May 05, 2003

Comment: U.S. Business Cycle

A comment on the U.S. economy, on the striking difference between the output picture and the jobs picture. Because of the rapid pace of business reorganization and of investment in IT--investment which has continued through the recent recession: the quarter just past saw real investment in computers and peripherals (but not in telecom!) 26% above its previous summer 2000 peak, and real investment in computers and peripherals has been growing at 24% per year since its summer 2001 trough. You in Silicon Valley aren't making much money: competition's too fierce, and prices are falling too fast. Your customers, on the other hand, are cleaning up: buying lots of very good stuff very cheap.

This pace of investment drives labor productivity growth at a remarkable pace, a pace so fast that we need real GDP growth of almost 3.5% per year to keep unemployment steady. We are not going to get that in 2003.

Thus whether you are optimistic or pessimistic about the near-run business-cycle future of the American economy depends not on differences in forecasts but on what you focus on: if you focus on production, you think we are in recovery; if you focus on unemployment, you think we are clearly still in recession--and are going to stay in recession this year.

Posted by DeLong at May 5, 2003 04:40 PM | TrackBack

Comments

"...if you focus on production, you think we are in recovery; if you focus on unemployment, you think we are clearly still in recession..."

Has the term "growth recession" fallen out of favor? It clearly describes such a condition -- an economy growing but at below potential so employment is weak. It was common enough when I was in school way back when, and Google produces 1,600+ hits so it's not completely forgotten. If one wants an unambiguous name for the third condition between "healthy growth" and "recession", there it is.

Posted by: Jim Glass on May 5, 2003 07:02 PM

I focus on employment - the US is still very clearly in recession. In fact recession may be too mild a world for it. At best we seem to be looking at the 70's all over again. At worst . . .

Posted by: Ian Welsh on May 5, 2003 08:26 PM

The average growth rate for 2001-2 was less than 1.5% so if potential income growth is 3.5% per year, aren't we falling further and further below full employment? Why is the fact that employment falling a surprise given the suggestion that aggregate demand gorwth is less than the growth in potential output? The real question is why is aggregate demand growth so weak?

Posted by: Hal McClure on May 5, 2003 08:27 PM

The average growth rate for 2001-2 was less than 1.5% so if potential income growth is 3.5% per year, aren't we falling further and further below full employment? Why is the fact that employment falling a surprise given the suggestion that aggregate demand gorwth is less than the growth in potential output? The real question is why is aggregate demand growth so weak?

Posted by: Hal McClure on May 5, 2003 08:27 PM

http://www.businessweek.com/magazine/content/01_27/b3739009.htm


JULY 2, 2001

COVER STORY

Welcome to the Growth Recession

I love this part!!

In the short run, the biggest plus in the outlook is that policymakers at the Fed and in the White House have reacted in record time to put stimulus in place. That will provide added support under consumer spending and foster the business conditions necessary for companies to adjust to the new realities of the New Economy.

Posted by: Bruce Ferguson on May 5, 2003 09:06 PM

Here is another good one.

Larry Kudlow (archive)
(printer-friendly version)
August 22, 2002
No time for a growth recession


Let the Democrats wage Gore-ist class warfare. It's a proven loser, so long as Republicans clearly show they are truly out to help investors and revive businesses.

Yes the term has fallen out of favor.

Posted by: Bruce Ferguson on May 5, 2003 09:13 PM

...we need GDP growth of 3.5% per year to keep unemployment steady.

Assuming low unemployment is a necessary good, I have a question?

Let's say someone invented a robot that ran for a decade on a tablespoon of water. Let's say this robot and like models were each capable of the productivity of skilled workers performing every labor task imaginable; cooking, cleaning, teaching econ, designing software, lead guitarring etc. And let's say the patent holder, Bill Gates, produced these robots at a unit cost of $100.

Would the median person be far richer or destitute
in an economy with this technology?

Posted by: CMike on May 6, 2003 12:58 AM

"Would the median person be far richer or destitute in an economy with this technology?"

This is, of course what the technological Luddites have been saying for a couple of hundred years now. Things would get very cheap though, so a little money would go a long way. Would it depend on whether or not you had shares in Bill Gates company? Or whether you could start making better robots for $99? Or charge an economic rent by putting the last remaining humans in a museum for the robots to visit? Or if the 'robots' were us with Kurzweil style non-intrusive implant technology? As Keynes said, in the long run we're all dead: I think he meant it.

'Growth recession'. Nice one Jim. Of course in the 70's we had stagflation. To be symmetrical we now need producdisinflation.

Posted by: Edward Hugh on May 6, 2003 02:43 AM

Another interesting "decoupling" is found in the differing variability of output and employment over time: output seems increasingly stable, while employment (unemployment) seems increasingly erratic. Our host noted the latter a week or two back in posting a graph of jobs lost 24 months after the onset of recession: the number has been growing (roughly) since the first oil shock.

One might conjecture that the latter (labor market volatility) supports the increasing stability of the former (output variability), at least to the extent that it is a product of labor market flexibility. Taking the long view, and noting that periods of job losses have been followed by periods of very rapid job creation (the 1990s), is this a bad thing?

Posted by: Jim Harris on May 6, 2003 06:00 AM

I'm going to dust off my Rodney King impression one more time. Can't we all just get along with more? Employment is not a good. If we are more productive, why not split the difference, do a bit less and have a bit more. Neither politcal party likes to promise fewer jobs, so this can never be a national policy, but just look at the hours worked comparisons between the US and other industrial countries (which someone nicely posted at Brad's site a couple of weeks ago). Those of us in the US are not leading balanced lives. The fact that labor is bought and sold in big chunks militates against my solution, I know. A family usually has either 1 income or 2. Having 1.7 incomes is harder to arrange, but oh, how I long for such an arrangement.

Posted by: K Harris on May 6, 2003 06:08 AM

Hugh, I think Brad wrote that Bob Shiller is writing a book about what life will be like when they can produce robots to perform human tasks and the per hour cost of the robot labor goes below the subsistance wage. Of course, once this happens for some task, that means that robots will take over for people in performing it. I guess simple tasks would go first, like McDonald's jobs and cleaning crew, then perhaps manufacturing labor, and eventually maybe things like lawyer and economist (I don't know if any of these specific jobs are correct)?

Personally I think this is great since it increases the per capita income of society -- but I think that it is imperative that you redistribute ownership of the robots more equitably especially to those whose skills do not match well with the types of jobs that remain (which would result in lower wages for them).

By the way, I'm not implying a shrinkage in the number of jobs (although labor hours might shrink due to the income effect upon labor supply), and definitely not an increase in unemployment. I'm only discussing a change in the mix of jobs. The mix of jobs would tend towards those that require a human touch that can't be done by by robots or info technology or some none-labor input.

Posted by: Bobby on May 6, 2003 06:30 AM

"but I think that it is imperative that you redistribute ownership of the robots more equitably especially to those whose skills do not match well with the types of jobs that remain (which would result in lower wages for them)."

It should say that it is the lack of matching skills that results in lower wages. Since these people are in effect relinquishing their present jobs, which would be taken over by robots, for jobs that don't match their skills and this is to the benefit of society, they should be compensated by having some robots or other capital redistributed to them.

Posted by: Bobby on May 6, 2003 06:38 AM

When you say "real investment in computers and peripherals", does the 'real' mean that you're using the corrections you were talking about a few months back, where spending $999 on a 3GHz computer counts as 50% more 'real investment' than spending $999 on a 2GHz computer?

I'd be slightly surprised if people were spending 26% more on computers nowadays: they don't wear out, and there's more than one per desk already.

Posted by: Tom Womack on May 6, 2003 08:58 AM

People vote based on unemployment, not growth in investment.

Maybe it is time to reduce the number of hours in a work week to 36.

Posted by: bakho on May 6, 2003 09:48 AM

Bakho

I suspect each voter votes his own pocketbook. But then those unemployed are very unlikely to vote for the status quo. The employed might also vote to change the status quo if their real incomes fell for whatever reason. But let's see - the average work week now is 34 so your suggestion is to increase the work week?

Posted by: Hal McClure on May 6, 2003 10:33 AM

I don't know if one could characterize the GDP experience of the past couple of years as anything resembling "recovering". Of the three quarters of growth that annualized at above +2%, the first had a heavy dose of production delayed from third to fourth quarter thanks to 9/11, the second was two-thirds inventory accumulation and the third was half zero-percent auto financing.

Nonresidential fixed investment has fallen in 9 of the past 10 quarters. We'd expect to see a heck of a lot more than just trending to zero for investment to indicate a recovery, and as the preliminary number fell into negative territory again, that doesn't bode well for jobs or output in the near future.

Posted by: odgmis on May 6, 2003 11:05 AM

This is what technological Luddites have been
saying for a couple hundred years now...Would it depend on whether you had shares in Bill Gates company? Or whether you could start making better robots for $99?


Luddite concerns in the 19th and 20th centuries proved unfounded (unless you were one the unwashed who failed to transition seamlessly).

Therefore, there will never be a post-industrial economy in which per capita income rises and median income falls? I think this is the LTC investment philosophy -- the future is a rerun.

There are lots of smug assertions that do not get reexamined. Malthus was wrong about the consequence of population growth at the dawn of the mechanical revolution, therefore think how much richer the Chinese would be if they had unchecked population growth.

As to the above thread, the median economic actor will not have a substantial stake in Bill Gate's company and he will not be inventing any $99 robots.

The question I am posting is on some far away planet at some distant time even though it cannnot happen here is it politically possible and morally acceptable long term for per capita income to rise and median income to fall steadily in a human like society?

Posted by: CMike on May 6, 2003 11:43 AM

I think what is the problem-in our society there is unequal productivity in different sectors. The data on productivity is based on the whole nations productivity, but the labor productivity is vastly above the rest, so they are working their butts off keeping you in fancy houses, and maximum choice healthcare, while many of them forego the expense or work excess hours to reduce overhead to keep themselves on the world market. Every dollar of investment that you get in this country that is used to finance consumption is a dollar that is not spent in a developing country to develop their growth, so ultimately leads to worldwide decline in demand.

Workers in 1st world countries struggle to keep up with 2nd and 3rd world competition, and pretty soon worldwide supply exceeds demand which is accelerated by the application of technology. So that you have your workers competing against the rest of the world at their market rate, but you knowledge workers are really just overhead of the manufacturing workers now, you are not really "high tech" anymore because you are not basic research, you have moved into applied and incorporated, and you are way too expensive to support at present rate of consumption. Maybe that is the real "crisis of health care."

The next "high tech" maybe will come from somewhere as yet determined-auto industry and energy research possibly, or something in physics. But for now your overhead market rate has not yet been determined because there aren't 2nd and third world societies that have developed enough for you to compete to determine what that is. So I suppose you could say that Europe and Japan are doing the world a favor by slowing down productivity-in Japan they do it by saving and in Europe they do it by taking month long vacations and working less hours, and maybe that's what we should do too. Not "go shopping" but take more vacations and more haircuts, health club, whatever.


Should we really aim for is 0% inflation? Is inflation is a sign that resources are being applied in places in the economy that they should not be, or that the rate of consumption is not sustainable, or that your infrastructure is going to hell, or that you are going to have to work on a new technology to advance your growth rate possibility curve to the rate of consuming.

So perhaps the energy crisis imposed by OPEC was a way of saying that it's time for you to start reducing consumption so that we can invest the resources that we will need to develop an economy when we run out of oil.

The analogy I am thinking is-you eat your potatoes, then your seed potatoes, then you ask your neighboring village to give you those seed potatoes because you promise you're going to plant them and give them enough potatoes, but instead you decide to just go ahead and eat the seed potatoes anyway because some more will show up somewhere.

I understand the capitalist free market system favors market speculation both in stock and securities as an incentive for growth, but you have to understand the 2nd and 3rd world mistrust of something that has caused so many innocent people to suffer. Vaule increases seem to go so disproportionately in favor of speculators at the expense of workers. If the free market is so wonderful then maybe the principles of Adam Smith should have included 'first do no harm".

Posted by: nkirsch on May 6, 2003 09:16 PM

"I suspect each voter votes his own pocketbook. "

I suspect most voters vote for much the same reason that they root for a particular sports team.

Posted by: StrontiumDog on May 7, 2003 06:27 AM
Post a comment