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

Quote of the Day, Economic Recovery Edition

Floyd Norris cites John C. Dugan, the man whose agency was charged with regulating AIG Financial Products in the NYT:

[T]hey believe that the banking system on its own is unlikely to have the ability to provide enough credit to sustain an economic recovery in the United States.

Gosh, really?

Norris quotes Dugan:

“We need a vibrant, credible securitization market to help fund the real economy going forward,” Mr. Dugan said this week. He was preaching to the choir — a meeting of the American Securitization Forum — but it is an opinion widely held in financial markets.

Remind me again why all those banks were “bailed out”? Wasn’t it supposed to be to kick-start the economy again?

What You Measure is What You Try to Manage, FRB edition

For those who were thrilled by the positive general prospects in Rebecca’s post, the WSJ presents words to die/foreclose by:

If that seems at odds with the economy’s recent strength, keep in mind that the unemployment rate is usually one of the last places recovery shows up.

Many of us are having trouble forgetting that, as the “flat” consumer confidence makes clear.

I Blame This on the NHL

With all the talk of “Detroit,” you would think that Michigan would have lost the most employees, as a percentage of same, on the year. After all, the scariest graph of the U.S. MSAs isn’t scary for nothing.

But the Regional and State Employment data is out for October (h/t CR), and there’s a different leader.

Apparently, the bursting of the Sunbelt Bubble (building expensive houses in the absence of a water table; what could go wrong?) compares well with destroying unionized automobile production. (Note to Senator Shelby: destroying Detroit didn’t keep your state from being #10 on the list.)

Also note that #4 on the list is my favorite state for bank failures. (The three states with 20 or more bank failures since Bear Stearns failed are 4th, 9th, and 11th on the list. The only other state in double-digits right now, Florida, is 16th.) I’ll wait patiently for Brad DeLong to explain again how “support of the banking system by the Fed and the Treasury [has] significantly helped the economy.”

The third and biggest point is that many of those are large states that have leaned Democratic in the past several years. Anyone betting that they—and the next two states, North Carolina and Wisconsin, which both went for Obama in 2008—will be hard-pressed to support Democratic policies twelve months from now without a significant change in the trend.

New Jersey showed you what happens when you run a former Goldman Sachs CEO for Governor right now. Virginia showed what happens when the base isn’t motivated. Paul Krugman makes the point directly:

The longer high unemployment drags on, the greater the odds that crazy people will win big in the midterm elections — dooming us to economic policy failure on a truly grand scale.

What are the odds of crazy people winning big? I’m not certain, but I make them much better than 20:1 based on the current data.

UPDATE: Via Mark Thoma, Free Exchange, of all places, also sees the danger:

[W]hat is clear is that it does no good for prominent, respected economists to continue heaping praise on a Fed that failed in its mission before the crisis and which [sic] is failing in its mission now.

Because as unpleasant as the prospect of Congressional intervention in monetary policy is, two more years of high unemployment might well lead to far worse.


By Spencer (2009)


The issue of a jobless recovery is getting a lot of attention recently.

I’ve found the best way to look at the issue is to compare the change in real growth and productivity over the long run. There have been three periods of different productivity trends in modern US economic history.

Prior to about 1973 productivity growth averaged 2.8%. In the second or low productivity era, running from 1974 to 1995, productivity growth slowed to 1.5% before rebounding to 2.4% since 1995.

But real GDP growth also slowed over this period. As a consequence, the ratio of real GDP growth to productivity growth fell from 68% in the early strong productivity to 50% in the weak productivity era before rebounding to over 80% in the most recent era. Basically, real GDP growth equals productivity growth plus hours worked or employment growth. A consequence of stronger productivity in an era of weaker GDP growth this suggests that each percentage point increase in real GDP growth generates a much weaker increase in hours worked or employment. Currently, a percentage point increase in real GDP growth now generates under a 0.2 percentage point increase in hours worked versus 0.3 in the pre-1974 era and 0.5 percentage points in the low productivity era.

But to a certain extent comparing productivity and real GDP is comparing apples to oranges. To be accurate one should look at productivity versus output in the nonfarm sector. GDP includes the farm sector of course, but also the nonprofit and government sectors where productivity is assumed to be zero.

If you look at what happened in the 1990s and early 2000s recoveries in the nonfarm business sector, you see that productivity growth significantly outpaced output growth in the early recovery phase of the cycle. As a consequence hours worked or employment fell, generating the jobless recoveries. It looks like the problem in these two cycles was much weaker growth rather than strong productivity.

This shift to an environment of stronger productivity and weaker real growth generated an interesting development that has received little attention among economists or in the business press.

This development was a secular decline in labor’s share of the pie. Prior to the 1982 recession there was a strong cyclical pattern of labor’s but it was around a long term or secular flat trend. But since the early 1980s labor’s share of the pie has fallen sharply by about ten percentage points. Note that the chart is of labor compensation divided by nominal output indexed to 1992 = 100. That is because the data for each series is reported as an index number at 1992=100 rather than in dollar terms. So the scale is set to 1992 =100 rather than in percentage points. But it still shows that labor payments as a share of nonfarm business total ouput has declined sharply over the last 20 years and prior to the latest cycle we did not even see the normal late cycle uptick in labor’s share.

If this chart gets a lot of attention it will be interesting to see how the libertarian and/or conservative analysts who keep coming up with all types of excuses to explain away the weakness in real labor compensation in recent years explain this away. If you really want to raise a stink you could look at this as a great example of the Marxist immiseration of labor that Marx believed was one of the internal contradictions of capitalism that would eventually lead to its self destruction.

additional chart in response to comments.

The Plural of Datum is Foreboding

Via Dr. Black, CR describes Washington, D.C. real estate as “the commercial version of the subprime situation.”

Two points:

  1. CR knows better, most of the time, than to believe that there was a “subprime situation” in any sense other than “We Are All Subprime Now.” [edited for tone]
  2. Possibly more importantly, Washington, D.C., is one of the few areas that has, relatively speaking, maintained employment levels during the current recession.

If D.C. is having CRE problems, is it any wonder the rest of the country is in a jobless “recovery” at best?