Are we still in the short run?

by on September 19, 2012 at 2:42 pm in Economics, Uncategorized | Permalink

The excellent Eli Dourado reports:

I think there is good reason to think that the short run is over—it is short, after all.

My first bit of evidence is corporate profits. They are at an all time high, around two-and-a-half times higher in nominal terms than they were during the late 1990s, our last real boom…

If you think that unemployment is high because demand is low and therefore business isn’t profitable, you are empirically mistaken. Business is very profitable, but it has learned to get by without as much labor.

A second data point is the duration of unemployment. Around 40 percent of the unemployed have been unemployed for six months or longer. And the mean duration of unemployment is even longer, around 40 weeks, which means that the distribution has a high-duration tail…

Now, do you mean to tell me that four years into the recession, for people who have been unemployed for six months, a year, or even longer, that their wage demands are sticky? This seems implausible.

A third argument I’ve heard a lot of is that mortgage obligations have remained high—sticky contracts—while income has gone down. Garett Jones endorses this as a theory of monetary non-neutrality, and I agree. In fact, I beat him to it. But just because debt can make money non-neutral in the short run does not mean that we are still in the short run.

In fact, there is good evidence that here too we are out of the short run. Household debt service payments as a percent of disposable personal income is lower than it has been at any point in the last 15 years.

There are numerous pictures at the link.

marris September 19, 2012 at 3:25 pm

My comment on his site:

> If you think that unemployment is high because demand is low and therefore business isn’t profitable, you are empirically mistaken. Business is very profitable, but it has learned to get by without as much labor.

Hmm… I’m not sure whether this is a brilliant insight or an incorrect one.

My understanding of the standard Keynesian spiral story is that people don’t want to spend, and business investors, predicting low returns on investment, decide to slow investment spending.

The author here points out that businesses are profitable… so is business investment up? Are companies actually spending lots of money on non-labor factors? Or is it the case that their capacity is still underutilized, even in this profitable environment?

The debt repayment graph is also interesting. Does the falling repayment percent imply that we are no longer in Fisher-style debt deleveraging mode? The graph shows personal debt repayment. Is there similar data for business debt repayments?

Doug September 19, 2012 at 4:40 pm

Okay here’s the things yields on junk corporate debt are at all time lows. (link below). Junk corporate credit are a pretty good proxy for new business investment (versus investment grade which is usually more about financing existing operations rather than new ones).

If like you say investors were slowing investment spending than junk yields should be at highs (at least relative to risk free treasuries), not lows. Supply of corporate credit is pretty much the same as it was before 2008, so low yields can only be explained by enormous investor demand.

The question isn’t why isn’t there demand for investment, there is, it’s enormous. It’s why aren’t investment suppliers, i.e. firms taking advantage of this enormous demand and ridiculously cheap rates to finance everything and anything. Firms should be taking on massive debt and expanding like crazy, because they’ll still get cheap rates if they have highly leveraged balance sheets (i.e. become speculative grade).

Anything project with even a modest return on assets should look attractive and profitable to firm management and shareholders. Unless the thing holding back investment isn’t ROE hurdles, it’s capital preservation risk. In this case even zero rates won’t stimulate investment if people are worried about substantial likelihood of having their investment wiped out. After all firms invest in large projects in Zimbabwe even if they can get zero rate financing.

But why would corporates be so worried about their investments going to zero. I wonder if it has anything to do with a president who claims that ownership of assets and their profits rightfully belongs to school teachers and social workers, rather than former titleholders because the latter “didn’t build that.” I wonder if it has anything to do with a massive social protest movement that seeks to shut down the financial system. Could it be related at all to an leftist executive branch that’s basically exercising unchecked power through executive orders with no balance of power through Congressional approval.

Gee, if only there was some option for president that the investment community trusted. Maybe someone with a long history in the industry, who’s worked inside corporations and the financial system and doesn’t view them simply as “stupid white men hoarding all the loot.” If only we ha had something like that maybe corporates wouldn’t be stuck in regime uncertainty and would start letting the investment flow again… If only…

http://online.wsj.com/article/SB10000872396390444273704577637790387902270.html

marris September 19, 2012 at 5:04 pm

Yeah, it’s possible that people are worried about capital preservation.

How are you thinking about the probability distribution for capital loss? [if there is such a thing]. Does it slope down (there is a high probability that I will lose 1%, a smaller probability that I will lose 2%, …, very low probability that I will lose 100%).

Or is the distribution much weirder? Maybe bimodal? There is a high probability that you will lose something like 5%, but there is another bump much further out, where you might lose 25% or more?

Doug September 19, 2012 at 6:55 pm

The major risk that most investors are looking at and the main cause of the regime uncertainty is political risk.

The chance that any major economic power shifts far left into socialism is the highest it’s ever been. Possibilities include super high tax rates, a flood of regulation, increasing government command of the individual sectors or the whole economy, trade wars, increasing corruption and crony capitalism, outright nationalization, and a general transfer from the productive to the unproductive (whether that’s from a shrinking pool of workers to a growing poor of medicare users, or from Germany to Italy).

Here the prototype would be the banking industry, which IMO has suffered the most government intervention since 2008. Basically the entire business model of investment banks has been broken by government intervention (Basel III, the Volcker rule, mandated central clearing, national capital controls, mandated segregated accounts, mandatory mortgage modification) and they can’t generate enough returns to even pay expenses.

US Financials share prices are down 50% since 2007 (compared to about 0% for the broader market. And the government didn’t even take the extreme socialist positions that were gaining much mainstream traction for a while (e.g. bank nationalization, prosecuting bank executives for “orchestrating a financial crisis”, the Robin Hood tax).

Other industries are looking at the financial sector as a model for political risk. And losses of 50-100% look quite plausible. Add on top of that the risk of a global depression, extreme currency devaluation/hyper-inflation (remember inflation tends to hurt equity returns, the need for an inflation hedge is why commodities as an investment have outperformed equities), and highly disruptive technologies in the horizon (a good thing for the economy, but a serious potential source of uncertainty for any business) and the regime uncertainty has never been higher.

Also the Fed’s QE craziness (who knows that they’ll try next) means that the non-neutrality of money has never been higher. If money is relatively neutral than one can simply park cash in TIPS as an inflation hedge. Even if two groups have different consumption baskets most prices move together. I.e. everyone tends to experience the same inflation which reduces risk, especially with explicit inflation hedges.

But depending on whether the Fed purchases the long end of the yield curve, mortgages (with their accompanying gamma) or credit (structured or corporate, like with TARP) means that the mechanism or money transmission will be different. Thus money is highly non-neutral in this environment. I.e. two entities with different consumption baskets could experience very different rates of inflation, at least over the medium term.

This is doubly risky for businesses which tend to have costs and revenues reflecting different consumption baskets. E.g. FedEx’s cost basket is heavily loaded on the cost of oil, but their revenue basket is heavily loaded on the cost of consumer goods (much of their business coming from E-commerce). So they have high non-neutrality of money risk, if the Fed’s actions increase inflation in oil faster than consumer goods they get screwed.

Emanuele September 19, 2012 at 9:43 pm

Just a question (not for Doug):
is Doug a lunatic or is he a good depiction of a sensible share of American electorate? Is a part of electorate thinking (and hinting) there is a positive probability Obama will expropriate the means of production?
Living outside of the USA it is not easy to perceive the situation through the internet. It is pretty easy to recognize lunatics in real life. On line it is not the case.

Doug September 19, 2012 at 11:03 pm

Oh yes dear such a distant possibility. Only lunatics could think. By no means is nationalization some sort of crazy paranoid fantasy. Certainly the Obama administration would never take over a major sector of the economy, say the production of automobiles. He would never wipe out the creditors circumventing the 1000 year old bankruptcy procedure enshrined a common law. Only a lunatic could think that Emanuele.

That’s why today the auto industry remains 100% privately owned in the United States.

prior_approval September 20, 2012 at 3:54 am

‘is Doug a lunatic or is he a good depiction of a sensible share of American electorate?’
Well, ‘sensible share’ might be a reach, but yes, he is sadly representative. Including ignoring the request that he need not answer the question.

And yes, all this talk of ‘socialism’ is deeply held by people with minimal (to be charitable) experience of living or working anywhere but in the U.S.

People who seemingly have no idea that a number of major car makers are not exactly in ‘private hands’ – a certain German car maker comes to mind, along with (in a sense) the French car industry (including Europe’s second largest car manufacturer). A certain Italian automaker also has bit of a history in this area.

Tellingly, however, one country with a long and proud automobile manufacturing history is not on this list of ‘socialist’ tainted companies – the UK no longer has a domestic automobile industry. Of course, some people point to this as an example of why government meddling does not work.

Other people point out that ineffective actions don’t work, regardless of who takes them. Keeping the American car industry alive seems to have been the sort of decision that most Americans would think an easy one to make. Of course, those are the sorts of people who rarely consider Thatcher a good role model in preserving a nation’s industrial base.

Emanuele September 20, 2012 at 7:16 am

Thanks for the answer.

I did not want to speak about the problems and virtues of a slightly more leftish or more rightish policy. I think that is a second order problem.

What astonished me was that from a European PoV both Romney and Obama seem pretty similar, both quite to the right of the European political center in most sensible debates, health insurance as the obvious example. Looking at the proposals, and not at their tones, they do not seem that different. Romney and Obama Health plan differs for commas and marginals values. The most visible differences are on social themes and not on economic ones (gay marriage as the obvious example).

To think that one is for crazy capitalism and the other will nationalize means of production seems the kind of thought you achieve when you think too much about something and you lose proper prospective. Like lunatics do.

ChrisA September 20, 2012 at 7:48 am

http://www.bbc.co.uk/news/business-18438193

@prior approval. Uk car production is at the highest in years!

JonF311 September 20, 2012 at 4:44 pm

If companies are worried about capital preservation then potential tax increases are a very minor issue there: no one thinks any future increase in the corporate tax rate is going to go to 100%.
The more likely fear is that any new investments will not only fail to bring a return but may rather bring huge losses. That was the lesson the real estate bubble after all: vast sums of money poured into real estate– and was ultimately vaporized, with firms by gross load going bankrupt. In an environment ruled by fear doing nothing looks attractive than taking any sort of risk.

dirk September 19, 2012 at 3:25 pm

“Now, do you mean to tell me that four years into the recession, for people who have been unemployed for six months, a year, or even longer, that their wage demands are sticky?”

It is those who have remained employed whose wage demands have remained sticky. For them, the compounded decrease in inflation over the past four years (not “since 2008″) never happened. The unemployed can’t simply take the same job as an employed person and work for much less. Institutional inertia won’t allow for it.

Corporate profits may be at all time highs but according to the stock market profit growth expectations (a proxy for labor demand) remains below where it was in both 2007 and 2000.

To sum up: profits are very high, profit expectations are mediocre, wage demands by employed workers are very high, wage demands by the unemployed are irrelevant. In other words: “Business is very profitable, but it has learned to get by without as much labor.”

Spencer September 19, 2012 at 5:24 pm

The year over year growth in average hourly earnings was 1.23% in July and 1.28% in Aug.. These are the smallest gains in this data series on record — i.e., labor demands by the employed at at all time record lows.

Exactly what do you mean when you say labor demands by employed workers are very high?

Emil September 19, 2012 at 5:30 pm

Absolute levels and year on uear change is not the same thing (sort of the same discussion as the one about labelling slower projected growth in government spending ad cuts)

dirk September 19, 2012 at 6:08 pm

At what data series are you looking?

Joe September 19, 2012 at 6:14 pm

+1

Anthony September 19, 2012 at 7:26 pm

“Now, do you mean to tell me that four years into the recession, for people who have been unemployed for six months, a year, or even longer, that their wage demands are sticky?”

After a little while, the unemployed person’s wage demand unsticks, then falls to a floor set by unemployment insurance, where it remains *very* sticky until the 99 weeks (not quite two years) is up.

Ray Lopez September 19, 2012 at 8:49 pm

@dirk – You may be right– I noticed that Verizon unions in the USA today agreed to a ‘four year deal’ with 15% wage improvements–that’s a long time and shows the power of unions and sticky wages. Debt is a four letter word and we need to go more towards an equity based financing system.

Doc Merlin September 19, 2012 at 11:56 pm

Equity is the way forwards, but the law does everything in its power (short of banning it) to benefit debt over equity.

Brian September 19, 2012 at 3:25 pm

“If you think that unemployment is high because demand is low and therefore business isn’t profitable, you are empirically mistaken”

I think the short run would be best if it were defined politically, and it ends whenever the bias of the position is satisfied. PK was just on ABC’s This Week recently, rebuking the other pundits that in fact, businesses are sitting on the sideline in hiring because of low demand. Thinking otherwise would be a misread of the empirical data, again according to PK.

So clearly, the short run is not over.

clayton September 19, 2012 at 3:30 pm

We aren’t dead yet so no

Brian Donohue September 19, 2012 at 6:03 pm

I just held a mirror under my nose and it fogged up, so…

Tyler, the “short run” is to today what “the long run” is to tomorrow. Remember how Bugs would always promise that Daffy could host the show ‘tomorrow’. Good times.

Philippe Legrain September 19, 2012 at 3:54 pm

Frankly, this is attacking a straw man. Does anybody claim that “unemployment is high because demand is low and therefore business isn’t profitable”? Corporate profits are high because business investment – the key, most cyclical component of demand – is low. Indeed, the corporate surplus is the flow-of-funds counterpart to the big government deficit.

ila September 19, 2012 at 4:34 pm

“…the corporate surplus is the flow-of-funds counterpart to the big government deficit.”

It seems like you are trying to ever-so-slightly suggest that the deficit is _indeed_ crowding out private investment. If the government stopped borrowing, do you think we’d see an increase in private investment?

Boonton September 19, 2012 at 9:46 pm

If corporations do not spend, income falls. Income falls, tax revenue falls. Tax revenue falls you get deficits.

If the mechanism was crowding out then corporations would not see surplus cash. Crowding out means that corporations have a tough time borrowing money in the market for investments because the gov’t deficit is sucking it all up. But corporate cash hoards would mean that those corps wouldn’t need the money markets to finance investments.

Emil September 19, 2012 at 4:40 pm

I think you are confusing cash flows with profits (a common mistake)

Doc Merlin September 19, 2012 at 11:57 pm

“unemployment is high because demand is low and therefore business isn’t profitable”
Krugman did for a while.

Boonton September 20, 2012 at 10:01 am

I believe you are misquoting Krugman. Demand is low therefore it is not profitable for businesses to hire more workers. That says nothing about whether business is currently profitable. You can be very profitable in a low demand environment is you reduce labor and other costs accordingly. The magic question, therefore, is if demand is increased why wouldn’t hiring eventually not increase as well?

Brian September 19, 2012 at 3:55 pm

On whether uncertainly or low demand is accounting for the high unemployment, here is Tim Taylor:

http://conversableeconomist.blogspot.com/2012/09/how-much-is-uncertainty-adding-to.html

Philippe Legrain September 19, 2012 at 4:04 pm

And it goes without saying (but it always worth saying, so as to pre-empt obvious replies), that business investment is low because consumer demand is low, both in the US, where households are deleveraging, and abroad (Europe in crisis, China and other emerging economies slowing etc etc) and because there is so much uncertainty at the moment that it makes sense to delay investing even if you are feeling relatively optimistic/your sector is faring relatively well.

Cliff September 19, 2012 at 8:46 pm

Maybe consumer demand is “low”, but it is also at an all-time high…

Brian Donohue September 20, 2012 at 8:06 am

Exactly. Yet the detoxing addict, predictably, wails.

dave smith September 19, 2012 at 4:06 pm

I though wage stickiness referred to employed workers not receiving cuts in wages, not to the idea that unemployed people were not willing work for less (or not receiving offers to work at lower wages.)

mw September 19, 2012 at 4:46 pm

That’s what everyone thought, except this dude.

Floccina September 19, 2012 at 5:18 pm

@Dave Smith, you are correct but that is due to their not being enough money after paying the employed to pay new workers but the fact that profits are high means that there is money available to hire more employees.

Emil September 19, 2012 at 5:38 pm

Most of the people doinb the hiring will hire people because they need them and can afford to pay them. Only affording to pay them is not sufficient

Doc Merlin September 19, 2012 at 5:44 pm

THIS!
This is the most important point in the thread!

Nowadays the marginal employees has little effect on current production but has a lot of effect on production growth. This means that if employers expect a less than rosy future (say from slow population growth) then they won’t hire very many people.

msgkings September 20, 2012 at 12:35 pm

“if employers expect a less than rosy future (say from slow population growth)”

And this is my slow-motion nightmare…when the whole world’s population growth slows (already happening), goes to zero (around 2050), and even turns negative (some time after)….what happens next? I seriously don’t know how global capitalism as we know it survives.

The Anti-Gnostic September 20, 2012 at 2:12 pm

msgkings:

You should get more sleep. If population slows, goes to zero or even turns negative, the only businesses (and governments) harmed in that instance will be those who’ve structured their leveraged finance on continual growth at a certain rate. They’ll have to sell out to businesses (and governments) who haven’t.

Markets, even population groups, expand, shrink, get decimated, get rebuilt, all the time. The only reason economists are always squawking about “growth” is because they know that future profits and tax revenues are leveraged to infinity (thanks in no small part to the very policies most economists espouse). The money system will indeed be destroyed, and be replaced by a new one. This is not unique in human history.

JonF September 20, 2012 at 4:50 pm

Global capitalism has survived handily with populations much lower than what we have today. The population of the world was about half what it is today when I was born, a mere 45 years ago. Whatever was wrong with the 60s I don’t think a rotten economy caused by too few humans on Earth was it. There probably (well, certainly) is a lower bound to the number of humans needed for the world’s technology to function, but we are far far above that lower bound. We could probably have a solid, high tech economy with as few as a billion people on the planet. Maybe even less than that.

Boonton September 21, 2012 at 8:10 am

Slower population growth is indeed a problem for business…..for a business that has achieved 100% market share and 100% global market share. For most businesses, though, there’s far more capacity to gain sales through competition for existing customers and changing tastes.

To the degree that slower population growth puts a dent in demand, it will also put a dent in the supply of new people seeking jobs so the two should balance each other out rather than create unemployment.

Anthony September 19, 2012 at 7:33 pm

The employer also has to have so much additional work that the current employees aren’t willing (or able) to work overtime to cover the additional workload. Even in a unionized environment, and without accounting for training costs, it’s often cheaper to ask 5 employees to go from 40 to 48 hours a week than to add one new 40-hour employee. (Benefits generally stop costing more at 40 hours, even if they’re paid hourly rather than monthly.) With high unemployment and job insecurity, more employees will be willing to take on the additional work if they’re paid for it, and for some, even if they’re not paid extra, but promised a little more job security.

ad*m September 19, 2012 at 4:07 pm

“Now, do you mean to tell me that four years into the recession, for people who have been unemployed for six months, a year, or even longer, that their wage demands are sticky? ”

Huh? Why would ‘people’ look for a job once they have discovered the greatness of transfer payments, section 8 housing, free lunch programs, unemployment benefits. Why look for a job? The government is taking excellent care of them.

In Belgium this started earlier, and it has entire towns with adults who have never had a job, whose fathers never had a job, and whose grandfathers never had a job either. See this newspaper article from 2001, http://www.standaard.be/artikel/detail.aspx?artikelid=DST12052001_019, and try to predict who they vote for.

What Charles Murray described is only the beginning, and there is no way back.

Michael September 19, 2012 at 4:35 pm

“Why would ‘people’ look for a job once they have discovered the greatness of transfer payments, section 8 housing, free lunch programs, unemployment benefits. Why look for a job? The government is taking excellent care of them.”

You could do an experiment where you tried to get SNAP, UI, and section 8 housing. If you succeed, you could tell us about how excellent that life is. There are indeed situations where the perfectly rational thing to do is collect those benefits rather than work because the payoff is higher. That’s why things like the Earned Income Tax Credit came into existence…as a way to entice people to work instead. Only now, we learn that if you take advantage of that and work, you’re still a parasite if that tax credit brings your federal income tax liability down too low.

Mind you, that’s not necessarily contradictory. One could believe that no one should get benefits and thus, then there would be less of a reason for something like the EITC to serve as an incentive to get a job.

Unfortunately, things get messy in the real world where there are issues like children to worry about. Having a child suffer for the sins of the parent seems cruel, so either you reward the bad behavior of the parent for the sake of the child, or you let the child suffer, or you start taking children away from poor parents and make them wards of the state…

John Thacker September 19, 2012 at 4:47 pm

Doesn’t the amount of money people get with UI depend on their wages in their previous job? I know it’s up to a limit.

That seems justified when it’s paid for by premiums, I guess, but it seems to have less relevance when benefits keep getting extended. After a year or more, why should someone get more money because they used to have a good job than someone who never had a good job? It seems regressive.

John Thacker September 19, 2012 at 4:52 pm

From what I know of some states, like <A HREF="http://www.massresources.org/unemployment-benefits.html"Massachusetts, someone who used to make $70k can get $35k year in unemployment, but someone who used to make $50k would only get $25k. As the length of benefits increases, and is increased past what it was when people were paying in premiums all those years, that starts to seem unfair.

It also would seem to make wages more sticky, because there’s good reason to avoid taking a paycut to a $50k job if you’re making $35k/year in unemployment, and that also would reset your unemployment level to $25k if you then lost that job.

JonF311 September 20, 2012 at 4:53 pm

Unemployment payments are capped at a maximum, so no matter how much you mad eat a former job, you can only get so much a year. In Ohio the maximum, at least ten years ago, was 1200 per month.
The average person collecting UI makes about 1/3 (yes you read that right) of his former salary income.

oki September 19, 2012 at 9:50 pm

STOP PUNCHING HOLES IN STRAWMEN!

To September 20, 2012 at 7:32 am

Citing a Flemish newspaper article about a Francophone town doesn’t work. This kind of thing is full of BS.

ad*m September 19, 2012 at 4:53 pm

I am not making or claiming a moral position. I am trying to explain why one should not be surprised that ‘wages’ are sticky. I give an example of another country where this is endemic and has been entrained to generations.

I prefer not to live on food stamps etc, no. But that is anecdotal. In Belgium at least, whole populations are happy to do so, doing some ‘informal economy’ work on the side.
There is a gradual curve from where the safety net is so awful that you starve, and people do anything to work for cents per hour, to where it is so generous that no one is his right mind wants to work. We are somewhere in between, and there is some fraction of the population that is okay with being on food stamps. The more generous the safety net, the larger that fraction is.

I do not presume to know what the appropriate or morally right fraction is. My point is that the data suggests that this fraction is now substantial, enough to cause ‘sticky wages’.

doctorpat September 19, 2012 at 10:50 pm

And don’t forget that “is okay with being on food stamps” does NOT mean “is happy and content”.

What this means is that they are unhappy. They complain, they protest, they march in the streets, they might even riot or smash windows. But they aren’t quite motivated enough to stop watching X-Factor at night and instead sit down and do a (free!) online course on software or something.
There are limits after all.

Michael September 19, 2012 at 5:22 pm

“If you think that unemployment is high because demand is low and therefore business isn’t profitable, you are empirically mistaken. Business is very profitable, but it has learned to get by without as much labor.”

This doesn’t strike me as an entirely valid argument. I think one would have to decompose those profits a bit.

The top profit earners are who you’d expect…lots of oil/gas and financials…Exxon, Chevron, ConocoPhillips, JPMorgan Chase, Wells Fargo, AIG, Berkshire Hathaway, Citigroup, Goldman Sachs, Morgan Stanley, etc. Do their profits really represent high aggregate demand? With energy, those are pretty inelastic goods their selling. The stock market? The vast majority of stocks are owned by a small minority of individuals and firms. Out of the stocks owned by households, the richest 10% own 80% of the stocks. Their riches doesn’t necessarily translate into higher demand from the other 90%.

Out of the 449 companies on the S&P 500 index 72% beat profit expectations, but only 41% beat sales expectations. There’s definitely a disconnect between the two measures. Look at restaurants or stores like Kohl’s and the numbers aren’t pretty. Some places like McDonalds and WalMart are doing well, but I’m tempted to say this is a case of people struggling and switching to inferior goods. It means higher demand and higher profits for them, but does it mean strong demand for the country as a whole? I’m not so sure.

I fear there’s a tale of two cities going on here. Financiers and oil men seem to be doing well. Tech companies (and their CEO’s) are too. There, the case for profits = no demand problems is probably stronger. But, overall, when the Forbes richest Americans show a 13% increase in net worth but most other Americans are pretty stagnant on these terms, it suggests you can’t necessarily extrapolate aggregate demand.

Yes, WalMart is making a killing. They’re worth what now? about $90 billion as a family? That’s equal to the bottom 40%. Those profits have made them very very rich, but I’m not sure you can point to that and say, because of that, everyone is rushing out to restaurants, or to buy new clothes, beds, washing machines, and dryers or jumping on planes to take vacations, stay in hotels, go to casinos, etc. In fact, most measures of those things don’t present a good aggregate demand picture.

Doc Merlin September 19, 2012 at 5:32 pm

The other possibility is that you Keynesians (yes Tyler, you are some flavor of Keynesian) are entirely wrong about the short run or about the nature of this recession. From just looking at the charts, it looks entirely supply side.

Claudia September 19, 2012 at 8:12 pm

I am unconvinced by the ‘well then it must be structural’ punchline of the piece. There’s a lot of talk about prices (in a broad sense), but what about expectations of prices? There is a recurring jingle here ‘they’re not as wealthy as they thought they were’ but why isn’t it ‘they’re not as poor as they think they are’? Bubbles often involve overshooting on the way up and undershooting on the way down. When I look at survey reports of income expectations by households, I see some very deep pessimism…much of it is understandable given the shocks they endured…but it looks too severe, too persistent. One might argue that years of pessimism and elevated unemployment mean that it is now baked in the cake (or structural now), but again I have a hard time seeing that the productive capacity has really been reduced so much (even if it was overstated some before). My main point is that we shouldn’t necessarily move directly from price stickiness to structural shocks like this piece seems to do.

uffy September 19, 2012 at 9:05 pm
Peter N September 20, 2012 at 1:15 am

In a consumer economy, consumption depends on labor spending their share on consumer goods, which is why labor’s share of GDP has been historically fairly stable:

“Bowley’s law is an observation in econometrics that the proportion of Gross National Product from labor is constant.[1] It is named for Arthur Bowley, the statistician who first observed it. It was first observed based on economic data in Britain from the late 19th and early 20th centuries.[2] Bowley’s Law has long been both an empirical and theoretical point of contention between rival theories of macroeconomic (functional) distribution.[3]“.

If the mechanism is recycling wages, then there are ways of changing the balance.:

Capitalists can do their own consumption and produce goods accordingly.

They can do their own consumption and spend money outside the country.

They can export capital, produce outside the country and repatriate the profits.

For low marginal cost goods they can keep the earnings from exports.

Etc.

As long as labor’s earnings are needed for consumption, the economy generates new low productivity jobs to replace those that increases in productivity eliminate. I don’t see anything that makes this process inevitable, though it seems to be an article of faith among many economists.

8 September 19, 2012 at 9:24 pm

Financial firms are earning huge profits because interest rates are low. When you can borrow unlimited at about 0.4% and buy a corporate bond at 4%, you can make some big profits, which is the Fed’s plan to recapitalize the banks. Multinationals are doing well.

Wages are sticky by regulation: people must buy health insurance or employers must provide it.

JonF September 20, 2012 at 4:56 pm

Many people are well above that wage floor. Why would wages be sticky above it? And low wage workers do not have to buy health insurance– in principle they will qualify for Medicaid and are excused from them mandate whether they do or not.

Dismalist September 19, 2012 at 10:26 pm

Then and Now:
Then, Keynes said: In the long run we’re all dead.
Now: Keynes is dead and we’re in the long run.

CIP September 19, 2012 at 11:06 pm

Now if only you could figure out that part about having your conclusions follow from your hypotheses.

John Skookum September 20, 2012 at 12:42 am

“Household debt service payments as a percent of disposable personal income is lower than it has been at any point in the last 15 years.”

My wife and I did the Dave Ramsey thing. We just made the last payment on the last of our four cars and swore to each other that we would never again buy a brand-new one or take out a loan for one. We have paid off all student loans, two out of three credit cards, and have nothing left but the third card and the mortgage. The card will be paid off by the middle of next year. The mortgage will take longer, but I think it will go more quickly now that all our other debt is falling off the books. Our FICO score climbs monthly but I don’t give a shit; I think I have borrowed my last nickel ever.

The Anti-Gnostic September 20, 2012 at 8:48 am

Corporate and household deleveraging is what keeps us afloat, not artificially cheap credit. I am mystified why the Fed thinks it’s such a good idea to pour money into a sector that nearly took down the primary dealers network. Wait, I just answered my own question.

Peter N September 20, 2012 at 12:46 am

Here’s something that may throw some light on the situation:

“Specifically, we examine employment trends in 366 detailed occupations. We formed three equal groups, each representing a third of U.S. employment in 2008: lower-wage occupations with median hourly wages from $7.69 to $13.83; mid-wage occupations with median hourly wages from $13.84 to $21.13; and higher-wage occupations with median hourly wages from $21.14 to $54.55 (all in 2012 dollars).
We then tracked net employment changes in these three groups over time, as shown in Figure 1. The red bars show net losses in employment during the recession (2008 Q1 to 2010 Q1). The orange bars show net growth in employment during the recovery (2010 Q1 to 2012 Q1).1 The pattern is striking.
During the Great Recession, employment losses occurred across the board, but were concentrated in mid-wage occupations. By contrast, in the recovery to date, employment growth has been concentrated in lower-wage occupations, which grew 2.7 times as fast as mid-wage and higher-wage occupations:2
 Lower-wage occupations constituted 21 percent of recession job losses, but fully 58 percent of recovery growth.
 Mid-wage occupations constituted 60 percent of recession job losses, but only 22 percent of recovery growth.
 Higher-wage occupations constituted 19 percent of recession job losses, and 20 percent of recovery growth.”

http://www.nelp.org/page/-/Job_Creation/LowWageRecovery2012.pdf?nocdn=1

So is it that the industries where the $13.84 to $21.13 jobs were haven’t recovered with the rest, are they now offering lower wages to new hires or are they using lower paid temporary workers?

Ricardo September 20, 2012 at 3:20 am

“If you think that unemployment is high because demand is low and therefore business isn’t profitable, you are empirically mistaken.”

Come on. Whatever happened to Econ 101? Imagine a firm in imperfect competition. It produces at the point where MR=MC and employs the number of workers needed to produce at that point. Low demand shifts both the Demand and MR curves back, resulting in lower production and lower employment. At the same time, the firm’s operating profit in equilibrium will be the area between the MR and MC curves which is positive. The fact that profits are at record levels is interesting but is not empirical evidence against a low demand story if the firms showing record profits exist in industries where there are barriers to entry (e.g. Apple and its patents).

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