Thursday, January 08, 2009

Obama fiscal policy 

I was speaking earlier today on Ed Morrissey's show about the Obama speech today. Note that Ed used the picture of Amanda Carpenter instead (who occupied the first half-hour of the show.) Ed knows his audience.
Broadcasting Live with Ustream.TV I didn't see the Obama speech so I worked from a transcript. A few comments.

Ed played this for me:
We start 2009 in the midst of a crisis unlike any we have seen in our lifetime, a crisis that has only deepened over the last few weeks. Nearly 2 million jobs have been now lost, and on Friday we're likely to learn that we lost more jobs last year than at any time since World War II. Just in the past year, another 2.8 million Americans who want and need full-time work have had to settle for part-time jobs. Manufacturing has hit a 28-year low. Many businesses cannot borrow or make payroll. Many families cannot pay their bills or their mortgage. Many workers are watching their life savings disappear. And many, many Americans are both anxious and uncertain of what the future will hold.

Now, I don't believe it's too late to change course, but it will be if we don't take dramatic action as soon as possible. If nothing is done, this recession could linger for years. The unemployment rate could reach double digits. Our economy could fall $1 trillion short of its full capacity, which translates into more than $12,000 in lost income for a family of four. We could lose a generation of potential and promise, as more young Americans are forced to forgo dreams of college or the chance to train for the jobs of the future. And our nation could lose the competitive edge that has served as a foundation for our strength and our standing in the world.

In short, a bad situation could become dramatically worse.
"All we have to fear is the status quo," I think, is how Ed characterized that. But I think much of this is hyperbole. Take for example "2 million out of work." The context for this is a workforce over 140 million people. Through November, the 12 month percentage change in employment is a decline of 1.4%. (You can play with the data.) This doesn't even match the 12-month percentage change in March 2002, hardly a period that called for the drama of this speech. Payroll employment declines of 2.5% or more have occured in both the 1974-75 and 1981-82 recessions. We may get to that level; I think that's more likely than not some time in the next six months, at which point you will say "4 million out of work" rather than two. But let's keep some perspective rather than dwell on "we could lose a generation of potential and promise." That's just bathos. Four million jobs lost sucks, but it's not without recent precedent when the size of the economy is accounted for.

That same perspective is needed elsewhere. 2.8 million more people involuntarily in part-time work? Take a look at the data. 25% of them are workers age 16-24. We don't have data before 1994 for the unemployment series that includes part-time workers who wish they were full time (known as U-6), and we know it's higher than it has been since we've tracked the current series. But it was pretty high in 1994, also not a date when we thought the end of the world was nigh.

The lost GDP? From CBO's budget outlook, it's on a par, in percentage terms, with the 1974-75 recession. (See Figure 1 in the link on page 2.) Indeed, if you take that 8% gap and use Okun's law, you'd estimate excess unemployment of 8/2.5 = 3.2% approximately. The CBO estimates the natural rate of unemployment to be 4.8%, so the expectation from that would be an average unemployment rate in 2009 of 8%. Again, not that far out of line from other recessions, and better than 1981-82.

8% has only a single digit.

Don't believe me? Ask CBO:
By CBO�s estimates, economic output over the next two years will average 6.8 percent below its potential�that is, the level of output that would be produced if the economy�s resources were fully employed. This recession, however, may not result in the highest unemployment rate. That rate, in CBO�s forecast, rises to 9.2 percent by early 2010 (up from a low of 4.4 percent at the end of 2006) but is still below the 10.8 percent rate seen near the end of the 1981�1982 recession.
9.2% is a little high based on the Okun gap calculation, but certainly plausible for a one-month peak somewhere out there. Note that it's rather unusual to be above potential GDP, and usually being above means inflation. This yardstick is usually used to discuss the size of the budget deficit (notably, once TARP, Fan/Fred subsidy and the recession are pulled out of the calculations, the deficit is estimated to fall in the area of $250 billion.)

Rahm Emanuel noted that the new administration didn't want to waste a crisis, that they could pass things in crisis mode that wouldn't get past Congress in normal times. The speech tries to elevate a normal recession into a crisis. In doing so it risks imposing a solution to a problem that doesn't exist anymore when fiscal policy works through its lags. As John notes in that article, Bruce Bartlett has argued that passage of fiscal policy legislation has been a pretty good predictor of the end of recessions. Could it happen this time? The last two big recessions lasted about 16 months. If the recession started in December 2007, that puts you at April this year. Not sayin', just sayin'...

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