Tuesday, September 22, 2009

A Chicken in every pot

As the G-20 meets the US is said to be in favor of 'a new wold economic order' It's not clear how that will work out. The idea is for big deficit countries, like the US, to save more and for trade surplus countries (exporters) to stimulate more domestic demand. It does make sense. Remember that some time ago Bernanke framed the problem as the other countries saving too much instead of as the the US consuming too much. But it's all part of the same phenomenon.

So how do you get here from here? What policies will the US propose to raise US savings? Will it put a VAT tax into play to discourage all consumption including imports? (Ouch!) Will it subsidize savings accounts with more tax breaks? What is the plan to achieve the rhetorical end sought by the Obama Administration? And what are the incentives for Germany, Japan and other surplus county exporters? What would their governments do to to spur consumption at home?

While we know that some of these steps need to be made what if we cannot agree on the nuts and bolts or enabling policy coordination?

Well, that's why God invented exchange rates.

Exchange rates are supposed to rebalance these imbalances. The dollar has been kept too strong for too long in the face of widening deficits. The adjustment system has failed to work; it failed to choke off this huge volume of imports. China's FX rate has been too low The EMU rate has been too low, the yen has been too low. So if this initiative fails you can expect the dollar to be one of the factors to move to create what policymakers refuse to create on their own.

One deliciously ironic things is that everyone complains and wonders about foreigners continuing to buy our debt. But buying less of it is exactly the remedy. It was the continued aggressive purchases of dollar assets that supported the dollar and kept it from falling in the face of huge deficits. Had the dollar fallen, US exports would have been stronger and imports weaker with a resulting favorable impacts on the trade balance.

We have gotten too deep into this hole because some countries- without thinking - were willing to buy huge amounts of US-based financial paper. Those purchases supported the dollar and financed the US deficit and financed their own continuing trade surpluses.

In economics all the pieces usually fit together. They do again in this case. So we should watch the G-20 closely and see if the policymakers have any workable ideas or if the grandiose rhetoric will go down in flames in the foreign exchange market.

stay tuned

Wednesday, September 9, 2009

America the beautiful-pessimistic, but beautiful

Yes, in America, the land of the free and the home of the brave, no one can seem to muster the backbone to be optimistic on the economy. By this I do not mean ‘stick out your neck’ optimistic, just not so pessimistic that you extrapolate every trend to the downside.

I recently heard an economist say that the recovery was going to be slow because the recession has been so bad.


Charting JOB recoveries - For most recessions the employment low point comes quite close to the end of recession, falling early in the recovery. But in the 1990 and 2001 recoveries the employment low points occurred well into their recovery period. That is not an issue here since we center all series indexed to their respective cycle lows in employment.

Job patterns around the business cycle - So instead of using the business cycle to mark time let's look at jobs dropping from their cycle peaks and rising from their cycle lows and ignore the business cycle dating. This treatment gets us away form those notions and in doing so it shows a different and seldom spoken aspect of job losses in and around recession periods. Job losses and gains tend to be symmetrical around business cycle periods. That is if we lose jobs in a slow U-shaped drop, we put them back on in a slow U-shaped rise. If we lose jobs in vigorous V-shaped drop we tend to put then back on is a vigorous V-shaped rise. We do not have ‘V-shaped’ drops coupled with ‘U-shaped’ rises.

The Real Deal gets the RAW DEAL - So the real answer is that if the job losses are severe in recession we should expect the recovery job gains to be strong. And the losses have been (and still are) severe in this recession so why are so few economists willing to talk of a strong recovery when history so clearly points to that as the MOST LIKELY CASE SCENARIO?

Pessimists rule!

Hold the presses…never mind - So why do pessimists rule? It’s an intriguing question. I think part of it is that ‘dog bites man and man might get rabies and could die,’ is a better story than ‘dog bites man, man get tetanus shot goes on his way and is healthy’.

The perils of forecasting - In recession it is never clear how we get to recovery. In expansion periods the economist that predicts recession is a pariah no one believes. Every cycle someone is right and often that person is right for the wrong reason.

The PARIAH MESSIAH - In this cycle the Pariah Messiah forecast was that housing would bring down the consumer and the economy. Instead housing has been an ongoing issue but it was the loan instruments, leveraging and reckless lending that crashed the financial institutions that still do not want to lend. They then shut out credit to each other sapped the markets of liquidity doomed jumbo loan financing and changed the terms and conditions of home financing in a way that bludgeoned housing and sucker-punched autos, both big ticket items that required bank involvement. Also oil at nearly $150/bbl did not help. No the doom-forecasters for the most part, got the doom they forecasted but the causes were completely different from what they had warned.

Paradox of thrift not of theft

Actually it will be the consumer to lead us to recover regardless of people saying it won't. And as for the needed rise in the savings rate that may happen and it will slow spending but it will not doom us to a paltry recovery.

The first thing to understand is that we know about the paradox of thrift and no nation has ever saved its way to damnation (boom, gloom and doom report aside). A higher savings rate will not rob us of our growth, there is so much more at work here than just the need to hike the savings rate.

Perspective! - The next thing is to gain some perspective. Pessimists say that consumers can’t spend and incomes can’t grow. But all this misses the point. The point is that 6.9million fewer jobs exist in the nonfarm payroll and there are 7million fewer employed compared to the peak in the household survey of employment.

What happens to those people?

Tradition! History (see graph above) tells us they get put back to work. If so they get jobs and get incomes. They amount to about 5% of total employment. So their return to the labor force is liable to be a key element driving incomes higher. Remember income is not just the product of current people working times their wage; it’s all the people currently working plus those brought back to work times the number of hours they work times their wages. And that is just for the wage component of income. And wage as salary income revives so will profits, rents and so on.

The arithmetic of pessimists- Productivity has remained strong in this cycle. If population growth is 1% per year and productivity is 1.5%, then we can grow at 2.5% per year –and that is at the lower work week with 5% of the workforce remaining unemployed. But that won’t happen.

The arithmetic of realism - The work week will go back up further boosting growth during that transition. The SEVEN MILLION unemployed will go back to work. If they are hired at an astonishingly slow pace and if it takes five years to re-employ them, then growth can look like this FOR FIVE YEARS IN A ROW: 1% for population 1.5% for productivity and 1% point more per year for five years as we put the unemployed back to work. That’s 3.5% per year. And we still get a transitional bounce on top of that as the work week segueways itself back up to normal.

Let me add that we have a government stimulus program of growing impact to help make this happen in 2010.

Pessimists must be related to ostriches - I cannot for the life of me understand what the pessimists are thinking – are they thinking? Do they think that the seven million unemployment are going to go bury themselves at Forest Lawn and disappear forever? It’s not just a matter of looking at my job growth chart. It’s a matter of thinking about this country and what is likely to happen. Life goes on. People pick themselves up and go on with their lives. Sometimes dreams are shattered. But writing-off the recession job-losers as if they will disappear is a big mistake. If the jobs in Detroit are gone for good then, new ones will be formed or people will move. Houses may become abandoned. But those people will go somewhere else and they will work. We saw this in the wake of the first oil price bubble when prices went back down and whole unlived in apartment complexes in Texas were bulldozed. Texas survived. Look at the evisceration of Louisiana after the floods. Whole neighborhoods are gone but the people are elsewhere rebuilding their lives.

OHHH but it will be different this time - Maybe it will be different this time; maybe it will be slower this time. Usually jobs are put back on faster than they are lost. But the reason to dump pessimism is strong. The great pool of formerly employed will be a powerful job-creating force. Don’t forget the supply side. These people will want to work. The one differing factor is that there may be ‘some displaced workers’ close enough to age of retirement to not reenter the labor force. That is a difference with past cycles and it could impede the tendency to rehire this time around. Still, that should be small potatoes.

Wednesday, September 2, 2009

Why credit the ephemeral? Two Gripes:

One gripe...
There is no doubt that cash for clunkers ($4C) has helped the economy. Just look at the auto sales.

And in selling cars, inventories were drawn and will be rebuilt spurring production, putting people back to work, stimulating income growth. Amen.

Finally a plan that worked...but for whom?

Some of these people going back to work will be Americans. You see, a lot of Japanese-made and Koerean-made cars were bought in the $4C program. That will come out imports eventually and that will blunt the impact on GDP while putting Koreans and Japanese back to work.

As for the big stimulus plan (Obama-nomics) its impact has just begun to uncoil. It will make its big strike in 2010. Our data are barely from mid-year 2009.

But the WSJ and others want to chalk the progrss up to stimulus.

Yet stimulus is not the only reason for a rebound. All recessions -even severe ones- end. We have offered several different calculations on how they end. We have shown/argued that when recessions are severe and job losses are severe recoveries tend to be strong ('recovery' refers to the first 12 months or so after recession ends). Separately we have shown that if we look at job losses per se in business cycles but not tied to the cycle timing itself, job gains tend to follow about as rapidly as the losses that had preceded them. That finding is independent of stimulus.
It is the automatic self-correcting aspect of the economy at work. And we do not deny that government might play a role in getting the economy to make that turn. But once the turn gets in gear natural forces are at work.

A second gripe...
Treating indicators as fact...
I also wonder about the ADP. I see it being reported as though Moses brought its number to market on stone tablets. I'd sure prefer to hold my judgement on job growth until I see the real figures. We know that the purveyors of the ADP survery are 'full of themselves' and have even spoken of how their survey is better than the one conducted by the Labor Dept. Sorry if I don't sign on for that Kool Aid-drinking fest. Last month ADP was well off the mark. This month the ADP shows continued improvement compared to is error-laden report of last month. Unlike the WSJ, I will reserve comment on how fast job improvement is coming along until I see real numbers from the Labor Dept.

However, on the positive side, the ISM MFG report did show a turn to growth in its survey and its employment gauge improved in August. Well, ADP says it is better than the ISM results but (big BUTT) that boasting all comes from in-sample observation-hitting. In real time ADP is missing the diminishing job losses and it it really missed the slip to outsized job losses as the recesssion became intense.

I'd reallly caution the Journal to speak speculatively of what the ADP indicates instead of treating it like manna from heaven. It's been more like Manny from Brooklyn.

I remain optimistic that improvement continues at a rapid pace and look forward to seeing that view borne out in the Friday jobs report.