Chapter 5 from the text.
Chapter XI from the handbook.
All posts from April 24 to April 30.
All posts marked as “Exam 4 Only” on the post “Required for Exams 3 and/or 4”.
There will also be a “wild card” section consisting of questions that were on the last exam, but which were not answered by anyone.
Here’s a chloropleth from the April 26 article from The New York Times entitled “Southern Europe’s Recession Threatens to Spread North”
Note how few EU countries match the (below average) growth rate that America put up over the last year.
Also, recall that Russian money that fled Cyprus is now reported to be going to Latvia. Latvia is a member of the EU (like Cyprus) but is not a member of the EMU (unlike Cyprus) — so it’s reasonable to conclude that the situation won’t evolve the same way. Even so: check out Latvia’s growth rate: inflows of foreign cash are apparently good for you up until they’re bad for you.
The economy grew at a below average annualized rate of 2.5% in 2013 I.
Part of the reason is cuts in government spending.
How is that possible given the level of spending coming out of D.C.?
The reason is that what we commonly hear in the legacy media as government spending is actually government outlays. In short, every check they write. But outlays includes both government consumption and investment (what used to be called government purchases of goods and services) and transfer payments.
But, only the former enters into GDP directly. Transfer payments enter into GDP as private consumption and investment.
So, the explanation is that Obama had doubled-down on the progressives’ nightmare: increasing transfer payments more than government consumption and investment. Thus, total outlays go up, while creating a direct drag on the economy.
You can see this in Table 1.3.3. in Section 1 here. It shows the components of GDP in index form: Federal government consumption and investment has declined for 6 straight quarters.
The advance report came out this morning: 2.5% (annualized). With the final revision to the previous quarters growth of 0.4% (annualized), this puts total growth over the last 12 months at 1.8%.
That is not enough to exceed the population growth rate of around 2%, so we’re talking about continued declines in real GDP per capita.
It’s now been 15 quarters since the trough … making this expansion one of medium length already. Yet total growth is only 8.3%
For comparison, Bush’s weak recovery in 2001-5 put up 10.9% growth over the same number of quarters. The somewhat stronger Bush/Clinton recovery of 1991-4 (that was bad enough to get Bush I voted out of office) got 13.2% over the same period. Reagan got 20.2% in his recovery.
When governments get into financial trouble, (like toddlers) they start making outrageous claims.
This week it’s Greece. Greece wants Germany to pay war reparations for World War II.
It’s a little late for that, isn’t it?
Oh … and there’s the other thing … that by having its Nazi government dissolved by the Allies almost 70 years ago, Germany gets a pass on any damages it incurred.
After 2 months, Italy has a (rickety) government. They were able to elect a ceremonial figurehead last week, and this week put together a coalition government headed by … someone no one has ever heard (not really, but none of the big name people could get a majority of the votes).
He is not seen as someone who will make tough choices that Italy may need:
Mr. Letta, one of Italy's most Europe-minded politicians, is already joining a rising chorus calling for an easing of austerity measures that have hobbled several of the continent's weaker economies—including Italy—and more emphasis on jogging growth and jobs.
"European policies are too focused on austerity, which is no longer sufficient," Mr. Letta said after being nominated by President Giorgio Napolitano.
So ends Italy’s experiment with an EU-oriented premier who was an economist with some understanding of the necessity of tough choices.
In trying to figure out how government finances work, we can’t forget tax expenditures.
That sounds like an oxymoron: a tax can’t be an expenditure … can it?
Welcome to D.C., where it can be. It turns out there is spending and taxes. But a tax expenditure is rebate of one form or another: it’s a tax that should be collected but is somehow exempted. The deductibility of mortgage interest is a good example.
A new or bigger tax break is a "tax cut." (Cheers.) If Congress tells the U.S. Treasury to issue a check for the same sum for the same purpose, it's a spending increase. (Jeers.) So Congress has done a lot of the tax-break approach, which has been dubbed "backdoor spending through the tax code."
This may sound like semantics or, worse, obfuscatory accounting. It's actually a whole lot more than that.
…
All these are variants on the same idea. All have similar economic effects. All involve the government using taxpayers' resources to pick up some of the … tab. One type goes through the spending side of the budget, booting the oft-cited statistic measuring government spending as a share of the economy. The other goes through the tax code, reducing government revenue as a share of the economy.
…
… Donald Marron of the Urban Institute think tank … and colleague Eric Toder estimate that about two-thirds of the $1.2 trillion a year in tax breaks is "spending in disguise."
Read the whole thing, entitled “Tax Breaks as Spending” in the April 25 issue of The Wall Street Journal.
David Wessel, a fairly good economics columnist from The Wall Street Journal lists out the 7 things he thinks we should learn from the last 6 years. It’s tone is similar to my 26 short posts.
A generation ago, unemployment of 7.6% would have been considered a bad recession in the U.S. Now it's a sign of improvement …
Is this the best we can do?
…
It's hard to know what might have been. This episode is not yet over, so no one can know the ultimate consequences of what has been done. That said, a few early lessons seem clear:
Lesson one: Get the diagnosis right.
Ken Rogoff, a Harvard economist … says the single most important thing to remember is this: "When you have a recession accompanied by a deep financial crisis, you are in for a long period of slow growth."
… This sort of recession is more like a chronic disease. … "This is really about whether you are going to have slow growth for five years or 15," he says. Neither the U.S. nor Europe understood this in when the first major financial shocks hit.
Lesson two: When in doubt, do more, not less.
… Recent history demonstrates that initial forecasts are rarely gloomy enough …
… Recent history doesn't yet provide much support that less stimulus would have been better.
Lesson three: A financial crisis is about economics, not morality.
There's a temptation to preach after so many people make so many mistakes: Avoid the sins that created the crisis. Punish the perpetrators. Pursue the economic rectitude of thrift.
… There's a strong case for … temporarily putting aside the fear …
Lesson four: Mind the banks.
During the Great Depression, as Ben Bernanke showed in his academic work, the economy suffered from the Federal Reserve's failure to see that dying banks were clogging the credit arteries of the economy. … During the 2000s, the U.S. learned from that history; Europe did not.
…
So U.S. banks are widely regarded as healthy, and are beginning to lend more readily. Some major European banks, meanwhile, are still seen as shaky.
Lesson five: Mind the borrowers, too.
If a borrower truly can't pay back a loan, then pretending he will does neither borrower nor lender any good—and it can cripple an economy. But the politics of writing off debts, especially at taxpayer expense, can be an insurmountable obstacle.
… Neither the Bush nor the Obama administrations ever found a vehicle with a payoff that they thought worth the economic and political cost. Their critics say this excessive caution prolonged the housing bust and slowed the recovery.
In Europe, there was a reluctance to appear to be rewarding profligate peripheral economies (see Lesson three) by forgiving their debts. …
Lesson six: Go for long-acting, time-release fiscal policy.
With hindsight, the composition of the small Bush fiscal stimulus of 2008 and the big Obama fiscal stimulus of 2009 weren't suited to the problem. … Had Congress been willing, a smarter stimulus would have been … more "speedy, substantial and sustained"
Lesson seven: Have an exit strategy and explain it.
There is still a nagging worry that this is going to end badly, and that can lead businesses, consumers and politicians to hold back and hurt the economy.
Typically, I agree with a big chunk of what Wessel says, but rarely all of it. Same here.
Read the whole thing, entitled “Seven Lessons for Fixing an Economy” in the April 20 issue of The Wall Street Journal.
There’s a tendency to think, that because Germany is the healthiest economy in the EU now, that it is healthy and it has always been that way. A set of graphs shows that’s not the case:
What’s interesting about these charts, is that Germany is shown in each one in comparison to another country.
In the top row, Germany starts during the Great Recession with unemployment over 8%, and is beaten on that count by half the countries. By while Germany improves more or less steadily, the other countries each get progressively worse.
The story with the debt/GDP ratio is a little different. Germany is slowly getting worse here. But following one path or another, all the other countries end up at the same level or worse.
Read the whole thing, entitled “Inside Merkel’s Bet On the Euro’s Future” in the April 24 issue of The Wall Street Journal.
The recession was large. This was certainly the worst recession since 1981-2, and arguably the worst since 1937-8 (although I don’t support that). Perhaps we lack perspective on how lousy these things can be; recall that Reagan and Bush were not able to get the unemployment rate to return to its “natural rate” either.
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The second half of the recession was particularly steep. We haven’t seen a nosedive like fall 2008 since 1957-8 or the Fed/Carter mini-recession in 1980. That one was caused by policy blunders that were easily undone, this recession was not. Again, perhaps we lack perspective on how lousy things can be.
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The recovery has been weak. It has been weak, but it’s actually on the low end of normal in most respects. The inherent variability in the macroeconomy is broader than people recognize. To be fair, we’re running around the 30th percentile for performance over the last 4 years. That’s lousy but it isn’t Pittsburgh Pirates territory.
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Weak recoveries may be the new normal. We haven’t had a strong recovery since 1982-4. When we say the recession of 2007-9 was the worst since 1981-2, we end up implicitly claiming that the recovery since 2009 should look like 1982-4. There is no basis for thinking that assertions like that are any better than charting is for investment analysis. Having said that, we shouldn’t assume that this recovery should have been weak either.
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There is no path to recover towards. Any time we measure the deviation of where the economy is from where we think it ought to be, we have to make a guess about where that is. We rarely ask if that question has any meaning at all. An example may help. When Super Bowl XLVII started, we might have looked at the 49ers average of 24 points per game and forecast them to score that many. But, by the time the power outage hit, they had only scored 6 points, with less than half the game left. At that point, everyone would say they might get 6 points more in the second half (matching the performance they’ve already put up), or perhaps 12 more points (because that’s their historical rate for a half). We would not say that the season average of 24 points is some sort of attractor that has the power to force them to score 18 more points in the second half to make this particular game consistent with the historical average (this is why it was such an exciting shock when they did just this). But, that is exactly what we do with the economy when we say it is still 5% off where it should be, and that there is a problem with its performance because it isn’t closing that gap. The only gap we’re sure of is the one in the past, and it’s a non sequitar to assume there’s one in the future too.
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The Bush stimulus didn’t work either. We tend to forget that there was a smaller set of stimulus packages pushed through early in 2008. Recognizing this should make us pick on Obama and the Democrats less, and the concept of stimulus more.
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Obama’s stimulus package was mostly pork and shouldn’t have been expected to work well. Larry Summers argued before the inauguration that at most there was $300B of (potentially) stimulative spending that could be dreamed up. The scope of this recession, which probably exceeded the likely effects of what the package spent (even if it was all stimulative) would clearly swamp this smaller value.
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Obama’s stimulus package was backloaded. The package contained little that was spent quickly, and instead ramped up spending over a period of 8-10 years.
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Tax cuts work better than spending increases. Obama’s CEA Chair, Christina Romer, published new estimates of multipliers (while she was in office) showing that tax cuts appear to have about 3 times the effect of spending increases. Obviously the stimulus package got this backwards.
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The multiplier is small. Inside the White House, they were using 1.53 as their estimate of the multiplier. This puts their own estimate of the effect of their $800B package at no more than $1,200B. Arguably, that’s smaller than the dropoff we actually had before the package was put into effect. This is the support for the position of Krugman or Bernstein that the stimulus was too small. If you’re a believer, they have a point.
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We don’t have a counterfactual. Perhaps the Obama and Bush stimulus packages, along with Federal Reserve policies did work … and things could have been a lot worse.
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The financial crisis and the recession are separate beasts, and we don’t usually get both at the same time. Everyone conflates these, and we should know better. There are financial crises without recessions (like the S&L crisis of the late 80’s), and nasty recessions without financial crises (like 1973-5). We haven’t had them coincide since 1929-1933. In particular, note that this recession’s first 9 months were relatively mild until the financial crisis hit and doubled the fun.
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A lot of other countries have tried fiscal stimulus, and it hasn’t worked there either. Of course, the classic example here is Japan over the last 20 years. But, we could also include China over the last 10-15 years in this group (and while China has grown very well, it’s much harder to assert that it has grown faster than other countries with its level of development, many of which have not resorted to Keynesian policies).
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Perhaps our expectations were inflated. How quickly we have forgotten that the 4 best years in the history of the global economy were … 2003, 2004, 2005 and 2006. I don’t subscribe to the view that economically we get a hangover from the good times. But I do find it reasonable that, just as our current expectations exaggerate the negative, our expectation of what good times should look like is more optimistic than it should be.
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Perhaps we’re not measuring the right things. We have millions of kids in the developing world walking around with (what in the 70’s would have been) trillions of dollars worth of computing power in their pockets. They clearly think this is valuable. Yet we measure this at current retail prices. The viewpoint of our statistics is that most of the time people spend on the internet is wasted. No one seriously believes that. Even so, our statistics are geared towards measuring the economy we don’t have any more, and that the Chinese do. Perhaps this is why we look so bad and they look so good.
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We’ve embodied a lot of wealth in non-liquid forms, and our policies are trying really hard to keep it that way. Financial crises can either be in solvency or liquidity. The latter is easier to address. The housing aspect of the crisis was clearly one of solvency. This is a bigger problem because those insolvent assets are also illiquid. We did a much better job of addressing that sort of issue with the S&L crisis of 25 years ago. At the time we bitched a lot about the inadequacies that were obvious in unraveling those positions, but our current approach is a cluster**** by comparison (I hope I can be free to use that military lingo for emphasis).
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Obama’s policies have created a lot of uncertainty. This view is particularly insidious. We should not take as seriously the claims of business people that they are unwilling to invest because of policy uncertainty: uncertainty actually raises the value of the option component of equity investments. Nonetheless, I don’t think these people are fibbing, so what are they worried about? Options theory tells us that the same results follow if either a) current prices of investment projects are inflated, b) future values of investment projects are deflated, c) the time horizon has been shortened, or d) the discount rate has gone up. The only one that holds water is (b). In this case, firms are saying that their project is worth more without (say) Obamacare than it is with it. Fair enough (and while I don’t subscribe to this view, it isn’t unreasonable to conclude that the social benefits to Obamacare outweigh those private losses). The thing is, claiming that it is uncertainty that is holding investments back is implicitly a claim that once the policy uncertainty is removed, investment will rush forward. This is a tooth fairy story for Democrats; option theory tells us that if this argument is correct it would have already happened. I don’t think it’s a mistake that the generally compliant media have latched on to this story, since that tooth fairy end game is hopeful for progressives. I also don’t think it’s a mistake that the Democrats in D.C. spend so much effort downplaying that they are creating widespread uncertainty: they can see that stirring up the uncertainty pot has been beneficial for specific industries (e.g. solar) … but that story just doesn’t work for the rest of the economy.
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Rules vs. Discretion. It’s a settled issue in macroeconomics that discretionary policy regimes lead to wasteful spending. Politicians refuse to get this point, and the Democrats tend to be a bit worse about that. Certainly the policies since Clinton left office have been much more discretionary. Perhaps we’re feeling poor because we’ve thrown so much away.
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Temporary vs. Permanent cuts. Again, this is a settled issue in macroeconomics that politicians choose to ignore. In short, policies that are viewed as temporary are unlikely to have strong effects. Further, while something like Obamacare as a whole is probably permanent, large aspects of it are malleable, and therefore best regarded as temporary. Perhaps the biggest fault in our current political system is that grandstanding has led to an upsurge in temporary policies.
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FICA cuts were to the wrong source. One of the few tax cuts initiated by Obama and the Democrats was the FICA rebate. The thing is, if they wanted this to help the economy, they should have rebated the FICA taken out of firms’ compensation bill. This might have encouraged them to hire more people. Instead, the rebate went to workers. So this is really a transfer from the unemployed to the employed (yes, you read that correctly).
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We’re in a liquidity trap. This is more or less what the textbooks have been saying for decades that a liquidity trap would look like. But, the way out of that is expansionary fiscal policy … D.C. is a lot better at labeling their policies as expansionary than they are at actually making them so (passim).
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Central bank policies change the measures of liquidity made external to people, but it isn’t clear how they affect liquidity inside people’s heads. This was the Japanese experience in the 1990’s. In short, it means that monetary policy isn’t expansionary because policy says that it is. Instead policy is expansionary because the public proves that it is. If they aren’t cooperative, you need to go back to the drawing board. The Fed seems to recognize this, which is where quantitative easing came from.
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State and local government sectors are down. On the whole, if you take the economy apart, the only sector that was and is still hurting is state and local government. Textbooks have made clear for at least 20 years that the procyclical policies put in place at this level were a disaster waiting to happen if the downturn was severe enough. Bingo! D.C. has made this worse by collecting the taxes and then distributing the funds to lower levels: to the extent that D.C. is increasingly hobbled by entitlement spending, their ability to head off procyclical amplification of downturns by cub scouts at the state and local level is decreasing.
| There’s an arthouse film called Thirty-Two Short Films About Glenn Gould. You’re getting Twenty-Six Short Posts from Dr. Tufte. :) These are on why it’s difficult to understand the current macroeconomic situation. Joe Baker is not a macroeconomist, but we all do a little bit of everything at SUU, so he has to teach principles of macroeconomics sometimes. The other day he asked for pointers about summing up for his students why we can’t quite figure out what’s wrong with the economy. I came up with 26 reasons, most of which have been discussed in class, and all of which are now required. |
The country is having an attack of collective laziness. You have to soft sell this point, but it is always worthy of mention. Time use studies indicate the decline in paid work is not matched by an increase in unpaid work or investment (charity, exercise, going back to school). Instead, most of it has gone into leisure pursuits. The world would be a better place if this was voluntary instead of involuntary leisure. On the other hand, we might feel better about the state of the economy if we counted leisure in real GDP, and pointed out to people that there’s a tradeoff between goods and leisure going on. This is provocative because it runs in parallel to some other aspects of the economy: a) lack of financial liquidity, b) high hedonic value attached to virtual goods and services that is difficulty to monetize, and c) our own time and effort is getting more difficult to monetize (so more leisure is actually a choice to be lazy because turning your time into liquidity has gotten tougher). All of this is supported by the low willingness to move to where the jobs are over the last 5 years.
| There’s an arthouse film called Thirty-Two Short Films About Glenn Gould. You’re getting Twenty-Six Short Posts from Dr. Tufte. :) These are on why it’s difficult to understand the current macroeconomic situation. Joe Baker is not a macroeconomist, but we all do a little bit of everything at SUU, so he has to teach principles of macroeconomics sometimes. The other day he asked for pointers about summing up for his students why we can’t quite figure out what’s wrong with the economy. I came up with 26 reasons, most of which have been discussed in class, and all of which are now required. |
The employment sector has bifurcated. JOLTS data indicate that the job market has been recovering normally for almost 4 years, and that in many ways is back to where we should expect it to be in mid-expansion. Except we’ve left about 5 million people out. Somehow we’ve put an (invisible) scarlet letter on a small, but not insignificant, chunk of the population. The data and the reality will not be pretty until we figure out what’s wrong with this group.
| There’s an arthouse film called Thirty-Two Short Films About Glenn Gould. You’re getting Twenty-Six Short Posts from Dr. Tufte. :) These are on why it’s difficult to understand the current macroeconomic situation. Joe Baker is not a macroeconomist, but we all do a little bit of everything at SUU, so he has to teach principles of macroeconomics sometimes. The other day he asked for pointers about summing up for his students why we can’t quite figure out what’s wrong with the economy. I came up with 26 reasons, most of which have been discussed in class, and all of which are now required. |
The latest hot off the presses research argues that we’re overinvesting in many job categories. The typical view is that there is a flow of job skills that is required by the economy. For example, the economy needs more apps, so the education system produces a flow of more app designers. An alternative view is that employers are not trying to match inflows to outflows, but are instead accumulating human capital. In this case, the decision to acquire people with certain skills is driven by getting the level of human capital to its target. The latest is research argues that we had high growth in certain fields in the 80’s and 90’s that was driven by inadequate human capital inside firms, but that the target was achieved around 2000. Yet we’ve spent the last decade maintaining that flow of people with certain skills … much to their detriment. This is consistent with the view that we have openings for workers with some general higher order thinking skills, but without the more specific skills imposed by most college majors.
| There’s an arthouse film called Thirty-Two Short Films About Glenn Gould. You’re getting Twenty-Six Short Posts from Dr. Tufte. :) These are on why it’s difficult to understand the current macroeconomic situation. Joe Baker is not a macroeconomist, but we all do a little bit of everything at SUU, so he has to teach principles of macroeconomics sometimes. The other day he asked for pointers about summing up for his students why we can’t quite figure out what’s wrong with the economy. I came up with 26 reasons, most of which have been discussed in class, and all of which are now required. |
I posted last month about how overtime hours are close to an all time high, even though employment is not.
Here’s a graphic with a slightly different take:
This shows a great deal of similarity between the current expansion and the expansion of the early 90’s. That expansion was regarded as weak for its first 5 years. There is also some similarity to the “Reagan expansion” after the 1981-2 recession (although in that one the unemployment rate declined from its peak by a full percentage point more than it has in this expansion: 10.8% to 7.2%, instead of 10.0% to 7.6%).
One way to view this is presented in the article: that business are giving existing workers more hours because they are unsure if the strong sales will keep up. The alternative given in class is that we’ve increased the fixed costs of hiring a new worker to the point where firms can’t justify bringing them on.
Read the whole thing, entitled “Factory Overtime Cranks Up” in the April 18 issue of The Wall Street Journal.
