It’s Over. Economists are Speechless.

I’m a few days late with this, but much of the mainstream media have covered it already.  The recession is over.  Officially.  We are now in recovery officially.  Actually we’ve been in recovery for over a year now, ever since June 2009.  The official pronouncement is here. Of course this has led to much confusion and contention.  Many people, rightly feeling the pain of nearly 10% unemployment, slow sales, foreclosures, weakening incomes, etc. are wondering “In whose universe is the recession over? I’m still hurting!”

What this all points out, though, is confusion over terms.  Or, more precisely, the lack of vocabulary among economists.  First, the whole reason for dating recessions “officially” is so that economic research amongst different economists can go on without endless confusion and arguments about the timing of some historical decline in GDP.  In this case, the practice of “officially dating recessions” might well be a bust.  It’s hard to tell.  But in the larger public discussion, the current confusion of “how can the recession be over if I still don’t have my job back and it still looks grim?” actually reveals two serious flaws in economic theory/terminology.

First is the fact that economists have not defined the term recovery adequately.  Basically, there’s a definition for recession, but not for recovery.  Instead, a recovery is happening anytime a recession isn’t happening.  So, since the period since June 2009 doesn’t really seem to fit the definition of recession (no broad-based decline in aggregate measures of the economy such as output, employment, and production), we are therefore, by default, declared to be recovering.  Except of course that we aren’t really recovering. We’re going nowhere. In aggregate we stopped declining in summer 2009, but we haven’t started really growing in a broad-based way.  We certainly haven’t come anywhere near re-couping what we lost.  And that brings us to the second terminological problem.  Economists and theory are based on the assumption that an economy is either growing significantly or declining significantly.  We have “recovery” for when we’re growing, getting better, and moving upward.  We have “recession” for when things are declining, getting worse, and moving down.  We don’t have a word, indeed we barely have a concept, for an economy that’s parked. Stationary. Going nowhere. That’s why we’re speechless.  The economy has fallen and it can’t get up. But we don’t know how to say that.

BTW:  Want to know the official dates of previous recessions?  Check it out here.

CPI: What Inflation?

The anti-stimulus types who have been apoplectic about the FedGov Deficit warned us higher inflation, if not hyper-inflation would be just months away.  That was last year.

Let’s look at the data:

From the BLS report on the Consumer Price Index on Sept 17:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. … Over the last 12 months, the all items index increased 1.1 percent before seasonal adjustment.

The index for all items less food and energy was unchanged in August … Over the last 12 months, the index for all items less food and energy rose 0.9 percent …

That’s DISinflation, meaning inflation rate continues to decline.  If it continues to decline, then we move from a positive inflation rate to negative – that’s deflation.  And monsters lie in deflation.

Unemployment vs. Inflation: Which is Worse? Part I

Macro economic policy making is often characterized as a trade-off between achieving full employment vs. achieving stable money (no significant inflation). This relationship or trade-off,to the extent it exists, is called the Phillips Curve.  [note: the stability and existence of a long-run trade-off is highly contested by some]. In this post, I want to look at the costs of missing our objectives on either.

In my macro classes I like to emphasize that an economy, any economy, wants to achieve at least 4 major objectives through policy:

  1. Overall growth (long run trend growth in GDP)
  2. Short- and Medium-run stability of growth (minimize the business cycle)
  3. Stable monetary and financial system (no significant inflation, no deflation, no financial crises)
  4. Full employment

Of these, it is often perceived that achieving both #3 and #4 may be problematic since the easy policies to achieve either run the risk  of making the other worse.  It is possible to achieve both, but it’s more tricky and requires more accurate policy moves. That brings us to the question of which way is the more serious error?  Not all dilemmas are symmetrical.  In other words, if we’re likely to make an error, which error should we prefer?  Yes, we may be stuck “between a rock and a hard place”, but if the hard place is material that’s likely to absorb some impact and let us survive with injuries, while hitting the rock represents certain death, I would definitely prefer policies that, if they are wrong, they tend to lead to the hard place over the rock.

So which is worse?  The rock of high unemployment?  Or the hard place of inflation?  In this post, I’ll offer some evidence for why high unemployment is the more costly problem.  In a later post, I’ll look at the costs of inflation.  For now let’s look at the costs of high unemployment below the fold:

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Just How Bad is the Income Tax Burden?

Rdan and Dale Coberly at Angry Bear give us a short summary of the true effective tax rate for different groups of taxpayers.  The effective tax rate is basically:  TotalTax$Paid / Income = Eff.Tax Rate%.  Note this is different from the marginal tax rate which is the percent of the next (additional) dollar of income that will be paid as taxes.  Many people get the two rates confused.  Adding more confusion is that deductions, tax credits, etc. are most often available to higher-income payers and not to lower-income households.  There’s a reason the low income households use the 1040-EZ form.  Anyway, here’s what they found for 2008:

The richest one percent of the population, who make more than 410 thousand dollars per year (AGI) pay an income tax rate of 22%. (Rdan…Does not include less taxed capital gains and estate income)

The next top 4% of the population, earning over 160k but less than 410k, pay an income tax rate of 18%

The 5% of the population earning over 113k but less than 160k, pay an income tax rate of 13%

The 15% of the population earning over 67k but less than 113k, pay an income tax rate of 9%

The 25% of the population earning over 33k but less than 67k, pay an income tax rate of 7%

The 50% of the population earning less than 33k, pay an income tax rate of 3%.

Now these numbers are excluding capital gains from the income numbers. Capital gains, the money earned from investments, is taxed at a lower rate. Capital gains are also significant sources of income for the upper 5%, but not very significant for those making less than $200,000.

Finally, these numbers don’t include the Social Security/Medicare payroll taxes which all wage earners pay on incomes up to approx. $100,000, but incomes over that are exempt from payroll taxes.  So, just out of curiousity, I decided to add the payroll tax number to the above numbers to get a better idea of just how big of a bite the Federal government is taking out of our paychecks.  Now the employee’s porton of the payroll tax is just a little over 7.5%,  The employer also pays an additional 7.5% to make approx. 15% in total, but the employee doesn’t see the employer share reported on his/her check stub. Now since, the above numbers from Angry Bear are already rounded, I’ll just use 7% as the SS/Medicare tax bite.  Without the detailed income numbers for the top 3 brackets, we’ll have to estimate, so I assumed the minimum level of income.  The revised numbers become:

The richest one percent of the population, who make more than 410
thousand dollars per year (AGI) pay an income tax rate of 22%. no more than 24%

The next top 4% of the population, earning over 160k but less than 410k, pay an income tax rate of 18% no more than 24%

The 5% of the population earning over 113k but less than 160k, pay an income tax rate of 13% no more than 19%
 

The 15% of the population earning over 67k but less than 113k, pay an income tax rate of 9% 16%

The 25% of the population earning over 33k but less than 67k, pay an income tax rate of 7% 14%

The 50% of the population earning less than 33k, pay an income tax rate of 3%. 10%