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

Sunday, July 31, 2011

Well, we have an agreement

And I don't mean that in a favorable way.

Although I'll wait until we see the details, all the early reports indicate that what we have is an agreement that does three, maybe four, things:

1. Raises the debt ceiling (although I've seen nothing that says by how much.

2. Makes an average of about $200 million per year in federal government spending cuts over the next decade.

3. Adds no additional revenue.

4. Makes it likely that we will have to revisit this entire issue in the relatively near future.

Or make that five things:  Blackmail has, in fact, paid off.

It's the spending cuts that probably hurt the most.  The Bureau of Economic Analysis (Department of Commerce) just released preliminary second quarter GDP data.  They show GDP growth in the second quarter at an annualized 1.3% per year, which is not enough even to maintain the current unemployment level, let alone lead to a decline in unemployment.  And, the revisions to the GDP estimates for the past couple of years were all downward--meaning that even the tepid recovery we though we were having was even worse than we thought.

And now we're going to cut federal government spending by $200 billion a year.  In an economy in which nominal GDP seems to be right around $15,000 billion on an annual basis right now, that's not a lot, only 1.3%...but that's enough that it would more than wipe out the growth in GDP during the second quarter  (growth in nominal GDP from the first quarter to the second quarter, annualized, was about $132 billion).  Macroeconomic Advisers has apparently forecast a 3.1% increase in real GDP for the next four quarters; this spending reduction would cut that in half.  That'll be helpful. 

There were alternatives.  Any number of people suggested ways to avoid this capitulation, from invoking an admittedly controversial interpretation of the 14th Amendment to the Constitution, to arguing that by passing a set of spending acts that required a budget deficit tacitly authorized additional borrowing, to overdrafts at the Fed to the "platinum coin" ploy.   But the administration ruled out everything except a budget deal.

And so it goes.  Another compromise that looks more, at this point, like a surrender.

UPDATE:  It's even worse than I thought.  The Huffington Post reports that the debt ceiling will increase by $900 billion. Since the budget deficit is currently running something more than $1,000 billion a year, we appear to have a ten-month window before we're back in the room, negotiating with blackmailers. 

Friday, July 29, 2011

The Debt Ceiling Crisis

Houston, we have a problem.

The problem is that the Republican Party in Congress refuses to agree to any reasonable solution to raising the debt ceiling.

The problem is that Congress--including the Republican members of both houses--has authorized spending that exceeds the tax revenue that will be collected.

The problem is not the spending side of the equation. 

Between 1947 and 2007, federal government expenditures (at all levels, including transfer payments and interest payments) averaged about 21% of GDP, while government recepts averaged about 19%.  Since 2007, federal government spending has, in fact, increased to about 25% (from about 20%).  But that increase has been entirely a consequence of the recession, as real federal spending has increased by only about 6% while real GDP has remained almost unchanged.  Had real GDP grown at its long-term rate of about 3% per year, federal government spending as a percent of GDP would have declined since 2007, not even taking into account the share of spending that is in response to the recession.

Meanwhile federal government receipts as a percent of GDP have declined from about 19% to about 16%; again, this is almost entirely a result of the recession.  Federal government tax revenues are nearly 12% below their 2007 levels.  Absent the recession, the current budget deficit would be less than half its current level.  And we would not be having this debate.  Indeed, absent the recession and the tax cuts enacted in 2002-2004, we would have a budget surplus of about 2% of GDP.

We have higher than normal (and higher than expected) spending, because of the recession,  We have lower-than-normal revenues, because of the recession and because of the tax cuts enacted in 2002-2004, revenues that are lower than they would be without the recession.

None of the current problem is a long-term issue. 

But the country's finances are being held hostage. 

The responsibility is not shared.  The responsibility is wholly that of the Republican members of Congress, who, offered a deal to reduce federal spending significantly below its long-term level, without additional tax revenue, said "No."

Even if, by doing so, the nation's credit and economic well-being suffer. 

Wednesday, July 27, 2011

Labor Market Rigidities and Unemployment

Murat Tasci and Mary Zenker have written an interesting Economic Commentary for the Cleveland Fed, looking at the relationship between labor market rigidities and the response of unemployment rates during the recent recession.  They focused on OECD countries.  What they found, using the OECD index of "Overall Strictness of Employment Protection" as their measure of labor market rigidity, is this:  In the OECD, countries with more strict employment protection experienced smaller increases in their unemployment rates during the "Great Recession", while countries with less strict employment protection (notably the U.S.) experieced larger increases in unemplyment rates.  However, in non-recessionary periods, countries with less strict employment protection tended to have lower unemployment rates than did countries with more strict employment protection.

For example, the unemployment rate in the U.S. (least strict protection) rose by more than 4 percentage points during the recessions, while in France (4th most restrictive) saw an unemployment rate increase of less than 2 percentage points.  Both had total GDP declines during the recession of about 4% to 4.5%.  However, the unemployment rate in France was consistently 2 - 3 percentage points higher than in the US from the trough of the previous recession (in 2001).

What I find interesting, but unable to do much with (because finding the relevant data for France, or other countries, is apparently more difficult than it is for the U.S.), is that Tasci & Zenker say nothing about the labor market rigidity often cited as a major contributor to flexibility in labor markets--wage rigidity (or its converse, wage flexibility).  We would expect countries with more flexible wages to display smaller increases in unemployment during recessions (although our expectations about average levels of the unemployment rate are less clear).  So what can we say about wage flexibility?

All I can (easily) find are quarterly data for the U.S. on "Usual Median Weekly Wages" in current dollars (at  And, relative to trend, U.S. wages appear both to be reasonably flexible (the mean percentage point change in actual relative to trend for the 1979 to 2011 period is 2.2 percentage points.  And this is quarterly data, not annual data.  Furthermore, wages do not appear to behave particularly counter-cyclically (in the U.S.), so this does not appear to be a source of added flexibility for the U.S. economy.  (Real wage flexibility apears roughly similar to nominal wage flexibility, with an absolute mean quarterly deviation from trend of 2.4 percentage points.  Again, the pattern does not appear to be counter-cyclical.)

Ignoring wage flexibility seems to me to be a clear (and unforced) error, but one that I cannot easily try to adjust for.

Tuesday, July 12, 2011

The forbidden internet

So I just clicked on an economics-oriented blog, and got this message:


You do not have permission to access this document.

I guess that tells me where I stand.

Monday, July 11, 2011

An investment opportunity?

The Treasury has been able to borrow at essentially a zero interest rate since September 2008. The most recent sale of 4-Week T-bills (July 7) required an interest rate of 0.03%. And that’s an annual rate. Someone buying $100 Million (redemption value) of T-bills paid $99,997,692 for them. That buyer will receive in interest payment of $2,308. On $100 Million worth of T-bills. During the 2001 recession, $100 Million in 4-Week T-bills would have yielded about $260,000 in interest…

Personally, I think the Treasury should start using the proceeds from the sale of T-bills to buy AAA corporate bonds. The profit opportunities are breathtaking.

Friday, July 08, 2011

I thought I had written the last of these...Another Employment Situation report

The Bureau of Labor Statistics released its Employment Situation Report for June 2011 today. I thought--I hoped--I had written my last set of comments on this subject, at least for a while. But this is not good. Not good at all.

Many of the comments I have seen are focuses on the monthly changes, and they are discouraging. A net 18,000 increase in jobs (+57,000 private, -39,000 government). But a single bad month is not something to get too worrier about. So I decided to look at the change since June 2010, and the change since the "official" end of the recession, conveniently two full years, June 2009.

Total employment in the last year has increased by 0.8%. In the two years since the end of the recession, growth in total employment has been 0.4%--only 0.2% per year (total employment actually fell, by 0.4%, in the first year after the "end" of the recession.) Simply to keep up with employment growth, we'd need employment growth of more like 1.3% to 1.5% per year. To return to pre-recession levels in anything like a reasonable amount of time, we'd need growth like that coming our of the 1982-3 recession--when employment growth averaged about 3% per year for 6 years...when employment growth in the first couple of years pushed 5% per year. The economy is not just "running in place;" it's falling further and further behind.

That might be acceptable if private sector employment were booming. But it's not, it has grown just 1.6% in the past year and only 0.9% over the past two years (falling, obviously, between 2009 and 2010). Again, the contrast with the mid-1980s is instructive--private sector employment grew by more than 3% per year over a six-year period.

And even that might be acceptable, except that public sector, particularly state and local, employment has actually declined. State employment is down by 1.5% and local government b7 2.9% over the past two years. Federal government employment has increased, by 0.6%--16,000 jobs--since 2009.

The economy is growing so slowly, overall, and both in the private sector and in the public sector, that we are not even keeping pace with population growth and we are making even less progress in returning to our pre-recession levels of employment.

The employment-population ratio, which was 63% in June 2007 (before the official beginning of the recession, in December 2007), and which had declined to 59.4% in June 2009 (the official trough of this business cycle), has continued to fall in what is officially the recovery, and now is at 58.2%. By contrast, the employment population ratio rose from 63.9% in 1983 to 66.5% in 1989, rising every year.

As a result, people are dropping out of, or not entering the labor force. The labor force participation rate, which was 66% before the recession is now 64.1% and falling; it is lower now than it has been since 1982.

And the slow growth in employment has kept the unemployment rate from falling very much during the "recovery," even though the labor force is shrinking. Coming out of the recession in the 1980s, the unemployment rate fell from 10.1% in June 1983 to 7.2% in June 1984. Not this time. In June 2009, at the trough, the unemployment rate was 9.5%. June 2010, one year later? 9.5%. June 2011, two years later? 9.2%.

But maybe that's all a result of harder times for part-time workers. Well, no. For full-time workers, the unemployment rate, which was 10.3% in June 2009, is still 9.8%. In the 1980s? Down from 10.2% to 7.1%.

How about wages? Nominal wages have risen since the trough, by a whopping 4.5%--remember, that's over two years. But prices have risen (slightly) faster, so real wages have increased more slowly, by 1.3%, in the two years since the trough of the recession--and have declined in the past year. During the recovery.

I'm too depressed to continue. Me and what passes for a recovery.