About that Robust Recovery

Several months ago there was a bit of a flap between Greg Mankiw, Arnold Kling, Paul Krugman and Brad DeLong about how robust the recovery was going to be. Mankiw and Kling were pointing out that it is entirely possible the recovery might not be that robust. Mankiw cited the “unit root hypothesis” in economics and Kling explained how such a hypothesis could be seen as basically an over-investment in housing and that as a result resources needed to shift sectors which would take longer than has been typical in recessions in the past. Krugman called this view point evil. DeLong pointed to some data which someone noted relied on the economic growth after the Reagan tax cuts.

Well here we are and many economists are saying the recession is effectively over. But has the recovery been robust? I think you’d be hard pressed to find many who would make such a claim. Unemployment, while not rising is remaining stubbornly at 10%. While there was one good quarter of growth, the overall feeling is that was somewhat anomalous due to things like Cash for Clunkers (now defunct) and other policies. Also, when looking at things like business investment we see that things don’t look so good.

Now we have this article that indicates what frequent comments Drew has been seeing in his real life profession: small businesses are just not interested in expanding, hiring new workers, or doing much of anything.

A potential wave of new regulation and higher taxes may be scaring many businesses from hiring, prolonging any rebound in employment, say business groups and economists.

The prospect of increased federal and state regulation and taxes has been particularly disruptive to the hiring plans of small- and medium-sized businesses, which have historically generated about two-thirds of the nation’s jobs.

“I don’t really see the private sector hiring much in the next few months,” says Brian Bethune, an economist at Global Insight. “For the small-business sector there is just too much uncertainty about what happens beyond 2010.”

Not only is the Obama administration seeking to push through major overhauls of energy and health care policy, it is also expected to impose dozens of new workplace rules and raise income taxes.

[…]

In reporting that its small business optimism index fell for the second straight month in December, the National Federation of Independent Business Tuesday said members’ No. 2 reason for not expanding payrolls was the prospect of government policy initiatives.

Twelve percent said it was not a good time to expand because of the political environment. Over the next three months, 15 percent said they plan to reduce employment, while eight percent plan to create new jobs.

“We’re hearing it more and more from our membership,” says Bill Rys, the NFIB’s tax counsel. “At the federal level, there’s uncertainty about tax rates, health care costs, energy costs. You also have what’s going on at the state and local levels, with new fees and taxes. They’re reluctant to jump back in.”

Rys says the effect has been more pronounced in the past few months, perhaps mirroring the legislative progress of the massive health care reform bill, the highly-publicized Copenhagen climate change conference and new EPA rules on carbon emissions, as well as the approach of 2010, when the near decade-long Bush administration tax cuts are expected to expire.

[…]

According to the Bureau of Labor Statistics, companies with 1-4 employees lost 140,000 jobs in that period; firms with 10-19 employees shed 220,000 jobs. (That’s the most recent period covered by the data.)

Some of those jobs as well as new ones would normally be created in the coming year.

Coming out of the previous two recessions, companies in the two groups were responsible for net job gains relatively soon after the downturn had ended and picked up momentum as the recovery was established.

Note to the Obama Administration: You are doing it wrong. Creating more uncertainty, raising taxes, imposing more regulations and costs on employers is merely going to make them turtle up, not get moving. That last three paragraphs in particular point out that this is so and that predictions about a robust recovery were foolish. Further, the last two recoveries had significantly longer lags between the end of the recession and the recovery in employment.

I realize that as politicians a crisis is a great time to implement the changes you’ve always wanted to implement but didn’t have the support to do it, but it appears that it is hindering the economic recovery. It is prolonging the dismal outlook in the job market.

FILED UNDER: Economics and Business, Government, Health Care, Taxes, US Politics
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Jeff says:

    hey, wasn’t Krugman the economist for Enron ? Maybe his predictions don’t work out so well if there is no fraud involved.

  2. Scott Swank says:

    Paul Krugman has not been saying that we were going to have a robust recover.

    http://krugman.blogs.nytimes.com/?s=recovery&search=Search

    Neither has Brad DeLong

    http://delong.typepad.com/sdj/2009/12/the-arithmetic-of-a-jobless-recovery.html

    http://delong.typepad.com/sdj/2010/01/a-better-employment-report-than-i-had-expected.html

    They have both been talking about a jobless recovery as the most likely scenario since last fall.

  3. Scott Swank says:

    In fact, this quote from DeLong summarizes his viewpoint reasonably well.

    “I’m betting that the risk tolerance of financial markets will recover, but will do so slowly and gradually. Imagine two years of 3 percent annual world growth and only very slow declines in unemployment before the economic recovery-to-be hits its stride. Should we regard this as a victory?

    I would say yes. Why? Because the magnitude of the financial shocks was greater than that initiating the Great Depression, yet the damage to the real economy is, proportionally, less than one-third as great. That is a victory.”

    http://delong.typepad.com/sdj/2010/01/the-most-important-question-is-who-is-kikuchiyo.html

  4. markm says:

    http://www.nytimes.com/2010/01/09/business/economy/09jobs.html

    And whilst were on the subject…can someone translate this to Peasant speak?
    http://blogs.dailymail.com/donsurber/archives/7530

  5. Dave Schuler says:

    The obvious retort on employment is that employment is a lagging indicator. The problem that I see with that explanation is that employment has got to come from somewhere and I’m darned if I can see where it’s going to come from.

    On net over the period of the last decade the only sectors that have seen employment growth are government and its handmaiden sectors, particularly education and healthcare. When those sectors grow, it’s not good news for the rest of the economy for several reasons. The first is that the money to feed them comes mostly from the rest of the economy and the jobs per buck is worse than in the rest of the economy.

    We’re pretty clearly not going to see a rebound in construction: the excess inventories in both residential and commercial properties could take decades to run off. Manufacturing is growing in terms of outputs and income but its productivity is improving, too. More outputs per unit of labor means little need to add workers. Retail needs buyers. Technology needs business investment. Exports needs a weaker dollar than the Chinese will allow. It won’t come from the financial sector: there are probably tens of thousands of people who used to work in that sector that never will again. Even lawyers are having a hard time finding work.

    So, where will the new jobs come from? Whenever I hear the pablum about green jobs I can only snicker. Those green jobs are probably displacing the old brown and black ones. We need net job growth not just one sector preying off the others.

  6. Dave Schuler says:

    And whilst were on the subject…can someone translate this to Peasant speak?

    U3 is the official unemployment rate and U6 adds discouraged job-seekers and underemployed people to that number. IIRC U6 is over 17% right now.

    A couple of years ago I was talking to quite some number of people who were holding between one and a half and two fulltime jobs and barely getting by. I can only imagine how they’re doing unemployed or with just a single minimum wage job.

  7. markm says:

    The obvious retort on employment is that employment is a lagging indicator. The problem that I see with that explanation is that employment has got to come from somewhere and I’m darned if I can see where it’s going to come from.

    Exactly. I guess some definition of “recovery” can be met with modest growth but to a layman like me, a jobless recovery is hardly a recovery.

    And if Mr. Zandi’s prediction is correct, we may have to re-re-define what a recovery is.

  8. Steve Verdon says:

    Scott,

    I direct you to this post by Mankiw.

    http://gregmankiw.blogspot.com/2009/03/wanna-bet-some-of-that-nobel-money.html

    DeLong and Krugman predicted a recovery that was far more robust than what we are seeing. That DeLong has modified his views since then is a credit to DeLong.

    Also there is this post by Tom Maguire.

    http://justoneminute.typepad.com/main/2009/03/unit-roots.html

    He quotes DeLong,

    Mankiw is here arguing that the Obama administration’s forecast is too high, and so forecasts future deficits that are smaller than the deficits are in fact likely to be. Mankiw is arguing that future economic growth is likely to be just average–that there will be no post-recession catch-up during which growth is faster than average.

    […]

    A fall in production that is accompanied by a big rise in the unemployment rate will in all likelihood be reversed. You have to do a bivariate analysis–to look at two variables, output and unemployment. You cannot do a univariate analysis and expect to get anything useful out.

    Guess what kind of unexpected fall in production we are experiencing right now?

    That an unemployment rate higher than normal is likely to be followed by a period when unemployment falls sharply is sure. On average, we expect half of deviations of unemployment from its average value to be erased over the next two years:

  9. Steve Plunk says:

    There’s one other issue weighing heavy on the minds of small businessmen, energy prices. When ever the economy shows signs of recovery oil jumps. When bad news rolls around oil prices fall. We have a commodity, no THE commodity, that has the power to slow and even stop any recovery. The uncertainty surrounding oil and the memory of how high prices can devastate the economy are also keeping business expansion in check.

    Without energy stability (which there was a measure of in previous recoveries) we will not see anything resembling a historic recovery.

  10. Scott Swank says:

    Let’s pull the relevant quotes from the Krugman piece to which you linked.

    “Greg Mankiw challenges the administration’s prediction of relatively fast growth a few years from now on the basis that real GDP may have a unit root — that is, there’s no tendency for bad years to be offset by good years later.”

    We are not yet ” a few years” from March 2009. Krugman finishes with:

    “How can you fail to acknowledge that there’s huge slack capacity in the economy right now? And yes, we can expect fast growth if and when that capacity comes back into use.”

    He says that we can expect fast growth “if and when that capacity comes back into use.” Capacity is very strongly tied to employment-population ratios. Right now we have a very low number here. When employment returns we can expect fast growth. That has not yet happened.

  11. Scott Swank says:

    Now let’s quote DeLong, again from the piece to which you linked.

    “Whether an unexpected fall in production is followed by faster than average catch-up growth depends what kind the fall in production is. A fall in production that does not also change the unemployment rate will in all likelihood be permanent. A fall in production that is accompanied by a big rise in the unemployment rate will in all likelihood be reversed. You have to do a bivariate analysis–to look at two variables, output and unemployment. You cannot do a univariate analysis and expect to get anything useful out.

    Guess what kind of unexpected fall in production we are experiencing right now?”

    So he is very clearly saying that after employment comes back we can expect faster than average growth.

  12. MarkedMan says:

    The link Steve posted to that article is 404’d, so I don’t know the source, but the tone smells like USCOC/Right Wing Think tank. I used to have my own small business and still know many, many people with small businesses and although many of them grouse about government regulation and taxes, I’ve never seen a single one make a hiring or investment decision based on what the government might do (with one exception: when some government program or credit is about to expire or kick in they speed up or hold back so as not to miss it). As for the bigger discussion of what Paul Krugman did or didn’t say, I read him fairly regularly and my impression all along is that he feels this recovery will be fragile and slow. FWIW, I factor in the Democratic Administration effect and think it will be moderately robust based on nothing more than that. There. Anyone who remembers this prediction can laud me or loathe me at the end of the year.( and examine table 1 on page 27)

  13. Drew says:

    And for those of you who haven’t had the opportunity to enjoy my rants…….

    I think Steve V (and Schuler) have got it right. We have a real pickle on our hands, and the policies of the current Administration and Congress are almost wholly counterproductive.

    My business is dealing with the small/medium business owner; and I own small businesses. These guys and gals are a different sort of cat. On the one hand they are entrepreneurs. On the other hand, they have had near (business) death experiences, and are very conservative.

    If you create an environment where their time and capital investment may be unproductive or overly at risk then, as Steve V said, “they turtle up.” Why?

    This is the point the left always misses. They assume the small business owner will just take it up the, well…. Not true. These guys are rich yesterday; they are rich today; and they will be rich tomorrow. So they have no need to risk their capital, or waste their time if the benefits will all (that is, a large fraction) be taken away for Obama-mania policies. They just won’t do it. They don’t have to. They are not going to be lambs lead to slaughter. And the Average Joe suffers.

    There is a certain M Reynolds who has a different world view. (Sorry, MR, can’t resist the rib poke.) Says Mr. Reynolds, increased taxes, risks whatever are just like the electric bill or gasoline prices going up………so people will just work harder and pay up to the government. Bernard Finel and I had a similar go-round months ago. Its a “no problem, we’ll just squeeze the Golden Goose, world view.”

    My view: that’s pure crap. Many people don’t have the opportunity to increase their work; many others, those I am describing, simply say I’ll go work on my golf handicap. That’s reality. And the Average Joe takes the pipe. What a terrible social result.

    Two final points:

    1) My objection to endless leftist policies is that despite the advocates’ claims of “caring,” they really create a drag on the economy, and therefore growth and employment. As such, they unnecessarily keep people out of work and are cruel and immoral. I dare say I care more about the Average Joe than a million pretenders like Obama and his acolytes, despite their rhetoric.

    2) It has been observed (mostly by DS here and at his cite) that we have had lagging employment in the last couple recoveries. Could it be that the negative effect of government intrusions in the private sector have long been at work, but masked by the last two “bubble recoveries?” Now there is no bubble to come to the rescue. What now?

  14. Rick DeMent says:

    The last “recovery” was tepid at best coming out of a very short and shallow recession using all the tax cutting wankery that the GOP could muster.

    Tax cuts are spending period end of story. I never hear any of you tea baggers discuss farm policy which is way more “socialist” as anything Obama has even thought about in his horny wet dreams yet they get a free pass only because it’s socialism that “Real Americans” ™ like. (I will concede that Verdon is a purist and would like to see farm subsidies go but he never makes that big of a deal out it other then to say “I’m against that too”)

  15. PD Shaw says:

    I would support ending farm subidies to Nebraska to pay for the subsidy exemption from the healthcare bill.

  16. spago says:

    Anyone who remembers this prediction can laud me or loathe me at the end of the year.( and examine table 1 on page 27)

    The data is compiled from the census bureau…so I have to ask how accurate is the census bureau when calculating income? I didn’t even fill that section out in the last census and I doubt very much that I am the only one. But then again I don’t see any hidden agenda from Larry Bartels…I do find it funny that he is trying to stir up some sort of populist fury. From the administation that suggested that the stimulus bill would keep unemployment below 8% its not looking that great. I’m not sure how cap and trade and this healthcare bill are models of middle America’s best interests (those being the only measures of interest coming from the white house and congress…after the stimulating bill…which according to the AP is a failure)

  17. Steve Verdon says:

    Scott,

    Right and that fits in with DeLong’s claims about a jobless recovery oh so well. A for effort though.

    markedman,

    The link Steve posted to that article is 404’d, so I don’t know the source, but the tone smells like USCOC/Right Wing Think tank.

    Works for me. The sources in the article are of course the American Nazi Party….just kidding.

    The sources are:

    Global Insight
    National Federation of Independent Business
    The American Chamber of Commerce

    Jackbooted Right Wingers if ever I saw one.

    Rick,

    The last “recovery” was tepid at best coming out of a very short and shallow recession using all the tax cutting wankery that the GOP could muster.

    While I often disagree with you, the above is something I mostly agree with. GDP growth was decent for a fair stretch there, but the job situation was pretty fragile all along, IMO. It took something like 2 years for the job market to turn around.

    This is a much deeper recession and the policies being pursued are not the kind that promote investment and thus growth. Add on that we will probably go at least 2 years from the end of the recession (2011) probably 3 (2012) and the claims of robust growth are not going to appear.

    Note we have seen this before…well not in our life times…the Great Depression. From a GDP growth stand point the economy started growing again shortly after FDR took office (March 1933). However, despite all the stimulus and such unemployment stayed above 20% till 1936 and we didn’t hit single digits until 1941.

    I suppose that one could argue it would have been much worse without government intervention, but when intervention is along the lines of restricting output to push up prices and wages I don’t consider that a good way to get more people employed.

  18. Gerry W. says:

    While I can’t condone leftist policies, we have seen the right with laissez-faire policies of just tax cuts and ignoring the economy and globalization. A lot of damage has been done and it will take many years to recover. I am predicting some 10 to 20 years. One lady was on C-Span and she said some people will not get hired until 4 years from now. Well, guess what? Four years from now we will be in another recession.

    We will have a jobless recovery for many reasons. Uncertainty is one factor along with high energy prices. Deficits and debt will also be a drag on the economy and the fed has had interest rates too low. It is also that we have globalization and lot of our jobs were taken away. We cannot compete with 2 to 3 billion cheap laborers in the world. Since globalization and all these factors have been ignored, the only thing you can do is invest in your country, invest in your people, and invest in the future. And this will take many years to do.

  19. Scott Swank says:

    Steve,

    DeLong said that when we see an economic slowdown that is accompanied by a drop in employment we can expect that: 1. employment will come back, and hence, 2. gdp will come back with said employment.

    He also said that employment will only come back slowly.

    He did not, as far as I’m aware, say that we would have a “robust recovery.”

  20. I think it’s really strange that Paul “we’re going to need a bigger stimulus” Krugman is encapsulated as an optimist. Hasn’t he been calling for a second stimulus for some time?

    In fact, I sense a reversal in “we don’t need a [bigger] stimulus” sentiment. I get that stimulus as mechanism was the problem for some, but many also predicted a fast and natural recovery as their reason not to stimulate.

    FWIW, I think the situation is fairly ugly, and Mankiw or Krugman commenting on it doesn’t (can’t) change that. We probably got as much stimulus (and as much tax cut) as politics and fiscal reality allowed more or less a year ago. That option is largely closed now. At best a very small stimulus might be tried with high haloopa, to inspire the animal spirits, but that’s about all.

    We’ve got the recession we would have got regardless, minus some pain saved by stimulus seven ways from Sunday.

    Certainly the old argument that some few did make, that this would be a small or quick recession, and therefore not in need of mass response, looks less good today.

  21. BTW, I really liked Mankiw’s stimulus proposal:

    I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

    The only strike against it is that it was (and is) totally politically impossible. Geez, how much harder would GM have crashed with a gas tax over a payroll tax?

  22. Steve Verdon says:

    Scott,

    He is on record defending the Obama Administrations predictions about growth. Those predicitons were above average. Sorry, that does not fit with,

    1. employment will come back, and hence, 2. gdp will come back with said employment.

    He also said that employment will only come back slowly.

    Again, A for the effort, but just on the basic logic its falling flat.

  23. BTW, one way to look at it was that for 2009 we had two things overlaid: Bush Tax Cuts and Obama Expanded Spending.

    If those two things did not stimulate the economy … any ideas on what the heck will?

  24. Scott Swank says:

    Steve,

    Could you give me a source?

  25. DaveS:

    So, where will the new jobs come from? Whenever I hear the pablum about green jobs I can only snicker. Those green jobs are probably displacing the old brown and black ones. We need net job growth not just one sector preying off the others.

    Remember that jobs/GDP is an average across fields with very different labor intensities. I’m not sure you should assume that labor intensity of brown is necessarily the same as green. I know when I visited coal-fired power plants there were relatively small parking lots. In fact a smaller employee parking lot than the local strip-mall.

    This is not to say I am an unquestioning green job advocate. I only refuse to reject jobs because they are green 😉

  26. Duracomm says:

    Rick DeMent said,

    Tax cuts are spending period end of story.

    And up is down, black is white, dry is wet, etc.

    The comment does illustrate one of the unfortunate totalitarian strains on the left.

    Namely that all of your money belongs to the government and you should be happy with whatever the government allows you to keep.

    That is the only philosophical reference frame that allows one to refer to tax cuts as spending.

  27. steve says:

    Drew (sort of Steve)-You seem to be saying that if we had the same regulations and tax structure assured as under Bush, that these businesses would be growing, or at least they think they would be growing. No way to prove or disprove that, but where do they/you think demand is coming from? Who would buy all the stuff they would start making if there were no health care reform, etc.?

    Krugman, Mankiw, Kling and DeLong all missed the call on this financial crisis and how bad it would be. Successfully predicting how quick we would or would not recover matters little if the reasoning was unsound. It also depends on an accurate assessment of the initial conditions, which the administration did underestimate in terms of its severity.

    Steve

  28. I think Duracomm, that we can agree with the basic observation that cutting taxes and spending together reduces the size of government. Actually cutting spending alone does that.

    The only thing that doesn’t do it is cutting taxes, while not cutting (or expanding) spending.

    The Laffer promise was that cutting taxes would increase revenues (and allow higher spending!) through higher growth. An economy sized at 100, with a tax rate of 10% yields 10 units of revenue. Cut the tax rate to 9% and grow the economy to 120 units, and woo-hoo you get back almost 11 units of revenue.

    The only problem was that the economy would not dance on demand to Laffer’s curve.

  29. Duracomm says:

    Rick DeMent said,

    I never hear any of you tea baggers discuss farm policy which is way more “socialist” as anything Obama has even thought about in his horny wet dreams yet they get a free pass only because it’s socialism that “Real Americans”

    Farms subsidies are a liberal program, started by liberals, and still supported by liberals.

    Yet somehow in Rick’s world farm subsidies, a liberal program, started by liberals, and still supported by liberals are a problem of….. the tea party folks.

    Farm subsidies have caused an immense amount of social, fiscal, and environmental harm. Yet they have been impossible to kill.

    They are also a tiny portion of the federal budget.

    Which makes a person wonder just how much more destruction is being caused by government programs with larger budgets.

    One other point:

    Farm programs should be ended. But I guarantee that any attempt to eliminate farm programs would result in howls of outrage from liberals about the need to protect “family farms”.

    And the new york times would run some heartbreaking human interest story about small farmers damaged by the elimination of ag subsidies.

  30. Drew (sort of Steve)-You seem to be saying that if we had the same regulations and tax structure assured as under Bush, that these businesses would be growing, or at least they think they would be growing. No way to prove or disprove that […]

    Nonetheless, it boggles the mind.

    Or actually not. I’m used to people telling me their fantasy as the counterfactual, and then declaring that any sub-fantasy reality is a failure.

  31. Michael Reynolds says:

    I’m re-reading Patrick O’Brian’s brilliant Aubrey-Maturin series. It’s an interesting counterpoint to discussions of the science of economics.

    The character of Dr. Maturin, (circa 1805) discourses at great length on medical practices that are seen in contemporary light to be almost completely wrong. For a very long time medicine continued practices which could quite easily be seen not to work in the real world — after all, their predictions of the effects of certain medicines or practices were never very accurate.

    But of course early 19th century physicians were wedded to their theories and less invested in scientific facts than in plausible-sounding bullshit.

    I mention this apropos of nothing in particular.

  32. Duracomm:

    Farms subsidies are a liberal program, started by liberals, and still supported by liberals.

    It was one of GWB’s best ideas to means-test farm subsidies, and cut their size. The problem was that his whole congress (I believe a Rep. majority at the time) wouldn’t go along with it.

    Seems kind of silly to call something so perverse “liberal.” It’s not like a means test was hard on the poor. It was all the farm state congressmen protecting their rich buddies. Corruption, not political philosophy at work.

  33. Brian Knapp says:

    …science of economics…

    Economics is not actually science. It is not a natural system in any meaningful way. Maybe that’s why no one can ever predict anything without a reasonable level of certainty.

  34. Steve Plunk says:

    I can’t speak for Drew but my take is more complicated than a simple ‘it would be better under Bush’ statement. I speak with no academic credentials but a lifetime of business experience. I converse with a wide range of other small business people who see things much as I do.

    Historically Democrats have been the party of higher taxes, more regulation, and anti business rhetoric. Some might disagree with such a general statement but for business people the Democratic party is only good for ‘connected’ business or business heavily unionized. The Republican party is perceived not as the opposite but rather just not as bad. The Republican party seems to think Wall Street is representative of business across America. They still think what’s good for GM is good for America. That attitude doesn’t help small business like my own or the thousands of others that are the backbone of modern American business.

    Small business saw the likely election of Obama 18 months ago and many (like myself) immediately went into ‘hunker down’ mode. My capital purchases were postponed until a clear indication of tax and regulatory policy could be seen. While waiting the housing market imploded, the banks were sucked into the mess, the government instigated TARP and a stimulus plan that most felt was geared to those ‘connected’ businesses and local government spending. No stimulus for housing (a driver of small business) or companies. Then came the talk of huge debt, rising interest rates, inflation, a double dip recession, a second stimulus, the list went on and on without any good news in the mix. Early talk of a payroll tax holiday that would stimulate small business was soon gone and not heard from since. Health care reform came along with mandates for small business and the self employed. Cap and trade to us meant cap and tax. Even small business pays a price for CO2 regulation. And to top it all off oil keeps climbing despite new finds and full storage. Even the great advances of drilling technology that created a boom in natural gas supplies was met at the EPA with concerns over ground water and other unknowns.

    So small business has no reason to be optimistic and small business has to have optimism to grow. We have an administration and congress hostile to most traditional business. We have a banking system adverse to any risk at the present and regulators ensuring they don’t get into the risk business. We have state and local governments still taxing and spending like there is no recession. The only logical thing to do is to just try and weather this perfect storm of circumstances.

    If Washington wanted to stimulate the economy it’s actually very simple. A payroll tax holiday to stimulate hiring (the only thing that would cost money). A freeze on regulations. A freeze on tax hikes. Stop health reform as is and instead work the edges with small bills. And for gosh sakes stop the cap and trade talk completely. Do these things and restore optimism to American business.

  35. sam says:

    As I was cycling down through the to and fro in the comments, I saw this over on the New Atlanticist site: Derivatives Market 20 Times Size of American Economy, by our own JJ. Of course, as the article says, this value is “notional”. Twenty times the size of our economy, notional or not, boggles the mind. Does anyone on the planet understand the cogs and wheels of that? Can anyone on the planet understand it? Didn’t we just suffer a shitstorm involving something about derivatives?

  36. Steve P, do you remember that the economy actually turned for the worse under GWB, and that the first stimulus was his, and that the first stimulus did not halt the fall?

    You can believe that continued GWB would have fixed it all, after all, faith is a wonderful thing … but I don’t see a rational way to make the case, other than by faith alone.

    Oh, yes. You can tell a “just so” story about how small business loved GWB and would fix the economy for him … even though they were actually pulling back their activity on his watch.

  37. sam says:

    You know, in thinking about the argument going on in this comment thread, and that NA article, I’m inclined to liken the situation to a married couple standing in their driveway arguing about what car to take while a Tyrannosaur is lunging about their backyard.

  38. Pete says:

    Sam, I’m with you. What a great forum for ego-nastics. I wonder how many of these intellectual giants ever had to meet payroll, which does impact other peoples’ lives.

  39. Gerry W. says:

    Steve Plunk.

    I won’t defend Obama as I understand lower taxes and regulation is better for business. However, I will defend one thing, and that he was dealt a bad hand. We have a banking crisis, a housing crisis, an auto crisis, a recession-near depression, globalization, factories closing, the losing of the middle class and jobs, 2 wars, and the list goes on.

    Now, some of us saw this years ago. We had 8 years of tax cuts, but if you ignore the problems then the tax cuts mean nothing. So what we have seen is 8 years of our jobs going overseas, our money going to Iraq, and the neglect of the country.

    To narrow this down, we saw neoconism, militarism, laissez-faire, and religionism. You cannot run a country like that. So with 8 years of tax cuts or stimulus, how can you stimulate? It is like crying wolf too many times. Add to that the fed and they have had interest rates low for a long time. So now, the stimulating does not stimulate. We are in a hole and it will take more than a decade to get out. It was the roaring 20’s during Bush’s term. After all, it was Cheney who said “deficits don’t matter.” After all, we could spend in Iraq and ignore our own problems while piling up deficits and debt and also seeing our jobs go overseas.

    Both parties are caught up with failed ideology. I don’t think you would call it economics anymore. Bush did none other than a “guns and butter” economics just like LBJ did. And after LBJ it was almost 2 decades of inflation/stagflation, higher interest rates, and higher unemployment. I expect the same will follow now, no matter who is president.

    The only think you can do besides cutting spending and give some tax relief, is the following:

    1. Invest in your country: That is energy independence for security and for jobs. That includes drilling for oil, to nuclear plants, to alternative energy. You need to make a better infrastructure. That is perhaps high speed rail. It is also a new air traffic control system and that will make flights more direct and saving fuel for the airlines. This will make them more profitable and will buy more aircraft.

    2. Invest in your people: There was a day, you could leave high school and walk to the nearest factory. Those days are over with globalization. You need an educated society. Mandatory vocational training is in order.

    http://www.hudson.org/index.cfm?fuseaction=publication_details&id=5656

    3. Invest in the future: That is federal research grants for universities and businesses for science and new discoveries. We saw the attack on embryonic stem cell research and we lost scientists. South Korea has gone further ahead of us in battery technology. China is buying raw materials.

    http://www.newsweek.com/id/222836/output/print

    We used to do great things in our country. It is no longer. Maybe government is too big. Maybe we rely on failed ideology. Whatever the case may be, we need to get it together.

    And in my town, you cannot have a small business if the factories leave. My town of 16,000 lost 2000 factory jobs as 3 plant closed down. So, you cannot have a small business without a prosperous town. My town is one of many throughout the Midwest, while Bush was saying “free trade is good.” It made no sense.

    So here we are in a hole and it will take a decade or two to get out of. Cities and states cannot compete with globalization. We cannot compete with 2 to 3 billion people in the world that get paid far less than we do. States are grasping for cash for clunkers, extension of unemployment benefits, and for casinos. We are where we are and it will take a long time to get out of.

  40. Steve Verdon says:

    Could you give me a source?

    The Mankiw and Maguire links. At Maguires we find this link,

    http://delong.typepad.com/sdj/2009/03/permanent-and-transitory-components-of-real-gdp.html

    That is to DeLong’s website where he argues against Mankiw’s possibility of less and robust economic growth.

    I’ll post it again,

    Mankiw is here arguing that the Obama administration’s forecast is too high, and so forecasts future deficits that are smaller than the deficits are in fact likely to be. Mankiw is arguing that future economic growth is likely to be just average–that there will be no post-recession catch-up during which growth is faster than average.

    Now you come here and say, “No DeLong is talking about a jobless recovery. Well in March DeLong wrote the following,

    That an unemployment rate higher than normal is likely to be followed by a period when unemployment falls sharply is sure. On average, we expect half of deviations of unemployment from its average value to be erased over the next two years:

    But we are waaaay behind schedule. We are 1 year out and unemployment hasn’t gone down from where it was in March, but up. And while it has dropped a bit in the past few months it seems to be stuck at 10%.

    Will it be stuck there forever? No. Of course not. Will it be stuck there or above say 7% or 8% for the next 6 months to a year? I’d say that is a safe bet given what we see now AND given the increasing lag times between the end of a recession and the turning point in the labor market. And once again you point to DeLong writing about a jobless recovery.

    BTW Scott, I just noticed you are looking at DeLong/Krugman since the fall of 2009. Go back to SPRING 2009, specifically March of 2009. DeLong/Krugman were bing cheerleaders for Team Obama and it doens’t look like it will work out for them. I hope though there is still time for them to be right. That a surge in employment is coming and we’ll all go “Huh, didn’t see the recovery coming from that sector!” But I think it is silly to base policy on wishful thinking.

    You seem to be saying that if we had the same regulations and tax structure assured as under Bush, that these businesses would be growing, or at least they think they would be growing.

    Not necessarily. I’ve noted that with the recession during Bush the recovery in unemployment lagged far longer than we’ve seen historically. I’ve noted this before. However, I think that we’d things would be better under a more predictable regime. Note, I’m not saying perfect, but merely better and right now that is a low bar, IMO.

  41. Not necessarily. I’ve noted that with the recession during Bush the recovery in unemployment lagged far longer than we’ve seen historically. I’ve noted this before. However, I think that we’d things would be better under a more predictable regime. Note, I’m not saying perfect, but merely better and right now that is a low bar, IMO.

    Many market democracies around the world are in the same sort of boat we are. The more developed nations generally seem somewhat hollowed by financialization and globalization. Not coincidently, consumption in the “rich” (or “debtor”) countries has stalled.

    What will happen now? Can any “regime” make this “predictable?”

  42. Drew says:

    Steve-

    (not SV or SP)

    I have no idea what you are talking about. I hold no brief for the free spending Bush Administration. If you find it possible to break away for a moment from partisan politics, perhaps we can communicate.

    In the interim, at the moment we have Obama and Reid/Pelosi…….and their policies are just wretched for business, and will result in unnecessary unemployment and suffering. Its truly evil.

  43. Steve Plunk says:

    John p.,

    My statements are not a defense of Bush. I make it clear the Republicans were misguided as well. Less misguided than the Dems, but misguided. Regardless of what Bush was I’m talking Obama now and how small business views his policies as threats. The fact stands we have hunkered down for good reason.

    Gerry W.,

    I agree with some of what you say. Obama had a mess on his hands early on but rather than correct the problems I believe he has made them worse. I don’t look for government to fix the economy but to just get out of the way and let it fix itself. Obama’s policies are impediments to optimism and growth.

    I believe in energy security but high speed rail is a proven boondoggle. Education has been giving diminishing returns on investment for years. It’s not only the size of government but it’s unchecked power that discourages business.

    The trend is toward government and away from business today. Unfortunately business pays the bills government rings up. Unless we prioritize business as the engine of our society’s success and grant it it’s due we will stay stagnated.

  44. MarkedMan says:

    Steve replied to my request for the source of the article with this:

    The link Steve posted to that article is 404’d, so I don’t know the source, but the tone smells like USCOC/Right Wing Think tank.

    Works for me. The sources in the article are of course the American Nazi Party….just kidding.

    The sources are:

    Global Insight
    National Federation of Independent Business
    The American Chamber of Commerce

    Jackbooted Right Wingers if ever I saw one.

    Actually, that’s just about what I thought. By “USCOC” above I meant the US Chamber of Commerce. (I didn’t say “Jack Booted Thugs” Steve put those words in my mouth. Easier to win an argument if you give yourself the advantage of making both sides of it…) FWIW, I consider the national Chamber of Commerce organizations to be little more than a pass through for big business, while pretending to represent the small. A lot of yadda yadda about taxes and growth and semi-disguised Ayn Rand BS, but no, not Jack Booted Thugs.

    But I doubt I would convince anyone hear with my anecdotal arguments, and so I won’t bother making them. In fact, it is probably to peoples credit when they take anecdotes at a healthy discount rate. Provided of course, that discount is applied equally to those anecdotes that seem to prove our biases…

  45. Gerry W. says:

    The three points that I have made is to help business. You need to invest in the country, which time and time again republicans only have tax cuts and do little else (laissez-faire). The tax cuts did not create prosperity, did not prevent jobs from going overseas, did not reach the bottom 20% to 30% of the population, and did not prevent a recession.

    On education, I said mandatory vocational training. This is do to globalization. We cannot ignore this and we have ignored this for too long. It is either that or welfare. Vocational training can be controlled at a local level. It is going to be the fact that we need an educated society to meet the demands of todays world. It is cheap labor that is winning and we have to find some way of beating that to save the middle class. As of now, we are losing the middle class. And even if a person is educated, if he is able to find another job, that job will pay less. This is the jam we are in today. We cannot keep going on with this ignorance and arrogance.

    No small business can start up in my town as the anchors of my town (factories) have closed up. The last jewelry store closed up. We have fast food chains and even Kentucky Fried Chicken closed up. You can’t even get a part time job here. Three factories have closed up. That is 2000 jobs and more than that around the area. How many small businesses will create 2000 jobs?

    My take on economics comes from globalization. That means anything that is not bolted down will go overseas. We cannot be ignorant of this fact. You have 2 to 3 billion cheap laborers and there is just not enough jobs to go around. In our country it is one company taking market share from another company. That is not good enough. You need new jobs and there are no new jobs to go to. And therefore this is where the government comes in. I don’t like it anymore than you do, but the private sector is not going to do it all. There is no guarantee that widgets will be made in this country.

    In fact, thinking about high speed rail and Europe. Those jobs cannot leave the countries their in. The rail system in Europe may be subsidized, but it keeps people working in legitimate jobs. I appreciate the train and public transportation every time I go there. Like I said before, cities and states are grasping for extension of unemployment benefits and casinos. I don’t think this is healthy. But they have no other choice as we see our jobs go overseas.

    It is republicans that want to stick with failed ideology. Democrats may be dumb, but republicans are a bunch of nuts as I have seen middle class jobs destroyed and all I heard was “free trade is good.”

    I have not heard anything differently from the republican party since. It is shameful to see so much ignorance. I have often wondered why the middle class are always left hanging, and after all these years and seeing the best of failed right wing ideology for 8 years-it all stands out.

  46. steve says:

    Drew and Steve-Ok, assume regulations are frozen. Taxes are frozen. Health care reform dies. Now, who is going to buy your stuff? With what? You go ahead and invest away and turn out more widgets. Where does the demand come from? People are broke and in debt.

    Steve

  47. OK, Steve P. For what it’s worth, I don’t put all the blame for the bubble and pop on the Bush administration. I think there are things they could and should have done (at the margin as it were) to make things better, but back to country-comparisons … there are plenty of places that didn’t have GWB and got in worse trouble. Iceland, for goodness sakes.

  48. sam says:

    @Drew

    My objection to endless leftist policies is that despite the advocates’ claims of “caring,” they really create a drag on the economy, and therefore growth and employment.

    However, as Dave pointed out above

    On net over the period of the last decade the only sectors that have seen employment growth are government and its handmaiden sectors, particularly education and healthcare.

    Note the timeframe: the last decade. Those years cannot fairly be characterized as reflecting leftist policies, can they? I mean, the Republicans and their rightest policies were dominant then, correct? How to explain the last decade from your point of view?

  49. a very related paragraph from interfluidity (more links there):

    Check out the very high quality debate on inequality and middle class living standards between Scott Winship and Mike Konczal. Winship (in two posts) suggests that complaints about middle-class living standards over the past three decades are overdone. Konczal rejoins that even if so, during the last decade something changed, with middle-class income stagnating entirely and debt growth accelerating. Plus, he reminds us, many of the gains in middle class household income prior to the millennium were due to women working more rather than increased wages. Finally, he notes that it’s pretty hard to accentuate the positive for the middle class just now, given the impact of the housing bust and recession. Another piece of the puzzle that Konczal doesn’t address here (but has addressed fabulously elsewhere) is Elizabeth Warren’s point that the operating leverage of middle class households — the proportion of their wealth devoted to fixed necessary expenses — has dramatically increased, leaving families more vulnerable to shocks and worse off in risk-adjusted terms than their (modest) income growth suggests.

    Basically, people who look for all the evil in our economy in “teh Dems” policies over the last year or so are going to miss the big picture. But then, maybe they want to.

  50. Rick DeMent says:

    Farms subsidies are a liberal program, started by liberals, and still supported by liberals.

    Yet somehow in Rick’s world farm subsidies, a liberal program, started by liberals, and still supported by liberals are a problem of….. the tea party folks.

    Liberal sure but now it’s one that ever red blooded Republican and Democrat alike will defend to their death. When the GOP had control of the government did that try and reform farm policy? No … they tried to kill Social Security.

    Look all of the wankery about evil liberals is childish, the stimulus was 40% tax cut because the Administration want some GOP buy in. Fine, I would have done it different but like I said redistribution is redistribution whether it goes under the guise of a “tax cut” or just handed out on a street corner.

    Rick DeMent said,

    Tax cuts are spending period end of story.

    And up is down, black is white, dry is wet, etc.

    The comment does illustrate one of the unfortunate totalitarian strains on the left.

    This analysis show that some right wingers are incapable of critical thinking. Let’s go through it kids. (and yes this is all back of a napkin math but this post is too long already)

    1. You have a deficit – let’s make it 100 units to make the math easy for the cognitively challenged.

    2. Cut taxes – lets say 10 units now you’re receiving less in revenue but it’s asserted the economy will grow. Well it might but at best your going to get is .2 units of revenue from that growth and believe me I’m being generous, so you are left with 9.8 units of more deficit.

    3. Borrow the 9.2 plus some more to cover your parties personal spending priorities.

    Viola! You have just effectively borrowed money and redistributed it to people using the tax code. You could have just as easily sent out checks for $300 to everyone (and they did and had the balls to call that a tax cut too)

    God some people are so easily duped.

    Look I have no illusions about the “stimulative” effects of the stimulus, the best that can be hoped is that the money will help to smooth out some of the rough edges and prevent a full scale economic retreat. but Tax cuts, spending on infrastructure, spending on anything you could think of are all pretty much the same (within a few % points) in their effect on the economy. You cannot reduce the deficit by cutting taxes (without massive cuts in spending) and anyone who thinks so is too uninformed to even have a voice in this debate. And anyone who thinks it would be a good idea to reduce federal spending at this point in time and add another 20 million or so to the unemployment rolls and cut off unemployment relief for those currently looking (see the bogus GOP economic recovery plan) is also too uninformed to be taken seriously.

  51. Duracomm says:

    Regarding my comment that

    Farms subsidies are a liberal program, started by liberals, and still supported by liberals.

    john personna says,

    Seems kind of silly to call something so perverse “liberal.”

    FDR kicked off the whole farm subsidy debacle. That makes farm subsidies a liberal program started by liberals.

    The fact that it had numerous destructive unintended consequences, and did more harm than good was completely predictable, routinely occurs with government programs, and does not change the fact that it was a liberal program started by a liberal.

    The rent seekers always end up driving government programs because they receive concentrated benefits from those programs.

    Rent seekers receive benefits, average citizens receive harms.

  52. Duracomm says:

    Rick DeMent,

    I don’t think liberals are evil.

    I do think they are clueless about the damage their utopian programs cause when they move from the rarefied halls of political discourse and drop with a dead fish thud out in the real world.

    The end results of liberal good intentions are often evil. Farm programs provide a good example of this.

  53. FDR was before my time DC ;-), which makes it rather more interesting to me who can (or can’t) stop those subsidies. FWIW, I think ethanol subsidies stink even worse. I suppose you could look back for who started those …

  54. Duracomm says:

    Rick DeMent,

    Points 1-3 in your 8:35 AM comment illustrate the fatal defect in most “liberal” analysis of budget deficits.

    Lots of concentration on revenue and taxes. Little attention paid to the other critical part of the deficit equation which is spending.

    Obama’s response to the economic meltdown illustrate the problem with your approach to budget issues.

    Obama became bush’s third term by strongly supporting and expanding bush’s response to the economic meltdown.

    That is to hose down politically connected interest groups with taxpayer money, (examples are banks like goldman sachs insurance companies like AIG and more banks through federal taxpayer funds disbursed through AIG.)

    Obama’s reckless spending spree (which mostly serves to prop up politically connected interest groups including corporate banks, etc) is rapidly expanding the deficit.

    I’m not much of a populist but I object to the politicians giving money taken from taxpayers (who are generally less well off than the people receiving their money) to well connected interest groups like the banks.

    “liberals” used to object to that sort of thing, now with obama in office they mostly cheer it on.

  55. Heh

    Obama became bush’s third term by strongly supporting and expanding bush’s response to the economic meltdown.

    and yet Obama is “liberal.” Funny I don’t recall Bush being called “liberal.” At least not until spring 2009.

  56. Duracomm says:

    john personna,

    I think ethanol subsidies kicked off under jimmy carter’s synfuels program.

    Of course both bush and the republicans and obama and the democrats strongly supported expanding ethanol subsidies.

    Another example of why in the vast majority of cases the safest, most humane policy is to scrupulously avoid enacting government subsidies and payments to interest groups.

  57. Duracomm says:

    john personna said

    and yet Obama is “liberal.” Funny I don’t recall Bush being called “liberal.” At least not until spring 2009.

    Fair point and it points out just how hackish political commentary can be.

    I do notice there is a lot less complaining from the liberal side of the aisle about patriot act provisions and telecomm immunity now that obama is in office.

    Personally I find most politicians to be ignorant buffoons. I consider limiting their power a vital step to limiting the damage they cause to polite society.

  58. If you listen to the Olbermans and the Maddows (I don’t) I think you’ll find they are still on about extralegal activities. But, maybe part of it is that with Obama in, fewer folk tune in.

    I have seen street protests on the order of “new boss, same as the old boss” … but that was up in Oregon, where you might expect such things.

    Nationally, the more moderate liberals probably hoped Obama would work his way around to achieving their goals. I think their patience has only recently started to ebb.

    I, more moderate than liberal, believe those Oregon signs a little more than I did a couple months ago.

  59. MarkedMan says:

    Plenty of liberals are dismayed by how little Obama has rolled back the Bush/Cheney unitary executive coup. In fact, it is pretty much a running theme on the moderate to liberal blog sites I visit that this is one of the reasons the base is disillusioned.

  60. Goddamned liberal, leftists, socialist types and their utopianism. It’s their fault that Europe is a howling post-apocalyptic wasteland and Canada is overrun by mad, mutant moose.

  61. Scott Swank says:

    Steve,

    DeLong has two (related) points.

    Mankiw is here arguing that the Obama administration’s forecast is too high, and so forecasts future deficits that are smaller than the deficits are in fact likely to be. Mankiw is arguing that future economic growth is likely to be just average–that there will be no post-recession catch-up during which growth is faster than average.

    On the first, whether the Obama administration’s economic forecast is too optimistic, I suspect that you’re correct. In point of fact, Calculated Risk has been tracking the administration’s Stress Test estimates for the banking sector and comparing them against actual values.

    Housing prices are well above the administration’s estimates (good).

    http://www.calculatedriskblog.com/2009/12/house-prices-stress-test-price-to-rent.html

    Unemployment, however, is worse than the administration’s estimates (bad).

    http://www.calculatedriskblog.com/2009/11/unemployment-stress-tests-unemployed.html

    On the second “root unit” point, of whether the will likely be a surge in growth when we do return to fuller capacity (e.g. lower unemployment) I suspect that DeLong is entirely correct.

  62. Steve Verdon says:

    Scott,

    No, I think DeLong is wrong because the overly optimistic prediction is based on us not being a unit root world. If they are wrong it is evidence that we are in a unit root world/situation. We will see growth again, we just return to the old trend we were once on. We will be on a new one.

    The two hypotheses are this:

    Trend Stationary–We are growing at an average percentage rate each year. We have a recession and the economy contracts. During the boom the initial phase has much larger growth than average to get us back to the initial trend, then growth levels out and returns to the same old average. More simply–economy grows by 3%/year, recession -3%/year, boom say 5.25% to get us back to where we “should have been” then a return to 3%.

    Unit Root–We are growing at an average percentage rate each year. We have a recession and the economy contracts. During the boom the eocnomy grows, but does not get us back us back to the initial trend. More simply–economy grows by 3%/year, recession -3%/year, boom say 3% from then on and we never get back to where we should have been.

    Of course, this isn’t really an either/or. There might be something in between or a completely different possibility/hypothesis as well.

    Markedman,

    Dude, try switching to a decaffienated brand or something,

    I didn’t say “Jack Booted Thugs” Steve put those words in my mouth.

    I think it was pretty clear it was a joke. And yeahs, the CoC is one of the sources. One. You have a firm, Global Insight, that tries to make money by being accurate, and a business group. Then you have Drew, who makes his living interacting with medium to small businesses saying the same thing. And Dave Schuler as well. I know its easier to pass things off as Right Wing Batsh*ttery, but this seems to be the overall jist of things. And Team Obama is worried, hence all the talk about jobs, a jobs summit and possibly a second stimulus (throwing the baby out after the bath water never struck me as a good idea, but hey I’m a kook).

    But I doubt I would convince anyone hear with my anecdotal arguments, and so I won’t bother making them.

    You don’t even have anecdotes just ad hominems. I’ll take the ad hominems if you also have some data, even anecdotes. And if the ad hominem is funny I’ll even chuckle.

    steve,

    Taxes are frozen. Health care reform dies. Now, who is going to buy your stuff? With what? You go ahead and invest away and turn out more widgets. Where does the demand come from? People are broke and in debt.

    You’re right, lets just all roll over and die.

    Actually a recession can be a good time to start a business. You can often find good deals for many things since the economy is in the crapper. Note the last 3 paragraphs in the OP’s quote. Small businesses often provided the early job gains, usually pretty soon after a recession ends. We have guys like Drew out there who are putting the deals together. And not everyone is broke, and debt isn’t always bad.

    sam,

    Note the timeframe: the last decade. Those years cannot fairly be characterized as reflecting leftist policies, can they? I mean, the Republicans and their rightest policies were dominant then, correct? How to explain the last decade from your point of view?

    You do realize that Dave sees the above as a “bad” thing. And Drew has already said he has no truck for Bush’s ginormous spending. Hell, I’ve argued I think Bush is more accurately described as a liberal…at least when it comes to spending. Socially conservative, fiscally liberal…an anti-libertarian if you will. Drew hasn’t come out saying he is a libertarian, but I think he has strong leanings in that direction.

    Not much for Drew to explain then.