NBER BCWC?

The Times reports on the NBER's Business Cycle Dating Committee:

A committee of economists, charged with determining the official turning points in the nation’s business cycles, certifies the beginnings and ends of recessions. But this time, the committee members say, the evidence is not so easy to decipher.

The committee plans to announce on Monday that it cannot yet declare an end to the recession that began in December 2007, several members indicated on Sunday. Such an acknowledgment is rare in the history of setting dates to business cycles and could affect the behavior of investors and consumers.

Despite a recent uptick in employment and income, the decision of the committee at a meeting on Friday reflects a lingering worry that the economy could turn downward again in a so-called double-dip recession.

Several economists on the committee, which has seven active members, said they considered such a turn to be unlikely. But, they said, the duration and severity of the contraction have made it hard to determine with authority that a recovery has begun.

Hmmm... sounds more like a Business Cycle Waffling Committee.

The NBER's official definition of recession is rather squishy:

[A] recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

That leaves quite a bit of room for subjectivity. As an economist, I'd like them to keep the data series as consistent as reasonably possible. A quick comparison with the previous two recessions, which were mild and short, but followed by "jobless recoveries," suggests that the consistent way to call it would be a trough (end of recession) date in mid-2009.

Indeed, FRED (the St. Louis Fed's great data tool that I used to make the graph) provisionally penciled in a trough of July, 2009, which explains the end of the "shaded area."

If things head back down, after at least two consecutive quarters of positive GDP growth (almost certainly three, if the first quarter of 2010 is reported positive as expected), and many other indicators having turned up, then the consistent way to describe it would be as two recessions. That is how the NBER treated the "double dip" of the Jan-July '80 and July '81-Nov '82 recessions. While a new downturn would really mean one prolonged period of economic awfulness, like the early '80s (or the depression, which was two recessions with a recovery in between), calling it as two separate recessions would be in keeping with the NBER's past practice.

Update (4/12): Here is the committee's statement:

The Business Cycle Dating Committee of the National Bureau of Economic Research met at the organization’s headquarters in Cambridge, Massachusetts, on April 8, 2010. The committee reviewed the most recent data for all indicators relevant to the determination of a possible date of the trough in economic activity marking the end of the recession that began in December 2007. The trough date would identify the end of contraction and the beginning of expansion. Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature. Many indicators are quite preliminary at this time and will be revised in coming months. The committee acts only on the basis of actual indicators and does not rely on forecasts in making its determination of the dates of peaks and troughs in economic activity. The committee did review data relating to the date of the peak, previously determined to have occurred in December 2007, marking the onset of the recent recession. The committee reaffirmed that peak date.

Update #2 (4/12): Via Economix, committee member Robert Gordon has offered a "dissenting opinion" (has that ever been done before?). He thinks they should have called the trough for June, 2009. Furthermore, "a double dip is implausible, if it were to occur in the future it would be classified as a new recession rather than a continuation of the 2007-09 recession." Another committee member, Jeff Frankel, declared the recession over on his blog last week.

Derivative Love

On the Times web site, Steven Strogatz offers a nice discussion of our friend the [calculus] deriviative:

Derivatives are all around us, even if we don’t recognize them as such. For example, the slope of a ramp is a derivative. Like all derivatives, it measures a rate of change — in this case, how far you’re going up or down for every step you take. A steep ramp has a large derivative. A wheelchair-accessible ramp, with its gentle gradient, has a small derivative.

Every field has its own version of a derivative. Whether it goes by “marginal return” or “growth rate” or “velocity” or “slope,” a derivative by any other name still smells as sweet. Unfortunately, many students seem to come away from calculus with a much narrower interpretation, regarding the derivative as synonymous with the slope of a curve.

Like many, I did not appreciate calculus in my first encounters with it, but it grew on me when I was in economics graduate school. I think its possible (though difficult) to make it as an economist without being a natural at math, but, at some point, you must learn to like it.

Stiglitz Says Chill Out on China

At Project Syndicate, Joseph Stiglitz argues that it would be counterproductive for the US to confront China over the exchange rate. He concludes:

Since China’s multilateral surplus is the economic issue and many countries are concerned about it, the US should seek a multilateral, rules-based solution. Imposing unilateral duties after unilaterally labeling China a “currency manipulator” would undermine the multilateral system, with little payoff. China might respond by imposing duties on those American products effectively directly or indirectly subsidized by America’s massive bailouts of its banks and car companies.

No one wins from a trade war. So America should be wary of igniting one in the midst of an uncertain global recovery – as popular as it might be with politicians whose constituents are justly concerned about high unemployment, and as easy as it is to look for blame elsewhere. Unfortunately, this global crisis was made in America, and America must look inward, not only to revive its economy, but also to prevent a recurrence.

Though he doesn't name names, he clearly seems to be answering Paul Krugman's recent column on the subject (discussed in this earlier post).

Update: Krugman responds.

Update #2: See also Martin Wolf, who agrees with Krugman.

Volcker Revisited

As bad as its been, it doesn't look like the current slump will match the postwar peak in the unemployment rate, 10.8% at the end of 1982. That recession was largely a result of the Volcker Fed's efforts to reduce inflation, which was quite painful - exactly as the Phillips curve implies. Since Paul Volcker seems to be back in vogue, Free Exchange asks a very good question:

The Fed began raising interest rates in 1977, and the American economy tipped into recession in 1980, at which point the central bank took its foot off the brakes. But inflation rates continued to rise, and so shortly after the economy recovered (briefly) in July of 1980, Mr Volcker orchestrated a series of interest rate increases that took the federal funds target from around 10% to near 20%.

What followed was an extraordinarily painful recession. Unemployment rose to near 11%. Manufacturing states were battered by the downturn; the near 17% unemployment rate in Michigan was worse than the state sustained in this latest recession. Mortgage lenders were devastated by high interest rates. The banking system was pushed to the point of insolvency. Things were quite bad. And while growth snapped back to trend rather quickly after the Fed took its foot offf the brake for good, there was considerable suffering through the recession, and the effects of unemployment, on health and earnings of sacked workers, persisted for years.

And yet, Mr Volcker is widely hailed as a hero for his total victory over inflation. This is understandable; inflation can be an extremely unpleasant phenomenon. It distorts consumption and investment decisions, and erodes faith in markets and government. But I found myself wondering yesterday whether the Volcker Recession was, after all, worth the pain. Was it a good decision to send the American economy into a debilitating recession for three years in order to whip inflation?

Their answer is worth reading. It leans heavily on the "supply shock" interpretation of the 1970s stagflation, suggesting that, in the absence of further oil shocks in the 1980s, inflation would have gotten at least somewhat better on its own. Hardcore believers in Milton Friedman's dictum that "inflation is always, everywhere a monetary phenomenon" would beg to differ.

Misplaced Rectitude

In the FT, Jeffrey Sachs and George Osborne argue that governments need to deal with their budget woes sooner rather than later:

Virtually all policy analysts agree that the path to renewed prosperity in Europe and the US depends on a credible plan to re-establish sound public finances. Without such a plan, the travails which have hit Greece and which are threatening Portugal and Spain will soon enough threaten the UK, US, and other deficit-ridden countries. In the recent duel of macro-economists, one camp has called for early budget consolidation, followed by further measures over five years. We agree. Others want more fiscal stimulus, delaying deficit reduction. We believe delaying the start of deficit reduction would put long-term recovery at risk. Such an approach misjudges politics, financial markets, and underlying economic realities.

Blaming our predicament on financial markets, as some in the second camp do, ignores the awkward truth that governments have enabled, if not enthusiastically promoted, recklessness, through chronic deficits and lax financial regulation. Our predicament, in this sense, is a political crisis at least as much as a financial one. We can’t expect “credibility” by succumbing to temptation just one more time. What politicians like to present as saving the world economy from financial markets is in many cases simply responding to past errors while continuing to operate on a time horizon no longer than the next election.

Count me with the "others" in the "second camp." In the case of the US, there is still little evidence of a problem. If markets were losing their appetite for US government debt, it would be reflected in rising Treasury yields, which are not apparent (unless you read alot into that tick at the end): That's not to say that their concern is irrational. If government finances don't eventually improve, at some point borrowing costs will rise, and crowd out private investment. We're not there yet, but it would make sense to think about what we'll do before we get there.

A couple of things to bear in mind:

• The government budget will get somewhat better when the economy recovers, and spending cuts or tax increases now would serve to slow the recovery.
• In the US, the long term federal budget problem is driven by projected increases in health care costs, so the bill just signed by the president is a step in the right direction, to the extent it helps control cost growth.

Sachs and Osborne seem to think that any policy would not be "credible" - i.e., would not influence expectations about future borrowing - if it does not inflict some pain today. They may be right, but I don't think so. If enacted today, a tax reform that projected to yield revenues closer to spending at "full employment" (i.e., once cyclical effects are taken out) would be a significant step to pre-empting the problem, even if the current deficit remains large because of the downturn. This would be true even if the reforms were phased in or scheduled to take effect in a few years. Indeed, some of the tax changes could be written to be contingent on recovery. But, while we should take future deficits seriously, we should not lose sight of the fact that, right now, a large deficit is exactly what we need to help make up the shortfall in private demand.

At Economist's View, Mark Thoma has a similar opinion to mine.

Health Care Reform and Inequality

In the Times, David Leonhardt argues that the health care reform just passed by Congress (!!) can be understood as part of President Obama's effort to reverse - or at least lean against - the trend of widening income inequality in the US. He writes:

The bill that President Obama signed on Tuesday is the federal government’s biggest attack on economic inequality since inequality began rising more than three decades ago.

Over most of that period, government policy and market forces have been moving in the same direction, both increasing inequality. The pretax incomes of the wealthy have soared since the late 1970s, while their tax rates have fallen more than rates for the middle class and poor.

Nearly every major aspect of the health bill pushes in the other direction. This fact helps explain why Mr. Obama was willing to spend so much political capital on the issue, even though it did not appear to be his top priority as a presidential candidate. Beyond the health reform’s effect on the medical system, it is the centerpiece of his deliberate effort to end what historians have called the age of Reagan.

Tax Time

From the instructions to form 1040:

Certain whaling captains may be able to deduct expenses paid in 2009 for Native Alaskan subsistence bowhead whale hunting activities.

Learn something new every day.

Did JP Morgan Save the Dollar?

In the 1890s, the ability of the US to maintain a fixed exchange rate came into question and it was threatened by an international financial crisis similar to those experienced in recent decades by many "emerging markets." In this instance, the exchange rate peg was to the gold standard, which meant grinding deflation as money growth, limited by the pace of gold production, failed to keep pace with output. This hit debtors particularly hard as it raised real interest rates - imagine a farmer facing fixed interest payments while the price of his crops falls year after year. Populists and silver mining interests campaigned for the monetization - "free coinage" - of silver, which would have led to inflation and devaluation.

With the commitment to gold under threat in the 1890s, the Treasury faced a drain on gold reserves and US bonds carried a risk premium over UK gilts. Nowadays, a country in such a predicament might seek the aid of the International Monetary Fund. Since the IMF did not exist at the time, the US instead turned to JP Morgan.

At the American Heritage website, John Steele Gordon has an interesting description of JP Morgan's 1895 "bailout" of the US Government. He concludes:

Morgan’s rescue of the dollar, despite intense criticism from the Left, changed the country’s economic mood, and a strong recovery from the depression began. The next year the 36-year-old William Jennings Bryan would win the Democratic nomination with a promise that the moneyed classes “shall not crucify mankind upon a cross of gold.” It was one of the most famous speeches in American history, but his far less eloquent opponent, William McKinley, trounced him by running on a slogan of “sound money, protection, and prosperity.”

The election proved to be the start of the revival of Republican dominance in American politics that would last until 1932.

While the Morgan loan did give the Treasury some breathing space, if deflation had continued, no doubt populism would have continued to gain strength. What really did in the "free silver" movement was the end of deflation due to an increase in world gold supplies:

For academic studies, see Milton Friedman, "The Crime of 1873" (Journal of Political Economy, 1990 [JSTOR]) and Hallwood, MacDonald and Marsh, "Realignment Expectations and the US Dollar, 1890-1897: Was There a 'Peso Problem'?" (Journal of Monetary Economics, 2000).

Hardball with China?

A useful article by Keith Bradsher in the Times points out a weakness in international economic governance - while the WTO provides a system of rules and an enforcement mechanism for trade, the IMF does not have the power to do the same for exchange rate policies. China has made use of this asymmetry, he writes:

Seeking to maintain its export dominance, China is engaged in a two-pronged effort: fighting protectionism among its trade partners and holding down the value of its currency.

China vigorously defends its economic policies. On Sunday, Premier Wen Jiabao criticized international pressure on China to let the currency appreciate, calling it “finger pointing.” He said that the renminbi, China’s currency, would be kept “basically stable.”

To maximize its advantage, Beijing is exploiting a fundamental difference between two major international bodies: the World Trade Organization, which wields strict, enforceable penalties for countries that impede trade, and the International Monetary Fund, which acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.

Paul Krugman argues that it is time for the US to confront China over its exchange rate policies:

Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.”

But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.

The Economist offers a more cautious view:

Will the administration’s new tough talk move things in the right direction? Those who argue in favour of sabre-rattling do so on two grounds: first, that it is likely to shift China’s position, and second, that a stronger stance against China’s currency from the White House will diffuse protectionist sentiment in Congress. Both are dubious. China’s reactions so far suggest that American complaints make an imminent currency shift less, not more, likely. And a row could spur rather than diffuse anti-China action in Congress.

Rather than raising a bilateral ruckus, America would be far better off convincing other big economies in the G20 to press together for a yuan appreciation as part of the world’s exit strategy from the crisis. Cool and calm multilateral leadership will achieve more, with fewer risks, than a Sino-American currency spat.

Dani Rodrik, on the other hand, has suggested China's policy is a defensible development strategy.

Speaking of hardball and China, the Economist reports they're not taking to it.

Update: More on Krugman's blog. Free Exchange is harshly critical of his column, and he responds, and is answered. Scott Sumner also disagrees with Krugman. See also Ambrose Evans-Pritchard, who sees China spoiling for a fight it won't win.

Grad School Advice

From Greg Mankiw. Among other things, he says:

Talk with the graduate students who are now in the programs you are considering. Are they happy?

Hmm.... yes, its definitely a good idea to talk to graduate students before choosing a program, but "happy" might be a bit too much to expect. (And if you do meet graduate students who are "happy," do them a favor and don't report them to the director of graduate studies).

My advice on grad school is here.

Update: Chris Blattman adds to Mankiw's list.