Monday, December 14, 2009

Administration views on recession dating 

Dave Prychitko finds a nugget in Council of Economic Advisers chair Christina Romer's appearance on Meet The Press yesterday:
MR. GREGORY: When do you expect you will be able to say the recession is over?

DR. ROMER: Well, I'm not going to say the recession is over until the unemployment rate is down to normal levels, until...

MR. GREGORY: Which would be?

DR. ROMER: You know, again--are you asking me, you know, timing?

MR. GREGORY: No, what's a normal level?

DR. ROMER: Well, the normal, you know, where we were before the recession is sort of in the--certainly in the 5 percent range. That is, you know, what Americans are, are used to.

MR. GREGORY: Can that be accomplished in a year's time?

DR. ROMER: Well, it--we'd have--I think we're going to--it's going to take--you know, this recession took a long time coming, it's going to take a long time coming out. We can make incredible progress. We can get that unemployment rate coming down.
Prychitko thinks the administration will declare victory long before then. CBO projected in August the unemployment rate to by 9.1% in 2011 and to average 6.4% between 2012 and 2013. 5% is in the area of CBO's estimate of the natural rate of unemployment. What that would seem to mean is that she won't declare the recession over until we are near the peak of the expansion.

President Obama on 60 Minutes last night had a lot more to say.
Here's what I know. That when I walked in to office, we had gone through a debilitating financial crisis. The banking system was close to meltdown. And in that first quarter, we lost over 3 million jobs. In December, we lost 681,000 jobs. That's before I was sworn in. January, 700,000 jobs. That was just about as I was being sworn in. The following month, before we had put any of our programs in place, we had lost another 681,000 jobs, and it just kept on going.
I can forgive the addition error on 3 million jobs lost in the first quarter -- it's more like 2 million -- but he's still trying to parcel out blame to others. He does it a minute later:
Now, what we had to do was he had to make sure that there was some buoy, some stabilizer in the economy so that it didn't go into a Great Depression. And that's why we passed the Recovery Act. And for all the criticism that it received from the other side --and we got no help from any Republicans, other than a couple, in passing it -- what we now know and every economist who's looked at it will acknowledge this, is that it helped us [stem] the panic and get the economy growing again. And it probably saved somewhere between a million and a million and a half jobs.
I really liked what Russ Roberts said about this last week:
In biology, a biologist doesn't pretend to know how many frogs there are at a particular point in time in the rain forest. He may have an estimate but if you ask him well "how many will there be in six months?", he can't give an honest answer about that. He can't even give you an honest answer and he won't pretend to give you an honest answer if you ask him well "what will happen in six months if something changes in the rain forest to the frog population?" That's what we expect of economists and that's wrong. We're not good at that.
Not that we don't do it -- we do, and I have. But I also teach on the difference between extrapolating within sample and outside of sample, and the truth is we don't have any datapoints that look close enough for me to say whether it's one or one million jobs saved or created. Given an annual benchmark revision to employment data that is about +/- 275,000, I don't think we know.

The President continues:
All right, so financial market stabilized, economy growing again. The problem we now face is that in any recession, job growth is what's called a lagging indicator.
Which, I believe, contradicts Dr. Romer.
Businesses don't start hiring again until they have some confidence out there that there's actually a market for additional goods and services. That's always true in any recession.

Usually, it's worse when you have a big financial crisis like this that prompts the recession. And this one's been exceptionally bad, partly because businesses were very spooked, and it was a global crisis. But partly because, frankly, businesses have figured out that maybe they can sustain themselves just with fewer employees producing the the same amount of goods and services.
At this point one would have hoped Steve Kroft would have asked two questions:
  1. Mr. President, what policies have you taken that would give businesses some confidence that there's a market for their goods and services?
  2. Mr. President, why do you think firms keep redundant labor on hand?
Perhaps it's not redundant labor -- perhaps it's labor whose marginal cost potentially going to be lower soon, so businesses are waiting to hire until you come through with those potential tax credits.