I always enjoy it when my reading brings together a number of seemingly unrelated pieces and, serendipitously, everything falls together and starts the mind racing. This has happened over the past couple of weeks and I think offers an opportunity to examine how we measure and address economic progress.
When we talk about economic policy, we often discuss the main objectives of policy: growth, employment, price stability, and exchange. Admittedly, none of these statistics are anything to get excited about. Gross domestic product (GDP), according to the most recent release was up 1% for the first quarter of 2008, and up .6% for the fourth quarter of 2007. It's hardly stellar, but not negative, and certainly not in recession territory if one is to go by the (incorrect) definition of two consecutive quarters of negative GDP.
Unemployment stands at 5.5% according to the most recent release. That is a bit higher than we've been used to for most of the past fifteen years. But it is not outside the bounds of the Non-Accelerating Inflation Rate of Unemployment (NAIRUE) or the natural rate of unemployment which many people believe to range between 5-6%. Furthermore, it is not of a magnitude to compare with the late 1970s and early 1980s, and nothing like the 1930s. First-time jobless claims were at 356,000 this week. This is not a good number. On the one hand, it's over 1/3 of a million people - that's hard to ignore. On the other hand, many expected worse.
Inflation is a concern. We are awaiting next week's release of the June Consumer Price Index (CPI). The May CPI showed year-over-year inflation for all urban consumers was up 4.2%. That translates to a doubling of prices every seventeen years plus a couple months. That's certainly not as good as it was even as recently as a few years ago. But it also does not compare with the inflation rates of the late 70s and early 80s. Back then inflation was near 20% which meant prices stood to double every three-and-a-half years.
Exchange is also a concern. The value of the dollar is very low, compared to most major currencies. As of this writing the dollar trades for about 106 Yen and will only fetch about .6 Euros. And since many major commodities are priced in dollars, the weakness is also contributing to higher commodity prices - especially oil. The flip side is that a weaker dollar is helping our export-oriented industries and narrowing (not eliminating) the trade gap. But it is easy to see how one could slip into the NNN category after looking at these statistics.
But they are not the whole story, just an episode. Just like a single still from a movie can't tell the whole story, the economy needs to consider time for us to get the whole picture. That's where my recent reading comes into play.
The roots of this post started with a recent post on The Big Picture blog by Barry Ritholz. In it, he found fault with an article inThe American magazine by W. Michael Cox and Richard Alm of the Federal Reserve Bank of Dallas. (The American is conservative in its editorial stance.) In the Cox and Alm article, they examine the U.S. standard of living by looking real income - the things we get for our money. I'm familiar with other work by Cox and Alm. And while I'm aware of the problems may have with drawing inferences from an average, the authors manage to tell an important story. And the story is not restricted to a single, still photograph. Their story is based on a movie. It develops over time. And that story is solid. But because it does not offer a moment in time for us to study and dissect, it does give the "now" short shrift. That does not mean the longer story is immaterial. To dismiss the work as belonging to the PPP category because it doesn't solely reflect the current situation is to compare apples to oranges. Cox and Alm are not talking about the same thing Ritholz is - despite what some may think.
Another resource that helped shaped this post was a podcast. It was an interview with Gregg Easterbrook on EconTalk. In it, Easterbrook and host Russ Roberts discussed the U.S. standard of living and how people perceive it. While there were a number of "ah-ha" moments, I found one most revealing and relevant to what Cox and Alm had written. Roberts mentioned that he frequently polls his classes, asking how much the U.S. standard of living has increased over the past 100 years. He said the average (there's that data again) answer was 50% - 50% increase over 100 years. Roberts said he was inclined to believe that a certain level of innumeracy may play into this response. It's possible that those polled believe you can't have an increase of more than 100%. But the interesting thing is that, depending upon the measures you use and how you correct for inflation, the increase is actually between 7 and 30 times! Clearly, we're not the best estimators of our own progress. (I would add that, given economic mobility over the course of a lifetime, it's even harder.)
The podcast would have been the end of it, but it wasn't. After hearing Easterbrook and Roberts discuss how hard it is to measure "happiness," I ran across one more article in The American, "Can Money Buy Happiness?" I also ran across a review of two books in The New Republic. The American article talked about the link (or lack thereof) between income and happiness. The reviews focused on research into how we choose, combining aspects of economics and psychology. Given some of the ideas that arose in reading these, it occurred to me that maybe our economic mood - ranging from NNN to PPP - has something to do with how we view the current state of the economy as well as our economy.
As an illustration, my view is that we are not in a CRISIS. I will admit that the economy is shaky but it is far from the worst economy in U.S. History. It's not even the worst of the past 50 years. Many will disagree with this view, but I would place them in the NNN category. Conversely, these are not good times. There are problems (largely of our own making) that call for solutions (again, we should be looking to ourselves rather than others for the answer). For those of us whose memories were largely forged in the expansion of the 1990s, the current state of things is disappointing, to say the least. People who would have us believe that the present state of things are nothing to be concerned about would fall into the PPP category.
I would label the current environment by borrowing from Charles Dickens, with a slight but significant alteration. It is not "the best of times". But neither is it "the worst of times." I don't agree with either extreme. The "now" is challenging. Can we work through the challenge? More importantly, can we provide to the tools to our students to work through the challenge? That's the
key question for this post. I think those of us who teach economics need to make sure our students can analyze and understand the short-term as well as prepared to solve the short-term problems. But this needs to be tempered with an appreciation of, and ability to see the long-term. If we do the first without the second, we run the risk of misunderstanding and misapplying what John Maynard Keynes meant when he said "In the long-run, we're all dead."
I apologize for this rather long-winded post, and I look forward to your thoughts.