Here are updated versions of graphs at the bottom of the blog. For the moment job losses have stopped rising (but haven't fallen much); ditto for unemployment. Participation rates remain low. Discouraged workers and workers on short hours numerous. The number of people unemployed less than 5 weeks is falling, but the number of long-term unemployed (27+ weeks = 6+ months) has yet to clearly do so and remains at the highest level since 1948, when "modern" unemployment data collection began. Motor vehicle sales so far this year remain below 11 mil units SAAR (seasonally adjusted annual rate) vs a bubble peak of 17+ mil. New housing starts ... ouch. And all the jobs that these two industries bring, up and down the value chain and in expenditures in local communities. Banks are only starting to deal with commercial real estate losses. And only in June will the full magnitude of the loss in revenues at the state and local level start to hit home, as tens of thousands of teachers lose their jobs.
Surely it would be better to run bigger deficits today but have educated workers down the road -- the cost/benefit calculation is pretty robust. And surely too people would rather pay slightly higher taxes down the road to regain employment a year or two more quickly. But Congress doesn't see it that way, I guess they can't be bothered with the jobless -- and state and local governments can't borrow so it has to be done at the national level. Nor will tax cuts work -- they're not effective if businesses aren't making a profit and can't borrow to expand. Or if, given the lack of growth prospects, they're afraid to expand.
Now at some future point budget orthodoxy is appropriate, indeed necessary. But just look at Japan to see how long recovery can take if you've come out of a leveraged real estate bubble and refuse to spend -- 12 years. Monetary policy doesn't work, and that's what got them (and us) into trouble in the first place. And extended stagnation builds up debt like mad, the claims that "we can't afford more debt" look hollow when the end result is just that, magnified several times over.
Unfortunately the Bank of Japan was no help. Ditto the US Fed today. After all, you become a monetary economist because you believe money is important, and the Fed (appropriately) employs monetary economists. Bernanke is one such. The models they employ -- DSGE models -- have to remain fairly simple to be tractable, and the base assumptions preclude fiscal policy from being effective. Again, maybe not a bad choice if what you want to examine is monetary policy. But most of the macroeconomic profession has been captured by these models. Plus central banks reign supreme -- again ironic, given their hand in keeping the Japanese and now US bubbles going, and the obvious impotence of a renewed bout of easy money to get the pump going. They need to study technology a bit, to see that you first have to prime the pump.
Autos are less and less similar to what they were in the 1930s; priming? -- there's no carburetor! But our economy looks more and more similar to that of the 1930s. And for all the talk of the New Deal, FDR didn't do much to get the pump going, until the winds of war blew from east and then west. I'd rather we spend on roads and schools than repeat history with tanks and mass mobilization.
Mike Smitka, March 14, 2010