Unemployment and recovery: debating the future

A conversation over at PEF, instigated by Jim Stanford’s modeling exercise with respect to what the future holds for unemployment, prompted me to put down some of my thoughts about the future path of economic growth. On commentator suggested that the Jim’s numbers were too pessimistic based on the experience of the past two recessions. I argue the past recessions will not be a useful guide and here is why:

Three years forward and it is anyones guess what monetary policy is going to be and a strong case can be made that some form of restraint will be in the works whether in monetary or fiscal form. I don’t think the last recessions are going to be a very good guide to, or even educated guess about what, we can expect over the next three to five years. I would make the following seven conjectures.

1) There is not any  post-NAFTA bounce this time around, either in terms of the optimism it generated in investors’ expectations or in the “easy” forms of continental rationalization it made possible.

2) The US is going into major deficits these will have to be paid for through some form of restraint –higher interest rates plus higher taxes and or spending cuts. So hard to see a Clintonite gilded age of surpluses along side of tax cuts. Much the same this side of the border although more muted.

3) The bubble was a financial bubble not simply confined to housing or the US. It was that bubble that generated the fantastic growth numbers that brought structural unemployment down towards, but never reaching, post WWII golden age averages. That bubble also generated the terrific commodity price boom through several linkages.

4) The bursting of the bubble undermined the faith in high degrees of leverage. It was that leverage which enabled the neoliberal consumption miracle.

5) Mainstream economists may still have faith in the “efficiency” (not in the tautological sense of the EFMH) of financial markets. But it is going to be a long time before that degree of faith is restored in investors’ eyes and even then it is hard to imagine a repeat of the heady days of 2001-2006/7 in our life-time.

6) Insofar as this is shaping up to be a generalized (international) recession, the spatial and temporal dynamics are going to be very different. It is not going to be possible to play the game of export to the hot demand zone. We are going to be trying to export our way to growth. There is a compositional fallacy involved here.  This will either degenerate into a beggar-thy-neighbor game or its opposite which is not a positive sum game either. Rather, it is a cut throat competition game played-out in putatively “free” markets

7) Policy makers on both sides of the line are looking for one-off spending programs which deliver fiscal stimulus that has the following exotic properties: (a) to stimulate the economy over the short-term with no medium to long term liabilities in terms of taxes or debt i.e., which do not permanently alter the weight of the state in the economy; (b) which preserves jobs and (c) which lays the foundation for a future round of growth based on high productivity. I would like to be 7 feet tall and I wish them the best of luck in their endeavors.

Taking 1-7 together we get a recipe for the more somber form of neoliberal macroeconomic policy where the costs of adjustment are forced onto subordinate classes sans the prospect of an eventual orgy of consumption to wash the pain away.

Put less colorfully, the future looks more demand and supply constrained than the past and the current ideological policy fashion is still fascinated with last seasons dogma.

In a nut shell Jim’s numbers just might be too optimistic.

I know it is ugly and self serving but I won the de-linking debate

The BOC thinks Canada is in a recession and this comes just two months after the US was in recession so I have to say I won.   Now the critics  will say sure you were right but you never said why you were going to be right,  so you were wrong ( the critics are still in denial about unemployment).  To that I will only reference what I said at the time.  What did I miss?

De-linking has been revealed as a fantasy for china too.  This is the mother of all fears.

Her Majesty the Queen of England wants to know!

Ok this is just too fun to pass up.  The FT is reporting that the Queen paid a visit to the London School of Economics (LSE) and asked the economists in attendance the rather whithering question:

Why did no one see it coming?

Yep, that is just how bad the state of the arts is in that profession.  The good news I suppose is that they are busy fixing it: the economists and the MBA’s that is.  What is the plan? Social credit of course!  This would be much more fun if so many innocent people were not getting hurt.

The vision thing

By Chris Giles,

Published: FT November 25 2008 20:24 | Last updated: November 25 2008 20:24

It has been a bad year for economic forecasters. So bad that royalty wants to know what went wrong. “Why did no one see it coming?” Britain’s Queen Elizabeth asked during a visit to the London School of Economics this month.

Her Majesty’s question has sparked a series of ludicrous claims about the prescience of individual forecasters.

Just another late night early monday morning bail-out: Citi-group gets what autos don’t

The good thing about being a major Banker is that you don’t have to fly to Washington hat in hand begging for money. Washington will fly to you with suitcases stuffed with money. Not only does this help avoid the embarrassing costs of private corporate jet-time but it also avoids all those nasty public questions.

“Hi we are Citi bank and we are too big to fail…yes yes yes we will see you at 10 pm tonight…whats that? you are arriving on the first commercial flight from Washington…oh I see you are just going to walk across the street.”

The US government rode to the rescue of Citigroup, entering an agreement to guarantee up to $306bn in problematic assets and inject $20bn in capital to restore confidence in a bank that defines the term “too big to fail”.

The question is how many IOUs or SYAs can the US Government write with credibility?

The Coyne Affair: the Political Autonomy of the Bank of Canada (BOC)

No not that Coyne the other Coyne: James Coyne the governor of the BOC from the mid 50s to the start of 60s.   Given I was not even born yet why do I care?  There was a presentation at Laval today by one Mr. Schembri who argued that when push came to shove with the government of the day over monetary policy Coyne got the heave ho.  Nothing controversial there.  Coyne did resign.  But it was the conclusion of the speaker I found a trifling…well let us just say… sans thought.

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His conclusion (almost always a he) was that the Coyne affair proved that, in dire straights, the government controlled monetary policy.  For the life of me I could not figure out why this warranted two hours of the audiences’ time.  Any run-o-the-mill political scientist or constitutional scholar could have told you that.  Neither in the BNA of 1867 nor in the Charter of the early eighties is the BOC mentioned.  Nor does the BOC have any status in constitutional convention.  Simply put, the BOC exists as a beast of simple legislation. As such, it serves, as it were; at the leisure of legislature (after all we are talking about a parliamentary system here).

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So why had Mr. Schembri schlept all the way from Ottawa to point out the painfully obvious–painfully obvious I might add because even sans the Coyne affair he could have made the same point given the legal status of the BOC?  The economists in attendance were of course in some other worldly ontology:  had the government of the day–armed with data hindsight and the latest and greatest data manipulation techniques–been right?  That was their murder mystery.

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Mine is of another dimension in the time space continuum that counts as legitimate scholarly inquiry (well that of course depends on who you talk to).  I was still trying to figure out why this Mandarin had made the trek north.  Surely, given Laval’s impressive faculty of law we had no need of him, his presentation, or the Coyne affair to clue us into the legal status of the BOC.  To repeat: the BOC serves at the leisure of the legislature.

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The plot thickens.  In the hollowed halls of central banking, outside of the ECB and its predecessor the Bundesbank, the BOC has been consistently ranked as one of the most “politically” independent central banks in the world.  Indeed in the annals of monetarism it was the BOC who blazed the failed trail of monetary contraction.  Volcker would come next and bathe the whole of advanced capitalism in the monetarist glow: a monetary induced recession of international proportion (as an aside, Volker is said to have commented in an off-the-hook interview with some friends of mine just how shocked he was at the tenacity of Canadian unions in the face of his cold bath: good on you comrades).

Yet from the time of Coyne’s dramatic resignation–he resigned because he would not serve the people as constitutionally sanctioned in law (oh well we all serve our own Gods I suppose…paging doctor Cromwell or is it St. Thomas Moore?)–to the present, the sitting government of the day has been more disposed to give the BOC “political freedom” rather than less.

And it is this empirical fact which the speaker was deafeningly silent on.  Since the Coyne affair the BOC has enjoyed more not less autonomy from the politics of the day!

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This is where the real action is: how is it that as an institution, despite its legal status and with the precedent of the Coyne affair to boot, the BOC has managed to increase its autonomy: despite enjoying no formal autonomy  in constitutional law?

Beg the obvious,  win the scorn: another day; another tantrum.

There is a spectre haunting the US which weighs on the US like…

No, not socialism: deflation.  The CPI fell by one percent in the US during the month of October.  For all those economic undergrads out there.  When you go to class tomorrow ask your prof two questions: (1) what he (or rarely she) thinks the NAIRU is for the US and (2) what the marginal productivity of capital is in the US.  Ask both questions again when the fed cuts to nominal interest rates to below 0.  When and if that happens ask a follow up question about the tax implications.  And if you want to be a real jack-ass about it ask your prof in the form of a multiple choice question.

But seriously if the NAIRU is good when inflation is positive it ought to be good when and if inflation goes negative.  The policy conclusion being that there are not enough price rigidities in the US economy.  Time to revamp industrial relations and legislate the unions and the welfare state back in no?  Think that is cheeky? Nope just the inverse of the cure for inflation.

Fed vows to fight against deflation

By Krishna Guha in Washington and Michael Mackenzie and Nicole Bullock in New York

Published:  Last updated: November 19 2008 21:33

The Federal Reserve will do whatever it takes to ensure the US does not fall into a deflation trap, its vice-chairman said on Wednesday, as US stocks fell to the lowest level of the financial crisis.

The comments by Don Kohn will reinforce expectations that the US central bank may cut interest rates again by as much as 50 basis points from the ­current level of 1 per cent in December.

Canadian House Prices: Mind the Gap

Now I am no housing market specialist but when I see a graph where real disposable income, real rent, the CPI and house prices all danced on the same floor until 2001and then suddenly the music stopped; or rather house prices started dancing to a new song, I cannot help but think that our housing specialists might be a little too sanguine.  If one takes a look at the regional data (only the national data is graphed below,  for the regional data see the CMHC web site) the basic picture at the beginning of 2008 looked something like a Bubble in the West, tapering to Hype in Ontario and looking somewhat reasonable in the East.   And prices seem to have moved accordingly.  Click here for a graph of regional house prices.

housing

The Effecient Market is Dead: Long Live the Effecient Market

Tallying both sides of the Atlantic there has now been of 3 trillion dollars in money pumped into the financial markets and the stock markets on both sides of the Atlantic are posting all time daily record gains.  Does this represent  a vote by capitalists in the affirmative or contra free markets?  Interestingly when the markets were tanking it seemed to be because the advanced capitalist governments seemed hesitant to massively interfere with the workings of the market.  3 trillion worth of intervention later and the markets have unanimously voted in favour of intervention.

The other interesting point to be made is that 3 trillion seems to be a useful measure (so far) of how sorely free markets got the prices wrong: or does it.  All the Efficient Market Hypothesis (EMH)  says is that prices represent all the relevant information available to economic agents at the time of transacting.  It says nothing about the quality of that information.

So rearranging: the EMH holds that shitty information will be as efficiently represented in price formation as good information and thus tells us nothing about whether prices reflect “true” prices, but, rather simply, and uselessly, that prices reflect all the shitty information that is available.  So in a perverse way had the markets not gotten prices wrong to the tune of 3 trillion then it would have been because markets were inefficient.  Give that man a Faux Nobel.

In this light we can make sense of the Mark Carney twist

The shocking truth about an IMF working paper: Labour market mobility in Canada

Travis Fast

Some mornings I wake up hoping that my capacity to predict the “robust” findings of liberal economists will have dissipated and that something counter intuitive and not part of the conventional liberal economic wisdom will appear. To that end I started reading through IMF reports this morning, hoping that I could not pre-scribe the predictable findings on central questions like the degree of labour mobility and its relationship to unemployment. To wit, I came across a working paper entitled Shocking Aspects of Canadian Labor Markets. Imagine my thrill. However, right from the summary I realized that the economists who wrote the paper fancied themselves as persons plain with whit and irony. The conclusion reads :

Labor markets within Canada seem to become more flexible as one moves to the
west. Migration plays a much more important role in labor market adjustment in the western
provinces than the Atlantic ones. Turning to the central provinces of Ontario and Québec, the
evidence suggests that Ontario has a significantly more flexible labor market than its
neighbor, consistent with microeconomic evidence on migration. Further analysis indicates
that migration appears to be the main process through which labor markets adjust over time,
with real wage differentials being a minor factor. Finally, the adjustment process appears
relatively similar across macroeconomic disturbances. In short, labor adjustment appears
very different east and west of the Ottawa river.

Shocking hey. The paper not only confirms liberal economists predeliction for blaming the victim but also the long held stereo-types in the Canadian body politic. And just how do they derive such a bold conclusion? Easy they construct their metric of labour mobility by dividing total net regional migration by total regional population. Eh voila, those bloody Eastern Canadians are a bunch of sedentary hillbillies who refuse to move to where the jobs are .

I have long been a skeptic of conventional economic wisdom; and even more so of conventional regional stereotypes so I decided to check the data. As far as the authors’ constructed metric of mobility goes it is correct. ‘Correct’ as in they got the numerator and the denominator right. But the metric is flawed. Why net migration? Surely the question concerning mobility is one of an individual’s willingness to leave the province or region . That is, what we want to know is how many persons as a percent of the total population are willing to leave their province of origin. How many persons who arrive in that region are of no consequence to the question of mobility because mobility is a question of the incidence of out migration. Net migration is therefore a lousy metric.

Let me hammer home this point with a little more force. Why should BC gain points on the mobility meter because there are more individuals entering the province than leaving? What do the truck-loads of senior citizens fleeing the Prairie winters have to do with labour mobility? ‘Nothing’ is the reasonable answer unless of course one is plumbing for a confirmation of the conventional wisdom.

The only reliable semi reliable statistic for mobility is out migration; flawed as it is. Why flawed you ask? for the reason just outlined above. Why should Saskatchewan gain points for labour mobility if the bulk of out migration is from the retirees moving to the relatively balmy lower mainland of British Columbia. Indeed, for these reasons we should be more skeptical of central and prairie province out migration figures as they do not distinguish between workers and retirees.

But let me run the the out-migration as a percent of total population for the regions as a metric of labour mobility. Below the regional statistics mirroring the IMF working paper on regional aggregations are presented.

What a difference a metric can make! By this metric labour mobility is higher in the East, lowest in Central Canada and middling in the West. All this of course makes very good sense to a Marxist or heterodox political economists. Labour is a special kind of commodity which is doubly free. Workers are free to contract with whichever employer they so chose but chose they must because they are ‘freed’ from the means of production at the same time. So within this frame one would be led to predict that even though the bonds of family, community and culture be strong there is simply no substitute for a job. That is, that individuals leave their place of origin at all is a testimony to the relative power of labour markets to “make all that is holy profane.” Thus, it is no surprise to Marxist economist that mobility should be greatest in the areas of relative economic stagnation and less so in those regions of relative economic stability. Indeed, it is but the history of immigration to Canada.

If we disaggregate the regions into their constituent parts the picture remains, by and large the same, although it is curious that central Canadian mobility rates, i.e., Ontario and Quebec, should be declining given that in the 2000s the hot labour markets are decidedly in the West. What then are the results of this brief study of mobility? The exact opposite of the conclusions drawn in the IMF working paper study. Labour mobility has tended to be highest in the provinces with stagnant economies and lowest in the provinces with stable employment. As the relative economic fortunes of the regions has shifted so too has the degree of mobility. Although this result is tempered by the most recent data. As labour mobility is highest in East despite the oil induced boom in GDP growth and lowest in the central Canadian provinces despite the decline of the manufacturing sector and aggregate unemployment rates. The east can be excused owing to the fact that an oil price led boom has not translated into a white hot labour market. That is, relatively high unemployment remains and that, as any Marxist political economist would predict, is a good determinate of outward-migration. That the Western provinces still place second despite white hot labour markets and central Canada still places third in the new millennium, is a plague upon all theoretical houses. So indeed there are, after all, some shocking aspects of Canadian labour markets to be explained.

Update

One possible explanation for the low mobility in Ontario could be its history of relatively high levels of employment which means that when workers are laid off they tend to be able to both qualify for EI and eventually find new employment in the province.  In any case, we would need better data to see what internal provincial migration looks like.  It could simply be the case, given the size and diversity of both Quebec and Ontario’s economy, that workers do not relocate to other provinces but relocate to to other regions within their respective provinces.  That is, surely moving from the Sioux to Toronto ought to count as mobile labour.

Loonie Must Fall

This note from the FT’s View of the day is worth reading.

View of the Day: Canadian dollar devaluation

By Carl Weinberg

Published: February 20 2008 14:36 | Last updated: February 20 2008 14:36

The Canadian dollar must be devalued, and quickly, says Carl Weinberg, chief economist at High Frequency Economics.

He points out that the currency has been pushed to record highs on the basis of anticipated oil revenues. However, he says, the windfall on oil exports – which are priced in US dollars, and thus decline in local currency terms as the “loonie” appreciates – must eventually be offset by losses on exports of manufactured goods and services.

“Those losses now exceed the windfall from oil exports, as last week’s report on Canada’s trade balance demonstrates very clearly,” Mr Weinberg says.

Click on title for full article