Recovery at Last

Paul Krugman's op-ed in yesterday's NY Times is an interesting mix of ideology and philosophy fallacies.  He is writing about the jobs report from Friday, noting that we finally have a good report.  Maybe we have recovery at last.  It still isn't great and the stimulus package from early in the Obama Administration was not enough, as he repeatedly argued, but finally we get good news.  Also the report refutes critics who said that the slow economic recovery was due to regulations and new programs like Obamacare.  Since Obamacare is in place and we now get the good news, clearly it didn't have a negative effect.  Here is the fallacy where because one thing precedes another there is a relationship among them.

More than this, Krugman never considers the possibility that the economy's self-correcting tendency eventually would generate recovery.  The last recession was particularly difficult and the buffers people have were depleted in some cases.  The drop in housing prices impacted many households.  Further, we had over built residential construction in the run up to the recession, so time would have to pass before a real recovery in housing could take place.  The improving economy has little to do with government activist policies and much to do with the natural tendencies in a market economy.

One more related note.  I saw a clip of Pres. Obama this morning talking about all the jobs he has created over the last 50+ months.  I don't care whether a Republican or Democratic president uses such language--it is wrong.  Presidents don't create jobs.  What a president along with Congress can do is create an environment in which people and businesses can flourish.  But the only jobs they create are government jobs.

Can the Obese Eat Their Way to Good Health?

David Wessel's column in today's WSJ discusses the need for more action on the economy. He discusses how there are three views--more stimulus is needed now, stimulus didn't work so have to rely on Fed, and the worry over debt so the need for austerity. He opts for more short-term stimulus combined with credible longer-term deficit reduction. He concludes with noting that financial crises tend to recover slowly, "But is this really the best we can do?"

I don't know if it is the best we can do or not. But, is his solution of short-term stimulus and credible long-term austerity does not seem realistic to me. In theory, one can make a case for it. But what would constitute credible long-term deficit reduction? Congress is expert at promising things long term that either never happen or are changed later due to some new crisis.

Given that many have used medical analogies, I will try one also. For example, I have read where people say that a doctor would be remiss not to do all that is possible for a cancer patient. Agreed. But what if our sick economy is more like health issues related to obesity? It would be wrong to keep feeding the patient to alleviate a symptom since the basic problem is obesity. Similarly, if the problem was too much leverage and debt, then more debt may not be the prudent action to take.

Economic Discontent as Noted by Michael Boskin

An op-ed piece in today's Wall Street Journal is of interest about the slowness of the recovery, but I think also fails in an important way. Michael Boskin argues that the recovery promised by the Obama administration has fallen short. It is hard to disagree with that. He then compares the GDP growth rate in the 4 quarters and 12 quarters after the trough of some past recessions--1975 and 1983. The growth rates were much higher in the previous two recessions than in this recession.

My concern is that not all recessions are alike and that the cause of a recession may be important in determining the pace of recovery. Both the 1975 and 1983 recessions were related to supply side issues such as rising oil prices, and a recent past of high inflation. The Fed tried to reduce inflation by raising interest rates. In the case of 1975, the Fed soon quit raising interest rates because of the recession while in the early 80s, the Fed held firm. Once inflation was reduced substantially and people recognized it, the economy was in a good position to grow rapidly.

The current recession has a different source. Fed policy was not tight; in fact it was probably too loose. Debt was the big problem. Consumers were spending beyond their means and running up debt. When housing collapsed and many households realized their wealth was not as great as they had thought, they reduced spending and worked on increasing savings and reducing debt. It takes time to do this and we cannot expect consumers to return to their old spending patterns in a short period of time. Further, as noted in Reinhart and Rogoff's book, This Time is Different, recessions that begin with financial crises tend to last longer. That is, the cause of the recession matters.

Jobs Again

There is an op-ed piece by Ed Lazear in today's Wall Street Journal. Lazear was chair of the Council of Economic Advisors under Bush. He writes that his final economic forecast while a part of the council predicted the economy would begin to recover in the third quarter, and this was without considering a stimulus plan. Of course, his forecast could have been overly optimistic, but it could also mean that the GDP growth in the third quarter was not due to the stimulus plan we have.

He also talks about the estimates of jobs created and the jobs retained as due to the stimulus. Recipients have to fill out a report providing the data. Lazear notes two problems with the reports. The first is reporting bias. A construction firm wanting additional funds may believe that it needs to err on the high side of estimates of jobs created or retained. Second, these programs are likely to count people who switch jobs as new hires.

I have written before on the methodology used by the government to estimate the jobs created and saved by the stimulus. It is a direct link to the spending, assuming so much money equates one job. It also measures job-years and not individuals. That is, a person who is hired as part of a two-year project would count as two jobs--one for each year. The Administration has been criticized for the way they are trying to estimate jobs created or saved, but they keep doing it. The process gives the illusion of precision that is only an illusion. The concept of a job saved is ok--grants sent to states that use the money as a stop-gap in cuts in schools will save some jobs of teachers. But to think we can measure these in a meaningful way is not legitimate.

Perhaps the members of the administration think that if you repeat something often enough, people will believe it must be true.

Is the "Recovery" Obama's 9-11?

Democrats often accused George W. Bush, with some justification, of using September 11 as a reason for any bill he wanted passed by Congress. September 11 was his trump card. It appears President Obama has his own trump card--the recovery. Any bill he wants passed is crucial for economic recovery. In today's papers there are articles about his push for passing health care legislation. (See here for an example.)

The current health care system in the country had nothing to do with the financial crisis that led to the recession. The health care plan may or may not be good for the country, but it has nothing to do with ending the recession. We had growth with the current system and can have growth again with it. It would be nice if policies were argued on their merits rather than by using fallacious arguments.