August 15, 2009
Current economic conditions
This was another week when everybody but me sees an economic recovery in the works.
The cash for clunkers program was expected to have had quite an effect on retail sales. However motor vehicle and parts rose only 2.4%; expectations had looked for a gain more than double. Sales at auto and other motor vehicle dealers were up just 2.8%, a healthy gain to be certain but far less than many economists expected. The initial impression is that, perhaps, some of the cash for clunkers sales will find their way into the August data.
The auto numbers are indeed surprising, since we know directly from industry counts that the number of autos sold in the U.S. was up 16% in July. I'm wondering if the reason that didn't show up in the retail sales report may be due to the definitions used by the Commerce Department:
Sales are net, after deductions, of refunds and allowances for merchandise returned by customers. Sales exclude sales taxes collected directly from customers and paid directly to a local, state, or federal tax agency.
Though I haven't seen a direct statement on this, if sales exclude taxes, they should also exclude subsidies, meaning if someone bought a $20,000 new car with a $3,500 cash-for-clunkers trade-in, Commerce may have counted that as $16,500 in sales. Perhaps the basic message from these numbers is that the government was willing to spend money in July, but nobody else was.
The one solidly positive U.S. economic indicator I've seen was the report from the Federal Reserve that U.S. industrial production was up 0.5% in July, the first monthly increase since December 2007. Capacity utilization was also estimated to have risen to 68.5% in July, the first increase for that measure since October 2008. However, Dean Baker is worried that most of the increase in production came from the auto sector. My read on this therefore remains as it was on August 4:
If we'd seen these kinds of numbers in the absence of the cash for clunkers incentives, I would have viewed it as a strong suggestion that the economic recovery has begun. As is, I'm left wondering, and fundamentally not knowing, whether the auto figures signal the shift we've all been watching for, or sales stolen from September and October and delivered to July.
The economic recovery may well have already begun in Asia and Europe, and certainly the mechanics are in place for significant improvements in U.S. real GDP even without any changes in the underlying fundamentals. However, I remain persuaded that a real U.S. recovery requires an increase, nor further decreases, in the number of Americans working.
Thursday's modest bump up in the 4-week average of initial claims for unemployment insurance suggests to me that that goal is a little farther away now than it was a week ago.
UPDATE: Danielle Devine of the Census Bureau tells me they would count the purchase as $20,000 not $16,500 in sales.
Posted by James Hamilton at August 15, 2009 11:01 AMdigg this | reddit
You are not alone! I ain't seeing it either. And not just in the US, but in China too.
Posted by: Craig Pirrong at August 15, 2009 12:04 PM
The German and French recover are considered remarkable by most economists, but they are not surprising to those of us who are not demand side economists.
In April 2009 against the advice of many economists refused to engage in any more stimulus.
Chancellor Angela Merkel stood firm in rejecting any new German economic stimulus program even as the International Monetary Fund said the recession is worse than previously thought and called for measures to spur demand.
Merkel shrugged off calls for more spending despite a report by Germany’s leading economic institutes which will show tomorrow that Europe’s biggest economy may shrink as much as 6 percent this year -- almost three times the contraction of 2.25 percent forecast by the government in January.
...Merkel told reporters in Berlin today after a meeting with business leaders and economists.
“We shouldn’t talk about a third stimulus package,” Merkel said. “Instead we’ll let current measures take effect.”
The chancellor’s comments echo statements today by her finance and economy ministers underlining unity in the coalition over not stretching the budget more to pay for new stimulus steps.
This last statement was critical to German recover. Business leaders saw that even under severe pressure from the IMF, her own government, and around the world Merkle had ended the German government's raid on production. Finally businesses could make plans for the future.
The result has caught the stimulus hawks by surprise. The German economy was simply too bad to stop the stimulus wasn't it? Apparently not.
So what of the US? Our stimulus plan has yet to began to sap the strength from our economy. $Trillions are being wasted and this waste is scheduled to increase in 2010. President Obama admitted in his town hall in Montana that he would have to raise taxes to pay for his health care takeover. Soon the same admission will have to be made as the government scrambles to find revenue to pay for the waste.
Sadly as the nations of the world end their stimulus foolishness and production returns the US will be floundering in a sea of stimulus. It was stimulus in the form of the TARP that caused the economy to crash and now it will be stimulus that will prevent our recovery.
But this is something the stimulus hawks will never admit.
Posted by: DickF at August 15, 2009 12:09 PM
I am surprised that Menzie has not commented on this already since he had such an intense interest in Iraq, but there is another drain on our economy that has nearly totally slipped from the radar, Afghanistan.
The following was written by one of my friends for his business news service.
Unlike President Bush’s pronouncement of an American “strategic and moral” interest in a “prosperous and peaceful democratic Afghanistan”, Obama has somewhat limited the Af-Pak mission, saying, “The core goal of the U.S. must be to disrupt, dismantle, and defeat al-Qaeda and its safe havens in Pakistan, and to prevent their return to Pakistan and Afghanistan.” This concentrated motivation has become the new Washington Consensus on Afghanistan & Pakistan. In other words, Afghanistan is linked to Pakistan and vice versa. What’s more, the Obama administration has also altered the mission to include hunting down drug lords and drug interdiction, similar to U.S operations in Latin America. Such a lateral shift implies a level of military involvement that could persist for decades.
With a quagmire like Afghanistan sure to last for the duration of Obama’s first term, the new Washington Consensus presents a challenge potentially more dangerous than Iraq. And the costs could eventually dwarf expenditures in Iraq during the next few years.
Between October 2001 and early August 2009, U.S. casualties in Afghanistan have numbered 780 according to ICasualities.org, and total spending according to the Washington Post has amounted to $223 billion. This compares with more than 4,300 American soldiers killed in Iraq and approximately $670 billion spent on that conflict since 2003. Not including operations in Pakistan, it appears that the U.S. footprint in Afghanistan is likely to deepen. Allied troop count is expected to be about 98,000 this year, of which 68,000 will be American. The Congressional Research Service estimates that U.S. defense spending for Afghanistan for the 2010 fiscal year will be about $68 billion (equivalent to $2,000 for every Afghani alive, for a country where per capita income is roughly gauged to be $400/year). And a recent cable to Hillary Clinton from U.S. Ambassador to Afghanistan, Karl Eikenberry, requested nearly $1.5 billion more in non-military spending than what Obama had already asked Congress, defending the funds as necessary "if we are to show progress in the next 14 months."
As noted the Bush administration actually had a goal for its Afghan policy, a functional democratic government, but the Obama administration has changed that mission to now be a police action. Based on that our troops will not be pulling out of Afghanistan any time soon.
Sadly many are beginning to voice their opinion that we are actually losing in Afghanistan.
CBS News reports:
"The U.S. is now losing the war against the Taliban," Anthony Cordesman, of the Washington-based Center for Strategic and International Studies, wrote in a report Thursday. A resurgent al Qaeda, which was harbored by the Taliban in the years before the Sept. 11 attacks, could soon follow, Cordesman warned.
In the same report:
British Prime Minister Gordon Brown, on a visit to Kabul last week, said he knows that something must "be raised with Pakistan's government, and I will continue to do so." French President Nicolas Sarkozy, who rushed to Afghanistan after the French attack, warned Thursday that "terrorism is winning."
Finally, I am not a big John McCain fan but he has been right at times. Both CNN and CBS are reporting that "Former GOP presidential nominee John McCain warned Wednesday that the United States is losing the war in Afghanistan."
The Democrats needed a counter to George Bush in Iraq to demonstrate they were just as military as he was. The only problem their motivation was political and they picked Afghanistan. More and more it appears their policial ploy has backfired and they have committed us to military action with a goal that has no end, has no victory.
Posted by: DickF at August 15, 2009 12:34 PM
I don't think it makes sense to attribute the industrial production increase to cash for clunkers. The program only kicked in during the last week of the month.
Future production schedules are being ramped up because of C4C, but July production was up because inventories were extremely lean already.
Posted by: Steve at August 15, 2009 12:44 PM
A BusinessWeek article from May on Germany’s cash-for-clunkers program mentioned, “Total unit sales in Germany were up 18% in the four months to April vs. a year earlier…”
...sales were 18% HIGHER than 2008. It would seem almost impossible that they are not taking from sales that would have otherwise occurred in the future.
Floyd Norris has a piece on the recent uptick in trade that has a nice chart.
The countries that had recent significant upticks, all had steeper falls. This could well be just a slowdown in the pace of inventory destocking by their buyers. The 45% YoY fall in in exports from Japan and Taiwan has now eased to 25-30%--still way worse than anything seen in 1930.
Posted by: Bob_in_MA at August 15, 2009 01:26 PM
I hate to birst your bubble but it hasn't caught stimulus hawks off guard at all. The important criteria in judging the relative performance of the 23 major nations that engaged in fiscal stimulus is not how they performed in the second quarter in absolute terms, as obviously some of these nations slipped deeper into the liquidity trap than others, but how they performed relative to baseline projections formed several months earlier, before any stimulus had been officially approved.
Fortunately Christina Romer has already done some elementary analysis and the correlation between how these countries performed in the second quarter relative to forecasts made in November of 2008 is quite high. See the scattergram and trendline on page 16:
In Romer's own words:
"The fact that the observations lie along an upward-sloping line shows that, on average, things have improved more in countries that adopted bigger stimulus packages. And, the relationship is sizable: on average, a country with stimulus thatï¿½s larger by 1% of GDP has expected real GDP growth in the second quarter thatï¿½s about 2 percentage points higher relative to the November forecast.
This correlation is in some ways surprising, because thereï¿½s an obvious element of reverse causation thatï¿½s pushing it the other way: countries that got worse news around the turn of the year probably adopted more aggressive stimulus packages. Also, to the extent that analysts back in November could foresee countriesï¿½ likely actions and take them into account in making their forecasts, this would cause the relationship to understate the effect of stimulus. But despite these factors tending to bias the estimates down, the relationship is highly statistically significant, large, and robust to changes in the sample and in the measure of forecasted growth."
The fact that only 6 of the 23 nations performed better than forecast is a criticism of how optimistic initial forecasts were worldwide in November and not of fiscal stimulus itself.
Posted by: Mark A. Sadowski at August 15, 2009 02:15 PM
Professor Hamilton. Have you run any numbers yet to see if the oil price runup might be sufficient to help account for these setbacks?
Posted by: Steve Bannister at August 15, 2009 03:55 PM
Steve: Yes and no. Once decision makers have a good idea of what policies are going to get put into effect from Washington, they begin incorporating the information into their decisions. The "Cash for Clunkers" legislation was introduced early in June 2009, which means that it could have contributed to the 2nd quarter's increase.
So that means that it was possible. In reality, the effect would be rather small given that most of the second quarter was already over before the legislation was even introduced, and long over when it passed into law, then took effect.
For the record, stock market investors have been anticipating that 2009Q2 would mark a bottom in this particular phase of the recession since mid-April, long before the "Clunker" bill was even introduced in the House. They're not anticipating anything like a robust recovery anytime soon, and even see a strong likelihood of a double-dip in 2010Q2.
(Yes, we do incorporate indicators other than dividend futures into our analysis, but we do seem to be the only ones that incorporate them at all, which is why we appear to focus on them so much.)
Posted by: Ironman at August 15, 2009 04:17 PM
Might I suggest that you are overweighting lagging/coincident indicators, and underweighting leading indicators into your assessment.
US industrial production in July was.... well, in July.
The ECRI's index has rocketed to a very high growth rate.
Posted by: GK at August 15, 2009 04:52 PM
It is hard to say we are 'losing' in Afghanistan when only 6-8 US troops are dying per MONTH to the Taliban.
The anti-US left used the Iraq casualties (60-80/month) to paint a false picture of 'losing', even though those numbers are already low, relative to Korea or VietNam.
Yet, we won in Iraq, and NOW there are virtually no US casualties to speak of. Iraqi casualties are also very low.
In Afghanistan, we are suffering only 1/10th of the casualties we were sustaining in Iraq at the worst points. Yet, we are 'losing' in Afghanistan? Hogwash. We just killed the big Taliban honcho, Baitullah Mehsud, last week.
Afghanistan is merely a slow-motion low-intensity war of attrition. We just have to keep killing Taliban in Pakistan with unmanned drone strikes, until they deplete. That is all. It will take 10 years, but we will lose only 500-1000 US troops over those 10 years.
That is all.
Posted by: GK at August 15, 2009 04:59 PM
My understanding is that production schedules are determined up to a quarter in advance. Everything I've read suggests that additional production due to cash for clunkers is coming in Q3 and Q4. Considering the original law was signed at the end of June and nobody knew exactly how much it would increase demand until the end of July, that definitely makes sense to me. I also haven't read anything suggesting C4C caused an increase in July auto production.
Posted by: Steve at August 15, 2009 06:15 PM
"It is hard to say we are 'losing' in Afghanistan when only 6-8 US troops are dying per MONTH to the Taliban."
Troop deaths are not the only indicator of winning or losing a war.
Posted by: Babinich at August 16, 2009 03:14 AM
Mark, I hate to burst YOUR bubble, but wouldn't it be likely that those economies that declined the most rapidly be exactly the ones that would also bounce back the most rapidly, even without any stimulus? An important lesson for you is that correlation does not imply causation.
Posted by: John Smith at August 16, 2009 04:56 AM
Wasn't the comparison of the murder rate between each side in a conflict one of the things that made the Vietnam war drag on so long? Didn't we keep hearing about how we were killing 10 of them for one of us? Yet we still lost.
America loses wars because it goes arrogantly blundering around the world believing it has an undefeatable army (obviously we have forgotten this is untrue) and the moral right to do as we please wherever we please. Little real attempt is ever made to understand other nations' religions, culture and politics - which is why we are constantly being surprised (and angrily disappointed) by their refusal to do what we want.
Posted by: John Smith at August 16, 2009 05:06 AM
We are losing in Afghanistan because the objective has changed. The Talaban is expanding its territorial control and many of the commanders there have acknowledged. As I stated in my post the stated objective has changed. We are now the Afghanistan police force.
Posted by: DickF at August 16, 2009 05:44 AM
Mark A. Sadowski,
Romer is engaged in Monday-morning-quarterbacking. As she has done since she came into the administration she is making excuses for why the administration's plan is not working when everyone else is. Is there any nation that has passed more stimulus than the US? The countries that are in recovery are the countries that refused additional stimulus, China, Germany, France. Those countries such as the US that are still pumping cash are languishing.
This only makes sense if you step away from the equations and graphs and consider economics from a behavioralist position. As long as the government is taking from the private economy the entrepreneurs, businessmen, and even the banks are going to sit on their cash. There is a lot of talk about restoring confidence in the markets. As long as investors are worried that an investment today will be a government target tomorrow no serious investor is going to part with his capital.
In truth the stimulus neither hurts nor helps the economy, but what does harm is the waste of resources and capital for useless projects and the threat of future taxes that will drive the economy up the Laffer curve. As long as Obama is saying he will allow the Bush tax cuts to expire to pay for his health care bill and congress is building taxes into all of their spending bills the economy is going to flounder. But once those taxes hit - Katie bar the door!
Posted by: DickF at August 16, 2009 05:57 AM
You quoted some article about Germany's refusal to apply additional stimulus and commented:
"This last statement was critical to German recover."
Celebrating one single data point of a small GDP-growth in Germany as proof for any recovery and the end of the recession in Germany or as proof for the correctness of your economic world view regarding your opposition to any stimulus programs or the views of "demand side" economist is just methodological nonsense. It wouldn't be the first time that the GDP-change is somewhat positive in the middle of a recession. It's also a logical fallacy to take this as proof for your view that stimulus spending is damaging the economy, since Germany's government applied stimulus policies, even if they didn't add to the existing programs, and you just can't know what would have happened, if they hadn't applied any stimulus programs at all.
As for Germany's GDP growth in Q2 2009. Besides other factors, it was in part a result due to following according to Germany's Statistisches Bundesamt:
"As price-adjusted imports declined far more sharply than exports, the balance of exports and imports also had a positive effect on GDP growth."
I read here that a technical increase in the trade balance apparently contributed to the positive GDP change, although both components of the trade balance continued to fall in Q2 2009. Falling exports, but even stronger falling imports doesn't look like a recovery in Germany at all to me.
Posted by: rootless cosmopolitan at August 16, 2009 06:16 AM
I'm not trained in economics, but as a part of what I do it is important that I be able to understand economic signals. Mortgage lending has a tremendous impact on real estate values and since investors rushes in and then out of the globalized secondary markets things have been a little chaotic.
I have to admit it took me way too long to get back to the basics, but I'm closer than I was when home equity could be what ever you wanted it to be.
Anyway, to have an economy to discuss people must have money to spend and traditionally they get that on pay day.
Now it appears jobs must be created (invented) in order to extend paydays to a growing number of people who no longer have one. And I agree we aren't seeing much impact on the economy yet.
I am not convinced the jobs being created will be in the production of goods and services the world wants to buy and this "adjustment" is going to be protracted.
Posted by: Edd at August 16, 2009 06:43 AM
Thank you for this piece.
I strongly believe most economists are missing the forest for the sparse green shoots. Aside from industry bias (see Menzie's piece on the WSJ hugely optimistic consensus forecast of economists--mostly all serving Wall Street), I think the green shoots are getting so much media coverage, economists tend to lose sight of the top causes and effects of this recession: the vast overleveraging of the financial sector (which still exists despite accounting voodoo) and the crash of the housing market (which is still ongoing) that has resulted in huge increases in unemployment and massively cut consumer net worth and income. The deeply indebted and over-leveraged consumer can't spend more until he/she has a job, and he/she can't get a job until other consumers start spending more.
And that leaves me wondering what economic force(s) will lead us out of this recession. Maybe the more rapid recovery of European economies will help stimulate demand for US exports, but the notion of relying on exports is a fragile green shoot in my view.
Posted by: Terry at August 16, 2009 06:50 AM
"This was another week when everybody but me sees an economic recovery in the works."
James, could it be that you hang out too much with economists who have an ego investment in growth ?
Posted by: John Lee Hooker at August 16, 2009 07:09 AM
A bullish case for the consumer?
Posted by: fwm at August 16, 2009 07:54 AM
DickF: Are you seriously asserting China did not engage in additional stimulus? If you would like to refer to actual numbers, please consult Table 1 this tabulation.
Posted by: Menzie Chinn at August 16, 2009 08:31 AM
Something which has not been talked about is the considerable uncertainty created by the Administration's initiatives in health care, climate change, energy, and future increases in taxation. Irregardless of what side one may be on in these issues, certainly the uncertainty is causing people to thing twice before risking capital or making long-term decisions.
Posted by: Jason at August 16, 2009 09:35 AM
I agree that a sustained recovery will require an increase in employment. However, in the initial stages of recovery, output can increase rapidly due to a more intensive use of currently-employed labour, even for a fixed number of working hours. This would show up as a large increase in labour productivity, which is a fairly common feature of the early stages of recoveries.
At this point, the US recession and recovery looks to me more like it will have a "U" shape than a "V" shape (i.e., more like the 1981-82 recession than, say, the 1973-75 recession). Perhaps this is due to the greater difficulty of adjusting output quickly via firing/hiring of workers compared to varying the intensity of work. However, as a global recession, it appears to have had a most definite "V" shape in Asia (see figure 1 in this article in the Economist), where unemployment rates did not go up by as much.
Posted by: James Morley at August 16, 2009 12:11 PM
John Smith wrote:
"Mark, I hate to burst YOUR bubble, but wouldn't it be likely that those economies that declined the most rapidly be exactly the ones that would also bounce back the most rapidly, even without any stimulus? An important lesson for you is that correlation does not imply causation."
I actually replicated Romer's analysis. It is indeed statistically significant (in fact at the 1% level). On the other hand, when I regressed the change in Q2 growth from November forecast on the percent decline in GDP from peak through Q1, the R squared value was approximately 0.06 (quite insignificant). So the answer to your question is apparently no. I'm well aware correlation does not imply causation. But when you find results that are as robust as Romer's it normally is cause for further investigation. On the other hand lack of correlation usually implies no causation.
"Is there any nation that has passed more stimulus than the US? The countries that are in recovery are the countries that refused additional stimulus, China, Germany, France. Those countries such as the US that are still pumping cash are languishing."
Six major nations have larger discretionary stimulus in 2009 as a percent of GDP: Australia, China, Japan, Korea, Russia and South Africa. On average the 23 major nations in question had GDP growth rates in Q2 (SAAR) about 0.9% worse than predicted in November. Of the nations that passed larger stimuli than the US, Australia, China, Japan and Korea had Q2 GDP growth rates better than average compared to last November's forecast, and all but Australia are doing *much* better than average (5% to 6% better). Germany and France also passed discretionary stimulus although theirs is smaller as a percent of GDP this year. Of the 11 major nations whose discretionary fiscal stimuli are less than 1.5% of GDP in 2009 all but Brazil had Q2 GDP growth rates worse than average compared to last November's forecast.
As Romer notes these findings are consistent with earlier work finding that fiscal expansions have mitigated the effects of past banking and financial crises (see International Monetary Fund, World Economic Outlook 2009, Chapter 3,
Posted by: Mark A. Sadowski at August 16, 2009 12:12 PM
Next week jobseeker numbers will be approx 500 000 and that will correct the average and also the total curve will look like it should.
This recession is so fast and deep that also recovery will happen in the last moment and relatively fast.
Because this recession is caused by panic, actually 2 panics- one about the quality of subprime mortgage products, another about the banking system after Lehman collapse.
Posted by: Ivars at August 16, 2009 12:22 PM
An OT question:
Is a recession something to be avoided or something to be controlled? For example, for many years, forest fires were considered inherently undesirable, and a great deal of tinder accumulated on the forest floor, with massive forest fires resulting. Modern thinking holds that forest fires are natural and necessary to the ecosystem and should be controlled rather than supressed.
On the other hand, viral epidemiology holds that absolute suppression of nasty viruses is desirable, eg, if a virus like H1N1 can be contained, it should be.
The economics profession seems to be unresolved on the matter with respect to recessions. For example, we see stimulus checks issued even as the economy is sinking with no palpable impact on trend, suggesting that recessions are to be avoided or mitigated at all costs. Conversely, we have an organic view of recessions, which would suggest that recessions are mean-regression events which are necessary following misalignments of relative prices, eg, asset bubbles. In such a view, a rapid re-alignment of relative prices and associated property rights would seem desirable.
Where is the profession today on the matter? What are some areas of contention, and what issues must be resolved to achieve greater consensus?
Would it be possible to have a post on the topic?
Posted by: Steven Kopits at August 16, 2009 02:47 PM
I can't answer Steven's question, but I can think of another.
I hear in a globalizing "free economy" that there are winners and losers, but mostly winners. The end result apparently being that there are more goods and services available for trade and production goes to the most efficient. Everybody is happy except the losers. When changes occur and jobs move then losers must be retrained to do something else.
So does anybody have any ideas what our losers are going to be re-trained to do or how long it will take? Notwithstanding everything that is being discussed, I don't think this recession will even begin to recover until we get some job security.
I know the administration is out there creating jobs, but they are an illusion so far. Is there anything we can think of that the rest of the world wants to buy and can't be made or done more efficiently elsewhere.
Posted by: Edd at August 16, 2009 07:06 PM
Babinich wrote :
Troop deaths are not the only indicator of winning or losing a war.
Perhaps, but that was the main statistic waved around in the case of Iraq. Those who want a certain side to lose a war will always be able to find some reason to rationalize their pre-conceived beliefs. Some people say the US lost WW2. That does not mean their opinions have merit.
Didn't we keep hearing about how we were killing 10 of them for one of us? Yet we still lost.
Actually, we didn't lose. The US withdrew in 1973, while the South Vietnamese held out until 1975 and fell. The SV lost, rather than the US.
America's performance in Korea was actually worse than in Vietnam, particularly given that the Korean problem still exists today, while the Vietnamese does not.
America loses wars because it goes arrogantly blundering around the world believing it has an undefeatable army
America's army is undefeatable. It is the US media and fifth-column left that saps the morale of the public. No opposing army has ever beaten the US army (not even in Vietnam). The weakest war showing the US has had in the last century was Korea.
America loses wars
Wars? Plural? Sorry to disappoint you, but America has not lost a war in the last 100 years. The worst showing was Korea (stalemate). VietNam was lost by the SV, and Iraq was won. Afghanistan will be won, but will take a long time given the low-intensity nature of the war.
It is fifth-columnists like you who wish for the triumph of every tyranny and despot over America. We have no obligation to 'understand' other cultures. Why aren't they obligated to understand us?
Posted by: GK at August 17, 2009 12:12 AM
Steven. I think there will be a new focus on business cycle control among economists; one tag I hear is "macroprudential", meaning smarter counter-cyclical policies to reduce busts, temper booms, and maximize sustainable growth rates.
Edd. Stepping back and overly simplifying, economists speak of a "Production Possibilities Frontier," a sort of technology boundary that describes the current state of the possible in an economy. Many advanced economies operate close to that, and the growth and jobs challenge for them has been to expand that frontier with products based on new technologies, which advantages R&D and education and supports exports and jobs. Emerging economies in a sense have a simpler task..."all" they have to do is catch up, often using cheaper labor, which is in effect what globalization has meant to date.
Thats the simplified supply side story; on the demand side, advanced economies typically face aggregate demand shortfalls which discourage private domestic productive investment and encourage (unproductive) financial investment. The last several bubbles have been the result, and this does not yield products based on new technology. Referring to my comments to Steven, this deficiency must be resolved so we can start to build a "macroprudential" economy.
Posted by: Steve Bannister at August 17, 2009 04:45 AM
Menzie and rootless,
Read my post again. I did not say that the stimulus is harmful. I said that the waste and destruction that the stimulus is creating is harmful. I also said that because the stimulus must be paid for, something investors clearly understand, and because the government has not said how they will pay for it, the uncertainty is holding down recovery.
I know you are enamoured by equations and graphs but expand your thinking a little. Would you invest if you thought that the government might step in and take any return you would make? How would you invest in such a world of uncertainty?
If the government really wants to return confidence to the markets they need to stop meddling in the markets. When they meddle in the markets it unquestionably creates uncertainty - will I be next?
Posted by: DickF at August 17, 2009 06:07 AM
Holy Cherry-Picking Dick!! Could you be any more blatant in only looking at stuff that makes you feel all warm and smug, while ignoring everything else?
Germany's point in refusing to follow the US example from the outset was that it has far larger automatic stabilizers built into its fiscal system. (Anyone who is not aware of this, by the way, isn't really qualified to have an opinion on how fiscal policy is affecting German recovery.) Germany did engage in additional stimulus efforts, and Merkel has announced that she doesn't want any more of that, but the automatic stabilizers are still at work. The nice thing about automatic stabilizers? You don't have to wait for legislation in order for them to kick in. You might want to look there for at least some of the reason that Germany has had a better Q2.
You count China among the nations that has declined to continue stimulus efforts, without one peep about the fact that China went big and early with fiscal stimulus. Since the point of fiscal stimulus is to offset contractionary influences, and since China got busy quickly and in a big way, it is not all that convincing for you to claim that it must be, can only be, that it is China's decision not to do more than it had said it would do, that explains China's rebound.
The argument for the effectiveness of fiscal stimulus gets a heck of a lot of support from the German and Chinese cases. In both cases, their policies are still in place, doing what they were designed to do. The timing is just about what supporters of fiscal policy said it would be. You know, the business about making prediction with a model to see if the model holds up? Supporters of the model made predictions. The predictions are holding up.
The "behavioralist" (sic) position seems to be little more than a label you have slapped on the DickF position. The expiration of Bush's tax cuts has been on the books since the cuts were enacted. Citing them as somehow the source of weakness, with more weakness to come once they actually expire, presumes that most of us were not aware they were set to expire and will remain unaware up to the day it happens. That's nonsense. Your team has been howling about the dangers of keeping the promise to let these tax cuts expire from the day they were passed. One would have to live in a cave outside of any wifi coverage not to know that some temporary tax cuts are, well, temporary.
Posted by: Anonymous at August 17, 2009 07:06 AM
It probably is worth emphasizing at this point that, ideologies aside, there is little and diminishing evidence of achieving "non-meddled" self-correcting markets without enormous economic damage and dislocations in the complex modern economies we live in.
Posted by: Steve Bannister at August 17, 2009 07:40 AM
I've been reflecting on your apparent aversion to "graphs and equations." It's a sentiment that I frequently encounter in those whose economic ideology I would describe as libertarian.
Here's my general approach to economics. I try to avoid rigid ideology, focus on actual data, put it into context, and then work from that point. So I start with data, and then try to reach a conclusion. This is a pragmatic, mathematically based approach, and it has served me pretty well.
It has been my experience that economic libertarians do not seem to care very much for the numbers. Their approach seems to be to define a conclusion first, than seek out data or anecdotes that support that conclusion. This is the province of the economic ideologue. As you might suppose, these data-free ideologies are frequently wrong, and occasionally spectacularly so.
When you imply that fiscal stimulus cannot work because it must be paid for you are of course implicitly referring to Ricardian Equivalence. This is a key assumption of Neo-Classical economic models and yet it is not really supported by the empirical evidence (I know, those pesky numbers and graphs again).
Despite what you often hear from RBC/Neo-Classical economists (either because they are being disingenuous, or because they simply don't read anything by people outside of their macroeconomic school) there is a substantial amount of research literature on the effectiveness of fiscal policy. Here is a good summary of the literature by the IMF (about 200 papers are featured):
Here is what it says about the theoretical research:
"This literature suggests that fiscal multipliers will tend to be positive and possibly quite large when:
There is excess capacity, the economy is either closed or it is open and the exchange rate is fixed, and households have limited time horizons or are liquidity constrained.
There is an accompanying monetary expansion with limited inflationary consequences."
I would argue that, while we do not satisfy all of the assumptions, we do have excess capacity, liquidity constrained households, and an accompanying monetary expansion (with the federal funds rate probably pinned to zero for several years according to FRBSF analysis).
Here is what it says about the empirical research:
"Estimates of fiscal multipliers are overwhelmingly positive but small. Short term multipliers average around half for taxes and one for spending, with only modest variation across countries and models (albeit some outliers)."
But here is what is important:
"There is little evidence of direct crowding out or crowding out through interest rates and the exchange rate. Nor does full Ricardian equivalence or significant partial Ricardian offset get much support from the evidence."
So Ricardian Equivalence has little to no support from the empirical evidence, and yet Neo-Classical theoretical models pretty much fall flat on their faces without it.
Your prior reference to the Laffer Curve also relates to what I am trying to say here. Theoretically the Laffer Curve makes some sense, particularily, and obviously, at the endpoints. The problem is that the empirical evidence for the Laffer Curve is also little to nonexistent. And those studies that claim to find a revenue maximizing tax rate peg it between 65% and 85%, far higher than the Laffer ideologues would seemingly want.
And certainly uncertainty plays a role in investor decisions, and this is properly the province of behavioral economists. But I fear the real source of the uncertainty meme among economic libertarians is Amity Shlaes, a noneconomist that, sadly, such ideologues think is the foremost expert on the Great Depression (I assure you that she most certainly is not).
My advice is that you abandon ideology and become friends with graphs and equations. Conclusions should follow from data and not the other way around.
Posted by: Mark A. Sadowski at August 17, 2009 08:28 AM
Let's remember that economists are not the economy.
The "economy" is the participants in economic activity - the laborers and investors and consumers.
Statistics and data collection has it's place in understanding but perhaps the better place to start is in the motivations, intentions, fears, hopes, and capabilities of those economic actors.
In other words, one can make a case that people probably don't expect the recession to come to an end yet and so won't take personal actions that would make it so.
Uncertainty about future government intervention in economic affairs is a huge reason to avoid any risk-taking on the part of economic actors. The attempts on part of government to prevent rationalization of asset prices and labor relations just hold back recovery.
Personally, most of the talk about "green shoots" is wishful thinking and something of pep talk. The underlying world hasn't changed enough to justify it.
Posted by: Joseph Somsel at August 17, 2009 11:27 AM
And inevitably when I make a point like the previous one someone makes the case either that economics is not a science or that economists don't really understand the economy (despite the fact that they've usually spent most of their adult lives studying it).
Naturally "animal spirits" are important in explaining economic behavior. It was irrational expectations that inflated both the housing and the equity bubbles after all. But I think it's a little far-fetched to imagine that the recession will simply end if people expect it to end. A quarter of all real estate mortgages are "underwater" and approximately a sixth of the labor force is underutilized right now. Consequently consumers are liquidity constrained. As a result firms are running at roughly two thirds of capacity. It's going to take a lot more than widespread optimism about the economy to get us out of this jam.
I think that the uncertainty meme is vastly overdone. You couldn't possibly ask for a Federal Reserve or an Administration that is more transparent than the ones we currently have. Anyone who doesn't know what policy makers are planning for the next several months if not years is just not paying attention. True, Bernanke did have a little trouble admitting to himself, and to the nation, that the economic order was falling apart in 2007-2008, but I honestly think he's made up for it since, and I really don't see how anyone can make the argument that Romer doesn't know what she is doing. (And anyone who really thinks that they want to torpedo the economy probably belongs in a rubber room along with the birther, Lehman Brothers and 9/11 conspiracists.)
And frankly most of the people who are currently pushing the "green shoots" mantra are the very same free market fundamentalists who helped talk up the asset bubbles in the first place (Larry "Goldilocks" Kudlow comes to mind). A whole lot less psychology and faith based macroeconomics, and whole lot more attention to the economic fundamentals (which of course requires data) is what we really need right now.
Posted by: Mark A. Sadowski at August 17, 2009 01:19 PM
Sorry, but the argument that "economists... usually spent most of their adult lives studying it" is not a persuasive one.
Let's try "Astrologers spent their whole lives studying horoscopes." Convinced?
Not saying economics is not a worthwhile field just that predicting the future is ALWAYS hard and seldom accurate.
"But I think it's a little far-fetched to imagine that the recession will simply end if people expect it to end."
Didn't say that. The recession will end when enough people find in their individual self-interest to expand consumption, investment, and production.
One could argue that the signals from the Administration and Congress are clearly INCREASING the uncertainty of those in business since they are so counterproductive and damaging. Can they be stopped and the damage prevented is the question.
I don't know who exactly is pushing the green shoots meme but I still think they are wrong.
I do think we're in agreement on the importance of fundamentals. Data is historical - motivation is forward-looking.
What sectors are going to lead us out of this?
Posted by: Joseph Somsel at August 17, 2009 02:17 PM
My expertise is in economic policy (macroeconomics). I don't see my job as picking economic sector winners (that should be microeconomics). (There are, of course, economists that do specialize predicting such things.) It's my strong respect for microeconomics that causes me to argue against central planning. My job is to make sure that output (a.k.a. "aggregate demand," and hopefully, utility) is optimal. It's up to the individual actors (consumers and producers, perhaps with expert advice) to pick the winners. My job is simply to make sure that it is done in a way that is as optimal for everybody as possible.
I would also argue that the Administration (and even the Congress) is far more business friendly than its critics would acknowledge.
Posted by: Mark A. Sadowski at August 17, 2009 03:49 PM
When discussing recessions, Prof. Ed Leamer's paper:
Leamer, Edward E. 2007. “Housing IS the Business Cycle.” National Bureau of Economic Research Working Paper Series No. 13428.
seems very credible. So housing and consumer durables lead us into recessions. If there is symmetry on the recovery (and the extent of this is argued), then they should be key in leading us out.
And, as Prof. James Hamilton has demonstrated, energy prices are an incredibly important factor in all this, seemingly acting as one trigger to durable and housing cycles, so they MUST stay controlled for the recovery to proceed well.
Now thats what the data say as analyzed by the best in the business. This one could be different. I get suspcious when anyone says that, and really don't believe it.
So for this economy, this time as well as the last seven or eight times, and until there is a really significant structural shift, housing and durables will lead, and energy must remain contained.
Posted by: Steve Bannister at August 17, 2009 04:15 PM
DickF: "It was stimulus in the form of the TARP that caused the economy to crash and now it will be stimulus that will prevent our recovery."
TARP is more of a transfer payment to make lenders and their facilitators whole, rather than stimulus per se. I agree that such transfers may yet sink us.
Posted by: don at August 17, 2009 04:18 PM
Thanks for responding to my question. But, with respect to leaders and cures of this recession: Most of the relevant economic analysis I read does, as you say, point to housing as a leader. Apparently if it can lead us in it can lead us out, but what about lending?
It seems reasonable with the hindsight we now have to believe the recession of 2001 never ended, but was sort of distracted by a "
Consumer spending is apparently what props it all up. And the lending binge sent a signal that there was no end to positive consumer sentiment as long as we pretended that home equity could be expanded without limit.
Energy may be a potent influence on the economy, but so is lending. As soon as someone peeked under the lid of sub-prime lending, MSBs, CDOs and whatever else quants were doing with mortgage derivatives, panic set it, unemployment started up and the lenders ran away.
Looks to me like housing is a proxy. Since housing is a form of consumer spending, let me put it this way.
Demand for housing contains an effective component; ability. Traditionally that ability is measured by the amount in dollars that buyers can pay for the house and the banks were the gate keepers.
The banks sort of abandoned that gate keeper function and the sky suddenly became the limit. I guess, since housing is an economic bell weather, we missed the warning because the banks were covering it up. Now we know housing is a signal that can be manipulated. Why aren't lending practices, at least to the extent that they influence spending on housing, utilized more by economists?
Second observation. Apparently with respect to employment our economy lives on the edge of the possible. Do we only get to know what is possible after it is actual? I'm trying to complete micro real estate markets and employment and loans are big deal. Maybe macroeconomics is something I should totally ignore if it isn't relevant to what I do.
Posted by: Edd at August 18, 2009 07:36 AM
Mr. Bannister and Mr. Edd,
Thanks for the reminder about energy. An ecologist would claim that our economy is ALL about energy flows (Howard Odum for example). Pre-industrial economies were about solar-powered agriculture and empires rose and fell with changes in the solar influx.
With the James Watt and the Industrial Revolution, fossil fuels added their energies on top of the agricultural solar base and created the modern prosperity.
But energy is not enough - it must be put to use efficiently - hence productivity is the second factor.
The long run of productivity gains in information that started with personal computers and better communications (yes, the Internet) has about had its run. Any new "killer apps" out there, waiting to change society and the economy? Not that I hear about from my seat in Silicon Valley.
The Obama Administration and the Democratic Congress seem determined to make energy MORE expensive, not less so. The "cap 'n tax" legislation would impose huge costs on the economy. The Obama Administration has cancelled the new drilling leases signed before the last election and the inaguration. The electric renewables mandate will jack electric prices up through wasteful and pointless investments in wind and solar-electric.
Hence - energy is getting more expensive and no new productivity improvements have appeared. Increase government regulation will probably LOWER productivity overall.
So my question remains, what sectors will pull us out of the recession? Housing is iffy, energy is going the wrong way, consumer spending is falling as people relearn the virtues of frugality, overcapacity exists in most manufacturing.
I am beginning to appreciate the Obama Administration's efforts to stablize the financial systems. TARP was a necessary injection of liquidity and it ain't over yet. One can look back on the 1920-21 recession and long for the good old days and "Liquidate. Liquidate. Liquidate!" but the New Deal institutions have grown old and fossilized and might be part of the problem rather than the solution. FDIC for example is collapsing.
Posted by: Joseph Somsel at August 18, 2009 10:59 AM
My studies indicate that credit/lending is endogenous, that is it arises out of demand for the final goods like houses or whatever. Not to say that the credit rules are not important. But if the demand for housing is there, the credit will be there as well. Banks can create it as needed, especially now with huge excess reserves. So we need a return of the demand for housing, which means jobs, stable expectations, improved balance sheets, and such.
As far as the excesses of the housing bubble, the most fundamental cause IMHO was the imbalance of the financial investment sector's power that allowed them to create the risky instruments in search of excess profits. Finance has come to dominate this economy versus productive investment, and have been largely unchecked in their abuses. This has happened in history several times, always with a bad outcome. Finance must be regulated in their own and everyone elses interest. Lots of people saw this coming, but they didn't have the power to stop it. So finance in general must be restrained. The only thing they really "produce" is rents, and that in the long run is not good for growth.
In terms of macro and micro, you need both. The big thing here that most people miss is the many fallacies of composition, or what is good for the micro is bad for the macro and possibly vice versa. A great current example is the rise in the savings rate. Good, essential even, for the individual consumer. Bad for aggregate demand and jobs in the economy. The financial capital firms have a similar effect...their innovations were (sometimes) good for them individually (and certainly for individuals in the firms), but bad for the economy.
If you don't look at macro effects, you miss all that.
Posted by: Steve Bannister at August 18, 2009 11:44 AM
Can we discuss this demand for housing in economic terms? It has components:
1. The need for shelter,
2. The desire for shelter, and
3. The ability to buy shelter.
Included in the ability to buy is the financing portion, which as you observe the financiers have demonstrated they can effect the magnitude of lending and thereby impact how housing behaves in the economy.
Most likely lenders don't impact the need for shelter, but they can sure up the ante on desire when they provide the ability.
I am surely among the group powerless to change anything, but why don't the overseers of the advisers to those who can intervene in the excesses of lending include lender activity as an indicator the economy may take a nosedive.
OK. I'll continue to try and understand the relevance of macroeconomics in real estate market analysis. Right now I'm with the guys who are saying we experienced a "loan bubble" of which housing was both a symptom and a victim.
Posted by: Edd at August 18, 2009 12:36 PM