-6.2%....

Intrade is now predicting 10% unemployment by year-end...

Actually, those intrade contracts at unemployment above 8% at .75 look pretty attractive...

http://www.intrade.com/jsp/intrade/contractSearch/#

A month back I was bitching about how pathetically inadequate the stimulus was. Now it really appears to have been too small... The only positive statistical release I can think of is the Janauary CPI.

My thoughts on the budget balancing thing: Tax increases next year? Let's take care of the recession first guys... We don't know there's going to be a recovery by next year. The Obama team is acting like their miniscule stimulus package and doing nothing on banks is going to deliver us from evil.

I'm not saying we've got Armageddon on our hands, but it does seem a bit optimistic to just think that things will turn around on their own. And it still seems to me that all economists, but especially the President's economists, are way too optimistic.

Here's the NYT: "The country’s gross domestic product fell at an annualized rate 6.2 percent in the last quarter of 2008, the steepest decline since the 1982 recession. Economists are expecting a similar drop in the first quarter of 2009." Um, I'm no forecaster, but job-loss rates were higher in the first six weeks of 2009 than for Q4 2008, so why should we not expect worse GDP numbers too? And not just job-loss rates, housing prices, the stock market, and consumer confidence have all gone south since Q4 as well...

Here's the money quote:

The budget projected economic conditions that critics had called overly optimistic, including an estimate that G.D.P. would shrink 1.2 percent in 2009.

The administration thinks GDP will shrink only 1.2% in 2009! That's preposterous... It's just as likely that GDP will shrink by 11.2%... I'm not saying that's the most likely, but you've gotta believe if we have -8% for Q1, -6% on the year is entirely plausible, if not optimistic...

haven't posted in awhile...

W/ apologies... i had to grade last weekend, and i still *still* haven't finished the paper I'm working on... It's probably never a good idea for an untenured academic to spend too much time blogging...

Words of the Day...

Torschlusspanik vs. Torschusspanik

The first is the type of panic you do before a door is about to close -- you get the puck out! The 2nd is the type of panic you do when you've been passed the ball right in front of the goal and are expected to score!

Torschlusspanik, of course, is one of the explanations for what happens in a bubble... Yeah, some people know there is a bubble, but they can't resist those big returns, so they try to stay in until things start to turn south. And then when things start to turn, and the market begins to head south -- Bam! Torschlusspanik! Everyone tries to get out before the door closes...

Among the crazy things conservatives are now arguing, interestingly, is that

there is no such thing as bubbles.

That, since humans are rational, bull-markets (not bubbles, for there are none) are always warranted by their fundamentals. Even the "Tulip Mania", some conservatives argue, was completely rational responses to the fundamentals of supply and demand. Of course, this is all utter crap, but nevertheless, I'm always amazed at how many otherwise-intelligent, democratic-leaning economists get taken in by this shit... And is anyone else just getting sick of reading conservative economists write anything? It seems like they've just totally gone off the deep end...

Obama and the Goat Devil

Maureen Dowd, who is normally not worth reading, was this week.

I had always wondered if and when George W. Bush's relationship with Cheney would sour, now we have some evidence. So, I've gotta ask, how long before it will be before Obama loses faith in Summers? I think, on one hand, Obama's a smart guy, so it should be sooner rather than later. On the other, Summers is not nearly as crazy as Cheney, implying it could be later rather than sooner. What the President needs is clear, incontrovertible evidence that Summers has been wrong on something before the aura of the "brilliant" Harvard John Bates Clark medalist raised by Nobel Prize winners starts to take a hit.

Spending cuts in California and New York thanks to the stimulus package which was too small could be one data point where the evidence conflicts with what Summers likely told Obama when the size of the stimulus package was announced. Aside from the large size of the housing bill and the hint that there might be more stimulus to come, w/ today's announcement on the banks and the revelation that Summers will control the auto bailout, his role appears undiminished.

Incredible...

Well, I guess the die has been cast on the nationalization thing... In order to assuage the markets, Treasury has said: "This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government".

Doesn't that mean it can't happen now? Sure, stock indices rebounded to be only down about 1% on the day (bank of America up 25% after the announcement!), and the market's now only down about 20% since the (small) size of the stimulus plan was announced, but I can't help but think the result of this isn't going to be a whole lot of muddling... And who cares if the stock prices of insolvent banks take a hit?

The crazy thing about how much the stock market was down earlier today (down down 200+) is that January's core CPI was actually up .2%, which was an undeniably good sign. This week we had the housing bill, the stimulus signing, an announcement that another stimulus is on the way, promises not to nationalize the banks, and yet, how did the market do on the week? off 5-6%?

Deflation at Bay?

The Producer Price Index, after falling in Nov. & Dec., was actually up in January... Certainly, having the core rate up .4% is good news... That's basically perfectly normal, and a good sign for the economy. The intermediate goods index continued to deflate, by 1.1% however, so we're not really out of the deflation woods yet...

Tomorrow, we'll get the CPI

Amazing...

After yesterday's 4.5% spill in the S&P, the S&P was down again today! No dead-cat bounce... (At least at the moment...)

This is crazy considering 1)Yesterday Obama signed the stimulus, 2)Put out a feeler that we may need another, and 3)Announced a much larger housing bill than most people imagined.

I see 2) and 3) as very positive signs that Obama gets it. Particularly the Housing bill strikes me as something that's not the least bit Summers-esque... As liberal as I am, I'm not a huge fan of large new housing subsidies, so I can't believe Summers wanted this... This is pure speculation, of course, but I kind of wonder if the the 20,000 job cuts, the $14 billion tax increase, and the $15 billion cut in spending in California wasn't one bit of information (along with the plunging market) that is hard to reconcile with the belief that Obama's stimulus is large enough to "create 3.6 million jobs".

I also saw this: "the Fed’s Open Market Committee said it expected that the economy would contract by 0.5 percent to 1.3 percent this year, that unemployment would rise to 8.5 to 8.8 percent and that inflation would remain under greater pressure."

Those numbers are, of course, pure fantasy. I'll bet anyone the economy will contract by more than 1.3 percent, and that the unemployment will be higher than 8.8%. I'd be willing to give out 10:1 odds unemployment is higher than 8.5% at the end of the year... I guess the Fed can't say things are going to fall off a cliff, but it also loses credibility...

Meghan McArdle is confused...

Here she says that "we just don't know" that WWII ended the Great Depression. Sorry, but yes we do. Of course, I would date the end of the Great Depression to 1939, when war spending in Europe increased demand for US goods. Just b/c it was done in Europe does not mean it wasn't done by government. This, combined with what FDR was already doing, kicked the economy into high gear. Once the US govt's war spending started to increase, the first few years of the war were some of the fastest US growth on record (save FDR's first couple years in office)...

Cato Ad

The Cato Ad was the ad by a pack of utterly confused, raving mad Neo-Hooverite lunatics opposed to the stimulus (despite its small size; they thought it should be smaller...). This part of the ad caught my eye:

More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s.

This is completely accurate of course. More spending by Roosevelt helped the economy a ton, and led to 8% growth, but it didn't quite finish the job (partly b/c FDR cut back spending and raised taxes to try to balance the budget). Roosevelt did, however, end the Great Depression by spending lots of money in the 1940s. Key word being 1940s rather than the 1930s. Japan also really never tried any large fiscal stimulus.

Chicago economist says: Unemployed? You must be lazy or have bad morals...

Here's a working paper from a real live U Chicago economist, and its every bit as *good* as you'd expect. The line: The downturn is not caused by the burst of the housing bubble, the tightening of the credit market, the reduction in consumer durables caused by the market crash, but rather, the downturn is the result of laziness. I.e., people decide not to work b/c they'll get help w/ their house foreclosure! Lol... It's just too much. Check it out...

For the record, I remember when Harold Uhlig came out in the past year to give a talk on capital gains taxes. His conclusion was that the US, on capital gains taxes, was dangerously close to the flat area of the laffer curve -- and predicted, that even if they US raised cap gains taxes, it could only increase revenue 5-6%! I asked, how could that be, cap gains taxes are 0 for someone in my bracket, if i want to save, i've got no choice but to pay cap gains... Lol-- he was so ignorant, he didn't even have any idea what the cap gains rates in the US were! He'd just done a bunch of math and plugged in some absurdly high "average business taxes" number he got from the Heritage foundation...

One problem with both models is that they assumed everyone was the same. This is a standard assumption, of course, in macro models, but most results are sensitive to it.

I spent a full 10 minutes on Mulligan's paper, after the Ambrosini critique recommended it, and here was my take:

Real wages and productivity often rise in recessions when non-essential people are laid off. Say you’re the president of a two person firm. You’re firm makes $100k. Sales go down $10K due to recession, so you lay off your secretary/personal asssistant. Total hours worked at your firm dropped, and although sales are way down, productivity is up!

Replace labor with capital, redo the same calculations, and you could conclude that machines have decided to take more vacation time…

Poor Guy

Poor guy.

I've certainly been jet-lagged before, and when I am, and when I feel like going to sleep, even one red bull won't do the trick. Usually I drink 2-3, and make sure that I'm doing something active, or else I'll fall asleep...

Apparently, he readily admitted to having had some wine beforehand (wine does not equal red bull), so maybe he is to blame. Probably Japanese are a little bit edgy after the -13% 4th quarter growth. Any time a major official embarrasses Japan though, they'll get fired. So call it a two-fer.

Economist Blog Confusion

The Economist Blog looks at a few key economic indicators in the early 1980s vs. today, and concludes "things were a lot worse then".

Unfortunately, it's not really the case.

Given that, in a liquidity trap, deflation is the bigger threat, we'd clearly be better off if we had 14% inflation right now than we are w/ zero inflation/deflation. Similarly, if the prime rate and the mortgage rates were really high, we could be certain that lowering them would help the economy, and so we would know that things will not continue to get much worse.

Also, the real mortgage rate appears to be higher now than in 1981...

So, the only thing that really is worse in the above is the jobless rate. I notice that they cherry-picked the inflation rate from earlier in the recession cycle, and the jobless rate is taken from later in the cycle... Since unemployment usually still rises even after economic growth is restored, this is slightly misleading. Had they taken both numbers from 1980, the unemployment would have been less. had they taken both from 1982, the inflation rate would have been lower... Most economists expect the unemployment rate to increase for probably the next 12-18 months at least. It's better to compare how much the unemployment rate has increased since the beginning of each recession... And if we do, the answer is: If February is as bad as Nov.-Jan. as far as job losses go, this recession will have resulted in a bigger increase over the same period of time.

The total unemployment rate is also important, of course. My guess is that we could be at 10%-plus by the end of this year and could give 10.8% a run for its money. It's still too early to say.

Hail Greg Clark!

See this

Here's the money quote:

As chair of my department I tried to arrange a public debate between one of the signatories and a proponent of fiscal stimulus -- thinking that would be a timely and lively session. But the signatory, a fully accredited university macroeconomist, declined the opportunity for public defense of his position on the grounds that "all I know on this issue I got from Greg Mankiw's blog -- I really am not equipped to debate this with anyone."

Here's the list of shame: http://www.cato.org/special/stimulus09/cato_stimulus.pdf

Good News for Detroit: Summers N Charge of Bailout!

Summers and Geithner are in charge of the auto bailout means, of course, that Summers is in charge of the auto bailout. Yes, as Naked Capitalism says, it looks like they are executing a land grab. Geithner is over his head of course, but as Treasury Secretary, he's got two roles, one he's done and will do brilliantly, the other not-so-much. The role he's played brilliantly, of course, is in letting boss Larry Summers walk all over him, which he'll continue to do. He's been shaky so far in being Larry's public face, and wasn't chosen for this quality so much, more for his weak, impish qualities.

Knowing Larry, it's not hard to imagine what he thinks -- that governments should not pick winners & let the big 3 go thru chapter 11. Actually, in this case, this is also what Joseph Stiglitz thinks, so Summers ideology may in fact drive him in the right direction on the auto companies.

Still, it's depressing to see Larry Summers appropriate even more power for himself.

Immortalizing Summers Hero Milton Friedman

Brad DeLong has a post up quoting Republicans predicting doom after the Clinton 1993 tax increase.

Larry Summers wrote, upon Milton Friedman's death, that he was drawn to Friedman b/c Friedman was a prophet, successfully predicting 1970s inflation dynamics. Here's what the ever-prophetic Milton Friedman thought the Bush tax increases alone in the early 90s "comdemned us us to a very slow and erratic recovery from a mild recession, and, very probably, promises a relatively slow 1990s, almost regardless of what the Clinton administration does."

He really could not have been more wrong about that, now could he?

From the department of WTF? Should We Be Worried About Too Much Debt?

Harvard's Jeff Frankel asks, "Is $800 billion too big or too small?" and answers "Yes". In other words, he thinks it's too big and too small. Too small in the sense that it's not big enough to fill the output gap, too big in the sense it adds too much to the deficit.

A couple of points: Frankel uses a smaller output gap that I think is reasonable to predict, and he neglects considering state and local budget cuts, so while he agrees that $800 billion is too little to plug the output gap, he massively understates the extent to which the Obama stimulus is insufficient. More importantly, if what he is saying is correct, and investors are starting to get weary about holding more greenbacks, then we should see the dollar sliding against currencies, such as the Euro, who have smaller stimulus packages. Indeed, I believe this was Summers' reasoning.

But check this out:
http://www.ecb.int/stats/exchange/eurofxref/html/eurofxref-graph-usd.en.html

The dollar has actually increased substantially vs. the Euro! Now, it only takes $1.28 to buy one Euro, vs. $1.56 last summer, and $1.36 early last December. It doesn't seem to be taking much of a hit. And, last week, the dollar was unchanged vs. the yen, and on Friday, when the stimulus passed the Senate, the dollar actually rose against the yen. Indeed, even though the housing crisis and the banking crisis originated in the US, the dollar has strengthened against virtually every other currency since the crisis started. In turn, this has hurt the competitiveness of US producers and manufacturers, and is part of why we are bleeding jobs.

Let's think about it: if you were Toyota, and you were trying to decide which factory to close, would you close the factory in Canada, when the Canadian dollar has just depreciated 20% vs. the US dollar, cheapening labor costs? Or would you close your Mexican plant, given that the Mexican Peso has depreciated 40% vs. dollar, reducing labor costs there? (I'm not sure Toyota is even in Mexico, but several automakers are there, and they have to decide the same thing.) My bet is that you would close your American factory, since wages haven't fallen nearly as much as the dollar has appreciated.

So, on one hand, given the strengthening dollar, Frenkel's worry about debt appears unfounded. Secondly, Frenkel is wrong that if the dollar did weaken over concerns about the debt, that the resulting increase in competitiveness would somehow be a bad thing. Perhaps Frenkel is correct that if the stimulus had been on the order of $1.5 trillion, which is twice as big as it actually was and is roughly what I would have proposed, it would be better to include some future tax increases on the rich in the proposal, just to allay these long-term debt fears.

Still, I gotta ask: What's the Matter with Harvard Econ? Between Summers, Feldstein, Barro, Mankiw, Shleifer, and Frenkel (plus Baldwin), Harvard Econ looks like a nut-house. Rodrik has not impressed as of late either. Why does it seem like they've all got shit for brains? (Hoping to get someone from the H to take the bait and respond here...)

Finally, a Submission!

Yes, I've finally submitted the paper I've been working on!

No, unfortunately, not the Econometrica submission on the theoretical foundations of gravity equations I've been working on, but an Op-Ed urging our President to rid himself of you-know-who.

I kind of wonder whether I just wasted half a day... at least its off my chest now...

CBO projects what?

http://www.cbo.gov/budget/econproj.shtml

Click on the data for the projections as of December 12th 2008...

They projected an average of 8.3% unemployment for 2009, and 9.0% for 2010, reflecting the idea that even if the economy gets better, unemployment will not recover until next year. I think all economists would agree that we will not see month-on-month employment gains this year. It's just not in the cards. It also seems clear we'll hit 8.3% unemployment sometime in about 4-6 weeks, with additional increases in the unemployment rate for each of the following nine months.

The CBOs most current estimates are already a straight-up joke.

Escaping the Presidential Bubble...

I was just thinking. Imagine you are Barack Obama. Larry Summers is the economist you respect most, and he's telling you that the stimulus is large enough. Pitched against him are many conservatives whining about how the stimulus is so large it's going to bankrupt America, and that what we really need is a large permanent tax cut. So then, Barack talks to the very well-respected economists at the CBO, who say, that if the stimulus goes well, we'll see a dramatic reduction in unemployment by year's end of just 7.7% (a reduction, that is, over where we'll be in two months when the stimulus spending starts), Elmendorf forecasts, under the rosy scenario, and, if not, if the stimulus goes poorly, we'll still only be at 8.5%, just a touch above where we are now. Elmendorf predicts a "A marked contraction in the U.S. economy in calendar year 2009, with real (inflation-adjusted) gross domestic product (GDP) falling by 2.2 percent, a steep decline from a historical perspective." The thing is, the economy will drop at 5% in quarter one, that much looks clear. The stimulus spending in the six months thereafter comes only to $188 billion, or about 2.5% of GDP. So, let's assume that GDP contracts at only 2.5%, and then, magically, stages a recovery in quarter 4 to have flat GDP growth. This strikes me as an utterly fanciful scenario, and yet it yields a reduction in GDP for the year of 2.5%, higher than the CBOs prediction of 2.2%.

The problem is that, with monetary policy at a zero lower bound, any deflation we experience now will only increase the real interest rate, which should reduce economic activity. The CBO seems to believe that things will just magically turn around. They haven't said where the supposed recovery is going to come from. It looks like we've put all our chips into nonstandard monetary policy suddenly roaring to life and working, even though it has not been effective so far.

If Obama wants to hear an alternative to this rosy, magical recovery scenario, he basically has to read Krugman's blog, talk to stiglitz on the phone, or talk to Biden's economist Jared Bernstein, who has a much lower profile than Summers, Geithner, Orszag, or Romer. Point is, Obama can't exactly pick up the NYT and WaPo and find people blasting his stimulus as irresponsibly small. Criticism is pretty much limited to a few liberal cranks. (Although, with the bank bailout, there are no shortage of critics...)

Let's envision a disaster scenario. Last quarter, excluding the rise in inventories (which was an ominous sign), GDP lost 5.1%. Let's say things continue to get worse. Why might they get worse? Well, the labor market did shed 600,000 jobs in January, vs. an average of -520,000 in Q4 2008. The rise in inventories tells me that firms should want to cut back production even more, so they can reduce their costly inventory. There are still problems in the credit market, the banking crisis hasn't been sorted out yet, and the rise in unemployment means that consumer confidence should continue to be bad. So let's say GDP drops 6% in Q1 2009, which does not seem unreasonable given the January job loss numbers. Now let's say there is an increased crisis of confidence, consumers pull back even more than they are, and so too does state government spending (who's hands are often tied by balanced budget amendments), and so let's use a baseline of -7% for Q2 and Q3 of 2009, which doesn't seem too unreasonable. Why should we assume that, absent any government intervention, things won't just keep getting worse? In this case, the Obama stimulus gets us back to just -4.5%, and perhaps just -4% for Q4.

Here's the thing: If the economy does that poorly, state and local governments are going to be that much more in the hole, and will have to pull back even more in 2010. Previous estimates were that state governments forecasted revenue shortfalls of $350 billion thru 2011, but those estimates were almost certainly based on, at worst, the CBOs rosy predictions of -2.2% GDP reductions. With -4% GDP, those state government shortfalls could be more like $500 billion over three years, which has the effect of eating away at even more of the meat of the Obama stimulus plan. If local shortfalls (including cities but not states) come to $150 billion over the next three years, which does not seem unreasonable, then practically all of the Obama stimulus will be gobbled up by actions at the state and local level.

So, the question is, how long until Obama Stimulus II?

And, once the specter of Obama Stimulus II comes out, how many milliseconds will it take Congressional Republicans to jeer that, if the stimulus didn't work the first time, why on Earth would it work a second time? How long will it take them to deplore throwing good money after bad?

In this morning's WSJ...

Chris Dodd sticks a last minute provision in the bill limiting exec pay at firms who are getting public money... The provision would effectively limit the CEOs pay at Bank of America, for example, to $2.25 million. Larry Summers called Dodd to try to get him to take it out...

Presumably, how it worked was this: CITI called larry summers, and told him they wouldn't give him any more freebies on their corporate Jet unless he called Dodd to make sure Exec pay isn't limited to a humuliating coupla' mill. The Cossacks work for the czar, after all...

In This Week's Mail...

The aforementioned The Age of Roosevelt, by Arthur Schlesinger, Jr., vol. 1 (1957) and 2 (1958). --Incredibly interesting so far! It seems FDR, when first elected, was under the spell of his Treasury Secretary, who believed that the government had a moral obligation to balance the budget, and that if it did, everything would be well again...

Charles Stross's The Hidden Family -- Development novel and historical/sci-fi classic all rolled into one... Hard to put down so far.

Staffan Burenstam Linder's 1961 An Essay on Trade and Transportation. Ohlin's student (of the infamous Heckscher-Ohlin Theorem, which posits that factor endowments determine trade flows) Linder's hypothesis, a famous conjecture in trade theory, is that nations trade based on their demand structures, since manufactures are specialized, subject to increasing returns, and require learning-by-doing...

Milton Friedman''s Money Mischief, and his short essay "Why Government is the Problem". --The first 15 pages of Money Mischief have been interesting so far. I'm embarrassed to say that I had never read Milton Friedman (I know, I know, I should start with his Monetary History, but that was $40+ on Amazon, and I've gotta pay rent...). Since Milton Friedman was Larry Summers idol, and Brad DeLong often blogs about him as having been a genius, I've tried to read him with an open mind.

Most of his arguments do not really ring true for me. He lists nine major areas where he thinks government has made a mess... One of them is airports. Airports? He says the "bottleneck" is in air control facilities. I would imagine this was a 60s, 70s, and 80s thing. Yes, I had a flight delayed for a day when I flew home for Christmas, but it was because my layover was in Chicago, which had a blizzard. I fly frequently, I definitely do not usually have delays. Never had my luggage lost. Most airports appear almost excessively nice to me... This is one of his nine key areas where government has failed? Really? Another is homelessness... I just can't get my head around why it's government which has caused homelessness and not capitalism. Yes, ok, rent control is bad, but, please, there are also housing projects, welfare, social security, and food stamps, all goverment programs and all of which, if ended, there would be much, much more homelessness.

Another one is the "Financial System". Please. Not a good time for that Milton. Government can only be seen to have "caused" the current crisis in that it failed to intervene in the free market.

The next example of government failure was "Highway Congestion". Here, I tend to agree with him that government action has been problematic. Rush hour traffic and gasoline should both almost certainly be taxed, with the proceeds to go to expanding the highway and mass transit. I think where i would differ from Friedman on this, though, is that I think government is the only solution to the traffic problem.

On rent control and local building code requirements, though, I agree that there's too much regulation at the local level. This regulation is often designed to protect established interests from new competition...

Another of his big areas where government has failed is in "lawlessness and crime". Why? He says, if we would just legalize drugs, it would go a long way to stop gang violence. Here, too, I'm somewhat in agreement. I would like to see some drugs legalized, but only so they could be taxed heavily and regulated.

Friedman also argues that government has caused a decline in family values... Please. I'd pick apart his argument, but he doesn't really make any argument. This section is just really vague, and he cites Charles Murray's book as evidence that "these social problems owe a great deal to mistaken and misdirected governmental policies."


So, this Friedman essay reads like utter garbage to me so far. His one saving grace may be that this was published in 1993. I just checked his birth date -- 1912, which makes him 81 at the time. Given his age, it's actually quite impressive! It's never fair to judge an author by anything he wrote after the age of 60... I'll have to get his earlier books...