Posts Tagged ‘Macroeconomics’

Because macroeconomists have messed it up for every one else , says Noah Smith at The Week:

To put it mildly, economists have fallen out of favor with the public since 2008. First they failed to predict the crisis, or even to acknowledge that such crises were possible. Then they failed to agree on a solution to the recession, leaving us floundering. No wonder there has been a steady flow of anti-economics articles (for example, this, this, and this). The rakes and pitchforks are out, and the mob is ready to assault the mansion of these social-science Frankensteins.

But before you start throwing the torches, there is something I must tell you: The people you are mad at are only a small fraction of the economics profession. When people in the media say “economists,” what they usually mean is “macroeconomists.” Macroeconomists are the economists whose job is to study business cycles — booms and busts, unemployment, etc. “Macro,” as we know it in the profession, is sort of the glamor division of econ — everyone wants to know whether the economy is going to do well or poorly. Macro was what Keynes wrote about, as did Milton Friedman and Friedrich Hayek.

The problem is that it’s hard to get any usable results from macroeconomics. You can’t put the macroeconomy in a laboratory and test it. You can’t go back and run history again. You can try to compare different countries, but there are so many differences that it’s hard to know which one matters. Because it’s so hard to test out their theories, macroeconomists usually end up arguing back and forth and never reaching agreement.

Meanwhile, there are many other branches of economics, doing many vital things.

What are those vital things? Some economists find ways to improve social policies that help the unemployed, disabled, and other vulnerable populations. Others design auctions for Google. Some evaluate development polices for Kenya. Others help start-ups. And on and on. Love it or hate it, their work should be judged on its own merits, not lumped in with the very different world of macroeconomics.

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The Council of Economic Advisers just released an interesting paper examining the macroeconomic harm from the government shutdown and debt limit brinksmanship. To do so, they created a Weekly Economic Index from data that are released either daily or weekly (and weren’t delayed by the shutdown). These data include measures of consumer sentiment, unemployment claims, retail sales, steel production, and mortgage purchase applications.

The headline result: They estimate that the budget showdown cost about 120,000 jobs by October 12.

Looking ahead, I wonder whether this index might prove useful in identifying future shocks to the economy, whether positive or negative. As the authors note:

In normal times estimating weekly changes in the economy is likely to detract from the focus on the more meaningful longer term trends in the economy which are best measured over a monthly, quarterly, or even yearly basis. But when there is a sharp shift in the economic environment, analyzing high-frequency changes with only a very short lag since they occurred can be very valuable.

P.S. I am pleased to see CEA come down on the right side of the “brinksmanship” vs. “brinkmanship” debate.

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Ray Dalio, founder of the remarkably successful Bridgewater Associates, has released a 30 minute video explaining his vision of “How the Economic Machine Works.” Well worth watching, particularly his description of a beautiful deleveraging.

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James Bullard, head of the St. Louis Federal Reserve Bank, gave a nice presentation on “The Tapering Debate” today. See the whole thing here.

One question he considers is whether the Fed balance sheet is getting scarily big. It’s certainly large by U.S. historical standards — the only time is was bigger, relative to the size of the economy, was in the 1940s.

By current international standards, however, the Fed balance sheet isn’t an outlier. In fact, Japan, Europe, and the United Kingdom all have larger central bank balance sheets, relative to their economies, than we do (FRB = Federal Reserve Bank):


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By many accounts, Sweden did a great job managing its financial and fiscal crises in the early 1990s. But more than 20 years onward, its unemployment rate is still higher than before the crisis, as noted in a recent commentary by the Cleveland Fed’s O. Emre Ergungor (ht: Torsten Slok):


And its labor force participation rate is still lower:


Does Sweden’s experience portend similar problems for the United States? Ergungor thinks not. Instead, he attributes this shift to a structural change in Swedish policy that has no direct analog in the United States:

One study of public sector employment policies published in 2008 by Hans-Ulrich Derlien and Guy Peters indicates that for many years, the labor market had been kept artificially tight by government policies that replaced disappearing jobs in failing industries with jobs in the government. The financial crisis was the breaking point of an economic system that had grown increasingly more unstable over a long period of time. It was a watershed event that marked the end of an unsustainable structure and the beginning of a new one. Public sector employment declined from 423,000 in 1985 to 240,000 in 1996 mainly through the privatization of large employers—like the Swedish postal service, the Swedish Telecommunications Administration, and Vattenfall, the electricity enterprise—and it has remained almost flat since then.

With such a large structural change, what came before the crisis may no longer be a reference point for what will come after. Having corrected the root of the problem, the Swedish labor market is now operating at a new equilibrium.

That doesn’t mean smooth sailing for the United States, as he discusses. But it does leave hope that perhaps we do better than Sweden in creating jobs in the wake of a financial crisis.

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The U.S. economy has recovered slowly since the official end of the Great Recession in 2009. Mark Lasky and Charles Whalen of the Congressional Budget Office just released a study asking why. Their answer: two-thirds of the slowness (relative to past recoveries) reflects weak growth in the economy’s potential. The potential labor force, capital stock, and productivity are all growing less rapidly than they did following past recessions. The other third reflects cyclical weakness, particularly in government, housing, and consumer spending.

CBO’s Maureen Costantino and Jonathan Schwabish turned those results into a nifty infographic (click to make larger):

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The fine folks at FRED, the economic data service of the St. Louis Fed, recently added seven new data series showing how various measures of federal debt compare to the economy as a whole, as measured by GDP.

I particularly enjoyed this one, showing the federal debt owned by the Federal Reserve banks.

Quantitative easing gets all the press these days and understandably so given the recent spike in Fed ownership of Treasuries, now equivalent to almost 11 percent of annual GDP. But the chart also reminds us of that brief period early in the financial crisis when the Fed sold lots of Treasuries so it could make loans and buy other assets.

P.S. Anyone know how to get the FRED graph’s vertical axis to start at 0?

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Harvard historian Niall Ferguson goofed on Bloomberg TV yesterday. Arguing that the 2009 stimulus had little effect, he said:

The point I made in the piece [his controversial cover story in Newsweek] was that the stimulus had a very short-term effect, which is very clear if you look, for example, at the federal employment numbers. There’s a huge spike in early 2010, and then it falls back down.  (This is slightly edited from the transcription by Invictus at The Big Picture.)

That spike did happen. But as every economic data jockey knows, it doesn’t reflect the stimulus; it’s temporary hiring of Census workers.

Ferguson ought to know that. He’s trying to position himself as an important economic commentator and that should require basic familiarity with key data.

But Ferguson is just the tip of the iceberg. For every prominent pundit, there are thousands of other people—students, business analysts, congressional staffers, and interested citizens—who use these data and sometimes make the same mistakes. I’m sure I do as well—it’s hard to know every relevant anomaly in the data. As I said in one of my first blog posts back in 2009:

Data rarely speak for themselves. There’s almost always some folklore, known to initiates, about how data should and should not be used. As the web transforms the availability and use of data, it’s essential that the folklore be democratized as much as the raw data themselves.

How would that democratization work? One approach would be to create metadata for key economic data series. Just as your camera attachs time, date, GPS coordinates, and who knows what else to each digital photograph you take, so could each economic data point be accompanied by a field identifying any special issues and providing a link for users who want more information.

When Niall Ferguson calls up a chart of federal employment statistics at his favorite data provider, such metadata would allow them to display something like this:


Clicking on or hovering over the “2″ would then reveal text: “Federal employment boosted by temporary Census hiring; for more information see link.” And the stimulus mistake would be avoided.

I am, of course, skimming over a host of practical challenges. How do you decide which anomalies should be included in the metadata? When should charts show a single flag for metadata issues, even when the underlying data have it for each affected datapoint?

And, perhaps most important, who should do this? It would be great if the statistical agencies could do it, so the information could filter out through the entire data-using community. But their budgets are already tight. Failing that, perhaps the fine folks at FRED could do it; they’ve certainly revolutionized access to the raw data. Or even Google, which already does something similar to highlight news stories on its stock price charts, but would need to create the underlying database of metadata.

Here’s hoping that someone will do it. Democratizing data folklore would reduce needless confusion about economic facts so we can focus on real economic challenges. And it just might remind me what happened to federal employment in early 2009.

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The economy grew at a tepid 1.5% annual rate in the second quarter, according to the latest BEA estimates. That’s far below the pace we need to reduce unemployment.

Weak growth was driven by a slowdown in consumer spending and continued cuts in government spending (mostly at the state and local level), which overshadowed rapid growth in investment spending on housing–yes, housing–and equipment and software:

Housing investment expanded at almost a 10% rate in the second quarter, its fifth straight quarter of growth. Government spending declined at a 1.4% rate, its eighth straight quarter of decline.

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