The Jedi Principle

This will only make sense if you've seen the Star Wars movies, but it is so true.

The Jedi Principle, as proposed by Robert Farley:

The Jedi Principle runs so:

If you need the Jedi in order to make your project work,
don’t start.

Paul Krugman recently commented that the extent of the stimulus provided by increases in government purchases has been significantly over-estimated:

"That is, for all the talk of a failed stimulus, if you look at government spending as a whole you see hardly any stimulus at all. And with federal spending now trailing off, while big state and local cutbacks continue, we’re going into reverse."

Just how accurate is this? In the 4th quarter of 2007 (that is, at the peak of the business cycle as defined by the NBER Business Cycle Dating Committee), combined Federal, state, and local government purchases of goods and services totaled 18.4% of GDP. In the second quarter of 2010, that total was 19.4%--of a smaller GDP...In fact, government pruchases as a percent of GDP peaked in the second quarter of 2009, at 19.9%, and have declined since then.

In fact, government purchases grew at about a 2.1% annual rate between 1960 and 2007. At that rate, government purchases in the second quarter of 2010 would have been about $2,602 billion (annual rate). Actually, government purchases were less than that--$2,567 billion (annual rate). [One can argue whether having government purchases grow at that rate is appropriate or not--government pruchases grew more slowly than did GDP (which grew at a 3.1% annual rate), but that's a different question.]

So Krugman is unquestionably correct. Counting state and local government purchases (which have actually declined by 2.1% since the beginning of the recesion) as well as Federal government purchases (which have grown significantly, but the increase only slightly offsets the S&L decline--combined, state and local governments purchase considerably more than does the Federal government), the amount of fiscal stimulus was quite small.

Another ugly labor market report

Let’s start with the establishment employment data…total nonfarm employment declined by 131,000 in July (compared with June). Where were the losses?

Total government employment declined by 202,000; 154,000 of that was a loss of Federal government jobs; 38,000 jobs were lost in local government, and 10,000 lost in state government. So the largest issue is a loss of Federal government employment. The BLS press release attributed the loss of Federal government jobs primarily to 143,000 temporary Census-related jobs coming to an end.

Still, leaving that aside, total employment by governments fell by 59,000. At the local government level, 27,000 of the jobs lost were in local public education. This incorporates a seasonal adjustment, reflecting the fact that there are fewer people employed in elementary and secondary education in the summer. The raw loss (not-seasonally-adjusted data) was over 1 million jobs in local public education; that’s about 15% of the level of employment in local public education, and that June-to-July loss has been roughly the same since the mid-1960s, so this is not something unusual. However, a June-to-July decline in the seasonally-adjusted data is unusual; until the last two years, the usual June-to-July change in the seasonally-adjusted employment number was about +2%. In 2009 and 2010, it has been about -0.8%--not a big deal, but something very different from prior years.

But without the losses in government employment, overall employment grew—by only 71,000, an increase of 0.07% (or, frankly, probably statistically insignificant). Over the past 70 years, the June-to-July change in total private employment has averaged only about 0.1%, so there has historically been very little change in private employment in the summer. (Incidentally, this seems to be true whether the economy is in a recession, just recovering from a recession, or near full employment.) So the overall change in the private sector is generally consistent with our experience. However, the change in private employment from July 2009 to July 2010 is actually negative (-0.04%, or 41,000 lost jobs). This is not only rare for a year-over-year change in general, but is almost unheard of in what purports to be a recovery, especially from a serious recession. For example, the annual change from July 1983 to July 1984 in private jobs was +5.6%; from July 1975 to July 1976, +4.3%. Recently, however, this is not so strange. In the “jobless recovery” from the 2001 recession, the annual growth in employment from July 2001 to July 2002 was -1.8%, followed by an additional decline to July 2003 (-0.4%).

So not only is the decline in government employment signaling a weak recovery, the tepid growth in private employment is almost equally discouraging.

The dismal nature of this month’s report also shows up in the household data. Overall, the household survey reports a loss of 159,000 jobs from June and 950,000 from July 2009. So in a year of “recovery,” employment has not only not stabilized, it has declined by about 0.6%. The unemployment rate did not rise (still 9.5%), but only because the labor force also fell, even more that employment did, by 181,000. Over the past year, the labor force has declined by 790,000, with the result that the labor force participation rate is now at 64.6% (back to the December 1984 level), and the employment-population ratio is 58.4% (November 1977!—essentially the same as 33 years ago).

Of the 15 million unemployed, 60% are job-losers; typically, this is around 40% in good times. So job loss continues to dominate the unemployment data. The average duration of unemployment is essentially unchanged from June 2010, at about 34 weeks, but is 10 weeks longer than it was in July 2009—long-term unemployment is still increasingly the rule, and the failure of the duration of unemployment to fall is extremely troubling. It suggests that we’re seeing something that has not been a prominent feature of our economy since the Great Depression, and it increases the likelihood that some of the currently unemployed will find regaining jobs more and more difficult, unless things change quickly.

I am depressed.