The Real Unemployment Problem

The real reason unemployment is so high is more because new jobs aren’t being created, not that so many are being laid off.  Normally, people are being fired/laid off/quit all the time and new jobs are being filled at the same time.  The ratio of quits (what economists call fired/laid off/ quit) and hires is critical to achieving full employment.  Right now, the problem is too few hires.  John Robertson explains at Macroblog:

At the end of August there were estimated to be fewer than 2.4 million job openings, equal to only 1.8 percent of the total filled and unfilled positions—a new record low. This is an especially significant issue given the large number of people who are looking for work. The ratio of the number of unemployed to the number of job openings was greater than 6 in August. In contrast, that ratio was under 1.5 in 2007 and previously peaked at 2.8 in mid-2003, suggesting that finding a job right now is extremely difficult (see the chart).

A second Great Depression is still possible

The stock market’s hitting 10,000 again. Politicians and bankers, anxious for recovery (for votes & bonuses), are claiming victory and saying the recovery is on.  I say not so fast.  Maybe we recover, but we’ve been credit-aholics.  Like a recovering alcoholic, relapse is a very real danger.  As Palley points out below, the econometric models are likely misleading.

A second Great Depression is still possible

October 11, 2009 4:37pm

by FT

By Thomas Palley

Over the past year the global economy has experienced a massive contraction, the deepest since the Great Depression of the 1930s. But this spring, economists started talking of “green shoots” of recovery and that optimistic assessment quickly spread to Wall Street. More recently, on the anniversary of the Lehman Brothers crash, Ben Bernanke, Federal Reserve chairman, officially blessed this consensus by declaring the recession is “very likely over”.

The future is fundamentally uncertain, which always makes prediction a rash enterprise. That said there is a good chance the new consensus is wrong. Instead, there are solid grounds for believing the US economy will experience a second dip followed by extended stagnation that will qualify as the second Great Depression. Some indications to this effect are already rolling in with unexpectedly large US job losses in September and the crash in US automobile sales following the end of the “cash-for-clunkers” programme. Continue reading

The History of Modern Macroeconomics

A good piece from Brad Delong.  At the core, modern macroeconomic theory is relatively empty and vacuous when it comes to the major crises: last year’s melt-down, the Great Depression, the many bubbles, etc.  I have to agree with Brad’s conclusion that macro theory must re-connect with economic history ( I would suggest micro theory needs too, also).  Otherwise it becomes an imaginary trip through a fantasy world of math models (what Deidre McCloskey once called a “hyperspace of assumptions”).

Economic History and Modern Macro: What Happened?

Economic History and the Recession

If you ask a modern economic historian—like, say, me—if I know why the world is currently in the grips of a financial crisis and a deep downturn, I will say that I do know and I will give you this answer:

This is the latest episode in a long history of similar episodes of bubble—crash—crisis—recession, episodes that date back at least to the canal bubble of the early 1820s, the 1825-6 failure of Pole, Thornton, and company, and the subsequent first industrial recession in Britain. We have seen this process at work in many other historical episodes as well—1870, 1890, 1929, and 2000, for example. For some reason asset prices get way out of whack and rise to unsustainable levels. Sometimes the culprit is lousy internal controls in financial firms that overreward subordinates for taking risk; sometimes it is government guarantees; sometimes it is the selection of the market as a long run of good fortune leaves the financial market dominated by cockeyed unrealistic overoptimists.

Then the crash comes. And when the crash comes the risk tolerance of the market collapses: everybody knows that there are immense unrealized losses in financial assets and nobody is sure that they know where they are. The crash is followed by a flight to safety. The flight to safety is followed by a steep fall in the velocity of money as investors everywhere hoard cash. And the fall in monetary velocity brings on a recession.

I will not say that this is the pattern of all recessions: it isn’t. But I will say that this is the pattern of this recessions—that we have been here before.

Macroeconomic Theory and the Recession

If you ask the same question of a modern macroeconomist—like, say, the extremely sharp Narayana Kocherlakota of the University of Minnesota—you will find that he says that he does not know: Continue reading

Dow at 10,000 signals recovery. Or not…

Popular media like to point to the stock market as a real-time measure of the health of the economy. They particularly like the Dow Industrials average.  It makes quick, easy news for lazy journalists.  Occasionally they do it right, but it’s rare.  CNN gets it right here:

Don’t trust Dow 10,000

The stock market is supposed to be a leading indicator, predicting what happens next. But the rally doesn’t mean the nation’s economic woes are over…

…said Rich Yamarone, director of economic research at Argus Research. “But I think there’s a bubble-like atmosphere going on here in the rush back to 10,000. Caution should rule the day. We’re not out of the woods yet.”

Several experts point out than many of the relatively strong earnings reports helping to lift the markets in recent days are being driven by cost cuts, rather than strong revenue growth that would be a better indicator of consumers and businesses being willing to spend again. If businesses keep cutting costs to make the numbers that Wall Street wants to see, that can only put more downward pressure on jobs and wages, and result in weaker economic growth or another downturn.

“The companies are cutting fat, and in many cases cutting bone and muscle. There’s no organic economic growth there,” said Yamarone.

Barry Ritholtz, CEO and director of equity research at Fusion IQ, said that despite their reputation as a leading indicator, the stock markets do a terrible job forecasting the economy.

“Beware of economists pointing to the stock market,” he said. “The rallies tend to be false starts because it’s a reaction to what came before. The sell-offs tend to be overdone because, as they gain momentum, they lead to panics.”