What does the new gdp report imply for structural explanations of our current troubles?

by on July 31, 2011 at 4:31 am in Economics, Uncategorized | Permalink

How should we revise structural interpretations of unemployment in light of the new gdp revisions?  (For summaries, here are a few economists’ reactions to the report.)  Just to review briefly, I find the most plausible structural interpretations of the recent downturn to be based in the “we thought we were wealthier than we were” mechanism, leading to excess enthusiasm, excess leverage, and an eventual series of painful contractions, both AS and AD-driven, to correct the previous mistakes.  I view this hypothesis as the intersection of Fischer Black, Hyman Minsky, and Michael Mandel.

A key result of the new numbers is that we had been overestimating productivity growth during a period when it actually was feeble.  That is not only consistent with this structural view but it plays right into it:  the high productivity growth of 2007-2009 now turns out to be an illusion and indeed the structural story all along was suggesting we all had illusions about the ongoing rate of productivity growth.  As of even a mere few days ago, some of those illusions were still up and running (are they all gone now?  I doubt it.)

On one specific, it is quite possible that the new numbers diminish the relevance of the zero marginal product (ZMP) worker story.  The ZMP worker story tries to match the old data, which showed a lot of layoffs and skyrocketing per hour labor productivity in the very same or immediately succeeding quarters.  Those numbers, taken literally, imply that the laid off workers were either producing very little to begin with or they were producing for the more distant future, a’la the Garett Jones hypothesis.  The new gdp numbers will imply less of a boom in per hour labor productivity in the period when people are fired in great numbers, though I would be surprised if the final adjustments made this initially stark effect go away.  BLS estimates from June 2011 still show quite a strong ZMP effect, although you can argue the final numbers for that series are not yet in.  (I don’t see the relevant quarterly adjustments for per hour labor productivity in the new report, which comes from Commerce, not the BLS.)  Furthermore there is plenty of evidence that the unemployed face “discrimination” when trying to find a new job.  Finally, the strange and indeed relatively new countercyclicality of labor productivity also occurred in the last two recessions and it survived various rounds of data revisions.  It would be premature — in the extreme — to conclude we’ve simply had normal labor market behavior in this last recession.  That’s unlikely to prove the result.

Most generally, the ZMP hypothesis tries to rationalize an otherwise embarrassing fact for the structural hypothesis, namely high measured per hour labor productivity in recent crunch periods.  If somehow that measure were diminished, that helps the structural story, though it would make ZMP less necessary as an auxiliary hypothesis, some would say fudge.

Other parts of the structural story find ready support in the revisions.  Real wealth has fallen and so consumers have much less interest in wealth-elastic goods and services.  This shows up most visibly in state and local government employment, which has fallen sharply since the beginning of the recession.  Rightly or wrongly, consumers/voters view paying for these jobs as a luxury and so their number has been shrinking.  Construction employment is another structural issue, and given the negative wealth effect, and the disruption of previously secure plans, there is no reason to expect excess labor demand in many sectors.

In the new report “profits before tax” are revised upward for each year.  That further supports the idea of a whammy falling disproportionately on labor and the elimination of some very low product laborers.

Measured real rates of return remain negative, which is very much consistent with a structural story.  Multi-factor productivity remains miserably low.  In my view, a slow recovery was in the cards all along.  Finally, you shouldn’t take any of this to deny the joint significance of AD problems; AS and AD problems have very much compounded each other.

Hyena July 31, 2011 at 5:11 am

I guess I don’t understand.

“Real wealth has fallen and so consumers have much less interest in wealth-elastic goods and services. This shows up most visibly in state and local government employment, which has fallen sharply since the beginning of the recession. Rightly or wrongly, consumers/voters view paying for these jobs as a luxury and so their number has been shrinking. ”

I thought this was what a fall in aggregate demand meant?

J Thomas July 31, 2011 at 7:32 am

Yes, that’s what a fall in aggregate demand means.

In my county, revenues fell a whole lot because all of a sudden people had a lot less to tax. So the county had to find things to cut, and when they cut various programs they also cut the employees who had been running those programs. To me it didn’t look like voters thinking it was a luxury. It was that the voters simply did not have as much money, and it was a bad year to increase taxes a whole lot to make up the difference.

Perhaps as a side effect, they put up cameras at every intersection with a stop light, hoping to bring in more traffic-violation revenue. But the voters rebelled at that, and the cameras were turned off, and that program was delayed until this year when they managed to start it up without anyone in particular being held responsible for it.

TallDave July 31, 2011 at 8:06 pm

I think everyone agrees there has been a fall in AD, but that the question is whether we also have structural problems beyond AD (i.e. is AD failing to recover because productivity is not growing).

Andrew' July 31, 2011 at 6:16 am

Would people want the product if the economy was churning, or have people recognized the cost-benefit is not favorable? I see two scissor blades on labor. One is the increased competition for the jobs. The other is increased competition for the resources that represent the costs of labor (gasoline, etc.). We aren’t as wealthy as we thought we were, and that let policy-makers get away for too long adding artificial costs to labor.

Claudia July 31, 2011 at 7:10 am

Lower productivity during the ‘Greatest Recession’ does not necessarily imply anything about the longer trend in productivity. We are probably just learning more about what happened in the cycle.

Ron Potato July 31, 2011 at 8:42 am

The cycle is just beginning. Most of the losses were never taken. They were papered over, and put upon the back of the federal government, which is not an infinite money sink.

Rahul July 31, 2011 at 8:00 am

structural interpretations of unemployment

What exactly does that phrase mean? Are there other non-structural interpretations? Or is that one of those things pundits use to sound smart?

Let’s assume unemployment is because of the “we thought we were wealthier than we were” syndrome. So if we had not had that delusion; how would these masses have been any better employed? A ZMP worker is a ZMP worker; preceding delusion or not.

Jake July 31, 2011 at 8:21 am

“Structural” meaning the economy was geared to selling things people didn’t want, and it will take a while for everyone working in those useless areas to change course, figure out what is actually valuable, and then deliver it.

Ron Potato July 31, 2011 at 8:44 am

And it takes even longer when the failing companies are propped up.

The change in course toward productivity is still not happening. How many social media startups and high-end clothing stores do we need?

Rahul July 31, 2011 at 1:28 pm

If the stagnation thesis is true our basic needs are already well met. Food, houses, cars, TV’s all those we have well made and in sufficient quantities. Naturally the innovation’s coming in social media and other quirky areas. But I don’t see how else this would play out.

I mean, it’s almost impossible to make a new refrigerator, car, TV or oven that’d revolutionize the market in a step change. The need just doesn’t exist.

derek July 31, 2011 at 4:32 pm

Not quite. There are things that a refrigerator and car could do that would drive economic activity. We are on the tail end of a massive change in TV’s where we saw the death of the CRT.

There are other issues. If there was a new automobile technology, could it be sold and who could buy it? There are many examples in developing countries where solutions are available but either can’t be afforded or can’t be implemented due to governance or societal barriers. Is it possible that the US has hit the point where the convergence of the barriers and lack of resources would prevent these things from happening?

As for social media and other quirky things, I would ignore the consumer end except for the few who sell to them. The infrastructure of these things are available for quite reasonable. Right now there are a very large number of resources available to small firms that just weren’t there before. For me to set up a server to try some kind of service out for my very small company now is cheap, easy and available. The technological boom has allowed large firms to manage vast operation to a level just above mediocrity. The technology is available and cheap to make smaller firms capable of competing.

The current malaise is the economy purging bad ideas. The stupidity was deep and broad; you don’t get a collapse of this nature without multiple points of failure. The US has put itself in the position where it may miss out on the next coming thing.

J Thomas July 31, 2011 at 5:29 pm

We have a big need to do things more energy-efficient. But if I bought a new energy-efficient refrigerator it would probably take 8 years for it to pay for itself, unless electricity rates rise faster than I expect. Or if I have to take a job on the west coast, I doubt I’d try to move it there. I’d sell it for a big loss.

I’m not in the market for a new energy-efficient car just now, either. My apartment could use special insulation sprayed into the walls, but I’m not going to do it and neither is my landlady. That one might pay off in 3 years or maybe 4, but I doubt I’ll be here that long. I’m not at the most stable place to work.

Better insulation on my oven would pay off twice in the summer, I’d use less energy to heat the oven and less to aircondition the house. It would probably only cost around $500. Maybe my landlady will put in a new one when I move out. More likely not.

I never use the local bus system, even though it goes everywhere in town I’d need it to. It would be so easy to walk half a mile to the bus stop, and wait less than half an hour for the bus, and spend $1.25 to go close to wherever I want. They have a satellite system which reports where the bus is whenever I call. But it’s cold waiting in the winter, and way too hot in the summer. If somebody would just build a restaurant or something at the important bus stops, that sells stuff and lets people wait, and that announces the bus 3 minutes before it arrives … but they have not.

Some ways this is a good time for big new projects, right? If you need to borrow money to do something with a big payoff, interest rates are low. If you can actually get the loan.

E. Barandiaran July 31, 2011 at 8:02 am

Just two points.

1. On the “demand” side. In advanced economies, people were consuming too much in relation to their Hicksian ex-ante income (or their Friedman’s permanent income). The “crisis” led to a much lower level of consumption even in relation to the (lower?) level of that income. In the rest of the world as a whole, people may have increased their consumption/income ratios after the “crisis”. In advanced economies, government response to the “crisis” has hardly compensated the decline in private consumption and private investment because governments have been –and still are– engaged in redistributing incomes (including bailouts, welfare programs, bribes, looting), a redistribution that imposes the costs associated with (present and future) taxation.

2. On the “supply” side. For the last 25 years, the integration of China, India and other countries into the world market economy has implied a huge reallocation of resources across countries and within countries. Regardless of the “crisis” and its effects on each country’s consumption/income ratio, this reallocation process will continue. For each country, the relevant issue is how it is participating in the reallocation process rather than productivity gains or losses. A country’s participation is conditioned, among other factors, by government policies to free resources from old activities and to let resources enter into new activities.

Bill July 31, 2011 at 9:00 am

E., I agree, except for all of your description of government. Sometimes government serves as a temporary backstop until we find the new equilibria, or otherwise we just have overshooting panics.

Also, Tyler seems to look at employment simply as a structural job match issue where the market would clear if you just had the right skills. You can’t just look at it as a structural employment issue, when employment is an input to the production process. If there is no sustainable demand for output, and there is thus no employment, everything looks structural, doesn’t it.

E. Barandiaran July 31, 2011 at 10:05 am

My description of what governments of advanced economies have been doing is benevolent. I could have easily argued that despite all the noise made by great macroeconomists about big government spending on stimulus and bailouts, most has gone to owners and employees of failed companies (including banks and other financial intermediaries), beneficiaries of welfare programs, bribes to supporting constituencies (unions, unions, unions), and looting to finance political campaigns and the mercenary media.

I could have also elaborated that redistribution has imposed high and increasing costs to all advanced economies regardless of the “equity” or “inequity” of those transfer payments, including the deadweight losses usually associated with taxation as well as the resources wasted in the rent-seeking activities of the many groups that have been attempting to benefit from that redistribution. Indeed, you are not going to see all those great macroeconomists talking about these costs. I have the Argentine advantage — I have seen all of that many times in the past 60 years.

Bill July 31, 2011 at 11:01 am

If you have said the latter, I would have disagreed. But, the fact that you can call it benevolent, and then later malevolent, makes me think the former and not the latter is correct, as I do not see most elected officials in the same light as you. People do try to do what is right and they are held accountable, most of the time, by the electorate.

WTF July 31, 2011 at 4:46 pm

People do try to do what is right and they are held accountable, most of the time, by the electorate.

What separates you and me
In issues of public policy
Is you are naive

J Thomas July 31, 2011 at 5:50 pm

Ah, WTF, like the old joke that ends “The difference between you and me, is that I am apikorus and you are a goy.”.

E. Barandiaran July 31, 2011 at 10:30 am

In relation to your point about structural changes, let me say that in Latin America we stopped talking about structural changes long ago. Why? In the 1970s, “monetarists” and “structuralists” agreed that radical changes were needed, although there has never been an agreement on particular changes. Our economies have always been adjusting to internal and external shocks and since then the relevant issue is how to accelerate processes of resource reallocation precipitated by those shocks and how to protect some groups (usually the incumbents, not the poor) from both the shocks and the resource reallocation. You can bet that if many men from Marts came down to Earth, the marriage markets would be shocked and matching and mating would become a serious problem; well, this happened with the Chinese when they came down to the labor markets of the world economy.

Indeed, only in the long run, when we are all dead, the demand for output will be sustainable.

derek July 31, 2011 at 4:36 pm

There is immense demand in the world for manufactured goods. The structural issue is that the US with rare exception is unable to meet the demand competitively.

prior_approval July 31, 2011 at 8:03 am

We aren’t as productive as we think we are?

Which just might be an interesting insight, though it has been several decades since various criticisms arose at how the U.S. measures ‘productivity.’ Just take the growth of the entire financial industry – now that much of that ‘growth’ has cratered (in an utterly predictable fashion when viewed through a historical lens, it must be noted), does anyone subtract all that incorrectly assumed increased productivity?

lxm July 31, 2011 at 8:48 am

In our world money changes faster than the things money is supposed to value.

There’s a disconnect between money and value. The apparent growth of gdp in 2007-2009 was due to meta-money being created with no real connection to increased wealth in the world. It was just games played in the world of high finance. ($600 trillion derivative market, 75% of stock trades done by HST algorithms.) You can’t have an event like the flash crash of 5/6/2010 if there is a strong alignment between money and the value of things.

Finance is supposed to help with the creation of wealth. If finance can be restored to that function and we can again see the value in investing in infrastructure and manufacturing things as ways to increase wealth, then maybe we will stop sapping our strength and squandering our wealth on the imaginary.

Yancey Ward July 31, 2011 at 12:05 pm

+1

Noah Yetter July 31, 2011 at 8:53 am

“It would be premature — in the extreme — to conclude we’ve simply had normal labor market behavior in this last recession.”

There is no such thing as “normal labor market behavior in [a] recession”. We don’t exactly have a lot of data points. Why does the 1944-1983 period get anointed as the definition of “normal” and presumed to have relevance to today?

For example, it just makes sense for productivity to be countercyclical. When and if you need to lay people off, you lay off the least productive. We all believe in Diminishing Marginal Productivity, this is Econ 101 stuff here. So I don’t see how any recession where that doesn’t happen can be considered “normal”.

Gary July 31, 2011 at 1:17 pm

Perhaps economists have just made another terrible estimate, and we’ll find out next quarter that the most recent report actually underestimated productivity. I know, I know. THIS time they nailed it.

Tom Grey July 31, 2011 at 1:18 pm

I’m very disappointed to see no discussion of illegal aliens, as both consumers and producers, especially of construction.

I think when, starting in 2006, millions of illegals lost their jobs, but it did not change the official data because they are not officially counted, the data used in macro models gets muddy.

I guess the increase in unemployment/ underemployment of illegals was on the 2 – 5 million person change over peak employment in US (~2005/6) and the lowest, or today. As more illegals return to Mexico, and leave the rental (owner?) paying market, housing rentals and sales will remain weak.

I think GDP reports which don’t explicitly include illegals have too much fudge to base any good conclusions one.

Rahul July 31, 2011 at 1:41 pm

I think this is an interesting point but the relative amount this contributes to under-reporting needs to be quantified carefully.

It all depends on the methodologies used to calculate unemployment statistics I guess. Many illegals are in occupations where they might be getting officially counted.

e.g. a meat packing plant doesn’t lie about the number of employees. Just about their legality to work there.

J Thomas July 31, 2011 at 10:40 pm

I just went through that. The primary way we measure unemployment, is to talk to many thousands of people each quarter, and ask them whether they are working and if they are not, why not. The rules about which people to count as unemployed are sort of intuitive though not completely.

Illegal aliens do not get asked whether they are employed, unless they are willing to pose as citizens when the government calls them repeatedly.

When calculating unemployment statistics, the main measure does not at all ask employers how many people they have fired. It asks only citizens how many people in their household are working etc.

Rahul August 1, 2011 at 1:21 am

The sample surveys, do they even ask about citizenship and legal status?

J Thomas August 1, 2011 at 6:24 am

I checked one source about this.
http://www.census.gov/prod/2006pubs/tp-66.pdf

It’s a long document and I might have missed something. But what I see is that at the time this was written, they did not ask people about citizenship but they did ask whether people voted.

The attempt is to collect data about randomly-sampled homes. They use a complicated procedure to randomly select residences, trying to make sure that each area is represented fairly. Also they try to represent socioeconomic types fairly. Once they identify a primary residence, they call monthly for 4 months, wait 8 months, and then call monthly for another 4 months. They ask for social security numbers of everyone living there, and ethnicity, but not citizenship. If the person who answers the phone (or answers the door if using the phone doesn’t work) refuses to talk to them, they go away.

The residents of about 7% of homes refuse to be interviewed. Then the statisticians use whatever data they have about the residence to weight the responses from similar residences that did respond.

So, it’s predictable that a large fraction of illegal immigrants would refuse to answer government interviews. But if one person in the household does respond, an illegal immigrant living there might likely be included. And to the extent that people who live in places similar to the places illegal immigrants live respond similarly about unemployment, the nonresponse will not affect the statistics.

I can only make guesses, like my guess that illegal aliens are less likely to answer surveys, because I’m guessing about the absence of data and I don’t have accurate data about that.

David July 31, 2011 at 2:17 pm

There are important lags that should influence our interpretation of the data. The Pharma industry in the US has, I read earlier today, laid off 300,000 people since 2000. I can tell you from experience that a) some of these were definitely ZMP employees, but also b) most were not, and the flow of new products over the next ten years will be far lower than trend.

You can improve profitability in the short term by giving up on innovation, but this cannot be a successful long-term strategy.

Jim Glass July 31, 2011 at 4:18 pm

The “we thought we were wealthier than we were” explanation may be supported by a significant data point that I haven’t seen discussed anywhere.

In the early 2000s there was a huge, unprecedented, spike in new household formation. Such household formation normally corresponds strongly with “economic good times” — when people feel well off they ‘move out’ and form new households, amid hard times and uncertainty they stay put of ‘move back’ and consolidate households.

It seems people *never* felt so good as in the early 2000s! Perhaps seriously contributing to the housing bubble-and-bust.

The spike in household formation was a bubble-and-bust even *bigger* than the home building bubble-and-bust, and closely preceeded it — household formation leading the home building bubble on the way up, and collapse of household formation leading the home building bust on the way down. Which makes perfect sense: new households demand new housing, no new households demand no new housing.

Perhaps a troubling thing here is that the collapse in home building, as steep as it has been, has *not* kept up (down?) with that in household formation:

[] Household formation is down 78% since 2007, 75% from the average for 1998-2007.

[] Home starts are down “only” 57% since 2007, 67% from the average for 1998-2007.

The historical average home starts-to-household growth ratio has been 1.16 to 1.

During 2008 to 2010 the ratio has been 1.34 to 1 … in 2010 it was 1.64 to 1.

By these numbers, in spite of the collapse in home building, it looks likes homes are still being *overbuilt*.

Here’s the data in chart-and-graph form:
http://blog.scrivener.net/2011/07/has-housing-industry-boom-and-bust-been.html

cynic July 31, 2011 at 7:32 pm

As bad as the news is, at least I will hear less about ZMP workers, which I always felt were disgusting and inaccurate based on all the people in my life I knew who were hired, fired, or retained their jobs in this period.

Sadly I read: ” Furthermore there is plenty of evidence that the unemployed face “discrimination” when trying to find a new job.” As though, this was a proclamation directly from the market gods themselves. Employers exclude the recently unemployed because there are so many of them that are so desperate, they will apply to any position, no matter how inappropriate… not because they realize when they had to do layoffs, they got rid of the scourge of their own ZMP, and understand that every other company did the same.

Matt Young July 31, 2011 at 8:00 pm

“I view this hypothesis as the intersection of Fischer Black, Hyman Minsky, and Michael Mandel.”

I then add Shannon:
http://en.wikipedia.org/wiki/Information_theory
In which a quant of information is a quant of goods.

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