Tuesday, October 11, 2011

The big picture: uh-oh

Credit: Calculated Risk blog
Last Friday, the September unemployment numbers were published, with unemployment remaining unchanged at 9.1%. The broader U6 measurement of unemployment was up 0.3% to 16.5%. With 100,000 new jobs created, the economy just barely kept up with population growth, but did not manage to soak up any of the unemployed.

Ezra Klein's analysis of the last 3 years of Obama Administration economic policy was published this last weekend. Klein's basic thesis is that the policy response from all parts of government have been insufficient in the face of Reinhart and Rogoff's many writings that financial crises are much worse than a typical recession and that they require a much more robust response.
In March 2009, Reinhart and Rogoff took to Newsweek to critique the “chirpy forecasts coming from policymakers around the globe.” The historical record, they said, showed that “the recessions that follow in the wake of big financial crises tend to last far longer than normal downturns, and to cause considerably more damage. If the United States follows the norm of recent crises, as it has until now, output may take four years to return to its pre-crisis level. Unemployment will continue to rise for three more years, reaching 11 to 12 percent in 2011.” 
...“I don’t think it’s too much of an exaggeration to say that everything follows from missing the call on Reinhart-Rogoff, and I include myself in that category,” says Peter Orszag, who led the Office of Management and Budget before departing the administration to work at Citigroup. “I didn’t realize we were in a Reinhart-Rogoff situation until 2010.”
I'm reminded of when I first thought things were going to be bad. It was in the middle of 2008, driving south on I-5 between Los Angeles and San Diego and I was listening to "This American Life" and the famous "The Giant Pool of Money" episode. This is what they had to say at the end:
Alex Blumberg: That talk seems to have faded and there's more talk that the next few years will feel like the 1970s. There are lots of technical differences between this crisis and Jimmy Carter's malaise. But for the average person, it could feel the same. It's not an out-and-out depression. Everything's just kind of crappy. And not just in housing or banking but for the economy as a whole. It’s barely growing. There aren't a lot of new businesses, new jobs. Unemployment keeps creeping up. We're just sort of stuck, in neutral, for a while. 
Anyone under, say, 45 probably doesn't remember that 1970's malaise too well. Anyone under 30 has barely known a US economy that wasn't growing. Now there's a decent chance we'll all get to see what life felt like in the '70s. Which isn't great. It's pretty bad, actually. Unless you're comparing it to the 1930’s.
The 70's-redux theme hasn't really been disproven. Uh-oh. Best wishes to all of us.

30 comments:

  1. Wow. Rough sketching out the rest of that curve (in gIMP, very crude) had it returning to 0.0% at about the 71st month. Just under 2.5 years left to go.

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  2. At what point do we stop comparing this to the '70s and start with the '30s?

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  3. I guess what I'm tired of is hearing all the conventional thinking from policy-makers. It's all "yay tax cuts!" "cut regulations more!" I would really like to hear some out-of-box policy thinking (and no I'm not talking about arbitrarily reducing our money supply by going to the gold standard).

    I'm no economic expert but it seems like a problem on 2 fronts: lack of jobs, leading to lack of demand and high personal debt loads, related to housing. How do we solve these problems without going back to the bubble cycle we used to be on?

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  4. In the 70's Americans weren't leveraged with as much debt (student, mortgage, or credit) combined with stagnant if not deflating wages. Also, there wasn't the persistent workaholic hours that have us beating the Japanese in hours per week.

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  5. If anyone is interested that story was done as a partnership between "This American Life" and "Planet Money" which is a blog/podcast from NPR. It is a great way to really understand the in's and out's of what's going on with the economy in nice 20 to 30 minute chunks twice a week.

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  6. Ronald Reagan got the country out of the Jimmy Carter era.

    How? With policies which were politically hard to push. Tax cuts for the rich. Union busting.

    The reason that Ronald Reagan's policies work is because they were economically sound. Until Reagan the economic policies were concentrated on Aggregate Demand. The problem trying to repair an economoy with policy concentrated on AD is that you must chose between better productivity (GDP) or lower prices. So in short, you could have good employment outlook but you may cause massive inflation and vice versa.

    Ronald Reagan's policies were aimed at Aggregate Supply. This allowed prices to reduce while increasing the countries productivity. Lower prices, employed people, all good right? Unfortunately the policies were not well received when they were introduced. How do you explain to an average American that "Trickle Down Economics" is mathematically and fundamentally sound? They much rather see policies which concentrate on AD - even at the risk of their future by massive borrowing from foreign nations to fund the present.

    Cain makes a lot of sense with his flat tax. He could be the next Ronald Reagan. He could get us out of Obama era reimminscent of Jimmy Carter years.

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  7. @unstable isotope
    The last few years have seen the largest tax increases in the history of the nation. Regulations could not be more complex and are stiffling small businesses.

    Obama is doing everything opposite of Reaganomics because it will help him politically.

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  8. "there wasn't the persistent workaholic hours that have us beating the Japanese in hours per week. "

    Sad, how this becomes a self-fulfilling prophecy: i.e. many are afraid of losing they're jobs, so they work longer hours in order to make it look like they're working harder, and the boss thinks they don't need to hire anyone else.

    This whol "yay tax cuts!" thing is also amazingly stupid, and all based on the laughable "Laffer Curve". It's a nice idea, just try asking any economist where the tax rate corresponding to max govt income is......

    Morons. I think these rubes really believe that if we cut taxes to 0 it would result in maximum govt income.

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  9. Low taxes and corporate incentives are working pretty well for the average chemist in Singapore. At least some people can learn from economic history.

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  10. Yay! Vote Cain - he wants to increase the price of everything you pay by 9% to give more tax cuts to rich people!

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  11. By the way, the biggest tax increase in history came from St. Reagan. He raised Social Security taxes by a lot AND took away benefits. Also, you must show where the Obama administration cut taxes. They cut payroll tax and continued the disastrous Bush tax cuts, of course those will go away in 2012 if nothing is done.

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  12. @anon 7:10PM--Singapore has universal health care for its citizens.

    Feel free to rationalize that fact within an American left-right framework.

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  13. Former Reagan & GHW Bush official Bruce Bartlett takes apart the 9-9-9 plan. http://economix.blogs.nytimes.com/2011/10/11/inside-the-cain-tax-plan/?ref=business

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  14. Unstable Isotope will now spend the rest of his day trying to discredit Cain. What is he, the mainstream media?

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  15. Just shoot me already. Everyone is an underemployed economist (sigh even yours truly). I expect diatribes like this on CNN.

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  16. Discrediting = actually examining the plan. Good to know.

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  17. The isotope isn't the only thing that's unstable. Look, feel free to come up with ideas yourself. Taking a one-post mention of one person and triple-answering yourself with some big 'examination'?

    Anon7:56 has it right. not really the time or place for it.

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  18. Hmmm... what would I do if I were president? Cut taxes on corporations, or encourage specific industry growth? Probably one of those, but America doesn't have the guts for plans that really give results. Here's my economic plan for when I'm dictator:

    You know, a Gulag science camp wouldn't be that bad if you like research. They just send you to a cold, remote place in Alaska and hold you there for ten years with other scientists until you come up with some discovery which justifies your release (plus you would probably get a TT job after everyone hears about your great discovery). During your time in the Gulag, you get free meals and decent health care. Hell, even I would probably go for that if they included internet access and video games. It solves job problems for scientists and eventually one of them comes up with something that re-starts the economy or sends us on the paths of CO2 neutral fuels.

    Of course, just to make it serious so people don't complain, everyone that tries to escape Alaska before their scientific appointment term is up will be shot after a brief military tribunal. I don't think it will solve the lack of jobs problem as the workforce wouldn't be cut down fast enough. I think only 1% max of scientists will be executed by this method, but the rest will be happy to sit in the Gulag and do research from time to time. We would definitely not execute anyone for not being productive; I think the monotony of life and the cold would be the motivating factors here. Also, we shouldn't invest too much money in Gulag living infrastructure to encourage productivity so that scientists would seek to leave the Gulag by 'legal' means.

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  19. It would be cool to be stuck in a big and spacious jail with a bunch of other smart, scientifically-minded people. It's like a PhD but much more serious and the dynamics of the situation make you more philosophical and would probably raise the level of conversation significantly beyond the banal 'Oh man, did you believe the traffic on highway XX this morning?'

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  20. Sounds pretty close to working at many national labs.

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  21. Peter Thiel also seems to agree, things will not be getting better anytime soon:

    "When any given field takes half a lifetime of study to master, who can compare and contrast and properly weight the rate of progress in nanotechnology and cryptography and superstring theory and 610 other disciplines? Indeed, how do we even know whether the so-called scientists are not just lawmakers and politicians in disguise, as some conservatives suspect in fields as disparate as climate change, evolutionary biology, and embryonic-stem-cell research, and as I have come to suspect in almost all fields?"
    .......
    "The cruder measure of U.S. life expectancy continues to rise, but with some deceleration, from 67.1 years for men in 1970 to 71.8 years in 1990 to 75.6 years in 2010. Looking forward, we see far fewer blockbuster drugs in the pipeline — perhaps because of the intransigence of the FDA, perhaps because of the fecklessness of today’s biological scientists, and perhaps because of the incredible complexity of human biology. In the next three years, the large pharmaceutical companies will lose approximately one-third of their current revenue stream as patents expire, so, in a perverse yet understandable response, they have begun the wholesale liquidation of the research departments that have borne so little fruit in the last decade and a half."

    http://www.nationalreview.com/articles/278758/end-future-peter-thiel?

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  22. Two things:
    1. CJ, you gotta stop reading Ezra Klein. He's neither incisive, insightful nor intelligent. He's an 11th grader with access; and

    2. What do you mean that our former Budget Director didn't know our current predicament is the result of a financial flameout until 2010??!! You've got to be freaking kidding me!! Is he so clueless that he doesn't even understand how stupid it is to admit that he is three years behind everybody else in realizing it?
    This instance of innate stupidity auto-revelation bests my previous topper, a third year PhD student asked me if CIP assigned priority based on alphabetical order.
    /rant off

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  23. @Singapore posting people.

    Singapore taxes are not very low. You have an income tax that goes up to 20%, withholding of about 20% of the first S$60,000 (~US$50,000) employee side, 15% employer side for citizens and permanent residents for the Social Security system (effectively double our SS/Medicare taxes). Also a 7% GST (Sales Tax). If you want a car, you will pay three times the price, car+certificate of entitlement(~S$45,000/10 years)+100% customs duty+20% road tax. Gas is about S$1.80/L (US$5/gal). Scientific equipment is about twice the price as the US (even when it comes from China). Healthcare isn't free, but it's quality and subsidized. It's hot and humid 24/7/365.

    It's not as bad as the US, but chemistry is not booming there.

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  24. The graph you have included resembles an animal, such as a spider.

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  25. My favorite part is "Peter Orszag, who led the Office of Management and Budget before departing the administration to work at Citigroup." emphasis mine.

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  26. http://www.taxand.com/news/publications/Taxand_Global_Guide_to_R_and_D_Tax_Incentives

    Tax incentive descriptions for fostering R&D around the world.

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  27. I see the National Review loves science, so I should take everything they say very seriously:

    "...how do we even know whether the so-called scientists are not just lawmakers and politicians in disguise..."

    "...because of the fecklessness of today’s biological scientists..."

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  28. I think the main thing I've gotten out of the recent past is that scientists are no longer immune to the trends that have affected the rest of the economy for the last three decades. America may still have the finest research universities but well-trained scientists in other countries are available and work for less money.

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  29. UI -- I don't think they've been immune for a long, long time: http://chemjobber.blogspot.com/2010/11/scientist-unemployment-is-procyclical.html

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  30. a12:52p: I don't agree with him very much, but if you can point me to someone else that can synthesize policy with news as quickly as he can, I'd be happy to read them.

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