Think Happy Thoughts and Say Happy Things

by Jacob Davies

Optimism is a fine thing, even in dark times. Things generally will return to getting better sooner or later, and despair is useless in helping get there faster. But there is optimism and optimism; "One day I'll get a job so I won't stop looking" is the good kind. "We can't pay the rent next month but I'm sure it'll turn out fine" - not so good.

I'm having a little trouble with the economic forecasts of the Obama administration on those grounds. The CBO estimate on Friday indicated unemployment over 8% through 2012, combined with economic growth of about 4% through the same period. I'm no economist, but those two things seemed unlikely to coexist. 8% unemployment means insecure consumers afraid of losing their jobs, a large section of the population earning nothing and buying little, and businesses unsure of future demand and unlikely to invest. And as we've seen in the last few weeks, even the extended unemployment benefits that have kept the unemployed still spending some money are unlikely to make it even for another six months, let alone two or three years.

But I could be wrong. 8% unemployment would be terrible, but if economic growth was really 4% at least that would be something. Is that combination unprecedented? It's not actually unprecedented. In fact, the CBO projections very closely fit the pattern of the early 1980s recession and recovery:

(The purple line is "now" for the current recession, although the points for 2010 are still CBO projections.)

So that gave me pause. It is at least possible for roughly the predicted pattern to occur, although I think it's worth noting that employment fell further and faster than it did in the early 80s, the recession was a little deeper, and even the projected amount of growth in 2010 seems over-optimistic.

But the more I thought about the differences, the less convinced I was that their scenario was plausible. The basic dynamics of the situation are different. In both cases there have been drops in interest rates. In the 80s, the drop was far larger and from a far higher point. This time around we had barely gotten back to "normal" rates when we dropped back to zero again. But the really big difference is the household wealth effect. In the 80s, a period of high interest rates had choked off consumer lending and resulted in a serious dip in home values, but a shift to lower interest rates pushed up house prices and allowed a great deal of consumer lending.

Our situation is different. House prices were hugely inflated, and the crash has not even brought them to long-run average values (and I do not believe the crash is anywhere near over). There is no prospect of a major rise in home prices, and households are saddled with massive mortgage debt:

I'm not seeing where the equivalent boost in demand is going to come from this time. The stimulus is done, and nothing more is on the cards. When even the none-too-thrilling predictions of 8% unemployment through 2012 seem unreasonably optimistic, I think we're in trouble.

Comments

[John Thullen]

Me too.

Throw in the despicable practice of the credit agencies radically reducing the credit ratings of the unemployed, because they are unemployed, and further, selling those credit ratings to employers, who in turn throw job applications in the shredder because of low credit ratings.

We are a predatory, cannibalistic culture, that has institutionalized predation -- as an equation, as a mathematical value, over all human values.

It's higher math, like trying to cipher how many machetes it takes per angry person per week to cut off the heads of one million motherfuckers.

[Carleton Wu]

I'm not seeing where the equivalent boost in demand is going to come from this time.

Maybe from an erosion in the value of the dollar (esp against the yuan) leading to increased exports (and decreased imports ergo more domestic demand). Not saying that'll happen, just the first thing to pop into my head.

And, in general, I think the world economy is much more integrated than 30 years ago (altho I dont have numbers to back that up & am too lazy to look for them)- so other global effects may be equally important.

[Tony P.]

Color me annoyed.

GDP, real or nominal, is an aggregate number. Individual people experience per-capita numbers. If GDP grows at 4%/yr, it matters to the "average" person whether population is growing at 0, 2, 4 or 6% a year. So that's my first thing: economists should be required by law to use per-capita numbers.

Of course, even per-capita numbers are not what individual people experience. Very few individuals are 9.5% unemployed, for instance. And of course it's entirely possible for per-capita GDP to grow 4% with almost everybody's income staying flat; all you need is for 1 person in 1000 to see his income increase by ... what, you thought I was going to say 4,000%? No: the percentage could be much less than that if the 1 person in 1000 already had a much larger income than the "average" person to begin with. So my second thing is: the shape of the distribution matters a lot; the mean value, even per-capita, is a pretty limited piece of information.

Then, I am of two minds about the reality of "real" GDP. Real GDP is presumably nominal GDP adjusted for inflation -- or, quite possibly, deflation. Real GDP represents, in principle, actual goods and services measured in real units: cars built, movie tickets sold, teeth filled, and so on. But it can't be only that sort of stuff, or GDP would not count the "services" that, say, Wall Street "produces". Services like executing stock trades, to take the simplest possible example. Do we have more real GDP if the NYSE executes a billion more stock trades? Sure we do: if showing me a movie amounts to doing me a real service that's part of real GDP, so does executing my order to buy 100 shares of stock. But come on: do we REALLY have more "real" GDP?

I choose those two "real" services to compare, because I'm about to contrast them. A movie ticket and a retail stock trade are about the same price. Both are "real", however frivolous or unproductive you consider either one to be. But there's a BIG difference: there are physical constraints on how many movies I can go to in a day. Not so for stock trades. "Real" GDP can grow much more easily by virtue of "producing" more stock trades for me, than by selling me more movie tickets, let alone more cab rides or haircuts or E-books, because my capacity to "consume" that other stuff is limited by real (really real) constraints.

So I suppose my third, somewhat incoherent, thing is this: it would not shock me to learn that whatever "real" growth economists project, "financial services" probably accounts for a lot of it. Fat lot of good THAT will do for "average" Americans, let alone unemployed ones.

--TP

[Jacob Davies]

CW - exports would be nice, and have been growing, but imports have been growing more. And then there's this depressing post on capacity shrinkage.

TP - Probably not a surprise that I agree about most of that. I'm less concerned about population growth-compensated GDP growth for two reasons: one, I think everyone understands that we need to maintain steady growth just to keep pace, and two, US population growth has been fairly stable within a small band (0.8-1.4%) since 1964, and has been close to 1% for the past decade, so its effects don't vary a lot from year to year.

On the share of GDP from financial firms, I agree to some degree and especially in the last decade, I think some part of GDP growth has effectively come from banks printing money and taking it home. But I think the bigger problem is the capture of profits from other industries by the financial industry by a variety of means: kickbacks to executives to sell out company interests, complex financial instruments with consequences that the non-finance firm is not equipped to understand, and finally, with the overriding importance of making quarterly numbers, the creative - but ultimately expensive - assistance of financial firms in papering over cracks.

The problem with that is that it discourages investment in other industries, and the banks themselves aren't in a position to make those investments; they're hunter-gatherers, not farmers.

[DaveC]

We are a predatory, cannibalistic culture, that has institutionalized predation -- as an equation, as a mathematical value, over all human values.

I really feel for you John, I have felt that anguish myself. Now, I have always worked in the private sector, in manufacturing, and I also understand the fears that small businesses have of federal regulations. The small businesses simply do not have the resources to withstand prosecution by the government, and are scared to death. That's what has happened quite literally, the death of little private entities at the hand of lawyers, beauraucrats, big business, big banks, and it is a goddamn shame. Better for the little shops to hire undocumented workers, plus that proves that the business isn't racist.

I don't know really what the next big employment thing will be. I sometimes fantasize about doing brutal HVAC work in the bitter cold of the winter and heat of the summer, and then taking time off in the milder weather of the spring and fall, but I'm not a young man and can't handle it. I tried to get into the trades when I was young, and figured out that the unions were there to prevent me from getting a job, but I suppose if I gave the right person some money maybe I could have made it in somewhere. The big businesses and govt jobs were pretty much a non-starter because I was sort of a freak (not really a yippie hippie), but I was able to get work doing dirty or dangerous stuff. So my kids are lucky enough to have jobs during and after college, but for many kids, they cant even get a job at McDonalds or mowing the grass, because all those are taken. So we have gone from a manufacturing economy to a service based economy and no kids need apply.

In the very near future we will need service people, new devices, new methods, etc., to help take care of baby boomers in their old age. This is a growth industry (an observation by lj). The question is whether that industry will be competitive or all funneled thru the various layers of federal beauacracy as health care seems to be headed.

The old company I worked for got rid of all the R&D people and hired a small army of Quality Assurance form filler-outers. Now the plan seems to be to put their competitors out of business, either by buying them out and shutting them down or by using government to force them out of business for non-compliance. I'd say in this business climate, the best opportunities are in this QA sector for a larger company, or investigate companies in order to press lawsuits against them.

[wonkie]

I don't know how the economy can improve when the average person has little or no discretionary income to spend on the sorts of products that create jobs.

I'm not a trained economist and most of the time I can't follow discussions about the economy because I don't understand most of the terms that get thrown around. However, I do have commonsense. My husband and I sold our house a year earlier than was really convenient because I was pretty sure the housing market was going to crash. No, I didn't know a thing about derivatives and bad mortgages. It just seemed obvious to me that soon middle income people would no longer be able to afford houses and without middle income people to sell houses to, who was going to buy our house? We can't all sell our houses to the rich. When homes in my low to middle income neighborhood got up to 4oo,000 it seemed obvious that a crash was coming. As it turns out we beat the crash by about six months.

And it also seems clear to me that the same problem is endemic throughout the economy. The only products moving are essentials or products marketed to the wealtly. That's because the rest of us can't afford to buy anything not essential! And if we can't spend then the producers have a diminshed market and have to drop prices and lay people off. They sure can't hire. The only aspects of my local economy that I support with my spending are the gas station, the grocery and the vet. No remodelling, no new carpet or furniture, nothing for the garden, no clothes, no restaurants, no electronic toys and gadgets...and my husband and I are better off financially than most Americans. In the last year three local restuarants have closed and the landscaping business where I used to drop hundreds of dollars has gone belly up.

We have no debts, no car payment and no mortgage and still don't spend anything extra. I don't know how other people are managing to survive.

It's extraordinary to me that anyone still believes that cut-taxes-for-the-rich-and-improve-the-economy crap. Actually I don't think Repubican politicians who push that line really believe it themselves. They just don't care about most Americans. They are perfectly happy with an economy that benefits the wealthy and screws everyone else. They made that clear when they voted against the unemployment extention while advocating tax cuts for rich.

We need FDR again.

[Brett Bellmore]

"Throw in the despicable practice of the credit agencies radically reducing the credit ratings of the unemployed, because they are unemployed"

Maybe this was just some of your usual parody, and as usual just difficult to distinguish from other forms of nonsense, but I don't get it: To the extent that a 'credit rating' is an accurate gauge of your ability to make payments on money you borrow, having an income to make those payments from would appear to be a legitimate factor in computing it. Now, using that credit rating as a judge of whether or not somebody would be a good employee, THAT is stupid. I suppose they're using it as a proxy for trustworthiness, but it's a terrible proxy for that.

Jacob, your point is well taken: The economy can indeed show growth while unemployment remains high, under the current circumstances: Almost all of the stimulus money is going to government employees, who on average earn twice the private sector, and as a result of that flood of money, public sector pay rates have skyrocketed since the stimulus. Hence, the economy grows, but most people do not benefit, because it's only the government growing. Check out this graph, which I'm having a bit of trouble getting to display: http://innovationandgrowth.files.wordpress.com/2010/05/statelocal_3819_image0011.png>graph

[John Thullen]

Brett:

Pop over to the Slactivist July 22, 2010 post -- "Credit Scoring and Unemployment" for background.

More discussion on the topic at Kevin Drum.

Not parody.

Sometimes the clown car goes ka-boom for real.

[Phil]

Almost all of the stimulus money is going to government employees, who on average earn twice the private sector, and as a result of that flood of money, public sector pay rates have skyrocketed since the stimulus.

So, do those people then stuff that money into mattresses, or what?

[John Thullen]

"public sector pay rates have skyrocketed since the stimulus."

By which you mean, I trust, that new jobs opening up in the public sector are at the higher pay grades to entice the workers sloughed off by the private sector to take jobs with the government.

Look, some people got jobs. And here we're told they're sitting in hot tubs nursing a long-island iced tea while collecting unemployment.

The private sector could have held on to them -- they didn't, to their detriment.

Public sector employees, as a whole, are not receiving pay raises, with maybe the exception of cost-of-living increases.

Many states and localities are laying folks off.

[liberal japonicus]

As DaveC mentions, taking care of old people is the new growth industry. The second should be green energy, but for various reasons, that doesn't seem to be getting off the ground in the US, possibly related to things like this (from Paul Waldman, via the LGM blog)

UCLA economists Dora Costa and Matthew Kahn analyzed the impact of an energy-conservation program in California that informed households about how their energy use compared with that of their neighbors. While the program succeeded in encouraging Democrats and environmentalists to lower their consumption, Republicans had the opposite reaction. When told of their relative thrift, they started cranking up the thermostat and leaving the lights on more often.

I don't stick this up to shove a red flag in the face of the folks who don't believe in global warming (like DaveC, who I thank for the shoutout). But with this kind of visceral reaction, you wonder how many people who might have a good idea about energy conservation, or some better mousetrap along those lines are afraid to put it out because maybe half the population (assuming that the notion of global warming results in a even split) would tell them they are stupid to worry about it.

I'd also add that if you have your catastrophic health care covered by government health care, you are going to be a lot more willing to spend your money when you get to your old age. My iaido teacher, who is a spry 80 something, can basically spend down his wealth because he's not planning on taking it with him, so maintaining a lifestyle where he and his wife live not only with a certain sense of comfort but a sense of heightened possibilities means that money is getting pumped into the economy. A lot of people have mentioned the Japanese recession and the way they talk, it sounds like the landscape from Mad Max or A Canticle for Liebowitz. It is sh*tty to have to work with people graduating from college and get them to realize that they are never going to be looking at the same type of employment scheme that their parents or even their predecessors a decade ago took for granted. But, it's not an apocalyptic moonscape, businesses still start up, some people (though much fewer than before) make money, things happen.

In that regard, what Carleton points out about a weak dollar is worth noting. Given that there is a taboo against suggesting the dollar might be weak, or might be better off weak, it could be that the projections are in part based on the currency reality that dare not speak its name.

[ajay]

Almost all of the stimulus money is going to government employees, who on average earn twice the private sector,

Because they are, on average, older and more highly qualified; they do not earn twice the private sector wage for doing equivalent work. In fact, according to some estimates, they get 26% less in salary than their private-sector counterparts - which is what you should expect, given their higher job security and better non-salary compensation.

Furthermore, the last decade has seen a lot of government functions contracted out. As these will generally be lower-paid functions (cleaning and service jobs rather than managerial) you would expect to see average public-sector pay rise as the lower-paid employees are shifted to the private sector column.

and as a result of that flood of money, public sector pay rates have skyrocketed since the stimulus.

I don't think that an across the board 2% raise this year, the lowest annual increase in three decades, counts as skyrocketing. The point of the stimulus is to hire more people, so of course large amounts of the money will be used to pay the salaries of government employees. But these will be new government employees. Without actually lying outright, Brett implies that the money is going to pad the pockets of existing government employees - which is nonsense, of course.

Hence, the economy grows, but most people do not benefit, because it's only the government growing.

Because people who work for the government are not real people, and don't use their salaries to buy goods or services from the private sector. They just sit there in their government offices, being all governmenty.

[wj]

Very few individuals are 9.5% unemployed - Tony P

On the other hand, think of the improvement in the statistics if you counted everyone who was only employed part time, but wanted to work full time, as some percent unemployed. Say all of us on half time were counted as 50% unemployed. That would actually increase the reported unemployment rate. It would make historical comparisons difficult, but would give a more accurate idea of how bad the problem really is.

[hairshirthedonist]

Underemployment is.

Maybe if real wages had kept up with increased productivity in the private sector, the disparity wouldn't be as great between public-sector and private-sector wages and growth in wages. (And what ajay said.)

[russell]

Almost all of the stimulus money is going to government employees, who on average earn twice the private sector, and as a result of that flood of money, public sector pay rates have skyrocketed since the stimulus.

Seriously, what the hell?

Are you talking about government employees making twice the salary of a private employee for doing the same work?

And this differential has emerged over the last year or so, due to stimulus spending?

I don't mean to be a cop about it, but it seems like some kind of supporting documentation would be good.

Very few individuals are 9.5% unemployed

To follow up on wj's comment, folks who would like to be working full time but who can only find part-time work make up the difference between the U5 and U6 measures of unemployment.

As of June 2010 they are about 5.5% of the workforce, or about 7 and a half million people.

[ajay]

Russell: there's also the (much more difficult to measure) economic loss from individuals who have taken suboptimal jobs out of desperation.
If you're doing work for which you are overqualified, then that's bad for the economy - it's a waste of your time and thus of your human capital, just as using a computerised lathe as a paperweight would be a waste of physical capital, and having a big room full of banknotes is a waste of monetary capital.
Looked at very simply: you are a sprocket tuner. As such, every hour, you can take a dozen raw sprockets and tune them. A dozen raw sprockets sell for $10, but a dozen tuned sprockets sell for $100. You get a salary of $30 an hour.
But now we're in the Great Recession, all the nearby sprocketries have shut down. You're forced to work in the only job available: in a fast-food joint, cooking $10 of raw hamburgers every hour and selling them for $30. And you get paid $8 an hour.
You're still fully employed, but not only are you getting less money, you are adding less value to the economy.

[hairshirthedonist]

With a little training, a sprocket tuner could take up cog calibration. Of course, that would mean working for Mr. Cogswell instead of Mr. Spacely, and we all know what that means. Welcome to the future.

[Hogan]

Jane, stop this crazy thing!

[Chas Simmons]

Getting back to the comparison of the recoveries from the early 80s recession and the current downturn, Davies rather understates the huge difference in interest rates. The recessions of the late 70s and early 80s were deliberately caused to stop the inflation of that time, and prime rate was driven over 20 percent. Going into the current downturn, the prime rate was very low, and now even a 0% fed rate doesn't stimulate the economy.

There are many other differences. The housing stock was depleted in 1983: not only had construction been curtailed by the interest rates, but there was a massive destruction of urban housing over the previous 20 years, due to white flight from integration. And the baby boomers were reaching the buy-ones-first-house age. Today, we have a glut, with foreclosed houses available in plenty, so we can't have a construction-based recovery like we did in the 80s.

And the price of energy dropped throughout the 80s, even after economic recovery, which won't happen now, and there are yet other structural differences. Lowering unemployment isn't going to be easy this time.