Uncertainty


The graph above is from an ABC/Washington Post poll that’s been taken for the last 35 years or more. The detailed results are here. As you can see over the period of the last 12 years optimism about our system has given way to uncertainty about it.

To some degree I think that’s unfair. Today we have more information, more timely information, and more detailed information being dumped on us at a faster rate than ever before and that includes information about business, the economy, and government. The wisdom of Bismarck’s remark that anybody who likes law or sausage should never watch either of them being made and the Scottish proverb “Never show a fool a job half done” becomes apparent. Even at its very best the working of government is messy and unsatisfying. Very few issues are resolved in an hour or even in a six week story arc with heroes rewarded and villains punished. Some thorny issues are never resolved at all—they can merely be accommodated to.

However, I think that some of the change reflects the increasing detachment from or even indifference of policymakers to the realities that ordinary people experience every day. So, for example, when Ben Bernanke dismisses inflation as a problem and the Federal Reserve in its most recent official statement characterizes the underlying inflation as “subdued” while most people see the prices of most of the things they buy on a daily basis, e.g. food, gas at the pump, rent or mortgage payments, and utility bills seemingly rising on a daily basis and their wages remaining flat or rising much more slowly. I doubt that most people take much solace in the fact that Dr. Bernanke is technically correct. This conflict produces uncertainty.

When the Obama Administration made the decision to oppose expedited review of the challenges to the Affordable Care Act by the Supreme Court it may have been the right one from a tactical standpoint to defend one of the administration’s keystone accomplishments but, if successful, one of the strategic outcomes will be uncertainty as to whether the ACA will stand or not.

Failure to take a decisive position on the upheavals going on in the Middle East may be prudent but it also produces uncertainty. Strategic ambiguity has its benefits but also its costs.

When will the last American soldier return from Iraq? Unknown. The last American soldier return from Afghanistan? Unknown. Will China become the world’s leading economy? Unknown. The list is endless.

The amazing thing isn’t that uncertainty has supplanted optimism over the last twelve years but that there’s as much optimism (and pessimism) as there is.

Uncertainty has its own costs. When you’re uncertain about the future you’re less likely to take risks. An employee may decide not to take that new job. A consumer may decide not to make that additional purchase. That manager may decide to hold onto cash to see what happens next rather than expanding his business.

25 comments… add one
  • “Never show a fool a job half done”

    Or … as applied to the Agitator-In-Chief and national security policy, especially in the Mideast: “Never give a fool a half done job to finish.”

    d(^_^)b
    http://libertyatstake.blogspot.com
    “Because the Only Good Progressive is a Failed Progressive”

  • Yes, that’s why, despite the promise of a decent pension and lifetime health care, I’m still saving 25% of my income.

  • john personna

    I think I glimpsed an old software coworker yesterday, bagging groceries at Trader Joes. The guy is late 50s.

    Maybe that kind of thing always happened, but you know, when it starts to look like a demoghraphic that uncertainty goes up.

  • Icepick

    I agree with jp’s comment.

    The amazing thing isn’t that uncertainty has supplanted optimism over the last twelve years but that there’s as much optimism (and pessimism) as there is.

    Why are you surprised by the pessimism? That’s around the level of U-6 unemployment if you add the workers who have allegedly dropped out back into the total. As jp said, it looks like a demographic. Add in decades of wage stagnation and I’m surprised that pessimism is that low.

  • Uncertainty has its own costs.

    This is precisely Robert Higgs’ point. He points to regime uncertainty that followed the Great Depression and he argues we are, to some extent, repeating the mistake…hence the slow recovery.

  • john personna

    The only thing weak about your statement Steve is the claim of causality: “hence the slow recovery.”

    I think the reason we are stuck has more to do with household balance sheets. This recession came with a multiple whammy: real estate crash, credit crash, stock market crash(*), unemployment. It’s pretty hard to find anyone who didn’t take a hit from one of those.

    As a result, some have pulled in their horns on spending, and some who would be profligate just can’t get the credit

    … hence the slow recovery.

    * – the only one to show a seeming recovery so far

  • Household balance sheets doesn’t really explain poor investment numbers though on the part of firms that are supposedly swimming in cash.

    Looking at annual GDP numbers we see that real GDP and real PCE have not only returned to their pre-recession levels they have exceeded them. Where we are significantly lagging is in investment. We saw a similar lag in the last recession, and the effects on unemployment lasted quite some time.

    Oh and unemployment always goes up during a recession.

  • john personna

    Sure they do. Poor household balance sheets, and reduced consumer credit, are behind reduced demand.

    I think those rebounds in GDP happened in corporate “productivity” gains, exactly the opposite of putting $in workers pockets.

  • That doesn’t explain the rebound in PCE, and that has rebounded as well. Granted it is still likely below where it would have been absent the recession, but the “lack of demand” argument I find less than convincing when firms are supposedly hoarding cash.

  • john personna

    PCE? Can’t that just be QE2 (with a double oil effect)?

    Re. “lack of demand” I think even Drew told us recently that businesses had cash but didn’t see the opportunity for productive investment. I certainly took that to mean they could spend, but didn’t anticipate demand.

    Where would you look for demand right now?

    http://www.consumerindexes.com/

  • Icepick

    Where is the personal consumption supposed to be coming from? Even the people I know that are sailing through the recession have cut back. More concretely, aren’t state sales tax revenues still below the pre-recession peak? That seems to be at odds with PCE doing all that well.

  • john personna

    The latest data from the Federal Reserve suggest defaults have played a big enough role that “paying down” would be a misnomer. By our own estimate, based on the Fed data, banks’ and investors’ charge-offs — the result of defaults — lopped $822 billion off households’ debt load from mid-2008 to the end of 2010. In other words, net of defaults, consumers actually borrowed an added $163 billion.

    That calculation alone, though, doesn’t provide a full picture of consumers’ change in behavior. They may be adding debt, but they’re doing so at a much slower pace than during the housing and credit boom. Net of defaults, household debt grew at an average annualized rate of only about 0.5% from mid-2008 to the end of 2010. That compares to about 10.5% in the preceding decade, a difference of 10 percentage point

    http://blogs.wsj.com/economics/2011/03/19/number-of-the-week-household-debt-may-be-accelerating-again

  • Yet PCE is up….or you have to argue that the BEA’s numbers are wrong. PCE peaked in the 4th quarter of 2007, bottomed out in then second quarter of 2009, and was nearly back to its 2007 4th quarter value by the third quarter of 2010. Is it stellar? No. But it is far better than the trajectory that investment has been on.

    Investment peaked in Q2 2007, bottomed out in Q2 of 2009 (a longer period of contraction) and has yet to fully recover (longer recovery period). Q4 investment spending is on par with investment spending back in Q1 2002, and Q3 2010 investment spending (the highest annualized number since the recession) we’d have to go back to Q3 2003.

    So, I think the focus on demand–i.e. consumer spending–is incorrect. Add in the stories of firms sitting on vast amounts of cash and one has to wonder, is it really the consumer spending?

  • And no it isn’t QE2 because the numbers I’m looking at are real numbers, i.e. take into account inflation. Same for oil, and the run in oil prices don’t work for all of 2010. Oil prices have really taken a sharp upswing in the past couple of months…that is in 2011, so that doesn’t explain 2010.

  • Icepick

    Steve, where is the PCE recovery coming from? Unemployment is up HUGE from 2007. Those folks aren’t spending like they used to. A great many other workers aren’t making as much as they used to, and they aren’t spending like they used to. Housing sales continue to at best bounce along the bottom, both in numbers sold and price. A very large number of people are underwater on their homes. Auto sales are below 2007 levels last I checked. Where is the spending? It can’t all be iPads and Droids. I suggest that the BEA is missing something if they think spending has returned to normal levels for households.

  • Icepick,

    The uptick is coming in lots of areas.

    http://www.bea.gov/national/nipaweb/nipa_underlying/SelectTable.asp#S2

    It is both goods and services, yes motor vehicles and parts is still down, but just about everything else is back up past its Q4 2007 numbers. Looking at the monthly numbers here are the categories where consumption expenditures are still behind Dec 2007 (start of the recession):

    Motor vehicles and parts
    Other durable goods
    Gasoline and other energy goods
    Transportation services
    Recreation services
    Food services and accommodations
    Financial services and insurance
    Other services

    Here is where PCE is at or above the Dec 2007 levels:

    Furnishings and durable household equipment
    Recreational goods and vehicles
    Food and beverages purchased for off-premises consumption
    Clothing and footwear
    Other nondurable goods
    Housing and utilities
    Health care

    BTW if the data is wrong you’ve got nothing. You have nothing you can point too other than anecdotes. Again, less than convincing.

  • Well damn, looks like my response was eaten up.

    Oh well, go here and you can see which categories of PCE are up and which ones are still lagging behind their pre-recessionary levels.

    Link

    I’d recommend table 2.3.6U.

    And I’ll note that if you have no data you’ve got nothing other than anecdotes. Not exactly compelling evidence.

    Hopefully my first post will show up and is just needing approval.

  • Icepick

    Steve, FIRE was a huge component of the pre-crash economy. It hasn’t come back. Is that really made up by take out food?

    Yes, I am speaking of anecdotes. Such as (at least) 7.7 million jobs lost. Four million people who have dropped out of the workforce entirely. 14.5 million officially unemployed and similar amount working part-time for economic reasons. Labor participation rates that have cratered. I’m speaking of almost 1 in 5 houses in Florida sitting empty. I’m speaking of all the strip malls that are mostly empty I see when I’m driving around. I’m speaking about several decades of stagnant income growth for the bottom 80%. I’m speaking of corporate productivity gains in the last three years that have resulted in no wage growth for the employees.

    Oh wait, only one of those is anecdotal (the strip malls), and it’s not like commercial real estate is doing gangbuster business right now.

    What I am saying is that something is very rotten with the BEA numbers if they are claiming that PCE is back to pre-recession levels. I can believe that healthcare expenditures are up, and that can make up a lot of ground. But that is NOT A GOOD THING.

    Further, how has housing spend recovered if sales are down, prices are down, AND people are leaving expensive homes for cheaper accommodations? People that CAN/MUST cut back on housing expense have done so, and a great many others are now underwater and wishing they could cut back their expenditures. If they can’t do so that would look like a good thing for PCE, but be a bad thing in reality, just like healthcare expenses being up.

    Even if the numbers somehow work out and hold up to scrutiny, how can the numbers be considered meaningful if they don’t actually reflect reality? I grant that my own circumstance colors my opinion, but it’s not like I’m imaging massive long-term unemployment in the country, or any of the rest of it. Something is very wrong with numbers that tell us things are mostly fine when clearly things are NOT fine.

    Worshipping numbers for their own sake and growth for its own sake seems to miss the actual experience of reality. For example, the jobs that have been “replaced” have generally been lower paying than the jobs originally lost. But getting a charge out of adding 192,000 jobs (like most CNBC anchors) in a month misses that point. One has to look deeper. Yes, that often means looking at other numbers. It also means interpreting their actual relation to reality. And I suggest one needs to look deeper at the PCE numbers to figure out what if anything they are telling us.

  • Icepick

    Looking at table 2.3.6 I see that market-based PCE excluding food and energy is up ~$96B over the time frame you mention. Healthcare expenses pretty much covers that. Some of that can probably be explained by the aging Boomer population – each year we could expect them to spend a little more even if that costs for individual components remained the same. Again, I don’t see how this is a good thing.

    Also, I misunderstood the off-premises food category. I don’t see a population adjustment. Are gorcery expenses just up because the population has grown? For that matter, has the population grown?

    Clothing and footwear expenses have a big bump up in Q4 2010 from the previous two Q4s. Perhaps that’s pent up demand and people buying now because they NEED to buy new clothes eventually, or perhaps that is a sign that things have recovered. We’ll know this time next year.

    Overall it looks like people have cut back on expenses they could. But we’ve all got to eat, almost all of us get sick at some point or another, we would prefer to have housing. The only thing that sticks out ot me is Recreational Goods and Vehicles. That is up, and substantially so. No idea why that is the case. Smartphones and apps? iPads? No idea. People buying relatively inexpensive toys when they can’t buy (or sell) houses & cars? But that number only dropped on a quarter-to-quarter basis (that is Q4 to Q4) for three quarters – 2008 Q4 thru 2009 Q2, the worst of times.

    But just scanning those numbers they don’t look terribly convincing. All spending is not created equal.

    And look at the years 2000 thru 2003. PCE rose every single quarter back then, even through the recession and stock market crash. That’s also true for market-based PCE excluding food and energy for that time period. So maybe PCE isn’t all that great an indicator of the health of the economy if it can monotonically rise DURING a recession.

    In fact, from Q4 2007 to Q4 2010 PCE only rose ~$96B. The only two y-o-y quarterly comparisons that are worse than that in the early 2000s are still ~$83B and ~$60B, and that’s Q1 and Q2 from 2000 to 2001 – dropping into the recession. It has taken us three years , including 6 quarters of recovery, to match what the earlier recession almost did DURING the recession.

    Unless you’ve got something else, I’m starting to think that the PCE (even the market-based minus ENERGY & FOOD) doesn’t look like it is indicating that we have really recovered. I’m too tired to crunch the numbers now, but in percentage terms 19 months of recession followed by 18 months of “recovery” looks a helluva lot like a 3 year long recession, in comparison to the recession of 2001.

  • Icepick

    The 83B and 60B in the next to last paragraph are still positive gains, y-o-y. I’m not sure that’s clear.

  • Yes, I am speaking of anecdotes. Such as (at least) 7.7 million jobs lost. Four million people who have dropped out of the workforce entirely. 14.5 million officially unemployed and similar amount working part-time for economic reasons. Labor participation rates that have cratered. I’m speaking of almost 1 in 5 houses in Florida sitting empty.

    No these sound like estimates, not anecdotes.

    I’m speaking of all the strip malls that are mostly empty I see when I’m driving around.

    This is an anecdote as you note.

    I’m speaking about several decades of stagnant income growth for the bottom 80%. I’m speaking of corporate productivity gains in the last three years that have resulted in no wage growth for the employees.

    While this might be a factor in our current problem it is also likely the result of several decades worth of horrible policy that has resulted in most increases in income going into non-wage compensation. But still it doesn’t really get to the issue at hand, the sluggish economic recovery. BTW you are NOT going to fix the above problem. EVER. If it does get fixed you and I will likely be dead for several decades. The solution is to get rid of employer provided health care benefits or tax them as income. Good luck with that.

    What I am saying is that something is very rotten with the BEA numbers if they are claiming that PCE is back to pre-recession levels. I can believe that healthcare expenditures are up, and that can make up a lot of ground. But that is NOT A GOOD THING.

    I thought the narrative was that spending is spending and who cares if it is on health care or pyramids that will be totally useless?

    Further, why is it not a good thing? I mean provided the increase isn’t just due to price increases. If it is making people better off then it is a good thing. If on the other hand the spending increases is just due to cost increases and not actually resulting in enhanced welfare for consumers then yeah its not good. Kind of hard to tell from the BEA data alone.

    And look at the years 2000 thru 2003. PCE rose every single quarter back then, even through the recession and stock market crash. That’s also true for market-based PCE excluding food and energy for that time period. So maybe PCE isn’t all that great an indicator of the health of the economy if it can monotonically rise DURING a recession.

    Where am I saying the economy is doing well? I’m saying that the recovery is sluggish…i.e. the economy is not doing well, or could do alot better. Also the 2001 recession was actually considered to be very mild. Both shallow and short compared to previous recessions.

    And, I’d argue you are making my point for me, but you probably don’t see it. The current mantra is its demand–getting people spending more money. You point out that people spend even during some recessions, and that PCE recovers quicker than other components of our economy…components like investment that can be drivers for…wait for it…wait for it…future economic output. Yes, I’m saying pumping up consumer demand, at this stage, may not be the optimal strategy.

    The recession is undoubtedly over, unless you want to chuck all of our official statistics. The only problem then is like I indicated earlier you have nothing to gauge the economy on other than anecdotes and I find that less than compelling because different regions have felt the recession differently.

  • Icepick

    I thought the narrative was that spending is spending and who cares if it is on health care or pyramids that will be totally useless?

    That is apparently the narative you WANT me to make, but it isn’t mine.

    The current mantra is its demand–getting people spending more money.

    Again, that is not my mantra. Quit telling me that my mantra is what you want my mantra to be. I am not the straw man you want me to be.

    My mantra is that there is no recovery except for the statistics and the stock markets. It’s hard to believe the real underlying economy is doing as well as it was in 2007 in any meaningful way. Please see my “estimates” above. (And are you really going to claim that my numbers are wildly off unless I link to the BLS, Census Bureau, CoreLogic, etc? Add to those “estimates” the latest housing data – housing appears to be all but officially in a double dip, except for those places where it never came out of the first dip.)

    But your insistance on looking at PCE underlines MY point. The kind of gain in PCE from Q4 2007 to Q4 2010 would look recessionary in any previous time frame if it occurred in a one year time frame. Over three years? Forget it.

  • Icepick

    The 2001 recession was mild in some ways. But note that the NASDAQ has never returned to the pre-bubble valuations, and more importantly the jobs recovery for that mild recession was the longest for any recession since WWII – by a lot. Prior to the current difficulties, of course, which will probably be longer than the job recovery period of all recessions from WWII to 2001 combined.

  • Icepick

    The only problem then is like I indicated earlier you have nothing to gauge the economy on other than anecdotes and I find that less than compelling because different regions have felt the recession differently.

    Do I really need to link to the BLS reports to show that employment is still at/near the bottom of the crater? That labor/employment participation is at a 27 year low? Those aren’t anecdotes, those are the stats that yolu seem to worship, The same goes for the housing occupancy rate here in Florida. I could dredge up the particulars on commercial real estate, but what’s the point? You only accept the statistics that tell the narrative you want, and reject all others. That’s not exactly honest.

  • Icepick

    http://globaleconomicanalysis.blogspot.com/2011/03/us-petroleum-usage-new-home-sales-jobs.html

    The above link contains some fun charts showing problems with the idea of a recovery. All of them but the petroleum stuff come from rather reliabe sources.

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