larger economic damage? Sometimes it's hard to know ahead of time. Few in Congress thought the Smoot-Hawley tariff was a disaster in 1930 …

It is certainly one of the more amazing and senseless acts of political retribution in American history. …

…

The House legislation may also be unconstitutional on equal protection grounds given that it treats a homogeneous group of individuals differently depending on which companies they work for. It is one thing to treat the companies that receive federal funds differently from those that don't. But the individuals receiving bonuses may have nothing to do with the decision to receive TARP money. The House's 90% tax on some bankers but not others is only a step away from deciding to impose a higher tax rate on employees of any company out of political favor -- say, tobacco companies, or in the next Republican Congress, the New York Times Co.

Which brings us to the Smoot-Hawley analogy. With such a sweeping assault on contracts and punitive taxation, Congress is introducing an element of political risk to economic decisions that is typical of Argentina or Russia. The sanctity of U.S. contracts has long been one of America's competitive advantages in luring capital …

…

The other Smoot-Hawley comparison relates to our new President. Herbert Hoover sent mixed signals about the tariff until he finally bent to a panicked GOP Congress. President Obama has behaved in the past week as if he can appease and "channel" Congressional anger without being run over himself. So not only did he incite the Members last Monday, he welcomed the House bill on Thursday. By the weekend, cooler White House heads were whispering that the mob had gone too far, but it will take more than words to kill this terrible legislation. Mr. Obama will have to fire a gun in the air -- which means threatening a veto.

On Inauguration Day, we wrote that our young President has a first-class intellect and temperament. Our question was whether he is tough enough. So far the answer is no. He has failed to stand up to a Congress of his own party on anything difficult -- from stimulus priorities, to earmarks, to protectionism against Mexican trucks. Mr. Obama needs to face down the AIG mob, or his Presidency may be its next victim.

The content of this post will not be on any tests – this is just about keeping you all on the same page with where I went with a classroom discussion about current events.

Giving It Back

An article in the Business Day section of Tuesday’s issue of The New York Times discusses the plan in the works for Goldman-Sachs to repay the TARP funds they received in the fall.

There are a number of issues going on here.

1) It’s probably a good sign for the economy that someone can start repaying the money they got.

Very soon, actually — ideally within the next month, according to people involved in the process. That’s a much quicker timetable than the end-of-year goal previously set out …

2) Goldman-Sachs has gotten some bad press the last month because they were one of the largest recipients of money from AIG. So there’s money that went straight from the Treasury through AIG to Goldman-Sachs.

Criticism of Goldman over revelations that the firm had been the largest recipient of government money as a counterparty of bets placed with A.I.G. …

3) Goldman-Sachs has also gotten some bad press because Bush’s last Treasury secretary – Hank Paulson – was the CEO of Goldman-Sachs before taking that position.

Goldman would also like to put an end to the whisper campaigns about ties between it and Mr. Paulson (and Timothy F. Geithner, too, for that matter).

4) If you recall back in the fall, Paulson and the Treasury made a group of large banks all take money – whether they needed it or not – so as not to reveal who was in trouble. Apparently, Goldman-Sachs wasn’t.

But here’s the asterisk, and it’s a big one. If Goldman succeeds in returning our money, it could put pressure on other banks to give their money back, too, lest they appear weak.

This, you’ll recall, was the logic used by the former Treasury secretary, Henry M. Paulson, last October when he strong-armed some of the chief executives of the nine largest banks to participate in the Treasury plan to inject $165 billion of capital into the banking system, even though some felt they didn’t need it.

The problem now is that many of them may still need the money. And yet they may try to follow Goldman’s lead. …

…

Richard M. Kovacevich, chairman of Wells Fargo, expressed outrage at the TARP money he accepted and the strings that might be attached to it after the bonus bill passed last week.

“Is this America, when you can do what your government asks you to do and then retroactively you also have additional conditions put on?”

5) Goldman-Sachs is also making very clear that they are doing this because they want to be able to pay bonuses to people who deserve them without government interference.

“It’s just impossible to run our business in this environment,” said one senior Goldman executive who insisted on not being quoted by name for fear of crossing the Treasury …

…

The firm’s famously well-paid executives — Mr. Blankfein made $60 million in 2007 (some of which was in stock, which has since fallen in value) — would be taxed at 90 percent of their bonuses if a bill passed by the House last week were to become law.

Candy

A front page piece from Tuesday’s issue of The New York Times discusses the current state of the candy industry and candy retailing.

It turns out that candy is an inferior good: its sales go up when incomes drop.

This makes it an important indicator for the economy as a whole. Lipstick and other sorts of make-up that women by a la carte are also a good indicator that moves opposite to the economy as a whole (Greenspan was known for paying a lot of attention to lipstick sales).

There may be historic precedent to the recessionary strength of the candy business. During the 1930s, candy companies thrived, introducing an array of confections that remain popular today. Snickers started in 1930. Tootsie Pops appeared in 1931. Mars bars with almonds and Three Musketeers bars followed in 1932.

Duh … the reporter must not be a baseball fan because the Babe Ruth probably came out around the same time – near the end of his career.

Bad Data from Bad Countries

I’ve commented a few times in class on the lack of believability of economic statistics put out by, say, China, because there isn’t any sort of ombudsman (another word to look up) who might humiliate them into being more honest.

Andrew Gelman posted some evidence of this for Russia:

• $7,600 (World Bank 2007)15
• $9,100 (World Bank 2007)16
• $14,700 (PPP adjusted, World Bank 2007)17
• $4,500 (World Bank 2006)18
• $7600 or $14,400 (gross national income: "Atlas method" or "purchasing power parity," World Bank 2007)19
• $12,600 (IMF 2008), $9,100 (World Bank 2007), or $12,500 (CIA 2008)20
• $2,637 in 2000 US dollars (World Bank 2007)21; that's $3,200 in 2007 dollars22
• $2,621 (World Bank 2006) or $8,600 (IMF)

To sum up, the official figures are somewhere between 1/15 and 1/3 of those for the U.S. That’s a lot of uncertainty.

Attribution Error, Elections and Macroeconomics

Attribution error is the name given to psychologists that we tend to attribute blame (or thanks) to people or things that are close by: it’s very similar to guilt by association.

In macroeconomics, this comes up with business cycles and elections. Reagan, Clinton and Bush II get reelected because the economy is doing OK, while Bush I doesn’t because the economy is doing badly. This is in spite of the weak connection – if there is one at all – between presidents and economics performance.

An excellent example of how strong this attribution error can be is contained in this post from Core Economics (the most important Australian economics blog) where they show that state elections in Australia can be predicted by the U.S. unemployment rate.

This doesn’t mean that unemployment in the U.S. causes Australian elections. That’s silly.

But, there is a strong correlation.

What’s going on here is that U.S. unemployment rates are strongly positively correlated with the U.S. economy, which is weakly positively correlated with the Australian economy, which is strongly positively correlated with Australian state economies, whose performance voters attribute to the prominent nearby targets: local politicians.

This is a big problem for the U.S. in the future. The presence of attribution errors suggests that Bush will always be blamed for the recession that started on his watch. Obama will get the credit for ending the recession, since they all end relatively quickly (on the scale of elections).

This will extend to the stimulus package as well. It is very likely to be declared a success if the economy recovers. However, if the economy starts to recover before very late in 2009, it’s very likely that it is the Bush stimulus of 2008 that made the difference, not the Obama stimulus of 2009.

Home Price Roller Coaster

Here’s the link to the video at speculativebubble.

FWIW: the people who crow that no one told them this was coming weren’t paying attention to sites like this – whose authors chose the name speculativebubble in 1999. I’m going to go out on a limb here and guess that they chose that name 10 years ago because they had a pretty good idea what was coming and weren’t afraid to talk about it.

February’s Retail Sales

The U.S. Census Bureau announced that retail sales were down 0.1% from January to February.

This isn’t good news.

Having said that, this means that January’s 1.8% rise wasn’t a fluke: both months are now above December.

Also, if we don’t count motor vehicles (generally I am against nitpicking like this, but gee whiz, do you think people are inordinately worried about buying some makes of car these days?) retail sales were actually up in February.

Lastly, retail sales tend to be a coincident indicator: they peak and trough at the same time as the whole economy. The more months we string together, the more likely it is that the economy troughed around the new year.

Stimulus Packages In Perspective

Another long piece in the March 9 issue of The Wall Street Journal entitled “U.S. to Push for Global Stimulus” has a table in which stimulus packages by country are scaled by the countries GDP.

The U.S. is near the top, but not at the top.

As a subtext, the article also discusses how western European governments are pushing for less spending as a cure for the recession, and more regulation. It will be interesting to see how things turn out for them over the next 10 years or so, since they are already known for more regulation, and that has correlated with weaker economic performance over the last 30 years.

Manufacturing In Recessions

There’s a great chart in a long article in the March 9 issue of The Wall Street Journal entitled “Lean Factories Find It Hard to Cut Jobs Even In a Slump”.

It shows employment growth and production growth – for manufacturing only -  over the last 40 years. It can give you a sense that recessions are rarer than they used to be, and that the ups and downs are not as volatile.

This is part of the reason that folks are so freaked out about this recession: many haven’t experienced something like this before.

A Shrinking Global Economy

I a March 9 piece entitled “Report Says Economy Will Shrink Worldwide”, The New York Times reports that the World Bank forecasts that for the first time since World War II (basically since the first time they started measuring) the global economy will shrink.

This is a reasonable forecast, but it would probably help to have some context:

• The World Bank only started with the end of World War II, so its forecasts don’t go back very far.
• Prior to 1960 most of the world’s countries weren’t independent yet, so it isn’t clear how accurate measures of global performance were back then.
• The World Bank and other international agencies have had a bad habit of taking the economic estimates of disreputable governments at face value. We have less of those now, which suggests that past forecasts may not have been too good.
• The World Bank also measured (not forecast) that 2003-6 were each the best year ever for the global economy, four years running. As many have pointed out, perhaps we’re unraveling some of those good times – the higher you fly, the harder you fall.

February’s Unemployment Rate

It’s up quite a bit to 8.1%.

That’s the highest since the wake of the 1981-2 recession.

We talked a bit in class about the historical perspective on this, and you can get that data from the Bureau of Labor Statistics. On their graph, recessions are steep upward climbs on their time series plot of the unemployment rate, while expansions are flatter and longer downward sloping portions. The real question about this recession on that graph is how long that steep climb can persist; there’s simply no good way to figure that out.

Over the weekend I downloaded that data, got it into Excel and color-coded it to give you a better sense of how to interpret the numbers. It’s on the G drive, and is called Unemployment Rates.

Barro On the Chance of a Depression

Scary research from Robert Barro on the op-ed page of the March 4 issue of The Wall Street Journal.

He got data going back to 1870 from 33 countries on 251 stock market crashes and 97 downturns that he labels depressions (depression is not a technical term with a fixed definition, so he classifies any decline in per capita GDP of more than 10% as a depression). He does this because:

The U.S. macroeconomy has been so tame for so long that it's impossible to get an accurate reading about depression odds just from the U.S. data.

He finds that 3/4 of depressions are associated with stock market crashes, but that only 1/4 of stock market crashes occur with a depression. This translates to:

There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s.

Unemployment Rates by County

Unemployment rates, broken down by county, shaded for your pleasure by The New York Times, complete with cool interactive filters.

I was most surprised by the fact that unemployment rates are not more correlated with housing bubbles.

Technorati Tags: unemployment,rate,county,map

Best Policy Advice I’ve Heard Recently

Bill Polley links to this opinion piece from the editors of Notices of the American Mathematical Society. It’s general advice for people using mathematics to design policies for complex adaptive systems (like macroeconomies full of decision-makers):

i) Complete control … is impossible … decisions should instead be guidelines. Detailed plans should be left to those executing them.

ii) Expect some failures. Hence continuous revision and updating are required.

iii) There is no single solution …

iv) [Solution] Diversity should be preserved and encouraged.

v) Transparency and trust have to exist.

vi) Decisions can result only after serious consultations with those executing them and those affected by them (bottom-up approach).

vii) Deserved decentralization should be encouraged.

Read the whole thing: it’s short, and they “get it” in ways a lot of policy authorities don’t.

Technorati Tags: complex,adaptive,system,policy,guideline

More Signs the Economy Might Be Thawing

Irwin Kellner at MarketWatch has a list of all the good news in a February 24 post entitled “Signs of Life”.

It’s a fairly long list of encouraging signs, but keep in mind that there are hundreds of economic indicators, and here we have just a few dozen going in the right direction.

Again, I’m not making any claims that this is the turning point, but I am claiming that when later on when we realize a turn has definitely taken place, this is the sort of evidence we’ll be looking for.

Obama’s Economists Position

Christina Romer is chair of the Council of Economic Advisors in the Obama White House. That makes her arguably the top (real) economist in the administration.*

Here’s her official statement about the stimulus plan.

* One could argue that Larry Summers, the chair of the National Economic Council, has a loftier position. It remains to be seen whether one, both, or neither of them really has much influence.

Comparing Recessions

The Federal Reserve Bank of Minneapolis has a fantastic site that allows you to compare this recession against any of the other 10 most recent recessions, on the basis of where were are now versus where they were then.

The news isn’t good for optimists: a lot of recessions were over by now.

But, the news isn’t good for pessimists either: on employment, 3 of the 10 were worse than this one, and on output 4 of 9 were worse (there’s a tie in there I didn’t count).

Now, past behavior is no guarantee of future performance, but 10 out of 10 recessions suggest that employment and output will bottom out and start improving by summer.