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Brian_Dell
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If the unemployment problem is cyclical then why does the job vacancy rate continue to climb? The reality is that the long-term unemployed are searching less intensively than in the wake of earlier recessions. You can't call that cyclical. A few weeks ago at Berkeley, Krugman acknowledged that the main data point for a large output gap, the CBO's estimate of potential GDP, is really just "a gussied-up trend" and that a Phillips curve-based analysis implied hardly any output gap. Krugman then tried to explain why the CBO estimate was more accurate but not very convincingly.
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The authors say ""There is no evidence that the recession resulted in a long-lasting skills gap that would require retraining experienced workers to work in different industries." OK, but that only rejects one possible explanation for why there are rising job vacancies per unemployed, it doesn't reject all possible explanations nor does it explain the reality of job vacancies. The authors concede that "some permanent structural change [may be] under way and is keeping the unemployed from filling the jobs that are available." This is what the debate is about. I don't know anyone arguing that workers are well-qualified in general but for the wrong industry. It took Canada three decades to get its unemployment rate below the U.S. rate. Now if it takes three decades for the U.S. to do the same relative to Canada, it hardly matters whether you spin that as reducing cyclical or structural unemployment. The point is that you have to restructure as opposed to just increasing government spending.
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On Friday Krugman said that he pegged the output gap at $900 billion, which divided by $15.8 trillion Q3 GDP is 5.7%. Yet none of the metrics in that Table 1 are near that level except for the CBO which has marked down its estimate for potential GDP a decade out by 8.5% since 2007 (the CBO has slowly but surely been realizing that potential GDP has fallen sharply... the lack of variability in the CBO's estimate is a strike against it). And those metrics would be even further from Krugman's estimate if you used Q3 instead of Q2. In any case, my comment concerned the rate of change of job vacancies as opposed to the level. On that point the increase since 2009 is remarkable and inconsistent with the thesis that the output gap remains as steady as the CBO and Krugman contend.
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Well of course the HP-Filter will define away all cyclical demand deficiencies as losses of potential if one uses a sufficiently small smoothing factor. The question is what is a reasonable smoothing factor. Yes, a protracted slump gets interpreted as a decline in potential output if it is sufficiently protracted. Are you going to claim that Japan has been in a cyclical recession for the last two decades? For the the claim of a "cycle" to make any sense there would have to be a serious expectation that Japan is going to flip to the other side of the cycle and grow significantly faster. That there has been a loss of potential is the more reasonable interpretation. The OECD didn't use just a HP filter and they had marked down Japan's potential growth down to 1.6% at the time Krugman was claiming that the OECD was overestimating Japan's output gap. Yet few would dispute that the OECD looks more correct than Krugman 15 years later.
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I don't think Samuelson is predicting double digit inflation. In my view he's just making the point that the Fed overestimated the size of any negative output gap back in the 70s and could be doing so again. As for the Fed's "economic understanding", if it's so great then why has the Fed been so consistently overoptimistic with its unemployment expectations? It's a sound point to note that in the past there's been many instances of inflation pressures arising despite fairly high unemployment rates.
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THe IMF's model says Japan's output gap for 1998 was in fact less than two percent. On February 16, 2009 Krugman used this very same source to argue that the size of the output gap in the U.S. indicated a serious deflation danger.
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The record high for the proportion of firms with unfilled job openings was 34% and this was reached in 2000, at the peak of the cycle and just before a downturn. This represented a climb up from a low of less than 15% at the time of the early 90s recession. Increasing vacancies means there is an increasing shortage in the supply of labour relative to demand. An excess of aggregate demand is the opposite of an outgap gap since it is an inflationary gap. You could call it a positive output gap but regardless Krugman's contention is that there is a large negative gap (that there is shortage in the demand for labour, not the supply). The Keynesian contention, remember, is that there is a cyclical deficiency of aggregate demand. Increasingly, the Keynesians are being proved wrong because we are seeing potential GDP marked down by most observers (this closes the gap and should reduce estimations of the size of the negative output gap).
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In 1998 Paul said "my guess is that in retrospect it will seem clear that Japan's 1998 output gap was 8 percent or more." I dare say that in retrospect Japan was operating far closer to potential than that. He's likely overestimating the gap again, given where inflation is currently at. I might also note that job vacancies rose throughout 2010, 2011, and the first half of 2012 which isn't consistent with an enormous output gap.
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1) A central bank is indeed not a profit-making institution but if the Fed had to go hat in hand to Treasury asking for a capital infusion Congress would go nuts. Monetary policy would become politicized. 2) The Fed's claims on the private sector are distorting price signals. It's buying double the daily production of Freddie and Fannie (and to some extent Ginnie) MBS which may be driving a misallocation of resources. Residential fixed investment jumped more than 14% (annualized rate) in Q3 while nonresidential was negative. What is going to happen when the Fed stops? It isn't enough to have the federal government in housing, the central bank has to be in there too? 3) If global risk aversion falls, financial institutions won't be satisfied with the returns on U.S. government-backed debt and are going to be looking for more yield. That could entail either unsustainable lending or blowing up an asset price bubble. One cannot predict bank lending behavior with confidence... historically when bank balance sheets are very liquid central banks have struggled when it comes to limiting bank credit expansion.
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It appears that the CBO is gradually realizing that the economy is already operating near full employment, such that anyone employable who really wants a job already has one. The economy will just continue to waddle along at its current growth rate and a few years the CBO will announce that the output gap has been closed!
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Krugman et al are going to have to concede sooner or later that most of the weakness in growth is NOT due to weak demand but due to slow growth in the underlying productive capacity of the economy.
Toggle Commented Nov 29, 2012 on Let's Avoid 'Undercooked Turkey' at Economist's View
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"...if you assume that the increase in labour demand doesn't affect wages" Strikes me as a reasonable assumption if the economy is not at full employment and the market for labour is competitive. "If the CIT cuts go through and are later rescinded, we will not see a recession in which some 233,000 people lose their jobs. Instead, long-run incomes will be about 1.4% lower than they otherwise would have been." Has the idea that wages are downward "sticky" been discredited? It seems to me that if your general thesis is correct, when we go through recessions employment levels should largely hold up while wages fall. The empirical data I've seen suggests that it is the other way around.
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- James Rajotte represents an Edmonton riding, not Calgary - the value of this analysis is limited because it doesn't distinguish domestic lending from foreign lending. As a planet, Earth cannot easily go bankrupt because all the debt is owed to other Earthlings. But that doesn't mean certain countries cannot have a debt problem. And in the case of North America, we have a far higher propensity to consume than, say, the Chinese. Not coincidentally, China is a net creditor, not a net debtor. - From a scenario where the average household has net saving of $1000 and no household has any debt we get "the total debt/GDP ratio in this economy would be 1,000%." I'd like to see a little more explanation of this jump. Characterizing it as "debt" can be misleading unless "debt" is clearly explained. Because everyone's $1000 has been lent to firms, it has presumptively been used to purchase property, plant, and equipment. From an economy-wide perspective, it is an economy with a high propensity to invest. If the point is that a "debt ratio" is generally meaningless, fine, but it should be explained why, in my view, and the reason why is because it is just a rough proxy for the more important metric of marginal propensity to consume
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Oct 26, 2010