IP data shows the recovery is continuing

The America business cycle is not entirely an industrial production story, but it’s the dominant factor (with construction next most important.)  It’s not a very big share of GDP, but it’s far more volatile than services.  IP fell 17% in the recession, RGDP fell 4%.  In that context, it’s worth looking at IP data to see where we are in the business cycle.  In January I did a post that I thought was kind of important, but no one else seemed interested in, where I argued the behavior of IP was a sort of smoking gun that we were recovering from a recession, not that the weak economy was simply a “stagnation story.”  In other words, if:

1.  We simply had supply-side problems; you’d expect to see weak growth in both GDP and IP.

2.  If we had a deep demand-side recession that we were still recovering from, and also a big drop in the trend growth rate, you’d see disappointing RGDP growth and fast IP growth, as that highly cyclical indicator recovered from the demand slump.  We’d be recovering to a trend line that had slowed.

By January we were seeing signs of #2, and with today’s data the evidence is overwhelming:

IP is up 5.0% in the past 12 months, vs. 1.8% in the previous 12, and 4.3% in the 12 before that, and 2.5% in the 12 before that, and 8.1% in the 12 before that (the early stages of recovery).

It’s normal for IP to snap back quickly in the first year of recovery, and then slow as the recovery matures.  But 5% growth in IP is actually pretty fast for a recovery entering its sixth year.  We are still getting a cyclical recovery.  The bad news is that when the recovery matures and we hit the natural rate, RGDP growth will slow even further, to below the recent 2% to 2.5% trend.

BTW, IP includes manufacturing, mining, and utilities.  You get the same story if you just look at manufacturing (up 5.3%), so it’s not just data distortion due to swings in volatile utilities and mining (oil) data.  I suppose there is also a glimmer of hope for those who hope for a natural gas-led manufacturing renaissance (just don’t expect many jobs.)

PS.  IP is now 12.6% above the peak of the 2000 tech boom and manufacturing is up 13.3%.  (IP is a real number.) Don’t get me wrong, that’s not an impressive growth rate, but it’s also not exactly a collapse of manufacturing in America. Especially given that both series are now rising rapidly. Check out IP in other developed countries.  Since their 2000 peaks, IP is down 14.8% in Britain, 15.4% in France, and 24.3% in both Italy and Spain.  That’s “de-industrialization.”  I was tempted to say America = Germany (which is up 16.1%), but Germany’s even further ahead if you do it in per capita terms.  Still, America is more similar to Germany than to the rest of Europe.

The “problem” is jobs.

PPS.  For the entire EU (not just the eurozone), the change in IP from the 2000 peak to today is 0.0%.

Who had a better first half, the US or Japan?

The US had 4% real GDP growth in the second quarter, whereas Japan just announced a 6.8% annualized decline in second quarter RGDP.  So which country had the better first half?  Over the entire first half US GDP rose by 0.475% (not annualized) whereas Japanese RGDP fell by 0.175% (not annualized.)  So the US looks better.

But shouldn’t you adjust for different trend rates of population growth?  Isn’t per capita GDP what matters?  The most recent 6 month growth rate in working age population for the US was up 0.113% (not annualized) whereas it was down 0.64% (not annualized) for Japan.  So in the first half of 2014 RGDP per working age adult rose slightly faster in Japan than the US.

Even so, there’s no sugar-coating the weak Japanese first half.  I’ve consistently argued that the BOJ needs to do more to hit its 2% inflation target, and also that they should target NGDP, not inflation. If they target prices, they really need to do level targeting.

Given the rapid fall in the Japanese population, even a 2% or 3% NGDP growth target, level targeting, would be much better than the pre-Abe policy regime of falling NGDP. The NGDP growth rate should be at least high enough so that the Wicksellian equilibrium nominal rate is not negative (as it is today). Japan needs to raise the denominator of the debt/GDP ratio.

PS.  I also have a post on Japan over at Econlog.

Monetary offset in Australia

Stephen Kirchner quotes from Treasurer Wayne Swan’s briefing notes from August 8, 2008:

There are three broad considerations the Government would need to keep in mind in taking a decision to engage in discretionary [fiscal] action:

The Reserve Bank through its control over interest rates, determines the overall level of aggregate demand in the economy, and the Bank would likely take account of any fiscal stimulus in its monetary decisions – that is, more spending would keep interest rates higher than otherwise…

The bottom line is that in the event of a shallow downturn, discretionary [fiscal] action may not achieve any noticeable outcomes in terms of growth and unemployment, but would leave rates higher, erode the [budget] surplus and put at risk the Government’s fiscal credibility.

These costs of course need to be weighed against the potential political costs of being seen to do nothing…

Then Stephen comments:

Needless to say, the ‘political costs’ argument won in the end, with the first discretionary fiscal stimulus announced in October 2008.

Because rates have never been at zero in Australia, I presume Paul Krugman would agree with Stephen and I on this point.  Perhaps someone can search to see if Krugman commented on Australian policy.

The Millennials are the real “Greatest Generation.” (reluctantly acknowledged by a grouchy aging boomer)

Most readers will want to skip this post.

One of my great frustrations is that I am frequently misunderstood by commenters.  It’s my own fault—I try to say EXACTLY what I mean.  The prisoners in the Soviet “gulags” had enjoyable days. I really believe that.  Seriously.  But almost any other human who said something like that would have an ulterior motive.  ”Communism wasn’t as bad as many people think.”  In contrast, I really believe the gulag inmates had numerous enjoyable days, and I also believe communism was far worse than even Ronald Reagan believed.  No wonder I’m always misunderstood.

A few comments on the recent comments:

I don’t think young people are lazy.  I’m glad America today is much richer than in the 1970s. I’m glad the dorms are much nicer.  I’m glad teens don’t have to work as hard, and can have more fun.  I wish I hadn’t had to work as hard when I was 15.

The current generation of young people seems like the best ever.  Simply removing lead from gasoline boosted IQs by 6 points.  My generation had their brains addled by breathing in lots of lead, and I made it much worse by playing with lead.  Hacking off chunks from a big sheet of construction debris, melting it down to make soldiers.  Even worse, the sheets of lead had paint all over them, and it might have been lead paint!  Seriously, as a teacher I can see the improvement in students, even since the 1990s.

Go back another generation before me to the “Greatest Generation.”  My dad was 5 inches shorter than me, and he told me that he was the tallest kid in his class. WWII was won by a bunch of nutritionally-deprived midgets, many of which couldn’t read or write.  My dad occasionally wrote letters home for them. (In making these generalizations I exclude my 88 year old mom, who is still 5 foot 9! And my 89 year old stepfather, who showed more bravery in Okinawa than I’ve shown in my entire life.)

Of course the “Greatest Generation” that won WWII really was the greatest ever at the time. Generations like the Italians of 1500-1525 were so far inferior that it’s an act of generosity to even consider them human.  And let’s not even talk about Periclean Athens.  (OK, I guess I don’t always say EXACTLY what I mean.)

Now about those comments:

Finally, people have been grousing about college students for over a century. That means you are officially a grumpy old man. Sorry.

I am a grumpy old man, but one of the few I know that doesn’t look down on younger people. (Unless they are on my lawn.)

And from another:

You are basically saying the middle class should be happy because they have a higher standard of living than their parents. You don’t believe that that is the relevant point of reference, rather than peers at the top of the income scale. Why? Is your belief self serving?

These comments are so vague it’s hard to know how to respond.  I don’t think anyone “should be happy.”  I’d like it if everyone was happy.  I don’t believe middle class people should worry about their “peers” with more money.  I do believe middle class people should worry about their peers with less money—the poor.  That should be their “point of reference.”

I guess you either care about equality or you don’t. I can imagine your response: “those at the top have *earned* their wealth”. I guess you believe it is fairest to distribute income in exact proportion to people’s ability to produce.

I recently did a post arguing exactly the opposite—that people at the top don’t deserve their wealth. I would add that I also don’t believe that rich people (like Robin Williams) deserve their suffering from depression. I’m a utilitarian, and there is no “deserve” in utilitarianism.

Inequality makes people unhappy. If it has been rising, that raises the probability that doing something about it would increase aggregate utility, no?

If inequality were increasing, then that would make it more likely that redistributive policies could raise aggregate utility.  But remember, if you are going to make a “happiness” argument you need to use consumption (not income) data, and it’s not at all clear that consumption inequality is increasing.

Some on the left mock the “technology” argument for improved living standards. “Let them eat cell phones.”  But that’s exactly the point—revealed preference. Peasants in low income countries will buy cell phones before they can afford TVs, or indoor plumbing, or even “health insurance.”  (HT: Morgan.)

A third commenter:

I am having some difficulty understanding your exact stance here. Your post seems to involve a lot of hand-wringing, essentially stating that the American middle class is not your concern, should not be anyone’s concern, and certainly any problems it has have been self-inflicted (laziness).

I’ve addressed the “laziness” charge.  Is the American middle class “my concern?” I don’t even know what that means.  Is Robin Williams “my concern?”  Are the Yazidis being massacred in Iraq “my concern?”  All I can say is that I favor public policies that maximize aggregate happiness.  I want people to be as happy as possible.  I favor lots of public policies that I believe would help the American middle class.  But I don’t believe global utility can be improved by transferring bags of money to the American middle class from other groups.  Nor will it make them significantly more “happy.” Something is a “problem” if there are policy counterfactuals that address it while boosting aggregate utility.  If not, then focus your “concern” on something else.

Here’s what I read yesterday morning:

U.S. jobs pay an average 23% less today than they did before the 2008 recession, according to a new report released on Monday by the United States Conference of Mayors.

So I decided to check the actual data.  Average hourly earnings have risen from $21.63 in July 2008 to $24.44 today, that’s up 13%.  And PCE price index has risen from 219.016 in July 2008 to 237.693 today. That’s up 8.5%.  Everyone needs to take a deep breath; the “American middle class” will be fine.

And just so I’m not misunderstood, let me remind readers that I’ve spent the last 6 years of my life pushing for policies that would boost the incomes of the middle class by creating more jobs.  I hope actions speak louder than words “concern.” But I’m willing to furrow my brow if that will help.

PS.  Speaking of misreading me, who can forget Noah Smith:

What’s also interesting is how mad people get when their friends get called “stupid.” Kotlikoff is mad at Krugman for calling his pal Paul Ryan stupid (whether or not Krugman actually did this is beside the point). I guess it’s good to feel protective of one’s friends. But as a politician, doesn’t Ryan take much worse abuse on a daily basis from hundreds or even thousands of people? Compared to what Ryan gets in the political sphere, Krugman’s disses must seem like pretty weak tea.

In the end, I think people overreact to the “stupid” insult because, as a society, we use arguments the wrong way. 

Yes, let’s not overreact.  Why would someone feel “protective” when their friends are called “stupid?”  And yes, does it really matter if the charge is true?  No, that’s “beside the point.”

PS.  Please don’t write comments saying that some kids still live in houses with lead paint.  I know that, one of them is my daughter.

PPS.  The grumpy old reactionary in me liked this Kevin Erdmann post:

Again, thinking of Jane Austen characters, or even of people in many pre-capitalist societies today, for peasants, human capital would be largely unattainable or pointless.  For the landed elite, it would be insulting.  Traders and commercial innovators – producers – became tolerable, and capitalism was the result.

Because of the capitalist revolution, not only is being personally productive tolerated today, but we would find it incomprehensible to imagine it another way.  In fact, we are concerned about it!  We say: It’s not fair that rich kids get the opportunity to be more productive!  Today, high income workers work longer hours than low income workers.  Imagine the look of confusion you might get from a pre-capitalist gentleman if you told him that in your society, the poor work fewer hours than the rich and the government is implementing school lunch programs to make sure poor kids don’t ingest too many calories.  He wouldn’t just have a hard time understanding how that could be.  Those words literally could not form that sentence.  You might as well speak martian to him.  Don’t even try to explain to him that you’re outraged by how the richest kids have an advantage in attaining productive employment.  He’ll think you’re crazy before you even get to that.

PPPS.  About the gulags.  I recall one interview where the description of life by a former inmate was so horrific it seemed almost unreal.  At the end they said some thing to the effect; “not that there weren’t some fun days, when we sang and danced and joked around.” It’s all about your happiness thermostat set point.

Brazil on the short end of a 7-1 score

In economic growth and development there are mysteries that get a lot of attention.  And then then are deeper mysteries, the puzzling lack of puzzlement over certain facts.  Brazil is a country that has always puzzled me a bit.  Here’s a recent article from the Economist:

The unemployment rate is low. But with job prospects dimming, consumers, who have pulled the economy along in the past few years, are growing more downbeat. Last month 11.4% were more than 30 days behind on their debt payments, up from 9% a year earlier. Retail sales have flagged.

Sagging confidence poses the biggest threat to President Dilma Rousseff’s chances of a second term in an election this October. In an effort to prevent voters from feeling the pinch, Ms Rousseff has loosened the fiscal reins. In May public spending was 16% higher than a year earlier and revenues 8% lower. As a result Brazil posted its second-worst monthly primary budget deficit (ie, before interest payments) ever. “They are trying to mask the problem until after the election,” says Ms Maurício.

I checked online and it looks like Brazil has averaged 1.5% RGDP growth over the past 3 years.  In contrast, RGDP in China has been rising at about 7.5% per year. In per capita terms that’s a roughly 7-1 advantage to China.  Ouch.  (Sorry to my Brazilian readers for mentioning 7-1, but I just couldn’t resist.)  What could explain such a vast difference?

1.  Perhaps it’s because Brazil is about 20% to 25% richer, and richer countries tend to grow more slowly.  But that would explain only a slight difference.  Both are solidly middle income countries, thus the two growth rates should not differ that much.

2.  It sure doesn’t seem like “austerity” can explain the slow Brazilian growth.  Indeed the article suggests that fiscal policy has been expansionary.

3.  The business cycle?  Perhaps, but the unemployment rate is described as “low.”

4.  Ethnic differences?  Possibly, I’ve argued that for cultural reasons North Korea would have a much easier time growing 10% a year for 30 years in a row than Afghanistan or the Congo.  (Assuming North Korea adopted capitalism.)  But even so, I still have doubts about the ethnic argument.  Here’s a comparison of the US and Brazil:

Brazil:  48% white, 43% “pardo”, 7.5% black, 1% Asian, 0.5% Amerindian.

USA:  62% white, 17% hispanic, 13% black, 6% Asian, 2% mixed, 1% Native American

The US has fairly wealthy states like California and Texas where the white population is less than 50%.  I’m certainly not saying ethnicity has no role in the wealth differences, but the IMF estimates Brazilian per capita GDP (PPP) at $12,200, compared to $53,100 in the US.  That gap seems way too wide to be explained by the ethnic/cultural differences between the US and Brazil.  Even black and hispanic Americans have average incomes at least double the level of Brazil.

5.  Government policies?  Brazil does have a big government, at least for a developing country.  Government spending is 39% of GDP, which is considerably higher than other Latin American countries.  As a libertarian I’d like to pin all the blame on that data point, but of course many of those other Latin American countries with “small government” are also quite poor.

6.  If not size, then perhaps quality of government?  The Heritage ranking of economic freedom puts Brazil only 114th in the world, which is below average.  But China is #137, which is even further below average.

7.  The one thing that really stands out with government is that Brazil spends lots of money on pensions and not much on infrastructure.  And China spends LOTS of money on infrastructure, and spends it reasonably efficiently.  (China does build some unneeded infrastructure, but they also build a lot of needed infrastructure, very quickly and at low cost.)

The last item is the one I find most plausible, but even I don’t think it can come close to explaining the 7-1 growth gap between Brazil and China.

And to return to the opening—there’s the deeper mystery of why more people don’t talk about Brazil as a failed state.  Why this continual hyping of Brazil as the country of the future?  Recall it’s one of the original BRICS.  Here’s Bill Clinton in 2012:

Clinton, speaking at a forum of bankers in Sao Paulo, acknowledged some problems but said Brazil still “looks really good” compared to crisis-ridden economies in Europe and the United States.

He said Brazil also compared favourably to India, which is struggling with a stagnant economic reform agenda, and China, which has tensions with some of its neighbours and is at risk of suffering from water scarcity and other depletion of natural resources, he said.

Remember that Brazil is a sophisticated country that has been exporting products like commuter airliners to the US for many years.  They have a huge internal market and a fabulous agricultural sector. Waterpower and lots of resources.  Modern big cities.  We aren’t talking about Lesotho or Laos.

And their per capita income is $12,200 and going nowhere.  It’s a mystery to me. And it’s also a mystery as to why they get such a good press.  Why aren’t they expected to grow like China?  The soft bigotry of low expectations?  Is the mental image of Brazil the beach life in Rio, whereas the mental image of China is hard-charging, sharp-elbowed businessmen in Shanghai and Shenzhen? What do you think?

PS.  Paul Krugman recently had this to say:

You might be tempted to dismiss this notion as wishful thinking, a sort of liberal equivalent of the right-wing fantasy that cutting taxes on the rich actually increases revenue. In fact, however, there is solid evidence, coming from places like the International Monetary Fund, that high inequality is a drag on growth, and that redistribution can be good for the economy.

Brazil has tried that approach under the new government (and the previous center-right government as well), and in fairness inequality has fallen somewhat.  But I just don’t see the growth payoff.