Monday, July 5, 2010

Help Needed for the Economy

New York Times editorial "Help Needed for the Economy" (July 2nd, 2010) tries to worry people about a "double dip recession" without any cause to do so.
If the economy were a coal mine, the job market would be an 800-pound canary, warning of a recovery that is running out of oxygen.
Before panicking, let's remember that there have been approximately three double-dip recessions since the 1850's. In addition, let's analyze the job market in the most recent example: a recession that began in January of 1980, recovered for a year between July of 1980 and July of 1981, and then re-surfaced until November of 1982. What did the job market look like in the lull? Below, we plot the percentage change from the previous month in the unemployment rate from July of 1980 to November of 1981 (click here to expand figure).

There seems to be no evidence that the job market in any way predicted the double dip. The editorial seems to be a guess by the likely unqualified author that more economic trouble is around the corner. In addition, the article claims that
Republicans and several Democrats have made the argument that cutting the deficit is more important than spurring the economy. The argument is wrong — jobs and the resulting tax revenue are crucial to repairing the budget. But the Democratic leadership in Congress and the White House has been incapable or unwilling to successfully rebut the deficit-mongers.
Certainly this is not necessarily true! After a certain point, additional taxes only discourage people from working and lower total government revenue. Jobs created by the government require tax revenue from those already working. Taxing the productive sector, which indisputably creates lost surplus in the economy, in order to create jobs that the private sector may have created anyway had the government not interfered is extraordinarily unlikely to create gains in the economy. University of Chicago economist Kevin Murphy provides a very illuminating analysis of the parameters determining the success of the stimulus here. He finds that extremely optimistic assumptions (not supported by data) are needed in order to justify a government stimulus.

1 comment:

  1. I suspect that the high unemployment rate will not be the cause of a coming double dip recession but rather that the coming double dip recession and the current high unemployment rate are both being caused by the same sources. Current national economic policy - manufacturing trillions of dollars of stimulus that are poured down the endless resource consumptive drain of government, increased regulation and taxation with promises for much worse raises in regulation and taxation in the coming year, politicization and significant federal control over our largest banks (Citi, BOA), insurer (AIG), manufacturers (GM, Chrysler), nationalization of the student loan program, beginning the process of nationalization of 16% of the economy - is so terrifying anti-capitalistic, so flat-out socialistic that it necessarily impels businesses to view the future environment as quite risky, foreboding, and threatening - not a good time to invest. This has the consequence of retarding business activity and prolonging the Obama stagnation and ultimately the coming Obama stagflation.