demandside

Plus concerns from Roubini and Schumer in February are better than today’s notices from the Treasury.

NBER - the National Bureau of Economic Research called the recession officially this week. More precisely NBER’s Business Cycle Dating Committee came out with the announcemtn Monday that the current recession began in December 2007. Why so long?

Jeffrey Frankel of Harvard, one of the committee’s members suggested on his blog

One short answer is that our job is to be definitive, not fast. GDP and other government statistics are often revised after the fact, for example. We don’t want to have to revise our dating of the peaks and troughs later, in part because it would sow confusion among those who rely on them.

Phooey. Rely on them for what? Frankel goes on to talk about how the peak was difficult to define because different indicators gave different signals. Calculated Risk has had up the “likely recession” bar on all its charts for eight months. Demand Side put the recession’s onset one month earlier, at the first of November, and I believe ours is still more accurate. Gross Domestic Income peaked in the Third Quarter of 2007. The original credit crunch began in August.

The reason for the delay from NBER was simple politics. It was a presidential election year. The official word of “recession” had to wait until after the election so as not to weigh too heavily on the incumbent party. Martin Feldstein, former NBER director, was a key John McCain supporter.

As it was, of course, the collapse of the economy occurred in full view. McCain parachuted into Washington late in the campaign to avert an economic catastrophe and save his chances for the presidency. He accomplished neither.

The NBER announcement comes, of course, far too late to support anti-recession efforts by policy-makers. One must only be happy that austere group is not tasked with calling floods or hurricanes. But they were not alone in their slowness. It was late into June that more than fifty percent of economists and one hundred percent of Fed governors still claimed no recession.

The recession as calculated by NBER, which means an OFFICIAL recession, is not the two quarters of negative GDP growth or equivalent in other metrics as many or most have suggested ad nauseum. The NBER recession is the period between a peak in economic activity and the trough. It is followed by a recovery. That is all. Recessions and recoveries. No stagnations, stagflations, booms or busts.

Thus it was not necessary to forecast any GDP numbers, it was only necessary to see that economic activity had reached a peak it would not be seeing again any time soon.

We’ll revisit this recession - recovery again, but right now I want to give you Jamie Galbraith’s answer to the question, “Is the deficit a threat to future recovery?” Jamie Galbraith is the son of the great John Kenneth Galbraith and a leading economist in his own right today, based at the University of Texas and in the Obama camp.

I want to introduce Professor Galbraith’s response with a clip from Bloomberg’s First Word featuring retail analyst Howard Davidowitz, speaking about the troubles in the retail sector. I do this not to be alarmist, but to emphasize the death of the consumer and some of the effects.

DAVIDOWITZ

Now back to Professor Galbraith. “Is the deficit a threat to future recovery,?”

http://economistsview.typepad.com/economistsview/2008/12/is-the-deficit.html

No. The question is grossly misconceived. Right now and for the immediate future, the budget deficit is the only source of demand that can fuel a recovery. Our present problem is not that it is too big, but that it is too small. Far too small.

In principle, economic growth can come from household consumption, business investment, government spending, or exports. This is a tautology, indisputable and known to everyone who has ever opened a textbook….

[T]he entire private sector, across the entire country and indeed the world, is pulling the economy downward at the present time. … [A]s consumption, investment and exports decline, so will tax revenues. The government budget deficit is destined to rise, by a lot, on this account alone. This is helpful: a falling tax burden in a progressive tax structure keeps money in private pockets. But it is a weak device to promote expansion, since tax savings will be used first to try to pay down debt… A major tax cut, focused on working Americans such as by remitting the payroll tax, would help sustain after-tax incomes and provide funds to pay mortgages and buy cars. But even these effects are uncertain in a debt deflation.

In these conditions, only government spending can pull the economy out of the ditch. Government must spend. It must do so by as much as necessary in order to maintain a high level of employment. Aid to states and localities, an infrastructure fund, increased social security benefits, foreclosure relief, loans or grants to industry, a green jobs program — all can be useful in coping with the crisis. All will, of course, add to the public budget deficit.

…

Will the projected future deficit “crowd out” future private investment as so many claim? This is absolutely improbable. To the contrary, a successful program of public expenditure will create profit opportunities that will encourage private businesses, many of which will otherwise close, to stay open and eventually to expand. A general improvement of economic conditions can only lower, not raise, the presently prohibitive risk premiums on interest rates being charged private borrowers! There is no way that present or future public spending, even in very large volumes, would under these conditions raise long term interest rates generally by enough to offset the positive effects of an increase in activity and a reduction of risk. Quite the contrary! Public spending will crowd in, not crowd out, private investment.

…

Whether they know it or not, those who argue a “crowding out” model are working from a mental construct under which the economy is always operating at or near full employment, and under which there is a fixed supply of credit resources, a pool which government and the private sector must share. This is not the case! We are far below full use of available resources now and will certainly fall very much farther in the months ahead… And there is no fixed pool of credit! The entire purpose of the capitalist banking system under the Federal Reserve Act, ever since 1913, has been to create an “elastic currency” not subject to fixed limits to the supply of finance. With due respect to those who continue to have reservations about “crowding out”, please stop. This is a moment when an unfamiliarity with the most basic economic and financial facts can be very dangerous to national well-being.

…

and he goes on. The link is up with the transcript.

Now I hope you don’t mind a little I told you so-ing in honor of the NBER’s calling of the official recession. I’m going to play a bit from February and March, and a bit from Demand Side, but also from Nouriel Roubini and Senator Charles Schumer. Predicting a recession can be relatively benign, but here are people predicting something much more serious. And I think we see it coming to fruition.

FIRST SEGMENTS.

 Standard Podcasts: Play Now | Play in Popup | Download | Hits (235)