Economics
Business cycles
Running out of time
Jan 7th 2013, 3:05 by R.A. | WASHINGTON
WITH another month of jobs data in hand, economics writers can't help but note the remarkably stable pattern in employment growth. Payrolls rose by 155,000 jobs in December of 2012, according to figures released by the Bureau of Labour Statistics on Friday. Average monthly employment growth for all of 2012 was 153,000—the same as in 2011. This coincidence could be down to shortcomings in data gathering; new revisions may well nudge up the rate of employment growth in 2012. We had better hope so.
That's a disturbing possibility. At the last Federal Reserve meeting Chairman Ben Bernanke announced new thresholds that would be used as guidelines for deciding when to raise the Fed's benchmark interest rate. Based on these guidelines and the Fed's projections for labour market improvement, it reckons that rates may begin to go up around 2015—not, that is, until the economy is firmly within the window in which we would expect a new downturn. That's bad news. It suggests that the economy may be well on its way back toward recession at a time when the Fed's policy rate is at most a percentage point or two above zero. That, in turn, gives the Fed very little room to ease in response to economic weakness before running back into the constraints that have kept it, by its own admission, from addressing unemployment as aggressively as it would have had there been the opportunity to continue cutting rates.
Without an acceleration in the pace of growth, in other words, the American economy may remain stuck in this trap for more than one business cycle. That's rough news for workers. The Fed projects an unemployment rate between 6.0% and 6.6% in 2015, above the Fed's estimate of the economy's "full-employment" unemployment rate. At the pace of job growth in 2011 and 2012, the economy will only regain its pre-recession level of employment, of about 138m jobs, in March of 2015. A new recession may become a risk at a time when the economy has yet to work off the unemployment problem from the last downturn, and in a world in which the Fed is unwilling to respond as aggressively as the case demands because of its concerns regarding the risks of "unconventional" policy.
If that unpleasant outcome is to be avoided, the economy needs faster growth. Faster growth should bring back full employment sooner, reducing the risk that millions of the still-unemployed will drop out of the labour force forever, cutting America's growth potential. Just as important, an economy that's running hotter will generate upward pressure on interest rates sooner, giving the Fed more time to ease rates up in order to give itself a cushion to slash its policy rate into the next economic swoon.
The Fed often behaves as if time is no worry. It is. The longer current conditions persist, the greater the odds that the economy will suffer large and quasi-permanent damage from the 2007-9 recession. And the greater the risk that the Fed goes into the next downturn with its quiver empty of its favourite arrows. That will mean that the next downturn will be deeper than it should be, saddling with country with still larger an unemployment problem. That threat is a pretty good reason to worry less about (if not actively court) more inflation.
And because it's the worry of the day in Washington it's worth pointing out that current, disappointing growth rates make it harder to stabilise growth in the government's debt load, while the Fed's zero interest rate problem means that fiscal policy may have to do more of the job of economic stabilisation next time around. Of course, if America is bound to stay stuck in a low-growth equilibrium for the foreseeable future then, like Japan, it may be able to run up enormous piles of sovereign debt with little impact on interest rates. But elected officials squawking about America's fragile fiscal future ought to be more worried about present growth.
Our economics correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts
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Fundamentally, economy growth can only come from innovations. If people insist on doing the same thing even when it's not working, we're not going to see too many of those.
Given that US business cycles in the past have typically ended when the Fed raised interest rates to a level which brought on a downturn -
I'd suggest that this particular business cycle will last longer than those of the recent past.
For example, the data I've seen suggests that the Great Recession was brought on when the Fed raised rates to 6% in 2006, which in turn re-set mortgage ARMS for those home owners who couldn't afford them, etc.
With this in mind, I'd be surprised if a Fed rate of 2% at 6%+ unemployment would create the same kind (or similar kinds) of downturn.
While the author is correct to worry about future reception coming without substantial recovery and that the sooner unemployment drops the better, the questioned should be posed of whether past performance is indicative of future results? It very well might be but time surely not the only variable in an economic cycle. GDP lost during a prior recession vs recovered as well as net change in employment might both be interesting factors to examine. The U.S. needs to better address its failure to relaunch but we need also need compelling arguments to trigger action.
Wow... okay so lets talk about this a little. I love the you brought up that most economic expansion has averaged 96 months or so. This is important as the limited growth rate that we are currently experiencing is a troubling tell on the chance of a new recession hitting before we have clearly gained full employment.
However I actually disagree with many aspects of the current economic conditions. The slow growth has been an artifact of new regulations and a clamping of business. An unfortunate amount of growth has come from Government subsidizing the current methods of revival. I expect a quickening of growth in the short term, leading up to the next bubble burst. But by the same token I expected a shallow recession to hit in late 2012, which did not materialize due in part to the FED QE policies.
Nevertheless the $200 Billion the USA has shifted back to Revenue will again shift a good portion of spending away from the economy and cause additional pain in the short term. The economy has been growing at only around $600 Billion a year as it is ( again mostly due to Government )
This means that we will be losing a third of the growth that we expect this year to the revenue vs spending increase of the Government. I would not expect any faster growth in the private sector in the coming year, whereas there will be moderate growth in the Public Sector.
Inflation is biting heavily at the heels of economic increase as well. This year should be slightly worse for inflation even as the economy slows down a bit due to the removal of the temporary 2% payroll holiday.
Lastly the most concerning number for me is no longer the U3... Lets face it the U3 is a good method of looking at the economy when there is gainful employment occurring. Right now the U6 is a better indicator for real understanding and it is to be frank very disappointing.
The only thing you can really say for this economy right now is that things could be worse than they are. I am fairly worried about the coming years.
Well of course the recovery is subsidized by the government. That's what governments are supposed to do in demand based recessions. It's actually unfortunate that they're not picking up more of the slack. Pre-recession in the 2000s the annual growth rate for government expenditures alternated between 1 to 3%. From the recovery on, it's gone between -1 to 2%. Government employment has decreased in nominal terms as well, providing a major drag to employment.
You're also going to need to provide some kind of evidence for that "new regulations are clamping growth" line.
Inflation is also below target. For all of the above, FRED is a fantastic resource to see real data.
I do agree, however, that cutting the deficit and cutting demand right now will not be compensated for by the private sector, which would be an insane thing for anyone that cares about economic growth to do.
Dean,
In 2008 and 2009 Outlays by the Federal Government jumped by 9.3% and 17.9% respectively. In 2011 & 2012 it was 4% and 5%. Now if you are talking 'total' Government Spending as states have actually taken the time to get their fiscal houses in order you are correct the values have been considerably smaller than that.
As for regulation over the past 30 years clamping down growth... I cannot even believe you would question that. Industries are writhe with it. For instance the DO Not Call Telemarketing law pretty much decimated an industry.
This is not to say the regulation is not needed or wanted but that it does have overall economic impacts that ripple through the economy.
The new AHA law is having and will have a similar effect transforming the very basis of healthcare into a new and more expensive animal. Again not disagreeing with the law but it transforms the economy changing the allocation of resources in a dramatic and not necessarily good way strangling off large segments of capital for other use.
Lastly, Government continues to increase its presence in the economy. Perhaps for you this is not an issue. There is a reason however you simply do not print money enough for everyone to live on and send them a monthly check.
Yes inflation is well below target, it has to be when the main object has been the reduction of workforce (U6) as I mentioned above. The Velocity of money has had a major set back and people are doing more with less.
None of this bodes well for the future (long term) in the short term I see employment recovering at the same pace it has with slight acceleration, I see a new normal as far as growth is concerned, etc and so on.
Keynes was a genius and saw a way to minimize the impacts of a recession. However it comes at a cost that we have not had enough time to understand. This is an observation simply based on emotional logic as we have not reached the tipping point of what I expect to see. Of course I did the same thing with the Housing market back in 2005 and everyone said I was off my rocker then. Maybe I am.
Government has made it more difficult to create industry, if you disagree with that I shudder to think of what you think it has been doing over the last half century. If you disagree with that... Well I can send you just about every law that has been passed over the last fifty years and highlight 60% of each law pointing to economic impacts the laws have fostered.
Finally as for spending more money via the Federal Government. Yes you are correct that it would accelerate the rate of growth. But simply fostering growth without basing it in a solid industry that will continue to produce, creating a facade of money and its management, does not create a strong economy and you find out before long you are back on the dole so to speak as each new recession hits. The average rate is what, every 96 Months as the article says ( I view it as a 7 to 9 year cycle )
Does the Government simply apply this principle every time?
Since balancing a budget of necessity means ultimately slowing down said growth is it a practical solution? Unlike many the concept of robbing Peter to pay Paul is not an cycle that may last forever despite what you may feel.
Also Keynes himself said it would result in disaster for a country to borrow while it had a trade deficit. I am interested to see if ultimately he is correct.
1) State and local governments aren't "getting their houses in order," they're broke because their budgets are pro-cyclical. Where's the evidence that there was an actual, on the ground case for cutting police employment by 8.4% during the recession and recovery? Moreover, it's not that the values are "smaller," it's that they're negative. The country's bigger than it was before the recession but there are less people working for the government in absolute terms.
2) I'm not weeping for the reduction of the telemarketing industry. Obviously regulations have effects; that's the whole point. I'm just not seeing any sign that new regulations are a net drag on the economy. EPA rules are preventing expansion of coal capacity, but enhancing the expansion of natural gas capacity. Financial regulations place a minor drag on profits in that industry, but I don't see any reason to believe that their long term cost is above their benefits. What's the industry being held back by the feds? Sure, local services are held back by licensing requirements, but that's not on the feds. I suppose the telemarketing, spam email, and fraudulent mortgage industries have been hurt, but again, I'm not weeping for them.
3)Growth is never based on one industry (in this country, at least). That's a recipe for disaster. Growth comes from a lot of places at once; that's why planned economies don't work. We're very obviously in a demand recession (low rates, low velocity, low inflation) from private sector deleveraging, which absolutely argues for greater government spending to fill the gap. Unless you think that 7.8% unemployment is a good place to stay.
4) When interest rates are this low, it's ridiculous to say that capital is "strangled" and not being made available for productive uses. There is an excess of capital right now.
5) "Well I can send you just about every law that has been passed over the last fifty years and highlight 60% of each law pointing to economic impacts the laws have fostered."
Please do. I'm very interested in this 60% number.
1 ) When you are no longer bringing in revenue that allows for continued employment of people you HAVE to downsize. Only government would pretend otherwise. You do not increase your payrolls when your company is losing money. You cannot spend more than you take in. However this was then counter-balanced by the Federal Government which expanded its outlays considerably.
2 ) WOw... Okay I show you a case where the economy defiantly lost momentum, and now you can argue that it went to a different industry but the truth is that the economy lost ground due to regulation and then you say that you do not see it happening. You then suggest that the net effect really only goes somewhere else? First of all we became happily lucky that NG boomed while Coal got hit and you can say it was 'bound' to happen but the truth is that a technology was developed that aided in a different retrieval system that had nothing to do with anything but industry trying to find a better way.
You think only FRAUDULENT MORTGAGES have been hit by by the new regulations passed? Really? I know of several banks that have CLOSED because they could not afford to continue with the costs of the new 'Too Big to Fail' requirements???
http://www.americanbanker.com/bankthink/thanks-to-dodd-frank-community-b...
Wow, I mean honestly Wow... Do you honestly have your head in the sand? When you regulate something it has economic impacts. Sometimes good sometimes bad. What the heck do you do for a living?
3 ) The Government has a place in economic development. However the concept of simply throwing money at the situation is in itself destabilizing. It actually causes a mismanaged growth in the private sector. In other-words what are the industries that are 'growing' right now? The Problem with 'Growing Government' to fill the gap is that unless you then have the same growth in private industry you tilt the balance even further to the side of Government not being able to pull its weight. It is exactly what occurred During the 2000's!
4 ) Wow, okay WHY are rates this low? How easy is it for you to get a $500,000 - $1,000,000 loan in order to begin a new Business? If you are a major player you have the ability to better finance your continued growth but if you are NOT it is difficult to go forward. Again I am trying to figure out what industry you work in that causes you to have this misaligned view of how capital is working in the current economic situation. Rates are low #1 because the Fed has pushed for it and #2 it is damn hard to get a loan for anything other than established purposes that have little to no risk involved.
5 ) 60% is an off the cuff number based on the number of laws I have delved into in plotting a course for my own business. They center around what you can and cannot do or what Governments response should or should not be. These have in effect a limiting power to the kind of economic choices you can or cannot make. BTW I have never found a company that is not disobeying in one form or another a law that has been written to regulate it. It is just that most of them are far to silly to comply with, not even the regulators abide by all of them.
Have you ever read a law? I am most likely being generous at the 60% level rather than saying 99% of laws are meant to change the economic outcome of a society. But hey I am willing to allow for a portion of it regulating the way government runs things ( which again has an economic impact)
Please tell me you do not like Paul Krugman, you sound thus far much like a parrot of his.
The obvious fix here is a combination of fiscal/ monetary policy.
The US federal government should issue an extra $500-800 billion annually, and use the proceeds to buy financial market assets (equities, corporate bonds, some investment banks, some venture capital, etc, domestically and internationally). Borrow at low yields & invest at higher yields - reduce net debt.
The impacts of this would be:
- to support growth in the investment share of GDP (which is good for demand today since demand is what collapsed in the recession, and is good for long term growth since productivity growth is embedded in new capital investments).
- to provide sufficient liquidity (for meeting debt payments, for meeting expanded payroll commitments, for supporting higher inventories & trade volumes, etc) for which there is especially high demand today, as evidenced by very low liquid asset yields and very high yield spreads. This is especially good for growth.
- to reduce the burden of government debt (thanks to investment proceeds)
- to drive up yields on treasury bonds somewhat (especially in the long term, but even in the short term) for the prevailing level of economic activity & inflation. In other words, this would support progressively tighter policy by the Federal Reserve over the next couple of years, which would create more room for cutting rates when the next recession hits.
It's time to do what Sweden & Finland did in the '90s - issue extra government debt to build a really big sovereign wealth fund.
-----------------------
The US does still need other structural reforms (on fiscal policy, regulation, trade relations and in many institutions). But the above is the correct fix to lift America out of the hole of inadequate demand & failing monetary policy tools.
Here in is my issue with what you are saying. How would the USA not develop major conflicts of interest in investments?
Why not simply print more money to pay down debt rather than use a convoluted process to do the same thing?
None of your suggestions would not cause growth but in many ways except for the 'investment' part the USA is already dong much of this.
Finally, how would your proposal not cause inflation to surge? Do you realize the ramifications of this? Sweden and Finland are a much smaller portion of the Worlds GDP and have populations a fraction the size of the USA. I would expect their economies to differ in the practice they used.
WTF, Shaun - the Fed is issuing $1-trillion a year (like 7% of GDP) in QE-money right now. How much do you want them to do?
Government issuing debt to invest in diversified higher yielding (i.e. non-money) financial assets is far from QE; a smaller quantity of wealth-fund-building intervention will do far more to expand the money supply today, while it's also much easier to unwind.
A large wealth fund is inherently stabilising too - asset sales (to mop up government debt & fight inflation) are the right approach in a good time, while debt issue to buy assets is the obvious response to economic weakness.
Any private entity that was able to issue sovereign bonds would do precisely this - you know it. So why shouldn't government?
All the economists that are listened to by the Fed have all been educated to believe in a NAIRU based model economy. William S Vickrey (a noble prize winner in economics)dispelled that theory and predicted the meltdown of 2008 exactly as it unfolded. He espoused his theory of a FULL EMPLOYMENT model but no one in power was interested, because no one in power profited by it.
Sept 1994, Goldman Sachs reported on his full employment budget gap.
SOLVE the unemployment problem and you solve the deficit problem.
The Democrats and Republicans are too busy fixing the blame to be worried about solving the problem. THAT'S the problem.
"... a world in which the Fed is unwilling to respond as aggressively as the case demands because of its concerns regarding the risks of "unconventional" policy." (RA)
That'll be a brave (and uncharacteristic) new world indeed - any Fed that isn't afraid to do $85 billion of QE every month when the economy is growing at like 3% a year, well ... that kind of Fed doesn't have to prove its QE-courage (and political sycophancy) to anyone (with a brain).
RA's brave new world is less troubling than the bizarre present world as perceived by him, one where it is presumed -
Inflation generates employment
Expansions die of old age like blossoms in a fall garden
No catastrophe is worse than 8% unemployment
Central banks have the ability to create jobs at will
Debt doesn't matter
Here’s a thought worth of an appearance in front of a leftist- PC-firing squad, RA –
Maybe CB-activism makes things worse over time, not better? Asinine - right, RA?
We have tried Keynesian fiscal spending and monetarist credit expansion for 5 years since the beginning of the recession and we’re stuck in low growth. Reasonable people might suggest trying something else, but the monetarists and Keynesians demand that we stick with the failed policies and try harder.
Japan has tried the same approach for 20 years and failed. How long does failure have to continue before Keynesians and monetarists admit defeat?
The academics and bureaucrats whose bad policy-advice has led us to distress will never abandon 'CB-activism' - for them it is like received wisdom from God, though most of them have a higher opinion of themselves than they do of God.
Also worth mentioning - their cushy bureaucratic sinecures and status as 'people who matter' both end when CB-activism ends. The academics would have to confine themselves to teaching - they'd rather kill and eat their children than do that.
Forever Unfortunately...