Businomics Blog

Recessions: How Severe and How Frequent in the Future?

In the first half of 2007, I interviewed University of Oregon economist Mark Thoma (author of the Economist's View blog) about "The Great Moderation," which is the period of very mild business cycles that the world was in from 1983 through 2007. We did not know at the time of the interview that the Great Moderation was about to be jolted by a terribly severe recession. But the interview holds up very well.

Here are a few prescient points the Mark made back then:

• Some economists view financial innovation as a force toward economic stability. Mark was skeptical back then (as was I).
• Ken Rogoff was warning of the potential for tremendous volatility in the financial markets. Good call, Ken.
• Mark did not see recession on the horizon, but he was clearly worried about the housing sector and the dollar. It's worth noting that many of the loudest bears, such as Nouriel Roubini, expected the collapse of the dollar on foreign exchange markets. That did not happen, but Mark's worry about housing was well-founded.

You can listen to Mark by scrolling down on my Interviews page to the second-to-last entry.

The Recession Was Over! (June of Last Year)

That nasty old recession is finally over. Turned out it was over June 2009. But now we know it officially. The arbiter of business cycles is a committee at the non-governmental National Bureau of Economic Research, which announced the decision today.

Their key statement was:

The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date.

So, they are not saying that things are great now, or that the outlook is rosy. Simply that if things turn down now, it's a new recession rather than a continuation of the old recession.

For the record, I explained the background on the NBER approach in an older post about the beginning of the recession.

The committee looks at a number of indicators, including the classic four coincident indicators:

Guest blogging

Some of my posts will be showing up on the Oregon Business blog, which is a great way to find the latest business news about Oregon. My posts also show up frequently on Seeking Alpha and iStockAnalyst.

Advice for Freshmen: Not Just Economics

Harvard economics professor Greg Mankiw offers advice to entering college freshmen, which includes a great nugget:

LEARN SOME STATISTICS High school mathematics curriculums spend too much time on traditional topics like Euclidean geometry and trigonometry. For a typical person, these are useful intellectual exercises but have little applicability to daily life. Students would be better served by learning more about probability and statistics.

Here are my own suggestions:

1. Pick courses based on the professor, not the subject. I fought this advice for years, intent on pursuing my own interests. I finally succombed my second year of grad school. All the grad students said that Ed Tower was the best teacher in the department, so I tried International Economics. He was indeed, and I learned more microeconomics in his course than I did in the officially required micro course. I went on to take a field of concentration in International just because of Ed.
2. Challenge your own preconceptions. I entered undergraduate college very interested in economics and convinced that Keynesian economics was a crock. So my second year I arranged a tutorial in which I read Keynes in the original, as well as his critics. I continued reading both sides of the issue throughout my undergraduate years. I changed my mind a little, but more importantly, I struggled for understanding of radically differing views. It's the struggle for understanding that has value to the student, not the ultimate conclusion. Of course, I was wise to have chosen a college that enabled and encouraged students to follow their interests and create unique study programs.

One of the wisest students I knew had advice that I never took, but should have. She treated college as a 40-hour a week job. During the working hours of the day, she was either in class or doing homework. In the evenings, she was up for fun. Now most students are up for fun, but they have not put in their 8 hours of substantial work. Try it and I can almost guarantee that college will be easy. (Average time spent studying outside of class is apparently 14 hours, according to an AEI report.)

Unemployment and Extended Benefits: A Labor Day Comment

Today's employment report showed more joblessness. Harvard economist Robert Barro recently argued that today's unemployment rate might be as low as 6.8% rather than 9.5% (as of the time of his writing) if the maximum duration of unemployment benefits had not been extended from 26 weeks to 99 weeks.

Here's another back-of-the-envelope estimate: the academic research suggests that every additional week of unemployment insurance eligibility extends the actual duration of unemployment by about 0.2 weeks. (See this review of the literature, pp. 15-16.)  The increase from 26 weeks to 99 weeks would then imply an extra 15 weeks of average unemployment. For reference, the current median duration is about 20 weeks, and normal is somewhere between 5 and 8 weeks. That suggests that the extended benefits might have had a very large impact.

There are plenty of reasons to be skeptical of the data estimates, not the least of which is that the relationship between extended benefits and duration may not be linear. Even if we had a good estimate of the impact of a one-week extension, we might not be able to multiply it by 73 to capture the impact of a shift from 26 weeks to 99 weeks of eligibility. However, there is good reason to be concerned about the lengthy benefit eligibility.

Robert Reich, former labor secretary, replied with a simplistic answer: "So it's hard to make the case that many of the unemployed have chosen to remain jobless and collect unemployment benefits rather than work."

Let me explain how this works. Reich is correct that no one (well, maybe one or two, but not many) turns down a good job offer to collect unemployment benefits. However, what happens before the job offer is received is crucially dependent on incentives.

Joe is unemployed. On Monday morning he wakes up and starts looking for work. He answers an on-line ad. Then he calls a friend and asks if his company is hiring; the friend promises to ask around and get back to Joe. Then Joe goes down to a local company and applies for work in person.

Now it's noon. Joe has three applications or feelers out, and any one of them might turn into a job offer. What does Joe do Monday afternoon?  And Tuesday, Wednesday, Thursday and Friday? Keep in mind that Joe is like most of us: he does not like looking for work. He finds it difficult, frustrating and embarrassing. He might talk himself into sitting back and waiting to see if anything comes of his applications. Or he might keep plugging away, spending 40 hours a week looking for work.

It may seem that "there are no jobs out there," given that the Department of Labor continues to report virtually no growth in total employment. That view, however, would be mistaken. Last month over four million people were hired. There wasn't nearly that much net new job formation, but an unemployed person does not need a net new job. A job vacancy caused by a quit, retirement or death works just as well.

The government surveys Americans on how they spend their time, and it turns out that the unemployed only spend about 41 minutes per weekday looking for work. Research finds that the intensity of job search is sensitive to how much generous unemployment insurance benefits are, and how long they will last.

Finally, it's hard to be ungenerous to the working man and woman on Labor Day, but here's a little bit of additional research: virtually all of the tax that funds unemployment insurance benefits is passed on to workers in the form of lower wages. So this is not a benefit provided by "business" but one paid for by workers themselves.

Are there enough vacancies for everyone? No, but faster matching of job applicants with job openings would be stimulative to the economy for sure.