Readers have sent Paul hundreds of questions about the economy. He will address some of them, in a few takes, here.
Definition of “Economy”
From a “martian-looking-down-at-earth” perspective, what exactly is an “economy?” How would you sum it up? What alternative ways could we conduct our societies that might work better if we could start from scratch? What do you think is going to work in 10, 25 and 50 years that we are not doing now? — Brian J. Wimmer
I guess I’m a bit boring on such issues – I don’t have any deeply unconventional insights. I’d say that the economy is everything that involves making or using goods and services. That means leaving out subtler things like love, faith, and culture. (Alfred Marshall described economics as being the study of the “ordinary business of life.”
I’m also fairly conventional on how economies should be run. Self-interest is still the best motivator we know – or more accurately, the only consistent motivator. So I’m for market economies. But I’m for market economies with strong safety nets, with adult supervision in capital markets, with public provision of goods the private sector does badly (like basic research and much of education.) An idealized New Deal is about as far as I go.
Signs of Recovery
What does a recovered U.S. economy look like? Obviously many of the activities we did in the past such as home construction and real-estate related businesses and all sorts of things based on credit driven consumer spending will no longer work. Related to this, shouldn’t stimulus money be used to build a different sort of economy?— Jeremy Hickeson
The recovered economy will surely involve more manufacturing – in fact, before the world economy collapsed we were seeing a boom in manufactured exports, with shortages of machinists and other skilled workers. It will probably include a lot of green employment in the broad sense – not just people building and running wind farms, but people busily improving insulation and installing white roofs.
As for the stimulus: a lot of what we should be doing isn’t so much building the future as avoiding collateral damage from the crisis. We should be giving much more aid to state and local governments, so that education and basic services aren’t crippled by the slump. We should be investing in basic infrastructure, which we need regardless of the shape of the economy. It’s not clear that the stimulus has to be very much influenced by likely change in direction – although trying to prop up the housing industry is a mistake.
Stimulus Money
One of the arguments I hear most frequently against fiscal stimulus is that we’re taking money from future generations. While I understand the benefits that such a stimulus can provide now, how is it beneficial in the long term? — Chris B.
First of all: in the immortal words of John Maynard Keynes, in the long run we are all dead. Beyond that, however: the recession is causing low business investment, which means lower capacity in the future; it’s causing young people to postpone or cancel education; it’s pushing people out of the work force, eroding their skills; it’s raising child poverty, with devastating consequences for personal development. Stimulus, by mitigating the slump, helps limit all these long-term costs.
Rescue Efforts
If you were in the Obama administration (and why aren’t you…but that is a different question) and were given the power to do what you think is needed to rescue the economy, what exactly would you do first?— Pat McDowell
Right now: more job creation efforts! It’s OK if we don’t call it a stimulus, and it’s OK if we don’t put it all in one bill, but at this point we’re looking at an output gap – the difference between what the economy should be producing and what it will actually produce – of between $2 trillion and $3 trillion over the next year and a half, while the remaining stimulus in the pipeline is probably less than $400 billion. We have to do much more.
End of the Recession
Can you explain why it’s meaningful to say that the “recession is over in a technical” sense, when every meaningful number is looking bleak? — AwK
OK: the official definition of a recession in the United States is that it’s a recession if the recession-dating committee of the National Bureau of Economic Research says it is. But the committee, loosely speaking, says that a recession is a period when everything is going down. And that’s not true anymore. Industrial production is rising; GDP is almost certainly rising. So the economy has stopped shrinking.
Now, I agree that this doesn’t say much about the reality most Americans face – because the jobs picture is still getting worse. But it’s fairly clear that the official records will eventually say that the recession ended in the summer of 2009.
Economic Indicators
How can consumer spending be rising at a time when more and more people are out of work? Doesn’t the money that fuels consumer spending usually come from employment? Doesn’t this contradict the economic maxim that expenditures are equal to income? — Tim
That “economic maxim” is deeply misleading. Consumers can and do spend either more or less than their income. And even for the economy as a whole, in the short run income adjusts to match spending, not the other way around.
That said, some of the recent bump in consumer spending probably is unsustainable. In particular, there were a lot of one-time purchases due to “cash for clunkers”, which won’t persist and will actually probably be offset with lower purchases going forward.
What are the three most important factors to track (and over what time frame) to gauge if the economy has finally turned the corner. How critical are household wealth and consumer debt in influencing the above factors - are they lagging or predictive indicators? — aditya rana
What I can tell you is what I’m watching. I’m watching unemployment insurance claims – I won’t feel that we’re over the worst until those drop well below 400,000 a week. (they’re still in the mid-5s) I’m watching the ISM surveys, looking for signs of strong (not marginal) growth. And I’m watching the monthly employment reports.
Wealth and debt are predictive factors, not indicators. And for what it’s worth, they’re predicting a long, hard slog.
Jobs
How will we know that the employment picture is going to start moving in the right direction? Is there any way to know when we’re going to start coming out of the woods? — Rachel Engel
Yes – watch for job growth at a rate of 150,000 or more a month; watch for a rise in the employment-population ratio. Nothing like that in the data now. As I mentioned in an earlier reply, we’ll probably have advanced warning from the new claims data and the ISM surveys – but so far hope is not on the way.
We never have full 100% employment and 4-6% unemployment seems to have been the norm for the past several years. Are we in for a period where that norm is going to have to double? Things could be much worse – 90% of us still have our jobs. — John Kopp
No, no, no – we should not settle! Bear in mind that if you add in people who have stopped looking because it’s hopeless, who are working part-time when they want a full-time job, and so on, the unemployment rate is actually 17%. And those 17% have families, relatives, friends. The fact is that most Americans are hurting, or suffering anguish because of the troubles of people they care about – me included. This is not an acceptable situation.
Health Care Myths
The economics professor for my MBA program states that universal health care systems lead to rationing of health care. Specifically, he brought up the single payer system in Canada, the time people have to wait in lines for care in that system, and the “great number” of Canadians coming to the U.S. for care. How do I refute his claims that this is rationing, especially when it doesn’t meet the traditional definition of rationing? I’ve argued with him a great deal, but he seems to weasel his way around my arguments. — Chris V
Try Googling Canadian health care myths! Here’s a pretty good example. Or bring up the fact that many of the surgeries Americans get faster than Canadians are paid for by … Medicare.