Arnold Kling  

Is the Recession Over?

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Information Goods and Income D... Vacation until August 17...

I say that the recession continues, according to an indicator of capacity utilization in the labor market.


From March of 2001 through November of 2001 -- the respective dates for the beginning and the end of the recession, according to the NBER -- labor utilization fell from 97.8 percent to 94.5 percent. Since November of 2001, labor utilization has plunged still further, to 90.3 percent in July of 2003.

I describe this as a "productivity-cushioned recession." Coincidentally, the latest figures indicate remarkably rapid gains in productivity. Bruce Bartlett remarks that this is evidence that the New Economy lives.

For Discussion. Is the utilization of labor an indicator that deserves more focus?


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CATEGORIES: Macroeconomics



COMMENTS (10 to date)
Don Lloyd writes:

The idea that measured productivity increases are an indication of all problems being about to be solved is absurd.

High rates of productivity growth are primarily a signal that corporations have given up on the hope that their existing production capacity and labor force will prove to be of any value in the forseeable future. At best, it may indicate that we are closer to the point that widespread final liquidation of useless corporate shells will begin, unlocking and repricing the resources that will fuel the next expansion.

While it is certainly true that ongoing productivity improvements are part of any modern market economy, and improve general standards of living through lower prices, if the lower prices are not hijacked by monetary supply inflation, the improvements are generally no more a source of corporate profits, than they are a cost of business survival. This is because most productivity enhancements are widely available to all competitors and the gains are usually competed away as all competitors must make significant investments. This effect is greatly increased by antitrust policies which prevent favorable business combinations.

Regards, Don

Eric Krieg writes:

It seems pretty logical that we are in a productivity cushioned recession. This recession started like no other, being that it was a business investment led recession, not a consumer led recession. Business investment was misalocated during the bubble, and we are STILL working off that overcapacity.

But with that said, those productivity tools built up during the bubble are obviously still at work. Productivity grow unabated.

I find Arnold's policy conclusions uninspiring. The Fed already has its monetary foot to the floor. How much lower can rates go? And the last cut caused the yield curve to move in the wrong direction anyway.

I think monetary policy is done. Greenspan has done all he can do. Fiscal policy has to take the lead at this point.

And it has. Democrats hate the tax cut, but it is the right thing to do at this point in time. And the Democrats have certainly gotten their way spending wise. The spending is not to my liking, but it is the only thing proping the economy up right now. I can live with it for the near term.

Nublius writes:

I respectfully disagree with Eric Krieg's view on fical policy. Spending on the wrong things cannot be a good thing. How might an Austrian Econonmist explain this?

Imagine Robinson Crusoe had a neighbor on an otherwise-deserted island. Imagine too that he has a small amount of savings (15 days of berries), and is looking for a good investment.

He could:

a) save the berries for a rainy day (make jam)
b) use the spare time the berries afford him to build better tools for farming or hunting
c) fund his hungry neighbor to build tools (his neighbor is much better at this than he)
d) fund his neighbor to make 100 funny-looking sock puppets

From the viewpoint of Robinson Crusoe's neighbor, a fiscal policy that follows idea (d) might sound silly, but if he were being paid lots of berries for easy work, it might be "the only thing propping the economy up right now".

My point is that while Robinson's neighbor might sign-up to produce these sock puppets, the economy of the island will not be improved. In fact, there is an opportunity cost. Rather than using the surplus of berries to finance a project that might increase the standard of living on the island, both inhabitants squander an opportunity.

-Nublius

Eric Krieg writes:

Somebody shoot Crusoe already!

Look, we had 2.4% growth last quarter, and it would have been 1.4% growth without the government spending. I don't dispute that in the long term much of this spending is counterproductive, or that the government can increase spending faster than the economy is growing. But in the short term, it is all that we have going for us.

Sameer Gauria writes:

Eric,
I feel that just because the growth rate was improved, it does not mean that the tax rate was improved. The tax cut may have improved the growth rate in the short term (until the next election :), but will probably not be the best thing to do in the long run. Anyway, this tax cut is at the expense of a increased deficit, which means that it is just postponed tax.

Eric Krieg writes:

>>I feel that just because the growth rate was improved, it does not mean that the tax rate was improved.>The tax cut may have improved the growth rate in the short term (until the next election :), but will probably not be the best thing to do in the long run.>Anyway, this tax cut is at the expense of a increased deficit, which means that it is just postponed tax.

Derek Moeller writes:

Toward the end of the 1991 recession, productivity skyrocketed. Many hoped this was a resumption of 1950-1970 productivity rates. Robert Gordon (of Northwestern) argued that it was only an idle labor force retained by companies being charged with new work. He was right: after that one year, productivity fell in line with relatively slow improvements (~1-2%).

Could we be in the same situation today? Our unemployment rate only increased a few percent, so it's possible that there are quite a few employees who are being retained but not doing much work. As the economy slowly revives, companies can merely increase their employees' utilization instead of expanding the workforce. The result is perceived increases in productivity. Indeed, with the last number of 44,000 net job reduction, that effect could be powerful enough that companies can simultaneously lay off workers and increase the workload for the remaining ones while GDP grows.

mcwop writes:

One might argue that over the long-term, the one area of government spending that has actually contributed to the economy is the Military. The Internet and GPS are but two of many technologies tied to the military.

Nublius writes:

Eric,

I'll ignore your well-thought rebuttal to the Robinson Crusoe analogy. Your counter-argument is too formidable.

As for your next comment:

>>Look, we had 2.4% growth last quarter, and it would have been 1.4% growth without the government spending.

Eric, I think you would benefit by reading what Frederic Bastiat had to say about what one sees and what one doesn't see.

You're counting the 1% of government-induced growth (what is seen) as if the government created the capital used to fuel that growth. What you don't see (or are forgetting about) is that the government had to get that capital from somewhere.

You're ignoring the fact that in the absence of this confiscation, the capital still would have been available for investment (what is not seen) - though in the hands of people with a bigger stake in it's allocation.

Eric Krieg writes:

>>I'll ignore your well-thought rebuttal to the Robinson Crusoe analogy. Your counter-argument is too formidable. >You're ignoring the fact that in the absence of this confiscation, the capital still would have been available for investment (what is not seen) - though in the hands of people with a bigger stake in it's allocation.

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