Relevant and even prescient commentary on news, politics and the economy.

Thinking about Performance

My aging Subaru had a problem a while back. Leak of transmission fluid; a seal or another failing, leading to steady dripping out. And with little need to open the hood, no gauge—or even an “idiot light”—on the dashboard, it dripped for quite a while. And then some.

The first repair—call it Quizzical Effort 1—refilled the fluid, but didn’t find the leak. So we started driving it again, but were a bit more alert for signs that it was doing things such as slipping out of gear or having trouble accelerating from a stop.

We took it to another, better shop for Quizzical Effort 2 (QE2). There they found the leak itself. We spent a bit more money, but the leak is gone and the transmission fluid stays where it belongs.

But it was without fluid for quite a while, and fluids go into other parts of the system, “priming the pump,” as it were, for better operation.

Can we say that my car has made a “recovery”?

The question keeps rearing its “ugly” head as the Jobless Recovery moves forward. Even the Optimists (Mark Thoma, Brad DeLong) are hesitating in the face of the evidence*; Thoma’s graphic at the link just previous notes that the current reovery is not just Jobless, it’s still Job-Reducing, while DeLong tries to dance a line between “this time is different, just like the last one” and “we’re going to turn this into Structural Unemployment Any Day Now” while still thinking of rainbows and kittens.

The strongest evidence that the Recovery has begun is the fiat that NBER declared the recovery to have begun. The second-strongest evidence is that there is noticeable growth in the economy** since the date chosen by NBER.

The following graph appears to support NBER’s declaration. But note the yellow area.

If you want to speak of Business Cycles—I don’t; I consider RBC Theory as its proponents describe it to be the silliness idea this side of phlogiston, but there are those who do, and it’s a convenient fiction for purposes here—then surely you should speak of a full Cycle.

The return to the level of Capacity Utilization at the end of the previous recession comes not as the recession ends, but four quarters later, a year into the “recovery.”***

And that’s just the Capital side of the equation. Labor is rather more complicated.

It is as if the machine is running again, but has not received a proper tune-up, or any other (“structural”) work that needs to return it to peak performance. As John Maudlin noted last May, employment rises with income, and income tax receipts were not rising with the “head-fake” recovery—”grass shoots—of that time.

My Subaru used to get around 17-18 mpg (city). Now it’s closer to 15-16. It would require an investment of capital and labor to get it completely repaired. Being liquidity-constrained, I’m not going to make that investment until a couple of other things are cleared up—including, but not limited to, the possibility of upgrading to a model built in this century.

Similarly, capital recovery is a slow process, and incremental labor tends to follow that in productive industries. The gap in capacity at the beginning of the “recovery” took 12-13 months to be filled. Given that it took 55 months for the Employment/Population Ratio to recover after the 2001 recession (or here), it seems not at all unreasonable to expect the current recovery to take 67 or 68 months.

Which would be around January or February of 2015, just after the midterm elections and therefore nearing the end of the first Palin Administration.

It would be rude of me to note that the first “non-recession” period of the Great Depression lasted only fifty (50) months. Or that there hasn’t been a period of growth so long without tax increases since the Vietnam War.

As with my Subaru, some major investment is needed. Whether there will be the liquidity for that to happen in time is left as an exercise.

*Both, in fairness, have declared the current “recovery” “fragile” (Thoma) or filled with “unforced errors,” but persist in calling it a recovery.

**Let us sidebar that much of that growth is in the FI part of FIRE. If you have assumed that the lion’s share of the profits generated by an economy should go to those who are supposed to intermediate, you have to deal with the structure you’ve got, not one that would produce better, or even optimal, growth.

***The monthly series (MCUMFN; not graphed) reaches and passes the start of the previous recovery in July of 2010. NBER official dates the end of the recession to June of 2009, where Capacity Utilization reached its nadir of 65.2. It is perfectly reasonable to say “a recovery” began then, but a “Business Cycle” that ends with nearly 7% of usable capital (a 9.6% decline in capital terms) sitting vestigial is a poor “Cycle” indeed.

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Math is Math: There Was No "Second Stimulus"

One of the best rules in mathematics is that, to determine the value of all the variables, you need only as many distinct equations as you have variables. (previous sentence edited for clarity.) So let’s combine a couple of recent articles (h/t Mark Thoma for the first, Digby for the second.)

Richard Florida finds three studies of State Government Spending Multipliers. The three studies find multipliers of 1.5, 1.7, and 2.12. Let’s be nice (in context) and use the lower one. StateMultiplier = 1.5

David Dayden notes that budget cuts in just two (large) states can be matched against the Fed’s “stimulus” monies. Let’s see how much, putting the best face possible on the data (i.e., taking the most optimistic projections). CADeficit (ignoring “reserve”): $26.4B (12.5 + 12 + 1.9). ILDeficit: $19B (13 + 6).

That gives us a CA-ILEconomyCost of (26.4 + 19)*1.5 = US$68.1B

The Federal Stimulus is $55-60B. Again, let’s be optimists and say $60B. The required multiplier is then:

FedMultiplier * FedStim = CA-ILEconomyCost

FedMultiplier * $60B = $68.1B

FedMultiplier = 1.135

That’s the minimum multiplier needed just to counter those two states. Add in Texas (whose shortfall appears to be on par with California’s, and is larger than Illinois)and you’re at 1.77.

Only 47 states to go.

The maximum multiplier needed just to solve the CA-IL gap is 1.71. Add in TX and you’re at 2.63 with 47 states to go.

The Right-Leaning Econ Bloggers (e.g., Tyler Cowen and Greg Mankiw; I apologize to the former for linking him to the latter) argued in 2008-2009 that Federal Stimulus has a multiplier of 1.3 or less.*

1.3 would put the economy at neutral if the multiplier is 1.7 (median estimate) and most but not all of the CA ambiguities break the wrong way.

And that’s just eliminating the effect of those two states. Add in TX and the multiplier goes to 2.64—rather close to Christina Romer’s 3.0 that was attacked continually by Mankiw et al.

Repeat after me: There was No “Second Stimulus.” If the economy is going to go into full recovery—i.e., can I have jobs with that?—it will have to be from Private Sector Investment, which has been (let’s be nice) on the sidelines so far,* and really doesn’t appear to be warming up to replace TARP.

*Strangely, this was not argued by them as an argument that the initial “stimulus” was too small for the even-then-obvious shortfalls in C and I; I can’t believe they thought MX was going to cover the difference, but that’s a side discussion, perhaps.

*We can quibble over whether that was and remains the correct decision. As has often been noted here, a lack of demand is not exactly an incentive to expand, unless you think that will be changing soon. A true recovery should have convinced firms that a change is gonna come.

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Things to Do in Denver When You’re Dead: the AEA

You could either be there live, or check out some of the papers here while enjoying a musical interlude with the most talented musician to come out of the California “soft rock” movement of the 1970s:

Or the most talented member of the Velvet Underground:

Or this giggle:

Or just treat this as a prelude to the Open Thread Dan will probably post in the next hour or so anyway.

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Duncan Black, Ph.D. who Specializes in the Economies of Cities, Explains It All to You

Bruce has made this point repeatedly. Dr. Black puts it in more direct language:

[I]nevitably the Social Security Trustees will, perfectly justifiably, tweak a few assumptions about future economic activity so that there will be a DOOM scenario, an EVERYTHING’S AWESOME scenario, and a “uh oh maybe in about 40 years we will have a problem” scenario. And then Fred Hiatt will print another million ZOMG WE MUST DESTROY SOCIAL SECURITY NOW IN ORDER TO SAVE IT FORTY YEARS FROM NOW columns and some future president will marvel at those worthless IOUS and blah blah blah.

We know how this works.

And the Sensible Centrists* are gathering behind someone who wants to do just that.

When the Voice in the Wilderness is Andrew Samwick (who is at least honest about his willingness to steal from the Trust Fund), two things are certain:

  1. Jason Furman should work on his c.v., and
  2. Even as only Nixon could go to China (because only Nixon was enough of a bastard to sacrifice Tibet to Chou En-Lai), only the Obama Administration can turn the Social Safety Net into something the Republicans “saved” (by making it look like Dresden).

UPDATE: Tim Duy at his branch of Ecoonomist’s View piles on (h/t Steve Randy Waldman‘s Twitter feed, or maybe Felix Salmon‘s), giving the lie to whatever was left of the DeLong argument that being left of a cadre of Bob Rubins makes one a “liberal.” Pull quote:

The strong Dollar policy takes shape in 1995. At that point, Rubin made it clear that the rest of the world was free to manipulate the value of the US Dollar to pursue their own mercantilist interests. This should have been more obvious at the time given that China was last named a currency manipulator was 1994, but the immensity of that decision was lost as the tech boom engulfed America.

Moreover, Rubin adds insult to injury in the Asian Financial Crisis, by using the IMF as a club to enact far reaching reforms on nations seeking aid. The lesson learned – never, ever run a current account deficit. Accumulating massive reserves is the absolute only way to guarantee you can always tell the nice men from the IMF and the US Treasury to get off your front porch.

Go Read the Whole Thing.

Full Disclosure Update: Bob Rubin’s son is a college classmate of mine. Haven’t really seen him in the past not-quite-thirty years.

*I’m 99.44% certain those are assigned correctly. The Sensible one thinks that “attempt[ing] to push Clinton administration economic policy a little further to the left” was a Liberal position, while the Centrist is stupid enough not to believe people who have said for years that they intend to pick his pocket have something valuable to contribute to a discussion of his welfare, and does not remember that he lived through a decade when “the program [was] officially in balance.”

If H*ll exists as a form of reincarnation, my next life will be spent as a Centrist. If all my sins are venial and Purgatory awaits, I could live with being Sensible. At least until my neighbors couldn’t send their academically-achieving issue to college for purely monetary reasons, after which point I would consider this post to be rampant optimism.

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The Pound’s Not Sinking, The Yen’s Not Keeping Up…

Spent the past few minutes reading Alea. jck notes that, over the past five years, the Pound has grown in importance at the expense of the yen and that the Euro has done the same against the dollar.

If this goes against your memory, you’re not part of the IMF.

Even better is when jck gets his funny on. For those screaming about PIIGS, he presents the evidence:

Note: Banks and government debt rollovers amount to €210 bln for 2011, €15 bln lower than in 2010, you would never guess that reading the funny (pink) papers.

Somewhere, an FT editor is reading that and cheering that they’re on holiday until the 4th.

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Economics: a visual approach

Lee Arnold has a series of visual presentations at a high school level that might be useful to introduce different topics to friends and family that do not follow econoblogs. Here is the introduction to the series, which Lee tells me is for dissemination. (The visuals are copyrighted to help prevent voice overs and other pirating.)

Lee Arnold

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Flashback: How Donald Luskin Earned His Title

Max Sawicky, on his Twitter feed, sends us to this classic piece from Donald Luskin

Believe me, if we raise taxes on hedge-fund managers we’ll get fewer hedge-fund managers. Today, with lots of hedge-fund managers trading all the time and keeping markets efficient, stocks are at record highs around the globe and markets are deeper, more liquid and less volatile. With fewer hedge-fund managers, markets would shrink, become more volatile and more costly, and tumble from their present highs.

The date on the piece is 20 July 2007. Just over three months later—pretty much exactly three years ago—the IB-sponsored MBS origination market effectively died, having taken much more value than was produced by the underlying property and placed it firmly into the pockets of traders and originators who knew that the present value they were claiming was—let us be nice—overoptimistic.

Does anyone wonder why Brad DeLong designated Donald Luskin “the Stupidest Man Alive Emeritus“?

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Everything Old is New Again, Part 1934-1937

I have (vainly, I suspect, in both senses of the phrase), tried to start a meme on Twitter, #ifTimGeithnerrantheEmergencyRoom. “The defibrillator would only charge to 30 to prevent scarring; anything more and you’re on your own” probably isn’t winning friends or influencing people, but it does make me feel better.

It also makes me look back at the histories written of the time.  A detailed analysis of Keynes’s discussion of Goldman Sachs’s antics in the late 1920s, which echo their trading in middle 2000s, is left to someone else. (Suffice it to say, one never quite listens to John Denver’s “Take Me Home, Country Roads” the same way again after reading about Blue Ridge and Shenandoah.)

It’s the macro monetary moves that abide, and the lessons of history. Years ago, people failed to notice that money whose multiplier is 1 is not inflationary—most especially when you have one of the so-called “balance sheet recessions” where assets are being carried at a value significantly higher than can be realized even in Edward C. Prescott’s or Thomas M. Hoenig’s most lurid fantasies.  To wit:

Over time, Fed officials became increasingly concerned about substantial increases in bank reserves, especially excess reserves. During 1934 and 1935, gold inflows of some $3 billion contributed to a doubling of member bank total reserves (from $2.76 billion in January 1934 to $5.72 billion in December 1935) and more than a tripling of excess reserves (from $866 million to $2.98 billion; Board of Governors of the Federal Reserve System 1943, 371). The buildup of excess reserves alarmed Fed officials, who feared that these “idle” balances might permit a wave of speculation and inflation.

Using its traditional tools the Fed would have reduced reserves (or slowed their rate of growth) by selling securities and raising the discount rate. But this was not feasible in the mid-1930s. A discount rate increase would have had no effect on reserves since discount-window borrowing already was trivial, even at a discount rate of just 1.5 percent. Similarly, by mid-1935, member bank excess reserves alone equaled the Fed’s total security holdings, leaving the Fed unable to slow significantly the growth of total reserves through open market sales….

excresns2008201009

And the result, Basel III-like, of ignoring that the accounting Fantasies of Solvency were dwarfing the lending realities:

Alarmed at the sharp increase in excess reserves that had taken place since 1933, and viewing it as potentially inflationary, the Board of Governors increased required reserve ratios in August 1936, and again in March and May 1937. In total, the reserve requirements on time deposits were increased from 3 percent to 6 percent. Requirements on demand deposits were increased from 7, 10, and 13 percent to 14, 20, and 26 percent for country, reserve city, and central reserve city banks, respectively. The increases, according to the Annual Report of the Board of Governors for 1936, were intended to eliminate those excess reserves the board deemed ‘‘superfluous for prospective needs of commerce, industry, and agriculture, and, if permitted to become the basis of a multiple expansion of bank credit, might have resulted in an injurious credit expansion” (14).

If “those who forget the past may be condemned to repeat it,” are those who remember it and still fail to do anything are just condemned to be economists?

All quotes from Charles W. Calmoris and David C. Wheelock, “Was the Great Depression a Watershed for American Monetary Policy,” 1996-1998, as published in Bordo, Goldin, and White eds., The Defining Moment, NBER Press, 1998

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Thinking about Research

Chris Blattman highlights the latest version of Janet Currie and Reed Walker’s research on a positive externality of the shift to E-Z Pass (PDF link). From the Abstract:

We find that reductions in traffic congestion generated by E-ZPass reduced the incidence of prematurity and low birth weight among mothers within 2km of a toll plaza by 6.7-9.1% and 8.5-11.3% respectively, with larger effects for African-Americans, smokers, and those very close to toll plazas. There were no immediate changes in the characteristics of mothers or in housing prices in the vicinity of toll plazas that could explain these changes, and the results are robust to many changes in specification. The results suggest that traffic congestion is a significant contributor to poor health in affected infants. Estimates of the costs of traffic congestion should account for these important health externalities.

The interesting thing is that I read this paper a while ago—earlier this year, or even late last.  Well, maybe not this version of  the paper, but an earlier version of it which also showed significant positive results.  And it gets me thinking about how we deal with research.

Because the past six months or so—since the previous version—are six months in which this information apparently didn’t get disseminated to the Chris Blattmans and Kevin Drums of this world, six months during which uninformed people have bought houses near non-EZ-Pass toll plazas, six months during which every Republican candidate for the House or Senate not named Mark Kirk has spoken as if since climate change is not real, and therefore there are no possible reasons to reduce emissions. (As an aside, that the glorious liberal days of IN-9 are when Lee Hamilton seat for as long as he wanted it is an indicator of discourse shift, as this blog’s pretense to being “left of center” makes clear.)

In a limited sense, that’s probably as it should be.  People who knew about the paper read it, sent comments to the authors, asked questions, suggested changes and the refinements.  I’m certain the current version is a better paper than the one I read, with better details.

But there is likely someone who, in the past six months, bought a house near a toll plaza that doesn’t have E-Z Pass exits, thinking she was going to raise her soon-to-be-born child in a better environment than an apartment who would have liked to have known about this study, instead of ending up with “Buyer’s Remorse” in a real—not just an economic or psychological—sense.

As long as research is delayed by details and false narratives remain information-free, markets will remain inefficient. And people will have what economists gracefully call “suboptimal outcomes.”  Such as “prematurity and low birth weight,” neither of which is a positive indicator for future success and earnings.

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"Run Government Like a Business" = Deficit Spending

We’re used to that line by now. Ross Perot—one of the more prominent people who got rich due to government contracts—used it, Carly Fiorina and Meg Whitman are using it (while desperately hoping you don’t pay attention to how they ran Lucent/HP or eBay), and Aaron Sorkin even had Charles Grodin say it in Dave, if only to establish his Sensible Centrist cred.

So how are businesses running their debt-laden firms? Ask the WSJ and ye shall receive:

U.S. corporations have taken full advantage of low interest rates, going on a bond-issuing binge that has left them with tons of cash, which they appear to be holding largely as insurance against a new bout of financial turmoil, rather than spending on new hires. Nonfinancial companies were sitting on about $8.4 trillion in cash as of the end of March, or about 7% of all company assets, the highest level since 1963. Even before its [$1.5 billion at the bargain-basement interest rate of only 1%] bond issue, IBM had $12.3 billion in cash and short-term investments, which accounted for about 12% of all its assets.

The WSJ is, of course, worried about The Savers:

Meanwhile, though, savers are seeing some of the worst nominal returns in decades. As of June, the weighted average interest rate on deposits, money-market funds and other highly liquid investments stood at only 0.29%. Returns on riskier investments aren’t great, either: The average yield on near-junk bonds with maturities close to 30 years stood at about 5.9% this week.

As Brad DeLong said recently, in a slightly different context, “I share [the] belief that these numbers ought to be higher. But I also think that I don’t have very good reasons to claim that I am right that they should be higher.”

Neither does the market.

And it’s not as if those companies were all saving during the Good Times. Indeed, they were arguably more poorly managed than the government. As Floyd Norris noted almost two years ago:

Over the last four years, since the buyback boom began, from the fourth quarter of 2004 through the third quarter of 2008, companies in the S&P500 showed:

Reported earnings: $2.42 trillion
Stock buybacks: $1.73 trillion
Dividends: $0.91 trillion

The net flows there is -$220B, give or take a billion. It’s spending roughly $1.10 for every dollar you earn. And, to make matters worse, nearly twice as much was spent to make people go away (buybacks) than to reward loyalty (dividends).

If the government really were to be run like a successful business—the way the S&P500 are run, the way IBM is run—they would be borrowing long-term right now at that 2.82% 10-year or even than 4.00% 30-year rate.

If it’s good enough for IBM, it should be good enough for the U.S. Government. The Mitt Romneys and Ross Perots have been telling us that for years; many we should listen?

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