Category: Christina Romer

Political Promises

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February 28, 2016

Heaven on Earth

The tax and spending policies proposed by Presidential contender Bernie Sanders were “vetted” by economist Gerald Friedman.  David and Christina Romer review Friedman’s assumptions and methodology,  finding the former unrealistic and the latter flawed. Christina Romer was former chair of the Council of Ecomic Advisors during the Obama administration.

Friedman assumes that Sanders’ income redistribution policies will spur a lot of demand in the next decade, 37% more than the Congressional Budget forecasts.  Real GDP will grow by 5.3% per year (page 7), erasing the effects of the 2008 financial crisis. Friedman also thinks that the productive capacity of this country is far below its optimum.  Therefore, all that extra demand will not lead to increased inflation, which would naturally put a brake on economic growth.  Employment will increase by 26% from the 2007 peak and, magically, all that extra demand for workers will not cause an increase in wages and inflation.

On page 8, the authors provide some historical context:  “Growth above 5% has certainly happened for a few years, such as coming out of the severe 1982 recession. But what Friedman is predicting is 5.3% growth for 10 years straight. The only time in our history when growth averaged over 5% for a decade was during the recovery from the Great Depression and the years of World War II.”

While GDP growth averaged over 5% during the decade after WW2, it was erratic growth spurred on by the inability of many families to buy many household items during the war.  It included one recession as well as phenomenal growth of 13% in 1950, and is unlikely to be replicated.

But we want to believe, don’t we?

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Labor Force Health Report

Yes, we’re busy so who has time to look at a lot of data to understand whether the world will implode tomorrow?  As an indicator, the health of the labor market is pretty good.  To take the temperature of the labor market we can look at the ratio of active job seekers to job openings.  At an ideal level of 100%, seekers = openings.  In the real world, there are always more job seekers than job openings.  When the percentage of seekers to openings is 200%, it is almost certainly a recession.  The economy rarely produces levels below 150%, which means that there are 3 job seekers for every 2 job openings.

Looks pretty good on a historical basis, doesn’t it?

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Women in the Workforce

Fact Check: Women make less than men.  In 2013, the BLS published a survey comparing the full time wages of men and women in the general population and by race.  In 2012, median weekly earnings for women were 81% of men’s.  Black and Hispanic women were higher, at 90% and 88%, but this may be due to the fact that Black and Hispanic men make less than white men.

Education levels have changed dramatically.  In 1970, only 11% of women had a college degree.  In 2012, 38% did, just slightly below the 40% average for the U.S.  A 2010 BLS study found that, in 2009, median weekly earnings of workers with bachelor’s degrees were 1.8 times the average amount earned by those with a high school diploma.  (They are comparing a median to an average to reduce the effect of especially high incomes).

What the BLS notes is that “the comparisons of earnings in this report are on a broad level and do not control for many factors that may be important in explaining earnings differences.”  We will never hear that on the campaign trail.  Academic caveats do not get voters fired up to go out and vote.  If a candidate is running on a platform of fixing income disparity (Democrats), we will hear quoted the report with the most disparity.  Candidates running who claim little disparity (Republicans) will quote a paper whose statistical assumptions minimize income differences.

A more distressing trend is that older women are having to work longer.  8% of women worked beyond retirement age in 1992.  The percentage has almost doubled to 14%.  The BLS estimates that, in ten years, 20% of women will be working past retirement age.

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Oil Rig Count

Almost half of the oil and gas rigs in the U.S. are located in Texas.  The 60% reduction in Texas rigs reflects the decline in total rigs throughout the U.S., according to Baker Hughes.  Rigs pumping oil account for 3/4 of the rigs shut down.

The oil “glut” is only about 1.5 million barrels of oil per day, less than 2% of the 2016 daily demand of 96 million gallons barrels estimated by the IEA.  Fewer rigs reduce downward price pressures and lately we have seen crude prices rise into the mid-$30s. With a long time horizon of several years or more, a diversified mutual fund or ETF like XLE, VDE or VGENX would likely provide an investor with some dividend income and capital gains. Could prices go lower?  Of course. After falling more than 40% in 2008, the SP500 stood at 900 at the end of December.   Investors who bought at those depressed levels might have felt foolish when the index dropped another 25% in the following months.  Those “fools” have more than doubled their investment in the past 7 years, averaging annual gains greater than 12%.

Romer Regrets

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Jerry referred me to an article by Dana Milbank at the Washington Post, relating comments by the departing Christina Romer, Chairman of Obama’s Council of Economic Advisors.  According to Mr. Milbank, Ms. Romer said “she still doesn’t understand exactly why [the economic collapse] was so bad.”   Ms. Romer, well respected in her field, will probably share some of the blame for underestimating the deep structural weakness of an economy in which all the players had become over leveraged. In Ms. Romer’s defense, the cautious Federal Reserve, including the former chairman, Alan Greenspan, and the stock market underestimated the problem as well.  The Fed called for a recovery in the latter part of 2009.  The market’s rise from the March 2009 lows signalled the same outlook.  The stock and bond markets reflected the opinions of a majority of economists at investment houses, mutual funds, hedge funds.  How could so many educated people be wrong?

Ms. Romer is a proponent of Keynesian economics, a theory that government spending can offset the lack of demand in the private sector during recessions.  When John Maynard Keynes proposed his theory in 1930, his remedy of government spending was an antidote to smooth the regular ups and downs of business and economic cycles. In his theory, Keynes proposed that governments then run surpluses during good times to counteract the overly heated demand of the private sector.  As such, Keynes could not have imagined that governments would run up the large amounts of debt that they have in the past decades.  His theory was never designed for a recession or depression resulting from such a massive over-leveraging of both public and private debt.

Misjudging the scope and severity of the collapse of this asset and debt bubble led economists like Ms. Romer to think that Keynesian solutions like the stimulus bill passed in early 2009 would provide a substantial “kick” to the economy.  The stimulus bill has helped stopped the bleeding but the wound is deep.  Government tax credits for house and car purchases did little more than shift those purchases forward in time. Stimulus payments to states helped avoid state and local government employee layoffs – for a while.  They did nothing to fix the central problem:  businesses and consumers are paying down debt that they have spent almost a decade accumulating.  That de-leveraging is going to take time.

Economists who have a more classical view of the mechanics of commerce predicted that we might tip into a double dip recession, at worst, or a very slow “U” shaped recovery starting in 2010.  As a number of economic indicators turned positive in the early part of 2010, these same economists thought they might be wrong.  Some Keynesians felt vindicated as this economic data seemed to show that their model of government spending could shorten even a severe recession.

In February,  government deficits in Greece and several other European nations revealed the structural weakness of their economies and caused the stock and bond markets to question whether these smaller economies could withstand the relatively high ratio of government spending and debt as a percentage of each country’s GDP.  Germany, a paradigm of conservative fiscal policy, was forced to step in to help support these less fiscally responsible nations.  The European Central Bank, supported by the Federal Reserve, professed a firm support for the bonds of these weaker European nations.  With the magic that only central banks possess, the Federal Reserve pumped $1.2 trillion into U.S. government backed mortgage securities, signalling that it would not allow the newly recovering economy to fall back. In the spring of 2010, the market once again turned to the recovering economy.

Employment usually lags in any recovery and so many expected the unemployment rate to stay high going into the early part of 2010.  In April, after 8 or 9 months of expansion in the manufacturing sector and a recovering service sector, economists were expecting at least some reduction in the unemployment rate.  By late June and early July there appeared to be little increase in hiring.  Those who believed in a more traditional “V” shaped recovery began to have doubts and the market dropped to reflect these lowering expectations.

Week after week come conflicting economic reports, the Federal Reserve is running out of tools other than the rampant printing of money and the unemployment rate stubbornly hangs from the cliff of 10%.  Classical economic models seem to more accurately reflect the slow, tortuous climb out of the debt pit.

Decades from now, regardless of what happens, Keynesian economists will still profess that Keynes’ economic model was right – with perhaps a few modifications to their theory.  Classical economists who agree with the models of Hayek and Friedman will maintain that they are right – with a few modifications.  Fifty or a hundred years from now, our kids’ grandkids will get to do it all over again because too many policymakers would rather cling to their theories than learn from experience.