Comments on economics, mystery fiction, drama, and art.

Saturday, November 06, 2010

Why I don't like having to do a forecast for my local economy

I spent most of my day working on a presentation on the economic outlook for northwest Indiana, the 13th time I've done this. It seems like 13 versions of the same thing...northwest Indiana will grow more slowly over the next year than will the state of Indiana, which will grow more slowly than the nation. Sometimes I think I should just record my comments and play them next year.

But northwest Indiana has not done well since the steel industry collapsed in 1979. Oh, the steel industry has done well, but it has done well by shedding jobs, and the profits from that have gone elsewhere.

Population growth has all but ended. From 1900 to 1980, the population grew at an average annual rate of 2.2%; since 1980, it's grown at an average annual rate of 0.1%; since 1980, the region has added only 25,000 to its population, which, in 1980, was about 828,000.

Payroll employment has grown, since 1990, at an average annual rate of 0.14%. Now, I grant that we're still trying to climb out of a recession, but the average annual growth from 1990 to the December 2007 peak was a whopping 0.65%. Now, that's exciting. We added, from 1990 to the pre-recession peak, only 31,800 jobs (starting at 255,900).

And household employment is, if anything even less thrilling. Employment grew at an average annoual rate of 0.3% from 1990 to 2007, and has declined by 5.2% since the US economy hit bottom in June 2009. Using the household measure of employment, we have about 5,000 fewer jobs than we did in January 1990--and, because of seasonal factors, January is a bad month around here.

Growth in real per capita income hasn't been all that bad--average annual growth of 1.2%, compared with 1.5% for the nation since 1969 (through 2008). But growth since the beginning of the collapse of the steel industry has been only 0.8% per year, while the US PCI has grown at a 1.7%. Average annual compensation in non-farm employment has grown a total of 1.4% between 2001 and 2009--an average annual rate of 0.2% per year. Which is actually better than the US as a whole (average annnual compensation has declined by about 0.5% between 2001 and 2008).

So I'm trying to figure out what I'm going to say that won't be too depressing...

Thursday, November 04, 2010

What managers do

Tonight, I was looking for something to read, and I settled on a book by Bill James*, which I hadn't read since I bought it when it was published in 1997. Bill, as an undergraduate, double-majored in English and economics, and has spent his working life doing what he wanted to do (mostly), rather than working for someone else. And it's worked out pretty well for him.

The book is about managers of major league baseball teams, and it is in many ways quite fascinating.

Anyway, on p. 157, he writes:

"The most important question that a manager asks is "What needs to be changed around here?" Any manager, over time, loses the ability to see what needs to be changed..."


"If a manager is successful, he changes the needs of the organization. By so doing, he often makes himself obsolete."

(In the book, the second quote actually comes before the first.)

All of which makes a lot of sense in managerial contexts generally. Managers succeed when the make changes that redirect the organization as it needs to be redirected. Managers fail when they cannot identify what need to change. And, oddly, for reasons Bill writes about, it's almost always easier to implement changes early in a manager's tenure. Later on, managers have been captured by the culture they have created (or, at the very least, helped to create).

I'll let you all think about the applicability of this to your own work situations.

*The Bill James Guide to Baseball Managers From 1870 to Today, Scribner (New York: 1997).

Monday, November 01, 2010

How long will it take?

This came up a few days ago over at Matt Yglesias' blog, and I made an off-the-cuff remark that it generally takes growth in real GDP in excess of 3% to bring the unemployment rate down. Well, I decided to be a bit more systematic, so (using quarterly unemploymenr rate and GDP data), I regressed the 4-quarter change in the unempoyment rate on the 4-quarter percentage change in real GDP. The resulting regression indicated that, if real GDP grows by 2.64% over a 4-quarter period, the unemployment rate will (generally) be stable. Faster growth than that, the unemployment rate falls; slower growth than that, it rises.

What does this mean for the economy? Suppose we want to get the unemployment rate down to 5.5% from its current 9.6%. Well, that'll take

1 year of 11.1% growth in real GDP or

2 years of 6.8% growth or
3 years of 5.5% growth

We just got a 2% (annualized) growth in real GDP estimate from the BEA...not good that rate, the unemployment rate would, on average, rise by o.3 percentage points per year. The San Francisco Fed is forecasting growth of 2.5% for 2010 (we ain't there yet) and 3.5% for 2011. If we got that, the unemployment rate would decline about 0.4 percentage points by the end of 2011; if the economy continued to grow by 3.5% for another five years, the economy would return to a roughly full employment state--in 2016. Also not good enough.

I have seen no forecasts of growth approaching 6.8% per year for any time in the near future.

Coming out of the recession of the mid-1970s, the economy achieved 4-quarter growth rates in excess of 6% for a four-quarter period from the first quarter of 1975 through the second quarter of 1976; we grew at an annualized rate greater than 5% from the 4th quarter of 1982 through the fourth quarter of 1984--two years. So rapid growth coming out of a recession is not impossible. But we've topped out around 4% in the last two (1991; 2001) recessions.

Unless something happens that leads to a much faster growth in real GDP than we seem likely to have, the unemployment rate will almost certainly remain high for many years. This is a scenario that should lead to more discussion of additional means of stimulating the economy.

What we seem to be getting instead is the return of what Paul Krugman has called the "austerians."

I have a bad feeling about this.