I’ve been unavailable for a bit and will do a sort of potpourri post commenting on issues that I missed. This is convenient for me since it allows me to treat many issues in a cursory manner and without facing too much scrutiny leave myself painted in the best light.
Smithianism and Recovery Winter
Matt Yglesias’s and my joint theme of a near-term turn around in the US economy got a big boost on Friday with a strong jobs report. That said, the underlying notions at work here are not chartism – the idea that things will get better because they have been getting better – there is a logic to this story that goes beyond one month’s worth of data. I’ll pick that up later in the post.
For now, I want to say that I have two problems with Matt’s use of the phrase Recovery Winter.
First – and most importantly – “Recovery Winter” lacks the degree shameless self-promotion that the phrase Smithianism delivers and does little to flaunt the genius associated with our early revelation. I would like to say my early revelation and argue that Matt’s grace was to be wise enough to know truth when he read it, but I cannot be sure.
Second, it hangs its hat on the winter in a way that is not fundamental to the thesis. A shock could come that slows the economy next month or the month after. However, unless it is a particularly strong nominal shock it will not change the underlying dynamics and the economy should come roaring back as the shock subsides. Again, there are fundamentals at work here.
Where is Keynes?
There seems to be some argument over whether or not a recovery at this time could be seen as Keynesian?
I think some of the disagreement and some of the widespread disbelief come out of the sense that government is the major player in the recovery.
Now the US government – in all in facets – has some extraordinary powers. Those powers allow it to influence an economy over the course of the business cycle. However, it is not as if the economy is somehow simply the product of government policy. Even if the government does nothing, something will nonetheless happen, and indeed an entire dynamical system will be at work.
Regarding our present case, we might have wanted the mountain to come to Mohammed and for the government to take action to raise the natural nominal rate of interest, either through borrowing and spending on government-y things; transferring monies such that they moved from the liquidity free to the liquidity constrained; or by promising to deliver more inflation.
The US government, for the most part, demurred.
In the short-run this is tragic, but in the long run it will not effect the path of the economy. Mohammed shall go to the mountain.
That is to say, the natural rate of interest will rise on its own through obsolesce, decay and increases in population. We can literally – and I mean literally – see this at work. I hope to talk more about this in a series on “Touching the Capital Stock”
The point, however, is getting all wrapped up in government policy is likely to obscure your vision of how the economy works. And, it is working in a way that looks thoroughly Keynesian to me.
The Tortoise and the Hare
Kathleen Madigan argues that the recent burst in hiring is just catch-up and that we will return to a slow and gloomy trend. I have fundamental reasons for doubting this.
We really are short on housing and vacancies are low. The inventory of unsold houses looks big but it is tiny in comparison to the stock. What’s more the gap between current for-sale inventory and “normal” inventory is not as large as the gap between the current households and a “normal” number of households given population.
The size of the vehicle stock in the US is falling. And, let me be clear on this: I am not saying that we are producing fewer cars. I am saying the total number of drivable cars in America shrinks with each passing day. Deprecation is in excess of production. And the rate of depreciation is set to increase markedly.
Household debt obligations as a percentage of Personal Income are quite low and may very well hit a record low over the next year.
How can this be you ask? We have so much debt! The rate dear friend, the rate. If everyone refinanced into a 1% mortgage and 2% credit consolidation loan, household financial obligations would hit the floor.
Sadly, this shall not come to pass.
Nonetheless, we are still looking at record low refinancing for many households and very importantly we are looking at record low financing for new households. To be young and have a job in 2011 was a many splendid thing. And, though the unemployment rate was high, millions of people still fit in that category.
Still the people demand charts and so, I will chart.
The unadjusted rolling 12 month change in payrolls is rising. What’s more we are currently plowing through at 2.9 Million SAAR. If the next two months deliver even a 2.2 – 2.4 Million SAAR then we will clearly break trend here. Even in pure chart form a mean reversion argument has to deliver quickly, if it is likely to deliver at all.
Noah Smith likes models that produce long recessions as a consequence of multiple equilbria. I like all kinds of models. Good stories can be good to tell and to learn to tell well even if they aren’t strictly speaking “true” – whatever we might mean by that.
However, I would note that one problem with the multiple equilibrium story in general, is that world of recessions just doesn’t look like that. The world of long run growth, sure. But, the world of recessions is full of talk of “if only” not “that’s just not how things work these days”
That is, people don’t act like they look out their window and see a world that has by its nature changed since 2005. They look out their window and say that they don’t have the opportunities they had in 2005. They are describing constraints, not a different equilibrium path.
Now perhaps we can say path determination occurs on Wall Street and the consumer or businessman in the street just lives with it. That I could go with. Still it seems a stretch.
Future Congresses Spending Future Monies and Collecting Future Taxes in the Future
Its interesting to note the volume of chatter amongst policy wonks – though notably not actual changes in policy – that center around projections of the future.
This is only one of many charts that I see folks getting exercised about
Now I do understand that the purpose of this chart is to accuse others of being ne’er-do-wells and miscreants. Which is fine. Yet, in my heart I fear that there are a few cold and lonely souls who seek to truly change the world for the better. Such dreams should be crushed before they come to crush the dreamer.
So, one of the key things about the future is that it is not now. Yet, you are, by the very nature of your being, now. This puts a fundamental wall of separation between you and the future. This wall can be breached by your imagination but that is only imagination. It does not exist outside of your mind.
What you can do is, right now, create artifacts that will exist through time and thus be available to “you” in the future. You can also – though I caution everyone against this – enlist the promises of other persons to do things for you in the future.
The availability of these two options gives people a false sense of connection with the future that they then port into realms where it does not apply. Government budgeting is one of these.
For the law is no artifact and the promises of government are enforced ultimately by the government itself – which is to say not enforced in any meaningful sense of the term. Future congresses will do exactly what they want with exactly the resources they have available to them at the time.
Now, if you are absurdly clever you might get future congresses to want different things by framing the political zeitgeist in ways that suit you. More likely, however, efforts at attempting to influence future deficits by getting something different to happen in the future are a waste of time.
Still, one could build a bunch of infrastructure now, in the hopes that it would still be here in the future and thus support future generations. Or, one could try to uncover a bunch of scientific principles that will aid mankind in the future. These are real things that could be done now. Though I doubt that they will really make difference.
One could import a bunch of taxpayers who, presuming they set down roots and integrate themselves into the economy, will pay taxes in the future. This is a real thing that could make a difference by its sheer size. But, it works, if it all, precisely because you could do it now.
On the other hand, thinking that you are going to implement some plan to spend a lot less money or collect a lot more money from some given group of people in the distant future is a fool’s errand.
Overpaying Government Workers
Likely prompted by a new CBO study that argues federal workers are overpaid relative to private sector workers, Karl presents two questions I believe meant to imply that the government cannot overpay for workers
. . .
I could buy Karl’s story that extra wages was buying valuable extra skills. This could be the case if the “overpaying” was happening for financial industry regulators. But the CBO report shows that the overpayment amount is inversely correlated with the level of education, with the most overpayment coming for workers with less than a bachelors degree., e.g. those that are least likely to have heterogeneous skills that extra wages can buy, and jobs with the flexibility to have those skills pay off.
I pose two questions. My co-blogger disagrees with my story. Noah Smith scores the debate.
Soon I will write a one-word book and all the world will be abuzz.
Until then though, the point of that was, that simply by offering more money the government cannot upend the principles of supply and demand. Simply comparing the wages and salaries of private sector workers to public sector workers doesn’t tell you whether the supply or the demand differs and it doesn’t tell you what factors influence either of these.
There are many dimensions on which this can operate but two obvious ones are these. First, the government may seek to hire an engineer to fire rockets into space. So it turns out not a lot of people are offering this type of job. So it also turns out lots of little kids dream about having this job. One result of these two facts is that other things being equal the government might be able to get away with paying the engineer less than he or she could demand elsewhere.
On the other hand, the Department of Defense hires civilians to drive trucks and stock shelves who are expected to conduct themselves with a level of professionalism exceeding that of the median high-school-or-less worker. The DoD is also not shy about stating that it would prefer not to deal with lifelong civilians at all, if it can get away with it.
Well qualified veterans in the Best-Qualified category who provide all applicable veterans’ documentation (see “Required Documents” for more information) and meet all experience and/or education requirements will be referred before non-veteran candidates. If there are no well qualified veterans in the Best-Qualified category who have provided all applicable veterans’ documentation, non-veterans will then be referred for consideration.
Perhaps you don’t approve of these preferences. Which is fine.
However, at a minimum we want to ask who is the government turning away and why, and who is turning down the government and why.