Arnold Kling  

The Economy and the News Cycle

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Friends of mine have asked me lately how badly President Obama's economic policies are working. My reply is that it is way too soon to tell.

I would expect that by now, the effect of Obama Administration policies on unemployment would amount to rounding error. Instead, I presume that most of the increase in unemployment over the past six months was "baked in" to the situation that existed last year. Some people forecast the high unemployment, and some people didn't, but that is neither here nor there.

The super-delayed stimulus might have nudged the unemployment rate up by 0.1 percentage points by driving up interest rates, and the anti-business rhetoric and uncertainty generated by aggressive Administration initiatives on health care and energy might have nudged it up by another 0.1 or 0.2. Maybe a really optimal stimulus would have instead nudged it down by 0.2 or 0.3. More likely, the difference between best case and worst case amounts to rounding error.

The problem that Obama has with the unemployment rate is one of perception. The news cycle has gotten shorter over the years. If a story is more than three days old, it is stale. Meanwhile, the economic cycle has not gotten shorter, so it still takes several quarters for the economy to change direction. In fact, if anything, it could be that as far as unemployment is concerned, the economic cycle has gotten longer: as our labor force becomes more heterogeneous, it takes even more time to redeploy people out of declining businesses and into expanding ones.

The same news cycle that gets impatient with wars that last more than a week also gets impatient with recessions that last longer than nine months. The economic cycle and the news cycle are out of sync.

In this video, John Taylor makes a similar point in passing. It is a fascinating lecture. In part, he champions the use of high-frequency data in macro, which, if it were useful, would help close the gap between the news cycle and the policy evaluation cycle.

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COMMENTS (6 to date)
fundamentalist writes:

Hayek recommended stimuli like those of Bush and Obama to retard growth in employment in "Profits, Interest and Investments." His thinking was that if consumer prices fell too low (and therefore profits were very low), the Ricardo Effect would persuade consumer goods producers to buy too much labor-saving equipment in order to boost profits. That could cause overinvestments in the capital goods industries and re-ignite the boom.

So Hayek recommended some form of stimulus to keep prices from falling too low. That would slow the recovery and the growth in employment, but he thought it would make the recovery more sustainable. However, the stimulus would have to occur at exactly the right time and go to exactly the right industries, which Hayek doubted was humanly possible.

shayne writes:

A pair of graphics just presented on CNBC this morning emphasized 2 trends in recent (post 1980) recessions: a. unemployment claims during recessions are tending to be greater and longer-lasting (the "jobless recovery" phenomena) in more recent downturns, and b. economic productivity has tended to be less impacted and faster to recovery than other artifacts (such as unemployment) of more recent economic contractions. (I haven't confirmed the data or other sources of the graphics, but I don't doubt the result.)

It seems that technology contributions to overall economic productivity are making a non-trivial impact on the nature of recessions/contractions at large. To an increasing degree, the "real" economy can continue to be highly productive even during recession, and unemployment rates are decreasingly relevant/valuable to economists in estimating the depth, duration or significance of economic downturns. This isn't much of a "stretch" - technology is providing the means for capital to be the more dominant determining factor of economic viability, relative to the labor factor dominance of the past.

MikeDC writes:

I'd be very interested to see the correlations between new revelations about the success/failure/nature of Obama's various policy initiatives and the stock market.

While I agree that the actual policies put in place have had little effect (yet), my suspicion is that these initiatives (which mostly seem to be flagging- thankfully) have generated considerable uncertainty about the business world we're going to see going forward. And in the long run, establishing a positive set of expectations about the business climate is the name of the game.

In short, Obama's tax, climate, international corporate taxation, and health care proposals have raised the reduced profitability and growth expectations, because it looked likely he might be able to ram a bungh of this garbage through. As his plans falter, long-run expectations for economic growth and profit are increasing.

I mean, isn't that entry level macro?

William Klein writes:

If Obama fails, the economy succeeds. If Obama succeeds, the economy fails.

Perhaps the only catastrophic mistake by Obama that the US cannot easily overcome over time,will be Sotomayor.

Mike Rulle writes:

I have thought exactly the same thing MikeDC has written. I am not an economist. But my impression is all of this is unmeasurable, even if "modelable".

MikeDC writes:

Were I still in grad school, and were betting markets robust enough, I'd test this hypothesis by comparing swings in futures contracts on the likelihood of the proposals being passed and swings in the stock market.

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