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Eagle Ford development is proceeding a bit slower than I would have hoped. Nonetheless, the numbers are impressive.
From the Houston Chronicle
"So the growth rate out of there would be pretty spectacular," he said.
But before production can reach that level, some problems have to be solved.
About 1,400 Eagle Ford wells are waiting to be completed or to be tied into pipelines, ITG research shows. There are also shortages of crews and water and too few pipelines.
Once the problems of getting the oil and natural gas to market are gone, production from the Eagle Ford could double, and "the Eagle Ford would be the second-largest producing area if you could bring all those to market," Sloan said.
I haven’t looked at the raw data in some time but based on my earlier guess-estimate 1 million barrels per day by 2016 would be a significant disappointment. There are some bottle neck issues but assuming they are resolved I would expect a much faster ramp-up in production.
When these numbers get put together typically they assume that crude-oil prices are always headed back down toward $60 – $70 a barrel and they do historical ramp-up rates, which don’t take into account the blisteringly low real interest rate environment that we are in.
Negative real interest rates mean that investment doesn’t have to pay for itself in real terms. This allows you to “buy” lots of adjustment costs. In short, throwing money at a project to get it online as fast as possible makes business sense.
Krugman and some of the cyclicalists have focused the vast majority of their attention on cyclical issues. But this reinforces the (mistaken, misleading) claim of the structuralists that there is a tradeoff between the short term and the long term. One more Krugman blog post is not going to convince anyone to support stimulus, QE, etc. But one more Krugman blog post dedicated to discussing long-term issues will do a lot to convince readers that there is no policy trade-off. In other words, the marginal value of Krugman devoting more time to cyclical issues is negative.
I am sympathetic to this view and used to more or less hold it, but now I think it is mistaken.
While you don’t want to get trapped into people thinking that cyclical concerns are liberal concerns – hence my constant reminder that tax cuts are fiscal policy – I don’t think it actually helps to offer middle ground.
The problem is that too much of the debate is manufactured. That is, it is debate for debate’s sake. There is no underlying reasoning going on. So, if you move the debate towards a compromise the parameters will simply change because people want to continue having some form of a debate.
In short, the way the political narrative is set up makes it sound as if their ought to be “sides” and “viewpoints” and so even if there aren’t really sides to be had on an issue sides will be manufactured so that they can fit this narrative.
Look at the way Rajan’s essay was cast for example. You could have easily written that as, here are some long-run challenges that the West faces and a few modest proposals for what could be done. But, that’s not how it was cast. It was cast as “True Lessons of the Recession: Why the West Can’t Borrow and Spend its Way to Recovery” though the piece had little to do with the recession and nothing to do with borrowing and spending for recovery.
You see it in the budget debate as well. A person like me could say “why not just tolerate the mantra about the need for long run fiscal consolidation” even if I think long run plans are at best masturbation and at worst hubristic folly (see Regime Change, the Euro, Dirigisme.)
Well, the reason not to tolerate it is then the debate shifts into: should we cut spending or raise taxes and who “wins” this battle. The notion that hey this entire exercise flies in the face of what real interest rates are telling us and risks creating a massive global shortage in safe assets doesn’t even register. The debate has already settled, people have taken sides and that’s what they are comfortable doing.
So, you can’t let the debate settle. You have to keep needling.
So there has been a lot of chuckling over Scott Walker’s suggestion that his office is going to produce its own statistics.
This is important to me because it highlights a couple of things.
First off what does it mean to “create 250K jobs.” I am going to tell you that it means that the latest revision to the BLS payroll series shows that your state has 250K more jobs than it did when you made the announcement and that there simply is no reality beyond that.
I know that this weirds a lot of people out and if that is too much to handle then perhaps its better to think in terms of how we define “jobs” We could say there is a BLS definition of jobs, a Unemployment Insurance definition of “jobs”, a household survey definition of “jobs” and then reality.
Since we can’t measure reality directly we have to agree to be talking about one of these other measures or we are going to wind up just talking past each other.
However you can settle it in your mind, the point is that we need to agree on definitions and standards for measurement up front or we are going to be in for a world of confusion.
Second, I am beginning to think I must be wrong on this – given how different my intuition is from everyone else’s and the paucity of direct evidence that I have – however, my baseline assumption has always been that the undecided voter bases his or her opinion of the economy on what he or she experiences directly or through friends and family.
Are their really lots of voters who would be swayed by statistics? Maybe there are. Or perhaps, its about controlling the narrative. Lots of bad statistics give journalists a license to talk trash about you and this contributes to a general since of “failure” hanging around your administration?
I don’t know, but I am puzzled at the extent to which even a working administration would be focused on pure numbers rather than speaking to the lived experience of voters.
I define the simplified version of the Sumner Critique as follows: If the Central Bank is targeting Nominal GDP precisely then all other macroeconomic effects become classical in nature.
This is obviously an extreme position as it requires not just omnipotence but omniscience and for lack of a better term omnibenevolence on the part of the Central Bank.
A useful way to interject the Sumner Critique into all of our reasoning, however, is simply to ask what the Central Bank Multiplier (CBM) is.
So, do your analysis in whatever framework you prefer and then when you get to the end attach a CBM to all of your final estimates. Under Scott Sumner’s vision the CBM for all aggregate demand moves is zero.
Thus if you imagine that the Fiscal Cliff for example will subtract 4% from GDP then you apply a CBM of 0 and you get that the Fiscal Cliff will subtract 0% from GDP or will have no net effect.
A less extreme version might place the CBM a .5, so that your traditional analysis says that the fiscal cliff subtracts 4% but after applying the CBM you get 2%.
Now, to be sure there will not be a single the “CBM.” We don’t want to get trapped in that intellectual cul-de-sac again.
The CBM you use will not only depend on the nature of your thought experiment but the framework that you used in the first place to get your original estimate. If you included no type of monetary feedback then the CBM will be
The CBM concept also allows us to usefully go all the way back to IS-LM. Since we are going to apply monetary reaction at the end we don’t need it in the base model.
I also suspect, but it would require some work, that just about everything that you would want in an inter-temporal model can either be collapsed into assumptions about the way the IS curve responds to expectations or into the CBM.
I don’t think you need any other explicit inter-temporal modeling. The simple reason is that periods in time must either “push-on” each other ether through their effects on real goods and services which will show up in the IS curve or through inter-temporal prices, which will be collapsed into the CBM. In short the CBM works by manipulating intertemporal prices so as to achieve the effect the central bank wants.
So, from an outside perspective it doesn’t matter what agents think inter-temporal prices will be, the CBM will force them to be what they need to be to make the CBM work.
That does of course mean that you have to do a lot of thinking when trying to figure out what the CBM will be, but once you have done that you don’t need to carry the baggage around with you everywhere. Just do the simple statics with real expectations imbedded in IS and then apply the CBM.
Current official estimates of GDP growth over the last year look like this
My baseline assumption is that this will be edged up both on stronger residential construction and stronger business investment than originally estimated. A revised figure of 3.0% is not out of the question.
This would put Q1 GDP at a more rapid pace that Q4, and create a nice stair step coming out of 2011.
Q2 has just begun but there are major tailwinds moving in. The biggest of course, is utility consumption.
Housing and utility consumption faced major declines over the last two quarters, subtracting just under one percentage point from GDP, as heating consumption collapsed over the winter.
That is likely to bounce back strongly in Q2 if utility use simply returns to normal. This means that we could be starting out with a point or so base on which to build.
Now, as a intellectual matter I tend to discount the importance of the GDP report anyhow, but I do understand that it is the most widely looked at benchmark and so folks will probably be interested in evidence that we are seeing accelerating GDP growth all the way from 2011:Q1 to 2012:Q2.
No rate of increase like this on record. This is what convergence to the long run growth path should look like. As noted earlier housing permits are close to going parabolic as well, but we have yet to get confirmation of a similar movement in starts. Perhaps over the next few months – unless of course something awful happens to the global financial system.
From Mark Perry
When I said that by 2035 we could have 3 times as many cars as human beings, obviously that was a prediction about the predominance of Autonomous Vehicles (AVs). I think we should begin to retire self-driving/driverless car, as it will eventually sound as hokey as horseless carriage.
In part this is because it attempts to define a thing in terms of a paradigm that will no longer be familiar. Yet, it will also sound hokey because it suggests that AVs are basically like today’s cars but with no driver. That suggestion is likely to appear comical in retrospect.
My guess is that the majority of AVs will not only, not carry passengers but not interact with humans unless they explicitly need something that only a human can provide, such as specialized repair or maintenance.
The majority of AVs will live in their own world, interacting only with other AVs and a vast array of infrastructure as they form the backbone of a human-less global supply chain. They will pick up goods from the point of production and ship and sort them all the way to the final consumer without ever meeting human in between.
They will likely be the most powerful force for globalization we have ever seen.
I’ve gone on record saying that there is no way domestic auto producers can deliver 11 Million new cars in 2012 with the workforce they have on hand. It seems, however, that they are going to do their best to try.
Ford Motor Company will produce nearly 40,000 additional vehicles this summer by idling 13 plants, including six assembly plants, for just one week instead of the traditional two.
“We are working most of our North America plants at maximum capacity and we are adding production shifts in three of our assembly plants this month alone,” said Jim Tetreault, vice president of North America Manufacturing. “Requiring more capacity from our plants is a good problem to have and having the flexibility to add a week of production in our plants goes a long way toward solving it.”
The Ford assembly plants taking just one week of summer shutdown in 2012 include Chicago Assembly, Dearborn Truck, Kentucky Truck, Louisville Assembly, Michigan Assembly and Kansas City Assembly.
Other plants taking just one week of shutdown include Dearborn Engine, Chicago Stamping, Cleveland Engine No. 1, Lima Engine, Essex Engine, Sterling and Rawsonville.
Ford’s production boost due to its altered summer shutdown schedule is consistent with the company’s plan to increase its annual vehicle production capacity by 400,000 units.
Kentucky Truck, I believe, produces more value-added than any other auto plant in the US.
Charted below is the relationship between housing permits and the contribution of Residential Investment to GDP up through the end of last year.
The relationship is perfect, in part because there are more things than new construction in Residential Investment – the Realty industry, home improvements, renovations, etc – but the relationship is nonetheless pronounced.
If permits continue on their current trajectory of roughly 30% Y-o-Y growth it would not be unrealistic to expect a direct contribution to GDP growth of in excess of 1 percentage point. We’ve just spent a little over a year or so with residential construction making no contribution so as a baseline you could think of it as the GDP over the last 18 months plus 1 point.
Presumably, however, there is some multiplier here so you could imagine adding perhaps 1.5 points to GDP. If you also imagine removing the reduction from the drag of state and local government we could get up to 2 additional points. This would take year-over-year real GDP growth from something like 2% to something like 4%.
Now, all of this is subject to the Sumner Critique. That is, we are assuming that the Fed does not have a firm implicit Nominal GDP target. If the Fed does have such a target then it will slow the growth of the economy and prevent this from happening.
I’ve been frustrated over the past couple of months at the failure of housing in general and mutli-family housing in particular to respond to market in forces in the way I predicted late last year.
Part of the issue, however, seems to have been that the data was simply behind the curve. Sharp upward revisions to the past few months put us closer to the track I had expected and if by chance similar revisions come in with the next two months data we will be on track.
Total housing starts were at 717 thousand (SAAR) in April, up 2.6% from the revised March rate of 699 thousand (SAAR). Note that March was revised up sharply from 654 thousand.
Single-family starts increased 2.3% to 492 thousand in April. March was revised up to 481 thousand from 462 thousand.
Also, though the permits data was revised up was well it has been much more consistent and shows something closer to the parabolic path I had been expecting.
I don’t have anything against Kathleen Madigan and I think her posts do a better job at confronting economic data than the vast majority of what you read from major news outlets. Yet, as much because of that as in spite of it, she often presents idealized examples of garbled economic reasoning.
This post on wages and consumer spending is one them.
The first part links low retail sales to stagnant wages. The problems here are several fold.
Consumers managed a soft 0.1% gain in April retail sales, which suggests consumer spending is contributing only modestly to second-quarter economic growth. (In comparison, household spending accounted for 2.04 percentage points of the 2.2% increase in first-quarter real gross domestic product.)
But any increase in household spending is somewhat a surprise since worker buying power is falling far behind the rise in inflation.
True, inflation was flat last month thanks to a 2.6% plunge in gasoline prices. But hourly pay and hours worked also flat-lined, meaning real weekly pay was unchanged in April. Since peaking in October 2010, real pay has declined by 1.2%.
To be sure, personal income is made up of more than just paychecks, but wages and salaries still account for the bulk of income totals and are more likely to be spent than items like dividends.
Obviously there is no particular reason to think that month-to-month changes in wage and retail sales series are going to match but lets set that aside, assuming its just a device to motivate the larger discussion of stagnant incomes and consumer purchases.
A larger issue is that the retail sales series is an aggregate nominal series where Madigan appears to be comparing it to average real weekly earnings and then drawing conclusions about real Personal Consumption Expenditures.
Why does this matter?
Well, if more workers are hired and if their nominal wages are at least steady then we should expect the base for retail expenditures to be expanding even if average real wages are falling. This is because total spending on payrolls is rising even as average real wages are falling. Indeed, this is the classic mechanism by which we explain how recessions come to an end.
We might dispute whether this mechanism is indeed the driver of all recoveries but at minimum it’s the classic driver. Real wages fall and this induces companies to increase total employment and expenditure on payrolls which in turn in induces an increase in total expenditure on consumer goods which in turn induces a further increase in total expenditure on payrolls.
Now, on to immaculate inflation
In one sense, the Federal Reserve‘s quantitative easing may have helped investors, but it backfired on workers.
Steve Blitz, chief economist at ITG Investment Research, makes the point that in an open global economy the Fed has managed to raise inflation through its QE programs, but not wages. “As a consequence, consumer growth softens rather than accelerates,” he says.
The key here is to ask what exactly this is supposed to mean. So the Fed induces inflation through some means but this means winds up reducing consumer growth?
Its actually not that this is impossible. We could imagine, for example, that the Fed action is causing the dollar to fall. However, we need to trace through some mechanism. Generally prices go up when people are trying to buy more stuff. So, when you say pricing are going up, so people are buying less stuff, then off-the-cuff red flags should go up.
What exactly is it that you are saying here?
Blitz cites two reasons for wages’ nonresponse.
First, there is still a huge surplus of labor. Second, firms that are growing are competing globally, either through export or import substitution, and as such, “wages must be internationally competitive on a total productivity basis.”
Real manufacturing wages are especially under pressure since U.S. factory workers are competing with workers in emerging markets.
This seems to suggest something like a falling real exchange rate / falling real wage story. This of course is precisely our story about recovery, increases in payrolls and ultimately increases in PCE. So, we want to be explicit about how this ties back to the original insinuation of falling PCE.
The weakness in real pay may explain why consumers are pulling out their credit cards again after years of deleveraging. According to Fed data, revolving debt that includes credit cards jumped in March.
. . .
The Great Recession showed that U.S. consumers cannot permanently finance their lifestyle on credit. The economy is going to have to generate more jobs and pay raises above inflation to ensure the consumer sector contributes its share to the recovery
The first paragraph hints at a common theme missed by market analysts when they talk about “the consumer” I see folks do charts of real per capita disposable income as the “health” of the consumer. Its not entirely clear what that is supposed to mean, but what it almost certainly does not indicate is real purchasing power available for retail goods and services.
Here for example, is real per capita disposable income compared to real total disposable income after financial obligations.
The red line shows growth rather than stagnation for two reasons. First, the population is rising which means that total disposable income can grow even as per capita disposable income stagnates and second household financial obligations are falling dramatically which implies that after paying credit card bills, mortgages, etc folks have more money left over than in the past.
The relevance of the latter should be immediately clear but the former is important as well. Imagine for example, if the economy was adding an average of 170K jobs a month but the population was not growing. In that case the economy would be rapidly converging on full employment.
So that the population is growing is important both for our sense of how the job market is evolving as well as how consumer spending is evolving.
In closing I’ll just mention, as I often do, that it is not clear why the Great Recession showed us anything about consumer borrowing.
Folks are quick to say this but I have yet to see someone lay down a case for why this makes any sense. Just to keep it short I’ll note that the crisis centered around losses to lenders, not losses to borrowers.
He seems to start out ok
The country is divided when different people take different sides in a debate. The country is really divided when different people are having entirely different debates. That’s what’s happening on economic policy.
Many people on the left are having a one-sided debate about how to deal with a cyclical downturn. The main argument you hear from these cyclicalists is that the economy is operating well below capacity. . .
Other people — some on the left but mostly in the center and on the right — look at the cyclicalists and shrug. It’s not that they are necessarily wrong to bash excessive austerity. They’re simply failing to address the core issues.
I don’t know that its useful to reinforce an already seemingly foolish partisan divide here, but the notion that there is crosstalk between the structs and the cycs seems like something that could have merit.
Yet, then he seems to impose an even greater degree of false-dichotomization than those in blogosphere.
Unlike the cyclicalists, we structuralists do not believe that the level of government spending is the main factor in determining how fast an economy grows. If that were true, then Greece, Britain and France would have the best economies on earth. (The so-called European austerity is partly mythical.) We believe that the creativity, skill and productivity of the work force matter most, and the openness of the system they inhabit.
If I am not a card-carry Cyclicalist then I am not sure who is, yet I don’t believe that government spending is the main factor in how fast an economy grows. Scott Sumner may be the leading pure money Cyc and I am sure he would laugh at this idea.
Even Delong, Summers and Krugman who clearly advocate more government consumption and investment and emphasize the long run dangers of hysteresis wouldn’t say that.
Brooks goes on
Structuralists face a tension: How much should you reduce the pain the unemployed are feeling now, and how much should you devote your resources to long-term reform? There has to be balance. For my taste, the Germans are a bit too willing to impose short-term pain on the diverse national economies in Europe. But they are absolutely right to insist on the sort of structural reforms they themselves passed in the 1990s.
What exactly is the limited resource that one is budgeting here? The time and attention of policy makers? If this is such a major issue then why not have the Fed and Treasury focus on stabilization, while whatever reforms folks have in mind are hashed out by the rest of the government?
In any case I don’t see why these aren’t complementary goals, generally speaking. I can comprehend the German Government’s position that a crisis is a terrible thing to waste and this is a good opportunity for some arm twisting.
I think its foolish and self-defeating but its comprehensible. Yet, here in the US what is the tradeoff? I don’t exactly know what reforms Brooks, Tyler Cowen and the rest have in mind but its not immediately clear why they are easier in an environment of high unemployment.
Especially if you are looking for Alex Tabarrok type investments in basic research, it seems clear that this is going to be a much easier sell in an environment with higher revenues and lower unemployment insurance payments.
Brooks end with this
Make no mistake, the old economic and welfare state model is unsustainable. The cyclicalists want to preserve the status quo, but structural change is coming.
Its obviously not clear to me that this is true. Even in our basic projections the only part of the welfare state that is “unsustainable” is health care, but its simply “unsustainable” anyway. That is, one way or another excess expenditure growth in health care will come to an end. This is simply a mathematical necessity.
Not, as always that the truth of this mathematical conjecture says nothing about how it will come to an end. If health care ate the whole economy then the nominal rate of economic growth would either speed up to equal health care expenditure growth or the Fed would wind up curbing health care spending by curbing total spending.
Even still suppose you want to reform the welfare state. Both theory and experience suggest that this is going to be easier when unemployment is low rather than when it is high.
I have been arguing that “Spring Curse” in the US economy is mostly a statistical echo, coupled with some genuinely unfortunate events that occurred last year. One data source I have been looking at to track this is the Not Seasonally Adjusted Year-over-Year change in Initial Claims for Unemployment Insurance.
Said, more simply the following graph asks: How many greater (or fewer) people applied for unemployment insurance this year than in the same week last year. This has been trending at around 40,000 since last summer.
There was a bit of a scare a few weeks ago seemingly related to the different timing of the Easter Holiday. That has been repaid and as we look forward what we would like to see is the level of improvement run a bit better than 40K to make up for the genuinely bad luck of last Spring.
However, the general message is that the glide path of improvement has been pretty steady for over a year now.
Yes, US Auto production is coming back, but that’s not what I mean. Here is a prediction – bold but not unreasonable. Right now there are roughly 1 Billon cars on the road. The IEA predicts that there will be 2.5 Billion. I predict that by 2035 there will be more the 3 times as many autos in the world as human beings.
In all likelihood no one reading Rajan’s essay was a impacted by his casual dismissives regarding residential construction as I was. This has been a point of mine for over a year now but let me make a few comments because they are still relevant to how people think about the world.
The status quo ante is not a good place to return to because bloated finance, residential construction, and government sectors need to shrink, and workers need to move to more productive work.
There are three ways you could take this – all of them I think misguided.
- The residential construction sector is currently bloated and needs to shrink
- At the onset of the financial crisis the residential construction sector was bloated and needed to shrink.
- At its peak the residential construction sector was bloated and needed to shrink.
Here is a chart of housing starts since 1960. Some folks like to use Residential Fixed Investment as a percentage of GDP. However, there are at least two issues with this. One RFI is not the same as construction. Real Estate brokers are a part of RFI for example and they experienced a significant boom during the 2000s related to the home buying increase. A distinction I will make more of later. Two, RFI as a percentage of GDP will rise when the some other part of GDP falls but this does not necessarily imply that all of GDP should fall.
So, lets look at starts which are a proxy for construction itself
I think it’s a fairly straight forward case that the current level of housing starts is well below what is likely to be the long run average for the United States and indeed is currently falling behind household formation, which itself is falling behind population growth. This is reflected in rapidly declining rental vacancies and rapidly increasing rents.
What may be more surprising to folks is how depressed residential construction was going into the financial crisis. As Lehman Brothers declared bankruptcy, housing starts were already nearing record lows and were well behind population growth.
Indeed, the majority of the fall in starts happened even before the US entered recession. By the time the recession began housing construction was close to what some analysts at the time thought would be the cycle low. I disagreed, of course, but I do remember this was a major point of contention. There were not unintelligent folks suggesting in 2008 that home construction had bottomed.
Had the US remained at the construction level it had at the beginning of the recession it would not have been able to keep up with population growth especially given what had been a healthy influx of Mexican immigrants. Recently, the influx has died off and housing demand is actually weaker than we would have expected.
However, if the recession and immigration crackdowns had not come we would have been well below trend even at the dawn of the recession.
Now, what about the peak. Surely it wasn’t sustainable?
A few things though
First, it wasn’t even the all time peak. Starts in the 1970s were more robust as the baby boom generation was leaving the nest. And in the 2000s with the Eco-Boomers and Mexican immigration we were facing an adult population surge greater than that seen with the baby boom.
Here is the year-over-year absolute change in men and women over the age of 20. You can see the baby boom generation come of age in the 70s and you can also see the recent spikes, in part due to updates in the count of immigrants.
Now, lets layer this over starts
Given the relative changes in the adult population the surge in starts is not way out of line. Indeed, its not clear that it is out of line at all.
It may be that given the rapid drop off in immigration that we saw in the last half of the the 2000s that the huge ramp up in housing starts was ill-conceived. However, in 2004 when starts where surging towards their peak it was not clear that this was going to happen.
Thus, arguing that what was wrong with America is that we went on a crazy homebuilding binge is not clearly supported by the data. It is clear that we went on a crazy home buying binge and the number of rentals in the US collapsed. However, that is not the same as homebuilding.
Rental construction is residential construction and I am particularly sensitive to folks acting like the only residential construction in the world is detached single family homes. There is an important market in rentals and its not at all clear that once this market is taken into account that America was ever building an unreasonable number of homes.
However, even given all of that the US reduced home construction by over 50% even while the unemployment rate fell from 2005 to 2007. There was no problem at all shifting resources out of residential construction and into other things.
And THIS is precisely my point. People routinely ignore this key fact. The US had absolutely no problem whatsoever rapidly shifting the structure of production out of residential construction.
There was no problem because as this happened the dollar was falling and US Net Exports were surging. Indeed, part of the reason Net Exports had collapsed was because residential construction was surging. There was a smooth rebalance between the sectors and it occurred because PRICES were changing to make it happen.
This is why I simply can’t get over conversations about the recession and the mass increase in joblessness that ignore the key role of prices in shifting patterns of supply and demand.
I tend to think the Austerity debate is so hopelessly mixed up with left-right politics that it is highly unlikely that even the blogosphere will come to clarity, let alone the wider policy community.
Nonetheless, I’ll try to make a few points.
Generally speaking “austerity” is an attempt to reduce structural budget deficits. To do this a government will attempt to increase the growth rate of structural revenues and decrease the growth rate of structural outlays. Outlays here include not just what we would think of as government consumption and investment but transfer payments, such as Social Security in the United States.
Both of these effects, an increase in the growth rate of revenue and a decrease in the growth rate of outlays will tend to be contractionary.
Indeed this is the entire point.
Let me say again because there is much confusion here. The point of austerity is to be contractionary. If Austerity is not contractionary it cannot work.
Well, because the idea is to allow private sector investment to grow. But, for the private sector investment to grow it must have “room.”
Who determines how much room the economy has to grow?
The central bank does.
So, austerity works by contracting the overall economy through increasing the growth of revenues and decreasing the growth of outlays. This allows the Central Bank to decrease the path of interest rates. A reduction in the path of interest rates increase total investment.
In this way the economy has shifted away from consumption and towards investment. This shift is what makes austerity, austere. You do with less now to have more later.
Once we see this we can see why austerity would be highly controversial from a macroeconomic standpoint right now. Here in the United States there is a major debate over the Fed’s reaction function. My interpretation of their actions is that the reaction function is asymmetrical. That is, the Fed will move to speed up the economy if it slows down, but will not move to slow down the economy if it speeds up.
Ben Bernanke insists that the reaction function is symmetrical but also admits that it damped. That is, the Fed will nudge the economy towards the long run equilibrium that it wants rather than slamming on the gas or the breaks. It is clear that the Fed is not slamming on the gas now and Bernanke argues that if inflation were running at over 3% the Fed would not be slamming on the breaks.
Instead they seek a smooth glide path towards their long term goals.
This implies that fiscal policy has limited but real effects in America. Expansionary fiscal policy could push the country closer to and even above the Fed’s long run growth targets and then the Fed would react slowly to slow down the economy.
Notably Austerity in the US could take the form of cuts in government spending as happened at the State and Local level or increases in taxes as is the threat with the so called “fiscal cliff”
In Europe the effects of austerity are even more extreme because the monetary union is not a smooth market. Austerity in Spain for example should take some mild pressure off the ECB to increase rates. However, that would promote investment all over Europe and because of the fractured banking system, mostly likely investment in Germany.
However, the contractionary effects would happen in Spain. This is why Spain gains nothing from austerity. It makes “room” for private sector investment but has no means to achieve increases in private sector investment. Thus there is simply a whole in the economy.
Now finally there has been some debate over whether or not one should correct for inflation when looking at spending cuts. It depends on what you are trying to figure out. If you are trying to figure out whether or not the cuts are contractionary, then you should ask whether the growth rate of spending went down.
If it did then its contractionary, because the growth rate of something else would have to increase or else the growth rate of NGDP will fall.
Tyler Cowen argues that monetary policy matters less with each passing day because
1. Resource misallocation and unemployment get “baked in” to some extent, due to hysteresis. I also would argue that some of the long-term unemployed are revealed as having been “baked in in the first place,” once the boom demand for their labor ended and their marginal products were more closely scrutinized.
2. Many nominal values end up reset, more and more as time passes and as new projects replace the old.
3. As banking and finance heal, debt overhang is less of an AD problem. The debt repayments get rechanneled into investment, rather than falling into a black hole.
4. The Fed, at least right now, is not able to make a credible commitment toward a significantly more expansionary policy for very long. Putting aside the more general and quasi-metaphysical issues with precommitment, just look at the key players. . . .
5. The Fed already has failed to act, for whatever reasons. That makes it all the harder to achieve the credible commitment now. The market expectation has become “the Fed can/will only do so much.” . . .
So first lets address these points
On (1). Hysteresis seems to be widely misunderstood. At the very least the extent of our lack of understanding is underappreciated. First, and importantly, hysteresis goes both ways. This was an important part of Larry Ball summary of the issue.
Second, while lots of people have latched on to this erosion of skills idea, it is the one that is least compelling to me. I tend to think insider-outsider dynamics are more important as well as underinvestment in physical and social capital. However, just as a slow economy will under accumulate capital and hot economy will over-accumulate it.
(2) This is certainly true and it in large part explains why the economy is growing at, at least trend right now and perhaps slightly above. However, that is still well shy of full employment.
(3) I’ll have more on this in the coming days but this is exactly backwards. For some reason folks think of monetary policy as stimulating consumption but it works mostly through stimulating investment. Which is what one would expect given that “rate of return” is typically the key decision investment choices.
This “black hole” argument was an explanation for why monetary policy was ineffective in the first years of the crisis and hence as it recedes monetary policy should if anything be more effective.
(4) That the players are changing is even more reason to put the fear of God or at least the blogosphere into the hearts of the newcomers.
(5) I think this is largely correct, but the danger now is not simply that the Fed won’t agree to looser policy but that some are advocating tighter policy.
In the larger context there are two issues. One is our estimate of the time path of monetary effectiveness. The other is the time path of our estimate of monetary effectiveness.
To put it another way, it is one thing to look back and say wow, it would have really been a good idea to pressure Ben Bernanke back in 2009. However, if in 2009 you thought Ben was a a fire-breathing Dove and then in 2011 you find out that he is actually kind of pushover, then you want to increase the pressure. Even though the marginal benefit of change is less now, our estimate of the marginal benefit of pressing for change is greater.
Tyler Cowen starts the conversation which is good, because I wanted to go there.
I’ll have much more to say later but wanted to address a few quick things
Still, any given dollar must be spent somehow and “the stimulus model” and “the long-term investment model” are indeed competing visions for the allocation of resources. Think of it as having to choose a rate of discount for evaluating expenditures. I say choose the low discount rate, which of course still may justify those forms of stimulus with long-term payoffs.
This keys off a lot of things, including Rajan’s opening suggestion that the prevailing rate of interest was too low and was not providing the right incentives to save.
However, importantly, if the marginal rate of return exceeds the rate of interest there is no limit to how many dollars we can profitably spend. To paraphrase a former Princeton professor, the US government possesses a technology known as the printing press which allows it to produce dollars at essentially zero cost.
What costs us is the use of real resources. Yet, we have real resources sitting on the couch watching daytime talk shows. If we have profitable means of deploying them, then by all means we should. And, we should keep doing so until we run out.
Addendum: As I a side note, I do apologize for flipping out, though if it helps foster a key discussion then I am glad about that.
To explain – though not – justify myself I’ll note that after I finished reading the piece I literally did a search for the word “price.” It came up only twice, both in relation to oil. At that point I hit the roof.
Addendum II: I can’t go deeply into this right now, but just so as not leave the wrong impression, its not immediately clear to me why the long term investment model and the stimulus model are competing visions. My regular readers know that I have an natural affinity towards lower interest rates and tax cuts as stimulus, as they require little to no efforts at central planning. However, I am not utterly adverse to some central plan that Tyler might have in mind.
One of the things that can make interpreting the monthly job creation report difficult is that net job creation is influenced by creation, destruction initiated by employers and destruction initiated by employees.
In March we had disappointing job net job creation number but total hires were near a cycle high and layoffs were near a cycle low. On the other quits, were surging.
What is one supposed to make of this?
By my lights the correct answer is – we don’t really know.
On the one hand a surge in quits looks like a labor market where employees feel better about their prospects. On the other the fact that hires didn’t surge with quits may show us that employers are still reluctant uncertain about final demand.
Dan Gross has another article in the spirit of – wow, rental construction is soaring, hoocoodanode!
The depressed home-building industry has also shifted gears to adapt to the new reality. Housing starts for multifamily units have risen sharply since 2009, according to the Census Bureau. In 2011, whereas single-family housing starts fell 9% from the year before, starts of structures with five or more units were up 60%. In the first quarter of 2012, starts of multifamily housing structures were up another 27%, while single-family starts were up only 16.7%.
What’s more, the builders of these structures increasingly intend to rent them out. In 2007, only 62% of the housing units in buildings with two or more units were built for rent. In 2009, 84% of the units in such buildings were built to be rented. In 2011, 91% of the units in such structures were aimed at the rental market.
Which is why I need to bring this back to context. While the mainstream is increasingly impressed by the rental stats, I have been throwing my coffee cup month after month.
That’s because while the pace of construction of multifamily homes and the conversion of single family homes to rentals is increasing rapidly, it is still missing every mark that I set down for it and in the process throwing off my larger macro-economic projections.
What’s worse is the sinking feeling that if the economy doesn’t “kick” soon the Fed will nonetheless take higher rents as reason to prematurely tighten money supply.
Rents are the primary component of the core rate of inflation. Indeed, when it comes to the long run trend of inflation rents and wages are about it. Remember that the prices that you pay don’t just disappear into the ether. They are paid to someone. Higher prices imply higher revenues.
While corporate profits can continually surge – especially when someone has a hitherto hard to replicate product line like Apple – entrepreneurs are actually pretty good at seizing profit opportunities to expand production. And, when the price of raw materials like oil goes up, consumers and businesses are stuck in the short term but in the long term are pretty good at finding ways to use less.
Yet, land and labor, not so.
Thus to get the sustained year over year increases in prices that we know as inflation either land or labor has to play along. Otherwise income shares will shift towards business and materials and that will set in motion market forces that undue stall out the price increases.
Labor of course hasn’t been getting much of a raise recently and this led some folks to think that inflation would collapse.
Rent, however, is soaring and you only need one of the two to play ball.
Now, as Matt Yglesias likes to say, the technology known as the elevator allows us to reduce our dependence on land in the same way we reduce our dependence on oil. Yet, for that to work we need a free market in land development and the market we have is far from free.
Putting all of that together, when I see rent increase after rent increase and a swift but not nearly swift enough, increase in apartment construction, that points to a pinch emanating from an unfree market in land development.
In a post pushing for attention to Real Business Cycle models Garret Jones concludes
It’s usually hard to fit RBC into partisan political narratives, which helps explain why we don’t hear about it much. But as long as big ideas come in waves, as long as energy supplies depend on the vagaries of global politics, and as long as politicians enact policies that weaken confidence in the health of a nation’s economic institutions, RBC will matter.
This misunderstands why folks such as myself dismiss discussions of real business cycles (RBC) in the context of macro-economic management.
If your argument was that, in RBC we have a plausible explanation for the co-movement of lots of economic variables and the emergence of booms and busts over time then that’s fine. This may even be a topic of some non-academic interest. Though, aside from the confidence issue, its not immediately clear why.
The key problem, however, is that RBC doesn’t explain the failure of markets to clear and lots of folks report experiences that are damn close what we would expect if markets didn’t clear.
For example, suppose a boom hit and as a result wages and profits rose in the economy. Then later a bust hit and wages and profits fell. Yet, all the while people who wanted a job could get one and relative prices moved up and down but the total buying power of a dollar was stable. In that case I would say that it would be nice to have more booms and we it could be worthwhile to institute policy to help folks during the bust, but by and large, them’s the apples.
Unless we seriously think we can outperform a competitive market equilibrium it would be best not to go monkeying around with things.
Yet, this is not what happens. People look for jobs and can’t find them. Price changes can reverse course almost in unison. Something is going on here.
Even if that something had its origin in a technology shock, what makes it of interest to us is the failure of market clearing. Principally, to beat drum, that people tell us they are looking for jobs but cannot find them.
Moreover, we have evidence that we can help the market to clear by altering monetary policy. So, if a technology driven boom like the late 90s comes along and employers cannot find workers then we can help clear the market by raising interest rates. If the technology shock then fades and it turns out that workers cannot find jobs we can help matters by lowering interest rates.
The point is that regardless of the original source of the co-movement of economic variable what we are interested in is the failure of the economy to adhere to classical intuition. On this key matter not only are RBC models silent, but those brandishing them often dismiss the notion that there is anything to discuss!
This is the real problem with real business cycles.
In discussing declining labor force participation Mike Konczal writes
At the other end of the spectrum are those who would think that the unemployment rate is capturing all we need to know. If someone really wants a job, they would look for one, and there’s nothing interesting policy-wise in this information. At 8.1% unemployment there’s still plenty of slack in the labor market. (There’s an unemployment crisis at 8.1% unemployment!) The answer of the "true" unemployment rate should be somewhere in the middle.
I am certainly one if not the primary member of “those who think the unemployment rate is capturing all we need to know”
As will come as a shock to no one I have deep philosophical as well as practical reasons for pushing this stance.
The short-short on the philosophical is that there is no “true” unemployment rate. There are data collection and analysis procedures. Indeed, this extends to all of our interaction with “the world.”
Though its quite useful as a “sign post” of sorts to think that there are a certain number of people in America, when it comes down to brass tacks in what sense is “the number of people in America” a thing about which there is truth or something that is really just a figment of your imagination?
Now, in everyday life making these distinctions seems silly. There is no reason to force someone into recognizing that the existence of people they have never seen and never will see is just a highly useful figment of the imagination.
It does, however, become important when folks start getting into arguing over large scale statistics. They carry with them the useful figment that there really is a number of people in America and argue over whether the statistics are actually capturing that. However, there is no such thing. “At best” – let us not dwell too much on what that might mean – there are the results of a hand count, the Census. But, no one thinks the hand count is “true” and in some ways its less useful than more complex statistical estimates.
Once you accept this then you realize the important question is “what do I want to do with this number” not whether or not it represents some alleged “truth.”
One thing we often want to do with numbers is compare things over time. This makes consistency an enormously important factor in choosing a measurement.
For example, “right track, wrong direction” is an excellent survey question not because we actually know what people mean when they say “right direction” but because we have been asking it for a long time, and we think people have been interpreting the question the same way for a long time and so we can usefully correlate it other things we want to know about.
U3, the standard measure of unemployment, does well on this scale. We have U3 measurements. We have measurements of standard unemployment going back to the 1940s and well-vetted estimates going back through the Great Depression.
This allows us to compare rates over time with accuracy. We do know for example, what the U6 unemployment rate was in 1953.
We’ve also invested a lot of time and energy into thinking about and testing the relationship between the standard unemployment rate and other measures we are concerned about such as inflation. We have at least a decent sense about what the “natural” rate of standard unemployment might be, and what it might mean for this natural rate to change over time.
Lastly, even as a theoretical matter, standard unemployment gets at the question we want to know – is the labor market clearing. For many reasons it might be the case that people want to work more or want to work less. This could have to do with the prevailing wage, tax rates, government benefits, the return to education, personal wealth and yes the difficulty finding a job.
However, if the labor market is functioning “classically” then people who want a job should be able to find one. If there are lots of people telling us that they are looking for a job but can’t find one this tells us that classical economics has broken down.
I won’t defend it here, but my underlying contention is that it is the goal of macroeconomic policy to “classicalize” the economy. That is, what we want to do is create an environment in which the intuitions of classical economists holds. Once we’ve done that the job of macro policy is done and the question then becomes one between a laissez-faire and a more interventionist economic policy.
This is in part why I flew off the handle at Raghruam Rajan’s piece. In a piece entitled “True Lesson’s of the Recession” he seemed to largely ignore the non-classical elements of any economy, not even addressing the notion that recessions proper are impossible in a classical world.
As such large movements in U3 and a failure of classical precepts are fundamentally intertwined.
My understanding of British legal and political systems is notably weak. My general sense – however – is that if David Cameron woke up tomorrow convinced of the virtues of economic stimulus he could apply enough pressure to push through the following:
- A suspension/rebate of both the VAT and the National Insurance Contribution.
- A change in the mandate of the Bank of England to maintain the real international price of British labor at rates consistent with its marginal product, to be “unofficially” interpreted as buying German Bunds until the Pound fell .8 Euros.
- A temporary subsidy on energy that cut the price of petrol, heating oil, electricity etc in half.
Such a program would cause an immediate and hard reversal of the following trend
Given that Britain is currently suffering through an economic crisis that is now worse than the Great Depression, its hard to imagine that Cameron would not be hailed as a folk hero.
Statues would be erected in his honor. Choirs would sing hymnals about him. Kindergartners would memorize the details of his childhood. The conservative party would win reelection in a landslide. He could implement whatever neoliberal reforms he wanted and launch a torrid, all-too-public love affair with Pippa Middleton without the man in the street speaking ill of him.
Supposing that this analysis of the situation is correct, there is to my eye no theory of gridlock, limited attention, vested interest, special interest, or mendacity that explains the behavior of David Cameron.
The behavior of David Cameron as far as see can only be explained by suggesting that he disagrees with my interpretation of the facts.
This is part and parcel of a larger theory that in practice virtually all of our major policy disagreements are disagreements over facts. There are potential moral and aesthetic dilemmas, which by my lights folks don’t take seriously enough.
Yet, these are not what divide policy makers. What divides them are beliefs about the facts of the world.
This makes the spread of the type epistemic closure that Justin Fox reports on all the more confusing. Its easy to see why this would occur among political observers. They have little to gain and essentially nothing to lose from being wrong. Not so, with policy makers. Especially in times like this they have everything to gain from being right.
Yet, they seem unwilling to give up on tribal beliefs. What accounts for this? I have a few theories but none of them too serious. My favorite is that pragmatic people tend to be social misfits and this makes it hard for them to get elected.
I think, perhaps, Raghuram Rajan has been partly misunderstood. In a much maligned essay he writes:
Since the growth before the crisis was distorted in fundamental ways, it is hard to imagine that governments could restore demand quickly—or that doing so would be enough to get the global economy back on track. The status quo ante is not a good place to return to because bloated finance, residential construction, and government sectors need to shrink, and workers need to move to more productive work.
This has been interpreted by Karl and Paul Krugman to mean that the construction sector is currently in need of shrinking. What it looks to me like is that he’s saying we can’t go back to the size of these sectors that predominated before the recession, because it was in need of shrinking then. The key to interpreting correctly is that he says the way things were is not a “good place to return to“. But the confusing part is that “bloated finance, residential construction, and government sectors need to shrink“, rather than “needed to shrink”. But what I think he means here is that when sectors are bloated, as they were before the recession, they need to shrink. We do not want “to return to” the way they were because they were bloated, and “bloated..sectors need to shrink”.
The misunderstanding this generated is unsurprising: it’s worded confusingly. And who knows, maybe I’m the one reading him wrong. In any case, there much else wrong with his piece that, most importantly the incorrect assumption that we can either do long-term reforms or worry about short-term problems. We can do both. Why not, for instance, identify solutions that attack long-term and short-term problems. What magical policy could simultanously address our short-term housing sector weakness (including an oversupply of housing, low house prices keeping homeowners underwater, and a lack of normal construction sector contribution to recovery), long-term demographic problem driven by an aging society, a medium and long-run debt-to-GDP problem, and a shortage of skilled labor? A huge increase in skilled immigration.
To be clear: this is not to say we shouldn’t have more inflation, because we should. But whenever someone like Rajan wants to point out long-run problems, we should argue against them and advocate for more inflation, but we should also say that even if he’s right, there is at least one policy that address short and long-term problems: more immigration, and now. We might never convert the do-nothing caucus to inflationists, but perhaps we can convert them to the do-something-productive congress.
There has been pushback from economists who support fringe positions on this article I wrote while guest-blogging for Megan on things that economists agree on. A lot of the pushback seems to focus on the title of the piece which says “all economists” reject these ideas. That’s a fine complaint, but in the piece itself I go out of my way to not refer to all economists. Obviously within any field you will find some people supporting just about any position. I mean you see the doctors on TV selling obviously sham diet medicine, right? I may reply in depth to the criticisms more at some later point, but I don’t have time, so for now I just want to note one interesting thing. Here is Dean Baker who says he’s comfortable with three of the four things I say economists mostly agree on, but that I’m too easy on NAFTA and free trade. In contrast, here is Amity Shlaes who says I am spot on when it comes to free trade, but too hard on the gold standard. The general pattern is: yes, you are right to dismiss the other fringes, but not my fringe.
Which is fine, I don’t begrudge them wanting their fringe to be treated with more credence. But my point was specifically to point to a survey of economists that identified these positions as being rejected by a strong consensus of the profession. I’m not going to accurately marginalize these positions with one hand and then with the other hand tell readers to give them more consideration than the vast majority of economists do. These may be issues worth considering for economists or others with a detailed interest in the issues, but for laypeople who just want to know the truth these aren’t positions they should take very seriously.
New Claims out today and a big drop as many Easter seasonal advocates had argued. However, that’s not actually what interests me. If you look at Year-over-Year percent decline in Nonseasonally Adjusted Claims then they were running in a pretty tight band.
This suggested that despite the waviness in the week-to-week numbers the pace of improvement was essentially constant since last year.
Yet, there did seem to be a real slow down last year beginning in late April. What we would have hoped then is to see the year-over-year gap widen and we did in fact get that, at least for this one read.
My best guess is the annualized 10% rate of improvement in initial claims continues to chug right along.
I am loathe to use such language, but at this late date I think it helps to be direct. The paper reads to me like nonsense on stilts. Ostensibly its about the ineffectiveness of attempts to stimulate demand and induce recovery in advanced Western economies.
By my reading it is a litany of complaints about the current political economy of the United States and Western Europe. If this was story about why real wages are stagnant, why there is widespread social unrest, or why the current state of affairs is simply displeasing to Rajan’s aesthetic then we would have something.
As it stands he pens gems like the following:
The status quo ante is not a good place to return to because bloated
finance, residential construction, and government sectors need to shrink,
and workers need to move to more productive work. The way out of the
crisis cannot be still more borrowing and spending, especially if the
spending does not build lasting assets that will help future generations
pay oª the debts that they will be saddled with. Instead, the best short term policy response is to focus on long-term sustainable growth.
There are many things wrong here but I just want to point out a few that are illustrative of what’s wrong with this entire line of thinking.
First, we can argue about government and finance, but there is no evidence that the residential construction sector is bloated. A cursory look at actual production levels would tell you that United States is producing far too few homes. If you don’t trust that then you can look at prices. Rents – the price of the service flow from housing – are rising rapidly against a backdrop of depressed demand and high unemployment.
If you wanted to argue that a structural problem facing the United States is the inability of the residential construction sector to jumpstart itself, that would make sense. However, the idea that a problem facing the US is that it is spending too much capital and labor on residential construction is directly at odds with the facts.
This is important because it provides a window in the virtue vs. vice thinking that pervades this piece and much commentary. Vicious activities like buying houses you cannot afford must be replaced by virtuous ones, presumably such learning to be good electrical engineers.
What’s wrong with this type of thinking is not that it heaps blame upon the guilty, but that it encourages intellectuals to get away with slip-shod mechanics. Virtue and vice are human judgments, not actual forces in the world.
Natural phenomena must have natural explanations. This requires tracing down the effects of impersonal forces. And, perhaps actually taking a glance at housing starts or the issues associated with our vacancy rate measures before making pronouncements about which sectors need to shrink.
Second, Rajan writes that the way out cannot be more borrowing and spending, yet he makes no clear case why. If I may be so bold, I assume what’s going on here is standard ant-grasshopper prejudice. It’s the notion that consuming evermore without preparing for the future is a pernicious human tendency that must be battled at every turn.
Spending of course is not the same as consuming and Rajan pays lip service to that in his “especially if the spending does not build long lasting assets.” Yet, the “especially” is his confession. If the United States had the opportunity to borrow money cheaply in order to invest in highly productive assets this would not be a countervailing consideration that made it “OK” to borrow. It would be the central consideration and the defining feature of profit maximization.
Yet, even in the case that the assets the US wishes to invest in have a low return, its not clear that this makes borrowing a poor decision. If real interest rates are below zero then the return does not have to be great for the borrowing to make sense.
This is compounded by the fact that very little government spending is done on things that people would consider pure consumption. Most tax funded government workers are teachers, firefighters, law enforcement officers and soldiers. We can argue about the marginal products of these workers but all of them are in the business of creating or protecting capital.
If you are concerned about the future its not immediately obvious that these workers are a drag. To be clear, I am not dogmatically defending them. I am pushing back against the notion that “spending” is somehow equivalent to simply throwing wild devil-may-care parties, all the while passing the bill on to our children.
And again, it must be remembered that the real interest rate is not always positive. Even if all we care about is the children, passing wealth on to them is not always free. It is sometimes – and now is such a time – actually costly to do so.
This is just a fact about reality that people need to accept. Storage is not free. Passing goods and services through time is not free. For Jove’s sake people, this is the principle reason that every living thing dies and every built thing ends in ruins. Its not like its some weird confluence of events that should be difficult to internalize. It is the core struggle of our species.
That the combined forces of the industrial revolution, urbanization and the population explosion gave us a reprieve from these forces should not lull you into thinking that this basic issue has vanished into the ether.
Third, and I will be brief here since this has gone on long enough. Rajan says, “the best short term policy response is to focus on long-term sustainable growth.” Again, I hate to be rude but I have to be direct.
Is this some kind of sick joke?
Is there an area in which our policy initiatives have more consistently failed than in producing long term sustainable growth? Do we even have a consensus on how long term growth got started in the first place? Do we have a solid story to explain growth differentials today?
Is there a policy explanation for why the GDP of Northern California is booming out of control while Maine dies a slow death? Lets not even get started with cross-country comparisons where we can gesture in the vague direction of institutions but still know little-to-nothing about how to produce sustainable ones.
Perhaps, Rajan thinks the milder goal of human and physical capital accumulation is what is needed? Yet, this entire piece is arguing against the massive borrowing that is at the heart of such accumulation. Indeed, the largest single type of capital is housing, which Rajan has dismissed. Over half of the production activity of the government sector is education, which Rajan has said is bloated.
If you don’t want more borrowing or more teachers, what do you want? Perhaps efforts to increase TFP or educational effectiveness.
Welcome to the world!
This is what folks have been desperate for my entire life. If we knew how to get it, we would.
To close, none of this addresses the core issue that markets are failing to clear. If the root of our problems was nothing more than poor skills and over-borrowing then we should expect the dollar to fall, the consumption set of Americans to shrink and the competitiveness of US labor to rise.
The US would be at full employment but could not enjoy the bevy of foreign made goods that it does today. Indeed, Americans would be exporting much of their own production. This would be unpleasant for many and we could talk about moving the US towards a higher productivity society.
However, that is not the current situation. While the dollar has fallen and US manufacturing has risen, the balance of trade remains weighted towards imports. Unless this price changes Americans will either spend beyond their means and go deeper into debt or spend below their means and go into recession.
If the consumption and production habits of the US need to change vis-à-vis the world then prices need to change. This should be the core lesson of recessions and indeed, macroeconomics.
I saw a good bit of commentary suggesting that the contribution of Residential Investment to GDP was surprising. On the whole I am surprised that it is not higher, though going into the GDP report I knew I had not seen the level of Multifamily starts I had been expecting.
Nonetheless, one of the important things to remember is that it takes time to build houses, and multifamily in particular takes a long time. When we look the number of total units under construction we see this
Which looks like a small and pathetic recovery. However, what matters for GDP is not level but absolute change.
So here is the quarterly change in units under construction.
This shows an absolute change at roughly half of levels seen during the later half of the boom. Given the sharp rise in permits I suspect the number of units under construction will grow at an increasing pace suggesting that we could soon have GDP contribution nearing levels seen during the boom.
This is the type of seminal insight that simply cannot be ignored nor praised too highly. From the Chronicle
So I would argue that the answer to the first question above, as to whether new approaches such as blogging constitute scholarly activity, is an emphatic yes. Which leads us to a more problematic question: How should we recognize it?
. . .
It’s a difficult problem, but one that many institutions are beginning to come to terms with. Combining the rich data available online that can reveal a scholar’s impact with forms of peer assessment gives an indication of reputation. Universities know this is a game they need to play—that having a good online reputation is more important in recruiting students than a glossy prospectus. And groups that sponsor research are after good online impact as well as presentations at conferences and journal papers.
Institutional reputation is largely created through the faculty’s online identity, and many institutions are now making it a priority to develop, recognize, and encourage practices such as blogging.
More seriously. It is certainly the case that blog reputation is a big deal for a University’s overall reputation and amazingly work in the traditional way.
One of the most surprising things I have noticed about blogging is the number of students who have offered to do work for me for free because of it. Given the infrastructure right now I can’t even adequately handle them all.
Given that tangible result its hard to see how blogging over time doesn’t attract the best graduate students and that is presumably the foundation of University reputation.
Moreover, I tend to think its just a better intellectual world when everything is open and instantly accessible from top to bottom.
In economics in particular you have journalists writing about the things people care about. Some economists taking those pop questions and turning them into economic questions. Others, framing theories and arguments about them. Others applying data to the argument. Other synthesizing the findings and reporting them back out to the Journalists.
Thus there is a complete loop between the larger world and the academic world, ensuring that the things academics work on are not only based on things people care about but circle back to influence the general state of knowledge.
Not only that but the format lends itself beautifully to intellectual history. At relatively low cost the entire academic blogosphere could be recorded and stored as a fully functional web with timestamps, links and everything else.
This in theory allows us trace the evolution of an idea almost precisely and possibly to understand better how and why certain ideas win out over others.
Though Feb still looks to be an outlier, strong performance continued, with the mix shifting slightly to trucks.
This along with lower incentives means that we will likely see another month-over-month increase in retail sales from autos. The data above is units. The retails sales data is revenue.
Its pretty close to suggesting as well that US factories are currently under producing. Factories were set for something like a 10 Million unit year and its looking increasingly likely that we will get at least an 11 Million unit year.
This is the obviously just the first month, but also so far its looking like auto sales will not subtract from GDP in Q2, given the shift into trucks.
The new GDP figures offer a reminder that one can’t analyze movements in GDPby looking at components of GDP. We saw huge increases in spending on cars (pushing consumer durables up by 15.3%) and houses (up 19.1%.) And yet overall RGDP growth fell to only 2.2%. Why didn’t the spending on cars and houses help? Because in the short run it’s NGDP growth that drives RGDP. And the Fed continued its tight money policy by allowing only 3.8% NGDP growth, same as the previous quarter.
If the Fed had a strict NGDP target and everyone knew what it was the Scott would be correct. However, if either the Fed doesn’t have a strict target or we don’t know what it is then Cars and Houses are causal or informative, respectively.
This is because Cars and Houses pull harder on NGDP more than most sectors of the economy. If we think of the Fed trying to influence NGDP indirectly – through the interest rate or some other mechanism – then this would imply that an exogenous negative shock to the purchase of cars and houses would tend to lower the demand side pressure on NGDP and so the Fed would need to loosen its indirect target to keep NGDP growth constant. Conversely and exogenous positive shock would raise demand side pressure on NGDP and the Fed would need to tighten its indirect target to keep NGDP growth constant.
Even if the Fed is targeting NGDP directly then we could still look to Cars and Houses to inform us about what they were doing. If in the absence of some non-Fed shock the construction of new homes begins to decline, then one can say “Ah this must mean the Fed is tightening NGDP”
I see that a lot of folks are getting depressed about the incoming data. I think this is unfortunate because the general narrative from the later half of 2011 is continuing. The economy looks to be growing reasonably well against headwinds that are likely to turn into tailwinds. Residential investment is flat and government spending declining.
Yet, it is highly unlikely that these trends will continue. We have not yet seen the increase in multifamily construction I was looking for and we may never see it. However, as predicted rents are rising, and the supply of housing is tight. If the multifamily supply doesn’t increase then this will cause either young homeowner, investors, or move-up landlords to soak up the inventory of single family homes and lead to an increase in the building of new single family homes.
Given the way things are going the next big trend might be move-up landlords. What we are imagining here are folks who are financially stable, who notice they can rent their existing home for enough to cover the mortgage. So, they buy a new home. Because they are moving into the new home they get to enjoy Fannie-Freddie owner occupied rates on both mortgages. Yet, they are now landlords on the original home.
Government spending has been declining strongly and this has dampened economic growth, but seems not only unlikely to continue but likely to reverse. In any case even stopping the drain from government would make the economy look a lot stronger.
Here is quarterly final sales growth in the US economy.
Pretty spotty. However, here are final sales when we take out government.
looks more like what you would expect from a generally strengthening economy.
We get an even more dramatic difference if we allow for consideration of inventory accumulation. I tend to prefer this since inventories are in fact quite pro-cyclical.
Lots of people have responded on this. A couple of notes
- Its quite clear how one could get into a bit of trouble if nominal wages declined relative to nominally sticky debt. You still have to say something about the other factors of production and the terms of international trade but its certainly conceivable that you can get stuck in a trap
- This same argument is harder to see through with falling real wages driven by an increasing price level.
- Key in this is what is happening to income shares at the margin. If real wages are falling against rising prices this suggest that income shares are shifting. Demanders are bidding up the price of goods yet the per unit revenue is not flowing through to labor. It must be flowing through to some other factor. The question then is why does this factor not increase in supply and thereby drive up the marginal product of labor.
If this is driven by say oil then the answer in most countries is (on first blush) obvious. One cannot simply increase the supply of oil as it depends on having access to geological deposits. Thus as the price of oil is bid up there is no immediate reaction to increase the supply of oil and thus increase the marginal product of labor.
However, suppose the answer is that the margin is going to factory owners. Now we have a quandary. Why do factory owners not respond by increasing output rather than simply letting demanders bid up the price?
Now, I do not really have a good sense for what is going on in the UK, but I am skeptical of the notion that there is a massive supply shock. It could be but I need more. Just asserting this feels empty. One should be able to see most supply shocks and so if the supply shock is not obvious a story should be in order.
My first, guess – and it is a almost a pure guess – is that what is happening is related to trade and finance. .
Here is one scenario:
There was huge borrowing by British households to finance a construction boom which was driven in turn by a land price bubble. The land price bubble collapsed which collapsed the construction boom. British households now have to repay their debts.
To do so they have to move from construction into something that their creditors want to buy. Say manufactured goods. If their creditors are overseas this will require that the British Pound decline rapidly in value.
However, suppose at the same time there is an enormous increase in international demand for British Sovereign debt as a result of instability in the Eurozone. This buying of British sovereign debt props up the Pound and keeps it from falling.
Now, British households have no way to repay foreigners. That gives us the sustained depression in the British economy. They need to repay debt, but they cannot repay it because the Pound will not adjust.
Yet, now we must ask where the inflation is coming from. I know people will be tempted to say “The Bank of England” but there is no immaculate inflation. It is not as if the Bank of England simply decides to print money and magically the Consumer Price Index rises.
The prices of individual goods and services must be rising. They must be responding to the microeconomic forces of supply and demand that they face. This implies that supply is falling or demand is rising for some set of goods. Which are these?
This will help tell us why it looks like there is some sort of supply side shock to the UK. If it is rents then it is possible that this really is a “supply shock” of sorts, as is happening in the US.
I am loath to use that term for what it connotes but if the growth of the housing stock is constrained by falling land prices then we have a Keynesian depression in capital markets that is leading to a supply shock in the final goods market. The capital markets cannot clear because of sticky prices and collateral concerns and so there is a shortage of capital and so we can have rising prices (rents) at the same time as high unemployment.
Now, maybe it is rents in the UK or maybe it is something else. Maybe the UK economy is really oil dependent? I don’t know. However, to get at what is going on we need to know which prices are rising.
Question- how is it that ppl are advised against variable rate mortgages but pushed into variable rate student loans?
I never turn down the chance to lecture condescendingly to a Harvard trained economist, so let me see if I can clear this up for Jodie by arguing why it might make sense for an individual to have a fixed rate mortgage but variable rate student loans.
First note the similarities that lead one to ask this question: a college education and a home are sort of assets. Well, a home is literally an asset, and an education is kind of like an asset, but they both share the features of an asset that they are a long-lived investment that pays investment returns. In addition -and central to this issue- purchases of both are typically financed by debt. A third important similarity is that these are typically the large components of household debt, and two of the most important investments households make.
Given these similarities, it is natural to assume that it would be optimal for households to choose similar interest rates. But it is the nature of the returns these investments produce that explains why an individual might choose different interest rates. For a house, the investment return produed is a flow of housing services. Think of it as a factory that produces a months worth of housing each month, which the individual owning it consumes. Education, in contrast produces higher human capital which translates (usually) into higher value of output that their labor creates. The difference is that inviduals sell their labor output, whereas they consume the flow of housing services.
This matters because if inflation -and thus nominal interest rates- go up then the cost of debt service will go up for both housing and education debt if the interest is variable. In addition, inflation should also drive up the price of the output produced by the assets and the nominal value of the assets themselves: house prices and the value of the flow of housing services -equal, in theory, to rent- will increase, and so will wages. Because households are selling their labor, their income rises with their costs of debt. But households are consuming their housing services, their debt service goes up without an offsetting increase in income. For this reason, it is more risky to use variable rate interest on housing debt than on education debt.
Richard Williamson wants an answer
Back in November, Karl Smith made the clearest statement I have ever read of the New Keynesian explanation of a recession:
I can’t hammer this home enough. A recession is not when something bad happens. A recession is not when people are poor.
A recession is when markets fail to clear. We have workers without factories and factories without workers. We have cars without drivers and drivers without cars. We have homes without families and families without their own home.
Prices clear markets. If there is a recession, something is wrong with prices.
Right now, unemployment remains at over 8% in the UK while real wages are lower than they were 7 years ago and are continuing to fall. Yes, you read that correctly. Which immediately leads one to ask: on this explanation of a recession as expounded by Karl, how much further do real wages have to fall to eliminate disequilibrium unemployment?
I am not a political person, I’m trying to ask an intellectual question here.
I don’t know. I say that with a heavy heart.
I don’t have immediate access to British data but the first question is: where are the margins going?
When an item is sold we can think of the revenue from that item as being broken up into pieces. Some of the revenue is paid to labor. Some is paid to capital in the most fundamental sense. Some is paid to natural resources or foreign inputs. Some is paid to residual claimants who are typically entrepreneurs or shareholders.
If prices are rising and wages are falling then one of these other group(s) must be getting more margin from the items being sold. If we know who this group is then that will help us attempt to untangle this puzzle.
This is year-over-year private sector real GDP growth over the last decade
Real quick on this. Top line was 2.2%. Lets dig deeper.
Durable Goods Consumption: Added 1.13 pts. About in line with what I would have thought given the surge in cars, but cars was actually a little weak and other durables a little strong.
Non-Durable Goods Consumption: Added .35 pts. Surprisingly strong given the secular death of gasoline. Gasoline consumption has subtracted from GDP for the last 6 quarters and added nothing in the two before that. The US is de-gasolining and that has tended to make non-durables flat.
Consumer Services: Added .57 pts. Much weaker than I expected because I thought utilities would add big this quarter after subtracting big last quarter. But, no another major draw on utilities at –.23 pts. Yet, there is no serious way this is a trend. All of this will bounce back mechanically as we move into the Summer unless we have “The coolest summer on record” and electricity use dies.
Non-Residential Structures: Subtracted .35 pts. Larger subtraction than I would have expected. We know we are getting some subtraction as Natural Gas fracking in the Northeast cools down and Eagle Ford has yet to hit its stride but this is still a little bigger than I would have thought. Not quite sure what all is happening.
Equipment and Software: Added .13 pts. We knew this would be weak in January because of depreciation credits, however, this is a little weaker than census reports would have suggested given Feb and March. I am inclined to expect this will be revised up.
Inventories: Added 0.59 pts. I don’t have a good sense for what this means in a practical way or what to expect though I know petroleum product and natural gas storage is a big deal and went up.
Residential Construction: Added 0.40 pts. Slowly but surely as the starts data indicate. This should get bigger going into the year.
Net Exports: Subtracted 0.01pts. Not bad, though we should expect this to get worse as Europe does.
Federal Government: Subtracted 0.46 pts. SMACK. That is much bigger than expected and almost all comes from military drawdown. Two big quarters in a row of shrinking military expenditures.
State and Local: Subtracted 0.14. Surprisingly high and looks like its coming from lack of highway investment. What the political endgame on that is I don’t know.
All-in-all it looks decent. Government and utilities are not really driven by the underlying dynamics. Main area of concern is non-residential fixed investment where both structures and equipment and software are weaker than I would have supposed.
Also for those tracking GDI, personal income plus taxes on production grew by 140 Billion, adding 3.6 pts to GDI. A rough guess of 35 Billion in net corporate profit growth in the first quarter gives me 4.6% GDI growth est.
I think folks are grossly underestimating both the global demand for liquidity and the feedback action inherent in housing. We have an almost triple-witching of classic collateral concerns.
For a new home, the land has to serve as collateral for the building loan, then the building has to serve as collateral for the purchase loan, then purchase loan is bundled into a MBS where it serves as collateral in the repo market.
This makes for huge amplification effects in and of itself. Place on top of that the fact that the price of land is extremely sticky and housing suffers from time-to-build and you have the potential for a massive Yo-Yo.
I had hoped that a massive expansion in rental housing would buffer this, but alas that seems not to be going to pass. Instead this, from Bill McBride is:
Second mortgage purchase mortgage lending above 80% loan to value has begun to creep back into the market. Prudent Underwriting standards and deep risk analysis have convinced some private money to come back into the housing finance market of late. We’ve added an 80 / 10 / 10 product recently that has no Private Mortgage Insurance.
I will be highly shocked if it stops here. The products will start coming out of the woodwork. Loans will gush in.
Folks will say – have we learned nothing?
But, there is nothing that could have been learned, save for the fact that the US government needs to issue more debt and support that debt with greater immigration, but that is fantasy at this point.
The simple fact is there is not enough collateral in the world and the US government is not issuing enough debt. This will happen again and again and again. If not in housing, then in metals. If not in metals then in polysilicon. If not in polysilicon, well . . . you get it.
The core problem is that the world needs lots of young people under the rule of a democratic government. But it has old democracies and young basket case countries. This does not make for a world where safe sovereign debt can be issued.
We could attempt to reform the basket case countries but the easier solution is to youngify the democracies. Europe is beyond help in this regard. The US, Canada, and Australia are the world’s only hope. More immigrants. More young immigrants and more sovereign debt.
If not, this will never stop.
This is something that is hard to convey when people see how anemic housing is and how many problems there are in the market. However, measured by the absolute growth of housing permits issued, growth is now back to where it was during the boom.
That seems crazy?
However, first permits are going to be a little more steady than starts and of course lead starts. This is because when you break ground might depend on lots of different temporary factors. Also, while the seasonal flux in permits is strong its not quite as bad as starts.
Second, and more important, the contribution to growth comes from the absolute change. So, going from nothing to really crappy can be a strong contributor to growth. Just as going from a boom to normal can be a strong drag on growth.
Two quick things
One, is that – actually amazingly – the absolute change year-over-year in initial claims is following steady channel. You usually see the pace of decline, itself decline over time but that is not happening.
This to me suggests that nothing special has happened in the labor market since the summer of 2011 and that its essentially steady as she goes.
As stated before, I have expected to see the economy “kick” by March or April of this year but as things look it will be late. The pressures do still seem to be building, as I’ll talk about in another post.
The other quick note, is that while Initial Claims tells us a whole lot about the labor market what they don’t actually tell us that much about are layoffs, which people sometimes mistake. You can file an initial claim if you are laid off but whether or not you do so, is dependent on the state of the job market. That’s why initial claims are actually a better indicator than layoffs themselves which are back down to the lows of the previous recovery.