In reading this post of Scott Sumner’s I suddenly came up with an example that illustrates what bugs me about the description of the recession, economic downturn, slow recovery, or however you describe what’s going on now. Imagine a company that last year sold $100 million worth of widgets through a dealer network. This year for unknown reasons sales declined to $90 million. However, an unscrupulous sales manager in collusion with some equally unscrupulous dealers booked the entire $100 million and, via a scheme of phony sales, cancellations, and inventory transfers managed to make it appear as though everybody had made their numbers and, consequently, maintained their incomes. This may sound far-fetched but 30 years ago I worked for a company in which something very much like this actually happened.
The company ultimately uncovered the scheme and fired the sales manager. That made top management feel better about the situation but it didn’t solve the real problem at hand: sales weren’t as high as they thought they had been.
The analogy I see is to total employment. I think that the problem we’re having with creating jobs actually has been in process for decades and, with a succession of bubbles, has been made to appear much less severe than it actually is.
We’re no longer in a recession. We’re in a recovery. However, the jobs that were created during the successive bubbles have been wrung out of the economy and don’t appear to be coming back. As I’ve noted in previous posts none of the economic sectors we might typically expect to start booming and creating jobs at a rapid pace are likely to do so.
Pointing to the current president or his predecessor or even his predecessor for blame may be satisfying but it doesn’t actually solve the underlying problem.
“As I’ve noted in previous posts none of the economic sectors we might typically expect to start booming and creating jobs at a rapid pace are likely to do so.”
Real estate alone will not come back for years and will hold employment down. Balance sheets need to be fixed. Then, we need to work on the underlying structural issues like health care, education and finding a way to expand our entrepreneurial class.
Steve
There’s really very little sign of that occurring at this point and most of what has taken place to date has been via foreclosure. The problem from a policy standpoint is that the household balance sheets that most need fixing are those of income earners in the top quintile and they’re in the crosshairs right now.
What needs to happen in healthcare and education is that productivity needs to rise (rather than fall as it’s been doing). There are basically two ways for that to happen: you can produce more at the same or lower cost or you can produce the same (or even a bit less) at lower cost. Producing less at higher cost won’t do it.
You need to get in synch with the partisan blame game here Dave.
All kidding aside though, I can blame the current president and the current batch of scum bags in Congress for doing nothing about this problem…I can also blame for wanting to return to bubbles.
Change you can believe in!
@Dave Schuler
Why are you of the opinion that little deleveraging is occurring? Koo makes the argument that savings and deleveraging are occurring on a massive scale:
http://www.paecon.net/PAEReview/issue58/Koo58.pdf
The primary flaw in his paper is the claim government is currently borrowing the private sector’s savings to spend, when in reality government deficits ADD to the private sector’s savings. Beyond that he makes a pretty persuasive argument.
He’s measuring in percentages not real dollars. What he’s actually illustrating is that incomes fell.
How so? Koo isn’t looking at incomes, but spending trends. Are tou suggesting the drop in spending is mostly the result of lower wages and fewer hours worked? Fed data shows aggregate indebtedness falling:
http://www.newyorkfed.org/newsevents/news/research/2011/an111128.html
A 0.6% fall in a single quarter is significant for a country in which wages have been stagnant for decades.
Yes, foreclosure causes aggregate indebtedness to fall. I’m not sure the decrease in wealth that indicates is something we should be hailing.
What I’m saying is that there’s more than one way to interpret Dr. Koo’s data, the data are indirect measures of the things we’re interested in, he does no reality check using things that measure what we’re interested in directly, and some of the things that we can measure directly don’t support an uptick in savings. We do know that incomes have fallen and that foreclosures have increased. That provides support for an alternative explanation.
@ Dave Schuler
You can see here that savings and deposits are increasing significantly, particularly in 2011. For a quick rough estimate just subtract M1 from the matching number in the M2 column. The private sector is deleveraging, just not as quickly as we might like.
http://www.federalreserve.gov/releases/h6/current/
Ben, you can believe anything you want but from Nov 2007 to Nov 2011 (the “massive deleveraging” period) the difference between M2 and M1 increased by 23%. From Nov 2003 to Nov 2007 it increased 28%. But do check my figures. It’s always possible that I calculated wrong.
“Ben, you can believe anything you want but from Nov 2007 to Nov 2011 (the “massive deleveraging†period) the difference between M2 and M1 increased by 23%. From Nov 2003 to Nov 2007 it increased 28%. But do check my figures.”
Sure. You had previously criticized Koo for using percentages rather than absolute dollars, so let’s stick with that.
Non-M1 savings in commercial banks alone increased from $2.084 trillion in 2003 to $2.937 trillion at the beginning of 2007. From that time to December 2011 savings had increased to $5.026 trillion. So in the four years prior to the crash absolute dollar savings went up by just under $900 billion. In the four years from 2007 to now, savings increased by over two trillion dollars. The spread is similar with total non-M1.
http://www.federalreserve.gov/releases/h6/hist/h6hist9.pdf
What figures are you looking at?