January Jobs Report

The January Jobs report came out Friday along with annual revisions to past jobs numbers. Job growth in January was 157,000, a relatively average number for the current recovery. The unemployment rate went up by 0.1% due to revisions to population and labor force estimates. The better news is the direction of the revisions to past numbers. November was revised up from 161,000 to 247,000 jobs added, a strong performance in the context of the recovery. December was revised up from 155,000 to 196,000. Generally speaking, the revisions to older months were upwards in direction. There were even a couple months of job growth above 300,000.

The graph below shows the revised numbers in white, and the previous numbers in red.




The jobs report gives further evidence in conflict with the fourth quarter contraction in GDP indicated in the BEA's preliminary estimates. As I noted in the previous post, these estimates are always revised to some degree, sometimes by over a percentage point. When looking at other indicators of economic strength, it seems very likely that GDP did in fact expand in the fourth quarter.

Wha??

According to the Bureau of Economic Analysis, the economy is, well was in the fourth quarter, contracting for the first time since 2009. It comes as quite a surprise to any non-doomsayer. The economy grew by 3.1% annualized in the third quarter, in the fourth it contracted by 0.1%. Granted, the "advance" report is revised multiple times; initially the advance report put third quarter GDP growth at 2% annualized. The fourth quarter number could be revised up, but will still be poor. 

The reported contraction was due in large part to reductions in government spending (mostly defense, which alone knocked 1.28% off growth), and in inventories. The reduction in inventories could indicate an expectation of worse growth going forward. Exports also took a hit, owing to a weak world economy.

On the other hand, the jobs data had the same middling growth during the fourth quarter, as in not indicating a worsening situation. Consumer spending and residential investment put in strong numbers as well.

It should become a bit clearer whether the good signs will be revised down or the bad signs revised up when the January jobs report and previous month revisions come out on Friday.

Graphs out of Context

Here is a graph:

This Year Should be Better

Economically, this year should be better than last; it should be the best year of the recovery so far. There are two main reasons why: the housing market and the Federal Reserve. 

The massive debt brought on by the crash is still slowly but surely being paid off. The number of homeowners who are delinquent or in foreclosure continues to drop, making housing investments less and less risky. 

Data is for the New York Fed district and not the whole county, but the general trend is the same.

Housing prices in real terms[1] and as a ratio to rental prices have dropped to pre-bubble levels. 

The average amount of time a home sits on the market before being bought has returned to average levels as well (between 4 and 5 months). Eventually simple demographics will take hold. The population of the United States continues to grow, and the number of people per household remains above average. The consultancy Macroeconomic Advisers projects that the United States will need an average of 1.6 million new houses per year over the next decade; in 2012 1 million were built. 

The Federal Reserve has been buying assets to create $40 billion of new money each month since September, and last month increased that amount to $85 billion. They have committed themselves to this level of money creation until unemployment is below 6.5%, so long as inflation remains stable. This will reduce the cost of borrowing and investing, and a bit of higher inflation would reduce the real value of debt over time and make exports more competitive. Generally speaking, it takes about six months for changes in Fed policy to have a real effect. 

So 2013 should be better than 2012, however politicians can still ruin it. 

December Jobs Report

155,000 jobs were created in December. The number is incredibly average for the disappointing recovery. The monthly average for 2012 was 152,900; the average for 2011 was 153,300. Such weak and consistent job growth puts the economy on track to recover all the jobs lost in the recession by March of 2015. But the population will be larger, so recovery to the rate of unemployment seen before the recession will take even longer.

Life in Kibera

I try to do a little more than just link to other people's writings, but this is one of the best articles I've read in a while:

Upwardly Mobile Africa: Boomtown Slum

And the correspondent undoubtedly knows a lot more on the subject than I do. The article tells the story of a day in Kibera, the largest shanty town slum in Africa. It is part of Nairobi, the capitol of Kenya. Around 1 million people live informally (i.e. as squatters), without a sign of the government, in one square mile.

The point of the article is that this is not a pit of humanity festering in poverty. It is a very poor place, but has a very entrepreneurial and growing economy. Signs of growth can be found all over, and new residents come from the country side to seek a better life. Many in Kibera have incomes above the poverty threshold (of $1.25 a day), many residents are counted among the middle class according to the World Banks threshold of $10 a day.

Before anyone gets too libertarian about it, the government can make these people better off. Their richer neighbors in Nairobi pay less for water and electricity because they don't rely on informal businesses to tap into the grid. But what can a cash-strapped government do? Formalizing the shanty town and giving property ownership to the residents would immediately boost their wealth and give the countless entrepreneurs access to capital. 

Ayn Rand

A random thought hit me today. It’s about Ayn Rand, but don’t let that stop you from reading this. Ayn Rand argued that true morality was to not care about anyone’s interest but your own. Everyone pursuing self-interest would end up maximizing their own benefit. And if everyone’s benefit is maximized, society is best off. This logic comes from the First Fundamental Theorem of Welfare Economics, which holds that “competitive equilibrium is Pareto Efficient”. Competitive equilibrium means markets are perfectly competitive (no one firm has market power), and all in equilibrium (supply equals demand, no shortages or surpluses). Pareto Efficient means that no one person can be made better off without making someone else worse off. 

There you have it, one paragraph. So if you were considering reading Atlas Shrugged, don’t worry about it. But there are a few essential requirements for the First Fundamental Theorem to work; and they can't possibly exist in the real world:

1. All markets are in equilibrium – The economist Leon Walras proved that if all but one market is in equilibrium (say, theoretically, 9 out of 10) the remaining unstudied market must also be in equilibrium. The flip side is that if any one market isn’t in equilibrium, other markets must also be in disequilibrium. Which sounds more likely?

2. No externalities/market failures/public goods – This condition can’t possibly be true in the real world. Think of pollution, without government regulation a coal power plant suffers no cost for pollution, but the wider public does. This means from the point of view of society, the power plant over-produces because its monetary cost of production is less than the true cost of production. This externality breaks the no surpluses condition of equilibrium. There are clearly market failures, asymmetry of information being a classic example. There are clearly public goods, such as education.

3. No interdependent utility – This is the condition Rand was so in to[1]. It means no one’s utility, or personal well-being, depends on anyone else’s. Parents don’t care about kids, friends don’t care about friends, etc. It clearly isn't the case.

So it’s impossible for the First Fundamental Theorem to exist in the real world, though it is a very useful model for studying economics theoretically. And it’s a shame people can’t distinguish between a thought experiment and legitimate policy. Pareto’s theories were eagerly adopted by supporters of planned economies because they can show that optimal efficiency can never be brought about by purely unregulated markets (which will not be perfectly competitive)[2].

The reason I bring this up is the last condition, no interdependent utility. Rand argued that an individual’s utility shouldn't be influenced by other individuals. She spent a lot of time on it, wrote rambling monologues on it, yelled “compromiser!” at Friedrich Hayek the only time they met. She cared that he wasn’t as much an ideologue as she was[3]. She cared about spreading her ideas, and convincing people to believe them. You could say that part of her utility depended on what other people thought and did. This of course violates the 3rd condition for the theory she espoused to be true. It simply can never exist; humans just don’t act that way. 

Update on the Federal Reserve

This week the Federal Reserve has taken further unconventional action to attempt to stimulate the economy. In September the Fed announced it would buy bonds and other securities with newly created money to increase the money supply (more details here). With not much sign of things getting better yet, the Fed has expanded its asset purchasing (as in money creation) from $40 billion to $85 billion per month.

But that is only half the story. In September the Fed said it would continue making new money until unemployment falls back to "normal" levels, but only if inflation stays low. The limitations and thresholds were somewhat vague, which dulls the effect of the policy. However, this time, the Fed explicitly stated that it will continue creating money until unemployment goes below 7%, and keep interest rates near 0% until it goes below 6.5%. And even when it does they will not stop immediately, but rather gradually wind down the program. This is conditional on inflation staying near or below 2.5% in the short run[1]. The benefit of this policy is that the Fed is now committed in a clear manner to its stimulus. And as conditions change economic actors will know at what point the Fed policy will change.

I previously spoke of how large a change outlining policy in this manner is for the Fed. This is the first time ever the Fed has set an unemployment rate target[1]. Past efforts have involved set dollar amounts and calendar deadlines. Now the policy is still clear and predictable, but flexible and limited only by the accomplishment of its goals (you can find information on how monetary stimulus helps the economy here and here). I am a huge supporter of the Feds recent policy changes. While its no magic bullet and the magnitude of the effect is a matter of debate, it speaks well of our monetary institution that the Fed has been so able to adapt and act to economic conditions. 

My only present concern is the focus on keeping inflation near or below 2.5%[2]. I've posted about why inflation is not a threat in this weak economy here and here. We would not be hurt by inflation in the 3 - 4 % range, inflation has been that high numerous times in the past two decades. Keeping inflation relatively low will dull the stimulative effect because the Fed can only reduce inflation by slowing down the economy. The low inflation ceiling could lead people to expect that stimulus will be withdrawn too early. Metaphorically, the Fed is giving the economy more gas while still keeping a foot slightly on the breaks.

November Jobs Report

Middling is a good way to put it. 146,000 jobs were added in November, which is pretty close to average. In the face of the uncertainty of the fiscal cliff, depending what effect that uncertainty has, average could be better than it seems. According to the BLS, hurricane Sandy had little effect on employment. 

But the situation looks a bit worse once one looks deeper. The labor force participation rate declined, off-setting October's increase. This, and the added jobs, has brought the unemployment rate down to 7.7%. The data for the months of September and October were revised down by a combined 49,000 jobs, the first downward revision since April. The revision brings the monthly average job growth so far this year to 151,000, compared to 2011's 153,000. 

Politics

Guess which continent wasn't politically important enough for UN Secretary Dag Hammarskjöld's head to not block in this posed picture.

That's a bit unfair. He died in a plane crash in Africa on his was to the Democratic Republic of the Congo to negotiate a cease fire between factions that were tearing the country apart in the "Congo Crisis". Granted, UN members such as the United States, Belgium and the Soviet Union were using it as a playground for the Cold War, and completely undermined anything a neutral member of the UN could do. Also Dag was an economist so he couldn't have been that bad. Then again:

Fiscal Cliff Update

Because of the timing, I’d like to expand on a previous post about the fiscal cliff, seen here.

The CBO has released a new report about how terrible the fiscal cliff will be unless congress acts to prevent it. The basic story is the same, but there are a few key details worth dwelling on. The figure below provides a nice summation of them. The column on the left is dollars of GDP lost per dollar cut; the column on the right is essentially how many full time “equivalent” jobs will be lost per million dollars of cuts. 

The first thing noticeable is that the spending cuts that were part of the deficit ceiling deal will be the most damaging to the economy and employment. This is because discretionary spending (spending subject to the annual appropriations process in congress) is below its 40 year average, each additional cut will damage the economy more. The mirror of this is that tax increases will have less damaging effects per dollar of the deficit reduced. This is because taxes are below their 40 year average.

Furthermore, when “Extend Most Expiring Tax Provisions and Index the AMT to Inflation” is compared to the same policy “Except for the Lower Tax Rates on Income Above Certain Thresholds” (or, let the Bush Tax Cuts expire for the rich) there is little effect. In terms of GDP, the average difference in growth will be $0.10 per tax dollar forgone – notice though that the estimated range for increasing or not increasing taxes on the rich is the same. In terms of employment, increasing taxes on the rich is estimated to have no effect. It’s almost as if “the Job Creators” will keep working even if they keep a few percent less of their incomes each year. 

Poverty

Here's a simple post. There's a lot that's wrong in the world; but we should keep things in context. Poverty world wide is decreasing at the most rapid pace ever observed. It shows what good can be done when markets work, as opposed to corporatism masquerading as capitalism. No system has a better track record.

At the same time, this raises the question of what is happening in the United States. Whereas global inequality is decreasing, in the United States it is increasing. Whereas global poverty is decreasing, in the United States it is increasing (mostly due to the Great Recession but considering that it is at least not decreasing). As the graph below shows, while the United States has a lower poverty rate than many countries, it has a higher rate than pretty much every other developed country. And in a country of 310 million-ish people that results in a very large population in poverty.

So, the election, requisite post:

Obama wins, about 52% in the popular vote but barely a dent in his Electoral College count from last time, etc.

Conservatives: will blame Romney for not being conservative enough. One of the few relative "moderates" left has some insight on that:

“If I hear anybody say it was because Romney wasn’t conservative enough I’m going to go nuts. We’re not losing 95% of African-Americans and two-thirds of Hispanics and voters under 30 because we’re not being hard-ass enough.” – Lindsey Graham

But they’ll probably say that anyway despite two senate elections lost due to very conservative candidates' offensive ignorance about women and rape. Also worth mentioning: the states of Washington and Colorado decided to pursue sensible public policy by legalizing and regulating the sale and possession of marijuana.

Anyway, what about Maryland? In Maryland voters upheld a law giving illegal immigrants a pathway to receive in-state tuition rates at public colleges and universities. I’ve recently posted on the benefits of immigration and the difficulties of legal immigration. And education is the ultimate public good, higher levels of education make everyone better off. Additionally, Marylanders voted to uphold the state law allowing same sex marriages, or rather, upheld a law allowing equal access to the legal status given to people who receive marriage licenses. Maryland is indeed a great state, where a majority of people came out to vote for better public policy and the furthering of equality before the law. 

In fact election night was a big night for gay rights and equality. After losing every previous referendum on gay marriage, referendums supported it in Maryland, Maine, and Washington; and a referendum to establish a constitutional ban on gay marriage in Minnesota failed – a veritable sweep. Furthermore, voters in Wisconsin elected Tammy Baldwin to the senate. Unless a current senator comes out in the next couple months she will be the first openly gay U.S. senator. All in all, a good night for progress.

The Fiscal Cliff

The Fiscal Cliff is the popular term given to the scheduled expiration of mostly tax increases and spending cuts that will take effect as certain laws expire this coming January. Expiring tax provisions include the Bush tax cuts, tax cuts enacted as stimulus measures such as the payroll tax holiday and a provision limiting the expansion of the Alternative Minimum Tax[1]. Spending provisions from the Budget Control Act (the debt ceiling deal) will reduce discretionary spending and extended emergency unemployment benefits will expire starting in 2013.

In the coming decade, the expiration of these policies will reduce budget deficits to around 1.4% of GDP per year and debt from 73% to 61% of GDP. Failure to let these provisions expire will result in debt increasing to 93% of GDP by 2022. In the long run growth will be lower if these provisions never expire.

However, in the short run, given the weak state of our economy[2], allowing every provision to expire at once will cause the economy to contract and unemployment to rise. The Congressional Budget Office (CBO) forecasts the fiscal cliff will knock growth down to 0.5% over the next year and increase unemployment to 9.1%. The annual growth of 0.5% breaks down to negative growth of 1.3% on an annualized basis[3] in the first half of the year before recovering to grow by 2.3% annualized by the second half. Put simply, with the fiscal cliff, the worst year of the recovery has yet to happen. I personally find the CBOs non-cliff growth forecast to be too optimistic. But the size of the hit is the same; the CBO provides what is most likely a very best case scenario.

Those who think congress could never be as reckless to let this come to past should think back to the deficit ceiling drama. But even if it’s avoided, we are already suffering due to the uncertainty. The CBO estimates that the uncertainty alone will reduce growth in the second half of the year by 0.5% annualized. J.P. Morgan reports that 61% of its clients say the fiscal cliff is affecting their hiring plans. Economists Sylvain Leduc and Zheng Liu of the Federal Reserve Bank of San Francisco estimate that uncertainty has already added 1% to the unemployment rate.

Given the reality of the situation, simply delaying all elements of the fiscal cliff would be better than letting it happen. But the tax policies should expire first, and for the wealthy first. Even if none of the spending cuts take place, discretionary spending (the spending that is appropriated annually as part of the budget process) will still finish the decade below its 40 year average. And our tax system needs simplifying reforms to raise revenues. But the undeniable truth is that our debt problem cannot be solved by tax increases and discretionary spending cuts alone. Mandatory spending, especially on health programs, such as Medicare, Medicaid, and Social Security, will sink us eventually. If we can’t reform those programs, the only outcomes of the fiscal cliff debate are to ruin our economy now, or delay the inevitable by a matter of years later.

October Jobs Report

It's the last jobs report before the election, 171,000 jobs were added in October. A number that is only good relative previous jobs reports and the pessimistic expectations of market watchers. If this stayed the level of job growth we would return to pre-crisis unemployment by 2018ish. But the figure is an improvement, and furthermore, the numbers for the previous two months have been adjusted upwards by a combined 84,000 jobs. The unemployment rate increased to 7.9% due to an increase in people actively looking for jobs, a good sign.

As an example of how large future revisions can be, when the August jobs report came out the BLS reported a paltry increase of 96,000 jobs. By this report that number had be revised to 192,000 jobs added.