It's Still The Economy, Stupid

Thursday, August 07, 2003  

Good News, but Where are the Jobs?

"America's business productivity soared in the second quarter of 2003 and new claims for unemployment benefits dropped to a six-month low last week, a double dose of good news as the economy tries to get back to full throttle." Productivity in the second quarter grew at an annualized rate of 5.7%, which is extremely high by historical standards (note that the number is still subject to revision, but even if it's cut by 1/3, it's still very high).

New application for jobless benefits stayed below 400,000 per week for the third consecutive week. However, a slowing of the rate of layoffs is not the same as creating more jobs (recall that the recent drop in unemployment from 6.4% to 6.2% was triggered by people abandoning their job search, not by people finding new jobs; see also Matt's post below). But the productivity growth in the second quarter, if it reflects a trend and not an aberration, is good news in the long run: it will mean that when the economy starts expanding, inflation will not be a major concern.

On the other hand, excess capacity and the accompanying downward pressure on prices have been a major business problem of late. Because of that excess capacity, it would not be difficult for measured productivity (output divided by hours of labor) to increase quite a bit in the short run without reflecting what is typically thought to cause long run productivity growth--new, more efficient, technologies and processes (think 1990s). Time will tell. At the least, the latest news is not bad news; how good it is unknown.


posted by Angry Bear | 7:12 AM |

Wednesday, August 06, 2003  

A picture is worth a thousand words this is the change in the Producer Price Index over the last 10 years of energy products - as you can see, the bubble began overheating the US consumer sector in 1999, with an increasing volatility of energy prices. This could have been avoided had deregulation mania not been in vogue, and could certainly have been used to cushion the problems in the Economy. Who knows, the Enron sign might still be lit...

posted by Anonymous | 4:56 AM |

A good case can be made that the current "recovery" is living on borrowed time.

As the dollar devalues - and while it had a run up with the current seeming Wall Street rally, it was not enough to recouple the dollar to the equities market or securities market, nor do more than dent a year of brutal losses for the greenback - the price of oil will continue to march upwards. The three props of the economic stabilization - the word recovery is inaccurate to the point of being mendacity - have been cheap oil, cheap money and cheap government. The problem is that these three pillars are mutally exclusive in the long run. Cheap money comes from low interest rates, particularly residential real estate. Cheap government from massive tax cuts. Cheap oil came from the hope of US stabilization of Iraq and being able to quickly pump the very inexpensive to produce oil out of the ground.

Without the cheap oil - which is now clearly not coming in time - either the cheap money or cheap government pillar has to crumble. Either interest rates must go up in order to borrow, or the government must raise taxes dramatically. Since even the OMB - a department that produced numbers in January that can only be politely called fascinating fiction - admits that 23% of the current increase in the estimated deficit between then and now comes from what they euphemistically term increased costs of "tax relief" - the clear choice between cheap money and cheap government is now at hand.

Since Greenspan and his good friends at the Fed are not going to raise interest rates soon, and Congress is in absolutely no mood to do anything until there has been a clarifying election - that means that the choice is going to be made for us, and since the choice rests in the hands of bond buyers, that choice will be that cheap money, has got to go. Or should it be noted, already is going. The next bump down the stairs will come when the Already battered bond market is forced to bear the weight of another 36 billion dollars of long term federal debt. Particularly in the 10 year - which is crucial to the pricing of mortgage rates, which, in turn, have propped up the economy.

In typical macro-economic theory of business cycles, the recovery ends when the Federal Reserve is forced to raise interest rates, or when exogenous factors force long term interest rate spreads back upwards. This second condition is now becoming more likely in the weeks ahead, meaning that some drastic policy action will have to occur to avoid a second contraction in the current economic cycle.

posted by Anonymous | 4:03 AM |

Tuesday, August 05, 2003  

Layoffs Spike

Dow rings up triple digit loss on spike in layoffs. I guess this is just one more of those mixed signals on the economy. With recoveries like these....

posted by Matthew | 12:45 PM |


Two economics related articles from znet. Nobel Prize winner George Akerlof's interview with Spiegel Online.

"I think this is the worst government the U.S. has ever had in its more than 200 years of history. It has engaged in extraordinarily irresponsible policies not only in foreign and economic but also in social and environmental policy. This is not normal government policy. Now is the time for people to engage in civil disobedience."

Also, confessions of a recovering economist.

posted by Teddy | 7:45 AM |

Monday, August 04, 2003  

Even the Conservative Economist

The current Economist has an interesting piece, Hidden dangers: The American government's accounts look about as reliable as Enron's (article here--subscription required). The story reports on a study by two AEI economists, Jagadeesh Gokhale and Kent Smetters, that uses two new measures of how sustainable deficits are. One of them is the Generational Imbalance (GI) index, which measures (in net present value) how much society will spend on the current generation over their lifetimes versus how much society will collect from that generation over their lifetimes. They estimate that Medicare alone represents a transfer of $20 trillion (1.7 times GDP in today's dollars) from future generations to the current one!

This seemed a bit high at first, so I took a look at the 2003 Status of the Social Security and Medicare Programs, where I found this graph:

I didn't run the numbers, but based on this the Gokhale and Smetters number seems plausible. Not surprisingly, the AEI economists use their result to argue against expanding Medicare and Social Security benefits (a position I agree with, unless taxes are raised or other spending cut to pay for them). On the other hand, exacerbating the transfer from "the children" to the current generation via massive tax cuts and the accompanying deficits seems like an equally bad idea. Oh wait, I forgot, the solution is trivial: use more tax cuts to increase revenue--we better get taxes down and pronto!

Back to The Economist's assessment of the situation:

As the late Herbert Stein, a noted economist, once said, "If something cannot go on forever, it will stop." One way or another, America's budget gap will have to be closed. The question is, will it be done responsibly, by coming clean about the hidden liabilities now and taking the necessary, if painful, steps to deal with them? Or will the top management, like Enron's, stave off admitting the true state of America's finances until it is forced to do so by some spectacular collapse?


posted by Angry Bear | 3:21 AM |

Sunday, August 03, 2003  

Jobless Recovery

Via Ruminate this, check out John Andrew, who was recently laid off and is now using his free time to shadow the Bush Economic Crew.


posted by Angry Bear | 2:58 AM |