GDP growth is still subdued

GDP growth in 2010Q1 was 3.2 percent according to the BEA's advance estimate. That's weaker than I thought it would be - I guess the consensus is smarter than I give them credit for. 3.2 percent is not strong enough to bring the unemployment rate down at a satisfactory pace. For that we need growth in the 4-5 percent range for the next year at least.

On the broader question of what type of recovery this is going to be, however, the data for Q1 confirm (for me at least) that we're on track for a traditional recovery rather than the jobless recovery that so many economists are worried about. For the first three quarters of this recovery, GDP has grown at a 3.6 percent annual pace. Compare that to the growth rates in the first three quarters following the 1990-91 and 2001 recessions: 2.0% and 2.3% respectively. The last two recoveries were jobless for a simple reason - GDP growth was too slow. We are on track, I think, for a recovery like that following the 1974-75 and 1981-82 recessions. Following those two recessions, GDP grew at a 4.5% and 6.1% rate respectively for the first two years of the recovery - I'd bet on a 1975-77 recovery rather than a 1982-84 recovery however.

Why the confidence? First, there's the fundamental statistical properties of GDP growth in the past few decades. If you run a regression of GDP growth on a constant, the output gap, and two lags of GDP growth, you find that typically deep recessions are followed by periods of strong growth: every one percentage point output gap adds about a third of a percentage point to annualized quarterly GDP growth. Our current output gap of about 5.9 percent therefore provides a powerful impetus to growth in the coming quarters: the model predicts a growth rate of 5.2 percent for the next four quarters. If we use the model to forecast the next four quarters of growth from a point three quarters into the recovery following the last two recessions, we get much lower forecasts: 3.6% for 1992 and 1.7 percent in 2002-03. Now the standard errors for these forecasts are very large, and in fact growth was somewhat higher than the model predicted in 1992 and somewhat lower in 2002-03 (4.2% and 1.7% respectively). So I'm not going to bet a lot of money on 5.2%. But the point is that strong growth coming out of a recession like this is normal, as is weak growth coming out of a recession like the last two. If you want to convince me that growth will be considerably slower this time around, you have to explain how the economy has changed. And no one has done that to my satisfaction.

The latest GDP report calls into question the most powerful argument that has been advanced for a slow recovery. Economists have been arguing that consumer spending is going to be sluggish during this recovery because households are heavily indebted and housing prices have fallen so much. But consumption spending rose 3.6 percent last quarter, following a 2.8 percent and 1.6 percent increase in the preceding quarters. As long as employment continues to pick up (and I think it will), consumption spending should be able to maintain the current pace for the foreseeable future. Business spending on equipment and software, traditionally a powerful cyclical indicator, was likewise strong last quarter, growing at a 13.4 percent annual pace. This indicates that business investment is not being restrained by problems in the banking sector, another of the headwinds that growth-pessimists focus on.

Weak spots last quarter were business investment in structures - a consequence of overbuilding in commercial real estate during the boom - and spending by state and local governments. There's not much we can do about investment in structures, but state and local government spending should be less of a drag as budgets improve along with recovery. Congress should long ago have provided more relief for state and local governments, and if I were in charge I'd press for this now.

The key to turning this into a self-sustaining recovery, of course, is growth in employment. Here again I think we can rely on statistical regularities for a powerful argument for employment growth in the coming quarter. A regression of employment growth on the previous three quarters' output growth suggests that in the second quarter employment should increase by 624,000 jobs, or just over 200,000 per month. If you think we're going to have considerably less employment growth than that, you have to explain how companies have been producing at the recent pace without hiring more workers. I don't think there's a convincing argument for that. It's more likely that we'll see stronger growth in employment than this - as Bob and I wrote in our Financial Times article a few months ago, companies probably overshot in reducing employment in 2008-09, and now will need to hire at a faster pace to get back to normal staffing levels. I'd bet on monthly employment gains of 250,000 or so for the next three months.

Liberal arts majors in space

THE ONLY THING THAT CAN STOP THIS ASTEROID IS YOUR LIBERAL ARTS DEGREE.

BY MICHAEL LACHER

... Sure, we've got dozens of astronauts, physicists, and demolitions experts. I'll be damned if we didn't try to train our best men for this mission. But just because they can fly a shuttle and understand higher-level astrophysics doesn't mean they can execute a unique mission like this. Anyone can learn how to land a spacecraft on a rocky asteroid flying through space at twelve miles per second. I don't need some pencilneck with four Ph.D's, one-thousand hours of simulator time, and the ability to operate a robot crane in low-Earth orbit. I need someone with four years of broad-but-humanities-focused studies, three subsequent years in temp jobs, and the ability to reason across multiple areas of study. I need someone who can read The Bell Jar and make strong observations about its representations of mental health and the repression of women. Sure, you've never even flown a plane before, but with only ten days until the asteroid hits, there's no one better to nuke an asteroid.

Funny, but also kind of depressing. Thanks Darren.

Fear the deer!

Bucks win game 5 in Atlanta.

Anticipating Friday's GDP report

The consensus is that GDP grew at about a 3% annual pace in 2010Q1. I'm going to say 4.5%, based on everything Bob's been telling me, everything I read in the papers, and my sense that the consensus forecast is always too low in the early stages of a recovery (and too high in the early stages of a recession). These guys are less optimistic about Q1 but positively giddy about Q2.

HIRE Act

A commenter notes that Congress has already passed a jobs bill that includes subsidies for employers to hire new workers. The president signed the legislation, called the HIRE Act, into law in March. Among its provisions:

The idea is to reinvigorate the economy by encouraging new jobs with tax incentives. To qualify, hiring must occur after February 3, 2010, and before January 1, 2011. In addition:

• Individuals hired must have been unemployed for at least 60 days.
• Those individuals must be able to certify "by signed affidavit" and under penalty of perjury, that they "have not been employed more than 40 hours in the 60-day period ending on the date such individual gains such employment."
• No credit is available if the individual is hired to replace a person who is terminated, "unless such other person is separated from employment voluntarily or for cause."

The "encouragement" has two components

The first component [suspension of payroll taxes] has a maximum value equal to 6.2 percent of wages paid in 2010, up to $106,800 (the FICA wage cap). This benefit is realized as soon as the first payroll deposit is due since employers will not be required to pay the employer-share of Social Security tax on the wages of the new employee.

The second component is in the form of a $1,000 credit (maximum) for each new employee retained for 52 consecutive weeks. Wages paid in the last 26 weeks must equal at least 80 percent of wages paid in the first 26 weeks. This credit can be taken on the employer’s income tax return filed in 2011.

This seems to be quite similar, though a bit smaller in the magnitude of the benefit, to the legislation proposed in my previous post. Restricting eligibility to people unemployed for 60 days or more may narrow the scope somewhat relative to the proposal and make it more difficult for companies to implement, but is probably useful in restricting companies' ability to game the legislation.

Crisis in Europe

Simon Johnson is apocalyptic:

Everything you knew or thought you believed about the European economy – and the eurozone, which lies at its heart – was just ripped up by financial markets and thrown out of the proverbial window.

While you slept, there was a fundamental repricing of risk in financial markets around Europe – we’ll see shortly about the rest of the world. You may see this called a “panic” and the term conveys the emotions involved, but do not be misled – this is not a flash in a pan; financial markets have taken a long hard view at the fiscal and banking realities in Europe. They have also looked long and hard into the eyes – and, they think, the souls – of politicians and policymakers, including in Washington this weekend.

The conclusion: large parts of Europe are no longer “investment grade” – they are more like “emerging markets”, meaning higher yield, more risky, and in the descriptive if overly evocative term: “junk”...

This is about the fundamental structure of the eurozone, about the ability and willingness of the international community to restructure government debt in an orderly manner, about the need for currency depreciation within (or across) the eurozone. It is presumably also about shared fiscal authority within the eurozone – i.e., who will support whom and on what basis?

It is also, crucially, about stabilizing the macroeconomic situation without resorting to more unconditional bailouts. Bankers are pounding tables all across Europe, demanding that governments buy out their position – or bring in the IMF to do the same. We again find ourselves approaching the point when the financial sector will scream: rescue us all or face global economic collapse.

Paul Krugman is merely worried:

Greece seems to be spiraling over the edge into default; I just don’t know how it steps back from that edge now. Might it also leave the euro? That would be a total mess, inviting the mother of all bank runs, although as I’ll explain in a moment that may be happening anyway.

Now, Portugal. Scary spike in bond yields — with the downgrade more following than causing the trend, I’d say...

The question now is how far this will spread. I’m looking at the spread between Italian and German bonds...

It’s getting a bit scary out there.

How might this affect the US? Let's count the channels:

- the US exports about $200 billion worth of goods and services to the Euro area every year, so a slowdown in Europe would have a direct effect on demand in the US. The effect would be fairly small - a ten percent drop in demand for US exports from Europe would shave off a few tenths of a percent from the US growth rate.

- but if the effects ripple out from the Eurozone, the impact on US exports would be larger.

- a flight from the euro to the dollar would cause the dollar to appreciate, reducing demand in the US further.

- companies doing business in and with Europe might see their stocks fall in value - in fact, the Dow and S&P 500 have tumbled significantly in recent days, arguably due to concerns about the situation in Europe.

These are small effects. More worrying:

- companies doing business in and with Europe might see their stocks fall in value - in fact, the Dow and S&P 500 have tumbled significantly in recent days, arguably due to concerns about the situation in Europe. A significant drop stock markets could drag US growth down.

- how exposed are US banks to European debt problems? What institutions in the US have been writing credit default swaps on European sovereign debt, hold large quantities of European government bonds, are counterparties to trades with financial institutions that are so exposed, etc. There's really no telling what the ramifications are for the US financial system. I hope and assume the Fed and Treasury are monitoring the situation closely. So far, though, I don't see significant movements in US credit spreads that would indicate financial problems.

Jobs bill?

Brent Budowsky says the Democrats' only chance to avoid catastrophe in the November elections is a jobs bill. Specifically,

1. The president and Congress should enact a substantial tax credit for new job creation that would become effective immediately and expire Oct. 31, 2010.

2. For new hires that increase net company jobs, the tax credit should be $10,000 per new employee hired in May or June, $7,500 for those hired in July or August and $5,000 for those hired in September or October.

3. The tax cut should be financed by a tax on bank profits, speculative trading and/or Wall Street bonuses at bailed-out firms. It should replace the program in the financial bill that would transition failing firms, which would be removed in my plan. The $50 billion raised in the current bill would be applied instead to the jobs tax credit along with any additional bank levies needed to pay for the jobs bill.

4. The jobs bill would be passed on a fast track at the same time as the financial bill. Republicans would be asked to give bipartisan support for the jobs bill in return for removing the provision they oppose on the financial bill.

The plan would be a good idea on political grounds. But Congress toyed with this idea last year and couldn't get over all of the logistical problems (how many firms would fire their current workforce and hire them all back as new employees to collect the credit?). Furthermore, I'm guessing that with jobs growth in the 250,000 to 300,000 range beginning this month and lasting through the year, the economic rationale (and a big part of the political rationale) will fade away. My prediction is that the Democrats will do better than expected because the economy will do better than expected, and Democrats will justifiably take credit.

Bank loans are a lagging indicator

Worried that the unwillingness of banks to make loans will stifle the recovery? Take some solace in the fact that loans are a lagging, not a leading indicator of employment. The graph below shows the year-over-year percentage change in commercial and industrial loans by US banks (adjusted for inflation) and the year-over-year change in employment. Coming out of recessions, the general pattern is for employment to lead loans, not the other way around. More formally, a quick run through the data shows that employment "Granger causes" loans: past rates of loan growth do not help predict current employment growth, but past employment growth does help predict current loan growth.

What is the social value of a synthetic CDO?

The SEC charges that Goldman Sachs defrauded customers when it sold them synthetic CDOs without telling them that the securities that comprised them had been selected by a hedge fund precisely on the basis of their having a high probability of default. What, I hear you asking, is a synthetic CDO? Well, see if you can follow the bouncing ball:

- A mortgage, from the perspective of the lender, is a security that pays a fixed amount each month for 15, 20, or 30 years (I'm referring to conventional mortgages here).

- A mortgage-backed security (MBS) is a pool of mortgages. Like a mutual fund, it is a security whose payments are generated by the mortgages it contains.

- A collateralized debt obligation (CDO) is a pool of MBS. Its payments are generated by the payments on the MBS it contains, with the complication that the CDO divides payments into risk classes or "tranches." Any defaults on the underlying MBS are assigned to the lowest rated tranche first, then to higher level tranches as needed, so that if you buy the highest tranche you are insulated from most of the defaults on the underlying MBS.

- A credit default swap is a transaction in which one party makes small periodic payments to another party as long as an underlying asset such as a CDO continues to generate payments, and makes a large payment in the reverse direction if the underlying asset defaults. It is essentially an insurance policy on the underlying asset.

- A synthetic CDO is a collection of credit default swaps whose payment structure is designed to mimic the payment stream that would be generated from a CDO.

That's simple enough. But the question that naturally arises is the one posed by Andrew Ross Sorkin: "What purpose does a synthetic C.D.O., which contains no actual mortgage bonds, serve for capital markets, and for society? To answer this question, we turn to the Book of Keynes, Chapter 12. Read the whole chapter, it is chock full of insights. But the relevant passage for the present question is this:

In former times, when enterprises were mainly owned by those who undertook them or by their friends and associates, investment depended on a sufficient supply of individuals of sanguine temperament and constructive impulses who embarked on business as a way of life, not really relying on a precise calculation of prospective profit... Decisions to invest in private business of the old-fashioned type were, however, decisions largely irrevocable, not only for the community as a whole, but also for the individual. With the separation between ownership and management which prevails to-day and with the development of organised investment markets, a new factor of great importance has entered in, which sometimes facilitates investment but sometimes adds greatly to the instability of the system. In the absence of security markets, there is no object in frequently attempting to revalue an investment to which we are committed. But the Stock Exchange revalues many investments every day and the revaluations give a frequent opportunity to the individual (though not to the community as a whole) to revise his commitments. It is as though a farmer, having tapped his barometer after breakfast, could decide to remove his capital from the farming business between 10 and II in the morning and reconsider whether he should return to it later in the week...

Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called 'liquidity'. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of 'liquid' securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is 'to beat the gun', as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow...

The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only. But a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets often facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is 'liquid' (though this cannot be true for all investors collectively) calms his nerves and makes him much more willing to run a risk. If individual purchases of investments were rendered illiquid, this might seriously impede new investment, so long as alternative ways in which to hold his savings are available to the individual. This is the dilemma. So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive (especially to the man who does not manage the capital assets and knows very little about them), except by organising markets wherein these assets can be easily realised for money.

The answer is liquidity. Mortgage-backed securities make mortgages more liquid, hence more valuable to the lender, hence available at a lower price (interest rate) to the borrower. CDOs make MBS more liquid, hence more valuable, which further lowers the rate at which lenders are willing to extend mortgages. Credit default swaps make CDOs more liquid, and synthetic CDOs do the same. The social benefit from all these derivatives is greater liquidity for assets that by their nature are illiquid, hence lower mortgage rates for prospective homebuyers. The tradeoff is, in a financial panic investors try to exercise the liquidity value of these investments. But the house itself that is the asset underlying the pyramid of finance is not liquid, and therefore the rush for liquidity creates a collapse in the real economy.

But the argument for MBS, CDO, CDS, synthetic CDO and the like presumes that the liquidity value priced into these instruments reflects the true risks associated with each of these assets. The current situation has arisen in part because these assets were mispriced, which resulted in overinvestment in the underlying asset (housing). They were mispriced for a number of reasons, including stupidity on the part of market participants, corruption of the rating agencies, and (alleged) fraud on the part of institutions like Goldman Sachs. One way to increase the probability that these types of securities are correctly priced is to force them to be traded over organized exchanges rather than "over-the-counter" as in the Goldman Sachs deals. This is one of the most important elements of the financial reform bill that the Democrats are trying to pass. But Keynes tells us that even if assets are correctly priced in ordinary times, the function of financial markets of making fundamentally illiquid assets like houses appear to investors as liquid assets presents a dilemma: though it fosters investment, it also makes the economy susceptible to periodic panics that result in economic crisis.

Matthew Yglesias on Christina Romer on the unemployment problem

Christina Romer argued in a talk at Princeton that the reason the unemployment rate is so high is not structural problems in the economy but a simple deficiency of aggregate demand. Matthew Yglesias draws the wrong conclusion:

Every time there’s a downturn a certain swathe of the elite starts to label it unfixable and structural. And the worse the downturn, the louder come the calls. Look at the history of the Great Depression and you see an enormous chorus of voices from the right arguing that nothing could be done and people would just have to suffer through it. They were countered by a chorus of voices from the left arguing that nothing could be done and people would just have to stage a revolution. It wasn’t true then and it wasn’t true now. The fact of the matter is that key people responsible for running the global economy—people at the European Central Bank and the Federal Reserve Board, and the Bank of Japan, people in the United States Senate, people in the Germany cabinet—are screwing up. In the developed world, those countries who’ve been able to respond aggressively to the crisis with aggressive expansion-via-devaluation are all doing pretty well. The bigger developed economies can’t do that exact thing, but they can mount more aggressive expansionary responses—they just aren’t.

That's not how I interpreted her remarks, nor how I think she intended them to be interpreted. I believe Romer was responding to a view that is common among those who criticize the Administration's policies from the left. Their argument is that the disproportionate rise in the unemployment rate during the recession reflects structural problems - firms have figured out how to do more with fewer workers - and therefore we are unlikely to get a significant drop in unemployment unless we have extraordinarily high GDP growth. Romer's point, with which I agree, is that normal recovery-level GDP growth - I would say in the 4-5 percent range for several quarters - should be sufficient to bring the unemployment rate down at a reasonable pace (reasonable meaning as fast as can be expected, not fast enough). The Obama Administration's focus on stimulating demand through fiscal policy, bailing out the financial sector, and supporting the Fed's monetary policy, is the correct approach to the problem.

It may take awhile for forecasters to acquiesce to signs of a strong recovery

After a flurry of headlines announcing that the "consumer is back" and the economy is poised for a strong recovery (here , for example) I had thought the consensus was going to form quickly behind a "V" shaped recovery. Not so fast. Here's Greg Ip:

Curb your enthusiasm. Yes, the economy is recovering, as everyone save the nihilists expected. However, the debate ought to be about the strength, not the fact, of the recovery. At the risk of gross oversimplification, the debate is this: do we follow the strong recovery model (the “V”) which holds that deep recessions are followed by strong recoveries, or the weak recovery model (the “U”) that holds that recessions caused by financial crises are followed by weak recoveries? I have long been in the latter camp. In fact, I describe my forecast as “reverse square root”, sort of a cross between a V and U (credit to George Soros for the term): an early cyclical rebound followed by muted growth. I’m still there.

Talk about moving the goal posts! For year's we've been debating whether we were going to have a V or a U (occasionally you'd hear about a W or L too) - now we're concerned about a "reverse square root"? Criminy, the pessimism dies hard.

Ip's reasoning, usually solid, is pretty weak here.

Now, to the evidence. So far, the magnitude of growth does not validate the V. GDP fell more during the 2007-2009 recession than in either 1973-75 or 1981-82 and has recovered less. Assuming GDP grew 3% (annualised) in the first quarter, which is the consensus, then it will be up 2.8% (not annualised) in the nine months since the recession ended, compared to 3.8% after 1975 and 5.6% after 1982. Yes, employment is finally rising, but as The Economist notes, its performance is far worse than after other recessions.

Ip's argument is essentially, pessimism is justified because so many commentators are pessimistic. Of course the problem with "the consensus" is that it has been too pessimistic in recent quarters. GDP is more likely to grow at 5% this quarter than 3%.

Second, the composition of growth looks unsustainable. A disproportionate amount so far has come from inventories which are not a sustainable source of demand. Relative to expectations, final demand is a wash: consumption has been stronger but housing has been weaker.

Err, um, Mr. Ip - Consumption is 70% of GDP, housing is 3%. It's not a wash.

But after a financial crisis a traumatised financial system stops the benefits of easy monetary policy from reaching households. Banks have tightened their underwriting standards, and even if they hadn’t, many households wouldn’t qualify with their homes worth less than their mortgages.

We've heard a lot of loose talk about what happens after financial crises, but I don't think that there are enough close historic parallels to what's going on now to make any definitive judgments. Reinhart and Rogoff dig up some interesting data on financial crises around the globe, but it's not at all clear that these past episodes shed a ton of light on the prospects of growth in this particular case.

So, just as in 2008 it took forecasters and businesses awhile to capitulate to the fact that the economy was headed into a severe recession, it looks like it'll take another quarter or two of strong growth to convince them that we're really coming out.

Unemployment insurance claims

Thursday's ETA report showed that unemployment insurance claims rose in mid-April, potentially bad news for those of us who have been predicting big gains in employment this month. Both initial claims and continuing claims have flattened a bit in recent months:

But all is not lost. The WSJ reports that April's UI figures are lower than they should be because of Easter and a "special holiday" in California (is that what they call it when they have to shut the whole state down because of the budget crisis?). The WSJ report repeats the canard that initial claims "have to drop to 400,000 or lower to indicate an accelerated hiring trend." Not true, at least based on the experience of recent recoveries, as I've noted in earlier posts. Compare the current recovery to the one following the 1981-82 recession:

The black line at August 1983 shows the point in the recovery comparable to where we are now. At that time initial claims were at about the same level as they are now (450,000 or so) and squiggling up a bit. Nevertheless, 1983 was a pretty good year for job creation (3.5 million jobs created!). We're well behind the pace set in 1983, but it still looks like a much stronger recovery than we had after the last two recessions.

Union mines are safer

John Nichols at The Nation reports:

Writing in the Pittsburgh Post-Gazette several years ago, former Pennsylvania Center for the Study of Labor Relations director Charles McCollester made the essential point: "There's no question that union mines are safer."

"Critically, workers in a union mine are not afraid to speak," explained McCollester. "In a non-union operation, asking questions or challenging company mining practices or safety procedures can lead to termination."

Brad Johnson at The Wonk Room elaborates (while noting some idiocy from Rush Limbaugh):

Union mines have a significantly better safety record than non-union mines especially for major disasters, as union miners can refuse unsafe work and report dangerous conditions without fear of retaliation. In addition to preventing Blankenship-style intimidation, the proposed Employee Free Choice Act would increase whistleblower protections for non-union and union workers alike. Under Blankenship’s direction, the U.S. Chamber of Commerce and the National Mining Association have spent millions to oppose passage of such legislation for worker rights, comparing it to a “firestorm bordering on Armageddon.”

Nikolai Ivanovich Lobachevsky

Nikolai Ivanovich Lobachevsky's name came up in class today, which got me thinking of Tom Lehrer's famous tune:



It turns out (not surprisingly I guess) that Youtube is stock full of geek tunes. Here's a pretty good one:



How did Nikolai Ivanovich Lobachevsky come up in my History of Thought class? Read J.M. Keynes' General Theory, Chapter 2.

More on unions and mine disasters

David Moberg of In These Times finds some evidence that there are more fatalities in nonunion mines, but it does not seem conclusive. Someone needs to do some work on this topic. If the media won't investigate, how about an enterprising student in need of an honors thesis topic?

Lowballing the prospects for recovery

Kevin Drum gives ten reasons the economic recovery is likely to be weak:

1. This is a balance sheet recession, not a Fed-induced recession. Paul Volcker caused the 1981 recession by jacking up interest rates and he ended it by lowering them. That’s not going to happen this time. 2. In fact, there won’t be any further stimulus from lower interest rates. They’re already at zero, and Ben Bernanke has made it clear that he doesn’t plan to effectively lower them further by setting a higher inflation target. 3. Consumer debt is still way too high. There’s more deleveraging on the horizon, and that’s going to make consumer-led growth difficult. 4. The financial sector remains fragile and there could still be another serious shock somewhere in the world. 5. There are strong political pressures to reduce the budget deficit. That makes further fiscal stimulus unlikely. 6. Housing prices are still too high. They’re bound to fall further, especially given rising interest rates combined with the end of government support programs. 7. Our current account balance remains pretty far out of whack. Fixing this in the short term will hinder growth, while leaving it to the long term just kicks the can down the road. 8. The Fed still has to unwind its balance sheet. That has the potential to stall growth. 9. Oil prices are rising. This not only causes problems of its own, but also makes #7 worse. 10. Unemployment and long-term unemployment continue to look terrible. Yes, these are lagging indicators, but still.

I'm not sure what we're supposed to make of #1. Yes, this is a "balance sheet" recession, but what recession isn't? One of the main channels through which monetary policy such as Volcker's tightening in 1981 affects the economy is through the balance sheet channel. #2 is a concern. It's true that we've gotten about all the monetary stimulus we're going to get, but that was also true at this time into the 1983 recovery. In that recovery, real interest rates stopped falling at a level much higher than they are now and stayed high through the decade. #3 is certainly true. Over the next decade or so we're not going to be able to count on consumers being the engine of growth the way they were in the 2000s. But for the next year, I think it's quite likely that consumer spending will rise at a strong pace to catch up for some of the lost spending during the recession. Greece is apparently being solved, so I don't see another financial crisis on the horizon (a bubble bursting in China? maybe). We don't need another major fiscal stimulus, I think; I'm concerned that if the Republicans take Congress they will force a fiscal contraction, which would be very bad. #6 doesn't seem like much of a concern. Where's the evidence that housing prices are too high? #7 and #9 are real problems. The answer to #8 is that the Fed will not reduce its balance sheet until the economy is on solid footing. And #9 - yes, unemployment is too high. But that's a symptom of recession, not an impediment to recovery.

15 charts on wealth and income inequality in the U.S.

From Business Insider. To my mind the most important is data on mobility. This graph is suggestive: in any two consecutive years, the probability of moving up from the bottom 40% of the income distribution to the top 40% is small and has drifted downward since the 1970s (I assume the extremely high probabilities during the 1940s were due to unique circumstances that would be impossible to replicate today). Cross-country studies show that the U.S. compares unfavorably in the mobility department to most European countries, despite the "land of opportunity" mythology most Americans believe in.

Would 29 miners be alive today if Massey mines were unionized?

The president of the Steelworkers' union says they would be.

“I can absolutely say that if these miners were members of a union, they would have been able to refuse unsafe work… and would not have been subjected to that kind of atrocious conditions,” said Gerard. “In some places like in Australia and Canada, this kind of negligence would result in criminal negligence [charges] being brought against the management and the CEO.”

Krauthammer on nukes

Charles Krauthammer wrote a much more reasoned editorial on the Obama Administration's new nuclear posture review than I had anticipated. No BINGO for me this time. But he's still wrong, of course.

Krauthammer argues that Obama's policy change is misguided because it signals to our enemies that they might, just might, be able to get away with a chemical or biological attack on the U.S. Deterrence worked during the Cold War, he argues - removing a bit of that deterrent increases our vulnerability to attack. He takes a gratuitous swipe at Obama's distinction between NPT-compliant and noncompliant countries:

Imagine the scenario: Hundreds of thousands are lying dead in the streets of Boston after a massive anthrax or nerve gas attack. The president immediately calls in the lawyers to determine whether the attacking state is in compliance with the NPT. If it turns out that the attacker is up to date with its latest IAEA inspections, well, it gets immunity from nuclear retaliation. (Our response is then restricted to bullets, bombs and other conventional munitions.)

However, if the lawyers tell the president that the attacking state is NPT-noncompliant, we are free to blow the bastards to nuclear kingdom come.

Silly, because we know well in advance who is NPT-compliant and who is not. No lawyers need be consulted. And every country must know that a promise not to retaliate is time-inconsistent: when push comes to shove, any president, regardless of any promises made in years past, will be under pressure to go nuclear. Finally, our 'bullets, bombs and other conventional munitions" are surely sufficient to blow 'the bastards' to non-nuclear kingdom come in any case.

Krauthammer calls Obama's policy "strategicaly loopy":

Does anyone believe that North Korea or Iran will be more persuaded to abjure nuclear weapons because they could then carry out a biological or chemical attack on the United States without fear of nuclear retaliation?

... On the contrary. The last quarter-century -- the time of greatest superpower nuclear arms reduction -- is precisely when Iran and North Korea went hellbent into the development of nuclear weapons (and India and Pakistan became declared nuclear powers).

One could also argue that the last quarter-century was the time period during which our policies toward potential adversaries were most belligerent. North Korea began its drive toward nuclear weapons under the Reagan and Bush I regimes. It temporarily, partially suspended its efforts under a deal struck with the Clinton administration, then resumed development and became a nuclear power under Bush II. Iran's efforts began under Bush II. So who's to say a less belligerent approach would not be an improvement?

But here lies the fundamental problem with Krauthammer's argument. He imagines our nuclear policy as a strategic game between the US and our adversaries like Iran and North Korea. But that's not the way the Obama Administration sees it. For them, it's a game between the US and countries who might wish to develop nuclear weapons (Brazil? Saudi Arabia?) or who might tolerate the efforts of North Korea or Iran to do so (China? Russia? India?). By forswearing first use in certain cases, providing an incentive for countries to comply with NPT, reducing our arsenal, we induce those countries to cooperate with us in our nonproliferation efforts and marginalize Iran and North Korea.

Conservative critics of the Obama Administration's foreign policy have a similar blind spot in other contexts. Obama wants to put more emphasis on multilateralism and diplomacy. The critics argue, it's crazy to think that Iran, North Korea, and al Qaeda will respond to diplomacy. But the point is that Obama's policies are not directed at them, they're directed at our allies and those who can be persuaded to be our allies. The intent is not to bargain with al Qaeda and so on, but to marginalize them.

Floyd Norris predicts a strong recovery

Apparently he's been reading my blog. Or, more likely, talking to Bob Barbera. Whatever the reason, he seems now to be firmly on board.

Confederate History Month

Brad DeLong has gathered some fascinating documents re Virginia governor Bob McDonnell's proclamation that April is Confederate history month. Originally McDonnell neglected to mention that slavery was one feature of the Confederate experience, arguing that he thought it appropriate to mention only the aspects of the Confederacy that "were most significant for Viriginia" (apparently he did not consult any of the 1.5 million black Virginians as to what they thought the significant aspects of the Confederacy were). As to the idea that the Confederacy was not really much about slavery, here's the Vice President of the Confederacy, Alexander Stephens:

The new constitution has put at rest, forever, all the agitating questions relating to our peculiar institution -- African slavery as it exists amongst us.... This was the immediate cause of the late rupture and present revolution.... The prevailing ideas entertained by [Jefferson] and most of the leading statesmen at the time of the formation of the old constitution, were that the enslavement of the African was in violation of the laws of nature; that it was wrong in principle, socially, morally, and politically... Our new government is founded upon exactly the opposite idea; its foundations are laid, its cornerstone rests upon the great truth, that the negro is not equal to the white man; that slavery -- subordination to the superior race -- is his natural and normal condition.

Here's Ta-Nehisi Coates on the matter, also via DeLong:

A lot of you have e-mailed me to note that Virginia governor Bob McDonnell has decided to honor those who fought to preserve, and extend, white supremacy. I don't really have much to say. The GOP is, effectively, the party of willfully unlettered Utopians. It is the party of choice for those who believe global warming is a hoax, that humans roamed the earth with dinosaurs, and that homosexuals should work harder at not being gay.

That the party of unadulterated quackery also believes that Birth Of A Nation is more true to the Civil War than Battle Cry Of Freedom, is to be expected. Ignorance does not respect boundaries. It is, at times, qualified and those who know more, often struggle to say more. But people who believe that the Census is actually a covert attempt to put Americans in concentration camps, are also likely to believe that slavery was incidental to the Civil War.

This is who they are--the proud and ignorant. If you believe that if we still had segregation we wouldn't "have had all these problems," this is the movement for you. If you believe that your president is a Muslim sleeper agent, this is the movement for you. If you honor a flag raised explicitly to destroy this country then this is the movement for you. If you flirt with secession,even now, then this movement is for you. If you are a "Real American" with no demonstrable interest in "Real America" then, by God, this movement of alchemists and creationists, of anti-science and hair tonic, is for you.

And Gail Collins from the New York Times can always be counted on for the mots justes:

April is the cruelest month. Or, if you live in Virginia, Confederate History Month... People, what’s our bottom line here. The governor of Virginia has decided to bring slavery into his overview of the history of the Confederacy. Good news, or is this setting the bar a wee bit too low?

Meanwhile here at Gettysburg we're celebrating National Thursday is a Monday Day. Happy TIM Day everyone - gotta go teach my Monday classes.

EPA takes a small step toward restraining mountain top removal

While our minds are on coal and coal miners, surf over to Coal Tattoo for news from coal country. They're focusing on the Montcoal disaster now, but last weekend they reported that the EPA seems to be tightening up a bit on mountaintop removal. Read the article, but especially look at the pictures - it's appalling.

Massey Coal

Here are some things I've learned about Massey Energy Corp. since the mining accident this week that killed 25 miners.

An article in Forbes in 2003 looks at the company's dismal environmental record:

In October 2000 the floor of a 72-acre wastewater reservoir built above an abandoned mine in Kentucky collapsed, sending black sludge through the mine and out into a tributary of the Big Sandy River. The sludge killed fish and plants for 36 miles downstream. Water supplies were shut down in several towns for a month. In total, 230 million gallons spilled out, 20 times the volume of the crude oil from the Exxon Valdez. Lawns nearby were covered in as much as 7 feet of muck. Blankenship says the accident "could have happened to anyone"...

In June 2001 a pump at a mine near Madison, W.Va. sprang a leak during the night shift. Instead of shutting it down, workers handed the problem off to a maintenance crew in the morning. Over the next five hours 30,000 gallons of sludge emptied into Robinson Creek below. The company never told the regulators about the accident; Blankenship says workers made an honest mistake in believing the leak would be contained. Regulators were alerted by residents calling in to report their river had turned black. There were three more illegal discharges into the river over the next two months...

Over the two years through 2001 Massey was cited by West Virginia officials for violating regulations 501 times. Its three biggest rivals, mining twice as much coal in the state as Massey, were cited a collective 175 times. Blankenship says Massey is unfairly targeted by regulators. "We don't pay much attention to the violation count," he says.

Rolling Stone profiled CEO Don Blankenship in January:

In an age when most CEOs are canny enough to at least pay lip service to the realities of climate change, Blankenship stands apart as corporate America's most unabashed denier. Global warming, he insists, is nothing but "a hoax and a Ponzi scheme."...

The country's highest-paid coal executive, Blankenship is a villain ripped straight from the comic books: a jowly, mustache-sporting, union-busting coal baron who uses his fortune to bend politics to his will. He recently financed a $3.5 million campaign to oust a state Supreme Court justice who frequently ruled against his company, and he hung out on the French Riviera with another judge who was weighing an appeal by Massey. "Don Blankenship would actually be less powerful if he were in elected office," Rep. Nick Rahall of West Virginia once observed. "He would be twice as accountable and half as feared."

Michael Whitney digs up some dirt, so to speak. A memo uncovered in a lawsuit against Massey for a 2006 fire in a mine that killed two workers shows Blankenship instructing mine superintendents to ignore safety measures or anything else other than "running coal":

"If any of you have been asked by your group presidents, your supervisors, engineers or anyone else to do anything other than run coal (i.e. - build overcasts, do construction jobs, or whatever) you need to ignore them and run coal," the complaint quotes the memo. "This memo is necessary only because we seem not to understand that coal pays the bills."

The mine has been cited for thousands of safety violations:

This deadly mine has been cited for over 3,000 violations by the Mine Safety and Health Administration (MSHA), 638 since 2009:

Since 1995, Massey’s Upper Big Branch-South Mine has been cited for 3,007 safety violations. Massey is contesting 353 violations, and 127 are delinquent. [MSHA]

Massey is contesting over a third (34.7%) of the 516 safety citations the Upper Big Branch-South Mine received in 2009, its greatest count in the last 15 years. [MSHA]

In March 2010, 53 new safety citations were issued for Massey’s Upper Big Branch-South Mine, including violations of its mine ventilation plan. [MSHA]

The US MSHA issued more than $900,000 in fines against Massey in 2009. Blankenship responds:

“Violations are unfortunately a normal part of the mining process,” Blankenship said in an interview with West Virginia MetroNews Radio.

We need to know more. Why wasn't this mine shut down long ago, either by the Bush or Obama Administrations? I don't know what Obama's excuse is, but it's interesting to note that

In 2002, President George W. Bush “named former Massey Energy official Stanley Suboleski to the MSHA review commission that decides all legal matters under the Federal Mine Act,” and cut 170 positions from MSHA. Bush’s MSHA chief, Dick Stickler, was a former manager of Beth Energy mines, which “incurred injury rates double the national average.”

More later.

On property rights

Matthew Yglesias asks why conservatives and liberals sometimes come down in unpredictable ways on the issue of property rights. For example, conservatives want to treat the atmosphere as a commons into which anyone with a factory can spew carbon emissions while liberals want to assign property rights; on the other hand, liberals want to treat the spectrum as a commons while conservatives want to assign property rights.

To borrow an idea from Robin Hanson, I think it’s useful to think about political conflict in terms of valorized figures. On the right, you see a lot of valorization of businessmen. On the left, you see a lot of valorization of pushy activists who want to do something businessmen don’t like. Formally, the right is committed to ideas about free markets and the left is committed to ideas about economic equality. But in practice, political conflict much more commonly breaks down around “some stuff some businessmen want to do” vs “some stuff businessmen hate” rather than anything about markets or property rights per se. Consequently, on the left people sometimes fall into the trap of being patsies for rent-seeking mom & pop operators when poor people would benefit more from competition from a corporate behemoth.

I think it's simpler than that. Conservatives approve of property rights when people who look like them currently have the property rights. They approve of the commons when people who look like them currently enjoy the benefits of the absence of property rights. Liberals? We're crazy enough to think first of the public good.

Krauthammer Bingo

It's only a matter of time until Charles Krauthammer weighs in on President Obama's "revamping of nuclear strategy." How many shibboleths will Krauthammer manage to squeeze into one column? Five in a row wins a prize!

If Krauthammer fails to satisfy, apply same to Wall Street Journal editorial board or George Will.

Aargh again!

Robert Reich pooh-poohs the March employment numbers:

The US economy added 162,000 jobs in March. Great news until you look more closely. In March, the federal government began hiring census takers big time. These are six-month temp jobs, and they tell us nothing about underlying trends in the labor market... A census-taking job is better than no job, but it’s no substitute for the real thing. Bottom line: This is no jobs recovery.

But Reich has also been a major proponent of a "new WPA" to fight unemployment. Hey, the government has just announced a plan to hire a million workers on a temporary basis for the next six months. It's called "Census" rather than "WPA," but you'd think Reich could gin up just a bit more enthusiasm for it nevertheless.

Aargh!

Dave Altig comments on the jobs numbers:

What does seem clear is that the pace of net job creation is still well below the levels required to appreciably improve the unemployment rate or to make a sizable step toward regaining the eight million-plus jobs lost since the beginning of the recession. Updating a calculation referenced in a speech by Atlanta Fed President Dennis Lockhart on Wednesday, at a pace of 162,000 jobs added per month and at the current labor force participation rate, unemployment this time next year would still be just north of 9 percent.

Well yes, but at the pace of job creation in February every man, woman and child in America would have been unemployed by 2046. So that's an improvement.

[In case it's not obvious, my point is that there's no reason to believe that employment gains have reached a plateau at 162,000. For the last year there's been a steady improvement in the employment situation - the growth in jobs each quarter has been better than in the previous quarter (or more precisely, until this quarter, the decline in jobs has been less bad). This trend should continue.]

Not yet quite the breakout we've been looking for

March's employment numbers are in. The first month of substantial job growth in this recovery (except for the blip in November): payroll employment +162,000, unemployment rate unchanged at 9.7%. Consensus forecast was around +200,000, I was hoping for (I had been led to believe!) something in the range of +250,000 to +300,000, so it's not as good as expected. On the other hand:

(1) In the grand scheme of things, the recovery in employment is still pretty impressive and a lot more like 1983-84 than 1991-92 or 2002-03. The reason it's taken so long to get to jobs growth is that the recession was so dang severe. Look at the slope of the lines in recoveries:

(2) The household numbers are much better than the payroll numbers. One possible explanation is that the household numbers pick up increases in self-employment and in employment in new businesses that the payroll numbers miss. Household employment was up 264,000 in March and up 1.1 million since December (though the household employment numbers were more dramatic on the way down as well.) But the household numbers show the same dramatic recovery story as the payroll numbers do.

(3) Part of the reason the payroll number was lower than expected is that Census employment was lower than expected (+48,000 instead of the expected +100,000). Private-sector employment growth, at +123,000, was actually stronger than expected.

(4) One reason employment has not grown much during the recovery is that the average work week is rising instead. Average weekly hours has been increasing since November even as the number of employees has been falling. By comparison, in the "jobless recovery" following the 2001 recession, average weekly hours didn't start rising until mid-2003.

More views on the numbers: Calculated Risk, Financial Times, Paul Krugman.

The obvious take (a la Krugman): +162,000 jobs is better than a kick in the teeth, but short of the level that would signify a truly strong recovery. But we're on the way there.

Someone should've mentioned this at the faculty meeting

I would have, of course, but for my natural shyness. I understand that we may be forced to extend the semester by a week and add an hour of instruction for each course. So let's do the math: we teach 2 14-week semesters per year, 2.5 hours per week per class, 5 classes. That's 350 hours of instruction per year. If we go to 15 week semesters, 3.5 hours per class, that's 525 hours per year, a 50 percent increase. I assume the powers that be, in figuring out how we're going to make this transition, have factored in the extra compensation that faculty are going to want in exchange for the heavier workload. Here's a proposal: as we transition to the heavier workload, let's transition to a 2-2 teaching load. That reduces hours of instruction to 420, leaving a 20 percent increase in hours; you can compensate me for that in cash, thank you very much. Or, I suppose I could just do a 20% (or 50%) crappier job in each class.