No more jobs mystery. Period. End of story.

If I hear one more discussion of the mysterious lack of jobs I’ll explode.  The new GDP numbers are the final nail in the coffin.  For years I’ve been saying there is no jobs mystery.  That any deviation from Okun’s Law was minor compared to the scale of the output collapse.  With the new RGDP figures we now know I was right, there isn’t and never was any mystery as to why there are so few jobs.  RGDP is very low.  Period.  End of story.

I also argued that there was no mystery as to the low level of RGDP.  The new GDP reports shows the NGDP collapse, already the worst since 1938, was even worse than we thought.  Show 100 economists in mid-2007 the NGDP path over the next 4 years, and all but the kookiest RBC-types will tell you a severe recession is ahead.  At least 97 out of 100 will make that prediction.  Check out the graph in this Stephen Gordon post.

And then we have none other than Ben Bernanke telling is that the Fed can do more stimulus, he just doesn’t feel it’s necessary.  How do our elite economists react to the following facts?

1.  Unemployment is unambiguously caused by RGDP collapse.

2.  RGDP collapse is almost certainly caused or greatly worsened by the NGDP collapse.

3.  Bernanke says the Fed drives NGDP.

They react by pretending the Fed has no role in the crisis.  The conservatives say it’s structural.   And then we have one famous liberal economist after another issuing calls for more stimulus, which either ignore the Fed entirely (Larry Summers, Robert Shiller) or suggest that the Fed claims it’s out of ammunition (Alan Blinder), which is wrong.

I don’t find it hard to connect the dots between jobs, RGDP, NGDP and the Fed.  I can’t understand why so few other economists see things the way I do. 

A subscriber to the publication Consensus Forecasts passed along to me this summary of a survey of economic forecasters they conducted earlier this month:

Percentage of respondents in each country who consider current monetary policy
too tight / about right / too stimulative

US: 4 / 88 / 8
Japan: 15 / 85 / 0
Euro area (German respondents): 0 / 18 / 82
Euro area (French respondents): 9 / 55 / 36
Euro area (Italian respondents): 0 / 100 / 0
UK: 0 / 25 / 75

Unfortunately, there is no link.  Yes, the sample looks rather small (based on the percentages), but it’s consistent with other surveys I’ve seen.  If the public of the developing world actually understood the role of economists in this crisis, we’d all be lynched.  They think we failed to predict it.  But since monetary policy generally reflects the establishment view of the economics profession, it would be more accurate to say we caused the Great Recession.

Check out the always excellent Marcus Nunes on the new NGDP numbers.  This post compares RGDP, NGDP, and jobs in the 1982 and 2009 recessions.  The graphs are quite suggestive.  He also provided the Shiller link.  David Glasner is the go-to-guy on interwar monetary history, at least among us quasi-monetarists.  He has a good post comparing 1932 and 2011.


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37 Responses to “No more jobs mystery. Period. End of story.”

  1. Gravatar of Stephan Stephan
    30. July 2011 at 07:33

    OK. No one gets it. Fine. What I do not understand is your opposition against old fashioned Keynesian stimulus? With TIPS yields negative the US government can employ all construction workers to paint the US highways and pavements white with a paintbrush. Helps mitigate climate change! Even public works which yields Zero value comes with a profit.

    Yields: http://goo.gl/9JuL4

  2. Gravatar of marcus nunes marcus nunes
    30. July 2011 at 07:42

    Scott. If only Jon Hilsenrath knew the solution to his “riddle”:
    http://online.wsj.com/article/SB10001424053111903591104576468462275889544.html

  3. Gravatar of Floccina Floccina
    30. July 2011 at 08:28

    If monetary economics is too difficult for economists how can we expect politicians who answer to the rationally ignorant median voter to get it right? We need free banking or some other form of competitive money. In the mean time we need to hope and pray. Maybe those of us with jobs we can hire someone to.

  4. Gravatar of W. Peden W. Peden
    30. July 2011 at 08:37

    Floccina,

    Agreed. A free-market monetary system would be the greatest economic achievement of the 21rst century.

  5. Gravatar of Morgan Warstler Morgan Warstler
    30. July 2011 at 08:41

    Finally, you can start to see how politics far more deeply alters expectations / perceptions.

    When Rick Perry is president, those numbers will left, and WE ALL KNOW IT.

    It isn’t a simple class war thing.

    Amongst market thinkers, there is a difference between a government that wants to be the boss a government eager to to the bitch.

    Period. End of story.

  6. Gravatar of sabre51 sabre51
    30. July 2011 at 09:00

    Scott,

    I have been reading your blog for quite some time and find it excellent, despite being one of those (hopefully not kooky) RBC types you mention.

    I find many of your points persuasive, but cannot get over my objections to the basic theory. You say you don’t understand why more economists don’t think like you; I am not an economist, but I am sure there are others like me out there. So if you have time, or are trying to write a post which will hopefully be interesting to many people, I have a suggestion: convince me. I believe firmly that economics is a science, and soliciting the strongest arguments against my position is the best way to find the truth.

    In particular, I have a few points which you could address which would strike at my basic objections:

    1. What reasoning do you use for point 2 in your argument above, that RGDP is so heavily affected by NGDP? (Or just address this hypothetical- RGDP growth begins to slow, signalling a recession. What is the real difference in outcome between that economy with NGDP targeting vs. no monetary intervention, and how does the intervention cause this?)

    2. How do you address the claim that NGDP targeting hurts expectations? When RGDP growth falls, the monetary base would expand more rapidly than normal and erode savings more than expected- it seems to me this implicit policy would distort efficiency in savings in the long run.

    Rereading these points I am afraid I am coming across as not understanding general macro, which is not the case. I fear it does suggest, though, that I do not understand your point of view well enough to be precise- this worries me that I am wrong, and that is what I hope to fix here.

    I know blogging can be a struggle, and if you do not find time to reply I will certainly understand. In any case, thank you for your good work- I will be reading, no matter what.

  7. Gravatar of Scott Sumner Scott Sumner
    30. July 2011 at 10:13

    Stephan, In a recent post I suggested that it is a good time to build infrastructure. As an aside, I’d like to see the infrastructure built and operated by the private sector, as occurs in many other “mixed” economies. But you make a good argument.

    My skepticism about fiscal policy is two-fold:

    1. I don’t think under the current deficit situation it’s realistic to expect we could do enough fiscal stimulus to make a significant difference.

    2. Last time we tried (in 2009) the Fed basically sabotaged the effort with tight money. I fear they’d do that again. They seem to be inflation targeting, at least loosely.

    Marcus, Yes, that’s pretty disappointing article.

    Floccina, I’ve advocated that Congress define the unit of account in terms of a fraction of NGDP, and have markets set the money supply and interest rates. But I’d still like to stay with one money, defined by the government, as competing currencies would be too confusing. So I’m a moderate on the free banking issue.

    Morgan, Before Rick Perry become president, doesn’t he have to decide to run?

    sabre51, I only have time to sketch out an answer here:

    1. Even RBC types agree that money policy drives NGDP. And everyone agrees NGDP and RGDP are highly correlated. Some would argue for reverse causation–RGDP moves for “real” reasons, and since the Fed targets inflation, that sets up a NGDP/RGDP correlation. My response is that in earlier American history we are able to identify some exogenous monetary shocks–changes in NGDP caused by monetary policy actions. And those also had powerful real effects. Admittedly the recovery was often faster (such as 1922) but I attribute that to greater wage flexibility in 1922, along with lack of minimum wage, UI, etc.

    2. The fairness to saver issue is complex, and I’ll refer you to George Selgin’s arguments in Less Than Zero.

    Two basic points. NGDP targeting doesn’t change the average rate of inflation, hence savers would not be hurt on average. Selgin argues that when real shocks cause RGDP to go down and P to go up, NGDP targeting is actually fairer, as it spreads out the pain of a real shock across society. Don’t forget it works the other way when technological improvements cause lower than average inflation.

  8. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. July 2011 at 10:17

    I’m sorry but I have a general bias against “business economists,” who I assume represent most of the “economists” that Consensus Economics polls. They’re not the brightest animals in the economics barnyard, and the poll results, of course, show a general bias towards “too stimulative”, most likely because they’re completly befuddled by ZIRP.

    That being said, the results from the UK are absolutely ridiculous. Once you factor out energy and food and the VAT increase, inflation in the UK is well below the implicit target. Most of the elevated inflation in the UK is due to the VAT increase, so the BOE is following an austere monetary policy in response to an inflation rate artifically elevated by fiscal austerity.

    What lies between the ears of the economic forecasters in the UK other than cotton wool?

  9. Gravatar of flow5 flow5
    30. July 2011 at 11:15

    So now we’re going to change from targeting interest rates (it’s been 46 years since the operations at the “trading desk” has been dictated by the Fed Funds Bracket Racket), to targeting n-gDp? (and let the markets determine interest rates)

  10. Gravatar of W. Peden W. Peden
    30. July 2011 at 11:16

    Mark A. Sadowski,

    It’s funny to think that, if we had old Geoffrey Howe running a monetarist k% target like back in 1981, we’d have a much better macroeconomic policy, given that broad money is shrinking right now. It would be obvious that, say, underfunding the PSBR or QE2UK would be a good idea. Even Norman Lamont backed off from the ERM when it was clear that it was, in Norman Tebbitt’s words, an “Eternal Recession Mechanism”.

    This suggests to me that Mervyn King & co. are running a monetary policy regime worse than the earliest days of the Medium-Term Financial Strategy or the dark days of the ERM. Uh-oh…

  11. Gravatar of Benjamin Cole Benjamin Cole
    30. July 2011 at 11:33

    Alert to all economics bloggers: Please suspend your blog, and run this commentary by Scott Sumner in its place. You will doing yourselves and the nation a favor.

  12. Gravatar of JTapp JTapp
    30. July 2011 at 12:07

    Scott, have you seen this piece in the NY Times today by Mankiw? Defends Bernanke, yet advocates a price level target.

  13. Gravatar of JTapp JTapp
    30. July 2011 at 12:08

    Says:
    “What the Fed could do, however, is codify its projected price path of 2 percent. That is, the Fed could announce that, hereafter, it would aim for a price level that rises 2 percent a year. And it would promise to pursue policies to get back to the target price path if shocks to the economy ever pushed the actual price level away from it.”

  14. Gravatar of morgan warstler morgan warstler
    30. July 2011 at 12:41

    Hey Scott how about not saying I’m being hypothetical in a day dream post… I’m asking if you EXPECT I’m right. Not if it is “treasonous” just would the leading body of economists view things differently if this government had a different attitude towards taxes and regulations.

    Real answer please.

  15. Gravatar of marcus nunes marcus nunes
    30. July 2011 at 12:44

    Mankiw on Bernanke: Showing political savvy, but missing out on the “punch-line”.
    http://thefaintofheart.wordpress.com/2011/07/30/mankiw-on-bernanke/

  16. Gravatar of John John
    30. July 2011 at 13:08

    It almost seems to obvious to say, but low GDP stems from a large fraction of the work force not being in action producing the goods and services that count as GDP. Period. End of Story. Has economics really retrogressed this far? Shocking.

  17. Gravatar of StatsGuy StatsGuy
    30. July 2011 at 13:09

    1937.

    Enough said.

    The question now becomes, what happens in 2015 (1941).

  18. Gravatar of John John
    30. July 2011 at 13:14

    The economy is a complex series of production stages leading to final consumer goods. In order to make these processes dovetail, you need accurate ie market decided prices, including interest rates along with an environment conducive to entrepreneurship. GDP measures are incredibly flawed measures of economic activity that say nothing about economic health (patterns of sustainable specialization and trade).

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. July 2011 at 13:36

    W. Peden,
    Sounds like a list of bad monetary policy regimes, when of course, we should be doing (fill in the blank).

    After venting my rage at the BOE over doing inflation targeting totally wrong (which is especially wrong since inflation rate targeting itself is wrong) I went back to see where the UK stands in terms of real GDP data. Based on 2011Q1 the nations mentioned in the survey are the following percent below RGDP trend based on ten year average rates of growth through 2007Q4 extrapolated from previous peak (in 2007Q4 or 2008Q1):

    US: 9.6%
    Japan: 8.9%
    Germany: 4.4%
    France: 7.1%
    Italy: 8.7%
    UK: 11.7%

    And here are the May yoy core HICP rates with VAT/excise/sales tax changes factored out:

    US: 1.5%
    Japan: 0.6%
    Germany: 1.1%
    France: 1.1%
    Italy: 2.3%
    UK: 1.5%

    So, despite the fact that all of these countries except Italy are experiencing less than 2% core inflation minus tax changes, and all are well below trend in real terms, you can sort of excuse the forecasters in Germany for their relative stance (em, on second thought, not really). But the UK?!? It makes me want to grab British forecasters by the lapels and slap them silly.

  20. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. July 2011 at 13:50

    John,
    You wrote:
    “GDP measures are incredibly flawed measures of economic activity that say nothing about economic health (patterns of sustainable specialization and trade).”

    I hope you’re not one of Arnold Kling’s PSST followers (an unfortunate acronym, but much more memorable than the cumbersome phrase it stands for).

  21. Gravatar of W. Peden W. Peden
    30. July 2011 at 14:06

    Mark A. Sadowski,

    It looks like something(s) happened to the UK economy from 2002 to the present, which have made us (a) supply-side weak and (b) have an incoherent AD policy. There are a (few) steps being taken by the coalition to address (a), but what we really need is to get back to being world leaders in neo-liberal reforms and, of course, NGDP targeting.

    I do wonder if recent years suggest that Kilponen and Leitemo got it right and the K% Rule is at least [i]less worse[/i] than flexible inflation targeting. Inflation targeting doesn’t look like the panacea that it did back in 2008, whereas it turns out that money still matters.

    (Here’s Kilponen and Leitemo’s paper- http://onlinelibrary.wiley.com/doi/10.1111/j.1538-4616.2008.00127.x/full .)

  22. Gravatar of Scott Sumner Scott Sumner
    30. July 2011 at 14:57

    Mark, I agree.

    Flow5, Well, the interest rate targeting idea didn’t work out too well, did it?

    Thanks JTapp, I just did a post.

    Morgan, I’d like to think my fellow economists are idealistic, but sometimes I wonder.

    Marcus, Thanks, I did a post.

    John, Yes, but why are so few working?

    Statsguy. The Japanese bomb Pearl Harbor?

    Mark, What’s up with Italy? Are they even a market economy?

  23. Gravatar of Morgan Warstler Morgan Warstler
    30. July 2011 at 16:50

    Scott, WHY???????

    My god, you always give the same wishy washy BS.

    Answer my question, I promise not to getcha!

    Amongst market thinkers, is there a difference between a government that wants to be the boss a government eager to to the bitch?

    IF Rick Perry is president, do you think those numbers shift to the left Scott?

    Ya know, you may not where I’m taking this, but you aren’t being intellectually honest by dancing around my point.

  24. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. July 2011 at 17:04

    W. Peden,
    It’s an interesting paper but I think the biggest problem with monetary policy in 2008 is that nobody was even trying to hit a target. Otherwise inflation expectation would not have been allowed to go so low with so little reaction.

    That being said I think NGDP targeting is preferable to inflation which in turn is preferable to monetary aggregate, and level is preferable to rate. But the monetary authorities seemed to have a deer in the headlights stare in late 2008 that reflected the lack of any meaningful policy response.

    Scott,
    Yes Italy is strange. And so is Austria. Yoy core HICP, taking into account tax changes, was 3.0% in Austria as of May. (Austria is 6.6% below RGDP trend.) The only other eurozone country I’m aware of having such a high inflation rate is Estonia, and they’re recovering from a very steep drop in GDP and price levels.

    I wonder if there are any supply side policy changes in Austria and Italy that can explain this phenomenon?

  25. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. July 2011 at 17:05

    W. Peden,
    It’s an interesting paper but I think the biggest problem with monetary policy in 2008 is that nobody was even trying to hit a target. Otherwise inflation expectation would not have been allowed to go so low with so little reaction.

    That being said I think NGDP targeting is preferable to inflation which in turn is preferable to monetary aggregate, and level is preferable to rate. But the monetary authorities seemed to have a deer in the headlights stare in late 2008 that reflected the lack of any meaningful policy response.

    Scott,
    Yes, Italy is strange. And so is Austria. Yoy core HICP, taking into account tax changes, was 3.0% in Austria as of May. (Austria is 6.6% below RGDP trend.) The only other eurozone country I’m aware of having such a high inflation rate is Estonia, and they’re recovering from a very steep drop in GDP and price levels.

    I wonder if there are any supply side policy changes in Austria and Italy that can explain this phenomenon?

  26. Gravatar of PrometheeFeu PrometheeFeu
    30. July 2011 at 18:15

    I’m not sure I understand why you seem so opposed to the idea of the problem being structural: The market for housing appears not to be clearing which means a lot of people are stuck with large assets they don’t want and large liabilities tied to those assets. In other words, we probably have a lot of savings that are getting dumped into paying for mortgages instead of going towards more productive uses. The people who walked away from their homes left the banks with houses which are basically unusable assets slowing down investment on that side. I’m not entirely sold that it is the primary issue and perhaps loose money could help us restructure.

    On the issue of the correlation of NGDP and RGDP, I just don’t see the micro-mechanism which makes NGDP affect RGDP. I think the correlation is the result of what you mentioned above: central bank policy targets 2% inflation rates which means NGDP growth = RGDP growth + 2. I’m willing to believe it’s something else, but I have to see a micro story, not just a regression.

  27. Gravatar of Lorenzo from Oz Lorenzo from Oz
    30. July 2011 at 22:01

    PrometheeFeu. We do not live in a barter economy. People do not signal willingness to buy goods and services by offering other goods and services. Almost all transactions rely on money. Money is the fundamental means of making offers. (Even in an economy of set prices, rather than “initial negotiation bids” a la bazaars, we all offer money when we buy something.) It is also the means by which we pay existing obligations and how we frame future ones.

    Money is also not completely transparent. That is, we cannot know immediately how the average “barter price” (the price in terms of goods and services) of money is changing and how much. (Indeed, money works because it massively reduces transaction costs.) So, money because the fundamental communication device of the economy, operating with limited information and lags. Thus, movements in money availability (M and k) affect the level of money offers (Py) and so supply responses (y). Stop believing in the perfect transparency of money and where’s the problem?

  28. Gravatar of Scott Sumner Scott Sumner
    31. July 2011 at 06:04

    Morgan, I am being honest, you just don’t like my answer.

    Mark, I presume Austria’s economy is more healthy, is that right?

    PrometheeFeu, You are going up against hundreds of years of macro research, going back as far as David Hume. Inflation targeting is a very recent policy. Nominal shocks have had real effects for centuries.

    The mechanism is probably sticky wages and prices.

  29. Gravatar of PrometheeFeu PrometheeFeu
    31. July 2011 at 06:30

    @Scott Sumner: Worst case scenario I’ll turn out to be wrong and learn something. I should have qualified my statement a bit. Sticky prices do mean that you can have short term effects while businesses and consumers try to figure out whether they are seeing inflation or relative price changes. That is very clearly true. But I don’t see how that pulls us out of recession. Eventually, people realize that they aren’t actually richer as they bid up prices and they go back to their previous patterns of trade. It seems to me all that those monetary shocks would do is create a mini-business cycle within the business cycle. Now, if the central bank adopts an easy-money policy and inflates lots of those liabilities away, then I can see it helping as suddenly those payments on mortgages are much more affordable and we can switch resources away from maintaining those bad investments and into productive uses. None of that would account for long-run correlation of NGDP with RGDP though.

    @Lorenzo from Oz:
    I don’t believe in the perfect transparency of money. Though I realize that my earlier comment could lead one to believe I do. However, when the amount of money in the economy grows at a steady rate, people start seeing inflation for what it is: inflation and not relative price changes. So my argument is that all these effects you are describing are true but only in the short term. In the long term, we’re basically a barter economy with money being nothing more than a nice practical way to barter. So, monetary shocks won’t pull us out of recession.

  30. Gravatar of John John
    31. July 2011 at 09:27

    The prices of factors of production, including labor, have to fall. In a recession, the price of capital goods should fall more quickly than consumer goods which have more inelastic demand curves. These changing price differentials open up profitable business opportunities that create a recovery. It should be obvious that I think business is bad and many people are unemployed because the central bank and fiscal stimulus measures have stimulated artificial, unsustainable production. Hence the economy fails to adjust properly to changing conditions. The 80,000 pages of government regulation certainly don’t help either.

  31. Gravatar of david glasner david glasner
    31. July 2011 at 15:56

    Scott, Many thanks for your plug. Just for the record, my go-to-guy for interwar monetary history is you. And I borrowed shamelessly from you in the post you cited.

  32. Gravatar of Scott Sumner Scott Sumner
    1. August 2011 at 08:47

    PrometheeFeu, The point is to undo the monetary contraction that is causing the problem in the first place.

    John, Where’s the monetary stimulus?

    Thanks David.

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