The Great Inflation Scare of 2010

As previously noted, the recent rise in 10-year Treasury rates has raised concerns about inflation in some quarters. Paul Krugman writes of the rise in the term spread:

What the large spread now tells us is that the US economy is in the dumps now, but that investors see a reasonably good chance of a strong recovery in the not-too-distant future. That’s good news, not bad news.

More broadly, on the risks-of-default thing: surely if investors were growing worried about US ability to honor its debts, they would be worrying about a breakout of inflation as well as or instead of default per se. But we can track that by comparing interest rates on ordinary bonds and inflation-protected bonds. What we see is that from 3/17 to 3/30 — the period that inspired all those recent scare stories — the nominal interest rate on 10-year bonds rose by 26 basis points; the real rate rose by 28 basis points. So expected inflation actually declined, marginally.

Here's the data that backs him up. The red line is expected inflation as measured by the difference between yields on nominal 10-year Treasuries and inflation-indexed Treasuries. It went up a bit (5 basis points) last week, and since then has fallen about half way back down. It has been fairly stable throughout the month. The blue line is the credit spread - the difference between yields on Baa corporate bonds and 10-year Treasuries. It's been falling all month, and in fact fell a tad during last week's rise in the term spread. This suggests that what happened last week was a move out of Treasuries and into risky assets (simultaneous with a move from short-term to long-term securities), which is exactly what we want to have happen.

By the way, Krugman said nothing different from what I wrote in a post a couple of days before. Yet his mots justes inspire Brad DeLong to repeat his mantra:

Once again, the two rules:

1. Paul Krugman is right.
2. If you think Paul Krugman is wrong, refer to rule #1.

I definitely need to get me one of them Nobel thingies.

Scientists exonerated (round 1)

Associated Press reports:

LONDON — The first of several British investigations into the e-mails leaked from one of the world’s leading climate research centers has largely vindicated the scientists involved.

The House of Commons’ Science and Technology Committee said yesterday that it had seen no evidence to support charges that the University of East Anglia’s Climatic Research Unit or its director, Phil Jones, had tampered with data or perverted the peer review process to exaggerate the threat of global warming — two of the most serious criticisms levied against the climatologist and his colleagues.

In their report, the committee said that, as far as it was able to ascertain, “the scientific reputation of Professor Jones and CRU remains intact,’’ adding that nothing in the more than 1,000 stolen e-mails, or the controversy kicked up by their publication, challenged scientific consensus that “global warming is happening and that it is induced by human activity.’’

And yet...

ADP reports private employment down 23,000 in March. But: that doesn't count Census workers, of which the government probably hired around 100,000 this month; ADP has been 70,000 too low on average since October; ADP numbers weren't affected by the blizzard in February while BLS's were artificially suppressed. So it's not hard to see BLS reporting +200,000 even in light of ADP's numbers. But I won't be satisfied with anything less than 250,000.

Monetary policy, bond markets, and the job-rich recovery

Hyman Minsky argued that monetary policy affects the economy in the following way. The Federal Reserve reduces short-term interest rates. There's now no profit to be made sitting on money, so financial managers shift funds out of short-term, risk-free assets into long-term risky assets like corporate bonds. The increased demand for bonds pushes their prices (which were low at the trough of the recession) up and their yields (which were high) down. Credit spreads (the difference between risky rates and risk-free rates) therefore plunge. Businesses can borrow more cheaply, so begin to undertake investment projects that they had delayed due to the recession. Consumers also face lower borrowing costs, so they loosen up, and the recovery is underway.

The story implies that a plunge in credit spreads, say as measured by the difference between the yield on Baa corporate bonds and 10-year Treasuries, should normally precede a recovery in employment. Look at the historical record:

1974-76: Baa-Treasury spread peaks at 3.31 in January 1975, falls to 2.49 by July. Strong growth in employment begins that month.



1981-84: Baa-Treasury spread peaks at 3.82 in October 1982, falls to 1.79 by August 1983. Strong growth in employment begins in April 1983 with spread at 2.89.



1990-94: Baa-Treasury spread peaks falls, rises, falls again in early stages of the "jobless recovery." The last peak, at 2.25, comes in October 1992. From there it falls to 1.29 by December 1994. Strong growth in employment begins December 1992.



2000-2004: Another jobless recovery, with Baa-Treasury spread bouncing around until it peaks at 3.79 in October 2002. From there it plunges to 2.03 by May 2004. Strong growth in employment begins in March 2004.



So what have we seen this time around? A much more severe jump in credit spreads (up to 6.0 in December 2008) and a much more severe recession. But there's been a continuous drop in the spread beginning in March 2009, and the spread is now at 2.65.



Today the WSJ reports on the rally in corporate bond markets, and it sounds like it could have been written by Minsky (or Barbera) himself.

Investors flooded risky companies with money in March even as the government prepares to shut down a key engine driving one of the greatest corporate-bond rallies in history. A total $31.5 billion in new high-yield debt, otherwise known as junk bonds, hit the market through Tuesday, exceeding the previous monthly record in November 2006. Partly propelling the activity: The Federal Reserve's massive mortgage-buying program, which comes to an end Wednesday. By buying $1.25 trillion of mortgage securities, the Fed absorbed a flood of assets that otherwise would have needed buyers. That kept money in the hands of investors, who went searching for something else to buy. The Fed's underpinning encouraged investors to seek riskier, higher-yielding securities. A natural choice: corporate bonds...

The revival of bond fortunes has roots in the Fed's decision, around Thanksgiving 2008, that may have done more than anything else to encourage more investors to take a flyer on bonds. On Nov. 25, the Fed announced it planned to buy debt and mortgage-backed securities issued by housing-related governmentsponsored entities such as Fannie Mae and Freddie Mac. The program pushed mortgage-security prices higher, giving fixed-income managers an incentive to sell to the Fed. In return, they had a flow of cash that had to be put to work. With Treasury debt yields at record lows, the best alternative remaining was corporate debt. "That was the big turning point," says Ashish Shah, head of global credit strategy at Barclays Capital. "That's what drove money into credit."

The Fed expanded this program on March 18, of last year, to buy $1.25 trillion in mortgage securities, along with $200 billion in debt of Fannie and Freddie and up to $300 billion in long-term Treasury debt. The expansion fueled the second leg of the rally, which hasn't stopped.

The behavior of credit spreads in the last year looks very much like it did in 1975-76, 1982-83, and 2003-04. The change in employment has been following a path similar to that in 75-76 and 82-83. It's taken us longer to hit zero this time around because the declines were so enormous during the recession. With monetary policy having delivered a 340 basis point reduction in credit spreads over the last year (compared to 82 in 75-76, 203 in 1982-83 and 176 in 2003-04), is it unrealistic to think we're on the verge of a strong recovery in employment? I don't think so.

Keynes vs. the Classics, circa 2010

The debates between John Maynard Keynes and those who do not accept his views are just as fresh today as they were in the 1920s and 30s. That is both a testament to the power of Keynes' ideas and a damning indictment of Economics' claim to be a science. Two cases in point:

(1) Recent fears that inflation is just around the corner, coupled with skepticism about the effectiveness of last year's fiscal stimulus. From Keynes' "A Programme of Expansion," May 1929:

"The suggestion that a policy of capital expenditure, if it does not take capital away from ordinary industry, will spell Inflation, would be true enough if we were dealing with boom conditions... But we are far, indeed, from such a position at the present time. A large amount of deflationary slack has first to be taken up before there can be the smallest danger of a development policy leading to Inflation. To bring up the bogy of Inflation as an objection to capital expenditure at the present time is like warning a patient who is wasting away from emaciation of the dangers of excessive corpulence."

"The whole of the labour of the unemployed is available to increase the national wealth. It is crazy to believe that we shall ruin ourselves financially by trying to find means for using it and that "Safety First" lies in continuing to maintain men in idleness. It is precisely with our unemployed productive resources that we shall make the new investments."

"Negation, Restriction, Inactivity - these are the Government's watchwords. Under their leadership we hav been forced to button up our waistcoats and compress our lungs. Fears and doubts and hypochondriac precautions are keeping us muffled up indoors. But we are not tottering to our graves. We are healthy children. We need the breath of life. There is nothing to be afraid of. On the contrary, the future holds in store for us far more wealth and economic freedom and possibilities of personal life than the past has ever offered."

(2) The infamous Lew Rockwell links to the David Gordon reviewing Hunter Lewis' book on Keynesian economics:

Defenders of Keynes, such as the recent convert Bruce Bartlett, often claim that he supported capitalism... His interventionist measures had as their aim not the replacement of capitalism by socialism or fascism. Rather, it is alleged, Keynes aimed to save the existing order. The unhampered market cannot by itself recover from a severe depression or at best can do so after long years of privation and unemployment. Keynes discovered a way by which the government, through an increase in spending, can restore the economy to prosperity... Hunter Lewis convincingly shows the error of this often heard line of thought. Keynes, far from being the savior of capitalism, aimed to replace free enterprise with a state-controlled economy run by "experts" like him. His prescriptions for recovery from depression do not save capitalism: they derail the price system by which it functions...

Further, Keynes ignored the significance of a fundamental fact. The rate of interest is also a price. It reflects the preferences of consumers for present over future goods: the greater the time preference, the higher the rate of interest. Keynes principal aim in economic policy, not only to combat depressions but more generally, was to keep the rate of interest low: ideally, it should be done away with entirely. To do so flies in the face of consumer preferences. If the rate of interest is forced below what it would have been on the unhampered market, then people are being compelled to invest more than they wish. The point holds altogether apart from the Austrian theory of the business cycle, which Lewis fully accepts. That theory tells us that forcing the rate of interest below the natural rate may lead to an unsustainable boom. But even if this theory were mistaken, interference with interest rates would still distort the economic system. "Businesses depend on prices to give then the information with which to run the economy. If the price system for interest rates is broken, no part of the price system is unaffected. "

Of course a careful reading of the General Theory and Keynes' other works makes it clear that he was not in favor of government control of the economy. Government should manage the aggregate amount of spending through fiscal and monetary policy, but leave the allocation of investment spending to the private sector. When Keynes argues for the "socialization of investment" in the General Theory he is talking about the creation or expansion of semi-public institutions like "Universities, the Bank of England, the Port of London Authority, even perhaps the Railway Companies" and even throws in corporations whose management is insulated from the short-sighted demands of shareholders and are therefore free to take up social responsibilities (see "The End of Laissez-Faire," 1926). He approved not the free-wheeling capitalism we now have, nor something like the "commanding heights" program of the post-war Labor governments in the UK, but a system in which a critical mass of private enterprises were structurally insulated from the vagaries of the market.

It's entertaining to imagine how Keynes would have responded to each of Gordon's (and by implication Lewis') critiques of Keynes' theory. I'll take just one, the meaning of the interest rate. Keynes argued that

"It should be obvious that the rate of interest cannot be a return to saving or waiting as such. For if a man hoards his savings in cash, he earns no interest, though he saves just as much as before. On the contrary, the mere definition of the rate of interest tells us in so many words that the rate of interest is the reward for parting with liquidity for a specified period." (GT, chapter 13)

Capital, Keynes argued, earns a rate of return (equal to the rate of interest) not because it is productive, but because it is scarce. Thus the solution to our problems in the long-term is to lower the rate of interest and flood the world with capital. It's an interesting, provocative argument that I'm not sure I agree with, but it's ludicrous to claim that Keynes policy prescriptions are based on his having "ignored" the "fact" of the true determinants of the rate of interest.

The art of graphical presentation of data

Edward Tufte says Charles Minard's flow map of Napoleon's march into Russia is the best statistical graph ever drawn. It is pretty cool, I'll give him that.

Old school, indeed

Apparently the "Shadow Open Market Committee" is pushing for the Fed to start raising interest rates but soon. The WSJ reports:

The guys on the shadow open market committee are old school.

Rutgers University professor Michael Bordo said 0% interest rates, if continued for much longer, are going to cause a “run up in inflation expectations.” Noting history shows the Fed often ends up “exiting too late,” he said the central bank should be raising rates by summer, lest it engineer an unpleasant inflation situation.

Gregory Hess, of Claremont McKenna College, offered the most aggressive prescription.

“At this point it’s time for the Fed to make an announcement that it’s time to get out of the business” of owning mortgages, he said. The central bank needs to offer a timeline, saying the securities would be sold over the course of one to two years, as the Fed moves back to an all-Treasury balance sheet.

Meanwhile, Marvin Goodfriend, of Carnegie Mellon University’s Tepper School of Business, said the risk for the Fed right now was that market perceptions “are in flux” — Treasury yields spiked this week in a worrisome development — and officials should create the impression they will act to keep inflation under control, lest investor confidence be lost.

This is just a wee bit crazy. The spike in the 10-year note rate amounts to less than 20 basis points. Most of that is an increase in expected real interest rates. Expected inflation, as measured by the difference between yields on nominal and inflation-indexed 10-year Treasuries have risen by 5 basis points and is considerably lower than it was at the beginning of the year. The unemployment rate is still 9.7 percent, in case the SOMC has forgotten. So how about we wait a bit until we actually see a net job created before panicking about inflation?

Adventures in cable

Late night cable-surfing. First, Glenn Beck telling his audience that after you spank your child, you give him a hug so he knows he's loved. After the health reform vote Beck felt like he'd been spanked. But where's the hug? Instead, Democrats propose immigration reform, an issue that "split us apart" (by which I think he means split the pro-business wing of the Republican party apart from the racist wing). He concludes, logically, that the Democrats are not "evolutionaries" but "revolutionaries." Food for thought.

Next, Mitt Romney on Larry King. Mitt says he wants Congress to repeal Obamacare. Then when King asks how Romney describes himself politically, he says "conservative." Unbidden, he explains that the personal mandate for health insurance under the Massachusetts law he signed is a conservative idea, because it says that individuals cannot rely on government for health care, they need to pay for it themselves. King did not ask: how is the personal mandate under Obamacare different from the personal mandate under Romneycare? Which parts of Obamacare are worth saving, which need to go? Commentators have begun to argue that passage of a health reform plan that is basically a national version of Romney's and the Republican party's total opposition to same dooms Romney's chances for the Republican nomination in 2012. I say the commentators vastly underestimate Republicans' capacity for cognitive dissonance.

What? Mimes? Whistles? Balloons?

I don't have time to figure out exactly what happened here, but it sounds quite strange.

Anti-Immigrant Leader’s Bodyguard Reportedly Assaulted Mimes Who Were Blowing ‘Hateful Whistles’ At DC Rally

What does health care reform do in the first year?

Here's the list from Speaker Pelosi's office. A summary:

1. Small business tax credits

2. Begins to close Medicare donut hole

3. Free preventive care under Medicare

4. Re-insurance plan for companies that provide insurance to retirees <>

5. Ends rescissions

6. Bans discrimination against children with pre-existing conditions

7. No lifetime limits on coverage

8. Restricts annual limits on coverage

9. Free preventive care under new plans

10. New appeals process

11. Insurers have to pay 80% or more of premiums in health care

12. Temporary high-risk pool available to uninsured

13. Children can be covered under parents' plans up to 27th birthday

14. More money for community health centers

15. More money to train primary care doctors

16. Prohibit discrimination based on income

17. Helps states set up offices of health insurance consumer assistance

18. Creates public long-term care insurance program

But how about the tax increases and spending cuts needed to pay for the plan? Here's a complete list of the bill's provisions. I see:

1. Indoor tanning services tax, July 2010 (really?)

2. Begins to reduce payments under Medicare Advantage (2011)

3. Pharmaceutical manufacturers fee (2011)

4. Limit health flexible savings accounts (2013)

5. Eliminates deduction for employer Medicare Part D subsidy (2013)

6. Increased threshold for itemized deductions for health care (2013)

7. Additional hospital insurance tax for high wage workers (2013)

8. Medical device excise tax (2013)

9. Fee for patient centered outcomes research (2013)

10. Health insurance provider fee (2014)

11. Excise tax on high-cost employer-provided health plans (2018)

The timing of the rollout of these provisions is smart from a political standpoint. It's going to be difficult to campaign on repeal of the plan when so many of the benefits are introduced in 2010 and the costs are delayed until 2013. It also makes sense economically: taxes are delayed until the recession is over.

Hope for Democrats in the fall?

Experience shows that the president's party usually loses seats in Congress in midterm elections, also that the party in power loses seats when the economy doing poorly. So by all rights Democrats should lose seats in the House and Senate in November. The question is how bad the losses will be - will the Republicans take over the House and (less probable) the Senate?

Until the health care vote I would have said the probability of the Republicans taking the House was 50-50 or better. Now I'm more optimistic, and here's why. Three things need to happen for the Democrats to keep losses to a minimum.

(1) Pass health insurance reform. This gives Democrats a record of accomplishment, washes the stink of loserhood off of them. It will also provide concrete benefits that Democrats can point to in the upcoming campaign - no denial of insurance to children because of pre-existing conditions, subsidies for small businesses to pay for health insurance, allowing children up to age 26 to be covered under their parents' insurance, and so on.

(2) The economy needs to start recovering vigorously. Happily, this seems to be happening. The March employment numbers will be an important indicator of things to come.

(3) The Republicans need to overreach. This too seems to be happening. Here we see Republican Congressmen making fools of themselves with the Tea Partiers. Here the Republicans allow Michelle Bachman to be their spokesman in vowing to repeal the bill. Here we see why basing a campaign on repeal of health reform is not likely to work. Come campaign season, voters are not going to want to hear Republicans lambasting the health reform bill. They are going to want to hear what the candidates have to say about the economy, financial reform, the budget deficit, immigration, and so on, not have them rehash the arguments they made months earlier about a bill that has already been passed and signed. The Republicans are going to have to moderate their tone and focus on other issues if they want to sweep - but the issues that are going to be discussed in months to come like financial regulation are not winners for the Republicans, and the base will not let them moderate.

So the three things that need to happen for Democrats to survive are happening. I'm cautiously optimistic. Still, November is a long way away and things can change rather suddenly, as we have seen.

How not to stimulate an economy

I just got this email about a state program to subsidize employment from the College's Office of Financial Aid:

----------------------------------------------------------------------

From: XXX

Sent: Thursday, March 18, 2010 11:53 AM

To: WSCOOR@gettysburg.edu

Subject: PHEAA State Work-Study Program for the Summer

PLEASE SHARE WITH ALL SUPERVISORS IN YOUR AREA

As you make plans for student employment this summer, please keep in mind that the Pennsylvania Higher Education Assistance Agency (PHEAA) helps to subsidize wages for qualified employers in order to encourage them to hire college students.

Gettysburg College (and any office or department within the College) is an approved job location, and as such PHEAA will reimburse 40% of each eligible student's summer wages. Each department must have the funds to pay student wages during the summer. The 40% PHEAA share comes after the summer as a reimbursement.

The limitations are that the "eligible" students must be Pennsylvania residents who are receiving PA State Grants. Gettysburg College enrollment is not necessary as long as the students meet the requirements.

NOTE: Federal regulations prohibit the collection of information that is not required to determine an applicant's ability to perform the duties of a position. Therefore, it would be inappropriate to ask if a student is from PA or is eligible for a PA State Grant.

Eligible students should have received a bulletin from PHEAA which included the application form. Forms are also available from the Office of Financial Aid. Contact Sally Miller at samiller@gettysburg.edu or call x6614 if you need a form. SWSP Student Application/Placement Forms are due in the Office of Financial Aid by Friday, May 14. If you are unsure about a student's eligibility, contact the Office of Financial Aid at extension 6611 or via email reply.

Summer positions within your department/office should be designed with the expectation that your departmental budget will fund these positions. If your chosen candidate qualifies for the PHEAA Summer Program, reimbursement would be a wonderful benefit.

----------------------------------------------------------------------------

Um, if the purpose of the program is to get me to hire more students this summer, wouldn't it help if I knew whether employing additional students would in fact earn me the subsidy?

Recovery in goods production still keeping pace with 1983

The services sector is still a question mark however.

The Senate as social club

In today's New York Times, David Brooks laments the effect that pushing health care reform through by reconciliation will have on the comity of the Senate.

Once partisan reconciliation is used for this bill, it will be used for everything, now and forever. The Senate will be the House. The remnants of person-to-person relationships, with their sympathy and sentiment, will be snuffed out. We will live amid the relationships of group versus group, party versus party, inhumanity versus inhumanity.

It would be nice if the Senate were a friendly club where Jim DeMint and Barbara Boxer could socialize over brandy and cigars. But the purpose of a legislature is to legislate. The Republicans' scorched-earth tactics have made it impossible for the Senate to carry out this essential function. Reconciliation is a solution to a problem, not the problem itself.

The House vote on health care reform

Jonathan Bernstein on the House whip count:

To review: there are probably about fifty House Democrats who want the bill(s) to pass, but without their vote, and the Democratic leadership (I'm going to call them "Pelosi" but it's really the House leadership and the White House) need a lot of them to vote yes. Many of them have already said -- and most of the rest know, and a few of them fear -- that they will vote yes if they need to, but otherwise they're going to vote no. So what's actually happening is mostly a coordination problem, and much of it will be hard for outsiders to see...

What Pelosi is dealing with is a list of fifty or so people, each of whom she understands to be (whatever they say) with her if she needs them, and each of which is probably saying (in one way or another): don't make me do it. Put me at the bottom of your list. And she has to gauge who is bluffing and who isn't, who she wants to protect from the effects of a no vote and who she doesn't, who really ranks where on that list.

I'd like to see this modeled mathematically. It sounds like each of the wavering Democrats is making a time-inconsistent promise to vote "no" on the bill - time inconsistent because they want the bill to pass, so if they're the 216th vote, they'll vote "yes" regardless of their earlier promise. But there must be some probability that each waverer will actually vote "no" when push comes to shove, either because of a cost-benefit calculation or petulance. What is Pelosi's optimal strategy if she knows this probability? If she doesn't know this probability? If she knows/doesn't know each waverer's costs of voting "yes"? Is there a market mechanism that would elicit truthful commitments from enough waverers to pass the bill?

Robert Reich is pessimistic about economic recovery

Robert Reich, via Mark Thoma:

Are we finally in a recovery? Who’s “we,” kemosabe? Big global companies, Wall Street, and high-income Americans who hold their savings in financial instruments are clearly doing better. As to the rest of us – small businesses along Main Streets, and middle and lower-income Americans – forget it...

The US economy grew at a 5.9 percent annual rate in the fourth quarter of 2009. That sounds good until you realize GDP figures are badly distorted by structural changes in the economy. For example, part of the increase is due to rising health care costs. When WellPoint ratchets up premiums, that enlarges the GDP. But you’d have to be out of your mind to consider this evidence of a recovery.

Part of the perceived growth in GDP is due to rising government expenditures. But this is smoke and mirrors. The stimulus is reaching its peak and will be smaller in months to come. And a bigger federal debt eventually has to be repaid.

So when you hear some economists say the current recovery is following the traditional path, don’t believe a word...

I'm one of those who claim that the current recovery is following the traditional path, though I'm pretty sure Reich has never read this blog. I'm also pretty sure that Reich is going to be looking pretty silly in a couple months' time.

On the specifics: (1) It's pretty bizarre to claim that WellPoint's premium increases had a marked effect on GDP. We're talking about a very small fraction of GDP in play, and in theory the BEA controls for price increases in its measure of real GDP. (2) In the early stages of recovery it's normal to see big companies and stock holders getting healthier while "Main Street" is still mired in recession. These things take time; in a perfect world Main Street would recover before Wall Street, but that's never been the world we've lived in. (3) Fiscal policy at the federal level is still quite stimulative and will remain so for years, even though the degree to which it gets more stimulative is decreasing. And monetary policy is ridiculously stimulative. That's why growth is going to be strong in 2010.

The magic 400,000 threshold

Smart people like Calculated Risk continue to argue that we won't see positive jobs growth until initial claims for unemployment insurance drop below 400,000. Hence the latest report showing the four-week average of initial claims as of yesterday was 462,000 indicates that, Punxsutawney Phil-like, we are doomed to experience another month of job losses.

True, if you run a regression of the change in employment on initial claims you get something like a 400,000 threshold. And true, coming out of the last recession employment didn't start rising until initial claims fell under 400,000 (that was in September 2003). But that was a pretty strange recession. For one thing, it was incredibly mild and the recovery was very protracted. For another, initial claims were actually below 400,000 throughout most of the recession and recovery, even as employment was falling.

But in each of the recoveries that followed the 1974-75, 1981-82 and 1990-91 recessions, employment started to rise well before initial claims fell below 400,000. As the graph below shows, following the 1974-75 recession employment growth turned positive once and for all in July 1975. That month, initial claims were 445,000 while jobs increased by 249,000. Initial claims didn't dip below the 400,000 mark until November. By that time employment had increased by 1.2 million.

Recovery from the 1981-82 recession: employment growth turns positive for good in March 1983 (+173,000) while initial claims are 481,000. Initial claims don't fall below the magic 400,000 until October (by that time the economy had created 2.3 million jobs!). [Note: this is monthly data; Eviews is messing up my horizontal axis labels for some reason.]

Recovery from the 1990-91 recession: Employment begins to rise for good in March 1992 (+50,000) while initial claims are 428,000. Initial claims rise to as high as 442,000 before dropping below 400,000 in October. By that time 818,000 jobs had been created.

So excepting the 2001 recession, during previous recoveries employment began increasing 4 to 7 months before initial claims fell below 400,000. Four hundred thousand is not the magic number.

Retail sales up in February

February was supposed to be a down month for retail sales because of the blizzard. Surprisingly, the Census Bureau reports sales were up 0.3 percent for the month. Excluding motor vehicles and parts the increase was a pretty amazing 0.8 percent (that's 9.6 percent on an annual basis and

up 4.2 percent from February 2009. Why were the auto numbers so weak? Well, cars are sold outside. Hard to check out the new models when they're buried under 3 feet of snow. Toyota's troubles didn't help either.

I believe 2010Q1 GDP numbers are going to be very good. March employment should be strong as well. Happy days are here again,...

Economic policy in Obama's first year

This appears to be the season for retrospectives on the Obama Administration's economic policies one year in. Joshua Green at the Atlantic and John Cassidy at the New Yorker profile Treasury Secretary Tim Geithner and George Packer at the New Yorker explains why the Administration has failed to turn its accomplishments on the economic front into political hay.

The story that emerges from these pieces is one of an Administration that has been amazingly competent at handling the most challenging economic crisis the country has faced since the Great Depression; but one that has been hamstrung by its focus on halting the economic slide rather than using the crisis to transform our economic institutions.

The government's response to the crisis had three major elements. First, the Federal Reserve took creative steps to halt the financial crisis and keep credit flowing to households and businesses. Second, a large fiscal stimulus package to stimulate aggregate demand. Third, a recapitalization (or bailout if you prefer) of large financial institutions, first through TARP and then with private money following the Treasury's "stress tests" of major banks. The Obama Administration gets full credit for about half of this suite of policies - the fiscal stimulus and stress tests - and partial credit for the other components. It could, after all, have forced the Fed to reverse course or abandoned TARP, but instead it supported these initiatives. And the program has been remarkably successful. A year ago most forecasters were predicting that the economy would not begin recovering until 2010 and that there was a real chance of a major depression. Instead, economic growth returned in the summer of 2009. While we have not seen job creation yet, the turnaround in that department is happening about as fast as anyone could reasonably have hoped.

Throughout, the Administration has chosen the practical measures most likely to stabilize the economic situation quickly. And this has been the source of its political troubles. The Administration may well have been better off politically had it taken a tougher line against the banks. Many observers from both the left and the right were calling for nationalization of the largest and most irresponsible banks. But Geithner and Obama calculated, rightly, that this would cause so much disruption in the banking system (for one thing, once the government nationalized one money center bank it would probably have ended up having to nationalize all of them) that the recovery would have been delayed by months or years. As Geithner put it, had we gone the nationalization route the government would have ended up owning 18 AIGs. Instead, the Administration sought to shore up existing institutions, trading off political damage for a quicker economic recovery. The same desire not to unnerve the financial system has led the Administration to propose a financial reform plan that restrains the activities of big financial institutions but does not break them up.

The design of the stimulus package also reflects the practical-mindedness of the Administration. The Administration's goal was to get a package through Congress as quickly as possible so that it would begin immediately to have an impact on the economy. As a result, the program was probably too small and contained sops to Senate moderates like the fix for the alternative minimum tax that would do nothing to stimulate the economy. Furthermore, the package forsook high-visibility projects that might have garnered political advantage for an under-the-radar approach that, while arguably more effective, have put Obama's entire agenda in peril. The Administration chose to focus spending on projects that would either have maximum short-term impact like road repair or grants for research into green technology. Fine ideas, but new buildings and new infrastructure would be a more visible demonstration to the public of how their money is being spent. The Administration did not help itself when it decided to put up big signs at highway construction sites touting the role of the ARRA - put the signs up when the road is completed you morons, not when they only serve to remind drivers why they're stuck in a traffic jam on I-95. Similarly with the tax cuts: the Administration chose to implement tax cuts by reducing the amount withheld from paychecks on the theory that consumers would spend more of the tax cut that way than if it came announced with fanfare in a shiny envelope with a picture of a smiling Barack Obama. But of course if you want people to appreciate the money you're giving them, the shiny envelope and the smiling picture is exactly what you want. In the end, the Administration accomplished with the fiscal stimulus something I would have thought impossible: it managed to spend $800 billion without getting any political benefit for it whatsoever.

I'm a big admirer of the Administration's economic efforts. It crafted a sensible and effective economic plan with a degree of maturity and practicality that we haven't seen from a presidential administration since - hmm, I can't even think of a precedent. (My one beef is that the Administration has not done enough to fight the foreclosure crisis that has been unfolding gradually over the last two years.) In one sense, I think Americans are getting better governance than they deserve. We're incredibly impatient and ignorant, often willfully so. We're quick to look for scapegoats and believe charlatans peddling crackpot economic theories. We have a government that tries to rise above this and has paid a steep political price. On the other hand, part of governing is leading - convincing the public to buy into your agenda so that it has some staying power in the long run. Obama's failure in this regard - his failure to put his policies into a context that people can understand and that lays the groundwork for his future agenda - is a real one. Ronald Reagan did it right: while his economic policies were wildly unpopular in the first two years of his administration, he kept hammering on the ideology, and when the economy turned people gave him and his policies the credit. Obama needs to do the same or he will pass up an enormous opportunity for progressive change in the years to come.

I suspect John Rawls taught a better course in History of Thought than I do

Well, mine is Economic Thought and his was Political Thought, but there's a lot of overlap. Mark Thoma posts some class notes from a lecture Rawls gave on Marx's theory of economic justice (or lack thereof) at Harvard in 1973.

Summing up. (1) Marx views the notion of justice as a virtue of legal forms and institutions, and thus perhaps it is a notion which belongs to prehistory. The state depends upon the mode of production. (2) Marx doesn't deny that the various conceptions of justice have formal features in common -- exchange of equivalents for equivalents -- but the notion of what is equivalent is determined in different ways. Marx would be prepared to admit that capitalism in its high period is just. One reason he rejects the utopian's argument is that it is misleading. It rests on a misapprehension of where the essential problem lies: not in the superstructure, but in the mode of production. He felt that the key enterprise is to give a scientific theory of the mode of production.

Worth reading in its entirety, especially if you're taking my History of Thought class.

March employment and the Census

Calculated Risk runs the numbers and says if employment grows 200,000 in March, that's a pretty weak report. I'm inclined to agree, since March's number has to make up for the blizzard-suppressed February number, but at the same time perhaps beggars should not be choosers. I'm a little puzzled at CR's attitude toward Census workers. Beginning in March the Census Bureau will start hiring workers by the gajillions. CR calls this a "distortion" to the data. I say a job's a job - if Congress had passed a big jobs bill that created the same number of jobs, would CR call that a distortion?

Would Obama do better if he focused more on job creation?

The conventional wisdom is that his focus on health care instead of jobs is one reason for the sharp decline in his popularity over the last year. (To put it in perspective, however, no president would have sustained the popularity Obama had when he was inaugurated, and his approval rating, now around 49%, is not too far off the percent of people who voted for him in 2008.)

If the conventional wisdom is true, we'd expect Obama's support among people who are worried about their jobs to have fallen by more than it has for the relatively well-off. Is this in fact the case? Unfortunately, I can't find polling data from 2009 to compare to recent data. But Gallup issued a report in February that broke down presidential approval by employment status. It found that Obama has more support among the "underemployed" than among the fully employed:

Obama has stronger support among the underemployed than among the employed. On reflection, this is not surprising - Obama's most vocal opposition is from the Tea Party crowd, who look to me like mid-level, white-collar, self-employed, retired types, not the unemployed rabble.

This tells me that more emphasis on jobs would not necessarily help Obama. In fact, one could argue that access to health care is one of the primary concerns facing the underemployed. Obama's focus on health care may actually work in his favor among this group. The Gallup report doesn't answer this question, but it presents some alarming data on how being underemployed affects access to health care:

More optimism on 2010 growth prospects

We're starting to hear fewer of the "jobless recovery" forecasts, more projections of a fairly decent recovery. Janet Yellen forecasts GDP growth of around 3.5% in 2010 and 4.5% in 2011. Joseph Carson projects 3.7% in 2010. These numbers, of course, are less than satisfactory given that the economy has so far to go to full employment - Yellen, while centering her speech on a forecast considerably more optimistic than the consensus, argues with some passion that this rate of growth means we remain in dire circumstances for far too long.

But even this modest level of growth means that we'll have substantial growth in jobs over the next year. The surge in productivity growth in 2009 must have been a temporary phenomenon. I can't believe American businesses have figured out how to squeeze 5 percent or so more production out of the American workforce on a sustained basis. Most likely 2009's surge means that growth of productivity in 2010 will be below trend (this is the argument Bob and I made in our Financial Times piece in January). Trend productivity growth is supposed to be a little below 2 percent. If productivity growth in 2010 is a little under 1 percent, then the GDP growth forecasts above imply growth in hours of somewhere in the 2.5-3.0 percent range. Shave some off for an increase in the average work week, and it's easy to envision of 2 percent growth in jobs - roughly 2.6 million - and maybe more. This translates to over 200,000 jobs per month, far above the Obama Administration's forecast of 95,000, and a rate consistent with a fairly substantial drop in unemployment.

Courting Disaster: "nothing more than the defense's opening statement in a war crimes trial."

When last we met Marc Thiessen (see post below) he was claiming that we did members of al Qaeda a favor by torturing them because in doing so we relieved them of the burden of concealing information from us. The pseudonymous Matthew Alexander reviews Thiessen's book, Courting Disaster and reveals its utter depravity:

My gut reaction on reading Marc Thiessen's new book, Courting Disaster, was: "Why is a speechwriter who's never served in the military or intelligence community acting as an expert on interrogation and national security?" Certainly, everyone is entitled to a voice in the debate over the lawfulness and efficacy of President Bush's abusive interrogation program, regardless of qualifications. But if you're not an expert on a subject, shouldn't you interview experts before expressing an opinion? Instead, Thiessen relies solely on the opinions of the CIA interrogators who used torture and abuse and are thus most vulnerable to prosecution for war crimes. That makes his book less a serious discussion of interrogation policy than a literary defense of war criminals. Nowhere in this book will you find the opinions of experienced military interrogators who successfully interrogated Islamic extremists. Not once does he cite Army Doctrine—which warns of the negative consequences of torture and abuse. Courting Disaster is nothing more than the defense's opening statement in a war crimes trial.

Worth reading in its entirety.

A step back for gay rights in Virginia

The Washington Post reports that the Virginia state attorney general has ordered public colleges and universities in Virginia to rescind policies that ban discrimination on the basis of sexual orientation:

Virginia Attorney General Ken Cuccinelli II has asked the state's public colleges and universities to rescind policies that ban discrimination on the basis of sexual orientation, arguing in a letter sent to each school Thursday that their boards of visitors have no legal authority to adopt such statements.

In the letter, Cuccinelli (R) wrote that only the General Assembly can extend legal protections to gay state employees -- a move the legislature has repeatedly declined to take, including as recently as this week.

"It is my advice that the law and public policy of the Commonwealth of Virginia prohibit a college or university from including 'sexual orientation,' 'gender identity,' 'gender expression,' or like classification as a protected class within its non-discrimination policy absent specific authorization from the General Assembly," he wrote.

Colleges that have included such language in their policies -- which include all of Virginia's leading schools -- have done so "without proper authority" and should "take appropriate actions to bring their policies in conformance with the law and public policy of Virginia," Cuccinelli wrote.

I suggest that Gettysburg College start recruiting good faculty and students at public colleges and universities in Virginia who don't wish to be treated like second class citizens.

The Clusters!

Thanks to Ralph. Now who's old-fashioned?

February jobs report

I'm afraid I'm going to have to cry foul on the Squawkbox talking heads. The BLS reported payroll employment down 36,000 in February and the unemployment rate unchanged at 9.7%. The analysts, who for weeks have been saying that the February blizzards could reduce the payroll number by tens of thousands, maybe over a hundred thousand, saw the number and concluded that the blizzard effect had been much negligible after all. Apparently they had fixed in their minds that the "true" number was likely to be zero; when the number came in less negative than they had predicted, they revised downward their estimate of the blizzard effect rather than revising upward their estimate of the true number. I thought the blizzard effect was going to be in the area of -100,000 - though who really knows - and so I thought the payroll employment number was going to be in the area of 0 to -100,000. There's no information in the jobs report to change my estimate of the blizzard effect, so I'm going to say the "true" number was around +64,000. In other words, a pretty good report and an indicator that the jobs recovery is progressing on schedule.

Evidence for a substantial blizzard effect is that the biggest job-losing sectors was construction at -64,000. Also, the stock market responded positively to the report - traders may be interpreting the report as suggesting the beginning of sustained employment growth.

Bob Barbera's view of the report was more positive than the other commentators - no surprise there. He noted that we've now had two consecutive months with employment growth in the household survey of 541,000 and 308,000 respectively. That's phenomenal news.

Mark Zandi moved the goalposts. He's conceded that March and April are going to be good months for employment, but the true test is May and June. I want to rewind the tape to a few months ago and see if he's being consistent with his past statements.

Meanwhile, the report revised December's and January's payroll numbers: in December the BLS now estimates that the economy lost 109,000 jobs rather than the 150,000 originally estimated, and in January the job loss is 26,000 rather than 20,000.

For the record...

I'm not disingenuous or anti-liberal arts. I don't poison my students' brains about the curriculum. I may be a tad old fashioned. I'm very much anti-bullshit. And apparently that puts me in the minority.

February employment

The ADP National Employment Report says the economy lost 20,000 private sector jobs in February. The ADP report seems to be a good proxy for private employment as it appears in the BLS report. For reasons given in the link above, the ADP numbers for February will not be affected by the blizzards in the way that the BLS data are. The data suggest to me that total employment growth in February was near zero (-20,000 plus whatever government employment growth there was). The BLS report should show a large negative number as a result of the blizzards. We're behind schedule here, people!

The construction of the ADP figures, described here, is interesting (in an incredibly techno-geeky kind of way). One reason the ADP numbers fit the BLS numbers so well is that they are benchmarked to the BLS numbers through a regression technique that I don't understand.

The BLS data (as currently reported) for growth of employment by industry is regressed on: (a) the matched-sample growth rates by industry based on the ADP data; (b) a weighted average of the historical average growth rates of employment in each cell based on QCEW data; (c) a weighted average of the historical average

growth rates of employment in each cell based on the ADP data; (d) lagged values of BLS estimates of growth of employment by industry; (e) initial unemployment claims filed during the week immediately before the week that includes the 12th of the month.

The regressions are estimated concurrently. The coefficient on term (b) above is restricted to unity. The coefficient on (c) is restricted to the negative of the coefficient on term (a). This method allows different trends of employment by size of payroll within industries, while assuming that the other industry-wide relationships implied by the regressions hold for all size classes within an industry. Inclusion of lagged employment in the regressions5 controls for shifting differences between the BLS sample and the ADP customer base, while inclusion of initial unemployment claims controls for differences in the definitions of employment used by BLS and ADP.

A level of employment is established in each cell by cumulating the predicted value of the matched sample growth rate in each cell forward and backwards from the most recently benchmarked March estimate of employment in that cell. Such referencing effectively weights the growth rates of the ADP data in each cell by

the observed distribution of employment by industry and size classification.

These levels are then summed to the aggregates by select industry and size of payroll that are shown in the summary table of the monthly report.

In addition, every year the ADP are revised when the BLS does its benchmark revisions. So the phenomenal fit of the ADP data (correlation of differences is 0.95) is by construction. I wonder how well the ADP figures predict the BLS figures before revisions, i.e. how closely is the -20,000 number reported for February correlated with the BLS number we get on Friday? Apparently Macroeconomic Advisors has studied this question, but I don't know what they found.

Bob is telling me that the seasonal adjustment factors that the BLS uses are probably skewed this winter because the weather has been much more severe than it has been in the past few years. (Basically, the BLS's seasonal adjustment procedure uses the last 5 or 6 years of data to net out seasonal effects. So if we had a mild Januaries in recent years, the January effect will be small. Then when we get socked by a bad January as happened this year, and employment declines as a result, the seasonal adjustment process only partially offsets that, interpreting the plunge as a bad economy rather than bad weather.) ADP uses the same seasonal adjustment procedure, so whatever ails the BLS data on that dimension will ail ADP data as well.

Gettysburg College students respond to John Stewart

And here's the response from the Daily Show:

Kendra,

I found your name on the college website and you seemed to be the right person to contact. Your students posted a video about The Daily Show on youtube, and we wanted to let you all know how much we loved it. Jon (yes that Jon) and I just watched it and were extremely impressed. Both the comedic content and the level of professionalism used to create the piece were extraordinary. We genuinely laughed all the way through it. Clearly Gettysburg has great programs and a very talented student body.

Please pass on this email as well as our sincerest thanks to all the students for their effort in making the video, and tell them to keep up the good work. We'll do our best not to refer to your school as a "shithole" in the future, but I can't make any promises.

All the best,
Rory

Rory Albanese
Executive Producer
The Daily Show with Jon Stewart
604 W. 52nd St.
NY NY 10019
(212) 468-1750

The least they could do is show the video in tonight's show!

Democrats off message

A number of Democrats sought to take advantage of Jim Bunning's filibuster of the bill to extend unemployment insurance benefits:

"Jim Bunning has done more to draw attention to the procedural abuses in the Senate than ever before," Van Hollen said... "This is part of the wake up call for Americans that Republicans are abusing the rules in the Senate," Van Hollen said.

No, no, no! Jim Bunning's actions show that Republicans are out of touch with the everyday concerns of American families who are worried about paying for groceries and their children's medical care in these troubled times. The American people want help, they want jobs, they want action - Jim Bunning and the Republicans need to lend a hand or step aside.

That's the message, you dopes.

Marvels of modern medical technology

The NY Times reports: U.S. Births Rise in All Age Groups.

Singin' the Krugman Blues