It Ain't Happenin' Baby

[prole]

...unless Obama spends some $$$. Vancouver to Tijuana bullet-train anyone?

 

Formula shows why it's so hard to cut jobless rate

By JEANNINE AVERSA, AP Economics Writer

Sun Jan 31, 2010

 

WASHINGTON – The economy's 5.7 percent growth last quarter — the fastest pace since 2003 — was a step toward shrinking the nation's 10 percent unemployment rate.

 

There's just one problem: Growth would have to equal 5 percent for all of 2010 just to lower the average jobless rate for the year by 1 percentage point.

 

And economists don't think that's possible.

 

Most analysts say economic activity will slow to 2.5 percent or 3 percent growth for the current quarter as the benefits fade from government stimulus efforts and from companies drawing down less of their stockpiles.

 

That's why the Federal Reserve and outside economists think it will take until around the middle of the decade to lower the double-digit jobless rate to a more normal 5 or 6 percent.

 

Another way of looking at it: A net total of about 3 million jobs would have to be created this year to lower the average unemployment rate by 1 percentage point for 2010, economists estimate. Yet even optimists think the creation of 1 million net jobs is probably out of reach this year.

 

High unemployment poses a risk to the unfolding recovery because it leads consumers to spend less, keeping economic growth weak. A sharp pullback in spending might even push the economy back into recession. Joblessness also represents a danger for President Barack Obama's Democratic Party in this fall's congressional elections.

 

The National Association for Business Economics and the International Monetary Fund think gross domestic product will rise just under 3 percent for all of this year. GDP, the best gauge of economic activity, measures the value of all goods and services produced in the United States.

 

To get a sense of just how deep a dent the worst recession since the 1930s has made in the economy, consider this: The economy shrank 2.4 percent for all of 2009 — the sharpest drop since 1946. It was also the first annual decline since 1991.

 

Mark Zandi, chief economist at Economy.com, and Bill Cheney, chief economist at John Hancock, agree that the economy would have to grow roughly 5 percent for all of 2010 just to ratchet down the average unemployment rate for the year by 1 percentage point — to a still-high 9 percent.

 

Their math is based on Okun's law, named for economist Arthur Okun. In 1962, Okun produced a formula for the connection he saw between unemployment and economic activity.

 

Exactly how much GDP growth is needed to lower the unemployment rate for a given period varies. That's because the formula involves several factors besides GDP growth. It also considers, for example, businesses' productivity growth.

 

When the economy was recovering from the 2001 recession, it took two years to reduce the unemployment rate by nearly a full percentage point: It fell from 6 percent in 2003 to 5.1 percent in 2005. GDP growth averaged just over 3 percent.

 

Economists say the formula hasn't always held up perfectly in recent decades. Rather, it's relied upon as a rough rule of thumb for determining how much growth will be needed to lower unemployment.

 

But a near-textbook case occurred in 1976, when the economy expanded at a 5.4 percent pace. As Okun would have predicted, that growth drove down the unemployment rate by nearly a full percentage point: from 8.5 percent in 1975 to 7.7 percent.

[JayB]

Ahh - stimulus spending. Time for the Keynes vs Hayek Rap Battle...

 

[video:youtube]whGlF-hjCaI

[prole]

I like how Hayek is portrayed here as the outsider when in fact those ideas have represented the consensus in the political and economic establishment for nigh on 30 years. Is this part of the joke?

[G-spotter]

I like how Hayek is portrayed here

 

I like how Hayek is portrayed in Ask The Dust 8D

[JayB]

I like how Hayek is portrayed here as the outsider when in fact those ideas have represented the consensus in the political and economic establishment for nigh on 30 years. Is this part of the joke?

 

Debatable. I'd say the impact on political discourse has been far more profound than it's impact on policy, which has remained a mercantilist-keynsian ghoulash. Just take a look at the latest farm-bill, or better yet - the federal budget for a concrete demonstration of that fact. Not terribly surprising when you consider the political economy of the two systems. Any system that gives its blessing to dispensing vast amounts of debt and inflation fueled patronage is going to enjoy certain structural advantages in Washington.

 

In academic econ circles the highly formal Arrow-Samuelson approach has been dominant for the past 60 years, and folks in the Austrian school have very much been outsiders. Since the characters are attending an econ conference, this portrayal is both accurate and fair IMO.

 

When you ponder what the likes of Samuelson had to say about events that transpired outside the boundaries of his "general equilibrium" models - such as this gem from his 1989 econ textbook "The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and thrive." - that's truly remarkable.

 

 

[prole]

Yes Jay, the State does exist and people and interests do struggle on that terrain. Those tasked with the burden of actually dealing in the real world would require something with a little more meat on it than the airless utopian calculus of the cocktail napkin. That said, to suggest that the Hayek/Friedman complex has not been enormously influential and that free market fundamentalist thought has not been a primary driver of economic policy (when it favored the powerful) since the late 70's and the deregulation it spurred not largely responsible for the current crisis would be flatly absurd. I can only imagine such a bit of historical revisionism on your part is the prelude to arguments gathering momentum amongst the dead-enders that "we didn't go far enough": the typical lament when neoliberalism has either failed under its own weight or created a popular backlash by people unwilling to sacrifice themselves to your cause. Again, I do hope you're getting paid for this, it would be a shame for your talents to go to waste and for any evil deed to go unrewarded.

[JayB]

IMO "airless utopian calculus of the cocktail napkin" is much a much more apt description of the mainstream, highly formal Kenneth Arrow, Paul Saumuelson crew than folks in the Menger-Mises-Hayek camp, but I wouldn't expect you to know that. That's not intended to be a slight - it's just not something you'd know or appreciate unless it happened to be a hobby of yours. Just google "Samuelson - Revealed Preference Model" if your actually harboring any doubts about which camp is more enamored of utopian calculi.

 

The Chicago school sits somewhere between the two.

 

I think we've covered the deregulation bit before and I don't think you can make a credible claim that any of the deregulation that transpired under Ford-Carter-Reagan had a material effect on the present crisis, unless you think that allowing truckers, airlines, and oil companies to set their own prices, or the changes in the telecom market had a material effect on the present crisis.

 

The only bit of de-regulation that you could reasonably implicate in the crisis is the repeal of Glass-Steagal, and the decision not to have credit-default swaps traded on an exchange. If you take a look at the rent/mortgage, mortgage/income, etc, etc stats all over the world you see even greater price inflation in countries that didn't make major regulatory changes between 1998 and 2005 so it'd be hard to make a case that the repeal of Glass-Steagal in the US is sufficient to explain the global property bubble and subsequent collapse.

 

I also think that we've covered the said crisis before. My conclusion is that the Austrian explanation - interest rate distortions by a central bank leading to an unsustainable credit expansion leading to colossal malinvestment in credit sensitive sectors which eventually implode - is way closer to the mark than anything that the Keynsians have to offer. All of the other political distortions that generated a massive overallocation of capital into housing - FNMA/GNMA, CLA, mortgage interest deduction, capital gains exemption, property tax exemption - etc just got us where we were going faster.

 

I'm not terribly concerned about the long-term trajectory of "neoliberalism," since the alternatives will inevitably fare worse.

 

 

[Fairweather]

When you ponder what the likes of Samuelson had to say about events that transpired outside the boundaries of his "general equilibrium" models - such as this gem from his 1989 econ textbook "The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and thrive." - that's truly remarkable.

 

 

Watching JayB choke the life outta Prole/j_b's already tenuous grasp of the world is popcorn-worthy.

[prole]

Do you ever tire of bearing Jay_B's chamber pot?

[j_b]

more than 160 airline bankruptcies triggering the loss of 100,000's of middle class jobs and retirements packages since deregulation in 1978. Yet JayB still claims it had no effect on the economic security of employees and their need to take on debt to meet fixed expenses.

 

It's pretty dishonest to claim that free-market fundamentalists like Alan Greenspan, Milton Friedman, etc .. haven't been in charge over the last 30+ years.

[j_b]

The only bit of de-regulation that you could reasonably implicate in the crisis is the repeal of Glass-Steagal, and the decision not to have credit-default swaps traded on an exchange.

 

As if the race to the bottom labor cost and the flight/destruction of legacy jobs hadn't been enabled by widespread deregulation and consolidations into oligopolies.

[Kimmo]

The only bit of de-regulation that you could reasonably implicate in the crisis is the repeal of Glass-Steagal, and the decision not to have credit-default swaps traded on an exchange.

 

As if the race to the bottom labor cost and the flight/destruction of legacy jobs hadn't been enabled by widespread deregulation and consolidations into oligopolies.

 

we need specifics. i think they are there, and it makes your case stronger.

[Jim]

The only bit of de-regulation that you could reasonably implicate in the crisis is the repeal of Glass-Steagal, and the decision not to have credit-default swaps traded on an exchange.

 

 

Wrong - deregulation doesn't just mean the repel of existing laws. Under the Bushies they systematically ignored their power to regulate under existing laws. One of the best examples is when the CFTC tried to regulate default swaps under their jursidiction - they got hammered big time by Greenspan and his Ayn Rand groupies. Also under the Bushies, the amount of capitalization that financial institutions were required to keep was significantly reduced - allowing them to take larger bets with less backup. The "let the markets regulate themselves" was the rule and Greenspan just kept shovelling low interest rates into not one, but two bubbles, which turned out to be nothing more than a international Ponzi scheme.

[Peter_Puget]

more than 160 airline bankruptcies triggering the loss of 100,000's of middle class jobs and retirements packages since deregulation in 1978. Yet JayB still claims it had no effect on the economic security of employees and their need to take on debt to meet fixed expenses.

 

It's pretty dishonest to claim that free-market fundamentalists like Alan Greenspan, Milton Friedman, etc .. haven't been in charge over the last 30+ years.

 

Clearly you know very little about Uncle Milton's views...

[j_b]

Specific examples?

 

Deregulation is directly responsible for lack of health care insurance, which in turn is the leading cause of bankruptcy:

 

 

State Report Demonstrates Cost of Deregulation of Health Insurance Premiums

 

Deregulation of health insurance premiums has resulted in excessive rate increases that require many New Yorkers to pay more for health insurance than they should, and even force some to drop coverage altogether, according to a report issued today by the New York State Insurance Department. Governor David A. Paterson has submitted a bill to reinstate the Insurance Department’s authority to review health insurance premiums before insurers raise rates to ensure that the increases are not excessive.

 

- Health Insurers Can Increase Premiums With Virtually No Oversight. The Insurance Department is not allowed, by law, to review insurers’ rate calculations or underlying actuarial assumptions, much less approve or disapprove a premium increase before it goes into effect.

 

- Health Insurers Have Failed to Self-Police. File and use does contain a self-policing mechanism that requires insurers to refund excessive premiums to policyholders, but not until almost two years after the premium rate goes into effect. However, the mechanism does not protect against all abuses and it has clearly not worked. Under prior approval (1990-1995), the Insurance Department reduced 24% of premium rates submitted by health plans after concluding the rate was excessive. Under file and use (1996-2007), when it was up to the health plans to report their own overcharges, health plans self-reported excessive rates only 3% of the time. Between 2000 and 2007, health plans refunded approximately $48 million in overcharged premiums without Insurance Department intervention. Insurance Department investigations of some filings found that during this same period some health plans overcharged policyholders an additional $105 million - more than twice what the plans “self-policed” under file and use. This number may be understated because of the loopholes discussed below that may hide some excessive rates.

 

- File and Use Hinders Insurance Department Enforcement. File and use contains loopholes that allow health plans to revise underlying assumptions after the rates go into effect to avoid paying refunds. For example, at the end of a year, health plans can increase their estimate of claims they will have to pay but have not yet received, which are known as the reserves for “incurred but not received,” or IBNR, claims.

 

- Uninsured. Under file and use, an unjustified rate increase can result in an unjustified loss of health insurance coverage. File and use gives health plans until September 30 after the applicable year to pay refunds -- up to 21 months after rate increases go into effect. No relief is available to consumers or businesses that had to cancel their coverage because they could not afford the inflated rate increase in the first place. As such, file and use is a classic case of “justice delayed is justice denied.”

 

- File and Use Undermines Efforts to Help the Most Vulnerable. The state spent about $826 million from 2000 to 2008 in subsidies to make health insurance more affordable for working low-income New Yorkers and individuals with health conditions that make insurance very expensive. File and use, deregulated and subject to abuse, directly contravenes the State’s efforts to enhance affordability in these markets and protect consumers. While New York is trying to increase health coverage, file and use works to decrease it.

 

- Insurers’ Profits Have Increased While Health Insurance Has Become Less Affordable for Small Businesses and Individuals. Under deregulation, health insurer profits have been high. For example, in 1996, health insurers paid less than two percent of premiums as dividends to their parent companies. In 2007, they paid more than eight percent of premiums as dividends to their parent companies. Indeed, health plans have distributed more than $5.4 billion in dividends since full deregulation in 1999.

[Peter_Puget]

IMO "airless utopian calculus of the cocktail napkin" is much a much more apt description of the mainstream, highly formal Kenneth Arrow, Paul Saumuelson crew than folks in the Menger-Mises-Hayek camp, but I wouldn't expect you to know that. That's not intended to be a slight - it's just not something you'd know or appreciate unless it happened to be a hobby of yours. Just google "Samuelson - Revealed Preference Model" if your actually harboring any doubts about which camp is more enamored of utopian calculi.

 

The Chicago school sits somewhere between the two.

 

I think we've covered the deregulation bit before and I don't think you can make a credible claim that any of the deregulation that transpired under Ford-Carter-Reagan had a material effect on the present crisis, unless you think that allowing truckers, airlines, and oil companies to set their own prices, or the changes in the telecom market had a material effect on the present crisis.

 

The only bit of de-regulation that you could reasonably implicate in the crisis is the repeal of Glass-Steagal, and the decision not to have credit-default swaps traded on an exchange. If you take a look at the rent/mortgage, mortgage/income, etc, etc stats all over the world you see even greater price inflation in countries that didn't make major regulatory changes between 1998 and 2005 so it'd be hard to make a case that the repeal of Glass-Steagal in the US is sufficient to explain the global property bubble and subsequent collapse.

 

I also think that we've covered the said crisis before. My conclusion is that the Austrian explanation - interest rate distortions by a central bank leading to an unsustainable credit expansion leading to colossal malinvestment in credit sensitive sectors which eventually implode - is way closer to the mark than anything that the Keynsians have to offer. All of the other political distortions that generated a massive overallocation of capital into housing - FNMA/GNMA, CLA, mortgage interest deduction, capital gains exemption, property tax exemption - etc just got us where we were going faster.

 

I'm not terribly concerned about the long-term trajectory of "neoliberalism," since the alternatives will inevitably fare worse.

 

 

Interest rates below equilibrium might inspire some “malinvestment” but also some investment that will be fruitful with an expected future rise in interest rates. Many other investors will not make interest sensitive investments expecting a future rise in rates. (Read Lucas a Washingtonian!)) It is hard to see that absent implicit government guarantees and incentives and regulatory inexperience in actually closing huge financial institutions. (ie large bank holding companies) that the current crisis would have unfolded as it did.

[JayB]

The only bit of de-regulation that you could reasonably implicate in the crisis is the repeal of Glass-Steagal, and the decision not to have credit-default swaps traded on an exchange.

 

 

Wrong - deregulation doesn't just mean the repel of existing laws. Under the Bushies they systematically ignored their power to regulate under existing laws. One of the best examples is when the CFTC tried to regulate default swaps under their jursidiction - they got hammered big time by Greenspan and his Ayn Rand groupies. Also under the Bushies, the amount of capitalization that financial institutions were required to keep was significantly reduced - allowing them to take larger bets with less backup. The "let the markets regulate themselves" was the rule and Greenspan just kept shovelling low interest rates into not one, but two bubbles, which turned out to be nothing more than a international Ponzi scheme.

 

Credit default swaps definitely exacerbated the problem, particularly by giving folks the illusion that by buying them they were effectively covering the risk that the Alt-A, neg-am, no-doc pay-option paper that they were leveraging 33:1.

 

Having said that - the basic problem was and is too much debt backed up by too little collateral and income. It's difficult to tell how much worse the factors you cite made things, but the SNL crisis of the 80's and all of the other implosions going back to the South Sea Bubble indicate that you can have a world class financial crisis with nothing more than excessive optimism and/or poor lending standards.

 

IMO Greenspan's single biggest contribution to the disaster wasn't his failure to deploy the regulatory apparatus with sufficient vigor - it was keeping real interest rates at or near zero for far too long. Having said that - the bigger problem is a financial system that relies upon a single man/institution to pick the "right" interest rate. That's an impossible job. Ditto for determining the "right" capital ratio for all banks. When you couple a system with that kind of structural weakness with the likes of FNMA/GNMA, the CRA, the mortgage interest deduction, public deposit insurance, etc, etc, etc, etc, it's a wonder that we don't have financial crises more often.

 

Speaking of which - taken a look at the books for, say - the FHA loans originated *after* the nature and extend of the financial crisis began? How about the projected losses for FNMA/GNMA? Neither inspired much confidence in the inherent superiority of using bureaucratic mechanisms that are subject to massive political distortions/incentives to allocate credit/resources/capital.

[JayB]

IMO "airless utopian calculus of the cocktail napkin" is much a much more apt description of the mainstream, highly formal Kenneth Arrow, Paul Saumuelson crew than folks in the Menger-Mises-Hayek camp, but I wouldn't expect you to know that. That's not intended to be a slight - it's just not something you'd know or appreciate unless it happened to be a hobby of yours. Just google "Samuelson - Revealed Preference Model" if your actually harboring any doubts about which camp is more enamored of utopian calculi.

 

The Chicago school sits somewhere between the two.

 

I think we've covered the deregulation bit before and I don't think you can make a credible claim that any of the deregulation that transpired under Ford-Carter-Reagan had a material effect on the present crisis, unless you think that allowing truckers, airlines, and oil companies to set their own prices, or the changes in the telecom market had a material effect on the present crisis.

 

The only bit of de-regulation that you could reasonably implicate in the crisis is the repeal of Glass-Steagal, and the decision not to have credit-default swaps traded on an exchange. If you take a look at the rent/mortgage, mortgage/income, etc, etc stats all over the world you see even greater price inflation in countries that didn't make major regulatory changes between 1998 and 2005 so it'd be hard to make a case that the repeal of Glass-Steagal in the US is sufficient to explain the global property bubble and subsequent collapse.

 

I also think that we've covered the said crisis before. My conclusion is that the Austrian explanation - interest rate distortions by a central bank leading to an unsustainable credit expansion leading to colossal malinvestment in credit sensitive sectors which eventually implode - is way closer to the mark than anything that the Keynsians have to offer. All of the other political distortions that generated a massive overallocation of capital into housing - FNMA/GNMA, CLA, mortgage interest deduction, capital gains exemption, property tax exemption - etc just got us where we were going faster.

 

I'm not terribly concerned about the long-term trajectory of "neoliberalism," since the alternatives will inevitably fare worse.

 

 

Interest rates below equilibrium might inspire some “malinvestment” but also some investment that will be fruitful with an expected future rise in interest rates. Many other investors will not make interest sensitive investments expecting a future rise in rates. (Read Lucas a Washingtonian!)) It is hard to see that absent implicit government guarantees and incentives and regulatory inexperience in actually closing huge financial institutions. (ie large bank holding companies) that the current crisis would have unfolded as it did.

 

Agree with the last sentence 100%.

 

Seems like the magnitude of the malinvestment was sufficient to sink the ship this time around, but I'll read the guy you cite if you tell me his full name and/or the publication you're referring to.

[j_b]

Thanks to over 30 years of deregulation, 1/3 of the labor force has been pushed into part-time, temporary, contract jobs that pay a small fraction of full time employment and provide essentially no benefits.

 

But there is no crisis of the real economy pre-dating the financial collapse according to status quo apologists, so having to pay for one's overpriced health care and worthless pension plan while earning a fraction of what one use to earn couldn't have contributed to it.

[Peter_Puget]

 

Seems like the magnitude of the malinvestment was sufficient to sink the ship this time around, but I'll read the guy you cite if you tell me his full name and/or the publication you're referring to.

 

Two things:

One the loose money supply was not sufficient to create the housing debacle and two its magnitude alone was not enough to "sink the ship". Certainly an adherent of the Austrian school like you would be suspicious of any mere statistic. Don’t different malinvestments impact the economy differently. For example wouldn’t Mises/Hayek believe that malinvesments in short term projects have a different impact on the economy vis a vis long term malinvestment?

 

The type of “malinverstment’ not just the level is critical to its impact.

 

As far as Lucas his first name is Robert and he is (was?) at Chicago. Look up “rational expectations.”

 

[j_b]

The legacy of deregulation in trucking: "Sweatshops on Wheels" or "letting truckers set their own prices" according to JayB

 

U.S. News and World Report: "Conditions are so poor and the pay system so unfair that long-haul companies compete with the fast-food industry for workers. Most long-haul carriers experience 100% annual driver turnover."

 

The Washington Post: "The first credible cry in the wilderness describing the pitiful state to which the American trucking industry has fallen. The cabs of 18-wheelers have become the sweatshops of the new millennium, with some truckers toiling up to 95 hours per week for what amounts to barely more than the minimum wage. [This book] is eye-opening in its appraisal of what the trucking industry has become."-

 

Atlanta Journal-Constitution: "The first credible cry in the wilderness describing the pitiful state to which the American trucking industry has fallen. Long hours, low wages, and unsafe workplaces characterized sweatshops a hundred years ago. These same conditions plague American trucking today".

 

Sweatshops on Wheels: Winners and Losers in Trucking Deregulation exposes the dark side of government deregulation in America's interstate trucking industry. In the years since deregulation in 1980, median earnings have dropped 30% and most long-haul truckers earn less than half of pre-regulation wages. Work weeks average more than sixty hours. Today, America's long-haul truckers are working harder and earning less than at any time during the last four decades.

 

Written by a former long-haul trucker who now teaches industrial relations at Wayne State University, Sweatshops on Wheels raises crucial questions about the legacy of trucking deregulation in America and casts provocative new light on the issue of government deregulation in general.

 

How could deregulation have possibly contributed to making America's workforce more vulnerable?

[j_b]

"Just make sure you define what a trucker is and the data should be available in triplicate before anyone can even consider how deregulation was meant to drive labor costs to the bottom, which couldn't possibly have any relation to private debt levels"

[prole]

[Kimmo]

Credit default swaps definitely exacerbated the problem, particularly by giving folks the illusion that by buying them they were effectively covering the risk that the Alt-A, neg-am, no-doc pay-option paper that they were leveraging 33:1.

 

Having said that - the basic problem was and is too much debt backed up by too little collateral and income. It's difficult to tell how much worse the factors you cite made things, but the SNL crisis of the 80's and all of the other implosions going back to the South Sea Bubble indicate that you can have a world class financial crisis with nothing more than excessive optimism and/or poor lending standards.

 

IMO Greenspan's single biggest contribution to the disaster wasn't his failure to deploy the regulatory apparatus with sufficient vigor - it was keeping real interest rates at or near zero for far too long. Having said that - the bigger problem is a financial system that relies upon a single man/institution to pick the "right" interest rate. That's an impossible job. Ditto for determining the "right" capital ratio for all banks. When you couple a system with that kind of structural weakness with the likes of FNMA/GNMA, the CRA, the mortgage interest deduction, public deposit insurance, etc, etc, etc, etc, it's a wonder that we don't have financial crises more often.

 

Speaking of which - taken a look at the books for, say - the FHA loans originated *after* the nature and extend of the financial crisis began? How about the projected losses for FNMA/GNMA? Neither inspired much confidence in the inherent superiority of using bureaucratic mechanisms that are subject to massive political distortions/incentives to allocate credit/resources/capital.

 

i think much of the above is accurate, wthtout delving into the larger narrative.

 

 

except for the implicit belief that the public "bureaucratic mechanisms" should be replaced with private bureaucratic mechanisms (masquerading as a benevolent financial over-seers of the public good).

Edited February 3, 2010 by Kimmo

[j_b]

"That was discussed before and nobody can make the claim that deregulation has anything to do with a crisis that doesn't exist"