Wal-Mart Stores Inc. had the worst sales start to a month in seven years…
- A reverse substitution effect
I’m interested to see which it is.
Wal-Mart Stores Inc. had the worst sales start to a month in seven years…
I’m interested to see which it is.
The graph below has been making its rounds (see this post by Tyler Cowen for several links). Upon first glance it appears to refute any sort of fiscal approach to restoring GDP. The red (GDP) line is table although the blue (government spending) line decreases. However the key here is noting that this graph actually shows continued growth in GDP once government spending has hit a relatively stable level. It becomes much more clear in the graph below that I put together (note red now represents government spending and blue represent GDP).
Obviously this leaves out many other factors that I would consider relevant to the NGDP recovery (tax stimulus, low interest rates, right-sized asset prices, low steady inflation, etc.), but it at least gives an accurate depiction of the spending-growth pattern that emerged after the recession.
This is similar to a mistake many commenters make, wanting to distinguish between cash injected into the “real economy” and cash injected into financial markets. Cash doesn’t go into markets at all, it goes into the pockets of people and businesses. There is no meaningful distinction between cash going into the “real economy” and the “nominal economy.” If the Fed buys a bond from a dealer, he’ll quickly deposit the funds in the bank. If the Fed injects cash by paying Federal salaries in cash, the workers will quickly deposit the cash into banks. Over time the demand for cash will rise as NGDP rises. I suppose one could distinguish between cash boosting RGDP and cash boosting NGDP but not boosting RGDP. But then commenters would want to talk about the slope of the SRAS curve, not who gets the money. Or you could talk about cash injections failing to boost NGDP, because the extra money is hoarded. Yes, but once again that depends on factors that have nothing to do with who gets the money, as long as we assume fiscal policy is unaffected.
Ross Douthat’s recent New York Times article is making the rounds on the internet. Writing about birth rates in the U.S., he says:
Beneath these policy debates, though, lie cultural forces that no legislator can really hope to change. The retreat from child rearing is, at some level, a symptom of late-modern exhaustion — a decadence that first arose in the West but now haunts rich societies around the globe. It’s a spirit that privileges the present over the future, chooses stagnation over innovation, prefers what already exists over what might be. It embraces the comforts and pleasures of modernity, while shrugging off the basic sacrifices that built our civilization in the first place.
Such decadence need not be permanent, but neither can it be undone by political willpower alone. It can only be reversed by the slow accumulation of individual choices, which is how all social and cultural recoveries are ultimately made.
For this population replenishment challenge, rather than calling for a second baby boom, Adam Ozimek sees opportunity for immigration. He writes:
But of course immigrants also can be tomorrow’s taxpayers, workers, and entrepreneurs; and they can keep the ratio of workers per retiree up as well. Even better, immigrants arrive here as workers and skip past the whole taking and not giving stage of childhood through adolescence. If you want to apply the conservative meme of makers vs takers most accurately then apply to adults and children. Having more babies may be economically positive, but surely if we could give birth to fully formed adults their net economic contribution would go up. And that is effectively what immigrants are: fully formed adults who enter our country ready to work without having required anything from us first, unlike those needy takers we call America’s children…
Yet if immigrants have similar effects as having babies but with more positive net economic contribution, then why fuss about “Government’s power over fertility”, which Douthat recognizes is “limited, but not nonexistent”? Our power to increase immigration in contrast is both massive and cheap: all we have to do is stop getting in the way.
This morning’s AM Reads linked an article from Annie Lowery. The graph below is a highlight from the study she cited.
This paper studies aggregate employment dynamics during recent U.S. recoveries in a dynamic stochastic general equilibrium (DSGE) model, driven by the empirical features of firms’ employment benefit costs and by the interactions of these costs with firms’ financial conditions (i.e., borrowing capacity). The paper makes three main contributions. First, I document the underexplored cyclicality of per worker benet costs and a positive correlation between the cyclical components of the benefit costs and employment growth. I also show that this positive correlation has changed since 1990. Second, using these empirical features of benefit cost cyclicality and the costs’ rising trend in the model, this paper produces 2-to-7-quarter delays in employment recoveries relative to business cycle troughs for the 1990, 2001, and 2007 recessions and no delay for the pre-1990 period. This is consistent with the data. Third, the interactions of the benefit costs with the financial conditions allow the calibrated model to generate 40-90 percent of employment volatility, as well as most of the volatility in per worker hours and in output.
Thanks to Tyler Cowen for the pointer.
Analyzing the graph above, Avent writes:
The really distressing thing is to try and project these lines forward a bit. Japan is in recession. Britain may be out of it, but on the other hand may not. The euro zone has not grown for over a year, is almost certainly contracting faster in the fourth quarter than it did in the third and may well continue shrinking into 2013. One wonders whether the euro zone has already had the best quarterly output performance it will ever manage.
And then there is America, trudging steadily upward to the beat of its own drummer. How long can the divergence between America and the rest persist? And on what terms will these lines cross again? One thing seems reasonably clear: America will not be able to rely on demand from the rest of this bunch to keep its line going up. Most of all, it will have to count on the durability of domestic demand.
It appears Ben Bernanke will step down in January no matter who the next President is; that means the next president will need to appoint a new chairman. Scott Sumner makes a case that that person should consider NGDP targeting as the new Fed policy. He writes:
As compelling as I think the arguments for NGDP targeting are, I have come to believe the pragmatic arguments for it are even more powerful. These arguments mostly revolve around some overlooked practical shortcomings of inflation targeting…
There are errors in the measurement of both inflation and NGDP growth. But to an important extent, the NGDP is a more objectively measured concept. The revenue earned by a computer company (which is a part of NGDP) is a fairly objective concept, whereas the price increase over time in personal computers (which is a part of the CPI) is a highly subjective concept that involves judgments about quality differences in highly dissimilar products…
Such targeting would make it easier for the public to appreciate the need for sound supply-side policies. If the fiscal authorities understood that the central bank was going to allow only 4 percent NGDP growth, then they would know that the only way to boost real growth would be with supply-side policies, even in the short run. Tax reform that lowered marginal tax rates would tend to increase aggregate supply and, hence, to improve the inflation/output growth split in NGDP growth…
Finally, NGDP targeting would help depoliticize monetary policy. The current ill-defined dual mandate allows each side of the political divide to latch onto its preferred policy indicator and to argue that money is either too easy or too tight. This polarization has been especially pronounced during the Great Recession. NGDP targeting would provide for much greater transparency of whether policy was overshooting the target or falling short.
…but when I do I’ll at least tell you about it.
What all this also tells us is the folly of using growth from the recession trough as a measure of success: the worse you screw up the original response to the crisis, the better this measure looks!
And the bottom line remains the same: a weak recovery was only to be expected given the kind of crisis we experienced in the waning months of the Bush administration.
The second post essential expands the first point to Latvia. He explains:
As Reinhart-Rogoff say, rapid growth over a short period following a deep slump does not constitute a success story; by that measure, America was a tower of prosperity in the depths of the Great Depression. It’s much more informative to focus on levels, both of output and of unemployment, and compare them with the pre-crisis peak.
For evidence he points to Latvia’s GDP levels, which has apparently been considered a success.
What is a bubble? You certainly can’t know it’s a bubble by just looking at it. You need a model. (i) Write down a model that determines asset prices. (ii) Determine what the actual underlying payoffs are on each asset. (iii) Calculate each asset’s “fundamental,” which is the expected present value of these underlying payoffs, using the appropriate discount factors. (iv) The difference between the asset’s actual price and the fundamental is the bubble. Money, for example, is a pure bubble, as its fundamental is zero. There is a bubble component to government debt, due to the fact that it is used in financial transactions (just as money is used in retail transactions) and as collateral. Thus bubbles can be a good thing. We would not compare an economy with money to one without money and argue that the people in the monetary economy are “spending too much,” would we?
But the bubble component of housing prices after, say, 2000, does not appear to have been entirely a good thing, as it was built on false pretenses. Various kinds of deception resulted in housing prices – and prices of mortgage-related assets – that, by anyone’s measure, exceeded what was socially optimal. As a result, I think we can make the case that pre-2008 real GDP in the US was higher than it would have been otherwise. Further, the housing-market and mortgage-market boom could have masked underlying changes taking place in US labor markets – for example David Autor’s “hollowing out” phenomenon. One could argue that there was a cumulative effect in terms of the labor market adjustments needed, and that these adjustments took place during the recent recession, and are still taking place. See for example this paper by Jaimovich and Siu. That’s why all the long-term unemployed. So that’s not some confusion. People are talking about alternative ideas that have some legs, and may have quantitative significance. Why dismiss them?
This old Forbes article offers a great bio of newly minted Nobel Laureate Alvin Roth. It includes this simplified explanation of this major contribution to market design.
The algorithm is most easily explained in the context of matching multiple men and women who want to marry. First, each man proposes to his first-choice woman. Women who get numerous proposals reject their least preferred suitors, but don’t make a firm commitment just yet. The rejected guys make new offers, in order of their preferences, perhaps resulting in new rejections, until none of the guys is rejected or no rejected guy wants to propose to anyone else. At that point the women accept their most preferred suitor. For the men who don’t get matches in the first round because they didn’t list enough choices, there is another round where the men are offered a list of still-single women and they make another set of choices. Sometimes a third round is needed.