A new curriculum

Our curriculum discussions have focused on what some of us want to take away from the current curriculum. I thought it would be a good idea to work from the other direction: if the "alternative motions" are adopted, what kind of curriculum would we have?

Turn to page 29 of your Course Catalogue 2009-10. There you will find a description of the Gettysburg College curriculum (warning: Stanley Fish would not approve!). When I and my ilk have pushed our changes through, the description will look like this (italicized passages are changed from the Catalogue version):

The Gettysburg Curriculum

The overarching goal of the Gettysburg College Curriculum is the development of lifelong learners who

• Have a broad base of knowledge in a number of different disciplines

• Are integrative thinkers

• Are skilled in communication

• Are prepared for the responsibilities of local and global citizenship

Students demonstrate their progress toward achieving these goals through their performance in a range of courses or comparable faculty-sponsored experiences, their completion of a major field of study, and their ability to demonstrate connections across the curriculum.

Multiple Inquiries Goal Familiarity with a broad range of subject matter and an understanding of the assumptions and methods of different disciplines. The divisional requirements are designed to begin this process of development. Students must take

• One course in the division of the arts

• One course in the division of the humanities

• One course in the division of the social sciences

• Two courses in the division of natural sciences, at least one of which must have a laboratory component (B.Mus. and B.S.M.E. degree students complete one science course with lab)
Through these courses, students encounter the perspectives and modes of inquiry and analysis that characterize academic disciplines, an encounter that continues in greater depth in the major field of study.

Integrative Thinking Goal The development of a critical and open mind that seeks to adopt well-argued points of view through the active consideration and integration of alternative methodologies, perspectives, and foundational presuppositions. This process of development receives special emphasis in the curriculum in three different ways.

• Students have the opportunity to take a wide range of courses in and outside of their majors that emphasize interdisciplinary or multidisciplinary approaches to a common theme. Students may also choose from a number of interdisciplinary majors and minors. Through these experiences, students gain an understanding of the connections and tensions among approaches to common issues, texts, and phenomena.

• The Quantitative, Inductive, and Deductive Reasoning Requirement in which students take a course focusing on formal reasoning or mathematical problem-solving and the interpretation of quantitative or qualitative information.

• The Capstone Requirement, a course or faculty-sponsored experience in which students bring together what they have learned in their major curriculum and demonstrate mastery over the chosen area of concentration.

Effective Communication Goal The development of proficiency in writing, reading, and the use of electronic media. Central to these skills is the ability to articulate questions clearly, identify and gain access to appropriate kinds of information, construct cogent arguments, and engage in intellectual and artistic expression. Emphasis on this goal begins in the first year of study and continues in the major.

• First-Year Writing Requirement, a course that introduces students to the essentials of collegelevel writing. The course may be Introduction to College Writing (ENG 101), a specially designated First-Year Seminar, or an introductory course in a particular discipline.

• Major Field Communication Requirement, a course or series of courses or experiences through which students demonstrate they have learned the communication conventions of their chosen field of study. The means through which students will learn these conventions and demonstrate their mastery are determined by the individual departments.

Writing Policy: Since the ability to express oneself clearly, correctly, and responsibly is essential for an educated person, the College cannot graduate a student whose writing abilities are deficient. Instructors may reduce grades on poorly written papers, regardless of the course, and, in extreme cases, may assign a failing grade for this reason.

Local and Global Citizenship Goal The development of the skills, understandings, appreciations, and moral dispositions enabling students to be committed members of and meaningful contributors to their local, national, and global communities. Two requirements have been developed to assist students in achieving this curricular goal.

• Second Language Requirement, satisfied by successful study through the intermediate level (equivalent of 202).* (B.Mus. degree vocal performance students complete four courses in language, gaining a proficiency in German and in French or Italian at the first-year level or higher depending upon placement.)

• Cultural Diversity Requirement, two courses designed to help students achieve a fuller appreciation of human diversity through exposure to alternative historical and cultural traditions and modes of analysis. Students must take one non-Western course that has a principal focus on peoples whose practices and beliefs have been shaped in significant ways by a historical tradition separate from that of Western Europe. Students must also take one Domestic or Conceptual Diversity course that has a principal focus on dimensions of diversity within the United States or on the study of the varied dimensions of diversity in a conceptual or comparative context (whether in the United States or elsewhere). A course listed as both non-Western and Domestic/Conceptual may be used to fulfill the requirement in only one area. In all cases, two cultural diversity courses must be taken.

Now suppose a group of earnest faculty members proposed changes to this curriculum:

1. Under "The Gettysburg Curriculum," change "Have a broad base of knowledge in a number of different disciplines" to "Are able to acquire and process information and ideas in multiple ways."

2. Under "Multiple Inquiries Goal," change "Familiarity with a broad range of subject matter and an understanding of the assumptions and methods of different disciplines" to "The development of an understanding of multiple frameworks of analysis and of proficiency in reading texts that span the breadth of human expression."

3. Under "Integrative Thinking Goal," change "Students have the opportunity to take a wide range of courses in and outside of their majors that emphasize interdisciplinary or multidisciplinary approaches to a common theme. Students may also choose from a number of interdisciplinary majors and minors" to "The Interdisciplinary/Course Cluster Requirement, normally completed by the end of the sophomore year, in which students take two designated interdisciplinary courses or a two course cluster that emphasizes interdisciplinary or multidisciplinary approaches to a common theme. Through these experiences, students gain an understanding of the connections and tensions among approaches to common issues, texts, and phenomena." **

4. Under "Local and Global Citizenship," add another requirement:
• "Science, Technology, and Society Requirement, one course with a focus on the methodological analysis, historical context, or discussion of the social ramifications of some aspect of natural science or technology." ***

* We've since changed this requirement to two semesters of a second language.
** The APPC proposes eliminating the interdisciplinary course option, requiring students only to complete a cluster.
*** The APPC proposes allowing students to substitute STS courses for cultural diversity courses or vice versa.

Question: would the four proposed changes strengthen or weaken the curriculum?

Stanley Fish on the curriculum

A colleague sent me a link to a piece by Stanley Fish that asks "What should colleges teach?" Fish is sympathetic to a fundamentalist view of the curriculum:

As I learned more about the world of composition studies, I came to the conclusion that unless writing courses focus exclusively on writing they are a sham, and I advised administrators to insist that all courses listed as courses in composition teach grammar and rhetoric and nothing else. This advice was contemptuously dismissed by the composition establishment, and I was accused of being a reactionary who knew nothing about current trends in research...

Nevertheless, I found myself often nodding in agreement when I was reading ACTA’s new report. In it, the 100 colleges and universities are ranked on a scale from A to F based on whether students are required to take courses in seven key areas — composition, literature, foreign language, U.S. government or history, economics, mathematics and natural or physical science...

Credit for requiring instruction in mathematics will not be given for linguistic courses or computer literacy courses because their “math content is usually minimal.” Credit for requiring instruction in the natural or physical sciences will not be given for courses with “weak scientific content” or courses “taught by faculty outside of the science departments” (i.e., the philosophy or history of science). Credit for requiring instruction in a foreign language will not be given for fewer than three semesters of study because it takes that long to acquire “competency at the intermediate level.” And credit for requiring composition will not be given for courses that are “writing intensive” (there is a significant amount of writing required but the focus is on some substantive topic), or for courses in disciplines other than English and composition (often termed “writing in the discipline” courses), or for courses in public speaking, or for remedial courses. In order to qualify, a course must be devoted to “grammar, style, clarity, and argument.”

I wonder if those of us who oppose the current interpretation of "multiple inquiries" are thought to hold this kind of "fundamentalist" view of the curriculum. I certainly don't. My only objective is to have a curriculum that is intellectually coherent and furthers our students' education rather than being a barrier to it. One thing that I think we want our students to get out of the courses they take here is a breadth of knowledge about important topics. I want them to know something about biology, economics, etc. I also want them to understand how different disciplines answer questions (the "modes of inquiry") but this is a secondary consideration, best developed over a number of courses, particularly those in the students' majors. I don't know why we have a curriculum whose avowed purpose is only to expose students to different modes of inquiry, and not at all to have students gain knowledge.

Nice graph at Angry Bear

Spencer at Angry Bear has a nice looking graph showing that initial unemployment claims in this recovery are looking very much like those in the recovery that began in 1982. More grist for the mill!

November employment situation

Ok, very quickly, then I'm headed on the road. I just ran two vector autoregressions: one with initial unemployment claims and payroll employment and another with continuing claims and the unemployment rate. I used the VARs to forecast November's unemployment and payroll employment numbers. Then I took data for unemployment claims in the second week of November (big drop in both numbers - pretty remarkable, and good news for the labor market), used the historical correlation between surprise changes in those numbers and surprise changes in unemployment and payroll employment, and I get the following predictions:

November unemployment rate: 10.0%.
November change in payroll employment: -10,795.

I don't know whether to believe those numbers or not. The standard error of those point estimates is very large, and the models may be misspecified to begin with. But let's let those predictions stand and see what is reported a week from Friday. If the numbers look that good, there are going to be a lot of people scrambling to figure out how they could have been so wrong about predictions for a jobless recovery!

Pessimistic forecasts

Paul Krugman is warning of an extremely weak economy in the years ahead:

... a weird complacency has settled in on the state of the actual economy. We’re recovering, everyone says — no need to do anything more. Yet the outlook is extremely grim — not according to DFHs like yours truly, but according to the consensus of professional forecasters. Here’s what the Philadelphia Fed survey of forecasters says about inflation and unemployment, through 2012... Disastrously high unemployment, persisting years into the future... [Cue graph showing unemployment forecasted to stay above 9 percent through 2011.]

I'm not saying policy makers should be complacent - there should be more aid to states, extended unemployment compensation, continued fiscal and monetary stimulus. But keep in mind the record of forecasters. Here's the mean unemployment forecast of the Survey of Professional Forecasters at the trough of the 1974-75 recession, compared to the actual unemployment rate:

And here's the same graph for the trough of the 1981-82 recession:

My hypothesis is that the 2007-09 recession is more like the 1974-75 and 1981-82 recessions than the 1990-91 and 2001 recessions, because it's so severe. It's worth noting that at the trough of those recessions forecasters were very pessimistic about the unemployment rate, and, fortunately, very wrong. It's also worth noting how bad the professional forecasters did predicting the future path of unemployment in 2007Q4, on the eve of the current recession:

According to the SPF in 2007Q4, unemployment should be 5 percent now. Oops!

Still trying to make a silk purse out of a cow's ear

Ok, we're all depressed about the state of the economy. But here's some evidence that things are better than one would have expected given where we were at the beginning of 2009. Using data from 1980Q1 to 2009Q1, estimate a second-order autoregression model for GDP growth. Use the model to forecast GDP growth in 2009Q2 and Q3. Actual GDP growth is considerably better (by almost 3 percentage points) in 2008Q3 than the model predicts.


Do the same for employment growth. While we're still losing jobs, job losses are 2.8 percentage points smaller (on an annual basis) in Q3 than the model predicts. That translates to about 935,000 more jobs that would have been lost in Q3 alone if the economy had behaved as it normally does. The same computation for Q2 gives us 368,000 more jobs in that quarter than expected.

What does this tell us? Maybe that the extraordinary monetary and fiscal policy actions of the last year (plus other unusual things - strong recovery overseas and so on) have pushed GDP growth into positive territory and "saved or created" 1.3 million jobs.

Curve bending

Marc Ambinder writes about the cost containment provisions of the Senate Health Reform bill. Sounds exciting, no? He quotes Jonathan Gruber, prominent health economics expert at MIT:

"I'm sort of a known skeptic on this stuff," Gruber told me. "My summary is it's really hard to figure out how to bend the cost curve, but I can't think of a thing to try that they didn't try. They really make the best effort anyone has ever made. Everything is in here....I can't think of anything I'd do that they are not doing in the bill. You couldn't have done better than they are doing."

My chief complaint about the Senate bill is that I think they make it deficit-friendly by being excessively stingy on insurance subsidies to middle income people. This is not nice, and is also politically dangerous: do Democrats really want to have to face a lot of middle class voters who are angry that the government is making them shell out thousands of dollars for health insurance that they don't think they need? Another problem is that the bill doesn't start providing health insurance subsidies until 2014. That's way too long to wait - they ought to get this puppy dog up and running by this time next year.

Oops

The BEA reports that GDP rose at only 2.8 percent in 2009Q3, not 3.5 percent as reported last month. We seem to be moving away from rather than towards my prediction of 4 percent. There does not appear to be a single culprit: consumption of all kinds was a bit weaker than the BEA thought earlier, residential and nonresidential investment were both weaker, imports took more away from growth than previously thought, inventory investment added less.

The new data helps explain last quarter's employment numbers: with GDP growth at 2.8 percent (pretty close to the historical average growth rate), we would not have expected any improvement in the employment situation. The rise in unemployment and the continued loss of jobs is not a mystery due to structural changes in the labor market, but simply a result of weak growth.

I'd be a fool not to start to question my faith in a modestly strong recovery at this point. The point I made awhile ago (really Bob's point) still holds however: every quarter that inventory disinvestment continues at its historically high pace (still estimated at -133 billion in Q3) creates the possibility of a bigger spike upward in inventory investment in future quarters. So it's possible that some of the 0.7 percent drop in growth due to this revision will be added to growth in a future quarter.

The wages of sin

The New York Times has a very confusing write-up of the Bebchuk, Cohen and Spamann paper on executive compensation at Bear Stearns and Lehman Brothers. The paper itself is crystal clear. From the conclusion:

The stories of Lehman and Bear Stearns will undoubtedly remain in the annals of financial disaster for many years to come. To understand what has happened, and what lessons should be drawn, it is important to get the facts right. In contrast to what has been commonly assumed thus far, the top executives of those two firms were not financially devastated by their management of the firms during 2000-2008. They were able to cash out rather large amounts of performance-based compensation, both from bonuses and from share sale, during the years preceding the firms’ collapse. This cashed-out performance-based compensation was large enough to make up the losses on the executives’ initial holdings in the beginning of the period. As a result, the executives’ net payoffs from their leadership of the firm during 2000-2008 were decidedly positive.

Thus, the large paper losses that the executives suffered when their companies collapsed should not provide a basis for dismissing either the possibility that executives’ choices have been influenced by excessive risk-taking incentives or the importance of improving compensation structures going forward. Legislators and regulators seeking to prevent future crises would do well to consider seriously the role of incentives in the financial crisis of 2008-2009 and the fixing of such incentives in the future.

Knowledge in the Gettysburg Curriculum

Look at page 28 of the Gettysburg College Course Catalogue 2009-10. There under the heading "Academic Purposes of Gettysburg College" is an eloquent statement that must have been approved by the faculty many years ago (before I arrived at least) concerning the goals of a Gettysburg College education. We read:

In order to accomplish its liberating function, Gettysburg College believes that it owes its students a coherent curriculum that emphasizes the following elements:

... 2. Broad, diverse subject matter. The curriculum of the liberal arts college should acquaint students with the range and diversity of human customs, pursuits, ideas, values, and longings. This broad range of subject matter must be carefully planned to include emphasis on those landmarks of human achievement which have shaped the intellectual life of the present.

3. Rigorous introduction to the assumptions and methods of a representative variety of the academic disciplines in the sciences, the social sciences, and the humanities...

Now look at the section under "Gettysburg Curriculum" on page 29:

The development of an understanding of multiple frameworks of analysis and of proficiency in reading texts that span the breadth of human expression. The divisional requirements are designed to begin this process of development...

Through these courses, students encounter the perspectives and modes of inquiry and analysis that characterize academic disciplines, an encounter that continues in greater depth in the major field of study.

Fascinating. In some golden age many years ago, the faculty declared that it "owes its students" a curriculum that, by requiring courses across divisions, acquaints students with human customs, pursuits, ideas, etc., with an emphasis on the landmarks of human achievement. I think that means that they should know stuff, in addition to knowing how to know stuff. Then years later some more recent faculty adopted a curriculum that talks exclusively about knowing how to know stuff, without mentioning that students also need to actually know stuff. Students are expected now to "encounter the perspectives and modes of inquiry" of different academic disciplines; they are not expected to encounter customs, pursuits, ideas.

And when I suggest in a faculty meeting that one of our goals ought to be that students know stuff, I get giggles, quizzical looks, and hostility.

Faculty meeting

I can't believe we can't get unanimous consent for the idea that one of the goals of the Gettysburg Curriculum ought to be that "students know stuff about a lot of different things."

I'm not sure I understand seasonal adjustment

The unemployment rate rose from 9.8 percent in September to 10.2 percent in October, right? Well, not exactly. The Census Bureau, on behalf of the Bureau of Labor Statistics, surveyed households in September and October. In September it estimated that there were 14.538 million people unemployed and 139.079 million employed for an unemployment rate (u=U/(U+E)) of 9.5 percent. Then it surveyed another group of people in October and estimated that there were 14.547 million unemployed and 139.088 employed, for an unemployment rate of 9.5 percent. The number unemployed rose by 9000 as did the number of employed, and the unemployment rate was unchanged.

But then the BLS seasonally adjusted the data. Given that this is October when presumably some companies start to hire for the Christmas season, given the number of work days in the month, etc., we would ordinarily have seen bigger employment gains. So the numbers were passed through the seasonal adjustment sausage grinder, and voila, we have a decrease in employment of 589,000, an increase in unemployed of 558,000, and an increase in the unemployment rate from 9.8 percent to 10.2 percent.

I get that. But then I compare the unadjusted and adjusted data for October 2009 with October 2008. Comparing Octobers should take care of most of the seasonal factors, no? We're left with adjustments for number of weekdays, weather, whatever else the BLS factors in, which I wouldn't think were very important. But what do we find? According to seasonally unadjusted data, over the year from October 2008 to October 2009 6.455 million fewer people were employed, 5.078 million more were unemployed, and the unemployment rate rose from 6.1 percent to 9.5 percent (an increase of 3.4 percentage points). According to the seasonally adjusted data, we had 6.382 million fewer employed, 5.479 more unemployed, and an increase from 6.6 to 10.2 percent in the unemployment rate (3.6 percentage points).

So in a nutshell, seasonal adjustment subracted 73,000 people from employment and added 401,000 to unemployment, and added 0.2 percentage points to the unemployment rate, from October 2008 to October 2009. I wonder why? And I wonder if this should make me discount the sharp rise in the unemployment rate in October 2009 as somewhat a figment of the BLS's seasonal adjustment techniques?

Holy bubble economy!

This figure is from the CBO's Budget and Economic Outlook, August 2009. It shows household net worth as a multiple of disposable income. Until the mid-1990s, the ratio was fairly stable in the 4.5-5 range, dipping during the bear market, high inflation 1970s. The two most recent business cycles show dramatic and unprecedented increases in net worth followed by massive crashes. This is a phenomenon that cries out to be incorporated Minsky-style into macroeconomic models.

Household net worth seems to be back to normal. Another sign that the worst is behind us?

Making the rounds on Facebook

CNN report: 10 year old in Arkansas refuses to say the Pledge of Allegiance until gays can marry. Classmates call him "gaywad".

Why market structure matters

Greg Mankiw introduces an article critical of the possibility of the current health reform bills reducing health care costs by writing:

Let's review some basic principles of supply and demand: If a government policy increases the demand for a service, the price of that service tends to rise. If the government prevents prices from rising, shortages develop. The quantity provided is then determined by supply and not demand. In the presence of such excess demand, the result could be a two-tier market structure. Consumers who can somehow pay more than the government-mandated price will be able to purchase the service, while those paying the controlled price may be unable to find a willing supplier.

Everything he writes is true - if markets are competitive. If sellers (insurance companies, health care providers) have monopoly power, then it is possible to reduce prices while increasing quantity supplied. I know this because I read it in a book: N. Gregory Mankiw, Principles of Economics (5th edition), Chapter 15.

Americans demand higher unemployment!

Politico reports that the Obama Administration is planning to pivot toward deficit control, which could mean the end (for now) of cap-and-trade. This is worrisome if true:

1. We have a serious long-term budget problem; that is, after 2020 or so, the numbers look really ugly. The key to getting a handle on this is reducing health care costs. Hopefully whatever is passed this year will help, or at least give future governments tools to address these problems.

2. In the medium term there's no real budget crisis. Deficits are expected to stabilize at around 3% of GDP once the economy recovers (2013 or so), which is about the level under Bush II and lower than what we had under Reagan and Bush I. Tackling the long-term issues would be easier if we had a better medium term balance (or a better balance now), but reducing the deficit in the medium term should not be considered absolutely necessary in and of itself.

3. Roosevelt began taking aggressive actions to fight the Great Depression in 1933. In 1937, thinking the economy had recovered sufficiently, the Fed tightened monetary policy and FDR pushed through some budget cuts. The economy immediately sank into another severe recession. The Japanese began a massive fiscal expansion to stimulate their economy in the early 1990s. By 1937, they thought the economy had stabilized sufficiently to withdraw some of the stimulus. Taxes were raised; the economy sank into another recession. It would be a huge mistake for the Obama Administration to start tightening fiscal policy in 2011. Huge.

4. The Obama Administration knows this, so it looks like they're being careful to say that they are trying to tackle the medium term issues without cutting deficits in the near term. But politically, apparently, the American people (independents at least) want higher unemployment now. I worry about political pressure to reduce budget deficits too soon. In this environment, it turns out that running big budget deficits is the politically courageous move!

5. Cap and trade should be a net revenue enhancer, or at worst budget neutral. Initially under Waxman-Markey 85% of emissions permits are given away, but the percent that is auctioned rises over time. Budget concerns should not be an impediment to cap and trade (though I too see huge political hurdles at this time). If I were Obama, I'd propose a sweeping overhaul of the tax code designed to (a) eliminate loopholes, equalize rates for different types of income, and otherwise make the code more efficient; (b) increase revenues in the medium term enough to make a dent in budget deficits, while (c) preserving the current level of progressivity. A key element of this tax reform would be a carbon tax and/or cap and trade system.

Damn Church!

Ok, I'm getting mighty ticked off at the Catholic Church. Catholics? Fine, no problem, I've got lots of friends and family who are religious Catholics, and their Catholicism brings meaning to their lives, makes them good people who I admire, causes them to do good things for society. I went to a Jesuit university and loved the intellectual and moral climate there. Hurrah for Catholics!

But the Catholic Church? It's a big, lumbering, corrupt, top-heavy, patriarchal bureaucracy guided by medieval social values. It ought to have its land and buildings confiscated like they did in France in 1789.

Source of my ire today: this article saying that the Church has told DC officials that if they allow same-sex marriage, the Church will stop providing social services to the poor. The law does not require the Church to actually officiate same-sex marriages, but does require them to pay benefits to same-sex spouses of employees. Seems that the act of writing a check to cover Bob's health insurance because Gary is a Church employee is such a profound violation of the Church's religious principles that the Church would rather abandon Christ's commandment to serve the poor and downtrodden than compromise those principles. That is one twisted ranking of priorities.

Lingering source of contempt: the Church's insistence that Congress adopt something like the Stupak Amendment as the price for supporting health reform. Rachel Maddow said something last night that I hadn't thought of before. Before Stupak, the compromise that had been struck to avoid having federal money used for abortion services was that the federal subsidies for health insurance and the individuals' contributions would be segregated, and payments for abortion services would be paid out of the individuals' contributions. The Church called that a shell game - money is fungible, after all. Of course the Church is right. Here's another example of a shell game. The Church receives billions of tax dollars to support its social services work. But tax dollars should not be used to support purely religious activities like evangelism, paying priests, and so on. So the tax dollars are put in a separate pot to be used only for the authorized purposes, and the rest of the Church's activities are funded from its own sources. I assume that the Church, in fairness, would approve of a law modeled on Stupak that would prohibit any organization receiving federal money from participating in religious activities? Any takers?

The plight of the working poor

The graph below, from Greg Mankiw, shows income after taxes and transfers as a function of pre-tax and transfer income. At the high end of the income distribution the graph looks like you'd expect - as you get paid more you pay more in taxes, but your after tax and transfer income is still higher. In the "working poor" range, however, more effort to earn higher pre-tax and transfer income doesn't really pay off: various forms of assistance you get when you're poor (earned income tax credit, food stamps, Medicaid, etc.) phase out, leaving you no better off than you were with a lower income. That's bad.



The problem I have with this kind of analysis is, what would Mankiw do about it? Would he drop the green dot on the graph toward zero to improve incentives to work? Would he stretch out the transition period so as to reduce incentives to work for people in the $50,000-$70,000 range? Neither of those options is very palatable. If you're going to help the poor, you can either phase out incentives rather quickly as in the graph above, or phase them out really slowly, spreading the disincentives across the income distribution and greatly adding to the cost of your programs.

Disincentives to work are the unavoidable cost of a social safety net. Maybe it's ok that workers at Walmart don't have an incentive to take a second job at the 7-11; they still, after all, have an incentive to get an education and land one of them fancy college professor jobs on the upward-sloping portion of the graph.

Will the recovery be "jobless"?

A lot of economists are worried that the recovery from the 2007-09 recession, like those following the 1990-91 and 2001 recessions, will be "jobless." Mark Thoma, for example, writes

Historically, a good rule of thumb has been that the peak in unemployment lags the trough in economic output by a quarter. Thus, if output begins recovering in the second quarter of the year, unemployment would not begin to decline until the third quarter... But as shown in these graphs of the unemployment rate and NBER-dated recessions, this changed with the 1990-91 and 2001 recessions... in the most recent recessions, the peak in the unemployment rate came a year or more after the trough in GDP... An important question is whether this new relationship between unemployment and output observed in the last two recessions will also be present in this recession. All indications are that it will.

I don't think there's any mystery here. The reason that unemployment was slower to fall after the last two recessions than in previous recoveries was that GDP growth was anemic. The average growth rate in the first four quarters of the recovery following the 1974-75 recession was 6 percent and after 1981-82 it was 5.5 percent. By contrast, in the first year of recovery following the 1990-91 recession GDP growth averaged 2.6 percent, and after 2001 it was 2.2 percent. Okun's Law says that the unemployment rate falls when growth exceeds its average rate, which from 1973-2009 was about 2.7%. If you think growth will be higher than this for the next year, you should expect to see unemployment begin to fall; if you think unemployment will continue to rise, you must believe GDP growth will be lower than 2.7%.

The graphs below demonstrate that the recoveries from the 1990-91 and 2001 recessions were not unusual. Suppose that in the recoveries following each of the last four major recession we wanted to predict the path of the unemployment rate based on GDP growth. A version of Okun's Law should do the trick: the change in the unemployment rate this quarter should equal one half the difference between last quarter's GDP growth rate and the post-1973 average growth rate (2.7%). (Note: because we're dealing with quarterly data here, we need to divide the annual growth rates by four before applying Okun's Law).

The graphs below show that Okun's Law does a great job predicting the path of the unemployment rate following the 1974-75 and 1981-82 recessions. After four quarters of growth beginning in 1975Q2, Okun's Law predicts an unemployment rate of 8.0%; the actual rate was 7.7%. After 12 quarters, Okun's Law predicts 6.2%, the actual rate was 6.3%. Same thing for the recovery beginning in 1982Q4. Four quarters in Okun's Law predicted an unemployment rate of 9.9%, actual was 9.4%; 12 quarters in Okun's Law predicted 7.0%, actual was 7.2%.



Was the pattern any different following the most recent two recessions? Not really. When output began to grow in 1991Q2, the unemployment rate was 6.8%. For the next four quarters GDP grew by 2.6%. Okun's Law would predict a slight increase in the unemployment rate, and indeed the rate rose to 7.4%. Twelve quarters into the recovery, a period during which GDP grew at an average rate of 3.1%, Okun's Law predicts an unemployment rate of 6.4%; the actual rate was 6.6%. (There was a divergence in the second year of recovery, but it disappeared in the third.)

The same pattern held following the 2001 recession. When GDP began to grow again in 2001Q4, the unemployment rate was 5.5%. After four quarters during which GDP grew at an average rate of 2.2%, Okun's Law predicts the unemployment rate should have increased to 5.6%; the actual figure was 5.7%.
In the first 12 months of recovery GDP growth was 2.7%. Okun's Law predicts that the unemployment rate should have ended up exactly where it had started, at 5.5%; the actual rate was 5.4%.

Despite all the structural changes that have occurred in the economy in the last few decades, Okun's Law remains a remarkably stable relationship. Until I hear convincing stories explaining why Okun's Law has suddenly broken down after all these years, I'm going to assume that the pace of decline in the unemployment rate for the next few years will be dictated by the strength of growth in GDP.

For reasons I have given in a number of posts below, I believe GDP growth is going to be about 4 percent over the next year. We've already had one quarter of 3.5% growth. Okun's Law predicts that 2009Q4 unemployment will be 0.5*(3.5-2.7)/4 = 0.1% below the level of 2009Q3, or 9.5%. If growth is 4% from 2009Q3-2010Q2, by 2010Q3 the unemployment rate should be down to 8.9% and down to 8.7% by Q4. Now these numbers are probably optimistic given that unemployment rose to 10.2% in October. If we assume unemployment peaks at 10.2% in 2009Q4, then four quarters of 4% growth from 2009Q4 to 2010Q3 brings us down to 9.5% by 2010Q4. Let's split the difference between optimistic and pessimistic scenarios: unemployment will be 9.1% by 2010Q4.

That's a grim unemployment forecast however you slice it. It calls for some more aid to states, extension of unemployment insurance, and so on. But it doesn't mean that there's been a dramatic change in the laws of economics.

Governance reform proposal

No one should be allowed to serve on APPC if he has expressed any interest in serving on APPC.

If current trends continue...

... job growth will turn positive in January. An employment change number today in the -200,000 range is consistent with that trend.

But job growth needs to be around +140,000 for the unemployment rate to fall (usually); that won't happen until around April.

Employment growth (percent)



Bob says that "at business cycle turning points, revisions are in the direction of the inflection." So when the jobs numbers are revised next year we may find that job losses were smaller last summer and this fall than we think they are now, and the period of job growth would come earlier.

** Update **

Today's employment situation report says 190,000 jobs lost in October: right on target. Furthermore, job losses were revised substantially downward (fewer losses than earlier estimated) in August and September. Unemployment up to 10.2% - very bad, but it doesn't change my story.

Still pretty damn awful

I think we're headed into a healthy recovery. That's not to say economic conditions right now aren't pretty dismal. Calculated Risk has a lot of great information. Here's a frightening graph. Note what a huge outlier the 2001 "jobless recovery" was. If the current recovery takes that shape there will be rioting in the streets. The best we can probably hope for is something like the post 1982 recovery (magenta I believe). Note that there was a 4-5 month period at the trough of that employment series where it was easy to believe that, while the job losses had ended, the economy wasn't going anywhere fast. I hope we'll reach that point by early next year, with pretty healthy job growth and declining unemployment beginning in summer.

This recession is different, but not in the way you think

First we have the article mentioned below in which David Leonhardt argues that we might be a bit too pessimistic about the possibility of recovery - after all, everyone was pessimistic in 1982, and soon thereafter the economy went on a tear.

Calculated Risk responds that things are different this time (ignoring Leonhardt's point that things are always different this time):

Second, most recessions have followed interest rate increases from the Fed to fight inflation, and after the recession starts, the Fed lowers interest rates. There is research suggesting the Fed would have to push the Fed funds rate negative to achieve the same monetary stimulus as following previous recessions (see San Francisco Fed Letter by Glenn Rudebusch The Fed's Monetary Policy Response to the Current Crisis). Welcome to ZIRP! (Note: Professor Taylor disagrees on the size of the negative Fed funds rate).

Paul Krugman's response to Leonhardt echoes that of Calculated Risk:

OK, although I’m with Calculated Risk: we’re really in a liquidity trap now, which means that it’s much harder for the Fed to turn things around.

What CR and Krugman are talking about is the graph below. The graph shows the federal funds rate from six months before the trough of the last five recessions to 12 months after, normalized to zero in the month of the trough. (I'm assuming the 2007-09 recession ended in July and show the fed funds rate for the following three months.)

The blue and red lines are the recoveries following the two big recessions of 1974-75 and 1981-82. In each case, beginning 6 months before the trough the Fed drastically cut the federal funds rate (by 6 percentage points, give or take), then let rates drift down some more after the trough. The drop in rates was smaller but still noticeable - 2 percentage points - in the 1990-91 and 2001 recessions; in the 2001 recession the fed funds rate continued to fall for a year into the recovery. But in this recession, the Fed used up all its ammunition in the first year of the recession. By last spring the fed funds rate was already zero, so it did not fall at all during the six months leading up to the recovery, and is not going to fall in the months to come. Leonhardt and Krugman conclude that we're in worse shape now: because we're hard up against the zero bound, monetary policy won't bail us out of this one.

But wait. The interest rates that are most important as determinants of aggregate demand are things like corporate bond rates and mortgage rates (and we're interested in the real rates, not nominal). The federal funds rate is important only to the extent that changes in the fed funds rate affect these other interest rates. The Fed has been trying to change real long-term risky interest rates through unconventional means: providing liquidity to the banking system, intervening in credit markets, and buying long-term Treasury bonds, agency debt, and mortgage-backed securities. A more meaningful measure of the stance of monetary policy today and in recoveries past is how real long-term risky interest rates behaved. So let's look at the real yield on Baa corporate bonds:

What we see is that the amount of monetary stimulus we've been getting in the last nine months stacks up pretty well against the record of previous recessions. In the six months leading up to the recovery that began in 1982 the real Baa rate fell by about 2 percentage points; for the recovery that began in 1975 it fell about half a percentage point; and for this recovery it fell by about 1 percentage point. The real Baa rate has continued to fall since July, by more than it did in the months following the 1982 recovery. After the recovery that began in 1975 the real Baa rate shot up rather than falling. So by this measure we've got more stimulus than in 1975 and almost as much as in 1982; and a lot more than in 1991 and 2001.

On the other hand, it may be the level of the real Baa rate, not the change, that is important. When the recovery began in 1975 the real Baa rate was an incredibly low 0.48 percent versus 5.69 percent today - with interest rates that low it's a wonder everyone didn't start borrowing (and I think everyone did!). But the real Baa rate is not as high now as it was at the start of the 1982 recovery. It's also lower than it was in 1991 and 2001. Again - there's more monetary stimulus in our economy today than there was in four of the last five recessions.

There may be many things that are different about this recovery than previous strong recoveries, but lack of monetary stimulus is not one of them.

Commentators are always pessimistic in the early stages of recovery

I was going to post something like this a few days ago but didn't have the time. David Leonhardt gives basically the argument I was going to make (and quotes my friend Bob Barbera, some of whose thinking I have absorbed osmosistically in the past couple of years, along the way).

In the fall of 1982, with a long recession ending but the unemployment rate heading toward 10 percent, The New York Times ran an article titled “The Recovery That Won’t Start.”

It quoted prominent economists who worried that “the recovery may amount to nothing more than a few quarters of paltry growth — and possibly not even that.” The economists, the article noted, had “growing doubts about whether the mechanisms of economic recovery will — or can — operate as they have in other postwar business cycles.”

Over the next two years, the American economy grew at a blistering annual rate of more than 6 percent.

These days, as in the aftermath of every recession, you are again hearing a version of those early 1980s worries: this time, things are different. Consumers are tapped out. Business executives are skittish. Banks remain reluctant to lend...

“Of course, there is a long list of things to worry about,” says Robert Barbera, an economist and the author of a recent book on the financial crisis. “But it’s ever thus. If that were the reason you didn’t have a genuine recovery, you would never have a genuine recovery.”

I've been telling anyone who will listen (there aren't too many of them out there) that the economy is going to grow more strongly coming out of this recession than the conventional wisdom holds. My argument is basically that deep recessions are followed by strong recoveries: GDP growth for the year coming out of the 74-75 and 81-82 recessions was in the 5-6 percent range while growth coming out of the 1990-91 and 2001 recessions was in the 1-2 percent range. I think this economy is more like the 74-75 and 81-82 recessions.

There are two things standing in the way of strong recovery: (1) consumer spending is going to be slow for awhile as households deleverage from their excessive debt levels of the 2000s. (2) the economy recovered strongly in earlier recessions because the Fed moved to an expansionary policy, but in the current recession the Fed has already spent its ammunition.

Number (1) is an important factor that I think should shave a percentage point or more off growth. Number (2) turns out not to be true. True, the Fed has used its conventional ammunition already (the fed funds rate is near zero), so it can't be as expansionary on that dimension as it was in 1975 and 1982. But it has been free and easy with unconventional monetary policy. As a result, interest rates that really matter for the economy like the real Baa corporate bond rate have been falling by more leading up to the current recovery than in 1974-75 and 1981-82, and there's room for a continued decline in the next year. And fiscal policy is extraordinarily expansionary this time around. So I conclude that growth is likely to average around 4 percent this time around - not extraordinary, but enough for us to avoid a jobless recovery.

One problem with this story is that there seems to be no support for it from the labor market. Now comes along an analysis in Grant's Interest Rate Observer relayed by Noam Scheiber at the New Republic. Grant and his colleague Dan Gertner say that the behavior of unemployment in this recession looks more like it did following the 74-75 and 81-82 recessions than in the last two "jobless recoveries." The report is not online, but I reconstructed the data. Here's what I find:

Grant and Gertner's story is that in the typical strong recovery, the number of people unemployed for short durations (<5>

I guess the economic story here has to be that as the recession goes on, people who have been unemployed for short periods of time transition into the ranks of people who have been unemployed long term because there aren't enough new job opportunities. So long-term unemployment rises, while new layoffs and the shortage of job opportunities continually replenish the ranks of the short-term unemployed. When the labor market begins to recover, there is still a lot of transition from short-term to long-term, but the ranks of short-term unemployed are no longer replenished - the numbers in those categories start to turn down, eventually bringing overall unemployment with them.

I wish we had more to go on than the tea-leaf readings I've been relying on, but I find this new piece of analysis somewhat encouraging.

A comforting graphic

Awhile ago I posted a very scary figure showing that world industrial production during this recession was following closely the path of industrial production during the Great Depression. Here's the latest version of that graph from Economix (period 1 is April 2008):

Bernanke! Obama! Hu!

Bank breakups on the way?

The American Banker points to European regulators' decision to break up ING and Britain's decision to force Royal Bank of Scotland and Lloyds to divest some big units as the beginning of a trend that may hit the US as well. Paul Volcker and even former Citicorp CEO John Reed have called for moving back to a Glass-Steagal style division between commercial banking and other financial services.

This seems like a good trend, but it's not a standalone solution to financial instability. The firms that took the biggest risks during the housing boom were investment banks like Lehman Brothers that were not affected by the repeal of Glass Steagal in 1999. But interesting nonetheless.

Krugman v. Keynes

Paul Krugman takes Ned Phelps to task for mischaracterizing what Keynesians think:

Phelps:

Keynesian economics, which had been nearly forgotten inside the macro field, has found new voices from outside. They take the position that fiscal “stimulus” of all kinds is effective against slumps of all causes.

Krugman:

Nobody, and I mean nobody, holds that alleged position. The position held by Keynesians — by the way, if Keynesian economics has been “nearly forgotten inside the macro field”, someone should tell Greg Mankiw that he’s an unperson — is that fiscal stimulus is necessary only under certain special conditions. Namely, when you’re up against the zero lower bound, and conventional monetary policy is useless, fiscal stimulus may be your best option.

And we are at the zero lower bound right now, for the first time in 70 years. That’s why fiscal stimulus is on the agenda — not because Keynesians believe that deficit spending is always and everywhere the best policy.

Phelps' argument is nonsense. But Krugman's "defense" of fiscal policy is pretty pathetic. I think it's probably true that many people like Krugman who consider themselves Keynesians do believe that fiscal policy is only useful at the zero bound. But this is a pretty constipated version of Keynesianism. Keynes himself thought fiscal policy was an important policy tool in general, not just at the zero bound. His macroeconomic policy program during WWII was heavy on the fiscal policy.

I think if the profession put its minds to it, we could make a good argument for using fiscal policy on a more regular basis.

- Monetary policy affects some sectors of the economy (housing, small business) more heavily than others - why should those sectors be the ones to bear the burden of stabilization?

- We probably need to use monetary policy to prick asset market bubbles from time to time, but why sacrifice the productive sectors of the economy for the sake of financial stability; why not when faced with bubbles that need pricking execute an increase in interest rates coupled with fiscal expansion?

Fiscal policy is fraught with practical difficulties - delays in passing the necessary legislation, capture by parochial interests, complications posed by environmental and labor regulations, etc. But if we spent half the effort ironing out those infrastructural details as we have greasing the skids for monetary policy (I'm thinking of the ingenious ways that the Fed has come up with to issue and withdraw reserves and manage interest rates), fiscal policy would be a much more powerful tool.

New Jersey governor's race

Bruce Larson's analysis of the New Jersey governor's race:

NJ is a mess. The state's fiscal situation is dire, unemployment is worse than in surrounding states, and local property taxes are out of control. What's more, NJ Democrats are corrupt (and this is coming from a true-blue Democrat!), although corruption is probably worse at the local level than at the state level.

Given the context, NJ would seem to be a prime opportunity for Republicans to pick up a statehouse. But astonishingly, Corzine may well win a close one today. The problem is that incumbent failure by itself is insufficient to produce a challenger victory; voters also need an acceptable alternative. And it's far from clear that voters see Christie as such.

Republicans face difficult political terrain in NJ. Registered Democrats substantially outnumber registered Republicans in the state. To win statewide, therefore, Republicans need to win a sizable majority of NJ's large bloc of independent voters. But Christie, by many assessments, has been a disappointment. He has offered nothing specific about how to fix the state's fiscal mess, and the Corzine campaign has attacked him ruthlessly. Polls show him winning only about half (at best) of the state's independent voters.

Christie's chances are also hurt by independent candidate Chris Daggett, who has been polling roughly 8 percent of likely voters. This is a problem for the GOP because Daggett's numbers are strongest among independent voters--the very group that Christie needs to win in order to oust Corzine. His presence in the race may well have the effect of dividing the anti-Corzine vote--leaving Corzine victorious.

If I were a betting man, I'd PROBABLY put my money on a slim Corzine victory. This is only because I've seen a similar scenario (truly bad Democratic incumbent; even worse Republican challenger) play out in NJ again and again. NJ Republicans have not won a statewide race in NJ since 1997 (when Christie Todd Whitman won reelection as governor), and it may well be that the state's Democratic political terrain is simply insurmountable for Republicans.

But I may well be wrong about a slim Corzine victory. (How's that for hedging?) Many New Jerseyans dislike Corzine intensely, and in all my years of watching NJ politics, I've never seen NJ voters so gloomy about the state's future. Voters may be so fed up that they decide it's worth it to take a chance on Christie. In any case, it will be interesting to see what happens in the state today.

(As an aside, local property taxes in NJ will never come down until the state pushes for municipal reform/consolidation. Where I lived in NJ, there were at least five towns in a 25-mile radius from my house--each with its own school system, police department, fire station, etc. New Jerseyans don't seem to want to give up the benefits of these services, but they don't want to pay for them, either.)

My analysis:

Maybe only Republicans named Christie can win statewide elections in NJ.

Pre-emptive election spinning

Nate Silver sez the vote for governor has no predictive power for the presidential vote:

Still, if Republicans sweep the Virginia, NJ and NY House elections, it's a sign (as if any was needed) that there's an awful lot of discontent out there that the Democrats need to address - and be seen as addressing - by this time next year.

H1N1 in Gettysburg

A five year old boy who used to go to my kids' day care died yesterday of complications associated with H1N1. Get your children vaccinated!

Gettysburg Times front page story that day: "Horse Shot, Killed in Tyrone." Nice.

Sometimes the conventional wisdom is right!

William Sterling, "Looking Back at Lehman: An Empirical Analysis of the Financial Shock and the Effectiveness of Countermeasures."

My summary: John Taylor, John Cochrane, and Luigi Zingales say the Lehman Brothers catastrophe didn't cause the financial crisis of fall 2008 after all - instead, they say, it was Hank Paulsen saying there was a financial crisis, and that the government needed $750 billion to deal with it, and we can't tell you what we're going to use the money for. Their evidence is that LIBOR rates didn't move much after Lehman went under, spiking when Paulsen made his request. Sterling says - you dumb clucks, LIBOR data is drawn from surveys of how much banks say they charge each other for loans, not the observed rates on actual loans. In the days after the Lehman bankruptcy banks weren't lending to each other at all, hence LIBOR is meaningless. He reports the movements of the Bloomberg Financial Conditions Index, and lo and behold - well, just look at the graphs.

Paul Krugman makes an excellent point

He writes: If Fannie Mae, Freddie Mac, and the Community Reinvestment Act were responsible for the explosion of subprime lending, then why are 55 percent of the commercial mortgage loans coming due before 2014 underwater?

Apparently banks don't need government inducements to make boatloads of irresponsible mortgage loans.

New book on macroeconomic theory and pedagogy

Where's my copy of this book? I'm pretty sure I've got a chapter in there.