On vibecession and progressive thinking about the macroeconomy

The numbers for the American economy are finally out, with a delay of two months. Growth was 4.3 percent in the third quarter, which is fundamentally related to an expansion of consumption. Investment is flat (a bit negative actually, so much for the AI investment boom), and government spending is positive (but not much), mostly defense. In the previous two reports it was barely positive. There is also a contraction of imports. Normally, that would imply a slowdown of the economy, but in this case part of it might be associated with the tariffs.

At any rate, what I had suggested all along throughout the year, in many debates, often against the grain, was that we were not on the verge of a recession because of tariffs, nor that tariffs would be inflationary. And I was correct. What happened is what I had suggested: we are seeing a continuous slowdown that had already started under Biden, simply after the expiration of many of the measures associated with the Pandemic and the fiscal expansion that followed it. Tariffs have not had a significant impact on quantities, and only a limited impact on prices. If they had an effect, it would be a one-off increase in the level of prices, not in the rate of growth of prices, meaning inflation. And inflation remains subdued.

There are a couple of things worth pointing out. First, there is this whole discussion about a “vibecession,” or whatever people want to call it. Most of the discussion, including this piece in the Financial Times, is not really about quantities. A recession is a decline in the level of output and employment. Employment numbers are not great, they reflect the slowdown of the economy. The last report in September, which I discussed here, does suggest that the economy is slowing down. Those things are connected. One of the few laws we have in macroeconomics, Okun’s law, tells us that a slowdown in the economy should be reflected in a softening of the labor market. But unemployment remains relatively low, so we are not in a recession, for what it’s worth.

The vibe is not one of recession, and it is also not really about inflation (really). The graph above from the Financial Times suggests that wages grew less than rents (shelter), largely due to high mortgage rates that feed into higher rental prices. Wages also grew less than food prices. So food and shelter are supposedly getting more expensive. But the wages shown there are average wages. Once you look at the wages of non-supervisory workers, those seem to be growing more or less at the same pace, still above average CPI inflation, and particularly close to rental inflation.

Wages at the bottom have not really lost much (red line). They did lose a little during the pandemic, but they recovered fast enough and have been growing at roughly the same pace as inflation.

Of course, there is a perception that things are not good, and things are not good for working-class people, but that does not mean that the problem is inflation. By suggesting that the problem is inflation, something Trump used against Biden, progressives miss the point. I have discussed how Bidenomics had been good in several respects, with many policies favoring working-class people, although many of them expired before the end of his term. The perception that things were not good was not because of inflation, but because the quality of jobs and the conditions facing the working class have been deteriorating for a generation, going back to the 1970s.

For a long period, productivity gains have not translated into better living standards or higher wages for people at the bottom. This is not a recent phenomenon. Anger has increased over time, and in particular after the failure to redress the injustices and unfairness of the system following the global financial crisis of 2007–2009, the so-called Great Recession. There was great hope that Barack Obama would bring a different kind of politics and economic policy, and the disappointment contributed to the backlash we see today.

People are now angry at Trump because of affordability issues, but this reinforces the idea that if Dems win and bring in someone not particularly different from Obama or Clinton, although Biden did move to the left of them, they may face the same problems. The issue is NOT inflation. I want to be absolutely clear: the issue is NOT inflation. That is what my graph above indicates.

The issue is the long run stagnation of wages, the quality of jobs, about future prospects, and about the inability of Dems to show that people will have a better quality of life in the future. Addressing this requires policies that promote higher minimum wages, that would have demonstration effects that would help lift wages more broadly; policies that tax the wealthy at higher rates so they are seen as contributing proportionally to the system; and policies that provide accessible healthcare. Healthcare in the United States is incredibly expensive and of poor quality compared to other advanced nations. The United States is the only advanced country without a single-payer national public health system, which makes it look, frankly, like an underdeveloped nation in this respect.

Also, progressives overemphasis on inflation will have a negative impact on macroeconomic debates, reinforcing very conventional views about how the economy works, as I noted in a piece I wrote for ProMarket, the magazine of the Stigler Center. This focus misses the real dangers facing the American economy. The real danger, as I have argued all year, is the Federal Reserve and its interest rate policy.

The slowdown of the economy suggests that the real issue is high interest rates. Shelter prices, which are the highest component in the graph, are being pushed up by high mortgage rates. These impact consumption more directly than any other mechanism. High interest rates may cause a recession in the United States, and the Fed needs to reduce rates much faster than it is willing to do (or at least that;s what it seems). Ironically, these strong GDP numbers may lead the Fed to keep rates relatively high because of the danger of inflation.

This raises another problematic issue: the idea that anything Trump says must be wrong (that's often correct). However, Trump is correct in arguing that interest rates should be lower. He is also correct in saying that there is no particular reason why the Fed should be independent of political power. I would not argue for direct presidential control, but the Fed should be more accountable to Congress, and to the people. Fiscal policy is clearly political, it involves the executive proposing a budget and Congress approving it. The idea that monetary policy is not political, should not be politicized, and should not be subject to democratic scrutiny is deeply entrenched in conventional thinking, but there is no reason it should be. Why is there no representative of labor on the Federal Open Market Committee? Someone who could point out, for example, that high interest rates raise mortgage rates, push up rents, and keep inflation higher. That it affects access to credit and consumption.

In this sense, progressives have played a role in reintroducing very conventional ideas into macroeconomic discussion: the idea that inflation is more central than employment and activity in policy matters, because it counts more for electoral purposes, and that the central bank must be independent of political power.

That’s it for the year. I don’t think I’ll blog again until 2026, so happy holidays to all!

ReOrient

A graph that shows, for a longer span, essentially the same information presented in Robert Allen's graph of manufacturing production, and discussed before here. It is evident that the rise of China (India is not quite yet visible, even if its share did increase) represents a certain rebalancing, which is inevitable as the income per capita grows in that country, even if it does not scape what mainstream economists refer to as the middle income trap. Source here, and the data is, as expected from Maddison.

Note that the first millennia, where Asia (China and India essentially) is much smaller in terms of the graph, which is a result of the paucity of data. In a sense, the graph shows the relatively brief rise, and now relative decline of Western GDP dominance, as Asia regains a space more proportional to its population share.

PS: On issues with GDP measures see here.

GDP recovers a bit in the third quarter

According to the BEA, the advance estimate of GDP growth in the third quarter is 2.9%, which is a significant improvement on the second quarter (1.4%). So maybe there is no recession in the near future (Neil Irwin might be right about that), which does not mean Yellen should hike the Fed rate in December anyway.

Last quarter growth not impressive, and slow recovery continues

I was writing about this Friday, but other post took precedence. As noted in my links to other blogs, Dean Baker dealt with this in the context of the NYTimes coverage of the news. According to the BEA last release:

"Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- increased at an annual rate of 2.6 percent in the fourth quarter of 2014, according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 5.0 percent."

In other words, after two quarters of faster growth at 4.6% and 5%, the last quarter has been less impressive, and the overall growth rate for 2014 was at 2.4%.  Note that even those two faster quarters have to be taken with a grain of salt, since the first quarter had negative growth, and the subsequent ones seem higher for that reason.

This should deflate the overly confident views on how fast the economy is recovering, and about the need to hike interest rates, since inflation is the danger now. Also, it should underscore how additional fiscal expansion is still needed. The labor market presents an even worse picture.

Most comments are on the unemployment rate, at 5.6%. But employment is a better measure often. Below the picture of total non-farm employment in the last three recoveries.

Note that the last recession was more profound than the previous too, as it is well known. Also, only last year the level of employment surpassed the previous peak, after six years of the beginning of the crisis. The recovery still looks pretty slow.

Josh Bivens With Another Reminder About the Stupidity of Austerity

By Josh Bivens

[...] there are multiplier effects, so if actual federal government spending was $118 billion higher today (that’s the gap between actual and “should be” spending identified), then overall GDP would be roughly $180 billion higher. So, the policy decision to pursue austerity is costlier (in GDP terms) than just the difference between government spending levels [...] Government transfers—Social Security, unemployment insurance, food stamps, Medicaid, Medicare—are not classified as government consumption and investment spending in the GDP accounts. Instead, they show up as increased consumption spending [...] Most of the political argument has centered on the recovery phase of this cycle, simply because the actual recession began before the Obama administration took office. Further, it’s really only been since 2011 that government spending has been a truly significant drag on growth. Before then, between the Recovery Act and what we have called “ad hoc stimulus measures” (like the payroll tax cut in 2010), we didn’t have real austerity until the fallout from 2011’s Budget Control Act (passed in the wake of Republican debt ceiling brinksmanship in summer 2011) began.

Read rest here.

Mark Blyth's book Austerity: The History of a Dangerous Idea is highly recommended.

CEPR: Latin American Growth in the 21st Century - The 'Commodities Boom' That Wasn't

By David Rosnick and Mark Weisbrot

This paper looks at whether the data support such a conclusion. It finds that there is no statistically significant relationship between the increase in the terms of trade (TOT) for Latin American countries and their GDP growth. There is, however, a positive relationship between the TOT increase and an improvement in the current account balance. It may be that this allowed countries to avoid balance of payments crises or constraints.

Read rest here.

Stop bashing GDP!

So everybody hates the Gross Domestic Product! The New York Times and the Financial Times have recently published articles criticizing the main measure of production in the economy. This is certainly not new, and criticism of the value of GDP for certain purposes, as a measure of well-being, for example, have led in the past to the creation of other variables like the United Nations Development Programme's Human Development Index, which includes GDP per capita (actually Gross National Income per capita), life expectancy at birth and average years of schooling for adults.

In fact, the NYTimes article basis for the supposedly dramatic "Rise and Fall of the GDP" is it's inability to measure well-being, and in it the author emphasizes its disadvantages when compared to the HDI. The NYTimes piece quotes Sen, the godfather of HDI, complaining about the "silliness about identifying growth with development." Of course, since GDP is only about the material growth of the economy, it would be an incomplete measure of development.

The most common type of critique is that GDP does not count many things, like environmental degradation, or happiness (yep, I know; check Putnam's ideas in the NYTimes piece; talk about silliness), or almost all non-market transactions for that matter, or is slow to adjust to new products and services introduced in the market, and that it's not particularly good for understanding inequality (Robert Reich's complaint in FT's piece; check the full list of complaints in both articles linked above). The best defense is provided by William Nordhaus, who argues compellingly that: “if you want to know why GDP matters, you can just put yourself back in the 1930 period, where we had no idea what was happening to our economy.”

First, GDP is not a measure of everything, and it certainly has limitations. But it does measure relatively well the material production in a given year, and provides the basis for understanding the process of accumulation, which is central for understanding the dynamics of capitalism. And actually, if you look at functional distribution of income in the National Income and Product Accounts (NIPA), which are used to calculate GDP, you do have one of the best measures of income inequality! Yes growth of the flow of goods and services produced in a country in a year is not tantamount to development, but without growth developing countries cannot achieve the levels of well-being of advanced economies, so growth is kind of a pre-requiste (and yes, growth involves environmental degradation, and we should try to minimize it). Further, with GDP one can obtain a fairly good measure of productivity (labor productivity), which is the basis for the Wealth of Nations, if you believe that dude Adam Smith.

My beef with the profession is not the use of GDP growth as a measure of material progress, but the fact that a limited, supply-constrained, individual maximizing utility, market-friendly, neoclassical version of the process of growth and development is the dominant one. But GDP is fine. Like price indexes, which also are limited and sometimes inaccurate, is an essential tool for understanding the real world.

Dean Baker - Housing & The Downturn: It's Really Not That Complicated

By Dean Baker

Neil Irwin has a piece noting housing's importance in the downturn, which gets things half right. First, housing is typically important in economic cycles, as he says, but the picture is quite different than Irwin implies. In a typical recession housing construction falls because it is very sensitive to interest rates. Most recessions are brought on by the Fed raising interest rates to slow the economy. In these cases the decline in housing is a deliberate outcome of Fed policy, not an accidental outcome to be avoided. In contrast, the most recent downturn was brought on by a collapse of a housing bubble. This made it qualitatively different from most prior downturns (the 2001 recession was also bubble induced) in several different ways. First, construction was proceeding at an extraordinary rate of more than 6.0 percent of GDP before the collapse, compared to an average rate of just over 4.0 percent of GDP. This meant that housing contracted far more than it would in a typical downturn. Furthermore, because of the overbuilding of the bubble years, housing fell further than normal, hitting levels just above 2.0 percent of GDP. And, because the downturn was not brought on by a rise of interest rates it could not be reversed by a drop in interest rates.

Read rest here.

Asian and Latin American shares of world GDP

Reading the April World Economic Outlook (WEO), a biannual IMF publication (more to be posted soon). You can download all the data, which is always useful. Just playing around. Note that in the last decade the share of World GDP produced by advanced economies shrunk from around 80% to approximately 60%.

On the other hand, developing countries expanded from 20% to closer to 40% of World GDP. The fact that China might be the biggest economy in the world has been in the news recently. Note that most of this increase in the periphery is in Asia, which increased from around 7% or so, essentially the same level than Latin America, to 20%, while Latin America (which did expand in the last decade; the graph doesn't show it well because of scale) remains at the same level than 1980, recovering from the lowest point in the 1990s.

EPI: Raising the Federal Minimum Wage Would Lift Wages for Millions and Provide a Modest Economic Boost

At a briefing at the Economic Policy Institute on Tuesday, January 14, 2014, Jason Furman (Chairman of the White House Council of Economic Advisers), Sen. Tom Harkin (D-Iowa), Rep. George Miller (D-Calif.) and Lawrence Mishel of the EPI  discussed the economic case for raising the federal minimum wage and the path forward to enact the Fair Minimum Wage Act of 2013.

EPI research shows (see here) the Harkin-Miller bill would give a raise to 27.8 million workers, who would receive about $35 billion in additional wages. A $10.10 minimum wage would increase GDP by $22 billion, creating roughly 85,000 new jobs.

Mind you, raising the federal minimum wage to $10.10 is meager...should be at at least $20.00, which would provide more than just a 'modest boost' to the US economy.

Despite Upshot in Employment, No Real Changes in Long-Run Trends

Source: EPI's analysis of Bureau of Economic Analysis National Income and Product Accounts (Table 1.1.1 and Table 1.4.1)

By Josh Bivens

The Bureau of Economic Analysis (BEA) reported today that gross domestic product (GDP)—the widest measure of overall economic activity—grew at a 2.8 percent (annualized) rate in the third quarter of 2013. This was a slight increase relative to the second quarter’s 2.5 percent growth rate. 

However, there is little reason to celebrate today’s GDP numbers. For one, they remain disappointingly weak for an economy with so much productive slack. Further, growth in final demand—GDP stripped of the contribution of volatile inventory investments—grew at just a 2.0 percent rate in the third quarter. This arguably better indicator of underlying economic strength indicates that growth in the second quarter is essentially on the same disappointing trend that has characterized most of the recovery phase since the official end of the Great Recession. Additional evidence that third quarter growth was insufficient to soak up the economy’s productive slack is the continuing very low rates of core inflation measures. All in all, this is a status quo GDP report, and it clearly remains the case that the economy needs further support from both fiscal and monetary policy to generate growth sufficient to spur real improvement in the U.S. labor market.

See rest here.

By Heidi Shierholz

The jobs report released this morning by the Bureau of Labor Statistics showed the labor market gained 204,000 jobs in October, along with an upward revision of 60,000 to prior months’ data, bringing the average growth rate of the last year to 194,000. There appears to be no discernible impact on the payroll numbers of the partial government shutdown in October; in the payroll survey federal employees on furlough during the partial government shutdown were still considered employed. Importantly, the labor force participation rate dropped 0.4 percentage points to its lowest point of the downturn, 62.8%. The unemployment rate was little changed in October, ticking up slightly to 7.3%. The partial government shutdown may have played a role in the unemployment numbers, since federal employees on furlough during the partial government shutdown should have been counted as unemployed on temporary layoff in the household survey.

See rest here.