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.

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.

Christina Romer On The Apparent Recovery

From yesterday's Wall Street Journal.

Do you agree with her that the stimulus package is working, that the cash for clunkers program was a success, that business and government must "come together" to pull us out of the recession?

The Prychitko Stimulus Plan

The new October unemployment data is in.  The national unemployment rate hit 10.2%, with 15.7 million people unemployed.  The Obama stimulus plan doesn't appear to be working.

What could we do with a trillion dollar-backed stimulus plan?

My first-best solution:  There are a million millions in a trillion, so why not have a lottery -- announced immediately -- that offers a million dollars to a million unemployed workers?  Let them spend the money as they see best fit.  With odds at 15.7 to 1, that's a terrific and potentially welcomed opportunity.

But there's a problem.  The BLS doesn't have the names of the unemployed.  The measure is a statistical estimate.  It is based upon a survey of 60,000 households over four months, with a new group of 60,000 observed each month, and the data is then generalized.

So I offer my second-best alternative:  By lottery, give away one million dollars to one million U.S. citizens. There's around 300 million of us.  It will likely be considered less fair than the first-best proposal ("Why should the money go to those who already have jobs?"), but so be it. Here, the chances of winning are lower -- 300 to 1 -- but still remarkably better than a state lottery ticket. 

If Keynes is correct, it doesn't matter to whom the money goes, as long as it is spent. My plan is better:  think of the cost savings compared to the present plan of the administration.  No rent-seeking problems, no bureaucratic waste to oversee spending projects, no delays in how to allocate the proceeds.

I think I'm joking here -- I'm against aggregate demand management in any form, I don't think it works to improve things, and in fact on net it is negative.  But if the government is going to spend a trillion bucks to stimulate the economy, my proposal is less costly and would put cash immediately into the hands of a million citizens, citizens who spend their own money better than politicians and bureaucrats.

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.

$250,000 Per Job Saved?

The White House has an entertaining site called Recovery.gov.  The site has a "Jobs Saved/Created" counter to the left, which makes it seem like counting jobs saved/created is about as easy as counting hits to the EWOT blog!  According to the Washington Post, the web site will soon announce that 650,000 jobs have been saved. 

These numbers, of course, are all make believe; here's Douglas Holtz-Eakin in a very short clip explaining why.  Listen closely to the very end for his guesstimate of the cost per job saved.

Let's Drink To The Salt Of The Earth

Or, if the salt of the earth isn't being reflected in this poll, let's drink to the large majority of folks in the poll who think Obama's economic stimulus efforts are on the wrong track. 

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.

The Obama Rally

A colleague of mine recently asked me if economists are doing much research and/or have a good explanation for the rapid run-up in US stock indices like the S&P 500 and the Dow Jones Industrial Average since March.  I said I didn't know off the top of my head but that I'd look into it. 

Here were the three answers I would have provided on the spot:

(1) Market prices move up and down all of the time.  The movement back up since March is the market "searching" for an equilibrium that lies somewhere between 7,000ish and 14,000ish. 

(2) If you pour enough money into any market, you can get short-term movements up in prices. 

(3) The market could be experiencing a relief rally in that Obama's craziest ideas are being curbed by his falling approval ratings, internal party dissension, and gridlock.  While this article says there isn't much of a relationship between presidential approval ratings and stock market performance, there is evidence that divided government is good for stocks.  At the moment, even though the Dems have the numbers, the de facto scene in DC appears to be one of divided government.

Any thoughts, readers?

Stimulus Opponents and Proponents

My favorite Intermediate Micro textbook author, Robert Frank, has an article in today's Forbes.com that people with strong feelings about economic stimulus should read. 

According to Frank, the stimulus proponents are a diverse group of Democratic and Republican economists; the opponents seem to be a homogeneous bunch of hacks who are unified in that they are "staunch small-government conservatives" who lack even a "modicum of ideological diversity." 

The conclusion of his piece may come off as particularly frustrating for those still opposed to stimulus.  Based on his assertion that the proponents represent a more diverse group, Frank concludes with the following:

John Maynard Keynes once compared investing in the stock market to picking the winner of a beauty contest. In each case, it's not who you think will win, but who you think others will pick. It's the same for those trying to sort out the stimulus debate. The argument of stimulus opponents hinges on their belief that consumers and businesses will predict that stimulus won't work. The fact that stimulus opponents are far less numerous, have less distinguished academic credentials, on average, and are far less ideologically diverse than their counterparts does not guarantee they're wrong. But these factors should make rational consumers and investors less likely to side with them. And since this is really an argument about expectations, that's probably enough. (My emphasis)

"Every Economist" Less Three

My weekend is off to a good start any time I pick up the paper and find sound economic analysis in the opinion section.  When the analysis is written by yours truly (along with Allen Lynch and Skip Mounts), the weekend couldn't get much better. 

Many of our readers have probably heard about the Cato Institute ad against the stimulus bill.  Well, this article in this morning's Macon Telegraph is the Beaulier, Lynch, and Mounts way of making the protest more general (i.e., it’s not just stimulus bills we disagree with but almost every stabilization measure that has been introduced). 

Here are a couple of the better paragraphs from the piece. 

… Had the government refrained from spending $8 trillion, the money could have been allocated differently. Every economist — yes, every economist — calls this the opportunity cost of an action; by choosing to spend, we are necessarily giving up other alternatives. It’s a basic economic principle that Obama and his advisors seem to have ignored, and it says that all we will ever see is his spending; we will never see the outcomes of less or no spending...

Sitting in our offices and watching the crisis unfold, we have been opposed to every bailout measure Obama and Mr. Bush have introduced. We wish the president could reverse course and stop intervening into the market, but we know that will not happen. 

Instead, our request is more simple: Please watch what you say and revise your “every economist” generalization to “every economist less three.”

Holy Schnikeys!

My only real memory from the year 1984 (I was just six years old for most of that year) is the heartbreak I felt after the Chicago Cubs lost to the San Diego Padres in the NLDS.  After going up 2-0, they choked and lost three straight.  It was a team filled with lovable players like Bobby “The Deer” Dernier, Ryne Sandberg, Ron “The Penguin” Cey, Jody Davis, Gary “Sarge” Mathews, Rick Sutcliffe, and many more.   

Now, Hillsdale economist (and amazing marathoner) Gary Wolfram’s excellent op-ed is causing me to dig deep in the memory bank to see if I can remember what our federal government was like in 1984.  For the life of me, I can’t remember the government of 1984, but according to Wolfram, “…the compromise Senate amendment, at $827 billion, is about the amount of U.S. currency in circulation.  The entire federal budget did not reach $827 billion until 1984.” 

As they say, read the whole thing. 

Digging A Hole Here Means Forsaking A Hole There

Russ Roberts offers a nice analysis over at Cafe Hayek.