Tag Archive for 'USA'

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On interest rates

Published on 23 November 2009 at 12:05 pm in Economics, Finance and USA. Tags: Brad DeLong, Interest rates, Paul Krugman, Recession, Tyler Cowen, USA.

In what Tyler Cowen calls “Critically important stuff and two of the best recent economics blog posts, in some time,” Paul Krugman and Brad DeLong have got some interesting thoughts on US interest rates. First Krugman:

On the face of it, there’s no reason to be worried about interest rates on US debt. Despite large deficits, the Federal government is able to borrow cheaply, at rates that are up from the early post-Lehman period … but well below the pre-crisis levels:

Underlying these low rates is, in turn, the fact that overall borrowing by the nonfinancial sector hasn’t risen: the surge in government borrowing has in fact, less than offset a plunge in private borrowing.

So what’s the problem?

Well, what I hear is that officials don’t trust the demand for long-term government debt, because they see it as driven by a “carry trade”: financial players borrowing cheap money short-term, and using it to buy long-term bonds. They fear that the whole thing could evaporate if long-term rates start to rise, imposing capital losses on the people doing the carry trade; this could, they believe, drive rates way up, even though this possibility doesn’t seem to be priced in by the market.

What’s wrong with this picture?

First of all, what would things look like if the debt situation were perfectly OK? The answer, it seems to me, is that it would look just like what we’re seeing.

Bear in mind that the whole problem right now is that the private sector is hurting, it’s spooked, and it’s looking for safety. So it’s piling into “cash”, which really means short-term debt. (Treasury bill rates briefly went negative yesterday). Meanwhile, the public sector is sustaining demand with deficit spending, financed by long-term debt. So someone has to be bridging the gap between the short-term assets the public wants to hold and the long-term debt the government wants to issue; call it a carry trade if you like, but it’s a normal and necessary thing.

Now, you could and should be worried if this thing looked like a great bubble — if long-term rates looked unreasonably low given the fundamentals. But do they? Long rates fluctuated between 4.5 and 5 percent in the mid-2000s, when the economy was driven by an unsustainable housing boom. Now we face the prospect of a prolonged period of near-zero short-term rates — I don’t see any reason for the Fed funds rate to rise for at least a year, and probably two — which should mean substantially lower long rates even if you expect yields eventually to rise back to 2005 levels. And if we’re facing a Japanese-type lost decade, which seems all too possible, long rates are in fact still unreasonably high.

Still, what about the possibility of a squeeze, in which rising rates for whatever reason produce a vicious circle of collapsing balance sheets among the carry traders, higher rates, and so on? Well, we’ve seen enough of that sort of thing not to dismiss the possibility. But if it does happen, it’s a financial system problem — not a deficit problem. It would basically be saying not that the government is borrowing too much, but that the people conveying funds from savers, who want short-term assets, to the government, which borrows long, are undercapitalized.

And the remedy should be financial, not fiscal. Have the Fed buy more long-term debt; or let the government issue more short-term debt. Whatever you do, don’t undermine recovery by calling off jobs creation.

The point is that it’s crazy to let the rescue of the economy be held hostage to what is, if it’s an issue at all, a technical matter of maturity mismatch. And again, it’s not clear that it even is an issue. What the worriers seem to regard as a danger sign — that supposedly awful carry trade — is exactly what you would expect to see even if fiscal policy were on a perfectly sustainable trajectory.

Then DeLong:

I am not sure Paul is correct when he says that the possible underlying problem is merely “a technical matter of maturity mismatch.” The long Treasury market is thinner than many people think: it is not completely implausible to argue that it is giving us the wrong read on what market expectations really are because long Treasuries right now are held by (a) price-insensitive actors like the PBoC and (b) highly-leveraged risk lovers borrowing at close to zero and collecting coupons as they try to pick up nickles in front of the steamroller. And to the extent that the prices at which businesses can borrow are set by a market that keys off the Treasury market, an unwinding of this “carry trade”–if it really exists–could produce bizarre outcomes.

Bear in mind that this whole story requires that the demand curve slope the wrong way for a while–that if the prices for Treasury bonds fall carry traders lose their shirts and exit the market, and so a small fall in Treasury bond prices turns into a crash until someone else steps in to hold the stock…

For reference, here are the time paths of interest rates for a variety of term lengths and risk profiles (all taken from FRED):

To my own mind, I’m somewhat inclined to agree with Krugman. While I do believe that the carry trade is occurring, I suspect that it’s effects are mostly elsewhere, or at least that the carry trade is not being played particularly heavily in long-dated US government debt relative to other asset markets.

Notice that the AAA and BAA 30-year corporate rates are basically back to pre-crisis levels and that the premium they pay over 30-year government debt is also back to typical levels. If the long-dated rates are being pushed down to pre-crisis levels solely by increased supply thanks to the carry trade, then we would surely expect the quantity of credit to also be at pre-crisis levels. But new credit issuance is down relative to the pre-crisis period. Since the price is largely unchanged, that means that both demand and supply of credit have shrunk – the supply from fear in the financial market pushing money to the short end of the curve and the demand from the fact that there’s been a recession.

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The contradictory joys of being the US Treasury Secretary (part 2)

Published on 16 November 2009 at 4:28 pm in Economics, Finance, Politics, Trade and USA. Tags: Bloomberg, Brazil, Exchange rates, Federal Reserve, Geithner, Inflation, Interest rates, Korea, Roubini, Russia, Trade, US Dollar, USA.

In my last post, I highlighted the apparent contradictions between the USA having both a “strong dollar” policy and a desire to correct their trade deficit (“re-balancing”). Tim Geithner, speaking recently in Tokyo, declared that there was no contradiction:

Geithner said U.S. efforts to boost exports aren’t in conflict with the “strong-dollar” policy. “I don’t think there’s any contradiction between the policies,” he said.

I then said:

The only way to reconcile what Geithner’s saying with the laws of mathematics is to suppose that his “strong dollar” statements are political and relate only to the nominal exchange rate and observe that trade is driven by the real exchange rate. But that then means that he’s calling for a stable nominal exchange rate combined with either deflation in the USA or inflation in other countries.

Which, together with Nouriel Roubini’s recent observation that the US holding their interest rates at zero is fueling “the mother of all carry trades” [Financial Times, RGE Monitor], provides for a delicious (but probably untrue) sort-of-conspiracy theory:

Suppose that Tim Geithner firmly believes in the need for re-balancing. He’d ideally like US exports to rise while imports stayed flat (since that would imply strong global growth and new jobs for his boss’s constituents), but he’d settle for US imports falling. Either way, he needs the US real exchange rate to fall, but he doesn’t care how. Well, not quite. His friend Ben Bernanke tells him that he doesn’t want deflation in America, but he doesn’t really care between the nominal exchange rate falling and foreign prices rising (foreign inflation).

The recession-induced interest rates of (effectively) zero in America are now his friend, because he’s going to get what he wants no matter what, thanks to the carry trade. Private investors are borrowing money at 0% interest in America and then going to foreign countries to invest it at interest rates that are significantly higher than zero. If the foreign central banks did nothing, that would push the US dollar lower and their own currencies higher and Tim gets what he wants.

But the foreign central banks want a strong dollar because (a) they’re holding gazzilions of dollars worth of US treasuries and they don’t want their value to fall; and (b) they’re not fully independent of their political masters who want to want to keep exporting. So Tim regularly stands up in public and says that he supports a strong dollar. That makes him look innocent and excuses the foreign central banks for doing what they were all doing anyway: printing local money to give to the US-funded investors so as to keep their currencies down (and the US dollar up).

But that means that the money supply in foreign countries is climbing, fast, and while prices may be sticky in the short term, they will start rising soon enough. Foreign inflation will lower the US real exchange rate and Tim still gets what he wants.

The only hope for the foreign central banks is that the demand for their currencies is a short-lived temporary blip. In that case, defending their currencies won’t require the creation of too much local currency and they could probably reverse the situation fast enough afterward that they don’t get bad inflation. [This is one of the arguments in favour of central bank involvement in the exchange-rate market. Since price movements are sluggish, they can sterilise a temporary spike and gradually back out the action before local prices react too much.]

But as foreign central banks have been discovering [1], free money is free money and the carry trade won’t go away until the interest rate gap is sufficiently closed:

Nov. 13 (Bloomberg) — Brazil, South Korea and Russia are losing the battle among developing nations to reduce gains in their currencies and keep exports competitive as the demand for their financial assets, driven by the slumping dollar, is proving more than central banks can handle.

South Korea Deputy Finance Minister Shin Je Yoon said yesterday the country will leave the level of its currency to market forces after adding about $63 billion to its foreign exchange reserves this year to slow the appreciation of the won.
[...]
Brazil’s real is up 1.1 percent against the dollar this month, even after imposing a tax in October on foreign stock and bond investments and increasing foreign reserves by $9.5 billion in October in an effort to curb the currency’s appreciation. The real has risen 33 percent this year.
[...]
“I hear a lot of noise reflecting the government’s discomfort with the exchange rate, but it is hard to fight this,” said Rodrigo Azevedo, the monetary policy director of Brazil’s central bank from 2004 to 2007. “There is very little Brazil can do.”

The central banks are stuck. They can’t lower their own interest rates to zero (which would stop the carry trade) as that would stick a rocket under domestic production and cause inflation anyway. The only thing they can do is what Brazil did a little bit of: impose legal limits on capital inflows, either explicitly or by taxing foreign-owned investments. But doing that isn’t really an option, either, because they want to be able to keep attracting foreign investment after all this is over and there’s not much scarier to an investor than political uncertainty.

So they have to wait until America raises it’s own rates. But that won’t happen until America sees a turn-around in jobs and the fastest way for that to happen is for US exports to rise.

[1] Personally, I think the central bankers saw the writing on the wall the minute the Fed lowered US interest rates to (effectively) zero but their political masters were always going to take some time to cotton on.

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Not raising the minimum wage with inflation will make your country fat

Published on 10 November 2009 at 12:39 pm in Academia, Article Summary, Economics, Health Care, Thinking on the margin and USA. Tags: BMI, Chen, Fast food, Greg Mankiw, Meltzer, Obesity, USA.

Via Greg Mankiw, here is a new working paper by David O. Meltzer and Zhuo Chen: “The Impact of Minimum Wage Rates on Body Weight in the United States“. The abstract:

Growing consumption of increasingly less expensive food, and especially “fast food”, has been cited as a potential cause of increasing rate of obesity in the United States over the past several decades. Because the real minimum wage in the United States has declined by as much as half over 1968-2007 and because minimum wage labor is a major contributor to the cost of food away from home we hypothesized that changes in the minimum wage would be associated with changes in bodyweight over this period. To examine this, we use data from the Behavioral Risk Factor Surveillance System from 1984-2006 to test whether variation in the real minimum wage was associated with changes in body mass index (BMI). We also examine whether this association varied by gender, education and income, and used quantile regression to test whether the association varied over the BMI distribution. We also estimate the fraction of the increase in BMI since 1970 attributable to minimum wage declines. We find that a $1 decrease in the real minimum wage was associated with a 0.06 increase in BMI. This relationship was significant across gender and income groups and largest among the highest percentiles of the BMI distribution. Real minimum wage decreases can explain 10% of the change in BMI since 1970. We conclude that the declining real minimum wage rates has contributed to the increasing rate of overweight and obesity in the United States. Studies to clarify the mechanism by which minimum wages may affect obesity might help determine appropriate policy responses.

Emphasis is mine. There is an obvious candidate for the mechanism:

Minimum wages, in real terms, have been falling in the USA over the last 40 years.
Minimum-wage labour is a significant proportion of the cost of “food away from home” (often, but not just including, fast-food).
Therefore the real cost of producing “food away from home” has fallen.
Therefore the relative price of “food away from home” has fallen.
Therefore people eat “food away from home” more frequently and “food at home” less frequently.
Typical “food away from home” has, at the least, more calories than “food at home”.
Therefore, holding the amount of exercise constant, obesity rates increased.

Update: The magnitude of the effect for items 2) – 7) will probably be greater for fast-food versus regular restaurant food, because minimum-wage labour will almost certainly comprise a larger fraction of costs for a fast-food outlet than it will for a fancy restaurant.

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The death throes of US newspapers?

Published on 28 October 2009 at 4:48 pm in Economics, Media and USA. Tags: Media, Megan McArdle, Newspapers, Tyler Cowen, USA.

Via Megan McArdle’s excellent commentary, I discovered the Mon-Fri daily circulation figures for the top 25 newspapers in the USA. Megan’s words:

I think we’re witnessing the end of the newspaper business, full stop, not the end of the newspaper business as we know it. The economics just aren’t there. At some point, industries enter a death spiral: too few consumers raises their average costs, meaning they eventually have to pass price increases onto their customers. That drives more customers away. Rinse and repeat . . .

[...]

The numbers seem to confirm something I’ve thought for a while: we’re eventually going to end up with a few national papers, a la Britain, rather than local dailies. The Wall Street Journal, the Washington Post, and the New York Times (sorry, conservatives!) are weathering the downturn better than most, and it’s not surprising: business, politics, and national upper-middlebrow culture. But in 25 years, will any of them still be printing their product on the pulped up remains of dead trees? It doesn’t seem all that likely.

For those of you that like your information in pictoral form, here it is:

First, the data. Look at the Mean/Median/Weighted Mean figures. That really is an horrific collapse in sales.

Second, the distribution (click on the image for a full-sized version):

Finally, a scatter plot of year-over-year change against the latest circulation figures (click on the image for a full-sized version):

As Megan alluded in the second paragraph I quoted, there appears to be a weak relationship between the size of the paper and the declines they’ve suffered, with the bigger papers holding up better. The USA Today is the clear exception to that idea. Indeed, if the USA Today is excluded from the (already very small!) sample the R^2 becomes 30%.

To really appreciate just how devestating those numbers are, you need to combine it with advertising figures. Since newspapers take revenue from both sales (circulation) and advertising, the fact that advertising revenue has also collapsed, as it always does in a recession, means that newspapers have taken not just one but two knives to the chest.

Here’s advertising expenditure in newspapers over recent years, taken from here:

Year	Expenditure (millions of dollars)	Year-over-year % change
2005	47,408
2006	46,611	-1.7%
2007	42,209	-9.2%
2008	34,740	-17.7%

Which is ugly. Remember, also, that this expenditure is nominal. Adjusted for inflation, the figures will be worse.

So what do you do when your ad sales and your circulation figures both fall by over 15%? Oh, and you can’t really cut costs any more because, as Megan says:

For twenty years, newspapers have been trying to slow the process with increasingly desperate cost cutting, but almost all are at the end of that rope; they can’t cut their newsroom or production staff any further and still put out a newspaper. There just aren’t enough customers who are willing to pay for their product what it costs to produce it.

Which, in economics speak, means that the newspaper business has a large fixed cost component that isn’t particularly variable even in the long run.

Tyler Cowen, in an excellent post that demonstrates precisely why I read him daily, says:

I believe with p = 0.6 that the world is in for a “great disruption.” It has come to MSM first but it will not end there. In the longer run I am optimistic about the results of this change — computers will free up lots of human labor — but in the meantime it will have drastic implications for income redistribution, across both individuals and across economic sectors. For a core metaphor, the internet displacing paid journalism and classified ads is a good place to start. The value of newspapers has been sucked into Google.

[...]Once The Great Disruption becomes more evident, entertainment will be very very cheap.

Which may well be true, but will be cold comfort for all of those traditional journalists out there.

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Characterising the conservative/progressive divide

Published on 7 October 2009 at 2:45 pm in Epistemology, Justice/Law, Politics and USA. Tags: Conservative, Ideology, Progressive, USA.

I’ve been thinking a little about the underlying differences between progressives/liberals and conservatives in the American (US) setting. I’m not really thinking of opinions on economics or the ideal size of government, but views on economics and government would clearly be affected by what I describe. Instead, I’m trying to imagine underlying bases for the competing social and political ideologies.

I’m not claiming any great insight, but it’s helped me clarify my thinking to imagine three overlapping areas of contention. Each area helps inform the topic that follows in a manner that ought to be fairly clear:

On epistemology and metaphysics. Conservatives contend that there exist absolute truths which we can sometimes know, or even - at least in principle – always know. In contrast, progressives embrace the postmodern view that there may not be any absolute truths and that, even if absolute truths do exist, our understanding of them is always relative and fallible.
On the comparison of cultures[by "cultures", I here include all traditions, ways of life, interactional mannerisms and social institutions in the broadest possible sense]. Conservatives contend that it is both possible and reasonable to compare and judge the relative worthiness of two cultures. At an extreme, they suggest that this is plausible in an objective, universal sense. A little more towards the centre, they alternately suggest that individuals may legitimately perform such a comparison to form private opinions. Centrist progressives instead argue that while it might be possible to declare one culture superior to another, it is not reasonable to do so (e.g. because of the relative nature of truth). At their own extreme, progressives argue that it is not possible to make a coherent comparison between two cultures.
On changing one’s culture. Conservatives suggest that change, in and of itself, is a (slightly) bad thing that must be justified with materially better conditions as a result of the change. Progressives argue that change itself is neutral (or even a slightly good thing). This leads to conflict when the material results of the change are in doubt and the agents are risk averse. To the conservative mind, certain loss (from the act of changing) is being weighed against uncertain gain. To the progressive mind, the act of change is a positive act of exploration which partially offsets the risks of an uncertain outcome.

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A description of Australia’s healthcare system

Published on 20 August 2009 at 12:45 pm in Australia, Health Care and USA. Tags: Australia, Healthcare, John Hempton, USA.

John Hempton has gotten to it before I did and written it far better than I would have anyway. Have a read. Although I agree that Australia’s system is much, much better than America’s current system or any of their proposed frameworks, I would add three negative comments about Australia’s system:

Medicare payments to GPs for a consultation by a patient are determined centrally (at the federal level) and have not increased with inflation. At first that meant that GPs shortened each consultation to fit more people in per day, but in the long run served, I believe, to reduce the supply of GPs and as a result pushed people with minor ailments to hospital emergency rooms.
I don’t know if it is better or worse than other countries, but the administrative overhead in the state government health departments is surprisingly large, even to me. I am led to believe that adminstrators and middle-managers exceed more than 50% of the staff of Queensland Health (and that does not include admin staff on the wards).
The federal-state funding arrangement in Australia is a real problem. I don’t know whether the best policy is to put all health care in federal hands or to grant the states more revenue-raising posibilities, but something does need to happen.

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US government debt

Published on 14 August 2009 at 1:08 pm in Economics, Finance, Politics and USA. Tags: Brad DeLong, Credit crisis, Debt, Greg Mankiw, IMF, Rogoff, USA.

Greg Mankiw [Harvard] recently quoted a snippet without comment from this opinion piece by Kenneth Rogoff [Harvard]:

Within a few years, western governments will have to sharply raise taxes, inflate, partially default, or some combination of all three.

Reading this sentence frustrated me, because the “will have to” implies that these are the only choices when they are not. Cutting government spending is the obvious option that Professor Rogoff left off the list, but perhaps the best option, implicitly rejected by the use of the word “sharply“, is that governments stabilise their annual deficits in nominal terms and then let the real growth of the economy reduce the relative size of the total debt over time. Finally, there is an implied opposition to any inflation, when a small and stable rate of price inflation is entirely desirable even when a country has no debt at all.

Heck, we can even have annual deficits increase every year, so long as the nominal rate of growth plus the accrual of interest due is less than the nominal growth rate (real + inflation) of the economy as a whole and you’ll still see the debt-to-GDP ratio falling over time.

Via Minzie Chinn [U. of Wisconsin], I see that the IMF has a new paper looking at the growth rates of potential output, and the likely path of government debt in the aftermath of the credit crisis. Using the the historical correlation between the primary surplus, debt, and output gap, they ran some stochastic simulations of how the debt-to-GDP ratio for America is likely to develop over the next 10 years. Here’s the upshot (from page 37 of the paper):

IMF_US_debt_profile

Here is their text:

Combining the estimated historical primary surplus reaction function with stochastic forecasts of real GDP growth and real interest rates—and allowing for empirically realistic shocks to the primary surplus—imply a much more favorable median projection but slightly larger risks around the baseline. If the federal government on average adjusts the primary surplus as it has done in the past—implying a stronger improvement in the primary balance than under the baseline projections—the probability that debt would exceed 67 percent of GDP by year 2019 would be around 40 percent (Figure 4). Notably, with 80 percent probability, debt would be lower than the level it would reach under staff’s baseline by 2019. [Emphasis added]

So I am not really worried about debt levels for America. To be frank, neither is the the market, either, despite what you might have heard. How do I know this? Because the market, while clearly not perfectly rational, is rational enough to be forward-looking and if they thought that US government debt was a serious problem, they wouldn’t really want to buy any more of that debt today. But the US has been selling a lot of new bonds (i.e. borrowing a lot of money) lately and the prices of government bonds haven’t really fallen, so the interest rates on them haven’t really gone up. Here is Brad DeLong [Berkeley]:

[A] sharp increase in Treasury borrowings is supposed to carry a sharp increase in interest rates along with it to crowd out other forms of interest sensitive spending, [but it] hasn’t happened. Hasn’t happened at all:

It is astonishing. Between last summer and the end of this year the U.S. Treasury will expand its marketable debt liabilities by $2.5 trillion–an amount equal to more than 20% of all equities in America, an amount equal to 8% of all traded dollar-denominated securities. And yet the market has swallowed it all without a burp…

I don’t want to bag on Professor Rogoff. The majority of his piece is great: it’s a discussion of fundamental imbalances that need to be dealt with. You should read it. It’s just that I’m a bit more sanguine about US government debt than he appears to be.

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Culinary delights of Washington, D.C.

Published on 30 July 2009 at 8:10 pm in Links, Personal and USA. Tags: DC, Food, USA, Washington.

Half the reason for our recent trip to America was to visit friends in D.C. Photos for our gallery or facebook will have to wait until Dani gets back, but I thought I’d share a few thoughts on eating in Washington:

Tyler Cowen knows what he’s talking about. The complete version of his dining guide in a single page is here.
I ate buffalo (okay, okay. “american bison”) for the first and second time. The first was in the wonderfully thought out food hall of the National Museum of the American Indian. The second was in the form of a burger on the rooftop terrace of one of our friends. Good times.
The cupcakes at Georgetown Cupcake are delicious (and well worth the wait in line), but they’re not quite as good as those from the Primrose Bakery here in London.
The sandwiches at Dean & DeLuca are pretty damn fine.
The burgers at Ray’s Hell Burger (how do they not have their own website?) are utterly incredible. I can have my burger au poivre? With Foie Gras? My mouth is watering just remembering it.
Be careful that the Ethopian restaurant you choose doesn’t slap you with $6 + tax + tip cokes (it was in the fine print of the menu). Nevertheless, you’d be crazy to miss some Ethopian while you were there.
The crab cakes in Annapolis, MD are the perfect excuse for a day trip.
But hands down, the best food I had in D.C. — our friend Maria’s pasta aside, of course — was at Thai X-ing. It is one guy in the basement of a house. It’s freaking tiny and easily the best Thai food I have ever, ever eaten. Here are two photos that I took on my phone (Click on each for a bigger version. I apologise for the poor quality – the iPhone 3G only has a 1 megapixel camera and the receptor is hardly impressive):

We somehow managed to fit eight people in the space behind Dani and Maria (the bird cage was moved). The cooking is really slow, so the thing to do is to place your order the day before you go if you’re going to eat there. Unbelievably cheap. I refuse to recommend a single dish.

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On China

Published on 11 June 2009 at 3:31 pm in Development, Economics and Trade. Tags: Australia, China, Credit crisis, Germany, Japan, Menzie Chinn, Recession, Setser, USA.

Menzie Chinn emphasises that for the purposes of estimating country shares in global GDP, it is necessary to think of them in nominal terms. On that basis, China is large, but only half the size of the Euro zone and well under half the size of America. Therefore, he implies, an increase in demand from China won’t really contribute as much to global growth as people might be hoping.

Nevertheless, people do seem to be wondering about China as an engine of global growth in demand. The reason is simple: Despite a near catastrophic collapse in world trade, China’s economy is still growing while those of other export-oriented countries like Japan or Germany are falling precipitously.

Clearly part of the reason for the continued Chinese growth, like in Australia, is the successful use of a fiscal stimulus to boost local demand (the Australian rebound was also helped by the fact that, by not manufacturing much, their decline in investment was offset by a fall in imports and (price) changes in natural resource exports occur with a significant lag).

Brad Setser has explored the Chinese stimulus a little. He writes:

I initially underestimated the magnitude of China’s stimulus by focusing on the (fairly modest) change in the government’s fiscal balance. It is now clear that the majority of China’s stimulus has been off-budget: the huge increase in lending by state owned banks mattered far more than the change in the budget of the central government. The expected loss on these loans can be considered a form of fiscal stimulus.

Which is a fascinating way to conduct government business.

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Comparison of US recessions in hours worked per capita

Published on 7 June 2009 at 12:47 pm in Economics, Labour and USA. Tags: Labourforce, Recession, USA, Weekly Hours.

Following on from my graphs from January and February‘s data releases, here are some updated graphs based on May’s data release from the BLS [click on each graph to get a bigger version].

First the year-over-year % change in number of production workers, hours worked per member of the workforce and hours worked per capita:

A casual inspection of this graph suggests that the current recession is, for employment, about the same as or a little better than the 1973-75 recession, but that is an incorrect interpretation. This graph effectively shows rates of change, so it’s not just the depth below zero that matters but the time beneath it as well. As we will shortly see, the current recession is actually quite a bit worse than the ’73-75 recession and the 2001 recession was a lot worse than it looks.

First, though, it’s instructive to zoom-in to the last year or two on the graph:

The red line indicates the year-over-year change in employment. It’s clearly badly negative. The green line is the change in hours worked per member of the workforce. This is worse than that for employment because not only are people losing their jobs, but those who keep their jobs are, on average, having their hours cut. The blue line is the change in hours worked per capita. This is the worst of the three because in addition to people losing their jobs and those with jobs having their hours cut, some of those without jobs have given up looking. Notice that the blue and green lines were pretty close together at first. This suggests that in the first half of the current recession, people who lost their jobs were staying in the workforce in the hope of finding work, while it was only in the second half that some of the unemployed started to lose hope and give up looking.

In comparing recessions, I prefer to use the hours-worked-per-capita metric because it captures much more of the employment picture than just employment figures or total hours worked. Here is a comparison between recessions dating back to 1964, centred around their NBER-determined peak in economic activity:

Notice that hours worked per capita tend to have been falling for some time before the NBER-determined peak in economic activity. This is because employment is not the be all and end all of the economy and the dating committee has to take those other elements into account as well.

Now we rebase that comparison so each recession is relative to it’s actual peak in hours worked per capita:

This gives us a true measure of the depth of each recession with respect to employment. We can see that the ’71-75 and 2001 recessions reached about the same depth and that the current recession has now gone lower than either of them. Since it is reasonable to assume that the USA will continue to lose jobs (or at least hours worked) in the next couple of months, we can safely call the current recession the worst of this group of seven.

Finally, I thought it worthwhile to compare the falls relative to actual peaks, but centred around each recession’s trough in hours worked per capita (for comparison purposes, I have assumed that the current recession’s trough was in May ’09):

This graph gives some hope to those imagining a quick recovery. While the recoveries do tend to be a little slower than the recessions, there does appear to be some symmetry around the troughs.

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