I'll never complain about my job again

From the Pittsburgh Post Gazette:

Fall ruled cause of death for sewage plant worker
He may have been overcome by gases

By Sadie Gurman and Jim McKinnon

A worker killed Thursday at the Sewickley sewage treatment plant died from injuries he suffered from falling about 30 feet into an underground shaft and not as a result of toxic fumes that flooded the hole where he was working...

Some quick comments on the GDP report

The BEA reports that second quarter GDP growth was 2.4 percent, about what people were expecting but disappointing. At the same time, the BEA adjusted its estimate of first quarter growth way up to 3.7% (while adjusting downward its estimates of growth in 2009Q3 and 2009Q4).

There's lots of commentary out there on the report (here, here, here for starters), most of it highlighting the negative. Most negative is consumer spending, which crept up at an annual rate of 1.6 percent. That bad boy has to get into the 3 percent range for us to have a strong recovery, but it's unlikely to do so while employment growth is slow, consumers are heavily indebted, and the housing market is dead in the water.

But let's look at the good in the report. Business investment was very strong: non-residential fixed investment rose at a 17 percent annual rate, mostly due to investment in equipment and software. As has been widely reported, businesses are flush with cash, profits are high, and this month there has been a flood of new bond issuance. All of these things suggest continued strength in business investment in coming quarters.

Another thing that is good in this report is that the only major component that did not contribute to growth was imports. Imports rose by an astonishing 29 percent (annual rate), reducing GDP growth by four percentage points. That rate of increase is not sustainable. As imports return to their historic norm they will do less to dampen growth.

Finally, if we look at the last three quarters in its entirety, we see growth averaging 3.7 percent. That's not great, but it's not awful either. It would be great if we could have a couple of years of 5, 6, 7 percent growth like we did in the 1980s, but the economy isn't structured like that anymore and this is a different kind of recession. I'm guessing that 4-5 percent growth is about as good as we can realistically expect, and we're not that far off.

But back to the negative: the trend is down, and that's trouble. Even if business investment stays strong and imports stabilize, the fading effects of the fiscal stimulus will bring growth down in the second half of the year. There's no sign that consumers are going to go on a tear or the housing market is going to improve. So it's possible we could have 2 percent or lower growth in the next two quarters, as a lot of analysts are predicting. I'm more comfortable with the Fed's forecast of 3%+ growth however. Either way, the economy could use another dose of monetary and fiscal stimulus.

Initial claims stay flattish

Initial claims for unemployment compensation dropped a bit this week, but continues on a rather flat trajectory.

Initial claims have been drifting down very slowly since the beginning of the year and have been essentially flat the last three months. I've said before that historically large gains in employment have come several months before initial claims fall below 400,000. On the other hand, it seems unlikely that we'll see big gains in employment if initial claims aren't falling. So modest growth in payroll employment (+50-100,000 private) seems a good bet to me for the month of July. I don't know what's going on with Census employment this month so the overall numbers are hard to predict.

Mmm, the business cycle turns me on

Andrei Shleifer, quoted by Robert Waldmann:

"We have a new model of the business cycle. It starts with optimistic expectations and a rapid expansion, then there is a supply shock, followed by a period of involuntary unemployment." -- Andrei Shleifer 1983.

(You kind of need to read Waldmann's post.)

Back to basics

Everything that was happening in the economy in March and April appeared to be vindicating my bold predictions of a strong recovery. Everything that's happened since then seems to argue against this and raises the possibility of a long drawn-out jobless recovery or even double-dip recession. What happened?

Well, one thing that happened is that beginning in May credit spreads - the Baa-Treasury spread in particular - jumped significantly due largely to the Greek crisis. Concerns about the European banking system and the European economy in general, and the possibility of a spillover to the US banking system and economy, caused investors to dump risky assets. This raised borrowing costs and credit availability, which together with a general sense of unease halted business expansion. As the graph below shows in this recession-recovery there has been a strong correlation between the Baa-Treasury spread and economic performance (here given by the change in private payroll employment).

If the slowdown of the last two months was driven by the souring of financial markets, then stabilization of the markets could cause the economy to return to a strong recovery path. The response to Europe's bank stress tests, the leveling off (and slight decline in the last week or two) of the Baa-Treasury spread, and stock market rallies therefore may be a signal of coming strength in the economy.

To be honest I'm not as sold on the strong recovery story now as I was a few months ago, but I'm not dismissing the possibility either.

This is pretty much how I spent my summer vacation, but I didn't get a paper out of it

Chronicle of Higher Education: YouTube Better at Funny Cat Videos Than Educational Content, Professors Argue

Joe Barton on the perils of wind energy

Joe Barton (R-Texas) warns of the perils of reliance on wind energy:

Wind is God's way of balancing heat. Wind is the way you shift heat from areas where it's hotter to areas where it's cooler. That's what wind is. Wouldn't it be ironic if in the interest of global warming we mandated massive switches to energy, which is a finite resource, which slows the winds down, which causes the temperature to go up? Now, I'm not saying that's going to happen, Mr. Chairman, but that is definitely something on the massive scale. I mean, it does make some sense. You stop something, you can't transfer that heat, and the heat goes up. It's just something to think about.

I'm less worried about our using up all the wind and leaving the earth a still, lifeless wasteland (though that's a possibility that we can't entirely ignore) than I am of the possibility of a giant wind spill. Suppose the offshore windmills broke down and unleashed a torrent of 200 mile-per-hour winds on Cape Cod. A disaster on that scale would have us wishing that all we had to worry about was oil spills in the Gulf.

Blimey, that IS strong growth

Initially I wondered why everyone was responding so enthusiastically to reports that UK growth in 2010Q2 was 1.1 percent. In the US we're concerned that second quarter growth might be "only" 2 percent. As it happens, though, the UK statistical agencies report quarterly growth rates, not annualized quarterly rates as in the US. So the 1.1 percent growth is the equivalent of 4.4 percent in US reports. Brilliant!

Better than nothing

Nothing is what Ben Bernanke is offering in terms of additional stimulus from the Federal Reserve. Joe Gagnon suggests three things the Fed could do:

- Lower the interest rate the Fed pays banks on reserves from 0.25 percent to zero
- Purchase three year Treasury securities in sufficient quantity to achieve a target rate of 0.25 percent (versus 0.90 percent now)
- Establish a facility to allow banks to borrow for terms up to 24 months at an interest rate of 0.25 percent

He claims that

These measures are all within the Federal Reserve's established powers. They pose essentially no risk to the Fed's balance sheet. They would reduce unemployment roughly as much as a 2-year $600 billion fiscal package and yet they would actually reduce the federal budget deficit. And they can be reversed quickly should the balance of risks shift from deflation to inflation.

I'd be interested to know where he got the $600 billion figure - it seems wildly optimistic. Nevertheless, if the Fed did those things it would be better than nothing. I'd add that the Fed could begin charging banks for holding reserves (does anything in the legislation authorizing the Fed to pay interest on reserves require that that interest rate be positive?) as a way of encouraging banks to lend rather than hold idle reserves.

But even so, I think the Fed's ability to influence the economy is very constrained at this point. The Fed's quantitative easing has brought long-term interest rates to historically low levels. Specific intervention in the mortgage and commercial paper markets has brought spreads in those markets down dramatically. Corporate bond spreads are also at normal recession (not normal recovery) levels, but unless the Fed starts buying up corporate bonds in massive quantities there's not much it can do there.

The biggest obstacles to strong recovery now are consumer spending, the housing sector, lack of availability of credit for small businesses, state and local government finances, and employment. This is the job for fiscal policy, not monetary policy.

I'm getting very tired of Ben Nelson

Ben Nelson on aid to states, loans to small business, and other stimulus measures:

The Congressional Budget Office estimated that the original bill to reauthorize long-term unemployment benefits, a broad domestic aid package that also included business tax breaks and state Medicaid money, would have added $134 billion to the deficit over 10 years. When Senate Majority Leader Harry Reid (D-Nev.) first brought it to the floor in June, it failed with a whopping dozen Democrats voting nay. Over the next several weeks, Reid and Senate Finance Committee Chairman Max Baucus (D-Mont.) reduced the bill's deficit impact by adding revenue raisers and doing things like cutting $25 per week from every unemployment check. They got closer and closer in a series of votes, but Nelson joined moderate Republicans in saying the bill was moving in the "right direction" while still voting no.

Ben Nelson on extending unemployment benefits:

In this week's votes, Nelson insisted that Democrats find a way to pay for the extension of benefits. He said there are some stimulus funds that could be used -- an idea that Republicans back..."The question is the level of emergency versus the initial point: I'm not trying to say it's [unemployment] not important. Obviously it's very important. If it's that important, it's important enough to be paid for."

Ben Nelson on extending the Bush tax cuts for top income earners:

Two more Senate Democrats called for extending tax cuts for all earners—including those with the highest incomes—in what appears to be a breakdown of the party's consensus on the how to handle the expiration of Bush-era tax cuts. Sen. Kent Conrad (D., N.D.) said in an interview Wednesday that Congress shouldn't allow taxes on the wealthy to rise until the economy is on a sounder footing. Sen. Ben Nelson (D., Neb.) said through a spokesman that he also supported extending all the expiring tax cuts for now, adding that he wanted to offset the impact on federal deficits as much as possible.

Offset the impact on the deficit how? By cutting spending on things like aid to states and the unemployed? Has anyone suggested the opposite approach to Senator Nelson, paying for aid to states and the unemployed by allowing the Bush tax cuts to expire? More generally, I think that every time Senator Nelson says we can't undertake some stimulus measure unless it is paid for somewhere else in the deficit, the response should be to offer massive cuts in agriculture subsidies, directed specifically at Nebraska farmers if possible.

Mixed bag

I've been unimpressed with the stance of today's Republican party. In a time of national crisis - depression wars, environmental catastrophe - confronted with a government committed to addressing the problems facing the country, the Republicans have chosen the path of obstruction. One can't help noticing the parallels between the political problems facing the Obama administration and those facing the Roosevelt administration in the 1930s and 1940s. So I wonder, what were Republicans thinking in 1940, a time when a progressive Democratic president was trying to lead America in a time of war and Depression? Here's the Republican party platform for the election year of 1940. Turns out to be somewhat of a mixed bag - crazy in some ways, but not as crazy as 2010-style Palinism.

National Defense

The Republican Party is firmly opposed to involving this Nation in foreign war...

The Republican Party stands for Americanism, preparedness and peace. We accordingly fasten upon the New Deal full responsibility for our un-preparedness and for the consequent danger of involvement in war.

We declare for the prompt, orderly and realistic building of our national defense to the point at which we shall be able not only to defend the United States, its possessions, and essential outposts from foreign attack, but also efficiently to uphold in war the Monroe Doctrine. To this task the Republican party pledges itself when entrusted with national authority. In the meantime we shall support all necessary and proper defense measures proposed by the Administration in its belated effort to make up for lost time; but we deplore explosive utterances by the President directed at other governments which serve to imperil our peace; and we condemn all executive acts and proceedings which might lead to war without the authorization of the Congress of the United States.

Re-Employment

The New Deal's failure to solve the problem of unemployment and revive opportunity for our youth presents a major challenge to representative government and free enterprise. We propose to recreate opportunity for the youth of America and put our idle millions back to work in private industry, business, and agriculture. We propose to eliminate needless administrative restrictions, thus restoring lost motion to the wheels of individual enterprise.

Money

The Congress should reclaim its constitutional powers over money, and withdraw the President's arbitrary authority to manipulate the currency, establish bimetallism, issue irredeemable paper money, and debase the gold and silver coinage. We shall repeal the Thomas Inflation Amendment of 1933 and the (foreign) Silver Purchase Act of 1934, and take all possible steps to preserve the value of the Government's huge holdings of gold and re-introduce gold into circulation.

Jobs and Idle Money

Believing it possible to keep the securities market clean without paralyzing it, we endorse the principle of truth in securities in the Securities Act. To get billions of idle dollars and a multitude of idle men back to work and to promote national defense, these acts should be revised and the policies of the Commission changed to encourage the flow of private capital into industry.

Equal Rights

We favor submission by Congress to the States of an amendment to the Constitution providing for equal rights for men and women.

Negro

We pledge that our American citizens of Negro descent shall be given a square deal in the economic and political life of this nation. Discrimination in the civil service, the army, navy, and all other branches of the Government must cease. To enjoy the full benefits of life, liberty and pursuit of happiness universal suffrage must be made effective for the Negro citizen. Mob violence shocks the conscience of the nation and legislation to curb this evil should be enacted.

Un-American Activities

We vigorously condemn the New Deal encouragement of various groups that seek to change the American form of government by means outside the Constitution. We condemn the appointment of members of such un-American groups to high positions of trust in the national Government. The development of the treacherous so-called Fifth Column, as it has operated in war-stricken countries, should be a solemn warning to America. We pledge the Republican Party to get rid of such borers from within.

Immigration

We favor the strict enforcement of all laws controlling the entry of aliens. The activities of undesirable aliens should be investigated and those who seek to change by force and violence the American form of government should be deported.

Hawaii

Hawaii, sharing the nation's obligations equally with the several States, is entitled to the fullest measure of home rule; and to equality with the several States in the rights of her citizens and in the application of our national laws.

Puerto Rico

Statehood is a logical aspiration of the people of Puerto Rico who were made citizens of the United States by Congress in 1917; legislation affecting Puerto Rico, in so far as feasible, should be in harmony with the realization of that aspiration.

Third Term

To insure against the overthrow of our American system of government we favor an amendment to the Constitution providing that no person shall be President of the United States for more than two terms.

This will come in handy some day

From Wimp.com.

Note to self: neighbors get a little testy when you ask to demonstrate it using their dress shoes.

The macroeconomic effect of the stimulus

Bruce Bartlett has collected some recent research on the effects of the 2009 fiscal stimulus (ARRA). John Taylor in Congressional testimony makes the following arguments:

1. Fiscal stimulus was not effective

- models suggesting it was have conclusions "baked in" from the beginning

- other models show small effects

- the 2008 tax cut and cash-for-clunkers had very little effect on consumption, consistent with the permanent income hypothesis

- most of the turnaround in GDP growth can be explained by inventory growth, not government purchases

2. The main reason growth is slowing is lack of confidence resulting from a scary fiscal situation

- CBO projects that debt will rise to 947% of GDP by 2084

- there's a lot of uncertainty about financial reform, effects of health reform, future taxes

3. Therefore what we need is fiscal consolidation. Reversing the stimulus will not hurt because it has had such a small effect anyway.

I will agree with Taylor on his very first point, that models suggesting a large impact from the stimulus are not terribly convincing because their conclusions are baked in. What we need is to rerun the world economy with no stimulus and compare it to what we have now. We can't do that literally, but we can do it using theoretical models. But the theoretical models will by necessity assume the conclusions one way or another, so the exercise is of limited utility. I'll also agree with his claim that the 2008 tax cuts (and maybe cash-for-clunkers) had relatively small effects.

The rest of his argument strikes me as very sloppy reasoning. Take the inventory vs. government purchases argument. Inventory investment turned positive because inventories had been drawn down to a very low level and businesses were anticipating an increase in sales. Where did that expectation come from? It is inconceivable that a significant part of that expectation did not arise from the fact that the government had just committed to spending $787 billion over a three year period.

The challenge that stimulus pessimists face is coming up with another theory to explain the effects of fiscal policy. The Keynesian story is simple: in conditions of deep recession, if someone in the economy (consumers, business, government) spends, that creates demand for goods and services, which is met by new production and employment. How could it be otherwise? Taylor and others have dug through pre-Keynesian business cycle theories and hit upon the problem of "confidence". Government spending creates uncertainty, which spooks investors and keeps them from spending. Let me enumerate the problems with this line of argument:

1. There is no evidence, none, that the uncertainty created by government deficits has a greater impact than uncertainty concerning the length and severity of the recession. I don't know of any studies that show that the fear of budget deficits has any effect on investment at all, except through long-term interest rates (which are now at extremely low levels). Proponents of this theory I think are engaged in projection: budget deficits make me uncomfortable, so they must make businesses uncomfortable, which must explain why they're not investing.

2. The idea that anyone is worried enough about the debt-GDP ratio in 2084 under the CBO's alternate fiscal scenario to put off investment spending is ludicrous. As we speak the stock market is lurching to and fro in response to company earnings reports for 2010Q2. Consumers are worried about whether they can pay their bills this month. We've seen how ridiculously short-sighted businesses have been, from the financial sector to BP to GM. They're not investing because of what they fear the fiscal situation will look like when my grandchildren are old and gray? Please.

3. There was going to be uncertainty about the health and financial sectors regardless of whether or not reform bills passed. Arguably the passage of comprehensive reform bills has reduced uncertainty rather than increased it. Furthermore, the health reform legislation was the most serious attempt ever to control costs in Medicare over the long haul; you would think that people like Taylor who are concerned about the deficit (and any businesspeople out there who are hinging their investment decisions on fiscal policy) would give the Democrats some credit for that. But noooooo.

So the truth is that we do not know what the effect of fiscal stimulus was. But the Keynesian logic suggesting a substantial positive effect is far more compelling than any alternative that has been proposed.

Petard hoisting

Judge rules Defense of Marriage Act unconstitutional on 10th Amendment grounds:

A federal judge in Massachusetts found Thursday that a law barring the federal government from recognizing same-sex marriage is unconstitutional, ruling that gay and lesbian couples deserve the same federal benefits as heterosexual couples...

In the Coakley case, the judge held that that federal restrictions on funding for states that recognize same-sex marriage violates the 10th Amendment, the part of the Constitution that declares that rights not explicitly granted to the federal government, or denied to the states, belong to the states...

By citing the 10th Amendment and making what is essentially a states’ rights argument, Professor Balkin said Judge Tauro was “attempting to hoist conservatives by their own petard, by saying: ‘You like the 10th Amendment? I’ll give you the 10th Amendment! I’ll strike down DOMA!’ ”

While I'm 100 percent in favor of repealing DOMA and having all levels of the US government recognize same-sex marriages, I'm concerned about accepting an expansive interpretation of the 10th Amendment. There's much to dig in this opinion if you're a Tea Partier.

I've got an idea, how about we use our deposits to make loans to households and businesses?

The American Banker warns that as currently written the "Volcker rule" embedded in the Dodd-Frank bill will eliminate a major source of bank profits.

If the latest version of financial reform becomes law as expected, banks would lose a lucrative but wildly unpredictable source of profits scaling back so-called alternative investments over the next several years.

It's a bad time to curb what banks can invest in private equity and hedge funds in compliance with the Volcker Rule, observers say.

Private investing earnings are rebounding after plummeting last year; banks need every scrap of income in a post-recession regulatory and economic environment toxic to profit growth.

Financial regulation is taking all the fun out of banking, apparently. No more can banks invest in hedge funds, trade in unregulated over-the-counter derivatives markets, gouge their customers with exotic mortgage contracts and hidden credit card fees. Gosh, what else could banks sitting on roughly $1.5 trillion of excess reserves possibly do to increase their profit margins?

Correction

In the previous post I said aggregate hours grew 2.4% in the second quarter. That is the March-June figure. For forecasting GDP growth it makes more sense to take the percentage change in quarterly average hours, which from Q1-Q2 was 3.3%. This makes a GDP growth rate of 4% for the second quarter quite plausible, but it doesn't change the fact that the economy is losing steam.

What do we do about a slowing economy?

My rosy forecasts for economic growth coming out of this recession are not looking so good right now. Employment growth in March and April suggested a strong recovery. May and June's numbers, however, provide unmistakable evidence that the economy is slowing down. Private sector employment increased by 33,000 in May and 83,000 in June, well below the pace needed to make a dent in unemployment. Hours worked increased by only a tiny bit in June, so that total growth in hours in the second quarter is only 2.4 percent, the same as in the first quarter. Hence my best guess is that GDP grew no better in the second quarter than the first (3-3.5 percent, versus my guess of 4.5-5 percent based on April-May's data). What's going on out there?

Well, it seems as if in the race between the forces of recovery (pent up demand, expansionary monetary and fiscal policy) and the forces of contraction (consumer debt, oversupply of housing, pressure on state and local budgets, general lack of confidence) the forces of contraction have taken the lead. Awhile ago I thought that the prudent course of action was a "small" (on the order of $100 billion or so) stimulus focused on aid to the unemployed and state governments to guard against a slowdown. Now the slowdown seems to be upon us, anyone with a brain would agree that a stimulus package of that size or larger is the way to go. Unfortunately, people with brains seem to be very scarce in the policymaking and opinion-forming communities.

Paul Krugman and Brad DeLong have written several pieces lately asking how it is that Keynesians seem to have lost the argument on policy to the deficit hawks. The best answer seems to me to be the attractiveness of false prudence in times of crisis. We got into this mess because of over-indulgence. The cure must be to tighten our belts and accept our punishment. Reduce the budget deficit, put a halt to the rise in debt, take our lumps, and things will be all right. Well, that is clearly nonsense: the problem we face right now is that people and businesses prefer to hoard money rather than spend it. The solution must be to stimulate spending, which means that the government needs to borrow more, not less. But something about calling for more "irresponsibility" on the part of government at this time is deeply unattractive to an important segment of our polity (largely, though I suppose not exclusively, that segment that is securely employed such as politicians and journalists). And so here we sit, unable to do the obvious things like extend benefits to the unemployed and states that might get us out of this mess.

When people try to come up with a logical argument for austerity they focus on the effects of austerity on "confidence". David Brooks's column in today's NY Times is a particularly asinine version of this line of reasoning. First he paints an absurd caricature of proponents of stimulus (without naming anyone or citing specifics, of course) as arrogant and overly confident in their theoretical models. Nothing could be further from the truth: we all admit that we're in uncharted territory here (well, territory that has been charted only a couple of times in history) and allow for a wide range of uncertainty in our prescriptions). Then he idolizes the non-egghead, commonsense man on the street who somehow has accumulated more wisdom about the workings of the macroeconomy than the so-called "experts". And he summarizes their wisdom thusly:

You can't read models, but you do talk to entrepreneurs in Racine and Yakima. Higher deficits will make them more insecure and more risk-averse, not less. They're afraid of a fiscal crisis. They're afraid of future tax increases. They don't believe government-stimulated growth is real and lasting. Maybe they are wrong to feel this way, but they do. And they are the ones who invest and hire, not the theorists.

Is there a word for arrogant anti-elitism, the flaunting of ignorance as a badge of honor? Brooks is bathing in this, whatever it is. Would it do any good to point out that there is no evidence that business people are not investing or hiring because of fear of deficits or future tax increases (as opposed to the fear that no one is going to buy their stuff)? Probably not, because reliance on "facts" and "evidence" is too eggheady for the likes of Brooks. But for the record, if people with money were really afraid of a fiscal crisis, they would hesitate to buy government debt. The government would have to pay a premium to borrow - we'd see a big spike in interest rates. The truth? The interest rate on 10-year government bonds is 3.2 percent, which is ridiculously low. The expected inflation rate implied by the difference between the interest rate on regular government bonds and bonds that are indexed to inflation (TIPS) is about 2 percent, the same as it's been for decades.

Even renowned economists are capable of spouting nonsense about the advisability of stimulus. Ed Glaeser counseled in today's Times (the link has disappeared - perhaps he had second thoughts) against the government spending money on infrastructure and other things that we don't need. A waste of resources, he says, echoing the austere gentlemen who ran the British Treasury in the early 1930s as the British economy descended into a death spiral. What is a greater waste of resources - millions of people unemployed, or using some of those unemployed to build highways?

Government spending, either directly or through aid to states and the unemployed, is an essential part of the answer to the problem we face. The Obama Administration needs to make this its number one priority this summer. The Senate has to be convinced to take action now - otherwise the Democrats are doomed, and a Republican dominated legislature is bound to pursue the wrongheaded (but strangely morally satisfying) policies next year that will extend our economic misery for years to come.