The BBC reports that France is set to impose a carbon tax. Unfortunately, there is no discussion in the story of cutting other taxes. The goal of Pigovian taxation is to switch toward more efficient taxes, not to raise the overall tax burden.
Update: The Post reports some good news: "the government expects to raise euro 3 billion, which will be entirely returned to households and businesses through a reduction in other taxes or repaid via a so-called 'Green Check,' Sarkozy said."
Thursday, September 10, 2009
Judging Downturns II
In response to my previous post, an economist at a financial firm emails me the following analysis:
I am following the discussion on measuring the severity of recessions.
I prefer the unemployment rate for historical analysis. In olden days, it was likely better measured than real GDP. And before 1947, there is no quarterly real GDP. We have plenty of data on industrial production, but as the US becomes less of a manufacturing economy, its relevance is fading.
The point a reader raised about changing composition of the labor force is good. We can adjust for that. The CBO creates a quarterly estimate of NAIRU going back to 1947. The changing composition of the labor force is reflected in the estimate of NAIRU.
The first chart below compares the unemployment rate (quarterly average) with the CBO's NAIRU estimate.
If we combine the 1980 and 1981-82 recessions into one super-recession, the rise in the unemployment rate was 5.0 percentage points, slightly bigger than what we have seen so far.
Finally, critics like to make remarks that the US has artificially reduced its unemployment rate by putting people in jail, claiming that those people would otherwise be unemployed. First, there is no evidence they would be otherwise unemployed. But more important, secondly, the total institutionalization has not changed. Mental hospitals have been emptied out. Sad to say, many of these mentally ill people are in jail. The point is that the sum of all institutionalization is probably stable. As for comparing the US to Europe, many European countries reduce their unemployment rates by putting the long-term unemployed on disability, so they drop out of the labor force.
Bad as things are now, they don't feel as bad as in 1982. With good reason. The ratio of employment to working age population for those 20 years old or older has fallen a lot, from a peak of 65.4% in Q1:2007 to 62.0% in Q2:2009. But by contrast, in Q4:1982, that ratio was only 58.9%. In recovery, the rate did not hit 62.0% until mid-1986. Our current bad rate is the same as a good then-record high in 1986. More people working is a type of income insurance.
I am following the discussion on measuring the severity of recessions.
I prefer the unemployment rate for historical analysis. In olden days, it was likely better measured than real GDP. And before 1947, there is no quarterly real GDP. We have plenty of data on industrial production, but as the US becomes less of a manufacturing economy, its relevance is fading.
The point a reader raised about changing composition of the labor force is good. We can adjust for that. The CBO creates a quarterly estimate of NAIRU going back to 1947. The changing composition of the labor force is reflected in the estimate of NAIRU.
The first chart below compares the unemployment rate (quarterly average) with the CBO's NAIRU estimate.
The second chart shows the difference between the two series:
As of Q2:2009, the gap is just a touch lower than in Q4:1982. The gap is likely to expand for two or three more quarters, making it the worse gap of the post World War Two Period.
Another way to gauge the slack is to focus on a single demographc. Let's take married men, spouse present. They are the most stable segment of the labor forcce, and here is their unemployment rate: 
It has been terrible this time, but not as bad as the early-1980s. Why this time seems worse is the unemployment rate for teenagers is a record high. I think we should give some blame to 3 consecutive annual hikes in the minimum wage.
A final way to compare the rise in the unemployment rate from bottom to top; the dates of the cycle in the unemployment rate need not coincide with NBER peaks and troughs. Here are my calculations for real GDP and the unemployment rate. 
If we combine the 1980 and 1981-82 recessions into one super-recession, the rise in the unemployment rate was 5.0 percentage points, slightly bigger than what we have seen so far.
Finally, critics like to make remarks that the US has artificially reduced its unemployment rate by putting people in jail, claiming that those people would otherwise be unemployed. First, there is no evidence they would be otherwise unemployed. But more important, secondly, the total institutionalization has not changed. Mental hospitals have been emptied out. Sad to say, many of these mentally ill people are in jail. The point is that the sum of all institutionalization is probably stable. As for comparing the US to Europe, many European countries reduce their unemployment rates by putting the long-term unemployed on disability, so they drop out of the labor force.
Bad as things are now, they don't feel as bad as in 1982. With good reason. The ratio of employment to working age population for those 20 years old or older has fallen a lot, from a peak of 65.4% in Q1:2007 to 62.0% in Q2:2009. But by contrast, in Q4:1982, that ratio was only 58.9%. In recovery, the rate did not hit 62.0% until mid-1986. Our current bad rate is the same as a good then-record high in 1986. More people working is a type of income insurance.
Wednesday, September 9, 2009
Judging Downturns
A teacher emails me a query:
I am a U.S. history teacher and an avid reader of your blog, and I have a question which you might want to address (again) in your blog. I came across a story saying that we were coming out of "our worst recession since the 1930s." This strikes me as curious, considering our unemployment levels are not as high as the 1982 recession, I don't think. By your reckoning, assuming the worst has passed, has this been the worst since the 1930s? That raises a bigger issue:what standard should one use to "judge" a recession?
There is no right answer to this question, as various macro variables reflect economic conditions, and they do not move perfectly in lockstep. But a very standard metric is the peak-to-trough decline in real GDP. The chart above, from Donald Marron, shows that by this measure, the current recession is the worst since the Great Depression, as as long as you exclude the return to trend after the World War II boom.
Note that the phrase the worst since the Great Depression may inadvertently lead the reader to think that we are somehow getting close to the Great Depression in severity. As the chart shows, that is not at all the case.
One might wonder why the unemployment rate was higher in the 1982 downturn if that recession had a smaller decline in GDP. Part of the answer is that the 1982 recession followed closely after the 1980 recession, from which the economy had not fully recovered when the next downturn began.
Update: A data junkie who reads this blog emails me some conjectures about why unemployment is lower now than it was at the end of 1982:
All intriguing ideas. Thanks.I believe that a large part of the answer is the aging of the workforce. Unemployment rates are much higher among younger workers, so it takes a much larger downturn today than it did in 1982 to generate the same unemployment rate.
For example, the August 2009 unemployment rate was 9.7, while the rate was 10.8 in December of 1982 - the worst year of that recession. However, if you take the age-specific unemployment rates for persons age 16-19, 20-24, 25-34, 35-44, 45-54, and 55+ in August '09 and take a weighted average, weighting by these groups' labor force shares in December of 1982, your new "simulated" August 2009 unemployment rate is 10.9. In other words, if the age distribution of our labor force today looked like the age of the labor force in 1982, but we still had our current age-specific unemployment rates, overall unemployment would be worse now than in 1982. Obviously, this assumes that the age distribution of the labor force does not affect age-specific unemployment rates (not true!), but it's a nice way to show that this is an important factor.
The U.S. also incarcerates many more persons today than it did back in 1982 (1 in 100 according to a famous Pew estimate). Many of these persons would be unemployed if they weren't behind bars.
Field Research in Economics
Click here to watch talks given this past summer at the NBER by John List and Michael Kremer.
Speech Review
"Inspiring."
That's what I was told about the President's speech to schoolchildren when I asked my favorite 5th grader about it last night at the Mankiw family dinner table. He even recounted the story of young Barack Obama having to wake up at 4:30 am for his lessons.
Good job, Mr. President.
That's what I was told about the President's speech to schoolchildren when I asked my favorite 5th grader about it last night at the Mankiw family dinner table. He even recounted the story of young Barack Obama having to wake up at 4:30 am for his lessons.
Good job, Mr. President.
Tuesday, September 8, 2009
Saving the Capitalists from Capitalism
Insights from University of Chicago economist Luigi Zingales:
We thus stand at a crossroads for American capitalism. One path would channel popular rage into political support for some genuinely pro-market reforms, even if they do not serve the interests of large financial firms....
The alternative path is to soothe the popular rage with measures like limits on executive bonuses while shoring up the position of the largest financial players, making them dependent on government and making the larger economy dependent on them. Such measures play to the crowd in the moment, but threaten the financial system and the public standing of American capitalism in the long run. They also reinforce the very practices that caused the crisis. This is the path to big-business capitalism: a path that blurs the distinction between pro-market and pro-business policies, and so imperils the unique faith the American people have long displayed in the legitimacy of democratic capitalism.
Unfortunately, it looks for now like the Obama administration has chosen this latter path.
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