Phantom limb Keynesianism

The US economy continues to slide into double dip recession under the savage austerity of income tax increases, payroll tax increases, and deep spending cuts.

Not.

But like the pain in a phantom limb that his been removed by surgery, the press has a hard time refraining from blaming the austerity for a slowdown that never happened:

Payrolls rose by 195,000 workers for a second straight month, the Labor Department reported today in Washington. The median forecast in a Bloomberg survey projected a 165,000 gain after a previously reported 175,000 increase in May. . . .

Revisions to the prior two months’ payrolls reports added a total of 70,000 jobs to the employment count in April and May. . . .

Retailers added 37,100 jobs in June, with most of the increase coming from more hiring at motor vehicle dealerships and home-improvement outlets.

Automakers are one standout in the recovery, enjoying gains in sales fueled by improved confidence and cheap credit. New cars and trucks sold in June at the fastest pace since 2007 as American drivers replaced aging vehicles and a rebound in housing construction moved trucks off dealer lots. That helped new car sales beat estimates last month, giving a lift to General Motors Co. (GM) and Ford Motor Co. (F) Brisk sales are boosting hiring at dealerships.

‘It’s Crazy’

“We would take 10 sales people in a heartbeat,” said Don Hicks, owner of Shortline Auto Group in Aurora, Colorado, which employs about 150 people at four dealerships. “If they were available and trained, or trainable, we’d take another five or six technicians. It’s crazy trying to find people.”

Industry sales climbed to a 15.9 million annualized pace, exceeding the 15.5 million median estimate of economists surveyed by Bloomberg. That’s the best monthly pace since 16.1 million in November 2007 and compares to 14.3 million a year earlier, according to data from Ward’s Automotive Group.

“We’re a little island of prosperity,” Hicks said. “We’re leading the country out of recession.”

Other manufacturers aren’t doing as well as the recovery continues to struggle against crosscurrents. Americans are feeling the effects of a two percentage-point increase in the payroll tax that took effect in January and growth is being restrained by weakness overseas and federal budget cuts that began in March.  [italics added.]

Jobs growth in 2013 (201,800/month) continues to run ahead of the 2012 pace. Average weekly hours are steady at 34.5.  Hourly wages continue to rise about 2% per year. All this data suggests roughly 4% nominal income growth.

And it’s interesting to note that the US economy’s headwinds included not just fiscal austerity, but weakness in both Europe and the emerging markets.  The acceleration in job growth in 2013 is a testament to the power of “monetary offset.”

PS.  After the first quarter I predicted second quarter growth would slow somewhat, as monetary offset cannot surgically target a specific quarter, and the sequester kicked in in Q2.  Job growth did slow from 207,000/month to 197,000/month, but that’s less of a slowdown than even I expected.

PPS.  Oh, and about that UK “double dip recession.”  Never happened.  New data revised it away.  And notice that the UK jobs data never showed a double dip recession.

Macro:  It’s all about employment, hourly nominal wages, and aggregate nominal income.  Forget about the dodgy RGDP data.


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28 Responses to “Phantom limb Keynesianism”

  1. Gravatar of jurisdebtor jurisdebtor
    5. July 2013 at 06:04

    That phantom limb is this phantom jobs recovery.

    “The civilian labor force participation rate, at 63.5 percent, and the employment-population ratio, at 58.7 percent, changed little in June. Over the year, the labor force participation rate is down by 0.3 percentage point. (See table A-1.)

    The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) increased by 322,000 to 8.2 million in June. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job. (See table A-8.” (meanwhile, full time employment was down 240,000).

  2. Gravatar of ssumner ssumner
    5. July 2013 at 06:19

    jurisdebtor, You are quoting household survey data. The more accurate payroll data shows far above trend monthly job growth this year and steady hours worked per week. There’s a reason markets follow the payroll numbers, and not the household survey.

    If you want to be taken seriously in the econ blogosphere please don’t quote household survey figures.

  3. Gravatar of marcus nunes marcus nunes
    5. July 2013 at 06:32

    Just imagine what would be if instead of having a 4% nominal growth for the past 3 years they had targeted a spending level and went for it!

  4. Gravatar of marcus nunes marcus nunes
    5. July 2013 at 06:53

    This post illustrates the “what would be”:
    http://thefaintofheart.wordpress.com/2013/06/06/monetary-incompetence-begets-the-jobs-disaster/

  5. Gravatar of Bill Ellis Bill Ellis
    5. July 2013 at 07:24

    “Let us recur to what happens at the crisis. So long as the boom was continuing, much of the new investment showed a not unsatisfactory current yield. The disillusion comes because doubts suddenly arise concerning the reliability of the prospective yield, perhaps because the current yield shows signs of failing off, as the stock of newly produced durable goods steadily increases. If current costs of production are thought to be higher than they will be later on, that will be a further reason for a fall in the marginal efficiency of capital. Once doubt begins it spreads rapidly. Thus at the outset of the slump there is probably much capital of which the marginal efficiency has become negligible or even negative. But the interval of time, which will have to elapse before the shortage of capital through use, decay and obsolescence causes a sufficiently obvious scarcity to increase the marginal efficiency, may be a somewhat stable function of the average durability of capital in a given epoch. If the characteristics of the epoch shift, the standard time-interval will change. If, for example, we pass from a period of increasing population into one of declining population, the characteristic phase of the cycle will be lengthened. But we have in the above a substantial reason why the duration of the slump should have a definite relationship to the length of life of durable assets and to the normal rate of growth in a given epoch.”

    http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch22.htm

    “Average age of cars on U.S. roads rises to record 10.8 years.” http://articles.latimes.com/2012/jan/17/business/la-fi-mo-aging-autos-20120117

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. July 2013 at 07:46

    The thing that grabbed my eye is the unusually large increase in total private average hourly earnings (CES0500000003) from $23.91 to $24.01 or by 5.1% at an annual rate. That’s the largest increase in hourly earnings since November 2008 (when the data was being disturbed up by all the layoffs). The last time hourly earnings rose that much in a non-recession month was June 2007, six years ago.

  7. Gravatar of An igyt An igyt
    5. July 2013 at 07:48

    It is rather remarkable that the auto industry is leading recovery because of “improved confidence and cheap credit”, while residential investment is very weak — which Brad DeLong, among other smart people, attributes to a “broken mortgage market”.

    The obvious hypothesis is that mortgage standards are still crazy tight because of the crisis. That would reflect Fannie/Freddie and FHA decisions. Either those decisions are too conservative — in which case we have found a smoking gun for slow recovery — or the banks are being wild with car loans knowing they can get bailed out.

    Or the reporter just made that up about “cheap credit”, not thinking through the difference between consumer credit and the federal funds rate.

    Or ….?

    This being the blogosphere, I should make clear those are actual questions, raised in hopes of an enlightening answer, rather than intimations that I know the truth and you would see it if you shared my ideology.

  8. Gravatar of ssumner ssumner
    5. July 2013 at 07:52

    Marcus, That’s right.

    Bill, And what is the average age of cars in Europe, where they didn’t do QE and the Evans Rule?

    Mark, I noticed that too, although it will take many months to discern a trend.

  9. Gravatar of Mike Sax Mike Sax
    5. July 2013 at 08:15

    Even if Britian didn’t technically have a double dip last year there isn’t much to brag about.

    “BRITAIN did not suffer a double-dip recession early last year as previously thought, but household living standards suffered their biggest drop in a generation at the start of 2013.”

    “However, other figures from the ONS were almost unremittingly grim.”

    “Britons’ real disposable income fell by 1.7pc in the first three months of 2013, the biggest quarterly drop since 1987, driven down by an outright fall in wages and rising prices, causing households to reduce their savings to the lowest share of income since 2009.”

    http://www.independent.ie/business/world/uk-avoided-doubledip-recession-as-deficit-grew-29379174.html

  10. Gravatar of jurisdebtor jurisdebtor
    5. July 2013 at 08:30

    “You are quoting household survey data. The more accurate payroll data shows far above trend monthly job growth this year and steady hours worked per week. There’s a reason markets follow the payroll numbers, and not the household survey.

    If you want to be taken seriously in the econ blogosphere please don’t quote household survey figures.”

    http://www.themoneyillusion.com/?p=12951

    “It’s also not clear whether to look at payroll data or the household survey. Everyone seems to agree that the payroll numbers are better for month-to-month changes, as the sample is more comprehensive. But that’s less clear for changes occurring over 14 months, when sampling errors tend to even out. Remember that the household survey includes people working at small new businesses and the self-employed, which are not picked up in the payroll survey. Perhaps the RGDP data is just picking up “payroll GDP”, not “household GDP.” But even that wouldn’t explain all of the difference between jobs and RGDP.”

  11. Gravatar of marcus nunes marcus nunes
    5. July 2013 at 09:13

    Employment and “The Longhorn”:
    http://thefaintofheart.wordpress.com/2013/07/05/the-longhorn/

  12. Gravatar of Bill Ellis Bill Ellis
    5. July 2013 at 09:14

    Average age of cars in Europe ? About 8 years. (I guess in two more years Europe’s car sales will be rocking! J.K.)

    I am not saying that QE had noting to do with pent up demand breaking.
    But I am saying that the reason QE is working now is pent up demand.

    I guess, from a monetarist point of view, the pent up demand is a symptom of bad monetary policy in the first place. Too bad we can not compare our earth with the multiverse earth that carried out the “right” monetary policy before there was pent up demand. As it is, we don’t have a good experiment. (Never really do, do we? )

    Keynesians see Econ as a system of feed back cycles. In feed back loops the outcome will be effected by altering either end of the loop.

    Monetarists , If I may, see econ as a top/down channel… control the money supply and all else follows.

    Cart/Horse ?

    I think these fundamentally different ways of seeing things has M&M’s and Keynesians talking past each other an awful lot. (And put on top of that the tribal tendencies of both… well, it is not pretty. LOL.)

    The funny thing to me is when the economy returns to normalcy, we will be hard pressed to find any POLICY difference between M&M’s and Keynesians. (Keynesians believe that Monetary policy is “the strong force” when the economy is running right. ) So all we will have left to fight over is tribal stuff.

    So the conservatives Economists…Who’s opposition to QE is largely ignored by M&M’s now… will once again be a comfortably united tribe…The cause of their cognitive dissonance gone.

    (You know, I should not speak for Keynesians like I do, I don’t know enough, I am an outsider that identifies with them. )

  13. Gravatar of ssumner ssumner
    5. July 2013 at 09:14

    An, Good question. Perhaps the auto industry never went in for the extreme subprime lending, so they needed to tighten standards less, but that’s just a guess.

    Mike, Glad you agree that the UK has a big supply-side problem, and we shouldn’t over-rate the role of demand. Why do you think UK worker productivity has fallen so much?

    Jurisdebtor. Fair enough, we’ll look at the household jobs numbers 14 months into fiscal austerity, and if they look bad I’ll apologize.

    I would add the the LFPR that you quoted tells us nothing about jobs. And the employment/pop ratio (which is more valid) you just quoted for June. There’s a big difference between one month and 14 months. And even the employment/pop ratio is distorted recently by baby boomers retiring.

    %@#$%&*& search engines.

  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. July 2013 at 09:25

    Referring back to this post from two months ago:

    http://www.themoneyillusion.com/?p=21045

    Thinking about the effects of the tax increases and the sequestration, according to conventional major model type estimates of the effects of fiscal policy changes on employment, in the second quarter should be down by about 400,000 jobs just due to the tax increases alone. The sequestration went into effect on March 1 but let’s assume that for various reasons it was delayed by a month. Then employment should be down by 500,000 jobs in the second quarter due to the sequestration. That’s a total of 900,000 jobs less in the second quarter than would have existed otherwise.

    The latest employment report shows that employment was up 1.244 million in 2013Q2 relative to 2012Q4. That’s the largest increase this recovery in any two quarter period with the sole exception of 2011Q4/2012Q1. That’s also up from the 954,000 jobs created between 2012Q2 and 2012Q4.

    Assuming the major model type estimates are correct, then in the absence of the tax increase and the sequestration 2.144 million jobs would have been created which is over 50% more than in any other two quarter period this recovery and over double what was created in the previous two quarters. It would also have been the most jobs created in any two quarter period since the 2.251 million created in 1984Q1/1984Q2.

    So if one believes in the effectiveness of fiscal policy one is stuck with the inescapable conclusion that monetary policy just offsetted a major Federal fiscal contraction, which means that we are not in a liquidity trap, and in which case the key to a more robust economic recovery is simply better monetary policy.

    Either that or fiscal policy works with amazingly long and variable lags.

  15. Gravatar of ssumner ssumner
    5. July 2013 at 09:34

    Bill, Wow, the Italian cars I saw in Milan looked old compared to what I see in Boston–perhaps Italy is not representative. (Nor is Boston).

    My real target is not liberals, I’m trying to get MM to replace obsolete forms of conservatism, and having more success than I could ever have dreamed of. I see no reason to take the advice of liberals and quit while I’m making good progress. Bashing fiscal stimulus helps me with conservatives. Street cred. Ask Morgan.

  16. Gravatar of Bill Ellis Bill Ellis
    5. July 2013 at 09:37

    We should not just look at the Federal spending and the Sequester, (Much the sequester was offset by acts of congress has not happend yet. ) We should take into consideration state and local spending wich has been going up since the end of 2012. (before the most recent version of QE )

    Is it too early to get good total government spending figures yet ? Everything I could find on it (right-wing-deficit-scold-sites ) shows total government spending up.

  17. Gravatar of Bill Ellis Bill Ellis
    5. July 2013 at 09:41

    Got to stick with what works. :-)

  18. Gravatar of The US economy continues to slide into double dip recession under the savage austerity of income tax increases, payroll tax increases, and deep spending cuts « Economics Info The US economy continues to slide into double dip recession under the savage austerity of income tax increases, payroll tax increases, and deep spending cuts « Economics Info
    5. July 2013 at 12:00

    […] Source […]

  19. Gravatar of ssumner ssumner
    5. July 2013 at 16:01

    Bill, The big problem was tax cuts. But CBO figures show spending down, if you abstract from accounting gimmicks. S&L spending is endogenous, and no more belongs in multiplier estimates than investment spending. In any case, the Keynesians made the predictions that they made–there’s no taking it back now.

  20. Gravatar of Bill Ellis Bill Ellis
    5. July 2013 at 18:32

    “S&L spending is endogenous, and no more belongs in multiplier estimates than investment spending.”

    If one does believes in multipliers from fiscal stimulus, total government spending has to be the only way to gage it. It is not as if any Keynesian would ever be expected to disregard a portion of stimulus in his thinking because it was at the S/L level.

    If Keynesians predicted that the Sequester would slow the economy, it was because it was thought that it would would reduce total government spending…That has to be a given.

    If S/L spending has been offsetting the federal cuts than your argument is undercut in part. (Tax cuts are a different story. )

    From FRED.

    S/L spending up about 60 bill this year.
    http://research.stlouisfed.org/fred2/graph/?chart_type=line&s1id=SLEXPND&s1range=5yrs

    Federal expenditures down about 40 billion. http://research.stlouisfed.org/fred2/graph/?chart_type=line&s1id=FGEXPND&s1range=5yrs

  21. Gravatar of ssumner ssumner
    6. July 2013 at 05:09

    Bill, The distinction between S&L spending and investment in the simple Keynesian model is non-existent. Thus if S&L spending should be included, ditto for I. Does it matter whether a road is built by a private company or a state government?

    Multipliers are used for Federal fiscal policy decision-making, not to score debating points. If an increase in Federal spending would be offset by a fall in S&L spending, then that should be part of the model. You are trying to predict the effect of various possible decisions made by fiscal authorities, which means Federal authorities. Either include investment or exclude S&L.

    BTW, Your S&L data is meaningless without context. What was it last year?

  22. Gravatar of flow5 flow5
    6. July 2013 at 07:16

    The first of this year’s economic growth can also be attributed to eliminating a contractionary monetary policy (the expiration of widespread FDIC insurance coverage). Expanded coverage lead to dis-intermediation within the non-banks.

    Reversing the flow of funds to the non-banks adds to the supply of loan-funds, matches savings with investment, & is non-inflationary (other things equal).

  23. Gravatar of flow5 flow5
    6. July 2013 at 08:06

    There has also been a shift in the preference for various deposit classifications (from non-reservable liabilities to reservable liabilities, or from interest-bearing to non-interest bearing accounts).

    This movement isn’t entirely clear. Part of this shift resulted from the unlimited insurance coverage for noninterest-bearing transaction accounts provided under the Dodd-Frank Wall Street Reform & Consumer Protection Act which expired in December 2012.

    When you subtract those balances > $100,000 + IRAs & Keoghs from total time deposits = small time deposit accounts.

    In 1/1998 total time deposits were .48% of m2. Small time deposits were .33% of m2. Today total time deposits are .85% of m2. Small time deposits are .07% of m2.

    Corporations are sitting on cash. Plus, either Joe sixpack is dis-saving & there is a transfer of wealth, and/or depositors with low balance accounts are indifferent to balance types with historically low rates of return.

    The one-time, one-way, (abrupt change beginning in Oct 2008), in the composition of the money stock has exacerbated a longer-term trend.

  24. Gravatar of StatsGuy StatsGuy
    7. July 2013 at 17:11

    Mark S. – not sure when the sequester effects fully hit. The Pentagon, largest federal employer by far, only starts initiating furloughs this month.

    http://www.huffingtonpost.com/2013/07/06/pentagon-furloughs_n_3554309.html

    However, people could have altered spending patterns in anticipation of those furloughs.

  25. Gravatar of ssumner ssumner
    8. July 2013 at 13:38

    Stats guy, Military spending has fallen sharply during recent quarters.

  26. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. July 2013 at 13:45

    StatsGuy,
    “Mark S. – not sure when the sequester effects fully hit. The Pentagon, largest federal employer by far, only starts initiating furloughs this month.”

    In February the CBO estimated the “equivalent” of about 750,000 fewer full-time jobs would exist by the fourth quarter due to the sequester. The CBO’s estimates did not include a breakdown into federal versus non-federal jobs but I think it’s fairly obvious that the CBO did not believe a large proportion of the jobs lost would be in the federal government. Rather, they would be due to the indirect effect of the decline in federal government outlays.

    According to the CBO’s “Budget and Economic Outlook: Fiscal years 2013 to 2023″³, Table 1-2, the Defense Department, nondefense discretionary and Medicare will be cut by 7.9%, 5.8%, and 2.0% respectively. The Defense Department employed about 770,000 civilians in FY2010, the Department of Health and Human Services employed about 70,000, and all other departments, except the Social Security Administration (which is completely exempt), employed about 1.93 million people. Even assuming the federal jobs lost is proportional to the size of the spending cuts in a given department, that yields about 61,000 civilian Defense Department jobs, about 1,400 Health and Human Services jobs lost, and about 112,000 other federal jobs lost, or the equivalent of about 172,000 federal government jobs lost.

    Thus, assuming this estimate is correct, no more than a quarter of the estimated “equivalent” jobs lost will be in the federal government. Furthermore, federal agencies will probably avoid furloughs longer than 22 days because they fall under “reductions in force” rules. Without extended furloughs or layoffs, few federal government jobs will actually be lost.

    And there is evidence that the furloughs there may be actually started in February, one month *before* the sequestration officially started:

    “In fact, in every month starting in February, when agencies perhaps started preparing for the sequester, the number of reluctant federal part-timers has been higher than its level in 2012. In each of those months in 2013, the level has also been higher than in 2011, with the exception of April, when there were an equal number of federal part-timers for economic reasons in 2011 and 2013 (64,000).”

    http://economix.blogs.nytimes.com/2013/07/05/yes-the-sequester-is-affecting-the-job-market/

    And the article goes on to show that private sector defense related industries have been shedding jobs since at least March.

    So the effects of the sequestration are not yet to be felt, they have been going on for nearly five months now.

  27. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. July 2013 at 15:59

    “And there is evidence that the furloughs there may be actually started in February, one month *before* the sequestration officially started:”

    should read

    “And there is evidence that the furloughs actually started in February, one month *before* the sequestration officially started:”

  28. Gravatar of Keynesians Got It Wrong | John Goodman’s Health Policy Blog | NCPA.org Keynesians Got It Wrong | John Goodman's Health Policy Blog | NCPA.org
    10. July 2013 at 10:00

    […] Scott Sumner. […]

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