Category Archives: Business Cycles

Disappointing August Job Gains Tied to Covid Restrictions, Politics

This press release was originally posted at cei.org.

Competitive Enterprise Institute experts commented on today’s disappointing news about August job gains, urging policy makers to reject restrictions and politics and look for ways to lift barriers to economic recovery.

Sean Higgins, CEI research fellow:

“Friday’s Labor Department report https://www.bls.gov/news.release/pdf/empsit.pdf that the nation gained only 235,000 jobs in August was well below the gains of the previous months and proof that re-instituting Covid-related restrictions has created a serious drag on the recovery. Prior to August, the economy had been growing by more than a half million jobs a month. The department’s report is a reminder that there is a stark cost to restrictions and officials must be mindful of broader consequences. The economy has been resilient so far, but that was partly because the end appeared to be in sight. New uncertainty is undermining that.

“The number of people who reported being unable to work for pandemic-related reasons was 5.6 million, an abrupt rise of 400,000 in a single month. The leisure and hospitality industry, usually the first to feel the effects of covid-related policies reported no gains in August due to a loss of 42,000 jobs in restaurants and bars wiping out all other gains. That’s a serious blow to people who have already endured a year and a half of difficult times.

Ryan Young, CEI senior fellow:

“Covid’s delta variant is showing up in economic statistics now, not just health statistics. Payrolls are still growing, on net, and will likely to continue to grow for the rest of the year. But that growth will be slower than it otherwise would be, in part because some people simply insist on turning vaccines and masks into political issues. Today’s tendency to turn everything into a culture war bears a lot of the blame for low vaccination rates. This in turn makes people more reluctant to travel, dine out, and attend events, which is where a lot of vulnerable jobs are being lost.

“There isn’t much policymakers can do about cultural attitudes, since mandates tend to backfire; but there is plenty they can do to roll back regulatory, licensing, and financial regulations that are blocking businesses from opening, staying afloat, or even expanding. Policymakers can also restore confidence by walking back unnecessary multi-trillion dollar spending projects that have more to do with politics than economic recovery.”

Consumer Spending, Personal Income Growth Hinge on Combating Covid Delta Variant

This press release was originally posted at cei.org.

The federal government today released July data on consumer spending (slower growth compared to June) and personal income growth (higher than expected). CEI Senior Fellow Ryan Young says reducing the Covid risk through vaccines and mask-wearing is what will help economic and income growth most – not ramped up spending by Washington:

“Consumer spending grew in July, but that growth was down two-thirds from June. Personal income growth was higher than expected, though that number was inflated by government assistance and other temporary policies. The most likely reason for the slower growth is the rise of COVID’s delta variant. The extent to which people feel safe doing normal activities has more to do with COVID than with anything else, including grand political plans to spend and stimulate.

“The recovery would be much easier if people were not so eager to make everything a political issue. Vaccines and masks are tools to fight the virus, and their effectiveness has nothing to do with red-team-blue-team culture wars. Politicians from both parties who are using the virus as an excuse to enact pre-existing policy agendas are hurting both the economy and the virus response.

“The best COVID response going forward, though it lacks the drama of a cable news shouting match or another headline with the word ‘trillion’ in it, would be a little prudence, both at home and in Washington.”

Jobless Claims Drop to Pre-Pandemic Level but Congress Spending Binge Threatens Recovery

This news release was originally posted at cei.org.

The federal government today reported a drop in seasonally adjusted initial unemployment claims to the lowest level for this average since March 2020. CEI Senior Fellow Ryan Young expressed confidence that two pandemic recovery milestones will bring greater gains but also pointed to a big problem on the horizon: a spending binge by Congress.

Statement by Ryan Young, CEI Senior Fellow:

“Jobs are continuing to come back, and the near future also looks good, thanks to two milestones. One, the number of vaccinated Americans crossed 200 million, bringing the country closer to herd immunity. Two, the new school year is beginning, which will allow more parents to resume working if they choose; there are still plenty of openings. COVID’s delta variant clouds matters, but the more people who get booster shots, the less harm it should cause to people’s health and pocketbooks.

“The continued strength of the recovery continues to show how unnecessary Congress’ planned spending binge is. If Congress presses forward on the infrastructure bill and its other trillion-dollar plans, it will be less about doing good, and more about handing out political favors and not wanting to admit that their pet economic theories about stimulus are wrong.”

New Inflation Numbers: Still High, Still Fixable

July’s inflation numbers are out. The annualized Consumer Price Index came in at 5.4 percent, compared to a 2 percent target. The month-to-month increase was 0.5 percent, an improvement over June’s 0.9 percent. While a return to 1970s stagflation is almost certainly not in the cards, inflation is still too high. Congress and President Biden should act now to keep it in check.

This appears unlikely at the moment. As of this writing, their latest trillion-dollar spending bill is in the process of clearing the Senate, though it will likely face friction and delay in the House. Assuming the bill does pass, it will nudge inflation upwards in future months while doing little to help the economy. Fiscal discipline in Washington is currently about as popular as the plague, but that does not change the need to reduce deficit spending. Economic recovery depends on increasing vaccination rates, not more politically motivated spending.

Politicians also need to respect the Federal Reserve’s independence. Higher interest rates are necessary to keep inflation low—but they also make government debt more expensive. President Biden and other political officials should resist the urge to pressure the Fed to keep rates low, and should spend less instead. Political meddling in central banks is how inflationary debacles like in Argentina happen. While the Fed has its flaws, it can do a good job of keeping inflation low—if it’s allowed to.

Other price increases have nothing to do with inflation (see my recent post on what inflation is, and what it isn’t). These price increases also deserve attention.

Trade barriers from both the Trump and the Biden administrations are upsetting supply chains. Above and beyond inflation, protectionist trade policies are increasing prices for cars and houses, and are largely responsible for computer chip shortages. Occupational licenses are keeping honest people out of work. Excessive regulations and permit requirements are blocking new ideas and projects that could push product prices down. Financial regulations are keeping capital away from small businesses that could use to it grow and compete against bigger companies. Energy policy restrictions are raising prices across the economy.

It is not enough to do simply do something. It is important to do the right things. Today’s policy mistakes are likely not enough to topple the COVID-19 crisis recovery, but they will slow it down, for no good reason. Fortunately, there are lots of sound policies that can hold down inflation while boosting the COVID recovery. Many of them are in CEI’s most recent Agenda for Congress.

Numbers Show Economy is Recovering, but Washington Spending Won’t Help

This news release was originally posted on cei.org.

New numbers from the Commerce Department show the economy showed strong growth in the second quarter of the hear, with gross domestic product (GDP) at a seasonally adjusted annualized rate of 6.5 percent from April to June, besting the 6.3 percent growth rate from the first quarter. CEI Senior Fellow Ryan Young says vaccinations and deregulatory measures – not impending government spending – is what will aid that growth.

Statement by Ryan Young, CEI Senior Fellow:

“The economic recovery is continuing at a solid pace. Vaccinations are the key to keeping the recovery going, not more reckless deficit spending. The biggest current threat to the recovery is COVID’s delta variant. If it spreads widely, next quarter’s numbers will slow. If enough people are vaccinated and take other prudent measures to keep delta’s spread in check, we can avoid another lockdown, and the recovery will continue. More importantly, fewer people will get sick and possibly die an avoidable death.

“There is no need for a trillion-dollar infrastructure bill or the $3.5 trillion reconciliation bill. Instead, policymakers should enact reforms to help the recovery along. These include removing occupational licensing regulations that keep low-income and minority workers from getting good jobs, keeping inflation in check, lifting trade barriers that contribute to record prices for cars and houses, and easing Dodd-Frank-era financial regulations that impede access to capital for startups to grow. There are lots of ways to help the economy grow. Deficit spending is not one of them.”

Record GDP Numbers Need Context: Good news, but More to Do

Most of the talk about today’s GDP numbers will be related to the election. It shouldn’t. Presidents don’t run the economy; hundreds of millions of ordinary people do. Fortunately, the news is pretty good. Economic activity is most of the way back to pre-pandemic levels, but not all the way. Policy makers can help the momentum by continuing to waive never-needed regulations that are blocking opportunities for workers and entrepreneurs who are still finding new ways to adapt to life under COVID.

There are two GDP numbers being bandied about today: 33.1 percent and 7.4 percent. The 33.1 percent figure is how much the economy would grow if the third quarter’s pace were to continue for a full year. This is the annualized number, and it will almost certainly not happen. While the annualized 33.1 percent number has its uses, it is easy to use in a misleading way. Readers should be wary of people cheerleading it as a new record. While technically true, the record doesn’t mean much. The economy is still slightly smaller than it was year ago.

There was a similar confusion surrounding last quarter’s 31.4 percent drop, which set its own record as the worst ever. Again, that was the full-year projected pace at that quarter’s growth rate. It is not even close to what actually happened. The very next quarter had record growth and canceled out most of it.

The 7.4 percent number is the more realistic number to use, though the same caveat applies about its record status. This is how much the economy grew since the previous quarter. Since 7.4 percent growth happened right after a 7.2 percent drop, it means the economy is almost back where it was in 2020’s first quarter, when the pandemic began. Yet, it is not quite all the way back, because the 7.4 increase started from a smaller baseline than the second quarter’s 7.2 percent decline did.

Today’s good news is welcome, but it doesn’t mean the economy is going gangbusters. Businesses that have difficulty with physical distancing will continue to struggle. These include restaurants, retailers, travel, tourism, and live entertainment. Their employees will struggle as well.

Policy makers can help by continuing to find and remove never-needed regulations that block people from adapting to new circumstances and starting new businesses and by reforming system-level processes that keep pumping out harmful regulations.

For ideas on which never-needed regulations to reform, see neverneeded.cei.org.

2020 Second Quarter GDP Decline Is Worst in U.S. History—But Not 32.9 Percent

The good news is that the second quarter’s GDP numbers aren’t nearly as scary as the more dramatic headlines are saying. The economy has not shrunk by a third. The bad news is that yes, we really have just experienced the worst crash in U.S. history. And it’s not over yet. This post gives some context, and some ideas for how to aid the recovery for both the virus and the economy.

Several newspapers are reporting a 32.9 percent decline in GDP. This is a projection. It is not what has actually happened. If the economy were to continue shrinking for an entire year at the rate it did last quarter, GDP will have shrunk by 32.9 percent.

While normalcy might be years away, that steep of a decline is unlikely to happen. 9.5 percent and 7 percent are more accurate numbers for what has happened to the economy. Here is why.

GDP numbers are often seasonally adjusted. For example, an outsized amount of spending happens during the holidays, while other parts of the year are slower. So, GDP figures are often compared to what they looked like at the same time the previous year. That is what seasonal adjustment is, a way to compare apples to apples. For example, 2020’s second quarter GDP is 9.5 smaller than 2019’s second quarter. It is the worst decline in U.S. history, and barely begins to explain the pain that people all over the world are experiencing due to COVID-19. But it is not a 32.9 percent decline.

The non-seasonally adjusted number is a 7 percent decline. That is the change from one quarter to the next. That number also provides useful context. Lockdowns began late in the first quarter, so while the economy took a 5 percent dent then, it makes sense that the second quarter would be even worse, since the full three months were under lockdown. But since the dip had already started, it makes sense that the quarter-to-quarter number is a couple of percentage points gentler than the seasonally adjusted number.

For a fuller explanation, I refer readers to an excellent article by University of Central Arkansas economist (and my former grad school classmate) Jeremy Horpedahl, who has a gift for understanding and explaining statistics.

It will be another three months before we know for sure, but there is a chance the worst of the economic shock has already happened. People are finding ways to adapt. Today’s hardships will be with us for a while longer, and we need to help each other out. If you can, please do. But our troubles are 9.5 percent bad or 7 percent bad, not 32.9 percent bad.

What should we do to fight the virus and help the economy? Two things come to mind.

The first has nothing to do with public policy. It is simply to be prudent. COVID-19 is on pace to be America’s third-leading cause of death this year. Almost everyone who reads this has someone they care about who is high-risk, whether due to age, occupation, or a health condition. Think of them. Do right by them. The more people do to keep the virus under control, the more it will be under control. Some form of masks and social distancing might be necessary until a vaccine or other proven treatment is widely available. That could take a year or more. But it will happen, and the virus will lose. Until then, people need to be prudent. Not living in a hermetic seal, but prudent.

The second thing has everything to do with public policy. It is regulatory reform. CEI’s #NeverNeeded campaign has spent the last several months crafting as many COVID-related policy reforms as we can and explaining them to policy makers, media, coalition members, and the public.

Regulations against telemedicine should never have been on the books in the first place. A more realistic approval process would get new and proven COVID treatments to the public as quickly as possible. Factories wanting to retool to make personal protective equipment for health care workers should not have to wait 45 to 90 days for permits to come through. If a restaurant wants to deliver food to willing customers, regulations should never have forbidden it. The Centers for Disease Control and Preventions should focus on controlling diseases instead of spending $125 million on an anti-vaping campaign.

Nearly a third of occupations now require some kind of government license. In many states, this includes fields such as barbers and decorators. During normal times, these regulations protect incumbents by keeping competitors out. During times of double-digit unemployment, keeping people out of work on purpose is immoral.

President Trump has roughly doubled tariffs. They now cost the average household more than $2,000 per year. For families where someone just lost a job, that tariff money could help to keep them afloat instead.

Just this week, Congress held a hearing regarding potential antitrust cases against large tech companies. These are the companies that are making contactless deliveries and grocery shopping possible. They keep people informed and in touch with friends and family. They are improving video conferencing and other technologies that make remote work and education possible. And they provide on-demand entertainment to help keep people’s spirits up during a difficult time.

To this point, Congress and the president have mostly dealt with the virus and the economic crash with hasty “flash policy” such as stimulus bills. The next one is being drafted right now. Policy makers at all levels of government have already removed more than 800 #NeverNeeded regulations. President Trump issued an order directing agencies to remove more unneeded rules. But the Code of Federal Regulations alone contains 1.1 million regulatory restrictions and 185,000 pages. There is much more to do. For lots of ideas, see neverneeded.cei.org.

Keynes – The General Theory of Employment, Interest, and Money

Keynes – The General Theory of Employment, Interest, and Money

My undergrad macroeconomics teacher was an avowed Keynesian. Most of what he taught was in this book, except in the forms of Marshallian geometric analysis and Samuelsonian algebra. I could have saved 19-year old me a great deal of time and anguish by simply reading Keynes’ original, mostly verbal explanations of his ideas. In fact, that pedagogical experience was one reason I switched my undergrad major from economics to history, despite my much greater enthusiasm for economics. Depending on who teaches intro classes, economic ideas are sometimes taught more clearly outside of economics departments.

People often forget that Keynes worked from the same quantity theory of money framework his rivals Friedman and Hayek relied on—an insight I was never taught in undergrad, thanks in part to poor standard pedagogical practices.

Nearly all economists, regardless of ideology, agree that tinkering with the money supply can induce temporary booms and busts. Where they differ is that for monetarists and other free-market types, the fact that policymakers can mess with the price system does not imply that they should. There are tradeoffs a boom now comes at the price of a bust later. Picking up one part of the economy comes at the cost of dragging down other parts. Moreover, unintended consequences can be unpredictable, and harder to manage than the original problems.

Keynes and many of the economists he has influenced instead work with idealized models of economics and government. Economists, using increasingly sophisticated techniques, are increasingly able to foresee and adapt to changing circumstances and unintended consequences to maintain economic stability. Fiscal and monetary policies will never be perfect, but with careful management they can outperform unmanaged markets. Also in this model, politicians actually listen to economists. Even more fantastically, politicians use their boom-and-bust power in the public interest. They do not use it to influence their electoral prospects, or give favors to rent-seekers.

On the positive side, Keynes’ remarks about animal spirits remain insightful, though underappreciated. Here Keynes shared important common ground with economists from Adam Smith on down to his rough contemporaries such as Philip Wicksteed, Frank Knight, and F.A. Hayek, who all emphasized human psychology in their works over formal modeling.

Keynes’ followers pursued a different path after Paul Samuelson, preferring instead to confine themselves to quantifiable models, and to study Homo economicus rather than Homo sapiens. The old joke about Keynesians being more Keynesian than Keynes ever was is often true. Fortunately, the behavioral economics movement has done much to revive animal spirits in the wake of MIT-Harvard-Princeton’s sterilizing the profession, though many of them forget that human frailties also apply to policymakers and the policies they make.

This is not Keynes’ fault. But his unintentional legacy has harmed economics as a discipline, which has missed out on important insights and discoveries by largely walling itself off from other, less quantitative disciplines for several decades. Keynesian models have also acted as enablers for policymakers eager to hear justifications for things they want to do anyway, and for excuses to forget that can does not always imply ought.

October Brought 250,000 New Jobs, Despite Bad Trade Restrictions

This press statement is cross-posted from CEI.org. See the original here.

The American economy added 250,000 jobs in October, the U.S. Labor Department announced today. The unemployment rate was meanwhile unchanged from last month, at 3.7 percent – a 50-year low. That’s good news for the economy – it shows that even President Trump’s costly trade tariffs aren’t eclipsing growth, says Ryan Young, CEI fellow:

“Politicians don’t actually run the economy, and hence don’t have that much influence over employment rates or the business cycle. The fundamentals of the U.S. economy are strong, and it is showing in the 250,000 new jobs created in October. In a further show of strength, even with President Trump’s trade policies slowing economic growth by as much as 1.8 percentage points, the economy still grew by 3.5 percent last quarter.  The President’s supporters and critics alike should be delighted at today’s jobs report, and should work together on a range of beneficial policies, from lowering trade barriers to stronger central bank independence to reining in executive branch regulatory excesses.”

Young co-authored a recent report making the case for free trade, Traders of the Lost Ark

Rediscovering a Moral and Economic Case for Free Trade.

 

Questions for Janet Yellen

janet yellen
The Federal Reserve is arguably the government’s most important agency, even if it is (nominally) independent. It has control over the price system, the most fundamental part of any economy. It also exercises significant power over the banking sector, and in recent years has taken to doing large favors for Wall Street. These are all reasons why Janet Yellen’s nomination for Fed Chair needs to be carefully vetted. To that end, my CEI colleagues John Berlau and Iain Murray and I put together some questions about several facets of the Fed’s mission we would like to Yellen answer, whether during her confirmation hearing or elsewhere. You can read the short WebMemo here. Here is one of our questions about inflation:

Many observers expect you to pursue an inflationary stimulus, and believe this is likely a reason for your nomination. If your actions are already expected, will markets not take these expected price level changes into account in advance? If so, do you believe this would blunt the employment impact of any monetary expansion? Would you respond to these pre-existing expectations with an unexpectedly high inflationary policy?

As John, Iain, and I write, Yellen’s credentials are not in question. But the policies she might pursue as Fed Chair are. Read more here.