Radio commentary, April 9, 2009
Not a whole lot of economic news to talk about, partly because that’s just the way things are breaking, and partly because I’m recording this early in the week so I can go away for a longish holiday weekend. So I can’t talk about, for example, the latest weekly jobless claims numbers. Alas. But I can do that next week.
Leading index points mildly, tentatively up
But I can talk about some longer-term issues. First, the weekly leading index from the Economic Cycles Research Institute, one of my current obsessions, since it has a very good record in calling turns in the U.S. economy three to six months ahead. There are a few ways to look at the index. One is its absolute level, which has been rising since it made its low for this downturn in early March. Yeah, three consecutive weekly rises, which is what we’ve had, ain’t much, but it’s something to grab onto, since it would be really nice to start thinking about an end to this wretched recession. But even if that’s what it’s saying, which is a big if, things shouldn’t start picking up, or perhaps more precisely won’t stop sliding, until summer or fall.
I said there’s more than one way to look at this index. Aside from its absolute level, you can also look at its percentage change over various periods of time. One way I do that is to see what’s happened over the last six months. That six-month rate of change hit –19% last December, the most negative it’s been in its 42-year history. That’s been creeping higher over the last few months, however; it’s now up to –15%. That’s still awful, but in the past, upturns of that sort have rather reliably presaged the end of recessions. But even if that’s happening this time, and I wouldn’t bet the farm on it (not that I have a farm), any recovery is likely to be very weak, especially in the job market. So hold the champagne, or budget equivalent, for now.
Some analysts are saying that these signs of recovery are rather similar to a false dawn spied in 1931, as the Great Depression was unfolding. Back then, the unemployment rate as around 11–12%, about three points higher than now—in other words, somewhat higher, but not massively so. After that false dawn dissipated, the unemployment rate more than doubled over the next couple of years, peaking at over 25% when Roosevelt took office in March 1933.
So how valid are these Depression analogies? In a piece posted on the VoxEU website, the distinguished economic historian Barry Eichengreen, who teaches at Berkeley, and Kevin O’Rourke, econ professor at Trinity College, Dublin, present some scary graphs showing that world industrial output, international trade volumes, and stock markets are looking at least as bad as they did at a comparable interval into the 1929–32 collapse, maybe worse even.
What’s different, though, is the policy response. Central banks have cut interest rates massively, and inflated the money supply massively—not just our Federal Reserve, but its major counterparts around the world. Back in the bad old days, they did little of the sort, so busy were they defending the doomed (and dooming) gold standard. And today governments are spending far more aggressively now than they did in the early 1930s. In fact, at a comparable point in the early 1930s, most governments were running only small deficits; now, most are running giant ones.
Eichengreen and O’Rourke conclude with the $64 trillion question: “The question now is whether that policy response will work. For the answer, stay tuned for our next column.” I can’t wait.
End of the finance premium?
Finally, a recent paper by the economists Thomas Philippon and Ariell Reshef, of NYU and the University of Virginia respectively, looks at the earnings of workers in the financial sector over the last century. They find that from around 1910 through 1934, financial workers earned 60% or more than workers in other sectors of the economy. That huge premium disappeared over the next several decades, to the point where finance types took home little more than the average worker from the 1950s through the early 1980s. Starting then, however, history reversed itself, and the finance premium grew and grew to the point that in recent years, finance workers have earned over 70% more than the average worker. (Need I point out that averages are very misleading in this case because the high-paid toilers in finance are really really high paid. Secretaries and clerks pull down the average considerably.) Philippon and Ariell find that the major reason for this pattern over time is regulation. Fiannce was barely regulated in the early 20th century. Starting in 1934, though, it was tightly regulated. Those regulations started coming undone in the early 1980s, a trend that continued until, oh, the day before yesterday. If, however, we are now about to see a re-regulation of finance, then those high salaries are going to start coming down. That will have a massive effect on New York City, it goes without saying—just as the financial boom had a massive effect.
Of course, you’ll have to wait longer than the next column to see what that might look like.