3.5 Million New Jobs is Not Nearly Enough

CNNMoney and the Vice President must think this is excellent news:

The government's Recovery Act is responsible for between 2.2 and 2.8 million jobs through the first quarter of 2010, according to the latest stimulus report from President Obama's chief economic adviser. The report, from the Council of Economic Advisers, says the economic stimulus is on track to create or save 3.5 million jobs by the end of the year. "From tax cuts to construction projects, the Recovery Act is firing on all cylinders when it comes to creating jobs and putting Americans back to work." Vice President Joe Biden said in a statement.

Job growth is better than job losses and this does seem to be sufficient to lower the unemployment rate by a modest amount. But let’s assume that simply keeping pace with a rising population and labor force means we have to create 100,000 new jobs per month. With the civilian non-institutional population being near 237 million, the projected increase in the employment to population ratio for 2010 seems to be a mere 1 percent. This ratio was 58.2% as of December 2009 and has risen to 58.6% as of March 2010. If it rises to 59.2% by the end of the year, we will still have a very weak labor market.

What Letter Defines The Shape of the Great Recession: L, U, V, or W?

And the answer is: None of the above. Maybe somewhere between an L and a V, although the disjuncture between the turning around of GDP growth last summer and the apparent (keep those fingers crossed) turning around of employment last month, could make a sort of argument for a U, except that we have not seen a fast enough upswing on the back end to justify it any more than a V.

Of course, there have been some V's in other countries, especially in East Asia, where some of the former tigers, such as Taiwan and South Korea had among the sharpest GDP declines in the world, but bounced hard and are booming again, probably being dragged along by the hyper growth of China.

Will More Immigration Save Social Security?

Robert Reich says so, "Why More Immigrants Are An Answer to the Coming Boomer Entitlement Mess", which is also linked to by Mark Thoma. He has been on the Social Security Advisory board and has heard all the tales of coming Demographic Doom due to the impending wave of boomer retirements, even though the adjustments due to the Greenspan Commission in the early 80s were supposed to pay for the boomers' retirements. This year the fund is running a (small) deficit, and so out of all the sources of the broader federal budget deficit (of which rising medical care costs, not to mention high defense budgets) it is social security that is the Big Problem that Something Must Be Done About (along with Medicare). I would agree that more immigrants will help in the short run, but demography is not the main problem here.

I and Bruce Webb have posted only about a million times in the past here and elsewhere on how if the "optimistic" projection of the SSA were to hold, the system would never run a deficit. In many recent years the economy beat that projection. However, in the last few it has plunged far below the pessimistic forecast with fica revenues collapsing as employment has collapsed in the Great Recession. This is the problem, and the simple solution is to get the economy and employment growing again at something like the optimistic forecast rate. Then the system will go back into surplus, possibly even mostly staying there, without any fiddling with or opening the doors to massive immigration (and, no, I am not anti-immigrant at all here, just trying to be clear about what is what).

Indeed, the fallaciousness of this general demographic hysteria is seen in that the US has among the best demographics for this even with low immigration compared with other OECD economies. Germany (and others) have the age distributions the US will have in 2030 when we hear Doom will hit, and they are paying their pensions all right, with Germany's even higher than the ones here. Really, folks, higher immigration may be an OK thing, but it is relatively peripheral to the condition of the Social Security system. Growing the economy and particularly employment is the key to saving the system.

Will DeMint And Inhofe Apologize To Al Gore?

After the biggest of the snowstorms hit Washington this winter, Senators DeMint (R-SC) and Inhofe (R-OK) were mocking Al Gore (and many others) over the supposed end of global warming, hah hah hah! Well, it is cooler today, but this week has seen record high temperatures in the Washington area, and where I am two hours away by car in Virginia, the first time ever that temperatures have topped 90 degrees F in early April. Will we hear them apologize and change their tunes?

Now, of course I do not buy into that this week's temperatures around here show doodley-squat about long-run global temperature trends, just as they should have recognized the same regarding the colder temperatures than seen for quite a few years in this area (but hardly record levels) and the record-setting snowfall levels (actually consistent with global warming due to the greater amounts of water vapor in the air). Oh, and just for the record, the latest report is that January 2010 was #5 in all time recorded global average temperature, Feb 10 was #3, and March 10 was #4, with NASA now predicting that 2010 is likely to beat the all time record for a 12-month period, although I think we'll have to wait on that one and see. In any case again, DeMint and Inhofe are looking pretty silly, but I shall not be holding my breath for their acknowledgement of same or any apologies to anybody.

WaPo Worries That The End May Be Near!

Today the Washington Post had a story all worried about ten year interest rates going from around 3.5% on March 4 to nearly 4.0% yesterday. They note that this might reflect expectations of growth, but also worry that it might reflect expectations of rising inflation and dangers of collapse due to rising indebtedness. They did not bring up the earlier worrying that this was due to the Chinese not buying US bonds to punish us since they ran a trade deficit in March and did not have much money to buy foreign bonds with. They also worried about associated increases in housing mortgage interest rates, which tend to track the ten-year bond rate.

Curiously WaPo failed to note that most of this interest rate increase occurred during only a few days after March 22. This did correspond with the "weak" bond sale, but it also corresponded with the final ending of the Fed's support for the MBS market, which in turn had been propping up pretty much the entire secondary market in housing mortgages for well over a year. The winding down of this has been gradual, but in fact the real story here has been that the dropping of this final shoe had many on tenterhooks that there might not be anybody there at all to pick up the slack in the MBS market. If that had been the case, we would have seen mortgage rate increases far in excess of what happened, which was in line with the ten-year bond rate increase. This is one of those stories about how a dog did not bark, and in this case, to really mix my metaphors, we have apparently missed a dangerous bullet that could have thoroughly derailed the nascent recovery.

Another Incremental Improvement of a Bad Labor Market

BLS reports that the economy added just over 160 thousand news jobs during March but the reported unemployment rate remained at 9.7%. This 160 thousand plus new jobs showed up in both the payroll survey and the household survey reporting but we should also note that the labor force participation rate also inched upwards so when the employment-population ratio also inched upwards, the unemployment rate remained the same.

Our graph shows that we have had very modest improvements in the employment-population ratio for the last 3 months – from 58.2% to 58.6% - as we have also seen the labor force participation rate rise – from 64.6% to 64.9%. Note also the tremendous decline in the employment-population ratio from December 2006 to December 2009. The rise in the unemployment during this period understated the decline in the employment-population ratio as labor force participation also declined. While we are making small progress, we are very far away from a healthy labor market.

Term Structure and Default: April Fool’s

Paul Krugman does a nice job discussing the recent term structure and the competing hypothesis of why it is so steep:

As many people have noticed, the term spread — the difference between short-term and long-term interest rates — is very high. The last time I wrote about this, people were taking this as proof that the economy would recover soon. Now they’re taking it as bad news — as somehow suggesting fears of default. But there’s a reason for a high term spread that has nothing to do with either explanation. As I tried to explain last time, to a first approximation you can think of the long term rate as reflecting an average of expected future short-term rates. Short-term rates, in turn, tend to reflect the state of the economy: if the economy improves, the Fed will raise short-term rates, if the economy worsens, the Fed will cut. So long-term rates can be either above or below short rates. Except that now they can’t. If the economy improves, short rates will rise; but if it worsens, well, they’re already zero, so there’s nowhere to go but up. This implies that there has to be a positive term spread.

Paul continues by noting that the fear of default hypothesis would be reflected in higher inflationary expectations. Our graph, which reflects government bond rates for March 31, 2010, shows the term structure for nominal rates (blue) as well as for real rates (red). The difference (green) reflects the term structure with respect to expected inflation. Not only is expected inflation quite modest even as measured by the 30-year bond rates, the upward tilt of our green line is not as pronounced as the term structure for real rates.

The Shadow Knows

Gary Gorton has a piece floating around - I would link to if I weren't so inept - arguing that the financial crisis amounts to a classic bank run in the unregulated shadow banking sector. I found the description of the liquidity transformation that goes on in this sector fascinating, but at first I couldn't quite wrap my head around it. The more I thought about it the more it seemed to me a good example of the core idea of the classic Diamond/Dybvig article on bank runs. Let me explain.

The chief action in the shadow banking sector, Gorton says, looks something like this. Corporate treasurers flush with liquid funds buy securities from investment banks under repurchase agreements. My initial question was: where do the funds to repurchase the securities come from? I think the answer must be: from liquidating the securities. Which raises the further question: why don't the corporate treasurers hold the securities directly and liquidate them themselves? This is where Diamond/Dybvig comes in, I think. (Someone who knows what's really going on out there, I'm happy to be corrected. I'm begging to be, but indulge me a little longer!)

The idea in the article is that there is one asset available which is illiquid. If held for one period it yields a gross return of 1 upon liquidation; if held until maturity (for 2 periods) it yields a gross return of 2. Savers prefer a more liquid asset - one with a higher return if liquidated even at the cost of a smaller return if held for 2 periods. Savers may be of two types. One type wants to consume only in one period; the other type only values consumption in 2 periods. They learn their type only after one period. Each has the same probability of being a type 1 and my chance of being type 1 is independent of yours. With a large enough number of us, there is no uncertainty about the proportion who will be type 1's. So say all of us would maximize expected utility with an asset which gave us 1.28 if we turn out to be type 1's and 1.813 if we turn out to be type 2's. And suppose the probability of being type 1 is 1/4. There are 100 of us endowed with one unit, which is the cost of the asset. A "bank" pools the deposits and buys 100 units of the asset. After 1 period, they liquidate 32 units of the asset for one unit each, allowing them to pay each of the 25 type 1's 1.28 each. The remaining 68 units of the asset mature next year, paying 2 each, allowing them to pay 136/75 = 1.813 to each of the 75 type 2's, as promised. So the "bank" doesn't hold liquid reserves at all - like Gorton's shadow banks as I understand them. Mutatis mutandis: think one-period repos. 75 of the corporate treasurers are happy to renew their purchases after one period, so what the bank owes them is exactly offset by what they owe the bank and no funds move in either direction. The other 25 do not want to renew, so the shadow bank liquidates 32 of the assets.

Does this sound remotely plausible?

Is China Punishing The US for Google and Exchange Rate Bashing?

Maybe a little bit, but probably not much. The spike in interest rates on ten year US bonds accompanying a "weak" sale last week from 3.67% to 3.91% has the WSJ and numerous commentators freaking out about US national debt crisis and collapse and also noting that China bought little to nothing, leading some to speculate that China is punishing the US either for Google standing up to them or to the US for Obama pressuring them to appreciate the yuan/renmimbi, with Krugman and others howling for a 25% import tariff on their goods to make them do so. Jim Hamilton at econbrowser provides a good summary of much of this with some excellent comments.

Anyway, there are several reasons not to panic and even to think that while the Chinese are clearly annoyed, their weak buying is probably not due to some massive vendetta/collective punishment. One fact is that last month the Chinese actually ran a trade deficit, suggesting that their currency may not be all that undervalued after all, even if their bilateral surplus with the US remains large. This situation would mean that they are probably buying few foreign securities at all as they do not have the current account inflow to do so. Even if their currency is still undervalued, their high growth rate compared to other countries suggests one would expect their imports to be rising more rapidly than their exports.

Another aspect of this was pointed out by a commenter at econbrowser named Tom, who noted that the Fed has just turned a policy corner towards a more restrictive stance, having just brought to a final end its policy of propping up the housing market with MBS purchases. Many of us had been pointing for some time to March 23-25 as a point when there might be a spike in interest rates as this policy finally came to an end. So, the spike has happened, and we should probably be glad that it has not been worse, especially given the weak buying by the Chinese due to the change in their balance of payments situation, as this could have led to a renewed collapse of the US housing market and a fall into a definite double dip of the recession.

New Frontiers of Corporate Synergy

The buyout shops are purchasing hospitals, no doubt in a charitable effort to make health care more available. Cerberus Capital Management went one step further striking a deal to acquire Caritas Christi Health Care, a large Massachusetts hospital chain. To ensure that the hospital chain will have an opportunity to treat more people, Cerberus also owns Freedom Group Inc., one of the world’s largest makers of firearms and ammunition.

Way to go, capitalism!

Constant Capital and the Crisis in Contemporary Capitalism

Echoes from the Late Nineteenth Century

Introduction: Constant Capital and Crises

An understanding of constant capital is an overlooked, but necessary component of crisis theory. This paper uses the experience of the 19th century U.S. economy illustrate the relationship between constant capital and economic crises. The rapid technological advances of the time led to a lethal combination for capital. Investment in constant capital suffered rapid devalorization, while growing productivity saturated markets, creating what was then known as The Great Depression.

Constant Capital and Labor, Living and Dead

Read complete paper

http://michaelperelman.files.wordpress.com/2010/03/constan.pdf

Make it an Even Ten

After much reflection, I think I can add two more books to my "most influential" list, bringing me to my quota.

Mathematical Optimization and Economic Theory, Michael Intiligator. This fantastically lucid book taught me micro in grad school, helping me see (although this is nowhere mentioned in the book itself) that the math embodies a precise social theory. (Or, to be more exact, a pre-social theory.)

Atlantic Crossings: Social Politics in a Progressive Age, Daniel Rodgers. This is spectacularly well-written, but its main impact has been to alter my thinking about "reform" by seeing familiar issues in broad historical perspective. Also, the lives of reformers themselves often seem to trace a similar arc.

Fascism-Naziism-Socialism-Communism Triumphs In America!!! Prepare To Move To Guatemala!!!

I have such a deep respect for that profound scholar, Glenn Beck, and have been so convinced by the anti-tax arguments of his allies, the Tea Party Movement, who are obviously correct that Obama is planning to raise our taxes, since, heck, he cut them last year, and Robert Barro has taught us that tax cuts must be followed by tax increases. In any case, Beck and crew have warned us that passage of health care reform in the US will constitute a victory by a ruling cabal of fascist-nazi-socialist-communists, and now this has happened! Clearly, every red-blooded American should prepare to leave the country to pursue a free enterprise system in health care!

Fortunately, I have studied the data, and Guatemala is the answer! Public spending on health care is barely above 1% and not likely to rise! Hallalujah! And, we foreigners can figure to hog the available health care facilities, which certainly have plenty of excess capacity, given that only about 40% of the population uses hospitals! Or alternatively, we can all move to Guinea, where witch doctors are more widely used in the private market than any public sector health care! Long live the free market in health care!!!!

10 Books

Far and away the most amazing book I've ever read is Proust's *Remembrance of Things Past* which is also on Barkley's list.

I also would put 100 years of Solitude on my list, along with Peter. The other eight are then:

Stanley Elkin, The Franchiser or George Mills
Kierkegaard, Either/Or
Dickens, David Copperfield or Bleak House or Dombey and Son
Anything and Everything by Wodehouse, with the Blandings Castle novels firemost
Marx, Capital
Charles Taylor, Sources of the Self
Hannah Arendt, The Human Condition
Smith, The Theory of Moral Sentiments

Ten Most Influential Books, With Some Blanks

Try as I might, I couldn't come up with a list of ten books that had been highly influential for me. It's odd: I do read a lot, but I think I have a lot of resistance to being influenced. Here's what I have:

During high school (an impressionable time):
Rhinoceros, Eugène Ionesco
Mo Tzu: Basic Writings, Burton Watson (trans.)

Late teens, early 20s:
Technics and Civilization, Lewis Mumford
Presentation of Self in Everyday Life, Erving Goffman
Communitas, Paul and Perceval Goodman

Time of wandering:
100 Years of Solitude, Gabriel García Márquez

Since becoming an economist:
Rise and Fall of Freedom of Contract, P. S. Atiyah
John Dewey and American Democracy, Robert Westbrook

It's interesting that I couldn't think of a single economics book that left an imprint. What have I been missing?