The "final" revision of Q4 GDP. The investment numbers were revised down a little bit.
|IV 06||I 07||II 07||III 07||IV 07||I 08||II 08||III 08||IV 08||I 09||II 09||III 09||IV 09|
|Gross domestic product||3.0||1.2||3.2||3.6||2.1||-.7||1.5||-2.7||-5.4||-6.4||-.7||2.2||5.6|
|Change in private inventories||-1.08||-.61||.32||.19||-.63||-.21||-1.25||.26||-.64||-2.36||-1.42||.69||3.79|
|Net exports of goods and services||1.94||-.29||.66||1.36||2.24||.36||2.35||-.10||.45||2.64||1.65||-.81||.27|
Incentives from unemployment benefits
Fraction of unemployed people who start working, relative to when they exhaust their unemployment benefits:Krugman is quoted here as suggesting that incentives to find jobs simply don't matter in a recession because there aren't jobs; this seems like a particularly bad case of failing to recognize the heterogeneity of an economy, which is particularly important for things of this sort. A lot of people are losing jobs, and a lot of people are starting jobs; the balance for the last year or two has been slightly toward the former, but there have been a lot of job offers being made and accepted, even in 2009. Further, I don't think anybody imagines that this is primarily a case of people watching TV until two weeks before they're offered a job and then finding a job as soon as they care to look for one; if you're offered a job that would pay 20% less than what you made at your last job and would be less interesting or prestigious, you're more likely to take it if you have two weeks of unemployment compensation left than if you have 20.
This brings me to the point that, this notwithstanding, it doesn't necessarily mean that unemployment insurance is a bad thing. To some extent, letting people look around for the right job, rather than simply the first one that's offered, will benefit the economy in the longer run. This will be less true, though, when people overestimate what they're likely to be able to find, as is frequently the case in recessions; a lot of computer programmers in 2001 thought they were worth a lot more than they were, and the same is probably true of construction workers and investment bankers right now.
Finally, note that this is a bounded rationality argument. Ideally, people would be funding this search time from their own savings, which would be put aside with the possibility of unemployment in mind; they would weigh the value of continued search against taking a job sooner. For unemployment insurance to improve efficiency by enabling people to remain unemployed longer, it has to be playing a role in which people are more or less desperate for a job when they don't have the checks coming in and are much less concerned when they do. If someone with savings and a clear assessment about the value of taking a given job at a given time turns down a job that he would have accepted if he weren't getting unemployment checks, then that's pure loss.
The FOMC statement, as revised:
Information received since the Federal Open Market Committee met in
DecemberJanuary suggests that economic activity has continued to strengthen and that the deterioration in thelabor market is abatingstabilizing. Household spending is expanding at a moderate rate but remains constrained by a weak labor markethigh unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contractinghas risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls . Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack continuing to restrain cost pressures and
withlonger-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve
is in the process ofhas been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt . In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these; those purchases are nearing completion, and the remaining transactions will be executed by the end of the first quarterthis month. The Committee will continue to evaluate its purchases of securities in light of the evolvingmonitor the economic outlook and conditions in financial marketsfinancial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
In light of improved functioning of financial markets, the Federal Reserve
will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announcedhas been closing the special liquidity facilities that it created to support markets during the crisis. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit wil be offered at the final auction on March 8. The anticipated expiration dates forThe only remaining such program, the Term Asset-Backed Securities Loan Facility remain set at, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral . The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that
economic and financial conditions had changed sufficiently thatcontinuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.
Agency Bounds on Firm Rationality
The events to be described here took place about six months ago, but it came up in conversation over the weekend, and I thought I'd share it here.
A very good friend of a very good friend bought a house. It was a short sale with two lien-holders — this had been an 80/20 deal — which you can imagine is administratively complex; the total debt was on the order of $350,000 — I don't remember the exact figure — and he and the seller had agreed to a price of $253,000. The primary lien-holder had signed off on an agreement allowing the second lien-holder to receive $11,500, while the second lien-holder had agreed to accept 5% of the sale price. 5% of $253,000 is $12,650, so they were a bit stuck.
The climax came when the buyer was in an office with his real-estate agent, on a speaker-phone conference call with lower-level employees of both lenders, neither with the real authority to renegotiate either agreement. In lieu of being able to negotiate, they began yelling at each other for a protracted period of time, over which it occurred to them that there was nothing in the agreements stipulating a minimum dollar value that either bank would accept. Accordingly, they lowered the sale price to $230,000, of which 5% would be $11,500, and the buyer walked away $23,000 richer.
Most of the time for most purposes, firms, especially large firms, tend to behave more "rationally" than individuals; commercial mortgage prepayments, for example, are much more sensitive to interest rates than you're average conforming home loan. There are certain important quirks of firm behavior, though, stemming from the fact that they are not really unitary actors, but collections of agents with varying knowledge and authority, and sometimes that results in firms acting clearly against their own interests.
Update: Felix Salmon suggests this may be rational behavior in a repeated-game, or (perhaps relatedly) an aversion to outcomes perceived as unfair in some sense. An interesting suggestion, but I think if the lenders' representatives had had the authority to change the deal to split the other $23,000 among themselves, they probably would have; this is a story of individuals doing what's easiest for them rather than their employer, partly due to constraints created (on some level) by the employer.
productivity, growth, employment, and Okun gaps
On some level, I think it is common sense that the path to wealth is to have people able to produce things as efficiently as possible. At least in the long run, I think a full and detailed understanding gives the same result. Most people seem to be stuck on a middle kind of understanding in which it seems as though inefficiency is good, and I think that's partly due to a fixation on the business cycle; if you have a three year time horizon and we're going into a recession, there may well be things you could give people to do that are better than unemployment, even if they aren't efficient, but in the long run it probably means they will be doing the wrong kinds of things, or doing them poorly.
A lot of the neoclassical assumptions about smoothly functioning and adapting markets hold fairly well in the long run, and if they held in the short run as well, I think this would be more intuitive to people: if you have a fixed number of people doing things, to a large extent the tradeoffs you make (on a societal level) involve whether those people are providing health care or building computers, and the fact that someone who works as a doctor can't then be an electrical engineer during that time as well. The most reasonable time not to think this way is during a recession — you don't, on some level, have a fixed number of people doing things; if you can turn an unemployed person into a doctor, you don't have to give up any computers. You'd have to have a pretty gloomy outlook, though, to think that the tradeoff doesn't exist in the long run, that the number of useful jobs will be essentially independent of the number of people in the labor market over long periods of time. (In fact, if you want to predict how many jobs the economy will create in the next year or two, you might get your best estimate from an economic model, but if you want to predict how many jobs the economy will create in the next two decades, I'd steer you to a demographic model. How many more people will want to be in the work force in 20 years than there are now? That's about how many jobs will be created.)
So here's the upshot: for most government programs — e.g. road building — the benefit is the obvious output -- more or better roads. "Jobs created" are the single biggest cost. If the road isn't worth that cost, you shouldn't build the road. It's not completely insane on a short-term basis during a recession to think that labor is less of a cost than it usually is, particularly if the people being hired are likely to be those who are currently unemployed and who are particularly likely not otherwise to become employed in the near future. It's entirely wrong, though, on a longer term. (This is the single biggest reason I roll my eyes when I hear about "green jobs". The environment is worth something, and it's worth paying for a better environment, but long-term employment in making the environment better is a cost, not a benefit, and needs to be recognized as such; "we take people out of other production and improve the environment" isn't win-win.) Even if politicians understand this, though, I never expect to hear them betray it, especially (again) during a recession.