It's Still The Economy, Stupid

Friday, July 11, 2003  

Recession Redefinition

Amidst all the Niger Uranium furor I almost missed some interesting economic news. Fortunately, Angry Bear commenter Stirling Newberry alerted me to a story in the Friday Washington Post: Number Crunchers vs. Recession. Said number crunchers are members of the National Bureau of Economic Research (NBER) which, among many other things, is the most widely used source for dating the start and end of recessions. You've probably heard that the latest recession started in March of 2001 (notwithstanding Bush's simultaneous attempts to say that 9/11 caused the recession and that it started under Clinton--on this topic, this Slate story is a must-read). But when, if ever, did the recession end? Well, there are two conceivable ways to get to the end zone in football. Normally a team scores by moving the ball past the goal line. On the other hand, they could keep the ball stationary and simply move the goal line. It looks like the NBER is doing the latter:

"If the committee were to rely on the same indicator to date the end of the slump, the recession would already have lasted for two years and three months, making it the longest since the vastly more serious downturn that began in 1929 and became the Great Depression...

Chances are, by giving far more weight to the GDP than it has in the past, the committee will decide before long to call an end to the 2001 recession, which many economists believe ended late that year...

This is the dating committee's [new] official definition of a recession:

A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough
...But that language was sharply revised when the next update was posted last month on the National Bureau of Economic Research's Web site:
The committee views real GDP as the single best measure of aggregate economic activity. In determining whether a recession has occurred and in identifying the approximate dates of the peak and the trough, the committee therefore places considerable weight on the estimate of real GDP issued by the Bureau of Economic Analysis of the U.S. Department of Commerce."

My first thought upon reading this was "Hey, the NBER has the top economists in the country and is largely apolitical, so there's not much of a story here." My second thought was "On the other hand, the current President of the NBER is Marty Feldstein, who was Chairman of Reagan's Council of Economic Advisers from 1982-1984. It sure would be nice for Republicans if the Recession is formally announced to be over before November, 2004."

So I checked into who is on the NBER's Business Cycle Dating Committee:

Robert Hall (Chair), Martin Feldstein (President, NBER), Jeffrey Frankel, Robert Gordon, Christina Romer, David Romer, and Victor Zarnowitz.

All members are top-notch economists, but I don't know most of their political affiliations. Fortunately, many economists on both the Left and Right recently decided to reveal their political leanings by signing one of two letters (I blogged about the letters here). Besides Feldstein, no members of the NBER dating committee signed the Republican Letter (scroll down). Frankel, Gordon, and both Romers signed the Anti-Tax Cut Letter. So I think it's pretty tough to argue that the committee was stacked with Republican economists. Also, Prof. Frankel chaired Clinton's CEA in the late 1990s.

Instead, the change most likely reflects genuine confusion induced by the historically unusual confluence of positive GDP and income growth accompanied by rising unemployment.

Still, while probably not politically motivated the focus on real GDP as the single best measure of aggregate economic activity" is troubling because it implies a focus only on the total income in the economy, not the distribution of that income. Under this logic a recession would not be in progress even at 20% unemployment, as long as the other 80% of the labor force had more-than-offsetting increases in income. But at least one in five people in this scenario would disagree with this conclusion.


P.S. In the 1970s, economists thought recessions and inflation would not happen at the same time, so they had to come up with a new name for the new phenomenon: "stagflation". The only phrase I've heard for the current situation is "jobless recovery", but while acccurate, it's not very catchy. Ideas?

posted by Angry Bear | 11:37 PM |

Thursday, July 10, 2003  

House Republicans Actively Try to Destroy Investor Confidence

(X-Posted at To The Point)

This is just a joke:

A bill that would sharply limit the power of state securities regulators to police and penalize wrongdoing by brokerage firms and their employees was approved by a subcommittee of the House Financial Services Committee yesterday.

It now moves on to debate by the full committee.

The bill, the Securities Fraud Deterrence and Investor Restitution Act of 2003, was introduced in May by Richard H. Baker, Republican of Louisiana. It bars state securities regulators from creating rules for brokerage firms that differ from those established by the Securities and Exchange Commission or self-regulatory organizations like the New York Stock Exchange. If the bill had been law in 2002, for example, it would have prevented Eliot Spitzer, the New York attorney general, from pursuing the changes on Wall Street that resulted from his investigation into analyst conflicts.

If passed, the bill would prevent states from imposing rules on the disclosures that brokerage firms make about the investments they sell. The measure would also prohibit state regulators from instituting conflict of interest requirements on brokerage firms, like those relating to stock analysts that 10 large securities firms agreed to last December when they settled with regulators and paid $1.4 billion in penalties and fines.

The bill, which passed the subcommittee mainly along party lines, appears to be in direct response to Mr. Spitzer's aggressive Wall Street inquiry. Michael DiResto, a spokesman for Mr. Baker, said: "Congressman Baker's concern throughout was when a New York state official began to dabble in national regulatory matters, one state in the midst of their investigation, their criminal findings and their discussions of settlements, would start trying to institute new regulatory structures for financial firms that have national scope.

Yeah, I'm sure this will be heavily debated. What a legislative turd. If the Democrats could muster some energy, they could really take this one and run with it. How hard is it to demonize thieving plutocrats that have been caught red-handed when they are blatantly trying to change the rules after the crime through the same political influence that enabled the criminal activity in the first place?

Oh yeah, really hard. I forgot.

posted by Matthew | 7:10 PM |

Wednesday, July 09, 2003  

Democratic Presidents Are Good for the Economy

Go read Dwight Meredith's post documenting that since Hoover, job growth has been higher under every Democrat than under any Republican! That's right, the worst-performing Democrat created more jobs than the best-performing Republican. Sure, there are a lot of other factors, and Dwight hits on most of them, but it's an impressive empirical regularity.


posted by Angry Bear | 4:05 PM |

Sunday, July 06, 2003  

Spin, Spin, Spin

On Friday evening, as I was making dinner and listening to Marketplace, I heard Elaine Chao, Secretary of Labor, make an amazing claim. She stated that the shocking surge in the unemployment rate, to 6.4%, was due to the recovering economy. According to Chao's logic, people were feeling so confident in a turnaround in the economy, that 611,000 workers who had previously given up looking for work were inspired to try again, thus flooding the "labor force", those officially counted as employed or actively job hunting. Having scrutinized the numbers earlier in the day, I knew that while this may have had an inkling of truth, it was for the most part a big fib. So, I went back into the BLS data, and pulled some numbers, listed in the chart below:

Civilian labor force
Change from previous month
Not in labor force
Change from previous month
Change from previous month
Unemployment rate
 6.0 6.1 
Discouraged workers
Marginally attached to the labor force,
but not counted in the UE
New teens entering labor force

Secretary Chao was correct that the labor force swelled by 611K, but it's not exactly clear from whence those numbers transferred. The number of workers "not in the labor force" only decreased by 365,000, even though June is typically when a million or so recent high school and college graduates start job hunting. And where the missing 246K came from, I really don't know, although immigration, retirement from the military, release from institutions, etc., might account for a chunk. But it's pretty clear from which categories those workers did not move; the number of discouraged workers fell by only 5,000, and more importantly, the number of workers "marginally attached to the labor force" increased by 100K. Those are individuals who want to find a job, but for some reason, had not been job hunting in the four weeks preceding the BLS survey. It's also clear that the numbers are not coming from a maturing work force; only 10,000 teenagers, seasonally adjusted, entered the work force, pushing the teenage up to over 19%.

So Secretary Chao can spin, spin, spin those numbers all she wants (and if you watch the tape of her interview on MSNBC/GOP, you'll see the anchor eat the spin up like it was beluga caviar.) But an even cursory look at the number spin a very different tale, one which doesn't bode well for the job market for months to come.

(For a closer look at the unemployment numbers, I rehashed them over at Wampum earlier.)

posted by MB | 2:16 PM |