Keyboard Cat plays off Okun’s Law
Posted: July 23, 2009 Filed under: Team Obama, The Great Recession, U.S. Economy | Tags: GDP growth, Okun's law, unemployment Comments Off on Keyboard Cat plays off Okun’s Law
I’ve been teaching Okun’s Law in my principles level Macroeconomics courses since 1980. It’s been the policy rule of thumb since the Kennedy years on how much GDP needs to change to get a movement in the unemployment rate. Here’s the Wiki explanation which is as good as any.
In economics, Okun’s law is an empirically observed relationship relating unemployment to losses in a country’s production. The “gap version” states that for every 1% increase in the unemployment rate, a country’s GDP will be an additional roughly 2% lower than its potential GDP. The “difference version” describes the relationship between quarterly changes in unemployment and quarterly changes in real GDP. The accuracy of the law has been disputed. The name refers economist Arthur Okun who proposed the relationship in 1962 (Prachowny 1993).
I’ve mentioned recently that we’re seeing some fundamental changes in that relationship. This WSJ article talks more about how we’re breaking away from the historical pattern studied by Okun back in the 1960s. This has incredible ramifications for fiscal policy makers. Again, I think the Obama economic advisers appear to be ignoring some really important changes in the fundamentals. We’re much more oriented towards imports, service jobs, and capital than we were back in the Camelot days.
Monetary Policy at the Zero Bound
Posted: July 21, 2009 Filed under: Global Financial Crisis, The Great Recession, U.S. Economy | Tags: Ben Bernanke, FED, Fed Independency, monetary policy, quantitative easing, Zero Bound, ZIRP Comments Off on Monetary Policy at the Zero Bound
I am a financial economist and I’ve been through most phases of my career one that applies the trade in banking. That’s because my first economics specialty was monetary economics. I still have my original copy of Patinkin’s Money, Interest and Price sitting next to my dad’s original copy of Keyne’s The General Theory of Employment, Interest and Money. My grandfather was one of the first Fed lifer’s having been in charge of the bond area in the Kansas City District for both world wars. My ex-husband’s first job out of college was with that Fed. I worked for the Atlanta District Fed before retreating back to academia. So, in this day and age, with all the unpopularity that entails, I have to confess to being a banker of sorts. I hope you won’t hold that against me.
Today, there is more evidence that this is not my Grandfather’s Fed and it’s not completely the Fed I worked for either during the Greenspan years. When I was there, the emphasis was consolidating functions to various branches and realizing that check clearing and wire transfers, the main source of revenues for the branches, were being taken up by big money center banks and clearing houses. Clinton was President and the economy was good so there wasn’t much dithering about the technical things done up there at the desk in NYC. I just had my staff transmit the bond sells every Tuesday (even on Mardi Gras) dutifully.
Much consolidation has taken place and many traditional Fed services have been privatized. Oh, and then there’s that one other difference, Ben Bernanke and his realization that traditional monetary policy is pretty useless when interest rates are close to zero. Welcome to the world of Monetary Policy at the Zero Bound which is actually something we talked about last fall. I’m going to point you again to Ben Bernanke’s treatise again because it explains a lot of what we’re going to discuss. It’s written for wonks, but if you read the first few pages, you’ll get the basic idea.
The Fed’s upcoming retreat from its current position has been a topic of much discussion and speculation. That’s because every one has some concern that they will be accommodating for way too long and it may lead to another Bubble or to general inflation (instead of price increases in a specific market like housing). That’s pretty much the consensus of what happened post 9/11 when Greenspan left interest rates extremely low and we developed a speculation crazed housing market. For some reason, he popped the bubble of excessive exuberance during the Clinton years and the Tech stock run-ups, but let the mortgage market baste in low interest rates for way too long. My guess is that he was more accommodating to Republicans because he himself was one of them, but that’s a discussion for his biographer and just a source of speculation for me.
So, Ben used his platform as the second most powerful man in the US today to reduce the information asymmetry surrounding the Fed’s exit strategy. Again, if you check the link to his academic paper above, you’ll see that’s one of the things he believes is necessary when monetary policy hits the zero bound. He basically calls this “using communications policies to shape public expectations about the future course of interest rates” and that’s exactly what he’s doing in today’s Op-Ed piece in the WSJ.
I’m not sure how many people wrote and edited this piece, but it is a brilliant discourse that explains in a very succinct and clear way what the FED will do in the coming recovery to ensure that we won’t get inflation. He also reassures that they won’t reverse the course of any improvement either as was done in 1937 to cause a double dip depression. This Op-ed is historic in nature, although I’m sure only those of us steeped in Fed lore, culture and history will realize what’s going on here. Ben is opening up the some what secret world of the Federal Open Market Committee (FOMC) to those with the need to know.
MacroEconomic Malpractice
Posted: July 20, 2009 Filed under: Global Financial Crisis, Team Obama, The Great Recession, U.S. Economy, Voter Ignorance | Tags: Banking, Economic Forecasts, Keynesian Economics, Larry (LaLaLand) Summers, Mergers and acquisitions, Monopoloy, Supply Side Economics Comments Off on MacroEconomic MalpracticeIf the U.S. economy was a patient, I’m sure we all would be talking medical malpractice by now. After having 8 years of nothing to lecture on during the Clinton years other than, yes Keynesian economics works, we are now on our 9th year of wtf? (Feel sorry for my poor undergrads.) We’re still dealing with the spinning of the complete failure of Voodoo Economics, Trickle-down economics, Reaganomics or Supply Side economics from the free spending, tax dollar giveaway as success story with no real point other than supporting faith based economic hypotheses and the rights of the ultrarich to stay that way in to something it was not. I simply cannot believe that any REAL democratic administration with some roots in the Clinton years could possibly be choosing to continue the failed policies of the right.
So, since I’ve been on a populist rant over Wall Street Bonuses, let me just fuel the fire some more with this little piece in the Washington Post website today with the unsurprising title “Bailout Overseer Says Banks Misused TARP Funds”. No kidding cupcake. Why do you suppose the same risk happy folks that got their bonuses last year are getting big ones this year? We might as well funded a national road trip to Vegas.
Many of the banks that got federal aid to support increased lending have instead used some of the money to make investments, repay debts or buy other banks, according to a new report from the special inspector general overseeing the government’s financial rescue program.
The report, which will be published Monday, surveyed 360 banks that got money through the end of January and found that 110 had invested at least some of it, that 52 had repaid debts and that 15 had used funds to buy other banks.
So, we’re basically funding a real time game of monopoly. Okay, Republicans, let me just explain this to you ONE more time. MONOPOLY is the antithesis of market capitalism. It isn’t Socialism. Socialism is NOT an economic concept any more than GOD is a Buddhist one. It’s the difference between, I buy houses in Houston and I buy All the houses in Houston. We actually prove markets are efficiently working by comparing competitive markets to centrally planned ones and find the same result when they are. However, that’s IFF (if and only if) things in both circumstances are perfect (which they NEVER are). We live in a land of frictions and 30 years of research shows that we’ve just about got as much chance of having the Pure Capitalist dream as we do the Pure Marxist dream. Zip, Zilch, nada, no way! Our lives our lived in imperfect markets where government sometimes steps in to make things worse, and some times steps in to make things better. We’re basically in the search for the middle path.
Right now, we’re funding and sustaining a financial market structure that perpetuates extraordinary profits for the capital owners, less products available to the market, and higher prices for every one. It is also well-researched that bigger institutions do not bring efficiencies of scale to the market so how is this a good thing? Just pick up any basic microeconomics book and study market structures. The bottom line is a welfare loss for the market as resources will be inefficiently used, quantities will be reduced, prices will be higher, and the demand side of the market will experience a loss of welfare. (Sorry, I keep having to remind myself I have the summer away from theory, but I’m an old dog and that’s a new trick for me.) The empirics on this have supported these theories for hundreds of years!
It’s still the Jobs Stupids!
Posted: July 18, 2009 Filed under: The Great Recession, U.S. Economy 1 Comment
Lining up for 'Hoover Stew' during the Great Depression
More economists are taking up their keyboards trying to tell folks why the Great Recession is different. More importantly, why recovery from the Great Recession will be different. Today’s analysis comes from Dr. Brad DeLong at Grasping Reality with both Hands and The Economic Populist. Let me just offer up the titles first. The Economic Populist says “We are So Screwed” and Delong announces “Fasten Your Seatbelts for the Jobless Recovery“. No one but the Obama economics team is whistling Prosperty is just around the Corner. So, grab that bowl of Dubya/Obama Stew and let’s delve even deeper into why the job markets really worry me.
Brad’s believes that the worst of things are over and that we may actually being seeing the ‘trough’ or low point of the The Great Recession right about now. However, he’s not ready to sing “Happy Days are Here Again” primarily because he sees a jobless recovery along the lines of what we saw during Dubya’s first term only more aggravated. Remember the post 9/11 recovery that only felt like a recovery to the very rich while the rest of us saw our incomes stagnate so we had to finance our day-to-day things by borrowing and de-saving? DeLong’s crystal ball sees that kind of recovery without our ability to borrow or sell off over-priced assets. He believes we may have stalled the freefall, but we are in no way positioned for
dynamic growth because we’re not going to have any spare income to spend even if we’re lucky enough to have a job.
It is likely to be a recovery. The central tendency forecast right now is that real GDP contracted at a rate of 1% per year or less between the first and second quarters of 2009, and will grow between the second and third quarters at a rate of 2% per year or so. When the NBER Business Cycle Dating Committee gets around to it, it is most likely to call the end of the recession for June 2009, second most likely to call it’s end in April, and a recession-end date later than June 2009 is a less likely possibility. One reason that we are likely to see a recovery starting… right now… is the stimulus package. It probably boosted the real GDP annual growth rate relative to what otherwise would have been the case by about 1.0 percentage point in the second quarter, and is going to boost the annual GDP growth by about 2.0 percentage points between now and the summer of 2010–after which its effects tail off.
But it will not feel much like a recovery. After the 1982 recession the turnaround in employment lagged the turnaround in GDP by only six months. Thereafter employment growth was very strong: in the eighteen months up until the end of 1984, growth in work hours averaged 4.8% per year. it took only 7 months after the 1982 recession trough for the employment-to-population ratio to rise above its trough level (1980: 2 months. 1975: 5 months. 1970: 18 months. 1961: 13 months. 1958: 4 months. 1954: 8 months.) By contrast, it took 29 months after the 1991 recession trough for the employment-to-population ratio to exceed its trough level, and 55 months after the 2001 recession trough for the employment-to-population ratio to do so. Productivity growth in the immediate aftermath of the end of the 1991 and 2001 recessions was surprisingly rapid: rapid enough to eat up all of real demand growth and more as businesses decided to take advantage of the economic downturn to slim down their labor forces and become more efficient.
Today–unless we get much faster real GDP growth than currently looks to be in the cards–we are headed for a jobless recovery. The answer to the economic question–was the stimulus sufficient to rapidly return the economy to something like normal unemployment?–is likely to be: “h— no, it was much too small…”
When Will They Ever Learn?
Posted: July 17, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, The Great Recession, The Media SUCKS, U.S. Economy | Tags: AIG, Arbitrage profits, CBO, CNBC, Director of the CBO, Doug Elmendorf, Goldman Sachs, Matt Taibbi, Nouriel Roubini, Paul Krugman Comments Off on When Will They Ever Learn?The Blogging Econ heads are still news makers today as we have more and more reports of record profits at Goldman pigs-playing-poker1Sachs and examples of blatant corportist propaganda at CNBC. I learned yesterday that many folks are listening, it just isn’t necessarily the ones shaping and setting policy. We also see a completely unsustainable budget coming down the pipe per the Director of the CBO. Why is it that policy makers seem to want us in dire straights? Are their sources of campaign funds so sacred that they’re willing to bring down the U.S. economy? Where does a Cassandra start?
Matt Taibbi and Paul Krugman focus in on the GS profits. So, I’m all for making a decent rate of return, that’s necessary to keep a company in business and it’s required to attract capital to grow a market. However, record setting, extraordinary profits are symptoms of a market out-of-whack. In the most simplest of analysis it could mean there are minimally too few providers of a service which can also lead to some form of market manipulation, information hiding, or information asymmetry allowing them to reap extraordinary profits. I basically think we’re seeing GS game the market based on raiding underpriced AIG assets with a free source of capital. This means the profits are straight from taxpayer funding. No wonder these guys don’t want to pony up any equity to us based on profitability and want to dump TARP funds (with their compensation restrictions) as quickly as possible. How can Washington miss that they’re back at their same old games?
This is from Taibbi who basically lays it out. They’re taking our tax dollars and buying assets with tax dollar in government-selected subsidized fire sales, creating arbitrage profits (some through their own huge market shares now that much of their competition is gone) and churning themselves some nice bonuses. In music, that’s called riding the gravy train. It’s a no risk, no brainer, no lose situation. Why would that require bonuses? [You can mark my words on this. They looted (with government enabling) AIG and the next one up will be CIT.]
So what’s wrong with Goldman posting $3.44 billion in second-quarter profits, what’s wrong with the company so far earmarking $11.4 billion in compensation for its employees? What’s wrong is that this is not free-market earnings but an almost pure state subsidy.
Krugman, a microeconomist with specializations in trade theory, sees it too.
The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us?
First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.
Second, it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away.
Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.
Meanwhile, back in the Main Stream Media, also known as the Wall Street and K Street propaganda factory, CNBC has tired to rosy up Dr. Doom’s forecasts to enable its masters arbitrage profits. Roubini made it clear that his views on the economy have remained unchanged despite the attempts to make it look otherwise.
Nouriel Roubini, the economist whose dire forecasts earned him the nickname “Doctor Doom,” said after markets closed Thursday that earlier reports claiming he sees an end to the recession this year were “taken out of context.”
“It has been widely reported today that I have stated that the recession will be over ‘this year’ and that I have ‘improved’ my economic outlook,” Roubini said in a prepared statement. “Despite those reports … my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.”
Several business news outlets, picking up on a report initially from Reuters, earlier Thursday cited Roubini as saying that the worst of the economic financial crisis may be over.
The New York University professor was quoted by Reuters as saying that the economy would emerge from the recession toward the end of 2009.
Reports of his comments helped trigger a late rally in the stock market.
Did you read that bit about triggering a late rally in the stock market? Pity the poor suckers that believed CNBC and of course, watch the deposits grow of the folks that placed the offsetting market transactions. And, let’s see, which market insiders would probably know that was BS? I don’t think you have to be Ms. Marple or an SEC investigator to figure that one out. It was just a simple mistake, wasn’t it?
Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security (Percentage of GDP)
Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security (Percentage of GDP)
Another thing that really has sugared my cookies is this report coming out of the Congressional Budget Office (CBO) one of the few bastions of economic thought in the beltway that tries to look out for the real constituents of Washington D.C.. The Director of the CBO,Doug Elmendorf, had this to say to a Senate Committee followed by a post to his blog.
The current recession and policy responses have little effect on long-term projections of noninterest spending and revenues. But CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. This higher debt results in permanently higher spending to pay interest on that debt. Federal interest payments already amount to more than 1 percent of GDP; unless current law changes, that share would rise to 2.5 percent by 2020.
There’s also his bottom line.
Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy.
Okay, am I just being a little too wonky here or are these three things perfectly clear to any one who has the audacity to be informed?
Norway, anyone?
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