Monthly Archives: July 2012

Just how bad is the economy?


The second-quarter GDP numbers came out. The newspapers and Republicans pounced on low growth and anemic job growth. The Democrats rebut growth is growth and tell us of the steady job gains. How bad is the economy?
Economists know that levels matter, and that long-run growth matters more than anything else. I made a few graphs to emphasize these points.
Start with the level (in logs) of real GDP. (This is an update of a graph I saw on John Taylor’s blog.)

Looking at levels you see the current awfulness better than by looking at growth rates. GDP declined almost 5% in the recession, but then started growing at a glacial pace, averaging 2.4% since the trough.  We seem stuck in this slow growth trap.

If you distrust trend lines, you are wise. But this one reflects a solid historical pattern. Here is real GDP and the 1965-2007 trend through postwar history.

You can see that the economy has quite reliably returned to the trend line after recessions.The 1950s had a steeper trend, but there too the small recessions were followed by catchup growth.
Here is what the recovery is supposed to look like (Again, idea stolen from John Taylor, except I’m using trends rather than “potential GDP” which I distrust.) 

To be fair, I fit the trend through 1980, so I would not use ex-post information. You see that after the severe 1980 recession at the even more severe 1982 recession, the economy recovered to trend, by posting a few years of 6% growth.
The tragedy is poorly expressed in growth rates. By 1987, the economy was back on the prior trend line. We are now 14.5% below the trendline, and each year that goes by like this we lose another half a percent. The average person in the economy is producing 14.5% less, and earning 14.5% less, than if we had followed the path following the 1982 recession.
That’s a lot — and a lot more than the litany of quarterly growth rates suggest.
I used trends, rather than the CBO potential output. If you read how they make it, you’re likely to do that too. But here is the same graph contrasting my trend and the CBO’s potential

This is tragic. The CBO is giving up on us. The CBO potential, which goes towards a 2.35% long run growth rate, says that what we are seeing now is the new normal. All we can hope for is a modest recovery, and then anemic, sclerotic growth forever after that. The difference between 2.3% and 3.0% adds up fast as the years go by. (And the CBO has been bending the trend line down steadily as the recession goes on. Back in 2005, it’s “potential” looked like my “trend.” They didn’t see a permanent downward shift in level or reduction in growth rates. Look for “potential” to keep declining.)
Well, perhaps the CBO is doing its job as forecasters, saying “here is what will happen if you continue down the present policy path,” not “here is where the economy would be if you adopted growth-oriented policies.”
What about employment? I find employment more significant than unemployment. Unemployment means job search. It means people answer a survey saying they don’t have a job, and are actively searching for a job. It does not count all the people who gave up, or went on disability (effectively ending their careers), early retirement, or are just living in Mom’s basement and playing video games. (I don’t mean to make light of it. That may be the most tragic, as the chance to accumulate skills is lost.)
Here’s a good summary measure, the ratio of employed people to the population

This is really tragic. Employment declined by about 7 million people, from 63% of the population to about 58%. And it has stayed there ever since. The “job gains” you hear about in the news are just barely keeping up with population. As we are about 14% below trend and slowly losing ground, we are 7 million jobs short and sitting there too.
The link between employment and output is productivity. To keep the numbers simple here, I made plots of output per worker. Output per hour, and corrections for demographics and capital use are better, but this is simpler and works about as well. Here is a graph of productivity.

I crammed a lot of information in this graph. The first thing to notice is the behavior in the recession and now. There was a dip in productivity — output fell more than the number of workers fell. But it has since recovered.
In the short run, capital doesn’t change much, so as a rough guide you make more output when you hire more workers (or increase hours) and vice versa. So, GDP = Productivity x workers. To get more workers, we need to make a lot more GDP. The lackluster GDP growth is the other side of the terrible employment coin.
There’s more in the graph. In the long run, rising productivity is behind everything good in the economy. It’s what gives more income per capita. Rising productivity is the only hope for paying for entitlements and getting out of our deficit trap. It’s the main hope for long-run GDP growth, after the empolyment-population ratio reverts to where it should be. Rising productivity comes from new ideas, new companies, new ways of doing business. It isn’t all pleasant. Lots of incumbents lose out. Rising productivity is the core of a “growth” agenda as economists understand the word. 
You see in the graph that something terrible happened in the 1970s. Productivity, which was behind the large postwar boom, slowed down to a glacial 1% per year. 1982 marked a break in that as well. Productivity  started growing 1.69% per year, producing the boom of the late 1980s and 1990s, and incidentally producing large Federal surpluses.
OK, but the far right of the graph doesn’t look so good does it. Here it is, blown up, with a 2003-today trend marked in as well.

This is an economists’ horror movie. Yes, productivity did rebound. But it seems to be growing slowly as well.
The trends are an economists’ horror movie. Real GDP seems not to be recovering at all — no period of swift growth to go back to a trend. We seem stuck at 2.4% growth forever. The CBO is giving up on us too. Employment will not recover as a fraction of population until the economy recovers. We seem stuck at low employment forever. And now we seem headed to a 1970s productivity slowdown as well.
I don’t view this as contentious, outside of Presidential politics. Paul Krugman thinks the economy is pretty awful too.
What to do? If only it were so simple as to have the Fed print up another two trillion dollars, or have the Treasury borrow another $5 trillion and blow it on stimulus boondoggles. We’re stuck in sclerotic growth, and to everyone but a few die-hard extremists, that means growth-oriented policies are the only way out. 
Disclaimer. Yes, I know there are better ways to measure all this, especially productivity. This is an attempt to paint the basic picture using the simplest numbers. The message is, look at the levels and look at the trends. If you do that with better data, you will have gotten the message.
Data are from the St. Louis Fed’s wonderful Fred database, series GDPC96, GDPPOT,  EMRATIO.

Just how bad is the economy?
John H. Cochrane
Tue, 31 Jul 2012 22:26:00 GMT

Maybe we could all try stop making people change their deepest convictions with threats and intimidation. A good place to start would be by not using threats of government power to force Chik-Fil-A to say they believe in Gay Marriage, even if we support gay marriage.

If we force Chik-Fil-A to a conversion of Gay Marriage (an insincere conversion), how is that different than forced conversions to Islam or Christianity at the point of sword as has occured over time. Do these forced conversion show the moral superiority of anything? Why do we do this?

If you’re going to convert someone to a belief you can’t do it by force, and even if you can you shouldn’t. Isn’t that obvious???

Environmentalism and the environment

There is no point per the author.

The Economist has an interesting article on the gas boom in America:

Gas has wrought some remarkable changes. Over the past five years America has recorded a decline in greenhouse-gas emissions of 450m tonnes, the biggest anywhere in the world. Ironically, given its far greater effort to tackle climate change, the European Union has seen its emissions rise, partly because its higher gas prices (linked to oil) have led to an increase in coal-fired power generation.

So let’s review the facts:

1.  America is reducing greenhouse gas emissions faster than anywhere else because Bush/Cheney ignored environmentalists and went with the “drill baby drill” strategy.

2.  Europe is switching to coal because gas is too expensive.  But wait; doesn’t Europe also have lots of shale gas? They do. But they listened to the environmentalists, and have all but banned fracking.

3.  But wait; doesn’t Europe have lots of carbon-free nuclear power plants?  Yes, but countries like Germany have decide to close them all down, on the recommendation of environmentalists.  Other countries are also leaning that way.  I can sort of understand Japan, but when was the last time you heard about an earthquake in Germany or Sweden?

Now it’s true that the US still has a worse record than Europe, especially in high energy consuming states like Texas.  But the same issue of The Economist has another article with this interesting tidbit:

At a casual glance, Houston looks much as it ever did: a tangle of freeways running through a hodgepodge of skyscrapers, strip malls and mixed districts. A closer inspection, though, shows signs of change. The transport authority, which branched into light rail in 2004, is now planning three new lines, adding more than 20 miles of track. Most of the traffic lights now boast LED bulbs, rather than the incandescent sort. More than half the cars in the official city fleet are hybrid or electric, and in May a bike-sharing programme began. Every Wednesday a farmers’ market takes place by the steps of city hall.

Other changes are harder to see. The energy codes for buildings have been overhauled and the city is, astonishingly, America’s biggest municipal buyer of renewable energy; about a third of its power comes from Texan wind farms.

But are windmills actually that good for the environment?  Still another article in the same issue has this to say:

By 2009 Inner Mongolia had become China’s largest producer of coal. It is the biggest source of the world’s supply of rare earths. The coal bed around Xilinhot, the capital of Xilin Gol, boasts 38% of global reserves of germanium, a rare earth used in the making of circuitry for solar cells and wind turbines. Ripping up the grasslands and sucking up scarce water for thirsty mines has been part of the price of these “green energy” products.

Here are some comparisons between Inner Mongolia and Texas:

Texas is a state with 25.7 million people.  It started out as a ranching state and is now dominated by energy production.  It’s mostly hot and flat, and is growing much faster than the rest of the US.

Inner Mongolia is a province with 24.7 million people.  It started out as a herding state and is now dominated by energy production.  It’s mostly hot and flat, and is growing much faster than the rest of China.

Much faster?  How’s that possible given that China has grown at 10% per year for decades?  Because Inner Mongolia has grown at 17% per year since 2001.  Even Texans can’t say that.

PS.  People trying to convince you that China’s a bubble often show a video of Ordos, the almost uninhabited new city.  Ordos is in Inner Mongolia, and is hosting the Miss World pageant next month.  Let’s see what Ordos looks like in 10 years before we jump to conclusions.

PPS.  Do you recall that America’s had two Presidents named Bush, the second of which was governor of Texas?  China’s current President is named Hu, and another Hu is being touted as a possible future president.  He’s now the governor of Inner Mongolia.

PPPS.  Think about Mercedes, BMW and Audi.  Then think about the quality of the stuff you buy that’s made in China.  Do you sleep better at night knowing that Germany is shutting down its entire nuclear industry, and China is building nuclear plants at a rapid pace.

PPPPS.  Please don’t ask me what the point of this post is.  It’s Sunday. There is no point.

Environmentalism and the environment
Sun, 22 Jul 2012 21:03:39 GMT

DOT: Vehicle Miles Driven increased 2.3% in May


The Department of Transportation (DOT) reported on Friday:

Travel on all roads and streets changed by +2.3% (5.7 billion vehicle miles) for May 2012 as compared with May 2011. Travel for the month is estimated to be 258.4 billion vehicle miles.

The following graph shows the rolling 12 month total vehicle miles driven.
The rolling 12 month total is mostly moving sideways.
Vehicle Miles Click on graph for larger image.
In the early ’80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.
Currently miles driven has been below the previous peak for 54 months – and still counting.
The second graph shows the year-over-year change from the same month in the previous year.
Vehicle Miles Driven YoY Gasoline prices peaked in April at close to $4.00 per gallon, and then started falling.
Gasoline prices were down in May to an average of $3.79 per gallon according to the EIA. Last year, prices in May averaged $3.96 per gallon, so it makes sense that miles driven are up year-over-year in May.
However, as I’ve mentioned before, gasoline prices is just part of the story. The lack of growth in miles driven over the last 4+ years is probably also due to the lingering effects of the great recession (high unemployment rate and lack of wage growth), the aging of the overall population (over 50 drivers drive fewer miles) and changing driving habits of young drivers.
A new report suggests that driving preferences are changing for younger drivers:

From 2001 to 2009, the average annual number of vehicle miles traveled by young people (16 to 34-year-olds) decreased from 10,300 miles to 7,900 miles per capita—a drop of 23 percent.

With all these factors, it may be years before we see a new peak in miles driven.
Summary for Week Ending July 20th
Schedule for Week of July 22nd

DOT: Vehicle Miles Driven increased 2.3% in May
Bill McBride
Sun, 22 Jul 2012 19:03:00 GMT

Keynesians and Uncertainty IV

Facts & other stubborn things

via Keynesians and Uncertainty IV.

Superhero Tax Returns: Batman Owes More Than Spider-Man


But Batman earns more, too. A lighthearted calculation of superheroes’ tax returns, from H&R Block.

Superhero Tax Returns: Batman Owes More Than Spider-Man
Wed, 18 Jul 2012 17:07:41 GMT

The Erstwhile Conservative: A Blog of Repentance

Please tolerate the length of this essay. Hopefully you will be rewarded by staying with it:

othing causes conservatives more consternation than hearing the truth about what actually makes human societies flourish.

Such a truth was spoken  by President Obama last week during a campaign stop in Roanoke, Va., and what he said has driven already hateful right-wingers even further into the abyss of Obama-hate.  Here is the part of his speech you usually hear critics play:

That one phrase is played or quoted again and again, including on Tuesday by Mitt Romney:

If you’ve got a business — you didn’t build that.  Somebody else made that happen.

So, what was Mr. Obama’s point? Oh, I’ll let him tell you, in context and as as part of the rest of what he said:

If you were successful, somebody along the line gave you some help.  There was a great teacher…

View original post 1,404 more words

Daily Scoop: McConnell states health care access for uninsured “Not the Issue” [video]

I think the affordable care act has a number drawbacks, not the least is:  cost and substantial increases in taxes on earned income.  The impact of the economy is unknown.

That said it has a major advantage:  it got passed!  It raises a real policy problem to the forefront, rather than let the issue languish while more short-run concerns with economy dominate the national agenda. I hope that perhaps with a second Obama term and continued Republican control of the House; maybe we can actually get our legislature to attempt to solve a public policy problem, by improving on the foundation that President Obama got in place.  I think in giving health the priority it deserves, the Presidents deserves praise; and the SCOTUS as well for leaving this start on addressing the start on addressing this major issue in place.

If Obama loses and we have GOP control of the executive and legislative branches of government; I fear we’ll lose that important start.  Thanks to Mashed Potato Bulletin we see that there doesn’t seem to be much behind talk of Repeal and Replace.

The health care reform debate continues even after the Supreme Court ruled on its constitutionality. Republicans have stood firm on their vow to ”Repeal & Replace” yet their problems begin when asked about the replace portion of that promise. Both Mitt Romney and Republican leadership have touted “common sense“, step by step reforms. They promise to implement interstate commerce of insurance, keep insurers from denying coverage, allow young people on their parents’ insurance, implement industry cost-saving measures. The interesting part of these common sense reforms is that they are already in the Affordable Care Act. Where does common sense enter into a plan which involves eliminating a plan then re-implementing virtually the same plan, just slower?

Beyond this it appears Mitch McConnell may have provided Democrats another campaign gift when pressed by Fox News’ Chris Wallace to explain what the Republican plan was for improving access to care for 30 million uninsured Americans should a repeal prove successful.

Watch the video to see how the Senate Minority Leader handled the question.

Read more…


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Daily Scoop: McConnell states health care access for uninsured “Not the Issue”
Mashed Potato Bulletin
Sun, 01 Jul 2012 20:31:16 GMT

Corporations are People, My Friend

This statement has always seemed to me to clearly true.  Maybe  the question is what restrictions on their rights are needed to create a level playing field with people that are more obviously people?

Video of Mitt Romney saying “Corporations are people”

The title is one of my cousin Mitt’s most famous quotations. This statement has not served him well politically, but I want to agree with him. There are two potential meanings of this statement, and I want to agree with both: 

  1. When the government taxes a corporation, the tax ultimately falls on some human being.
  2. When a corporation makes a decision, some set of human beings is behind that decision, and they are morally responsible for that decision.

Mitt wanted to emphasize the first point: that any tax on corporations is ultimately paid by some human being. That is a sound principle in the academic field of Public Finance. The big problem with corporate taxes is that, despite efforts on the part of many economists, economists don’t have that good a handle on exactly who ends up paying them. Whatever someone says on this score, I think I can guarantee that it will be controversial even at the purely academic level—though I would be happy to learn of a widespread academic consensus on this that I missed somehow. So if the intent is to make taxes depend on income, for example, it is a lot easier to get the intended effect on that score by taxing people directly rather than by taxing corporations.

I want to focus more on the second meaning: when a corporation makes a decision, some set of human beings is behind that decision, and they are morally responsible for that decision. By and large, those who have the most power in important corporations are well paid, and so count as members of “the rich.” So I will hold “the rich” responsible for decisions that corporations make. When a corporation makes a decision or takes an action that respects truth, I will attribute that decision to “the honest rich.” Whenever a corporation makes a decision or takes an action that does not respect truth, I will attribute that decision to “the dishonest rich.” To my mind, that adds moral clarity compared to talking about the decisions of, say, “Microsoft” or “Lehman Brothers.” When approaching corporate decisions ethically, it minces words not to recognize the people behind the decisions, even when their exact identities are not clear.

Among some of those who viscerally reject the statement that “corporations are people” I think there is a hidden impulse that is quite dangerous: the impulse to read CEO’s and other key corporate decision makers out of the human race. Even when a CEO commits evil, he or she is still a human being, and needs to be treated with the dignity that everyone deserves for being a human being, despite his or her crimes. 

Now, although corporations are people, typically a corporation is not a person, but instead many people. To the extent that corporate decisions reflect the outcome of a game  among many people (in economists’  technical sense of the word “game”), the actions of a corporation may not reflect any coherent objective function, as I discuss in my post Jobs And in that post, one of my key recommendations is each corporation be encouraged or even required by law to articulate what its objective function is intended to be, as a fictive legal person. Then its actions can be judged in relation to the intended objectives of the corporation. In that way, we can try to protect people from Frankenstein monsters of corporations that are doing things no one intends because of internal games being played. And this policy of asking corporations to articulate their objective function would help somewhat in clarifying whether the moral responsibility key decision makers in corporations bear is a responsibility for intending what the corporation did, or a responsibility for letting the corporation become a Frankenstein monster that is doing something no one intends.

As I wrote the last paragraph, I was reminded of Adam Smith’s invisible hand of the free market that leads to good results that go beyond what the participants in the market intend. But unless a corporation were structured internally very much like a market, I don’t know of any theorem suggesting that an invisible hand will work within a corporation to make good things happen that no one intended. And the wisdom of literature such as Scott Adams Dilbert or TV shows such as The Office suggest, to the contrary, that entropy often reigns—so that corporations often do less well than the intentions of the people in them.

Even in the small world of the University of Michigan and the medium-sized world of the Economics profession, I have seen how simple justice usually requires someone to put in serious time and effort to make that justice happen. Sadly, justice—or any kind of good behavior on the part of an organization—doesn’t come for free. I honor those who help make good things come from organizations, and hold responsible those who don’t, even if it is from inaction.

Putting together everything I have said about the ethical sense of “corporations are people,” I come to a key point. For anyone who has a modicum of power within a corporation, it is possible to be a member of “the dishonest rich” by my definition without ever lying and deceiving personally, if by inaction one makes no efforts to prevent one’s corporation from lying and deceiving.

See my first post on MItt: “Rich, Poor and Middle-Class,” inspired by Mitt’s saying “I am not concerned about the very poor …’

Corporations are People, My Friend
Sat, 14 Jul 2012 02:16:00 GMT

Daily Gas Prices

Sign of a slowing economy – maybe good for President Obama

Gas Prices

The Big Picture

via Daily Gas Prices.