Brad DeLong's Semi-Daily Journal: A Weblog

That's horrible...
I'm still looking for a job, too.

This is serious. The weakest labor market recovery from a recession since the Great Depression, and weakness likely to continue. There was a significant mistake made last years in not setting up a revenue sharing stimulus program for the states for this year.

So, Brad -- what's your current recommendation? Are we re-enacting the 1930s (with Bush-Greenspan practicing a very twisted form of Keynesianism) or is this the 1970s redux? Or its own unique set of circumstances?

Brad, can we have a little explication for non-economists? There's technical terminology here that I don't know the precise meaning of.

When you say "the labor market," do you mean hiring, or wages, or both?

When you say "growth at or below the growth rate of potential output," do you mean ... well, what does that mean? It sounds vaguely like a slowing in productivity growth, but wouldn't that be a good thing for the labor market (if you could not longer expect to get more and more profit out of the same workers, due to productivity increases)?

Or does it mean that there'll be more factories capable of building more cars or packing more ice cream or whatever, but not enough demand growth to sustain their full capacity? Or....

Alas, i suspect the "proper" answer here is "kid, you need to go learn some econ." There are some impediments to that, i'm afraid, at least in the short term; i have mouths to feed and not so much time for taking econ classes....

My recommendation is that we at least stop going backward. Cutting back on overtime will mean even LESS money in the pockets of workers that would likely spend it.

Is the Bush plan to allow all the wealth to be concentrated no matter how deleterious to the economy? We can play Monopoly, but once someone wins, the game is over. There is no one left to pay rents. What do they teach Harvard MBAs anyway?

They probably do teach them that if one or just a few people have everything, that is also an efficient allocation. That is supposed to just be an example to clarify the students' grasp of concepts. But maybe for people with a certain mindset, who have very strong ideas about what is due them, maybe they interpret that in a dfferent way. But I dunno, actually.

There is little reason to believe either the jobs market or wage and benefits packages will improve signficantly. For employment conditions to improve there must be fast enough GDP growth to account for productivity increases and potential labor force growth from population expansion. A 3% productivity growth rate and 3% GDP growth rate, will not lead to more employment of enough labor demand to give much push to wages and benefits.

"The U.S. Chamber of Commerce is not as credible an analytical source as are a bipartisan group led by John Fraser--even if they are financed by the AFL-CIO."

Brad Delong

"It's worse than that. When you have the US Chamber of Commerce saying, de facto, "this measure will be bad for employers, but good for workers and we strongly support it," and the AFL-CIO says, "this will be good for employers, but bad for workers and we strongly oppose it" then the AFL-CIO has infinitely more credibility than the US Chamber of Commerce. Were the Chamber to say, "X is good for employers and for the economy as a whole" while the AFL says, "X is bad for unions and for the economy as a whole" then we would have a genuine epistemic dilemma. When the Chamber is pretending to operating against the interests of its members, we can tell that it's analysis is worthless -- the person talking to you is either a liar or else doesn't know how to do his job."

Matthew Yglesias

Prof. Walter Williams explains how the Democrats are intrinsically immoral.

THIS IS A POINT I'VE LONG MADE. WHERE DO THE DEMOCRATS GET THE MORAL AUTHORITY TO FORCEFULLY TAKE MY MONEY, ACTUALLY AT GUNPOINT? THEY DIDN'T GET IT LEGITIMATELY.

http://www.townhall.com/columnists/walterwilliams/ww20040817.shtml

Socialism is evil: Part II

Walter E. Williams

August 17, 2004

Positive reader response to "Socialism Is Evil" was quite surprising.

That column argued that it was an immoral, not to mention unconstitutional, act for Congress, through the tax code, to confiscate the earnings of one American to give to another American in the forms of prescription drugs, Social Security, food stamps, farm subsidies or airline bailouts. It's immoral because it forcibly uses one person to serve the purposes of another. Indeed, that's one way to define slavery and other forms of servitude.

Several letters of disagreement interpreted my argument as being against taxation. They used the sleight-of-hand approach saying that we need taxation for national defense, the courts and other constitutionally authorized purposes as if that observation meant that taxation for any other purpose was just as legitimate. Let me be explicit. Taxes to finance certain federal activities are indeed legitimate as well as constitutional.

Article I, Section 8 of the U.S. Constitution enumerates just what federal functions Congress has taxing and spending authority. Among them are national defense, post offices and post roads, courts and a few other activities. Or

http://pep.typepad.com/public_enquiry_project/2004/08/walter_williams.html

Yeah, OK, Alexander Hamilton was an immoral socialist. May he rot in Hell for misleading me into sin.

Anyway, Prof DeLong seems confused on one point, or maybe has changed his mind and is not telling us when this happened or why or how.

Until recently he was using balance equations relating productivity and GDP and employment growth rates to say that we needed less GDP growth in the short run to reduce unemployment, since we needed to find a way to soak more people who were being more and more productive, which was killing off demand for workers, given the need to produce a given amount of goods.

Now he seems to be saying productivity growth makes no difference in the short run, and implicitly using labor demand arguments (I think?) to say lower GDP growth rates mean lower employment growth rates, since that means lower demand for labor.

I'm all confused on the Prof's reasoning. I sure hope some one will explain it to me.

Probably not the Professor though, he won't bother. I think that Professor Man is getting too big for his britches, famous blog guy and all, trips to Italy and such, eating fancy Italian dinners wearing a fancy suit and tie. He never comes down here to talk with the help anymore, does he? Too much high falutin stuff, like buying gourmet plastic rice cookers, for him to do these days.

So some one please explain to me why this blogs arguments on emplyment growth suddenly changed, or am I misunderstanding something?

ASs. What a selfish jackass you are.

Where is that guy? Too busy reading Origen and thinking high toned theological thoughts, I guess. I've always been suspicious of these fancy equilibrium balance equation arguments like the Prof has been using for the relationship between GDP and employment growth. But economists love that kind of argument to no (good) end.

Or has the cyclical swing in productivty growth been declared large enough, or has slowed to the point that DeLong's previous balance equation arguments no longer apply, or work in the opposite direction?

But I am simple and maybe this is a misunderstanding on my part. But my distinct impression is that the Prof has been arguing that, holding productivity growth constant, we need less GDP growth to increase employment growth -in the short run.

jml

There has been no change in Brad Delong's positions.

jml,

Nope, the DeLong (and mostly everybody) argument was that productivity had to fall or GDP growth go up, in order to boost job growth. If he ever said GDP growth had to fall to boost employment, it was just a slip.

Lower GDP growth will mean lower demand for labor, assuming productivity stays about where it has been. Productivity always makes a difference, but when the subject at hand is GDP growth, it is pretty natural to think immediately of labor market effects. To save space and time, implicitly leave productivity growth about where it was.

Trend growth (I'm guessing one of those forecasts is Wieting at Citigroup?) should be sufficient to produce roughly 150k new jobs each month. The average so far this year is 176k per month, so it would not be a happy development, but I have been wondering whether the paltry job growth figures of the past two reports aren't short-term cost-control efforts. Make a promise to stockholders, then costs go up, revenues don't, and you have to do something to show you know what to do. What to do?...stop incurring new labor costs. Until costs (health care, energy) stop going up, or until demand growth eases the need to control costs, or until the implicit deal between managers and stock holders is rejiggered (can I have longer term goals now, can I, can I, can I, pulllleeeaaasee?), averaging 150k new jobs a month may seem like gift from heaven.

They're all down--oil prices and the effective end of fiscal stimulus.

BRAD, YOU KNOW BETTER THAN THAT. REDUCED MARGINAL TAX RATES ARE THE GIFT THAT KEEPS ON GIVING. POTENTIAL INVESTORS WILL SEE MORE PROFITS IN THEIR PROJECTED PRO FORMAS AND MORE JOB PRODUCING PROJECTS ARE LIKELY TO GO FORWARD BECAUSE OF IT.

kharris,
Thanks. I had strong coffee at lunch, and realized my mistake. Should have posted at the end of lunch hour, not the beginning. I was faint from hunger... yeah, that was it... Guess that professor dude doesn't have to come down here to straighten things out after all.
It's hard to believe that even the "dead cat bounce" crowd that populates the comment section here may have been overoptimistic on employment growth.

KHarris -

"Trend growth should be sufficient to produce roughly 150k new jobs each month. The average so far this year is 176k per month, so it would not be a happy development, but I have been wondering whether the paltry job growth figures of the past two reports aren't short-term cost-control efforts."

Fine point, but the short term these days looks like it will be continuing for a long while. Management and shareholders are focused short term unless we are looking at Berkshire Hathaway. I am hoping we can average 150,000 jobs created a month, but wondering if that is optimistic.

A Challenger, Gray and Christmans forecast about employment which came out in early July reported that employers were not planning on hiring very many workers for the next six months. This report would seem to confirm that. Wal-Mart's weak reports for August sales would seem to indicate retail sales have flattened as well, eliminating a lot of those jobs in the 150K forecasts the dreamers are projecting.

There was an adjustment in late winter to the jobs creation count, trying to better estimate jobs created in small businesses. There was an argument that the change in estimation may have made the figures seem too robust for a couple of months even if in the long run the estimations will be superior. I am puzzled by the following argument, but post noetheless:

http://www.gold-eagle.com/gold_digest_04/richebacher082004.html

http://www.gold-eagle.com/gold_digest_04/richebacher082004.html

It turned out that virtually two-thirds of the new jobs had come not from the survey, but from a new computer model. For decades, the BLS has aimed at small businesses when measuring job creation in times of recovery, especially those not captured by its established monthly survey. Until 2000, this statistical adjustment was fixed at 35,000 each month, called the "plug factor."

The recent sudden jump in these figures towards 300,000 each month results from a computer model based on a calculated "net birth/death adjustment," which is supposed to measure how many jobs small firms have created and shuttered. In this way, the former monthly 35,000 figure exploded into numbers that are almost 10 times greater.

For us, the sudden statistical spike in job creation during March-May was massively out of whack with prior numbers and other concurrent economic data to be credible. Then came June: 112,000 new jobs created, less than half the expected number. We never saw it mentioned that the net birth/death adjustment contributed 182,000 to this disappointing increase. Without it, employment would have fallen 70,000.

I'm too lazy to go and look it up on his blog, but Steven Antler of Roosevelt University and econopundit.com posted a prediction of job creation back in July or late June. Using some sort of model or equation, he said something like 1.2-1.5 million jobs would be added before the election. I have to wonder, what sort of model was he using?

Five months at 300,000 jobs created a month, and you have 1.5 million. But, that sadly was another era and most rapid growth. Goldman Sachs was also most optimistic about job creation earlier this summer.

I'm a securities analyst, not an economist. I listen to alot of management comments, and too much economic analysis. I didn't understand the strength in employment from late last year into 1Q-2004; it didn't comport with what I was hearing.

Now the opposite holds. I know for sure that it's impossible to hire truck drivers- they aren't available. I know that the rail infrastructure is totally screwed up due to a lack of investment and a lack of people from prior downsizings. Tech is the only thing that is in a stall mode due to overinvestment. It is plain silly, if this is what is happening in the real world, to worry about job growth.

And now there is handwringing about comp store sales flatness at WMT. Imagine! Flat same store sales compared to the $600 child credit tax rebate influenced sales of a year ago. Stupid me, I think that's pretty strong.

"What do they teach Harvard MBAs anyway?"

It's not what they're taught in class that's the problem. It's that most Harvard MBAs come from privileged families where the kids were never once whacked on the head (rhetorically speaking) for being jackasses.

As a result, their analytical minds are well-developed, but their moral side is starved. I used to work at a mutual fund company where honesty was listed as -- I kid you not -- a "skill".

R Lubman, do us a favor, and tell us what stocks you are recommending.

Because I want to short them....

"BRAD, YOU KNOW BETTER THAN THAT. REDUCED MARGINAL TAX RATES ARE THE GIFT THAT KEEPS ON GIVING. POTENTIAL INVESTORS WILL SEE MORE PROFITS IN THEIR PROJECTED PRO FORMAS AND MORE JOB PRODUCING PROJECTS ARE LIKELY TO GO FORWARD BECAUSE OF IT."
-Spidle

"He say, 'He can shout, don't hear you.'"
-Firesign

"It's the economy, stupid."

This may win the election for Kerry. If this is the stuff of victory, I would hate to see the stuff of defeat.

...and just how is Kerry going to respond to our grandfather's recession, anyway?

What's this? You haven't read about our wonderful economy? NY Times op-ed by Mankiw:(http://www.nytimes.com/2004/08/22/opinion/22mank.html

kharris
This is excellent advice: "To save space and time, implicitly leave productivity growth about where it was." I'd go further and treat it as a derivative allowing one to examine the history of the relationship between labor and product but not allowing statments about the future.
Richebächer describes the employment record, pointing his finger at the BLS model's "Plug Factor":
http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=35358
His argument is that because it's a guess, it's open to biases other than scientific ones. I can't say I'm an expert about how this (these?) model(s) work, but I would have thought that the birth/death of companies would be tabulated in a 3 month period and that would put an end to the guessing. The guessed component of some of the months, being 2/3 of the total, seemed a tad large. R thought they were a tad outrageous.

Really?

Ned, the Prof has already responded to the Mankiw article ... just scroll down.

Basically, Mankiw's argument hinges on the missing 3.5 million people.

And working on the bond desk, I can safely say that Non-farm payroll is about the only thing that matters to us. So the economist in me says, follow the money.

Now, speaking of the market ...

The Bloomberg median forecast for NFP is still at 150k. The last time, of course, the median was 240k.

And according to GS digital option, the probability of NFP<150k is only 22.2% and people still think there's half a chance (53.1% to be precise) for NFP to exceed 225k.

Too optimistic? I report, you decide.

One question: why should the end of fiscal stimulus result in a "trimming" of macro forecasts? It's been known since the 2003 tax cut was passed that there wouldn't be any more fiscal stimulus coming once we got to the second half of 2004. Nobody should have changed their forecast _now_ because of fiscal stimulus; it already should have been accounted for.

(The part about energy prices is valid, of course.)

Howard, try FFEX for starters. And listen to the 2Q04 call before you go short. But your supposed short sale is most welcome, especially if you don't do the work.

Is the birth/death number part of the seasonality? Seasonality appears to have a downward bias in the past year: the 12month growth in employment was only 1.123 percent according to seasonally adjusted number, but 1.265 percent according to non-seasonally adjusted number. In other words, the seasonally adjusted number cumulatively reported a total of 200K less payroll than non adjusted number in the 12-month period ending July. Not a lot for a 12-month period, but would distort the picture considerably if the downward bias was concentrated in the June/July numbers.

Anne,

My short term will last as long as benefits costs are rising really fast and oil prices are high, so I think your short term and my short term are the same term. As of noon today, I am able to verify that at least some workers incomes will be squeezed further, starting in Q3, by employers passing on higher benefits costs to employees.

Yes, but in the boardrooms of big oil and gas, where they contemplate future profits like those just reported, it must be a feeling of "Mission Accomplished". Has there ever been an investment (in Bush-Cheney) that has paid bigger dividends?