Nate Silver: Double Dip or Not, Economy Is Falling Farther Behind

http://fivethirtyeight.blogs.nytimes.com/2011/08/04/double-dip-or-not-economy-is-falling-farther-behind/

by codex • 15 years ago

57 33 15 years ago

fivethirtyeight.blogs.nytimes.com

tomjen3• 15 years ago

Interesting way to look at the economy, but I am not sure I buy it since the growth since the last war was really fueled by the fact that only America had unharmed factories.

watmough• 15 years ago

So-called 'trend growth' has been fueled by fossil fuels, with massive increases in the ability to exploit oil fields quickly, occurring since the 40's.

Basically, civilization is a heat engine, where prosperity, power, industry is directly tied to how much energy we can burn. Increasing prosperity demands increasing energy.

In the case of the US, oil production peaked in 70's, and the US has struggled to increase oil supplies since then. The show-downs with OPEC in the 70's that led to bad recessions are an example of the struggles.

As of 2005, World oil production has been basically flat. There's plenty of oil left, the problem is that despite trillions of dollars of CAPEX, it just can't be pumped fast enough to support 6 billion humans at increasing living standards.

Hence, World prosperity is probably staying level, but redistributing itself Eastward towards Asia.

edit: Per NBC, there are 45 million Americans claiming foodstamps in order to feed themselves. That's a very scary contrast with how the US normally thinks of itself.

redthrowaway2• 15 years ago

>Per NBC, there are 45 million Americans claiming foodstamps in order to feed themselves.

That number is set to increase with severe cuts to entitlements and the unlikelihood of another extension of unemployment benefits.

Americans have really drunk the Kool-Aid on the notion of American exceptionalism. The idea that America is somehow special, possessed of some manifest destiny and unable to lose has been so deeply engrained in the American psyche, and for so long, that even now the notion of failure seems too fanciful to enter the common narrative. America is not special. It's been favoured by politics and luck, but there's nothing keeping it on top besides continued prosperity. Look at Japan for an example of what could easily happen: a high-tech economy with a massive banking and manufacturing sector, that collapsed then...never really restarted. There are, in fact, many parallels between the Japanese and American recessions. While Japan is still a massive innovator, the benefits have not trickled down to the average Japanese citizen. China long ago took over as the biggest economy in Asia, and could easily supplant the US globally if current trends continue.

To face these challenges, the US has...Congress. The leadership vacuum in Washington is downright depressing. Amidst bitter political bickering, the disaffected masses turn to the demagoguery of the Tea Party, further perpetuating the political morass. Can anyone see a viable, achievable solution? Cutting the deficit is critically important, yet any proposed method of doing so seems likely to hurt the economy at a time when it simply can't take it. Everything seems poised to get much worse before it gets better.

nhebb3• 15 years ago

While Washington was busy debating whether or not to sabotage the recovery by failing to raise the federal debt ceiling

Up to now, Washington has thrown every Keynesian trick in the book at this recession, and it doesn't seem to have had a substantial impact. I think the original stimulus would have had a better impact if it had included a lot more infrastructure investments than "give a man a fish" type expenditures. I'm not a student of economics, and I won't try to pretend to be one on this forum, but haven't we run out of Keynesian options if we want to continue with the current economic policies?

Nate Silver's leading line above makes me think of Germany [1]. They were the only government to take a position of austerity, were widely criticized for it, but they're the only major Western economy that rebounded from the economic crisis. The U.S. government, on the other hand, lacks the unity and political will to lead a turnaround.

[1] http://www.nytimes.com/2010/08/14/world/europe/14germany.htm...

sesqu• 15 years ago

It was recently argued that the initial assessment of the severity of the downturn was wildly off (by 4% of GDP), and that led to poor strategy formulation by Washington.

watchandwait2• 15 years ago

There's no strategy in Washington. Indeed, policy chaos caused by sweeping changes (both proposed and enacted) in health care, energy, financial, tax, and union rules have wrecked private business planning. America is being run like a banana republic, borrowing over 40% of its spending budget, randomly intervening in industries like auto, banking, and housing to reward political allies, and operating on a week-to-week horizon.

ekidd• 15 years ago

Up to now, Washington has thrown every Keynesian trick in the book at this recession, and it doesn't seem to have had a substantial impact.

I don't think this accurately represents the arguments of the Keynesian economists. Krugman, to pick an example, calculated that high unemployment rates would cause us to miss out on at least $3 trillion of wealth creation, and he called for about $1.5 trillion in infrastructure investment. The government would capture perhaps 25% of the restored growth in taxes, so the federal government would come out at least $750 billion behind. But in theory, America as a whole would be wealthier. (All numbers from memory.)

The actual "stimulus" consisted of about $700 billion, of which maybe $350 billion was actually spent on things that Krugman thought would help the economy. He predicted that this was far too small to have any real impact, and that we would therefore spend years in a weak economy. (We later spent additional money on unemployment insurance; I don't know how this affects the models.)

So while you could very easily disagree with Krugman's theory, his models accurately predicted the results of the stimulus: A minor, temporary boost that would be insufficient to actually fix anything. So at least one high-profile Keynesian called it correctly, although you might argue that he just got lucky.

Personally, I don't know enough economics to have an informed opinion on my own. But we have at least 15 million Americans who should be creating wealth, and who are currently sitting around doing nothing. I'd love to see that get fixed, especially because the last 20 years of Japanese history suggests that if we alternate between rounds of weak stimulus and austerity measures, we might be stuck in this economy for decades.

po2• 15 years ago

These are all great points. The White House has really done Keynesian economics a disservice by limping into it. Republicans are often labelled RINOs (Republicans in name only) by their own peers… Maybe we should start to use the (Keynesian)INO label.

It all goes to show what a bad job of negotiating the administration has done. In this case, as well as healthcare and the debt limit, the White House surrendered key parts of their plan in the name of compromise. In the end, the opposition still calls you a communist, god-hating country-wrecker either way so it would be better to get what you wanted. That being said, and given the language of the administration I'm not sure they buy into Keynesian economics anyway. They certainly are cozy with Wall Street and use the language and framing of austerity all the time.

Politics tends to distort the models so it is important to hold people to account. You might not like Krugman's politics but he does put himself out there and make predictions. Speaking of which, does anyone follow any economists who are proponents of austerity that makes falsifiable predictions? I still don't really feel like I have found a good writer on that topic to follow.

nhebb3• 15 years ago

I remember Krugman writing that a $1.5 billion stimulus was needed, but is a stimulus of that magnitude really feasible? We spent half that and had trouble with funding enough "shovel ready" projects. I think it's harder to infuse $1.5 trillion into an economy than he takes for granted, without pissing much of it away.

yummyfajitas2• 15 years ago

Just curious, could you provide a link to Krugman's predictions?

I'd be really curious to see how a Keynesian model predicted a GDP/production recovery with stagnating employment. I was under the impression that most Keynesian models assumed that employment was slaved to production.

fauigerzigerk• 15 years ago

The comparison with Germany doesn't hold water.

Germany did not have a property bubble and hence it did not have an outsized building sector crashing, taking huge numbers of jobs with it.

German households have been saving like crazy forever. They are not indebted at all. Germany does not have to fight a deleveraging spiral.

Germany did not have a huge current account deficit. It has a huge current account surplus meaning Chinese growth does the Keynsian stuff for Germany.

Germany has a permanent stimulus resulting from sharing a currency with the likes of Greece, Ireland, Portugal, Spain and Italy.

German companies fire as few people as possible in a recession. That's a huge Keynsian effect as well and one I don't see many US conservatives pointing to when they celebrate German austerity.

And by the way, German "austerity" comes in the form of a deficit north of 3 percent, exceeding the level allowed under the Maastricht treaty. In comparison to other countries that's still low, but it's not austere by any definition and it comes at a time when the German economy is booming.

Austerity is what the Brits do and look at their growth. It's around zero, worse than in the US.

krschultz2• 15 years ago

Austerity by the states and local governments has outstripped stimulus by the federal government. I find it hard to argue that 'we've thrown every Keynesian trick in the book at this recession', I would argue we haven't yet tried much Keynesian economics at all.

If you look at the job reports over the last year, more often than not the private sector was adding jobs while the government has been shedding jobs (first firing census workers - obviously that doesn't count, but then states and local governments contracting)

And you can make a fairly simple correlation between the winding down of the federal stimulus and the current feeling that we are going into a double dip.

I know you can look at this data and come to either conclusion (that we did a stimulus and we're not having a roaring economy now, or that we didn't do enough stimluus and we're not having a roaring economy now), and also that proving causation in economics is very hard, but I personally think that the economics show that the stimulus was too small while the politics show that the stimulus was too big.

yummyfajitas2• 15 years ago

Austerity by the states and local governments has outstripped stimulus by the federal government.

False. Total government spending (in $B):

    2006  $4698
    2007  $4926
    2008  $5335
    2009  $5896

http://usgovernmentspending.com/spend.php?span=usgs302&y...

(State and local numbers for 2010 are not yet available.)

inthewoods• 15 years ago

Not sure where you get that Germany has only done austerity - I believe Germany did have a stimulus equal to 1.5% of their GDP:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a...

Spyro72• 15 years ago

"They were the only government to take a position of austerity"

There are several problems with the hypothesis that Germany's austerity experience is broadly applicable.

1. Germany is an export-oriented economy operating within a currency union with countries that are less export oriented. This means that Germany has the benefit of an exchange rate that is lower than it would be if Germany was not a member of the Euro currency.

2. Germany did not actually take an austerity only approach:

http://www.guardian.co.uk/world/2009/jan/27/germany-europe

http://www.thelocal.de/money/20090724-20807.html

As far as Washington goes, our first stimulus package was shameful. Our nation's infrastructure is underdeveloped:

http://www.economist.com/node/18620944

Our electric grid is woefully inadequate:

http://ideas.economist.com/blog/us-electric-grid-gets-less-r...

http://www.infrastructurereportcard.org/fact-sheet/energy

Yet, about half of our $700 Billion USD stimulus went to tax cuts. Given the lack of evidence that economic output improved, it seems sensible to conclude that most of these tax savings went to either debt servicing or savings accounts, and I have no idea where the rest of that $700 billion went. It doesn't seem to have gone into any major infrastructure projects that I am aware of.

When your entire problem is a lack of economic activity, investments should be made that produce positive net benefits.

As a side note, to call Washington Keynesian is to fundamentally misunderstand Keynes. Truly Keynesian economic policy would not continuously run a budget deficit. A central tenet of Keynesian economics is that a Government saves when times are good and spends when times are bad. Washington spends when times are good and spends when times are bad.

Edit: Also, one thing that is very important to keep in mind is that the States have received only marginal amounts of assistance with their budgetary woes. With the States needing to balance their budgets on an annual or bi-annual basis, the net effect of the federal stimulus package may have been nothing:

http://www.thefiscaltimes.com/Blogs/Bartletts-Notations/2010...

When you include the states in the picture, maybe the U.S. is not as far from austerity as we would like to believe.

RyanMcGreal• 15 years ago

> Yet, about half of our $700 Billion USD stimulus went to tax cuts.

Right - tax cuts are not Keynesian stimulus spending by any sensible definition. Trying to stimulate a recessionary economy with tax cuts is like pushing on a piece of string.

owenmarshall• 15 years ago

>They were the only government to take a position of austerity, were widely criticized for it, but they're the only major Western economy that rebounded from the economic crisis.

Two problems:

1. As others have noted, Germany's approach can hardly be categorized solely as a position of austerity.

2. Germany wasn't the only major economy to implement austerity measures. The UK implemented measures more dramatic than Germany, and was widely lauded as the model for the rest of the world by American conservatives -- that is, until their economy dramatically contracted, and the conservatives suddenly forgot about them...

troymc2• 15 years ago

Fun exercise: If something grows at 3.5% per year, how long does it take to double in size?

Answer: About 20 years. The exact answer is ((log 2)/(log 1.035)).

kqr2• 15 years ago

A handy rule of thumb for doubling is 70/(rate of growth).

troymc2• 15 years ago

Yes... Unfortunately, some people think that's the correct way to calculate doubling time for all rates of growth. Some pop investing books even elevate that rule to some kind of magical status.

One way to see why it's a good approximation is to do a Maclaurin series:

(log 2)/(log(1+r/100)) = c/(log(1+x)) where c=(log 2) and x=(r/100)

= c/(x - [x^2]/2 + [x^3]/3 - ...) ~ c/x = 0.693/x = 0.693/(r/100) = 69.3/r ~ 70/r

jleyank• 15 years ago

Another concern might be that the jobs are (slowly?) (rapidly?) being created, they're just not being created in N. America. Growth might be suppressed until this trend reverses or new activity appears to soak up the unemployed.

bho• 15 years ago

Well, sure. As the economy moves to be more global, jobs previously held by the US are now moving to China. Just a few weeks ago Goldman Sachs announced layoffs in the US, but added jobs in Singapore and Brazil. This is only going to continue.

Nate Silver: Double Dip or Not, Economy Is Falling Farther Behind

Related Stories