Sunday, June 01, 2008

We Are Not in a Recession

Don't let them get you down

Alot of press over the last few months has talked about the US economic 'slowdown' due to the meltdown of the housing market. It should be noted first-off that bad news helps sells newspapers and gets people glued to the tube.

However, yes, the economy is slowed somewhat, but not, repeat not, to the point where we are in a recession. A recession is where growth is negative, but we still have positive economic growth. This fact should be made clear.

Another thing to note is that we have seen unemployment rise slightly. It is still way below 6% (and in fact is less than 5% in New York City). Workers thinks that when unemployment reaches 6% thats when we should worry about the economy, and not before. Places like France accept 10% unemployment because that is their historical path, their social culture and thus France accepts the factor rigidities built into their economy (well this may be changing too witness Sarkzoy's win). In the US we may have to accept the Welfare State and higher unemployment or learn to fight the encroachment of government stiffling economic activity in our lives.

Prior to the Hoover Administration of the 1920s the natural rate of unemployment in the US was around 2%. Then, with the growth of government and the Welfare State after World War II the natural rate of unemployment (note some people don't like the word 'natural' used in economics, so let's just call it the 'average') rose to around 6% due to the increased factor rigidities, eg the inability of jobs and monies to move from one economic opportunity to another because of government's increased percentage of the economy, both with government programs and government regulation. Despite thse rigidities economic growth and well-being grew at unprecedented rates in the latter half of the 20th Century. We went from a manufactoring economy to a service economy to our now mixed service-and-information economy. (However we still manufactor alot of materiel, this isn't 'outsourced' much.)

Under Greenspan's central bank and stimulated by the Reagan-era deregulation and a constant larger but not growing relative size of government, the average rate of unemployment crept down to 5%. Therefore, given the US's increasing Welfare-Warfare State we are again seeing (Homeland Security anyone?), it is safe to say that we may see an increase in the average rate of unemployment without a concumbent slowdown.

The new increase in factor rigidities may also mean that the average economic growth of the economy may be less over time as well. Especially as we are now seeing an over-reaction in regulation due to the government-caused housing meltdown and such counterproductive measures as bailouts of over-extended finance houses and mortgage payment amnesties and increased government-backed housing bond guarantees. These are the types of things which caused the recent problems in our financial markets in the first place and thus to the real economy and they should be discontinued not expanded. The US is still unique in our entrepreneurial culture, so a little (or alot) more government still won't cause a recession, it will just mean lower increases in standards-of-living (which hurts the poor most of all, as they need growth the most) and more unemployment.

Lastly it would be remise to talk about macroeconomics without mentioning the "aggregations problem." Government statistics are very arcane, and the methodology changes without warning, so perhaps no-one truly knows what is true. What is a crisis in one part of the country may not at all effect another part of the country. The old dumb saw that a recession is when your nieghbor loses her job and a depression is when you lose your job is probably a more sure way to measure what's going on.