A special something for that special someone

I just came across this while looking online for a wine rack:

The 'Wine Rack Bra' looks like a normal sports bra, but actually holds 750ml (an entire bottle of wine) inside the cups.

In addition to giving wearers bigger-looking boobs, there's also a straw which allows them to covertly drink the contents.

Makers claim the 'Wine Rack Bra' is perfect for sneaking booze into movies, concerts, sports events and clubs.

However, users should consider that while a fluid filled bra can boost breast size from an A to a D -- the more drunk you get the smaller your boobs will appear.

A quibble

I keep coming across stories with headlines like "US Housing Prices Fall" and "Slide in US House Prices Stokes Recovery Worries." What we actually know is that house prices fell in October, two months ago. We really don't know what's happening to house prices right now (my guess: stable or falling slightly). Reporters often react to economic news releases as if they provide information about what's happening right now when in fact the data is rather old. Another example is the tendency of newspapers to cover breathlessly the release of state-by-state unemployment numbers ("most states experienced a rise/fall in unemployment") when that release comes out a month after we learn about national unemployment.

Samuelson and Solow

Samuelson and Solow's (1960) paper on the Phillips curve in the U.S. has been widely derided. The paper noted that wage inflation and the unemployment rate tended to be negatively correlated in the US during the 1940s and 1950s. This meant there was a "tradeoff" between inflation and unemployment: low rates of inflation could be "bought" with high rates of unemployment, low rates of unemployment could be "bought" with high rates of inflation. As the story goes, this argument convinced policymakers that they could achieve permanently lower inflation with a modestly high but stable rate of inflation, which led to the policy mistakes giving us high inflation and high unemployment in the 1970s.

A fascinating paper by James Forder at Oxford U. puts the lie to the argument. Forder notes that it was only in the 1970s that economists began to claim that Samuelson and Solow interpreted their Phillips curve to mean that the tradeoff between inflation and unemployment was a stable one, i.e. one that could be exploited by policymakers to reduce the unemployment rate to 3 or 4 percent. Forder argues that throughout the 1960s the paper was taken to have a different message entirely: that the existence of the tradeoff meant that we could not easily achieve the twin objectives of full employment and price stability, and that the tradeoff was not stable and therefore not exploitable. So why the change in interpretation?

Forder dates the transition in interpretation to Milton Friedman's introduction of the expectations augmented Phillips curve in 1968. This is certainly right. Friedman and his followers needed a strawman against which to build their argument for the existence of a natural rate of unemployment. It was convenient to claim that Keynesians had argued for a stable tradeoff between inflation and unemployment, since then they could demonstrate that that claim was logically false because as we all know there is a unique equilibrium level of employment and unemployment, then show how belief in the permanent tradeoff contributed to the Great Inflation of the 1970s, then advocate for reform of monetary policy institutions to make sure this doesn't happen again.

But Keynesians shouldn't get too touchy about the monetarists' mischaracterization of Samuelson and Solow's views. This is, after all, exactly what Keynes himself did to the so-called "Classical" economists in The General Theory. He begins his book by defining Classical economics (which was not generally recognized at the time as a distinct school of thought, at least not in the way Keynes used the term) in fairly cartoonish terms, and then proceeds to demolish this theory. Keynes did the world a service - thanks to his work we gained an understanding of both Keynesian and non-Keynesian (Classical) macroeconomic theory, which had been a complete muddle before. And I suppose the monetarists did us the same favor with Samuelson and Solow.

More inventory pessimism

For about the 5th quarter in a row, commentators are proclaiming that the strong inventory growth supporting the most recent quarter's GDP growth is bad news because it is unsustainable. For how many more quarters will they be willing to tell this story?

From Dean Baker:

The news stories are coming out on the Commerce Department's release of revised data on 3rd quarter GDP and it seems that almost everyone has missed the story. The headlines of the articles are telling us that GDP growth was revised up slightly from 2.5 percent to 2.6 percent. While that may sound like at least somewhat positive news a more careful review of the data shows the opposite.

While the rate of GDP growth was revised up, the rate of final demand growth was revised down. Final demand, which is GDP excluding inventory accumulations, grew at just a 0.9 percent annual rate in the 3rd quarter, the same as its growth rate in the second quarter. The reason that GDP growth was revised upward was a more rapid reported growth in inventories.

The reported rate of inventory accumulation in the 3rd quarter was$121.4 billion (in 2005 dollars), the fastest pace ever. This added more than 1.6 percentage points to the rate of GDP growth in the quarter.

It is very unlikely that this pace of inventory growth will be sustained. Suppose that in the 4th quarter the rate of accumulation falls back to the pace of the second quarter. This would mean that inventories would subtract 1.6 percentage points from the growth rate. If final demand growth is 2.5 percent in the quarter (higher than it has been in any quarter of the recovery so far), then GDP growth would be just 0.9 percent.

In short, because the upward revision to GDP growth was based on more rapid accumulation of inventories it should not be viewed as a positive for the economy's growth prospects.

For the record, the change in private inventories contributed 1.1, 2.8, 2.6, 0.8, and 1.6 percentage points to GDP growth from 2009Q3 to 2010Q3. But it can't last!

Christmas letter

Didn't get around to it this year, so how about this one:

Dear Friends,

What a lucky break the CEO sent his personal jet to pick me up from Istanbul; there's plenty of room, since I have the entire aircraft to myself, to take out the laptop and write our annual holiday letter. Just let me ask the attendant for a better vintage of champagne, and I'll begin.

It's been another utterly hectic year for Chad and I and our remarkable children, yet nurturing and horizon-expanding. It's hard to know where the time goes. Well, a lot of it is spent in the car.

Rachel is in her senior year at Pinnacle-Upon-Hilltop Academy, and it seems just yesterday she was being pushed around in the stroller by our British nanny. Rachel placed first this fall in the state operatic arias competition. Chad was skeptical when I proposed hiring a live-in voice tutor on leave from the Lyric Opera, but it sure paid off! Rachel's girls' volleyball team lost in the semifinals owing to totally unfair officiating, but as I have told her, she must learn to overcome incredible hardship in life.

Now the Big Decision looms -- whether to take the early admission offer from Harvard or spend a year at Juilliard. Plus the whole back of her Mercedes is full of dance-company brochures as she tries to decide about the summer.

Nicholas is his same old self, juggling the karate lessons plus basketball, soccer, French horn, debate club, archaeology field trips, poetry-writing classes and his volunteer work. He just got the Yondan belt, which usually requires nine years of training after the Shodan belt, but prodigies can do it faster, especially if (not that I really believe this!) they are reincarnated deities.

Modeling for Gap cuts into Nick's schoolwork, but how could I deprive others of the chance to see him? His summer with Outward Bound in the Andes was a big thrill, especially when all the expert guides became disoriented and he had to lead the party out. But you probably read about that in the newspapers.

What can I say regarding our Emily? She's just been reclassified as EVVSUG&T -- "Extremely Very Very Super Ultra Gifted and Talented." The preschool retained a full-time teacher solely for her, to keep her challenged. Educational institutions are not allowed to discriminate against the gifted anymore, not like when I was young.

Yesterday Rachel sold her first still-life. It was shown at one of the leading galleries without the age of the artist disclosed. The buyers were thrilled when they learned!

Then there was the arrival of our purebred owczarek nizinny puppy. He's the little furry guy in the enclosed family holiday portrait by Annie Leibovitz. Because our family mission statement lists cultural diversity as a core value, we named him Mandela.

Chad continues to prosper and blossom. He works a few hours a day and spends the rest of the time supervising restoration of the house -- National Trust for Historic Preservation rules are quite strict. Corporate denial consulting is a perfect career niche for Chad. Fortune 500 companies call him all the time. There's a lot to deny, and Chad is good at it.

Me? Oh, I do this and that. I feel myself growing and flowering as a change agent. I yearn to empower the stakeholders. This year, I was promoted to COO and invited to the White House twice, but honestly, beading in the evening means just as much to me. I was sorry I had to let Carmen go on the same day I brought home my $14.6 million bonus, but she had broken a Flora Danica platter and I caught her making a personal call.

Chad and I got away for a week for a celebration of my promotion. We rented this quaint five-star villa on the Corsican coast. Just to ourselves -- we bought out all 40 rooms so it would be quiet and contemplative and we could ponder rising above materialism.

Our family looks to the New Year for rejuvenation and enrichment. Chad and I will be taking the children to Steamboat Springs over spring break, then in June I take the girls to Paris, Rome and Seville while Chad and Nicholas accompany Richard Gere to Tibet.

Then the kids are off to camps in Maine, and before we know it, we will be packing two cars to drive Rachel's things to college. And of course I don't count Davos or Sundance or all the routine excursions.

I hope your year has been as interesting as ours.

Love,
Jennifer, Chad, Rachel, Nicholas & Emily

The 111th Congress

The current, soon-to-recess for good 111th Congress has put together quite a list of accomplishments:

• Lilly Ledbetter Fair Pay Act
• American Recovery and Reinvestment Act
• Edward M. Kennedy Serve America Act
• Credit CARD Act
• Matthew Shepard and James Byrd Jr. Hate Crimes Prevention Act
• Patient Protection and Affordable Care Act
• Dodd-Frank Wall Street Reform and Consumer Protection Act
• Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act
• Don't Ask, Don't Tell Repeal Act
• Food Safety Modernization Act
• James Zadroga 9/11 Health and Compensation Act*
• New START*

and more.

* Coming soon.

It sure was ugly, but the results are not bad, not bad at all. Farewell 111th, I'll miss you.

THE DIGITAL STORY OF THE NATIVITY

10 Economic Questions for 2011

Calculated Risk asks ten good questions for 2011, the answers to which will go a long way toward determining how weak or strong the recovery will be:

1) House Prices: How much further will house prices fall on the national repeat sales indexes (Case-Shiller, CoreLogic)? Will house prices bottom in 2011?

2) Residential Investment: It appears residential investment (RI) bottomed in 2010, and will probably make a positive contribution to GDP growth in 2011 for the first time since 2005. RI is mostly investment in new single family structures, multifamily structures, home improvement and commissions on existing home sales. Historically RI has been the best leading indicator for the economy, but the growth in RI will probably be modest because of the large overhang of excess housing units. How much will RI grow in 2011?

3) Distressed house sales: Foreclosure activity is very high, although activity has slowed recently - probably because of "foreclosure gate" issues. The number of REOs (Real Estate Owned by lenders) is increasing again, although still below the levels of late 2008. How much will foreclosure activity pick up in 2011? Will the number of REOs peak in 2011 and start to decline?

4) Economic growth: After I took the "over" for 2011 back in November, a number of analysts have upgraded their forecasts. As an example, Goldman Sachs noted Friday:

The US economic outlook for 2011 has improved further with enactment of the fiscal compromise, as well as a stronger trend in recent data. As we forewarned, we are revising up our forecasts to incorporate this news and now expect real GDP to rise 3.4% in 2011 and 3.8% in 2012 (up from 2.7% and 3.6%) ...

It does appear GDP growth will increase in 2011, although GDP growth will probably still be sluggish relative to the slack in the system. How much will the economy grow in 2011?

5) Employment: The U.S. economy added about 87 thousands payroll jobs per month in 2010 through November. This was extremely weak payroll growth for a recovery. How many payroll jobs will be added in 2011?

6) Unemployment Rate: The post-Depression record for consecutive months with the unemployment rate above 9% was 19 months in the early '80s. That record will be broken this month, and it is very possible that the unemployment rate will still be above 9% in December 2011. This high level of unemployment - and the number of long term unemployed - is an economic tragedy. The economy probably needs to add around 125 thousand payroll jobs per month just to keep the unemployment rate from rising (payroll jobs and unemployment rate come from two different surveys, so there is no perfect relationship, and the rate also depends on the participation rate). What will the unemployment rate be in December 2011?

7) State and Local Governments: How much of a drag will state and local budget problems have on economic growth and employment? Will there be any significant muni defaults?

8) Europe and the Euro: What will happen in Europe? When will the next blowup happen? How much of a drag will the problems in Europe have on U.S. growth?

9) Inflation: With all the slack in the system, will the U.S. inflation rate stay below target? Will there be any spillover from rising inflation rates in China and elsewhere?

10) Monetary Policy: Will the Fed expand QE2 (probably not)? Will the Fed reverse any of the Large Scale Asset Purchases? Probably not. Will the Fed raise the Fed Funds rate? Very unlikely.

We should add #11: what unforeseen event in 2011 will completely screw up our economic forecasts? War in Korea? Budget showdown that leads to a temporary default in the US? Bursting bubble and recession in China? Breakup of the Euro zone? Invention of a perpetual motion machine?

Highlight of the semester

Highlight of the semester: a student begs me to grade his second midterm right away because today is the last day to drop the course. I say sure, and come back a few hours later with the result: 36 (out of 100; that would be an F). The student responds, ok, I think I'll stay in the course.

University Cans Cursing Philosophy Lecturer

From the Chronicle:

The University of Hawaii at Hilo has told a philosophy lecturer who swore in the classroom that his services won’t be needed next semester, according to an article in The Honolulu Star-Advertiser. The lecturer, Daniel Petersen, said he had told students that “stuff happens”—though he used a more emphatic word than “stuff”—to illustrate concepts like free will and determinism. Parents complained, and Mr. Petersen was suspended without pay. Then he was informed that he wouldn’t be returning to teach next semester. Mr. Petersen told the newspaper that he planned to sue the university.

Hey, I think we've got a couple of those!

Letters of recommendation

This is coming in handy right now. I don't have anything to add.

November payroll employment

November's payroll employment number (+39,000) was much lower than expected. I just ran a regression of the percent change in payroll employment on the ISM manufacturing and nonmanufacturing employment indexes and initial unemployment claims. One would have expected employment growth on the order of 130,000 rather than 39,000 based on the historical correlation between these variables. So I'm guessing come the next employment report this number will be revised upwards in this general direction, and people won't be quite as glum about the employment situation as they've been of late.

Health reform declared unconstitutional

Well, it's just a federal court in Virginia, but it does move the issue one step closer to the Supreme Court. Just two comments:

(1) I recall that in the 2008 primaries Obama was opposed to the mandate to begin with. He argued at the time that you could insure almost everyone under a voluntary system if the subsidies were high enough.

(2) Even if the mandate were unconstitutional, surely it would be permissible for the government to tax everyone in the amount of the current penalty, then compensate people with a tax credit in the same amount if they demonstrate that they have health insurance.

More analysis of Obama's hostage crisis

Good God, I think I agree more with Charles Krauthammer than Paul Krugman. One reason is that much of the political costs that Krugman mentions disappears if Obama takes up tax reform next year.

That said, if the revolt of the House Democrats succeeds in squeezing more out of Republicans (as opposed to scuttling the deal entirely) I'm all for it. It would be great if the Democrats could get the Republicans to accept a lower threshold or higher marginal rate on the estate tax, but I doubt it. Money for infrastructure investment maybe? At a minimum I'd like to see the debt ceiling lifted now rather than risk a showdown over this issue in February.

Tax reform

For years I've been telling anyone who would listen that the Democrats ought to make tax reform their issue for the second two years of the Obama Administration. A simplified tax code that trades lower rates for a cap on tax deductions for people with high incomes + a focus on taxing consumption rather than saving + a higher estate tax and a high marginal tax rate for millionaires + a carbon tax, all wrapped up in a pro-growth, green, deficit-reducing package. This is a centrist agenda that the Obama Administration can ride to victory in 2012, while solving many of the biggest problems facing our country. Let's hope that this is an indication that Obama is going to take this route.

Initial UI claims continue to fall

The US Department of Labor reports:

In the week ending Dec. 4, the advance figure for seasonally adjusted initial claims was 421,000, a decrease of 17,000 from the previous week's revised figure of 438,000. The 4-week moving average was 427,500, a decrease of 4,000 from the previous week's revised average of 431,500.

Further evidence that the labor market is picking up speed after the slowdown in the spring and summer. As the graph indicates, we're ahead of the pace compared to the recoveries that began in 1991 and 2001 but behind the pace set in the recovery beginning in 1982.

Monetary policy in the Bible

I swear I'm not making this up. Yesterday FreedomWorks hosted an event on US Monetary and Economic Policy, covered on C-Span. At this event various Republican luminaries including Paul Ryan (R-WI) and Mike Pence (R-IN) criticized the Fed's quantitative easing program, arguing that "sound money" is essential to a vibrant, entrepreneurial capitalist economy. Judy Shelton (Atlas Economic Research Foundation) awed the crowd with her discussion of the "moral dimension of money." Pointing out that US currency bears the statement "In God We Trust," she quoted a passage from Deuteronomy:

"...thou shalt have a perfect and just weight, a perfect and just measure shalt thou have: that thy days may be lengthened in the land which the LORD thy God giveth thee."

What does Ben Bernanke know, Moses told us not to quantitatively ease!

Moses also told us "Thou shalt not muzzle the ox when he treadeth out the corn," so I guess we must let the lady speak.

Liberals continue to vent

I consider myself a liberal Democrat, so I'm as frustrated with the way things have worked out politically in the last two years as anyone. But the liberals who are hyperventilating about Obama's compromise on tax cuts and thinking about a primary challenge are ignoring some fundamental political and historical facts.

What I keep hearing from liberals in Congress is that they would prefer that Obama draw the line on taxes now, fight the good fight, lose, and carry the fight into 2011 and if needs be to the election in 2012. This wish ignores the fact that presidents rarely if ever find it in their interest to fight a losing battle. Standing firm on principle is good politics for members of Congress because individual Congressmen and Senators are rarely held responsible for results. But presidents are held responsible for results. A president's political standing is determined by the perception that he is powerful, can achieve important things. Losing votes in Congress creates the perception of weakness, and therefore presidents don't let this happen very often. George Bush and Ronald Reagan, beloved of conservatives, did not lose votes in Congress. When Social Security reform looked like a loser in 2005, Bush dropped it. Neither Bush nor Reagan ever fought "the good fight" to overturn Roe v. Wade or impose a national ban on gay marriage. They would have lost on these issues, and this would've eroded their power.

Liberals ought to understand that the best they can hope for from a Democratic president is a sympathetic ear. When there is a groundswell of support for liberal causes - as in 1933-36 and 1964-65, a Democratic president can deliver where a Republican president would not. If liberals want to repeal the top Bush tax cuts they need to generate public indignation at the tax cuts for the rich and get the votes for repeal in the Senate. They had the opportunity to do this before the election and it didn't happen. Right now Obama doesn't have the political capital to advance the cause using the president's bully pulpit. So compromise has to be the order of the day.

Liberals of late have put too much hope in the President to the neglect of doing the groundwork that is necessary to get the President on board with liberal priorities. During the debate on health reform we heard a great deal from the opponents of reform. Tea Party groups were protesting in cities across the country and on the steps of the Capitol. Where were the liberal advocates of reform? Playing the inside game and despairing when Obama was unwilling or unable to twist enough arms to get a more liberal plan through. It was apparent during the debate that Republicans and Democrats alike were scared of the Tea Party, scared of the insurance companies, scared of looking fiscally irresponsible. No one was scared of the liberals. The liberals should focus their attention on building up support for their (our) agenda at the grassroots. Only then will Senators feel that they need to bend to the liberals to preserve their chances of reelection, and only then will Obama have the leverage to force the Senate's hand the next time progressive legislation comes before it.

More compromises from the Obama White House

In Latest Compromise with GOP, Obama Agrees He is a Muslim

The deal

I agree with Ezra Klein that the deal supposedly struck between Obama and the Republicans is not too bad and better than was to be expected. We give the rich about $60 billion a year, and in return get about as much economic stimulus, focused on low- and moderate-income people, as we could hope to get. Liberals are threatening to filibuster, but this is what compromise looks like. Does anyone think there's any other way to get extension of unemployment insurance and the like? If the compromise is to be criticized it is for its effect on the deficit. I would've done the stimulus and paid for it by allowing the top tax rate to go back to 39.6. By doing both we dig ourselves into a deeper hole on the deficit. On the other hand, it has always made more sense to put off deficit reduction until after the recession ends, and nothing in this compromise makes that impossible.

Why not reconciliation?

Ezra Klein explains why:

1) They already used it: You can't call an audible and switch over to budget reconciliation in the middle of a legislative fight. Reconciliation instructions have to be written into the budget for the year in which they're used. That means planning about a year in advance. When Democrats passed the 2010 budget, in April of 2009, they did include reconciliation instructions, but they were for health care and student-loan reform. And they passed that bill back in March. You can only use reconciliation once a year, so that's that.

2) They passed a rule making it impossible to use reconciliation for bills that increase the deficit: When George W. Bush passed his tax cuts through budget reconciliation, Democrats were horrified. It was the first time reconciliation had been used to increase the federal budget. So when they took back power, they decided to prove their commitment to fiscal rectitude by passing a new rule: Henceforth, budget reconciliation could only be used for legislation that would reduce the deficit. This provided Democrats with precisely no protection against the charge that they loved deficits, and it'll likely be changed back as soon as Republicans retake the Senate, but for now, a rule's a rule.

So it's not just that Democrats didn't write the tax cuts into the 2010 reconciliation instructions, but that they actually couldn't have written the tax cuts into the 2010 reconciliation instructions.

Obama bashing

I'm as frustrated as anyone that there don't seem to be the votes in the Senate to extend the "middle class" portion of the Bush tax cuts while letting the rates for the top income earners expire. Liberals are heaping opprobrium on Barack Obama for not taking a principled stand on this issue. But as I recall in September Obama proposed exactly what the liberals want, but neither the Senate nor the House took this up because the votes weren't there and they were worried about the political consequences (leave it to the Democrats to not be able to figure out how to make political hay out of a vote to cut taxes for 98 percent of Americans two months before an election!). Now the votes still aren't there - why is it unreasonable, given the lack of votes for allowing the top tax rates to expire, to strike a deal?

Paul Krugman urges Congress to reject any deal and carry the fight on into next year. I think this is a bad idea. First, it could have an adverse impact on the economy, and economic recovery is and ought to be the number one priority for this government. Second, striking a deal with Republicans may allow Congress to bring other important measures to a vote, including START, extension of unemployment benefits, Don't Ask Don't Tell, and others. There's even talk of voting now on an increase in the debt ceiling in order to avoid a bitter fight in the spring that could lead to a government shut-down and an interruption of payments on US debt. This is an excellent idea. Third, there's a good chance that some version of the deficit commission's proposals will come before Congress this year. The proposals include a reform of the income tax code that trades limitations on tax expenditures (mortgage interest deduction, etc.) for lower marginal rates. I don't agree with the exact rates that the commission chairs proposed last month, but changes could be made to make the package more palatable. If so, then extending the Bush tax cuts beyond 2011 becomes moot. Why have a huge fight over this now if we're going to scrap the current tax structure next year anyway?

Having said all that, I would like the answer to the following question. The 2001 Bush tax cuts were passed through reconciliation precisely to avoid the filibuster. This is why they had to expire in 2011 and why we're having this fight today. Why can't the Democrats similarly extend the tax cuts for people earning under $250,000 by reconciliation? If they did this they could either (a) get the tax cut package they want, or (b) put themselves in a stronger bargaining position vis-a-vis the Republicans that they could use to strike a better deal than the one they're currently looking at.

What do we do now?

Obama continues to get beaten up from the right and left because of his failure to right the economic ship. November's jobs numbers guarantee that he will continue to be a punching bag for awhile longer. As for me, I think that Obama has done about half of what should have been done. That's better than the 0 percent that the Republicans are offering, so I continue to give Obama my increasingly tepid support. Today's employment numbers were indeed disappointing, but it is after all one month's data, subject to a lot of error (really, the difference between a good jobs report and a bad jobs report is whether the total number of jobs out there is 130,539,000 versus 130,639,000), and bound to be revised numerous times before we really get a concrete idea of what's going on.

Suffice it to say that just under three years since the recession began, the economy has still not achieved escape velocity. Most economists would say that the ideal policy in the current situation is to combine more government spending and tax cuts today with a credible deficit reduction program to begin after a few years. Few economists really believe that the Republican program - cuts in spending now plus tax cuts for the rich - would be of much help, and because the extension of the Bush tax cuts puts such a hole in the long-term deficit it might be damaging to the economy on net. Democrats aren't offering the complete package, but if you put Obama, liberal Democrats, conservative Democrats, and the ten most reasonable Republican Senators into a room you would come up with something approaching the ideal.

For me, that ideal is:

- permanent extension of tax cuts for income under 250,000

- let tax cuts for income over 250,000 expire on schedule and bring back the estate tax

- use the money generated by the expiring tax cuts to (partially) fund an extension of unemployment benefits, an infrastructure bank, and a payroll tax holiday.

- pass a carbon tax that would kick in around 2013 or 2014, the proceeds of which would go toward financing the expenditures above plus deficit reduction

- make large cuts to defense spending over the next ten years, with some cuts beginning in 2012 or so

- control growth in health costs using the tools in the health reform law

But of course our magical realist friends on the right side of the political spectrum have another ideal in mind: if government stops regulating businesses, cuts spending now, and cuts taxes to the bone for the rich - that is, if we essentially set the clock back to December 2008 - businesses will become so confident about the future that they will immediately start investing and hiring. If the economy continues to show signs of improvement over the next couple of months (other recent economic news has been much more upbeat than this employment report) I fully expect to read in the Wall Street Journal the argument that even the prospect of Congressional Republicans doing these things has already bolstered business confidence and put the economy on the road to recovery. It's a really nice story, but it's one that has very little support among actual economists.

Well, that was disappointing

Payroll employment up 39,000 in November (private sector employment up 50,000). Well below what I and the rest of the world thought it would be.

Here's how we respond to news like this in the economics profession. First we identify the deviation of data from theory as a "puzzle." We give this puzzle a really cool name: Feldstein-Horioka, Equity Premium, Black Swan. We write a paper presenting our theory and show that the data massively contradict it. We title the paper something like "The November Effect in Payroll Employment: A Puzzle." Then we sit back as hundreds of tenure-seeking assistant professors publish papers that seek to explain this puzzle (the goal being to do so with the minimum number of adjustments to our theory), citing our original paper prominently in the process.

Or I suppose we could wait until next month when the BLS revises the number upwards by 100,000 or so.

Tomorrow's employment report

Private sector payroll employment rose by 151,000 in October, well ahead of forecasts. Now the consensus forecast is for another gain of 145,000-168,000 in November. I think we're at another one of those points when the forecasters are a step or two behind the curve; for reasons laid out in a previous post I think we're back on track for strong employment gains in the months ahead.

I got an accurate forecast of employment in October by looking at the ISM reports, but the ISM non-manufacturing report for November has not been released yet. The manufacturing report was positive but not quite as strong as in October, but then again manufacturing is relatively small fraction of total employment.

We do have information on initial unemployment insurance claims and the ADP figure for November. ADP says private sector employment growth was 93,000 in November. All year long the ADP has been underestimating private sector payroll employment by 50,000 to 200,000. The average understimation is somewhere around 70,000, so that would imply +163,000 for private sector employment. Because of underestimation, ADP employment is now about .98 of BLS private sector employment, so if I inflate up from the level of ADP employment I also get something in the +150,000 to +250,000 range (the numbers are very sensitive to my assumption of the scaling factor).

Initial claims for unemployment insurance have been falling for the last month or two. If I run a regression of the change in private employment on its own lag and the current and two lags of initial claims and then use that regression to forecast the change in private employment in November, I get +175,000.

So let me express my forecast as a probability distribution, based on the above computations, my budding optimism of the economy, my respect for the uncertainty involved in these things, and the seat of my pants:

Growth in private sector employment in November:
100,000 < x < 150,000 (prob = .2)
150,000 < x < 175,000 (prob = .2)
175,000 < x < 200,000 (prob = .2)
200,000 < x < 225,000 (prob = .2)
225,000 < x < 250,000 (prob = .2)

Prob (x>250,000 or x < 100,000) = close to zero.

I guess that makes my mean estimate somewhere around +185,000.

The Ireland "bailout"

Here's Barry Eichengreen on the Irish bailout, via Brad DeLong.

You know, if you read John Maynard Keynes railing against the fiscal austerions and gold bugs in the British Treasury during the 1920s-30s, you don't need to read anything else about what's going on in Europe today.

There's really no excuse now

Pentagon Sees Little Risk in Allowing Gay Men and Women to Serve Openly