Standard Course, For a Financial Crisis

For today, just a link: "Fact-checking Financial Recessions", essentially showing that we're on the standard course of a financial crisis.

Baumol's Speaking To Him; Sadly, Ryan Doesn't Seem To Be Listening

The NY Times' Amy Wallace gives a glimpse of Professor Baumol's "The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t" in her review:

"As the cost of health care continues to be a battering ram in the 2012 presidential campaign, Professor Baumol’s seemingly academic treatise contains a couple of zingers that one can imagine President Obama incorporating into his stump speech. The future is bright, this book argues, as long as policy makers don’t do things that are sure to bring on the storm clouds. 

“The very definition of rising productivity ensures that the future will offer us a cornucopia of desirable services and abundant products,” he writes. “The main threat to this happy prospect is the illusion that society cannot afford them, with resulting political developments — such as calls for reduced government revenues entwined with demands that budgets be in balance — that deny these benefits to our descendants.” 

Are you listening, Paul Ryan? Because Professor Baumol seems to be talking directly to you."

Certainly a relevant book for one of the main decisions facing this electorate. Sadly, Ryan doesn't seem to be listening.

Unemployment and Party Policies: There's a Correlation, But What's the Causation?

Can we conclude failed / succeeded party policies from the following chart? Or did the policies change too much from administration to administration even within parties to attribute this trend to a policy set typical of either party?

This being unemployment, down is good ... a reduction in unemployment. The chart starts with the first President whose full term is entirely within the standard BLS/FRED  "unrate" data. Figures are calculated by starting with the first full month of the administration and going to the first full month of the next administration or to the latest available month in the case of the current administration.

As a group since Eisenhower, Republican Presidents averaged a 2.05 point increase in unemployment per administration. Meanwhile Democrats averaged a 1.42 point reduction in unemployment per administration.

From all that I've seen beyond just this chart, I'm tempted to say that this chart illustrates the economic impact mainly of two things: Republican drives to cut spending to balance the budget and Democratic drives to strengthen the safety net resulting in more fuel to the consumer engine. However, I hesitate to state that as a definitive explanation at this point. It's more of a rough hypothesis.

Encouraging Signs in Govt Payrolls ... For Now

Bill McBride of Calculated Risk comments on a number of encouraging signs in the economy in "Employment: Somewhat Better (also more graphs)",

"It appears most of the state and local government layoffs are over.
Overall this was a somewhat more encouraging report."

Sure. But there's a big "if" in the looming fiscal cliff from the budget sequestration. We're at a point where the economy might be more or less ready to start more seriously improving towards potential despite insufficient fiscal policy remediation. Yet we've got looming massive budget cuts that could tip us into a nosedive if Congress doesn't come to realize we've got more to fear from massive cuts than from short term deficits.

The Cost of Balanced Budgets and a Longer View on Presidents and Jobs From Ike To 2012

I'd usually heard the 50s described as more or less a golden era of rising prosperity. But till recently I tended to skip over digging into that decade's economic data to focus on the Great Depression up through World War II (when not mucking about the peaks and valleys of more recent times). So I have to admit this chart surprised me.

starting with Ike, the first President fully covered in the monthly POP data; to June 2012

I was expecting that adding in the Republican Presidents before Reagan would show that prior to Trickle-down / Supply-side economics / Reaganomics infecting the Republican party, they'd done better. I expected to be illustrating the post-Depression glory days of the Republican party via Ike, Nixon, and Ford. Instead, the data gave me what we see above. In jobs, Nixon and Ford both did worse than Johnson, Carter, and Clinton. While Nixon and Ford did better than Obama's marks for his full term so far, they each did worse than during his tepid recovery span from February 2010 on to the latest data. And then there's Ike -- whom we admire -- down there with the likes of the Bushes. I didn't want to see that. Frankly, I wanted to believe Ike pulled off the Clinton trick of balancing the budget while improving employment. But I can't deny the data.

If we look a bit further back, before the dates in the data used above to put payroll growth in perspective via population growth, we can at least compare Ike's raw payroll figures to those from FDR (since 1939) and Truman, but that only rules out claiming Ike's dismal jobs performance as part of a longer trend.

Ike's sad job numbers with context: at least he's not Bush II

It's not a pretty picture for Ike, which I'm sad to see. Thankfully there's still much to admire from President Eisenhower in the highway system and his work for civil rights. I still like Ike. I still think I'd have voted for him if I'd been old enough at the time. But his economic record is tarnished.

In his defense, President Eisenhower did start his term with a 2.6% unemployment rate during that first full month. It's hard to improve on 2.6% unemployment. Still, unemployment rose dramatically to 6.9% by the first full month of his successor's term. Ike's shift: +165% unemployment. That's a rather lousy fumble. And while the Eisenhower years saw increasing family incomes, the same can be said for the Kennedy / Johnson years except without the rising unemployment, as over the course of their span they reduced that rate from the 6.9% that Eisenhower left them back down to 3.4% by the end of Johnson's Presidency.

So what went wrong? Let's look at the modern history of balanced budgets:

• At Republican urging, FDR tried to balance the budget with spending cuts and it brought us the Recession of 1937-38. 
• After World War II we saw dramatic cutbacks in spending with balanced budgets in 1947 through 1949 and the recessions in 1945 and 1949. (Of course, the war spending was unsustainable; there was probably no way to avoid recession in the late 1940s.)
• Truman balanced the budget in 1951. But like the later Clinton-era balanced budgets this one was done while expanding federal outlays ... rather swiftly increasing from the 1948 lows. Then after we slowed spending at the end of the Korean War, we got the recession of 1953.
• Eisenhower balanced the budget in 1956 and 1957 and we got the Recession of 1957.
• Eisenhower balanced the budget again in 1960 and we got the Recession of 1960.
• Nixon balanced the budget in 1969 and we got the Recession of 1970.
• While Clinton balanced the budget in 1998 lasting through Bush's first budget in 2001, the balancing in these years was done without reducing the growth of federal outlays but rather through moderate increase of tax rates. As such, this particular instance was thoroughly different from most previous balancing of the budget (except Truman's).

There were also some recessions that didn't correspond to these balanced budgets: the oil shock under Nixon, the extremely high interest rates under Reagan, the S&L crisis under Bush I, the Dot-Com crash under Clinton and Bush II, and the housing/finance crash under Bush II. I'm not suggesting that all recessions are caused by cutting to achieve balanced budgets. However, it would seem that balancing our national budget via cuts -- even if only in inflation-adjusted terms as in 1960 and 1969 -- tends to lead to recession.

The impact of Eisenhower's budget balancing exploits are particularly of interest for its parallel to job losses in the Great Recession. Private payrolls dropped by 2.385 million between August 1957 and June 1958, a 5.26% decline. By comparison, that's just barely below the 5.47% decline during the worst job-loss months of the Great Recession from August 2008 through June 2009. Remember that saying about doing the same thing and expecting different results. If we implement massive cutbacks like Eisenhower with our sequestration fiscal cliff, we can expect yet another massive fall just like the Eisenhower recession ... and we've not climbed far enough back from the jagged rocks as it is.

In case after case, budgets balanced with spending cuts have brought on recession. And now the Republicans are once again pushing us to balance the budget with dramatic spending cuts. Democrats may not be leading the charge, but Obama like FDR is far too willing to accept the Republican push for cuts. If we don't turn away from this push to slash budgets, previous experience shows us it will hurt the economy. When we make the debt more manageable by growing our economy such that the debt shrinks by comparison, that's tended to work out well. When we clumsily attempt to tackle the debt directly by slashing spending to balance the budget in the hopes a primary surplus, the records shows it tends to work out poorly.

Presidents and Jobs (Average Private Payrolls Added Per Month Since Carter)

Given that Republicans are often billed as the pro-business party, shouldn't we find business booming under Republican Presidents? Shouldn't we find payrolls rising significantly from all that business expansion?

For President Reagan, to be fair, we should note that his early years were hurt by the same force that crushed payrolls under President Carter during April through July of 1980: the high rates with which Paul Volcker battled inflation. Double-digit prime interest rates diminished employment under both Presidents Reagan and Carter. While those unusually high interest rates may have been necessary to get control over inflation, those high rates severely slowed expansion and thus hiring. However, that doesn't remove the possibility that President Reagan's descent from Carter's payroll numbers hinted at the start of a Republican trend under Trickle-down policies. After all, the Bush I policies were largely a continuation of the Reagan policies. If we average together the Reagan and Bush I months, together they get 113.3 thousand jobs / month. That's less than either of Carter or Clinton. And it's also less than the rate of increase we've seen since the turn-around on 2/1/2010 under President Obama.

While these figures aren't conclusive proof alone, add them together with a few other factors such as that GDP growth has lagged under the lowest top marginal tax rates. It sure looks like Trickle-down (or Supply-side economic or Reaganomics) failed us in a big way.

Maybe we should stop accepting the notion that talking about lowering taxes and deregulating would actually be business-friendly. Maybe we should instead consider ways to return to the sort of sensible, progressive tax structures we had before Reagan lead us down the road to decline. Instead of calling it red tape, maybe we should consider regulation's value for helping business manage risk, compete on a level playing field, and have more predictable returns. And maybe we should get back to expecting serious infrastructure projects and demanding aggressive investments in our research and development programs to build our avenues for growth.

Notes on methodology: Generally speaking, the January in which the executive transitions from one branch to another will be almost entirely impacted by the outgoing President's policies and not those of the incoming President. As such, the average uses the change in monthly manufacturing payrolls starting with the change from the first full month of the President's term (i.e., from the February that is the first full month to the March thereafter) and going until the first full month after the President's term (i.e., the last change counted is from the January during which the President in question is last in office to the February thereafter). Data from BLS/FRED.

Noah Smith (and Miles Kimball) on New Classical vs New Keynesian

There might be zingers going around the Presidential campaigns, but there are some good ones going around the macro blogs as well. Noah Smith gives us this one in his "Engineering vs. "Science" in macroeconomics" post:

As my advisor (and Greg Mankiw's advisee) Miles Kimball tweeted today when we discussed this topic: "the 'micro foundations [used by New Classicals are] usually not very serious, they're often more like imaginary engineering than science."