NBER Recessions vs. Actual Recessions? (part 1 of 2)

It is not surprising that controversies surround the issue of whether an economic “recession” is over or not. This is especially true for a world-shattering episode like the Great Recession that started in late 2007 and ended in the middle of 2009. The dates I just quoted were determined by a committee of economists at the National Bureau of Economic Research. Contrary to what most textbooks say, however, such dates are subject to debate. So below I present another new gauge to indicate when economic recessions occur, on top of the one I discussed in an earlier blog post. The new one is based on the officially-measured unemployment rate (U3). But to set the stage for this, alas, I must first repeat some of what I already said in an earlier post. I promise to throw in a tiger analogy to make things more interesting.

There, I discussed a major contrast in perceptions: while the NBER, many economists, and most pundits declared the Great Recession “ended” as of July 2009, many or even most folks outside of this charmed circle say “the recession isn’t over!” Using a year-to-year fall in the inflation-corrected median household income as indicating the existence of a “recession,” it turns out that popular perception was almost completely correct. However, further examination of how the dates of recessions’ peaks and troughs are set suggests that more is going on. Even though many dislike the phrase, the idea of a "jobless recovery" actually makes some sense in terms of the normal workings of capitalism.

Definitional Differences. An important reason for the difference between the non-governmental NBER and those of us who have to live in the real-world economy is a lack of communication. First, econopundits define a “recession” as the situation where the economy is actually receding (or retreating) until it reaches the business-cycle "trough." Making things clearer, this kind of event is often called an economic downturn. Journalists often measure this as the situation when we see two or more back-to-back quarters when the inflation-corrected GDP fell. (This is also called the “real” GDP; I’m going to ignore the controversy about his practice and just go with the flow.) This is a simplistic, but easy-to-measure, version of the generally-accepted definition used by the NBER. In practice, it gives quarterly dates for peak and troughs that corresponds well to the NBER dates. Thus, I’m treating the journalistic definition as equivalent to an “NBER recession” – or a recession as defined in this “standard” way. (People should remember, however, that the NBER uses a more complex way to determine the dates of cyclical peaks and troughs. Otherwise they wouldn’t need a committee!)

In contrast, so-called “ordinary” folks, for whom the economy’s situation is up close and personal, often see a “recession” as including not only the period when the economy is falling but also the quarters or even years when it’s stagnating in the aftermath of an “official” NBER recession. We should be heartened by the fact that the economist Lawrence Ball’s Money and Banking textbook takes a similar tack: his recession adds what economists call a “recessionary gap” (i.e., real GDP hovering below its estimated potential) onto the back end of the falling real GDP conception.This fits with much of popular experience.

However, this debate is really nothing but a difference about definitions. To my mind, there’s no point in arguing about which definitions are “correct.” A fight over whether that big creature that’s about to stomp on us is a Brontosaurus or an Apatosaurus is totally sterile. And does it really matter whether we call a thumb a “finger” or not? But we should remember that this disagreement arises because people are speaking slightly different languages, based in their different life experiences and intellectual approaches. 

Median Income Recessions. But there are more serious differences. As noted in the previous blog post on this subject, the economists and pundits are likely gauging a “recession” using the wrong numbers. For the vast majority of people, using inflation-corrected median household income is better than using real GDP (which is so central to the standard definition). Suppose that the Jones family represent the median household, i.e., one which is smack dab in the middle of the income distribution. If they find that their money income isn’t keeping up with inflation (so that their real income falls), that disrupts their efforts to make ends meet and may drive them to borrow to maintain their  standard of living. That is, the Joneses must cut back, canceling visits to movie theaters, sit-down restaurants, and even doctor’s offices. This is exactly the kind of situation that the word “recession” evokes for most people.

In the previous blog post, I determined the dating of Household Income Recessions using yearly data, since that is what’s available. It’s possible that quarterly data would be better, but the analysis suggests that recessions are a much more serious problem than the econopundits have seen. A year-to-year recession of household incomes captures the severity that most associate with this word.

Using the median household income has the advantage of correcting the usual real GDP measures for the effects of population growth. In my post, I didn’t even mention this issue because it’s not very important in a rich country such as the United States.

A different way to deal with the population issue is to use per capita or mean income (that is, the total GDP divided by the total population). But using real median household income to gauge recessions is highly superior. Per capita incomes can soar even though the 99 percent find our lives continuing to be nasty and brutish (and short, if we can’t afford medical care). This happens if the rich are garnering income hand over fist and grabbing the lion’s share of any increase in total income. In fact, that’s exactly the situation we’ve seen in recent years: in the aftermath of the Great Recession, the rich have been getting richer while most of the rest of us have continued to suffer.

Thus, the Household Income Recession I found that corresponded to the NBER’s “Great Recession” ended in 2012 rather than in the July 2009. In fact, it may be continuing into 2013 or even later. Whether or not the Recession will continue can only be seen when the government cranks out the data (if they can find the money to do it).

Ride the Tiger! An important criticism of the use of market incomes to gauge the onset and end of a recession is that both GDP and household incomes, whether they are measured in “real” terms or not, totally ignore non-market costs and benefits. They thus mis-measure the net benefits produced by the economy. In GDP calculations, the cost of pollution – think of the megatons of oil the BP’s oil disaster dumped on the Gulf of Mexico a few years ago – is not deducted, unlike the market cost of (say) the gasoline that goes into making the GDP. In fact, the clean-up costs from a massive oil spill can add to the value of GDP since it involves hiring and paying droves of workers!  Further, the benefits of non-market activities – such as parents taking care of their own children – are also forgotten in GDP calculations. Thus, some have developed alternatives, such as the Genuine Progress Indicator to get an idea of the net sustainable benefits actually created by our economy for people.

This criticism is totally on-target when we think about the quality of long-term economic growth (i.e., rises in the ability of the economy to produce). Are we building higher and higher GDP numbers by dumping costs on Nature? That may not be sustainable because they’ll come back to bite us in a few years. For example, GDP growth is promoted by dumping carbon dioxide into the atmosphere (rather than paying for it as a cost up-front). But the resulting rise in the sea level with likely create large economic costs very soon, if global warming isn't doing that already (as with all of the "weird weather" we've been having).

The problem is that this criticism isn’t relevant to the issue of business cycles (a shorter-term matter). Remember that we live in a capitalist economy. That means that the vast majority of people are dependent on getting jobs and being paid wages or salaries. This makes us dependent on the health of the capitalist market economy – by its own standards. Even rich folks are dependent on the health of capitalism since they reap dividends, interest, capital gains, and/or princely executive salaries and bonuses that the system pumps out. GDP, despite its limits, measures capitalist health. This means that it real GDP stagnates, not many jobs will be created and not much property income will be garnered. So many or most people will suffer. 

Think of us as riding the back of the tiger called capitalism. Measures like GDP miss such events as when the tiger kills an antelope for no reason and lets the carcass rot. However, if we have no way to get off its back, we want the tiger to be well-nourished. After all, it might decide to eat its passengers. GDP is like a measure of the amount of food the tiger gets, as is the study of business cycles. If GDP is soaring, the passengers can enjoy the ride ...  (I apologize if this analogy is unfair to tigers.)

(to be continued)

– Jim Devine

Congressional Staff Compensation Packages Explained in a Way that Even Sean Hannity Might Get

I stopped listening to Sean Hannity years ago as watching his show is bad for both the brain cells and blood pressure so I have to thank Catherine Thompson for letting us know about this silly exchange:

A discussion between Fox News host Sean Hannity and Reps. Bill Pascrell (D-NJ) and Matt Salmon (R-AZ) on employer contributions to congressional staff's health care plans quickly devolved into a shouting match Thursday ... "You have a 72 percent subsidy that everybody watching this show does not have. That's what the law says congressman," Hannity said. "You’re getting special perks and special breaks for yourself, absolutely. So cut the crap and stop lying to the audience!”

I work for the private sector and my employer pays for part of my health insurance, but then again I just admitted that I was not watching this show. But let’s consider two possible ways of compensating the staff members of Congressman. Suppose Pascrell’s staff was paid $40,000 a year and got a health insurance package where the employee paid $50 a month and the government kicked in $150 a month. Sean Hannity would call that a 75% subsidy I guess. Suppose Congressman Salmon’s staff was not offered this subsidy but received $42,000 a year in terms of their Congressional subsidy. They then went onto a health exchange and got essentially the same insurance for $200 a month. Congressman Salmon’s staff would be getting an extra $200 a year precisely because the Federal government would be paying out an extra $200 a year per person. Which is just to say this has become one of the many stupid discussions in D.C. these days – for which we have Senator Grassley to blame.

The Mulligan Marginal Tax Rate

Casey Mulligan has published a truly amazing chart in his latest Wall Street Journal op-ed asserting the following:

The chart nearby shows an index of marginal tax rates for non-elderly household heads and spouses with median earnings potential. The index, a population-weighted average over various ages, occupations, employment decisions (full-time, part-time, multiple jobs, etc.) and family sizes, reflects the extra taxes paid and government benefits forgone as a consequence of working. The 2009-10 peak for marginal tax rates comes from various provisions of the "stimulus" programs in the American Recovery and Reinvestment Act of 2009 and the extension of unemployment benefits to 99 weeks in some states. At the end of 2012, the marginal tax rate index reached its lowest value since 2008: 43.9%. A little over a year later (January 2014), the index will be close to 50%, driven up by the expiration of the payroll tax cut and multiple provisions of the Affordable Care Act.

I have to admit that I have yet to read his NBER paper from which his graph is supposedly taken, but something in all of this looks mighty odd to me. The graph starts in the good old Bush43 days before the Great Recession. I realize that the “1 percent” paid marginal tax rates close to 36% on their Federal income taxes and perhaps a bit extra depending on what state they lived in. But these same folks had a zero marginal tax rate from payroll taxes. Yet, the payroll tax holiday and its expiration change the Mulligan marginal tax rate calculation dramatically. OK, there are a lot of households that were affected by the payroll tax holiday and its expiration even at the margin, but their marginal income tax rate was never anywhere close to 36%. So one has to wonder how few households face anything remotely close to the marginal rates presented in this graph. Given its pro-Republican spin value, Greg Mankiw dutifully linked to it under The Coming Tax Hike supposedly from “The-Not-So-Affordable Care Act” but provided absolutely no commentary or insights. I guess you’ve guessed by now that I’m not buying this Mulligan but it also seems I should go read his NBER paper. Any insights from other economists on whether this chart makes any sense or not would be greatly appreciated.

Public Health Externalities Argument For Universal Health Insurance Coverage

As coauthor of a widely used comparative systems textbook (third edition now in preparation for MIT Press) who travels around a lot and talks to economists and policymakers in many nations, I have been struck by a nearly universal argument that has been made to me repeatedly, often with dripping contempt for the discourse in the US, an argument that they consider to be obvious and a matter of common sense as well as good economics, but that one almost never hears within the US.  This is that the presence of negative externalities from having sick people walking around justifies making sure that everybody has health insurance, however one mananages to pay for it or organize it, so that people will get preventive care from physicians and not be wandering around infecting those around them.  With the US being the only high income nation that does not have universal coverage, I do not know to what extent our poor showing on life expectancy (37th to 50th depending on source and how many micro states one includes on the list) is due to our failing to cover everybody and avoid this obvious negative externatlity, but I have no doubt it aggravates this poor performance.

Of course, the joke is that the new ACA (aka "Obamacare," even though it was initially a GOP-supported plan out of the Heritage Foundation implemented in MA by Romney) does not provide universal coverage, although it increases coverage.  The SCOTUS in an unprecedented and supremely stupid move dramatically reduced this expansion of coverage by allowing states to opt out of the Medicaid expansion in the law, with that the leading source of the hoped-for expansion of coverage, now limited, and with the states with the highest percentages of uninsured (25% in TX) being the ones with governors or legistlatures or both blocking adoption of the Medicaid expansion.  I guess we should understand that at least one reason we do not hear this argument universally used in other nations is that ACA does not mandate universal coverage, although clearly the argument can be used to support the expanded coverage under ACA.  Unfortunately, I think the subtext of opposition to universal coverage is just plain raw racism, people not wanting "them," the moochers of racial minority status, to get coverage, especially those illegal immigrants who should be encouraged to leave the country and certainly should not be given any coverage, even if them getting sick puts all of the rest of us at greater risk of doing so as well.

Barkley Rosser

Why it Might Be a Good Thing After All that Popes Have Tenure

This.

George Will’s Reasoning to Repeal the Medical Device Tax

I guess I’m a bit late to the party as George Will penned this back in May of 2012:

In 2010, however, Congress, ravenous for revenue to fund Obamacare, included in the legislation a 2.3 percent tax on gross revenue — which generally amounts to about a 15 percent tax on most manufacturers’ profits — from U.S. sales of medical devices beginning in 2013. This will be piled on top of the 35 percent federal corporate tax, and state and local taxes ... Covidien, now based in Ireland, has cited the tax in explaining 200 layoffs and a decision to move some production to Costa Rica and Mexico.

Where to begin with this op-ed? First of all - Covidien denied that is decision to source some of its products from overseas were due to this tax. Of course, this did not stop the rightwing spin machine from repeating Will’s claim. Maybe other medical device manufacturers made this claim but Paul N. Van de Water has often noted:

the excise tax creates no incentive whatever for medical device manufacturers to move production overseas. The tax applies to imported as well as domestically produced devices. Thus, sales of medical devices in the United States will be equally subject to the tax whether they are produced here or abroad, and the tax will not make imported devices any more attractive to domestic purchasers. In addition, devices produced in the United States for export are exempt from the tax, so it will not reduce the competitiveness of U.S.-made devices in international markets.

Yes – I am repeating myself but as I also noted on Sunday, the tax is on the wholesale price and not gross revenues as Will claimed. Here are a few other things Will seems to not understand. Covidien’s effective tax rate is 15% - not the 35% Federal plus state & local taxes Mr. Will talks about. Maybe he is thinking more along the lines of Medtronic. So I checked its 10-K filing for fiscal year ended April 26, 2013. Its pretax income was 25.6% of its sales, which means this tax would be far less than the alleged “15 percent tax” Mr. Will suggests. And its effective tax rate was only 18.4%, which is about half of what Mr. Will claims.

Henry Aaron Calls For Obama To Ignore Debt Ceiling

This Henry Aaron is not the home run hitting former baseball player, but the longtime top tax expert at the Brookings Institution.  In today's New York Times he has an op-ed entitled "Obama Should Ignore Debt Ceiling: (I have actually linked to Mark Thoma's economist view links for today, but it is the top one there).  He makes numerous valid points.  One is to point out that if the debt ceiling is not raised then the president will be in a situation of inevitably violating the law one way or another.  On the one hand, he must have the Treasury pay bills as they come in that have been lawfully approved by Congress with him signing on.  OTOH, of course, he is not supposed to borrow money if the debt ceiling has been hit in order to pay for those bills (and he cannot unilaterally raise taxes to do so, either, a point not usually noted, and clearly way off the charts constitutionally). 

Aaron notes that there was a discussion of this conundrum in 2012 in the Columbia Law Review by Neil H. Buchanan and Michael C. Dorf who concluded that indeed there are only three options in this case: 1) do not pay lawful bills, 2) arbitrarily raise taxes, and 3) simply ignore the debt ceiling and proceed as usual.  After noting that these are all bad option and technically illegal, with Aaron adding "unconstitutional because violating the law," they conclude that #3 is the least bad of the bad options.  Aaron notes that Obama doing this may well lead to him being impeached by the House, but he would not be convicted by the Senate, and it would avoid multiple disasters to the world economy.  Aaron also notes that getting rid of the debt ceiling will end the periodic attempts at blackmail by opposition parties trying to achieve ends they could not get through normal legislative processes.  All of this is correct, needless to say.

The one thing that I find curious about this is that neither Buchanan and Dorf nor Aaron raise the possibility of not merely ignoring the debt ceiling, but going further to put the nail in its coffin (or drive the stake through its heart, if you prefer) by declaring it unconstitutional, with Part D of the 14th Amendment that declares that the national debt must be paid the obvious base for doing so.  I note that not only Bill Clinton and Bruce Bartlett have urged this, but also Moody's prior to the last raising of the debt ceiling, which was followed by them downgrading US debt precisely because of the political silliness and uncertainty involved in this process of raising the debt ceiling. 

Indeed, Aaron emphasizes how ridiculous the debt ceiling is by calling it a law "like a human appendix," with no discernible function, given that the budget already sets a course for a particular deficit level that will change the debt level.  As has been said a million times, raising the debt ceiling only ratifies what has already been committed, the source of all the contradictions.  I also remind one and all that the US is the only nation in world history to have ever had such a nominal debt ceiling.  It is time to have a fiscal appendectomy and remove this absurdity most thoroughly and completely, once and for all.

Barkley Rosser

The Medical Device Excise Tax

Last night the Tea Party crowd in the House passed a couple of resolutions. Most of today’s endless political mania is over the Faustian choice between either eliminating a centrist health care reform on the eve of when it will actually start helping people or watching the government shut down. The other resolution would repeal the Medical Device Excise Tax and it actually has the support of a few Democrats who just happened to be bought and paid for by the medical device sector. I just listened to one of them say that the tax will cause these firms shift production offshore. Paul N. van de Water rebutted this ridiculous claim yesterday:

the excise tax creates no incentive whatever for medical device manufacturers to move production overseas. The tax applies to imported as well as domestically produced devices. Thus, sales of medical devices in the United States will be equally subject to the tax whether they are produced here or abroad, and the tax will not make imported devices any more attractive to domestic purchasers. In addition, devices produced in the United States for export are exempt from the tax, so it will not reduce the competitiveness of U.S.-made devices in international markets.

Paul did an admirable job of addressing some of the other claims from the medical device sector so let me turn to a more subtle point about this alleged 2.3% tax rate. Section 4191 notes the tax is applied to the wholesale price as opposed to the retail price even though companies like Medtronic and Johnson & Johnson sell into the retail market. So the law allows for a constructive price, which is effectively the arm’s length price between the manufacturing division and the distribution division. The government seems to think that this price should be around 75% of the retail price, which is likely about right. If these companies accept this government position, their effective tax rate would be only 1.73% not 2.3%. But suppose the Big Four accounting representatives of these companies draft transfer pricing reports that base the price on production costs plus a modest markup over costs, which would like argue that the constructive price should be closer to 30% of retail sales. In this case, the effective rate would likely be less than 0.7% of sales. While any reasonable person would recognize that no medical device manufacturer would ever forego their substantial intangible profits by selling their goods so cheaply to a distributor, we will have to see whether the IRS has the intelligence and fortitude to challenge such incredibly aggressive tax evasion through transfer pricing manipulation.

Who Ends Up Losing Their Job Under a Higher Minimum Wage?

The effects of a higher minimum wage on employment is likely one of the most studied issues in economics with a surprising result being that employment losses are not that high. Well that is surprising to conservatives who think markets are very competitive. To those of us who recognize the potential existence of market power on the hiring side, standard economic theory says that wage floors may actually increase employment in some markets. But let’s turn the microphone over to a couple of conservatives starting with a Grumpy Economist who must do empirical research as he feeds his children fast food:

A sturdy hike in the minimum wage, in today's economy, is basically an industrial policy subsidizing the transition to low-skill service industry automation.

And Greg Mankiw says this is a nice post? OK – I’m citing Greg as he cites a paper by David Lee and Emmanuel Saez:

This paper provides a theoretical analysis of optimal minimum wage policy in a perfectly competitive labor market and obtains two key results. First, we show that a binding minimum wage – while leading to unemployment – is nevertheless desirable if the government values redistribution toward low wage workers and if unemployment induced by the minimum wage hits the lowest surplus workers first. Importantly, this result remains true in the presence of optimal nonlinear taxes and transfers. In that context, a binding minimum wage enhances the effectiveness of transfers to low-skilled workers as it prevents low-skilled wages from falling through incidence effects. Second, when labor supply responses are along the extensive margin only, which is the empirically relevant case, the co-existence of a minimum wage with a positive tax rate on low-skilled work is always (second-best) Pareto inefficient. A Pareto improving policy consists of reducing the pre-tax minimum wage while keeping constant the post-tax minimum wage by increasing transfers to low-skilled workers, and financing this reform by increasing taxes on higher paid workers. Those results imply that the minimum wage and subsidies for low-skilled workers are complementary policies.

Greg’s reason for not buying this argument is:

Rather than providing a justification for minimum wages, the paper seems to do just the opposite. It shows that you need implausibly strong assumptions, such as efficient rationing, to make the case. I cannot see any compelling reason to believe that in the presence of excess supply of workers, the market will somehow manage to efficiently ration the scarce jobs.

Hang on a second – a conservative economist arguing that markets are not efficient? Puzzling!

Stalin and Charles Murray on American Exceptionalism as Botched by Robert Samuelson

In today's Washington Post, non-economist Robert Samuelson yet again reminds us of his lack of credentials by a botched discussion of the American Exceptionalism issue.  He gains some brownie points by claiming that the term was first used by Joseph Stalin in 1927 when he apparently denied the argument by US Communist, Jay Lovestone, that the advanced state of the US economy precluded the need for a communist revolution with Stalin denouncing this "heresy of American exceptionalism." Stalin's skepticism is reiterated by conservative Charles Murray later in the column, who sees American exceptionalism dribbling away as American values are eroding, with Murray particularly emphasizing, with RJS supporting him, that while for our first 140 years the federal government never exceeded 4% of GDP in peacetime, "Now it regularly tops 20 percent.  The U.S. welfare state resembles the Europeans."

In the first part of the column makes the case for American exceptionalism, at least based on attitudes.  So, he recounts that solid majorities of Americans believe in "freedom over security" and also in free will, in contrast with various European nations where only minorities accept these.  OTOH, at the end of the column Samuelson admits that there is a sharp split within age groups in the US over whether or not "Our people are not perfect but our culture is superior," with 60% of those over 50 agreeing while only 37% agree among those aged 18 to 29.  Somehow Samuelson only mentions some alleged convergence of values and trends across nations without any mention of any economic factors in this outcome, curious for someone who supposedly writes on economics.  Needless to say, he has missed the boat here.

So, let us start with the argument by Murray, accepted so unquestioningly by Samuelson, about the size of government in the US.  It is claimed that somehow there has been some big increase in federal government size relative to GDP.  However, except for the during the depth of the Great Recession, the claim here does not hold up very well, see "U.S. Federal Government Budget as a Percent of GDP Over Time ".  So, since 1960, federal government spending reached a low of 17% in 1965, just prior to the Great Society expansion.  However, for every year from 1975 through 1996 the share of fed spending of GDP exceeded the supposedly fatal 20%, reaching a peak of 23% in the "Morning in America" Reagan year of 1983.  So, indeed, the share jumped to nearly 25% in 2009, rising slightly above in 2010, down a bit in 2011, but down to 23% in 2012, with this projected to hold about there for the next few years.  Yes, this is a couple of percent above the norm for 75 through 96, but hardly some fall-off-the-cliff into European socialism, with most of those nations over 30 if not 40% on this measure.  This seems pretty overblown and silly.

However, the real failure to face reality here is that Samuelson somehow misses all the recent reports and studies showing a massive decline in social and income mobility in the US, clearly associated with our ongoing and massive increase in income and wealthy inequality, see "4 Charts On Income Inequality And Economic Mobility That Will Destroy Your Faith In The American Dream".
Indeed, there is now less mobility intergenerationally and by other measures in the US than in tired old Europe, a result that has received a lot of publicity.  How has Samuelson missed this important fact that obviously has more to do with the decline youth belief in the superiority of US culture than some supposed erosion of American values?  The wannabe economist needs to get back to looking at economics and not bad sociology.

Barkley Rosser

John Taylor’s Prediction of a Fiscal Catastrophe Assumes His Candidate Won in 2012

John Taylor presents a graph suggesting that the Federal debt to GDP ratio will literally explode:

The chart below is an “apples to apples” comparison which uses the “alternative fiscal scenario” assumptions for both the 2013 long-term outlook and the 2009 long-term outlook. It shows the CBO forecast of debt to GDP ratio.

Before one goes bonkers over the prospect that Federal debt will be 600% of GDP 50 years from now, let me turn the microphone over to Ezra Klein:

The CBO has come back with two projections. One is a simple, mechanical projection of future deficits based on current law. Everyone pretty much ignores this analysis, because, in recent years, current law has been a poor predictor of future policy. The law said, for instance, that all the Bush tax cuts would expire at the end of 2012 and that huge Medicare cuts would be imposed. Everyone knew that Congress wouldn’t let that happen, and that the current-law projection was wrong. Recognizing this, the CBO constructed another projection it calls the “alternative fiscal scenario.” A better name might be the “Washington is incredibly irresponsible” scenario. Under this model, all of President George W. Bush’s tax cuts are extended, the automatic budget cuts known as sequestration neither happen nor are replaced by other cuts, the cost controls in Obama’s Affordable Care Act are repealed, spending on Iraq and Afghanistan continues indefinitely, and so forth.

We did have incredibly irresponsible fiscal policy during the Reagan and Bush43 Administrations. And had Mitt Romney won in 2012, we were told we would get even more tax cuts with little clues as to how they would be paid for. In fact, Romney promised to keep defense spending high and to repeal Obamacare. So – Dr. Taylor’s graphs are a nice way of demonstrating the fiscal future had his candidate won.

Business Insider’s Too Simplistic Explanation of Tapering

Joe Weisenthal tried to make “tapering” (or not) simple for his readers but alas this could be confusing to many:

In the middle of the 2008-2009 financial crisis, the Fed cut interest rates practically to 0% in a bid to stimulate the economy. But even with these ultra-low rates, there's still too much unemployment. So how does the Fed keep stimulating if it can't cut interest rates further? The Fed buys a lot of long-term US Treasuries and Mortgage-backed securities to cut borrowing costs and pump cash into the system. The Fed buys these assets with money it creates out of thin air, which it can do because it's the Fed.

Let’s try to help Joe out here – first by noting that there are different interest rates involved. Private borrowers do not get to borrow at the same interest rate as the government so even though Treasury bill interest rates are zero, the interest rate for private borrowers carries a credit spread. Hat tip to Brad DeLong for a recent explanation of how Quantitative Easing can change this credit spread. Brad also notes what the Federal Reserve did with its “Quantitative Easing”:

When the Federal Reserve undertakes quantitative easing, it enters the market and takes some risk off the table, buying up some of the risky assets issued by the U.S. government and its tame mortgage GSEs and selling safe assets in exchange.

Brad is describing asset trades, which was not the same thing as creating money “out of thin air”.

The Recession Isn’t Over -- or Is it?

One complaint I often hear from people is that despite what economists say, the recession isn’t over! In technical terms, the semi-official measure of recessions created by the National Bureau of Economic Research indicates that the “Great Recession” that began in December 2007 ended in the middle of 2009. But reasonably enough, people point to the facts that incomes are still stagnant, paid employment is still at a very low percentage of the population, long-term unemployment is still high, and the like. They also point to their own personal experience. What people often miss, however, is that the standard definition of a “recession” refers only to the decline of the economy. It does not say anything about the period of stagnation that can occur after the NBER recession is over during which the economy can get stuck on the “floor.” That is, the standard definition of a “recession” describes it as being like the tide receding in the ocean – but doesn’t cover the possibility that the tide might stay low for a long time.

But there’s another way to look at this issue: what if we’ve used the wrong number to see what’s “recessed”? The standard measure used by the NBER is very complex but in practice fits pretty well with the journalist’s rule of thumb. The latter says that a “recession” occurs when inflation-corrected or “real” Gross Domestic Product falls for two or more quarters (of a year) in a row. This rule of thumb suggests an alternative measure, one much closer to home. Using this measure, the popular complaint about the recession not being over may be right on target.

What if we see recessions as measured by a fall in the “real” median household income? This is the income of a household that’s smack dab in the middle of the income distribution, with an income higher than the poorer half of households but worse than the richer half. Since only annual data are available, a “recession” refers to the fall of that number from the previous year. This means that if this kind of recession occurs, an "average" household is suffering. As seen in the table below, this calculation implies different years for recessions. Call this a “household income recession.” The table also represents the different dates for NBER recessions during recent decades. Because median household income is measured only from year to year, my dating of recessions cannot correspond exactly to the NBER dating.

“Recession A” really consists of two back-to-back NBER recessions (a double dipper). It should be dubbed the “Volcker recession,” because the gap between the two was so short (with a very weak recovery in-between) and they occurred due to the Federal Reserve’s war against inflation. (In fact, one way to define a "double dip" recession is by the fact that we see two NBER recessions within a period characterized by a single Household Income Recession.) The table indicates that the household income recession started earlier and lasted one year longer than the NBER recession: real household incomes kept falling going from 1982 to 1983. Pundits who focus on the NBER definition miss how bad the recession(s) were for people on Main Street.

The NBER recession of 1990-91 (under the guidance of the “Maestro,” Alan Greenspan) is often seen as being "small" since it was less than one year long. But like the Volcker recession, household incomes continued to fall after the NBER recession had ended, all the way into 1993. This approximately two-year delay helps explain candidate Clinton’s slogan “it’s the economy, stupid!” and the dissatisfaction with President Bush #1 that helped speed his ouster from the White House. Of course, it was also this recession which spawned the seemingly oxymoronic phrase “jobless recovery”: even though the economy was “recovering” by NBER standards, the availability of jobs was stagnant. The latter fits with the idea of the Household Income Recession continuing into 1993.

Recession C (still during the Maestro’s reign, at the end of Clinton’s term) is renowned among pundits for being short and perhaps even sweet. According to the NBER definition, it started after 2001 began and ended before 2002 had even started. But for the average household, incomes fell earlier (going into 2000) and then continued to fall all the way until 2004. This fits with what critics of the “Bush #2 recovery” have been saying for a long time. This was another jobless recovery. In addition, it suggests that the hype about Clinton’s success at the end of his term has been overblown.

Finally, there’s the “Great Recession” (at the end of #2's terms and the start of Obama's), which the NBER dates from Dec. 2007 to June 2009. When measured using real median household income, however, this recession continued into 2012, exactly as the popular critics say. However, our data can’t tell us whether the Household Income Recession is over or not, since the numbers for 2013 won’t be available until next year. That's why the title to this note ended with a question.
-- Jim Devine

PS: I didn't use per capita income to measure recessions because the high incomes of the rich are represented disproportionately. Ignoring other changes, for example, if the incomes of the Koch brothers doubles, but the incomes of the non-Kochs stay the same, that raises per capita income. The median household income would say the same.

(The numbers for median household income are from the U.S. Bureau of the Census at http://www.census.gov/hhes/www/income/data/historical/household/,  Table H-6.)

Roger Lowenstein’s Reason to Rule Out Janet Yellen

Lowenstein actually thinks we need a banker and not a qualified economist to lead the Federal Reserve:

President Barack Obama should look for a truly “post-crisis” candidate who can reassert the Fed’s independence and move away from the unusual policies of the last six years. During the credit crunch of 2007-2008 and its aftermath, it was proper and right that the Fed and the Treasury Department were joined at the hip: Both had an interest in easing the financial crisis, which took precedence over everything else. It was also proper for the Fed to aggressively lower interest rates -- a popular policy that the administration avidly supported. But the next chairman will have to decide when to trim the Fed’s portfolio, swollen with its extraordinary program of bond purchases. And it will have to raise short-term interest rates, which are currently near zero. It may be sooner, it may be later -- the moment will come. Money cannot be free forever.

I’m sorry but this argument is what I would expect from the National Review and not from Bloomberg. OK, Lowenstein is a financial journalist and not a member of the economics profession. So maybe he can be excused for not realizing that Janet Yellen is smart enough to reverse course on monetary expansion when the economy gets back to full employment. But we are still far away from full employment and with fiscal policy turning contractionary, this is not the time to raise interest rates. And yes – the best candidate for this job is one who recognizes what Roger Lowenstein refuses to. Count me as a member of Team Janet.

Please Give Us the "Kindly Grandmother" Now, Mr. President!

The withdrawal of Lawrence H. Summers from candidacy for Fed Chair has triggered a surge in world stock markets, as well as rejoicing among feminist groups, the labor movement, the left wing of the Democratic Party in Congress, particularly among those on the Senate Banking Committee, and the vast majority of the economics profession pretty widely across the ideological and methodological spectrum.  Even many Austrian economists who would prefer that the Fed be shut down have admitted when pushed that they prefer Yellen over Summers.  All that is needed now is for President Obama to appoint Janet L. Yellen to the post, the main rival of Summers.  He may be about to, but why might he be holding back?

According to Ezra Klein, there is "pique" in the White House that so many would not go along with the desire the president to support his openly preferred choice, Summers.  The other reason he gives is particularly weird, that she seems "like a kindly grandmother," see "Five reasons Obama should name Janet Yellen to chair the Federal Reserve". Klein's five reasons are obvious sorts such as that she is the most qualified candidate and this would break the glass ceiling.  But this last odd remark about "kindly grandmother" must be coming from the WH and looks like the last gasp of sexism there.  First she lacked "gravitas" and then we did not want a "female-backed currency" (OK, that was the ed page of the WSJ), but now we get this weird slam on kindly grandmothers?  Frankly, some of the more formidable individuals I have encountered in my life have been kindly, but firm, grandmothers.

So, as a matter of fact, Janet Yellen is not (yet) a grandmother, although she does have white hair and at 67 (I think) old enough to be one.  And she is kindly and nice.  Her (and George Akerlof's) son, economist Robbie Akerlof (now at Warwick, last I heard) has so far failed to followed through on his reproductive responsibilities to sire an offspring, thereby making his kind but firm mother an actually existing grandmother.  In the meantime, maybe this is what the world needs, a kindly but firm (and she is firm) grandmother.  Let for now the world economy be her grandchild.

I shall not diss the remaining possible candidates, both the official one, Donald Kohn, an experienced Fed hand who preceded Janet as Fed Vice Chair, and the others often mention such as the macroeconomically smart Christina Romer, the globally experienced Stanley Fisher, or yet another former Vice Chair, Alan Blinder, all of whom I would have taken over Summers.  But, very simply, when one puts together experience, knowledge, ability to forecast the economy, and that kindly but firm personality, Janet Yellen is simply superior to all these candidates, even if one or the other might have an edge on her on this or that particular desirable characteristic. She beats all of them for the total package, which is also the message from Ezra Klein.

So, Mr. President, what the world economy needs now is this particular firm but kindly grandmother look-alike, Janet Yellen, please!

Barkley Rosser