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November 1, 2009

Economist's View - 4 new articles

"A Shaky Start"

I have something at Room for Debate (written last Friday) on the the extent to which the recent improvement in GDP growth can be attributed to the stimulus package, and whether more stimulus is needed ("Did the Stimulus Work?").

The link is to the much shorter version that appears on the NYT site. Here's the wordier, unedited version:

A Shaky Start, by Mark Thoma: With the news yesterday that output grew by 3.5% during the third quarter of this year, it appears we may finally be seeing the green shoots that signal the onset of the recovery. But what is driving the growth in output, what will it take to sustain that growth, and how long will it take to make up for the lost output and employment we experienced during the crisis?
A look beneath the growth numbers announced yesterday answers the first question. Increased consumer spending accounted for 2.4% of the 3.5% increase in growth, and much of the increase in consumption was driven by the Cash for Clunkers and other government stimulus programs. Today's announcement that consumer spending fell by .5% in September now that the Cash for Clunkers program has ended raises serious questions about the sustainability of the growth we are seeing. Without further help from the government, which has clearly aided the economy despite what you may have heard from naysayers, will the private sector be able to sustain growth on its own?
One of the big dangers we face is that we will declare victory too soon and begin raising interest rates and cutting back on stimulus before the private sector has recovered the ability to sustain growth without help from the government. I believe that we need more stimuli right now to maintain the growth we are seeing, particularly given how far the recovery in employment lags behind the recovery in output, but adding to the stimulus package is a political non-starter. However, amid the worries about the growing deficit and fears of inflation that make further stimulus political poison, we can and must maintain the stimulus that is already in place.
The need to at least maintain the stimulus we have, if not increase it, is enhanced by the fact that even though a 3.5% growth rate is far better than the negative rates we have seen recently, it's not nearly enough to make up for the output we lost during the crisis in a reasonable amount of time (Paul Krugman says that at this rate, "we wouldn't reach anything that feels like full employment until well into the second Palin administration"). The recovery period from past recessions were associated with output growth rates of 6-7%, enough to resume the level of growth that existed before the crisis, and to make up for losses in a reasonable amount of time. If those losses had not been recovered, if the level of output had been permanently lower instead of just a temporary deviation from its long-run trend, then employment and income would have also been permanently lower. That is not a desirable outcome in any case, and in the current recession the weakness in employment markets combined with the stagnation in middle class incomes even before the crisis began makes such an outcome even more undesirable. Unfortunately, at a rate of 3.5% -- which is only slightly above the long-run trend rate of growth -- it will take many, many years to make up for losses and return to the long-run trend, and any further slippage in growth would make the losses permanent.
The recovery we are seeing is being driven, in large part, by government stimulus programs. The fact that growth is weaker than we need to fully recover losses in a reasonable amount of time, and the even slower recovery we are seeing in employment markets, indicates that the stimulus programs already in place are too small. Thus, even though it's unlikely to happen, the economy could use more help than it's getting, but in any case it's imperative that we avoid cutting back too soon.
The signs are encouraging, and at some point the private sector will be able to sustain growth on its own, but it's far too soon to declare victory.

Other entries from:

Was the Invisible Hand "Central" to Smith?

Daniel Klein, Professor of Economics at George Mason University and Editor of Econ Journal Watch, asks:

What probably would you put on the truth of a broad hypothesis of deliberate centrality?

Here's more background on the question:

In a Word or Two, Placed in the Middle: The Invisible Hand in Smith's Tomes, by Daniel B. Klein and Brandon Lucas: Abstract: The meaning and significance of Smith's expression "led by an invisible hand" has been long debated, and especially lately. We speak to the large debate only in fine, by focusing on the conjecture, first hinted at by Peter Minowitz, that Smith deliberately placed his central idea, as represented by the phrase "led by an invisible hand," at the physical center of his masterworks. We bring supportive evidence and argumentation to the conjecture. The four most significant points developed are as follows: (1) The expression "led by an invisible hand" occurs pretty much dead center of the 1st and 2nd editions of Wealth of Nations, and of the final edition of the volumes containing Theory of Moral Sentiments. (2) The expression in WN drifted only a bit from the center, only about 5 percent from the center in the final edition (and even less if the index is excluded). (3) The rhetoric lectures show that Smith not only was conscious of deliberate placement of potent words at the center, but thought it significant enough to remark on to his pupils, noting that Thucydides "often expresses all that he labours so much in a word or two, sometimes placed in the middle of the narration." (4) There numerous and rich ways in which centrality and middle-ness hold special and positive significance in Smith's thought. In conjunction with larger considerations, these points may be helpful in assessing the significance of Smith's famous phrase. Here's a figure showing centrality through the 7 editions of each work.

This is an attempt to rescue the invisible hand from critics who argue that the invisible hand idea that is attributed to Smith was not a central part of his writing (e.g. see Gavin Kennedy).

In answer to the question, it doesn't seem very likely to me that this was intentional.

Note: If you are unfamiliar with the debate over the invisible hand, here is Gavin Kennedy:

...Lost Legacy has never been slow in criticizing the 'Chicago Adam Smith', a person with ideas that are far from the ideas of the Adam Smith born in Kirkcaldy in 1723. George Stigler's boast that "Adam Smith is alive and well and lives in Chicago" (1976) reflects to invention of the Adam Smith of the "invisible hand" (a mere metaphor for Adam Smith whose single use of it in Wealth Of Nations referred to the unintended consequences of the risk-avoidance of some, but not all merchants ... who preferred the home trade), and had nothing to do, at least in Adam Smith's mind, with how markets worked, ... or how the price system worked.

The belief that the "invisible hand" was a significant 'idea', 'concept', 'theory', or 'paradigm' was wholly invented in the 1950s by neo-classical economists on the back of general equilibrium mathematics ... and in support of a worthy criticism of Cold War, Soviet central planning. It is now taught in every economics 101 class as if it had historical validity, mainly by people who have never bothered to read Wealth Of Nations. ...

Update: See " Yet Another Note on Adam Smith's "Invisible Hand": What It Is and What It Is Not" by Brad Delong.

Long-Term Unemployment

[Calculated as the this divided by the this.]

links for 2009-10-31

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