The Economic Way of Thinking

The End Of The Recession Indicator: I Will Not Let Christina Romer Forget Her Words

There's nothing worse to me than watching politics and religion on TV on a Sunday morning.  But the Great Recession has encouraged me to occasionally watch Meet the Press, a show I really dislike.  Christina Romer was interviewed yesterday.  A clip from the transcript:

MR. GREGORY: When do you expect you will be able to say the recession is over?

DR. ROMER: Well, I'm not going to say the recession is over until the unemployment rate is down to normal levels, until...

MR. GREGORY: Which would be?

DR. ROMER: You know, again--are you asking me, you know, timing?

MR. GREGORY: No, what's a normal level?

DR. ROMER: Well, the normal, you know, where we were before the recession is sort of in the--certainly in the 5 percent range. That is, you know, what Americans are, are used to.

MR. GREGORY: Can that be accomplished in a year's time?

DR. ROMER: Well, it--we'd have--I think we're going to--it's going to take--you know, this recession took a long time coming, it's going to take a long time coming out. We can make incredible progress. We can get that unemployment rate coming down. The--you know, the whole key is not just, you know, growing again. We've got to grow robustly. That's how you get a lot of job creation, that's how you get a lot of progress on the unemployment rate.

So let's not forget those words, coming from the highest of auspices:  the recession won't be over until unemployment hits 5%.  Let's see if she and her staff declare it over well before we reach that benchmark.  My conjecture:  they surely will.

Assorted Links

(1) Here's a more literal interpretation of the fatal conceit.  Here's a link to the Australian study that found doctors had just a 9 percent hand-washing compliance rate, which is further discussed in Super Freakonomics.

(2) Speaking of Super Freakonomics, I finally finished reading it a couple weeks ago.  I'm a big fan; though, I must say that the controversial geoengineering chapter just doesn't fit with the rest of the content.  It's not really freaky (nor is it economics!), and it seems like it's included mainly to help sell copies.

(3) I've been listening to The Monster of Florence CDs in my car recently.  It's clear from the first couple of disks that Italy's history of botched crime scene investigations has a history that pre-dates Foxy Knoxy (slides describing some of the mistakes made in the Knox case here).  According to the book, serious mistakes and contamination of evidence occurred throughout Florence's string of creepy, unsolved serial murders. 

With Italy's legal system in the news (and on my mind), can someone point me to a good empirical paper on the effects of Italy's jury system vis-a-vis the U.S.?  The two judges on the jury structure of Italy's system, in particular, must be resulting in a lot of "professional" strong-arming.  And, surely, good empirical studies have been done on this difference, no? 

(4) Posner and Becker on Obama's jobs summit and increasing employment.

(5) An emergency physician who thinks about tradeoffs. 

The House That Uncle Sam Built

Steve Horwitz and Pete Boettke have a new and highly readable pamphlet on the causes of the housing bubble and our Great Recession, published by the Foundation for Economic Education.  Highly recommended.

Does Modern Macro Explain the Recession?

Scott Sumner thinks so in this insightful post; Arnold Kling disagrees.  I'm with Kling on Sumner's argument being "too circular."  Kling also questions whether inflation expectations can be read in the TIPS market and says,

Take right now, for instance.  The TIPS market is saying that inflation is going to be low.  But is that what the people who are buying gold believe?  I don't think so.

Along with concurring with Kling's concerns, I'll add that Sumner's analysis is too ex post for my taste.

A Reminder: There Are A Million Millions In A Trillion

Don't forget that when you look at GDP figures, which show the flow of income produced in our country during the course of a year.  Also, remember that when you look at the stimulus and stabilization policies.  And, finally, remember that when you look at the national debt. 

ADDENDUM:  Consider this: in a stationary economy, reducing the debt by a mere $1 trillion could be accomplished by levying a 100% tax (confiscation) on a million millionaires who earn one million dollars a year.  And who says taxation and the deficit won't affect incentives and long term economic growth?

What's Really Behind The Latest 3.5% GDP Growth

 Economist Mario Rizzo provides an enlightening discussion.

How Many Jobs Have Been Saved?

Ed Lazear on our jobless recovery.  Excerpt:

This type of gains-only reporting is precisely what the government is doing with respect to the figures on stimulus-induced new hires. When the government reports this figure, it wants us to believe that the new hires came from the pool of the unemployed and that they are net additions to the stock of employed workers. But the data do not speak to the number of workers who left their current jobs to fill government-sponsored jobs.

If the vacancies that are created as these workers move from their old firms to government-sponsored projects go unfilled, then these job-to-job transitions are negatives that must be subtracted from the positives. And in an economy that is growing on the basis of productivity improvements rather than more workers employed, firms may wait to fill vacated jobs.

Because these data do not tell us where the workers come from and what happens to the slots they leave, the numbers cannot answer the ultimate question: How many net jobs were created? A similar point holds for those who are reported as retained, only in this case the issue is that some of those retained would have moved to different jobs rather than to the pool of unemployed had they been let go. The government is reporting the gross positive figures, not the relevant net figures.

Our Keith Richards Economy

 

The Rolling Stones are, hands down, my favorite band.  I often surf around the Web in search of new tour rumors, and I'm proud to say I own merchandise like What Would Keith Richards Do? (a birthday gift from Anemone).  One of my favorite Keefism's from the book is his explanation of why he takes a turn as front-man: "The only joy I got out of being a front-man was I didn't have to look at [Mick Jagger's] *ss."     

My love for the Stones makes it all the more satisfying (no pun intended!) to report to you all that I worked in a Stones reference on the radio this morning.  When talking about America's current growth path with Kenny & Charles, I referenced an old comment by Pete and described the US economy as "the Keith Richards economy." 

The real GDP growth of 3.5% for the US, which was reported on Friday, is "totally fake."  More injections are ahead, and I just hope the US can make it as long as Keith has in our experiment of "better living through chemistry."    

Veronique de Rugy On The Assumptions Behind The Stimulus Package

Policy makers assume a multiplier of four.

So what do the data say? There aren’t many studies of the issue. But two stand out: Robert Barro’s work and research by Valerie Ramey, an economist at the University of California–San Diego, on how military spending influences GDP. Both studies found that government spending crowds out the private sector, at least a little. And both found multipliers close to one: Barro’s estimate is 0.8, while Ramey’s estimate is 1.2. This means that every dollar of government spending produces either less than a dollar of economic growth or just a little over a dollar. That’s quite different from the administration’s favored multiplier of four. What’s more, Ramey also found evidence that consumer and business spending actually decline after an increase in government purchases.

Read it all here.

Would The Legalization Of Marijuana Stimulate The Economy?

There's a long list of economists, including Nobel Laureates George Akerlof, Milton Friedman, and Vernon Smith, who have signed a petition against the prohibition of marijuana.  An excerpt:

marijuana legalization -- replacing prohibition with a system of taxation and regulation -- would save $7.7 billion per year in state and federal expenditures on prohibition enforcement and produce tax revenues of at least $2.4 billion annually if marijuana were taxed like most consumer goods. If, however, marijuana were taxed similarly to alcohol or tobacco, it might generate as much as $6.2 billion annually. 

This comes at a time when popular opinion (see Bill Maher's interview with Ron Paul, for example) is starting to favor legalization to provide a source of tax revenues for the government's stimulus package. 

Whether you are for repeal or not, my question is:  would it stimulate the economy and help us get out of the crisis? 

A Sentence to Ponder

"The large expansion in debt in World War II looks like a small blip compared to what's coming if we do not change policy."  That's what John Taylor said recently on his new blog, Economics One. 

Here's the relevant graph accompanying the comment:

 

What Caused The Great Depression?

Here's Art Laffer's answer in a WSJ op-ed from earlier this week.  The piece is quite good overall, and it encourages policymakers to exercise caution in the wake of our current crisis. 

Investment, Not Consumer Spending, Leads To Growth

That affects the bottom line of businesses relying on customers who could more easily get credit in better times. For example, retailer Target Corp., where about one-third of overall sales are made on credit cards, said tightening credit standards on its proprietary cards may have contributed as much as half a percentage point to its sales declines in the second quarter at stores open more than a year.

Nonrevolving credit, such as loans for autos, vacations and education, declined at an 11.7% annual rate. Economists expected a far smaller decline, given the increase in auto sales from the federal "cash for clunkers" program. The program, which ramped up in late July, gave consumers a government rebate if they traded in certain vehicles for more fuel-efficient models.

Tighter credit played a part in this realm, too, as 33% of banks in the Fed's loan officer survey reported tighter terms and conditions for approving consumer loans other than credit cards. None of the banks said they loosened credit standards.

Now wait a minute.  We want to see more consumer debt?  What about the billions upon billions of consumer defaults on their mortgages?  We are now concerned about a tightening of credit standards?  Sounds awful.  Read more of this morning's Wall Street Journal piece here.

The problem in this reasoning is clear.  It's the old Keynesian notion that "C," in the familiar C+I+G equation, can pick up the economy.  (Oh, and let's not forget, of course, the "G" element.)

Business investment drives the economy, not consumer spending.  Investment generates jobs, new jobs generate higher levels of income.  Higher income provides more opportunities for consumption spending and saving, which leads to further rounds of investment.

But let's not move too fast here.  If the new investment is spurred by artificially lower interest rates, it cannot be sustained. 

What do you think the government can do to move the economy back toward long run economic growth?

ADDENDUM:  Or, is it more saving that we need?

Highs and Lows: The Unemployment Rate Edition

According to the Department of Labor, Bismarck, North Dakota has the lowest unemployment rate for a metropolitan area (3.5%).  El Centro, California has the highest rate (26.8%). 

Detroit, MI continues to have the highest rate for cities with 1 million or more people (14.9%). 

I have a pretty good sense of why Detroit's rate is high, but do any of our readers know much about Bismarck or El Centro?

Family And Friends Want To Know

I started out as a double major in chemistry and water science, and after my first EC 101 course, switched without hesitation to economics.  My family didn't quite understand.  I tried to explain it to them, which leads to the question for our own readers:  why do you study economics?