Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Monday, August 07, 2006

*Sigh* It's Donald Luskin Time. It's Donald Luskin Time.

Every once in a while it is my painful duty to surf over to and document that Donald Luskin, who regularly trashes Paul Krugman in the "Paul Krugman Watch" column for National Review is... not an unarmed man in a battle of wits, it's worse than that... say merely that if he had a contest with Wile E. Coyote, Wile E. Coyote would emerge the clear winner.

So with enough Dutch courage in me to view the train wreck, I surf on over and find that today, August 7 2006, Donald Luskin is claiming that Paul Krugman "officially says [that a recession] is here." But Luskin's wrong. What Paul writes is:

Intimations of Recession - New York Times: The latest job numbers show falling employment in home construction, and retail employment has fallen over the past year, suggesting that consumer spending is running out of steam... neither business investment nor exports seem to be growing fast enough to make up for the housing slump. Now maybe we will still manage that soft landing despite a rapidly rising number of unsold houses; or maybe there is a boom in business investment and/or exports just over the horizon. But based on what we know now, there is an economic slowdown coming. This slowdown might not be sharp enough to be formally declared a recession. But weak growth feels like a recession to most people...

And I find Donald Luskin also claiming that Paul Krugman has declared that the U.S. economy is in recession "over and over during the past three booming years." He even provides links to three Paul Krugman columns:

The Conspiracy to Keep You Poor and Stupid: So I guess Krugman wasn't "serious" before, those times when he declared a recession over and over during the last three booming years (for instance here and here and here).

Of course Donald Luskin is wrong, again. In the first case Luskin points to, Krugman doesn't declare that the economy was then--summer 2004--in a recession. Instead, Paul says:

The Unofficial Paul Krugman Web Page: Summer 2004: When does optimism -- the Bush campaign's favorite word these days -- become an inability to face facts? On Friday, President Bush insisted that a seriously disappointing jobs report, which fell far short of the pre-announcement hype, was good news: "We're witnessing steady growth, steady growth. And that's important. We don't need boom-or-bust-type growth."

But Mr. Bush has already presided over a bust. For the first time since 1932, employment is lower in the summer of a presidential election year than it was on the previous Inauguration Day. Americans badly need a boom to make up the lost ground. And we're not getting it.

When March's numbers came in much better than expected, I cautioned readers not to make too much of one good month. Similarly, we shouldn't make too much of June's disappointment. The question is whether, taking a longer perspective, the economy is performing well. And the answer is no.

If you want a single number that tells the story, it's the percentage of adults who have jobs. When Mr. Bush took office, that number stood at 64.4. By last August it had fallen to 62.2 percent. In June, the number was 62.3. That is, during Mr. Bush's first 30 months, the job situation deteriorated drastically. Last summer it stabilized, and since then it may have improved slightly. But jobs are still very scarce, with little relief in sight.

Bush campaign ads boast that 1.5 million jobs were added in the last 10 months, as if that were a remarkable achievement. It isn't. During the Clinton years, the economy added 236,000 jobs in an average month. Those 1.5 million jobs were barely enough to keep up with a growing working-age population...

In the second example, Paul Krugman doesn't declare that the economy was then--spring 2005--in a recession. Instead, Paul says:

The Unofficial Paul Krugman Web Page: Spring 2005: In the 1970's soaring prices of oil and other commodities led to stagflation - a combination of high inflation and high unemployment, which left no good policy options. If the Fed cut interest rates to create jobs, it risked causing an inflationary spiral; if it raised interest rates to bring inflation down, it would further increase unemployment.

Can it happen again?

Last week fears of a return to stagflation sent stock prices to a five-month low. What few seem to have noticed, however, is that a mild form of stagflation - rising inflation in an economy still well short of full employment - has already arrived.

True, measured unemployment isn't bad by historical standards, and inflation is in the low single digits. But inflation is creeping up, and it's doing so despite a labor market that is in worse shape than the official unemployment rate suggests.

Let's start with the jobs picture. The official unemployment rate is 5.2 percent - roughly equal to the average for the Clinton years.

But unemployment statistics only count those who are actively looking for jobs. Every other indicator shows a situation much less favorable to workers than that of the 1990's. A lower fraction of the adult population is employed; the average duration of unemployment - a rough indicator of how long it takes laid-off workers to find new jobs - is much higher than it was in the 1990's. Above all, the weak job market leaves workers with no bargaining power, so they aren't getting ahead: wage increases have been minimal, and haven't kept up with inflation.

Underlying these disappointing numbers is sluggish job creation. Private-sector employment is still lower than it was before the 2001 recession. Things could be, and have been, worse. But those whose standard of living depends on wages, not capital gains - in other words, the vast majority of Americans - aren't feeling particularly prosperous. By two to one, people tell pollsters that the economy is "only fair" or "poor," not "good" or "excellent." Why, then, has the Fed been raising interest rates? Because it is worried about inflation, which has risen to the top end of the 2 to 3 percent range the Fed prefers.

What's driving inflation? Not wages: labor costs have been falling, because wages are growing less than productivity. Oil prices are a big part of the story, but not all of it. Other commodity prices are also rising; health care costs are once again on the march. And a combination of capacity shortages, rising Asian demand and a weakening dollar has given industries like cement and steel new "pricing power."

It all adds up to a mild case of stagflation: inflation is leading the Fed to tap on the brakes, even though this doesn't look or feel like a full-employment economy.

We shouldn't overstate the case: we're not back to the economic misery of the 1970's. But the fact that we're already experiencing mild stagflation means that there will be no good options if something else goes wrong...

And in the third example, Paul Krugman does not declare that the economy was then--spring 2003--in recession. Instead, Paul says:

The Unofficial Paul Krugman Web Page: Spring 2003: Over the last two weeks, nobody has been paying much attention to economic news; even the ups and downs of the Dow have reflected reports from the battlefield, not the boardroom. But the economic news is quite worrying. Indeed, the latest readings suggest that our recovery, such as it is, may be stalling.

Actually, the recovery can't officially stall since it hasn't officially begun: the committee that rules on such matters still hasn't declared the recession that began in March 2001 over. There are good reasons for the committee's hesitation: while G.D.P. started growing in late 2001, the job situation -- which is what matters to most people -- has more or less steadily worsened. In particular, fewer people are working now than were employed a year ago. Since the working-age population continues to rise, jobs have become steadily harder to find.

Still, the latest data suggest that the rate at which things are getting worse is accelerating. In February, payroll employment fell by 308,000 %u2014 the worst reading since November 2001. Some analysts suggested that number was a fluke, distorted by bad weather, but yesterday there were two more worrying indicators: new claims for unemployment insurance jumped, and a survey of service sector companies suggests that the economy as a whole is contracting. Now what? Ever since hopes of a rapid recovery faded last summer, the economy has seemed balanced on a knife-edge. Pessimists like Stephen Roach of Morgan Stanley warn that the U.S. is near its "stall speed": growth so slow that consumers, nervous about a weak job market, cut back on spending and send the economy into a tailspin. Yet optimists keep expecting businesses, anxious to update their technology, to resume large-scale investment and create a robust recovery. Both outcomes are still possible, but it seems increasingly likely that consumers will lose their nerve before businesses regain theirs...

I could pile on: I could point out that although Paul Krugman wrote in April 2003 that the economy might (not was: might) be in or fall back into recession, Donald Luskin has written since that he has a "better theory... using a different date for the end of the recession... April 2003." I could ask why the other regular writers for National Review haven't begged the editors to drop Luskin to stop the damage to their reputations (some claim that they have done so).

But what's the point? The only useful thing to do is to lay down a marker stating how ridiculous he is, and move on.


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