Recessionary employment declines

In response to some widely circulated and controversial charts of employment declines in major recent recessions, I took a look at the employment to population ratios. I looked at the recessions from an employment ratio perspective, starting at peak employment ratio and continuing until it recovered. The conclusions are somewhat surprising.



First, some recessions merge. The 1980 and 1981-82 recessions do, and we have never gotten out of the 2001 recession. 2001 on kind of looks like a Long Recession by this measure, and may be turning into a Long Depression. The current recession by itself (2007) does indeed show up as bad - it's the worst of all at 25 months. It's not quite as bad as the 1981-82, but it's very close, and it's worse than everything else, including 1974-75 (except of course 2001 with 2007 added on). Also, the lurch downward over the past 7 months is unprecedented and worse than anything else, although the 1974 lurch down is very close. Another bad month will make the 2007 recession unsurpassed.

Um - try 23 years.

Paul Krugman has a post about the fall in employment ratio to numbers not seen for sixteen years.

Except it's actually 23. And probably more to come.

Drama Geisha?

Yves Smith of Naked Capitalism passes on a report from Frank Veneroso decrying the massive collapse in Japanese manufacturing, which is the fastest on record for a major industrialized country. He complains that he's "crying from the rooftops" but it's "like a neutron bomb had gone off" because nobody cares. He blames the EEEVIL speculators, picking - of all agents to blame for a manufacturing depression - technical analysis traders. Blaming that fractious bunch earns him an "Oh Please" award.

Japan, a supercreditor nation, is now running a small trade deficit, which is what it should be doing, so the yen is about right. Of course they're getting a depression in switching from an insanely low manipulated exchange rate to a reasonable one, because they've had truly massive misallocation of resources over the past 30 years, due to the crazy low yen value. Basic economics, folks - bad prices cause bad decisions.

Venerosa is right that the rest of the world doesn't care - because we all know this is about where things should be. The depression which will result from this return to sanity isn't something we can do much about anyway. Normally there would be more sympathy but since Japan Inc. has been wrecking everybody else's manufacturing longer than most working people's memory nobody's going to feel too sorry for them now.

Maybe we can get a bunch of really, really small violins to play along with MITI's sob story about manufacturing disaster from unfair trade practices - their own. Heck, Japan's into miniaturization and classical music. Maybe they can provide the violins for us!

Thoughts of an unserious economist

William Pesek writes:

No serious economist thinks Japan is going to crash.

This charming little argument from intimidation reminds me of the endless parade of pundits proclaiming that all the "serious" people supported the War in Iraq. Or, for that matter, all the "serious" mockery of housing bubble predictions.

It seems most people fall into a fallacy encouraged by standard macroeconomic thinking that savings automatically produces something useful and that all "productive capacities" are equally good. All investments are particular - they are to make or do something. Market action equalizing marginal benefit *normally* produces a very good set of particular investments so it's an acceptable approximation to view any investment as equally good. But markets do fail, and they can also be distorted. If this happens the investment is wasted - perhaps partially; perhaps totally.

Japan has a huge productive capacity, but if that productive capacity is for export products that nobody will buy for years, then it's virtually worthless - regardless of how much people thought it was worth last year, or the effort put into creating it. Likewise Japan's vast savings, insofar as they own worthless productive capacity or assorted foreign bonds that can't be paid, are also worthless.

If Japan's exports continue down 35% they will crash. Hard. Are the "serious" economists going to be wrong again?

What does it take?

Right now the world faces a real risk of economic disaster, quite possibly a depression, as a result of a credit bubble set off by insanely low interest rates in 2001-2005. This is no surprise; if you set the price for something (credit in this case) you get overconsumption and efficiency losses; when the item in question (credit) is the most important single element of the economic system the waste has particularly dire results. Now Germany's finance minister blandly observes this obvious fact we are so painfully being reminded of.

And Paul Krugman finds this objectionable?

Seriously, what does it take for economists to accept basic economics? Mad Max?

What do we have to invest in?

Many pundits are proposing government-funded investments as a way out of the current recession. I wonder though, what is there to invest in? Certainly current infrastructure has deteriorated in the past few decades of neglect, but I haven't seen any indications that the deterioration is causing the enormous financial losses that would justify the kind of investment we need. Likewise we've seen in the past year that energy consumption can drop substantially in a relatively short time, with driving down 5.6% in one year. Green energy isn't needed so desperately if consumption declines.

Fundamentally investment is to increase production. But we really don't lack for goods, widgets, or entertainment. The real goal should be to improve lives, and I think at the moment that more time with family and fun is more worthwhile than fancier cars, bigger houses, or smoother roads for faster highway speeds. In an abstract sense, we might be better off with a smaller economy; happier, better connected, and more relaxed.

The problem, as with all major shifts, is that capital and human resources are misallocated for an American form of Dolce Vita. If we have that kind of shift in consumption many investors and workers will be left with no way to make a living. So perhaps the solution, rather than massive capital infrastructure investment, is investment in what we might call "home economics" training - teaching people how to live well and control spending, and how to help others do the same.

Here comes the catastrophe

The House is clearly ready to pass Paulson's horror of a bill. This bill will give effectively unlimited discretionary power over the Federal government's economic policy to a man who's been wrong on almost everything for two years in office, who got rich passing off toxic garbage at Goldman Sachs, who just asked for authority to steal $700 billion dollars, and whose plan will cause a Greater Depression by sucking all the money out of the working capital markets and using it to prop up the prices of toxic mortgage derivatives. Oh, and both Presidential candidates have gone all-out for the plan.

Could it really get any worse?