Economics Never Sleeps

At the NY Times' Economix blog, Catherine Rampell reports survey results showing that economists are America's fifth most sleep deprived category of workers.

Most Sleep-Deprived
6h57m	Home Health Aides
7h	Lawyer
7h1m	Police Officers
7h2m	Physicians, Paramedics
7h3m	Economists

She seems puzzled by this:

Personally, I would love to know why economists are on this list. Economists in academia, at least,  seem to have flexible schedules that should let them get lots of sleep. Maybe a lot of them are grad students scrambling to publish, publish, publish. Or maybe there are a lot of folks like Larry Summers who prefer allocating more hours for work.

I've never met Larry Summers, but, based on what I've read, I don't think there are a lot of folks like him. 

But the "scrambling to publish, publish, publish" certainly doesn't end in grad school - indeed, that's only the beginning of it.  I really like being an academic, but its not quite so cushy as people seem to think.  However, I'm not sure why that would be worse for economists than other academics - if anything, it should be better for us because our job market is better than in most disciplines.  But it does seem to be the case that economists are disproportionately represented among the faculty I see around the building late at night or on the weekends.  Perhaps economists face a lower opportunity cost of working (i.e., we have lousy social lives).

Or maybe we just love what we do!

However, there doesn't seem to be much variance among occupations.  The least sleep-deprived group is "forest, logging workers" who get 7 hours and 20 minutes of sleep -  that's only about 3 percent more than economists.  As an economist, I wonder if that's a statistically significant difference.

Abu Dhabi: the Hartford of the Gulf?

The Brookings Global MetroMonitor 2011 includes a ranking of the world's 200 largest metropolitan economies by per capita GDP:

1. Hartford $75,086
2. Oslo $74,057
3. San Jose $68,141
4. Abu Dhabi $63,859
5. Bridgeport $63,555

Take that, Oslo!  We're #1!!

We're #1?!?  Really?!

That comes to my attention via this report from the Courant, which notes that we don't do quite that well in other rankings.  For example, according to the BEA, among the 52 US "Metropolitan Statistical Areas" with more than 1 million people, the top five in terms of per capita real GDP (in 2005$) are:

1. Washington-Arlington-Alexandria, DC-VA-MD-WV   $68,283
2. San Francisco-Oakland-Fremont, CA    $68,008
3. Hartford-West Hartford-East Hartford, CT     $65,031
4. Boston-Cambridge-Quincy, MA-NH    $62,395
5. Seattle-Tacoma-Bellevue, WA    $60,859

(out of all 366 US MSA's, Hartford ranks 10th; to convert to 2011$, multiply by 1.1133).

Looking at the Brookings report, its not clear exactly how to account for the discrepancy - they cite Moody's Analytics as their data source for the US, though Moody's estimates are based on BEA data.  One of the report's footnotes says:

Moody's Analytics estimates GDP by metropolitan area as the sum of the GDP of component counties.  The GDP by county, estimated or forecasted, is obtained through allocating U.S. Bureau of Economic Analysis' state GDP to component counties based on the counties' share of employment in the state employment.

Hmm... that sounds like that might have the effect of smoothing income disparities within states, which would make Hartford appear even better off than it is because of the very high per capita GDP of the Bridgeport-Stamford-Norwalk MSA ($82,449) which in the same state (that number also explains why "Bridgeport" appears in Brookings' list - it shares an MSA with some very high income areas).

In any case, though the streets aren't paved in gold (or maybe we just put asphalt over the gold to avoid seeming ostentatious...), the Hartford area comes out pretty well no matter how you slice the economic statistics.  And there's good pizza, we get the Boston AND New York sports channels on TV, and you're never far from Dunkin' Donuts...

Is "Policy Uncertainty" Endogenous?

At Vox, Nicholas Bloom and Scott Baker argue "falling policy uncertainty is igniting the US recovery."

Since the idea that the economy weighted down by "uncertainty" induced by the Obama administration seems to have become a right-wing talking point, I'm instinctively skeptical.  However, the underlying premise that uncertainty could reduce investment and consumption is sensible (even if I don't think it explains much about the current slump).  So, perhaps its a worthwhile academic endeavor to try to quantify it and make an empirical study of its impact.

According to Bloom and Baker, their index of "policy uncertainty" has three components:

• The frequency of newspaper articles that reference economic uncertainty and the role of policy.
• The number of federal tax code provisions that are set to expire in coming years.
• The extent of disagreement among economic forecasters about future inflation and future government spending on goods and services.

The difficulty with this arises from the possibility that an economic downturn causes the measures of policy uncertainty to rise, rather than vice-versa.

Certainly a downturn means more news about the economy, and it also leads policymakers to try to respond.  The process of negotiating a policy response through the political system is naturally uncertain, and leads to newspaper articles which discuss the various, uncertain, policy outcomes.  In the Obama era, for the sake of "fairness," in their stories about administration proposals, the media will quote critics, many of whom like to argue that the administration is destroying the economy by creating more "policy uncertainty."  The frequent repetition of this argument causes the measure of policy uncertainty to rise, regardless of whether it has merit.

One set of policy responses to a slump involve temporary tax cuts.  This leads to expiring tax code provisions, which increase the measure of policy uncertainty.  (Though in the US case, the main uncertainty was arguably created in 2001 and 2003 when Congressional Republicans passed tax cuts that were scheduled to expire in 2010).  Furthermore, if there is uncertainty about the state of the economy - which there often is during slumps - there will also be uncertainty among forecasters about future policies.

Overall, I would expect more "policy uncertainty" as Baker and Bloom measure it, during economic downturns - but I think it is primarily a consequence of a bad economy, rather than the cause.

Bartlett: Not the Time for "Reaganomics"

At washingtonpost.com, Bruce Bartlett writes:

Judging from the [Republican] candidates’ tax proposals, they seem to believe that the most Reagan-like candidate is the one with the biggest tax cut. But as the person who drafted the 1981 Reagan tax cut, I think Republicans misunderstand the premises upon which Reagan’s economic policies were based and why those policies can’t — and shouldn’t — be replicated today.

Although I am skeptical of "supply-side economics" in general, and I don't think that it should be considered a success in the 1980's (see this post, for example) I think Bartlett makes a reasonable case that it made more sense (or at least was less non-sensical) in 1980 than today:

When comparing Reagan’s policies with Republican proposals today, several things stand out. Inflation is low now. We are not looking at “bracket creep” or sharply rising taxes, as we were in the late 1970s. The top income tax rate is 35 percent, half the rate Reagan inherited. And federal revenue is at a 60-year low of about 15 percent of GDP, compared with a post-World War II average of about 18.5 percent.

These differences are essential to understanding why Reagan’s policies worked when they did — and why they are not appropriate today.

All of the evidence tells us that the economy’s fundamental problem today is not on the supply side but the demand side.

January Employment: Getting Better, Mostly

The BLS' employment report for January was a relatively good one: the economy added 243,000 jobs in January, and the unemployment rate fell to 8.3%.

The headline jobs number comes from a survey of businesses (the "establishment survey") and the employment rate is calculated from a survey of households.  Both series had some revisions.  The establishment survey was updated based on information from unemployment insurance records, and these revisions resulted in higher estimates of employment for 2011 - the new estimate for the jobs number for Dec. 2011 was 266,000 above the old one (and the addition for January is on top of that).  The household survey data was updated based on census data, which led to an upward revision of the estimates of the size of the population and labor force.  The BLS explains:

The adjustment increased the estimated size of the civilian noninstitutional population in December by 1,510,000, the civilian labor force by 258,000, employment by 216,000, unemployment by 42,000, and persons not in the labor force by 1,252,000. Although the total unemployment rate was unaffected, the labor force participation rate and the employment-population ratio were each reduced by 0.3 percentage point. This was because the population increase was primarily among persons 55 and older and, to a lesser degree, persons 16 to 24 years of age. Both these age groups have lower levels of labor force participation than the general population.

Although the reasons for it have more to do with demographics than with discouraged workers, it is still disturbing to see that the revision pushed the labor force participation rate down to 63.7%, its lowest since 1983.

Labor Force Participation Rate (Seasonally Adj.)

The revisions also mean that, despite strong employment gains in the month, the employment-population ratio remains at a depressed level of 58.5.

Employment-Population Ratio (Seasonally Adj.)

(Without the population data changes, the employment-population ratio rose by 0.3 and labor force participation was flat in January.)

Although the establishment survey jobs number gets more attention because it has a larger sample than the household survey, the household survey was stronger: the number of people reporting that they were employed increased by 847,000.  After removing the effect of the revision to the population data, the increase was 631,000.

January is a month with a big seasonal adjustment, which attempts to remove the effect of the decline in employment that normally occurs during this time of year (e.g., many holiday retail jobs end).  On a non-seasonally adjusted basis, the unemployment rate in January was 8.8%, and payroll employment fell by almost 2.7 million.  Floyd Norris has a skeptical note on the seasonal adjustment.

Overall, this report was good, but not nearly good enough.  While it is nice to see employment growth at a pace strong enough to actually improve things a bit (i.e., faster than the 125,000-ish jobs per month needed just to keep the unemployment rate constant as the population grows), the employment-population ratio illustrates that the economy is far from healthy.  12.7 million people remain unemployed, of whom 5.5 million have been unemployed more than 27 weeks, and "U-6", the BLS' broader measure of unemployment which incorporates discouraged workers and part time workers who want to work full time, is at 15.1%.

See also: Ezra Klein, Free Exchange's Greg Ip, Calculated Risk.

What is the Fed Doing?

Last week, the statement following the Federal Open Market Committee meeting was accompanied by a summary of projections by the participants, which included for the first time projections on future interest rates.  The FOMC also released a statement clarifying its policy goals, and Bernanke held a press conference.

The statement on the policy objectives included the following:

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate.

That appears to somewhat formalize what we've known for a while, that the Fed is shooting for 2 percent inflation.  Their interpretation of the employment part of their mandate was somewhat squishier:

The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. 

That sounds like a statement about the "natural rate" or NAIRU, which changes over time, and which economists can disagree about.  In this context, "maximum level of employment" isn't a very good phrase - it sounds like something Stalin would try to achieve in industrializing the Soviet Union - but "maximum" is the word in the Federal Reserve Act, so they probably wanted to stick with it.

The FOMC participants' projections of the federal funds target rate were summarized in this chart:

This indicates that most of them expect the federal funds rate to be above its current range of 0-0.25% in 2014, their projections that inflation in 2014 will be 1.6-2.0% and unemployment will be 6.7-7.6% notwithstanding.  Now that they've made their interpretation of their mandate more explicit, we can say the Fed is projecting inflation will be below their "mandate consistent" level and unemployment will be above it, but they will be raising rates anyway...

The language in their regular meeting statement was:

In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. 

To be fair, though most of the participants are projecting a rate increase by 2014, all of the projected rates are still quite low relative to their "longer run" projection.

Many people seem to be interpreting the language about keeping rates "exceptionally low" through "late 2014" as an expansionary "open mouth operation" where the Fed tries to stimulate the economy by influencing expectations (and since the December statement said "mid-2013" they have opened the mouth wider).  If people believe short term rates will be lower for longer, long term rates will also fall.  Bernanke explained how this would work in his 2002 speech about deflation:

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities. There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. 

Credibility is indeed one major problem with such a strategy, as Gavyn Davies noted in a blog post previewing the FOMC release:

The problem for practitioners, however, is the time inconsistency of these proposals. It is one thing to promise now to hold interest rates at zero if inflation starts to rise in several years time, and quite another actually to do that in the circumstances of the time.

The temptation to renege on a long forgotten commitment, possibly made by an earlier Fed chairman under a previous administration, would surely be overwhelming once the economy is recovering. Since the private sector knows in advance that this would be the case, it would be extremely hard to persuade people today that such a policy would in fact be pursued in the future. And that would defeat its purpose.

However, while many knowledgeable observers are interpreting it that way (e.g., Stephen Williamson and Ryan Avent) it seems to me that the Fed is being careful to say that it is not promising to keep rates low, only that it believes the economy in 2014 will still be lousy enough that rates should still be low then. 

During the press conference, Bernanke seemed to place quite a bit of emphasis on the dual nature of the Fed's mandate, and even said "the Committee always treats its primary objectives on price stability and maximum employment symmetrically." Really?  In the past, I've thought he's seemed to give higher priority to inflation, so that sounded unexpectedly dovish to me.  One interpretation might be that he's listening to Chicago Fed President Charles Evans, who has argued the Fed needs to be more aggressive to try to reduce unemployment.  Scott Sumner also found dovish signs in the press conference.

An alternate interpretation is Bernanke felt the need to be extra careful to sound like he is being faithful to the dual mandate because the statement making the 2% inflation goal explicit sounds like another step towards "inflation targeting," which Bernanke advocated during his academic days.  Indeed, one of the reporters said: "Congrats on the inflation target or goal. That's a big achievement for you, I'm sure."

So, what is the Fed doing?  I'm really not sure, but I hope it works.

Middletown - DC - Davos

The New York Times profiles Lael Brainard, Wesleyan class of 1983, who has the difficult charge of prodding Europe towards a solution to the euro crisis: 

Lael Brainard, America’s top financial diplomat, landed Thursday in Switzerland to help coax the European negotiations along. As the Treasury under secretary for international affairs, she has the urgent task of helping to persuade the Europeans to head off a financial crisis by building a firewall to quiet the markets once and for all — and doing so without any formal role in their negotiations. It is at times an awkward role, but the stakes are enormous, not just for the United States but for preservation of the euro zone and its currency. 

Ms. Brainard, 49, operates mostly behind the scenes, in private phone calls and discreet visits — 17 trips to Europe alone in the last two years. 

“They trust her, they reach out to her, they talk to her for ideas and to get us to engage,” said Timothy F. Geithner, the Treasury secretary, who is also in Davos this week.

Q4 GDP: Back to Average

GDP grew at a 2.8% annual rate in the last quarter of 2011, according to the "advance" estimate the BEA released today.  That can be taken as good news as it represents improvement over the first part of the year (growth rates of 0.4%, 1.3% and 1.8% in the first three quarters).  But 2.8% is just the average growth rate over the past 40 years, so its not fast enough to significantly close the gaps in output and employment left by the recession.

The advance estimate puts growth for the full year at 1.7%.  We'll get the revised "second" estimate on Feb. 29.

For more, see Wonkbook's Brad Plumer, Calculated Risk, NYT's Catherine Rampell.

UK: Worse than the Depression?

On their blogs, Paul Krugman and Brad DeLong have both reproduced this graph (from here):

and cited it as evidence that the UK economy is now worse than the Great Depression.  I haven't been following the UK situation closely, but I'm instinctively inclined to agree with their criticisms of the Cameron government's austerity policies.

Having said that, I think the graph (and implied interpretation) is a little unfair because of how Britain's experience during the interwar period differed significantly from that of the US.

While the US economy went pretty suddenly from the "roaring 20's" to the depression, the UK economy was already in bad shape throughout the 1920's, which I believe can be primarily attributed to the attempt to resume the gold standard at the pre-war parity (the infamous "Norman [Montagu] Conquest of $4.86"/ "Economic Consequences of Mr. Churchill") and the 1930's was just a further deterioration of an already dismal situation.

So, while it may be the case that the deterioration from 2008 in Britain has been comparable in magnitude and will be worse in terms of persistence than the decline starting from 1930, saying that its worse than the depression that ignores that Britain in 1930 already had an unemployment rate of 16%.

For comparison, here's the US (red) and UK (blue) unemployment rates over the past several years:

Yes, things look like they're getting worse in Britain, but they're not exactly in "Road to Wigan Pier" territory yet...

*Since this is just a quick blog post, I haven't dug into the technical differences between various unemployment data series, but I'm pretty sure they would all show similar trends, if not exact levels.

Update (1/30): In his column today, Krugman writes:

O.K., about those caveats: On one side, British unemployment was much higher in the 1930s than it is now, because the British economy was depressed — mainly thanks to an ill-advised return to the gold standard — even before the Depression struck. On the other side, Britain had a notably mild Depression compared with the United States.

Steve "Jobs" versus Barack "US" Jobs

Indiana Governor Mitch Daniels, Republican response to the State of the Union:

Contrary to the President's constant disparagement of people in business, it's one of the noblest of human pursuits. The late Steve Jobs - what a fitting name he had - created more of them than all those stimulus dollars the President borrowed and blew.

Perhaps he missed this, in a fascinating story about Apple in Sunday's New York Times magazine:

[A]s  Steven P. Jobs of Apple spoke, President Obama interrupted with an inquiry of his own: what would it take to make iPhones in the United States?

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas. 

Why can’t that work come home? Mr. Obama asked. 

Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.

Apple employs 43,000 people in the United States and 20,000 overseas, a small fraction of the over 400,000 American workers at General Motors in the 1950s, or the hundreds of thousands at General Electric in the 1980s. Many more people work for Apple’s contractors: an additional 700,000 people engineer, build and assemble iPads, iPhones and Apple’s other products. But almost none of them work in the United States. Instead, they work for foreign companies in Asia, Europe and elsewhere, at factories that almost all electronics designers rely upon to build their wares.  

As for those dollars we "borrowed and blew," according to the Congressional Budget Office:

CBO estimates that ARRA’s policies had the following effects in the third quarter of calendar year 2011 compared with what would have occurred otherwise:

• They raised real (inflation-adjusted) gross domestic product (GDP) by between 0.3 percent and 1.9 percent,
• They lowered the unemployment rate by between 0.2 percentage points and 1.3 percentage  points,
• They increased the number of people employed by between 0.4 million and 2.4 million,

(According to the CBO's estimates, the impact of the stimulus peaked in the third quarter of 2010 at 0.7-3.6 million).

To summarize, US jobs:

• Steve Jobs' "noble pursuit": 43,000* 
• Barack Obama "borrowed and blown": 400,000-2,400,000

Maybe it would be fitting to call the President Barack "US" Jobs.

*Don't get me wrong - I'm a fan of his computers.  There's alot to think about in the Times article - see Paul Krugman and Ryan Avent. However, many of the issues raised by it, and by the President's speech, about trade, education and "industrial policy," are really about the composition of employment.  The total number of jobs at any time depends mainly on aggregate demand - and when there is a slump (particularly one the Fed can't handle), the appropriate fiscal policy response is indeed for the government to borrow some money and "blow" it.

Update (1/27): Paul Krugman noticed the same thing, and wrote a column about it.