How to prepare for next time

Let's face up to the fact that our government is not going to try and stop "running" the economy any time soon and think about ways to limit the damage they do.

When it comes to macro policy, there are two no-brainer reforms that would really help.

First, I agree with Ryan Avent (really). Raise the inflation target to say, 3.5%, but INDEX all tax brackets so that the higher inflation can be more neutral.

There clearly is a "discontinuity" in the Fed's reaction function when nominal rates hit zero, and a higher inflation target can help avoid this situation.

Second,  I agree with JM Keynes (really). Counter-cyclical fiscal policy is a good idea. Surplus in the booms, deficits in the downturns. Chile has figured this out for Pete's sake, why can't we? Balance the budget over the business cycle.

People, I don't think the Fed can control real GDP. I think the Fed has done a decent job controlling inflation over the last 30 years, and they did a great job throwing the kitchen sink at the financial system and preventing a full meltdown / depression. I don't think there is a magic monetary policy the Fed could have been following that would have either avoided the downturn or given us a quick and robust recovery. I do think that zero bound problems were not sufficiently appreciated and a modestly higher inflation target could help us from smacking into them.

Neither do I think that fiscal policy has big multiplier effects (though I admit to being intrigued by the idea that at the zero bound, the effects are perhaps greater than 1), but you know that in troubled times it will be used. Let's just stop shooting ourselves in the foot by running big deficits in the good times as well.

We are not going to get rid of policy actions in downturns. But if our policymakers were operating from better baseline positions (further from the zero bound, further from an explosive level of debt), these policy actions would be much more effective and carry lower long term consequences.

Not the report we were looking for.

69,000 net new non-farm jobs in May. The prediction was for a relatively weak 150,000 and we didn't get to half of that!

April's number was revised down from 115,000 to 77,000 and March was revised down from 154,000 to 143,000.

To put all this in perspective, we should be seeing numbers around or over 250,000 per month in an "normal" recovery.

YIKES!

Job wars

Nothing takes worse of a beating in presidential elections than do facts and figures.  We know that (a) our employment levels have not recovered to their pre-recession levels and (b) job losses in this recession are far worse than in any post-war recession.

But yet someone manages to produce this (clic the pic for an even more misleading image):

So this "recovery" is "normal", even though we know it isn't.

The trick is accomplished in three steps. The first is by using the total number of jobs and not taking into account that the labor force is much larger now than it was in 1990 or 2001. The second is to date the chart from the bottom of the recession. The third is to ignore all the other post-war recessions.


The invaluable Calculated Risk blog provides a more accurate view about the strength of our current recovery (clic the pic for an even more enlightening image):

Yes people, that is actually where we are and what we are still up against. The first graph is roughly comparing the upward sloping part of the red line against the upward sloping part of the brown line (the 2001 recession and recovery) on a total number of job basis instead on of a percentage of jobs basis, and trying to get you to think that we are better off in this recovery than we were in the 2001 recovery, which of course is utter nonsense.

On a more positive note, I am fairly certain that Bin Laden is actually dead.

The employment situation

The March jobs report is out from BLS and it's not good.  After job growth averaged over 225,000 per month the last three months, the current number is 120,000. "Expectations" were for 205,000.

We are not out of the woods yet, people.

Prophets of the KPC?

I've been droning on (and on) about how the Fed has backed themselves into a weird position where if the economy keeps growing decently, they will have to backtrack on one of their two promises.

Promise #1 is 2% inflation. Promise #2 is a doozy: no short term interest rate hikes until the second half of 2014!

Increasingly, others are growing more skeptical of promise #2.

In CNBCs survey of "67 economists and equity and fixed income managers", it found that "nine out of 10 market participants don’t believe the Fed will wait that long. In fact, 54 percent believe the first Fed interest rate hike will come by 2013."

I wonder what The Bernank and crew are thinking? Are they banking on a recession to save their "credibility"? Do they think there is enough weasel room in the wording of promise #2 that they can claim compliance no matter when they raise rates? Do they regret getting pressured into making promise #2?

People, which is more likely to happen, the Fed keeping promise #2 or Congress allowing the planned sequestrations to go through without any changes?

Hat tip to LeBron.

edging upward

The BEA announced an upward revision of real GDP growth in the fourth quarter of 2011 from 2.8% to 3.0%.

Entre la espada y la pared?

As I've been droning on about, the Fed has promised to (a) keep rates near zero until at least the second half of 2014, and (b) keep inflation at or below an upper limit of 2%.

The latest report on the CPI came out today.

Behold (clic the pic for a more glorious image):

CPI inflation (blue line) is currently 2.9%. CPI less food and energy inflation (red line) has now climbed over 2% and is trending upward.

Something has got to give. Either the recovery falters or the Fed has to take a pass on one of its promises

Yes, I know that the Fed target is probably some genetically modified version of the GDP deflator.

Here's a slightly less updated inflation graph using the deflator for personal consumption expenditures (from Tim Duy at Mark Thoma):

Even this cherry picked series is over 2% and the series less food and energy is trending up and poised to hit 2%.

Please understand that I am not advocating that the Fed tighten policy right now. I think 3 or 4 percent inflation for a while would not be a disaster.

I am saying that the Fed has made some very strange promises of late that don't bode well for its vaunted "credibility".

Too much good news?

The Fed has promised two seemingly inconsistent things.

1. to keep interest rates "extraordinarily low" well into 2014

2. to keep inflation at 2%

As noted, these are really only compatible if the economic recovery remains sluggish.

But, growth accelerated last quarter (and there is talk that number will be revised upward), and early indicators show that growth may be strong this quarter as well. Unemployment is falling, initial jobless claims are falling, Greece continues to be willing to eat Germany's sandwich.

If these trends continue, it will be a case of too much good news for The Bernank, and the Fed will face a tough decision about which promise to break.

So, come on American economy! Let's kick some butt and make the Fed rue their super-bearish forecast.

poco a poco

243,000 net new jobs in January (including 50,000 in manufacturing), November & December of 2011 figures revised up by 60,000, unemployment rate down to 8.3%. Details are here.

Not too shabby.

Net new jobs in the private sector were 257,000 so not only is employment rising but its composition is slowly shifting away from government and toward the private sector. In the last 12 months there has been a net job loss in the government sector of around 275,000 jobs

The net jobs figures for the last three months, after revisions, stand at 157,000 203,000 and now 243,000.

It will be interesting to see how the "austerity is killing us" people will spin this.

Not good

The advance estimate of real GDP growth for last quarter (2011 q4) is in at 2.8%. This is not so good in a number of ways.

First, "expectations" were for 3%.

Second, over half of the growth came from increased "inventory investment", i.e. the accumulation of unsold goods. 

Third, this number is subject to revision and the direction of revision is frequently downward.

Fourth, real GDP growth in 2011 was substantially lower than it was is 2010! 1.7% vs. 3.0%

Epic Fail!

Fifth, even if we discount points 1-4, 2.8% is a pitiful growth rate for a country coming out of a deep recession with a high unemployment rate and a depressed level of labor force participation.

President Obama should be thanking his deity every day for Mitt and Newt. They are the only reasons he's likely to win re-election with an economy this weak.

Initial Jobless claims fall!

"Only" 366,000 this past week. Slowly but you know what-ly, the American economy is rising, perhaps just in time to get hammered by the Euro debacle, but rising nonetheless. Good news for President Obama.

The mysterious recession, take II

Yesterday I claimed that the behavior of the US economy in our current recovery is, contra Matt Ygelesias, "mysterious", in that we have not seen the common "v-shape" or recovery to the original trend.

Ace commenter John Thacker pointed out that Greg Mankiw (and others) have argued that macro aggregates have a unit root and thus reversion to a fixed trend is not to be expected.

I don't want to get into a big discussion about the power of unit root tests here, so let me show a picture (from the blog Calculated Risk) that illustrates what I was trying to say (clic the pic for a more glorious image):

The graph shows job losses in the recessions since WWII. All but the last three could be reasonably described as "sort of V shaped" and except for them, time to recovery seems almost independent of the severity of the recession. Our current situation is notable both for the severity of the job losses and the extreme slowness of the job market to recover.

The 244,000

All in all a decent jobs report. 244,000 net new jobs in total, 268,000 net new private sector jobs. 29,000 new jobs in manufacturing and the median duration of a spell of unemployment fell below 21 weeks for the first time in over a year. However the overall unemployment rate did rise back up to 9%.

Woods on the Non-Depression of 1920

I did not much like "Meltdown." It's just too tendentious and selective in its use of evidence, though I agree with many of its conclusions.

But this T. Woods talk is pretty entertaining. Earlier he had written this, which is interesting and useful. (Hard to believe that this 50 minute talk followed a dinner, though. That's a long after dinner talk. Yikes.)

A Cautionary tale

I loved this mini-story / blog post by John Scalzi. It's titled When the Yogurt took Over" and is self recommending!!

One quick nugget:

A week later, during breakfast, the yogurt used the granola she had mixed with it to spell out the message WE HAVE SOLVED FUSION. TAKE US TO YOUR LEADERS.

Sunday links

1. The Steet is dead. Long live the Street.

2. Raghu is a credit snob.

3. Mankiw explains the unholy trinity.

4. Mark Thoma takes leave of his senses.

5. Angus' song of the year so far.

6. Hayek hearts Singapore (nice post by Will W.)