Over the last three months, there has been a substantial downshift in the level of economic activity and six-month forecasted growth, according to the Philadelphia Fed.
Figure 1: Log coincident index for Wisconsin, from March release (blue), April (red), and May (green), and associated implied forecasted levels. All normalized to 2014M01=0. Source: Philadelphia Fed coincident, leading, and author’s calculations.
For those who are dubious about the indices’ relevance, note that Philadelphia Fed states that the correlation of the Philadelphia Fed’s coincident index and real Gross State Product exceeds 0.85 for Wisconsin.
Update, 6/27 7PM Pacific: Ironman suggests that an explanation for the downturn in Wisconsin “… is to consider the timing of major changes in the price of oil and fuel.”
I don’t know what to make of this. A decrease in energy prices lowers costs of production, so should be a boon. Perhaps Ironman believes that the drop in oil prices, and the associated decrease in drilling activity has had a negative impact on Wisconsin mining activity and manufacturing output (production of equipment, steel fabrication, etc.). In a previous post I decomposed the drop in employment, where these categories had negligible explanatary power for the numerical decrease. But no matter, here is a focused version of that graph.
Figure 2: Month-on-month change in employment by mining and logging (blue), by manufacturing (red), and rest-of-nonfarm payroll employment (green), in 000’s. Source: BLS and author’s calculations.
Notice that mining and logging has almost not role in the downturn in employment; the same is true of manufacturing. The latter also suggests that the dollar’s strength is not a big source of the decline. It is interesting to me that some people will cast about for any, any, any other cause, except perhaps contractionary fiscal policy and/or policy uncertainty. The latter omission is particularly interesting given the fact that many were willing to point to policy uncertainty as a source of the slowdown in US economic growth in 2011-2012 (see this post).
Oh, and since 2010 (when lots of tight oil production came on line), the correlation between the three month growth rate of the coincident index for Wisconsin and the three month growth rate of the relative price of oil is … negative.
Governor Walker and the Republicans on the Joint Finance Committee are creating uncertainity and destroying job creation. That is one explanation for this downturn.
Shock! Horror! Three months down the spout! Tenure Changes!
Where is Fighting Bob LaFolette now that we need him?
Ban the Confederate Flag? Vote for Bernie? Please Prof. Chinn – give us hope after these horrors!
c thomson: I wish you would have something substantative to say about the data sometime. Here are the last times the 3 month change in the index started dipping below the value recorded in 2015M05: 1979M12, 1981M06, 1990M10, 2000M11, and 2007M11. So, I would say this occurrence is pretty rare — and merits mention, contra your protestation.
c thomson: By the way, it’s spelled “La Follette”.
Menzie,
I think there’s a typo in your description of Figure 1. It refers to Kansas. I think you meant Wisconsin. Not there’s all that much difference in the trajectories over time.
2slugbaits: Yes, absolutely right – thanks for catching that. Now fixed.
Professor Chinn,
It looks like your chart and legend for Figure 1 do not agree.
AS: Yes, you are right – thanks for the close reading. Now fixed.
These are very drastic falls and changes in predictions over just a few months for both Kansas and Wisconsin (with the national trend continuing upwards). Do you have any insights as to what specific GDP factors have been “killing” those two states. Is there a drastic fall in consumption and predicted consumption (after all that is the main driver of GDP) – if that is the problem is it connected to specific cuts in consumer class spending money (benefits to poor people or lack of employment opportunities).
Okay, I left this on the previous post with no one having any thoughts on the matter:
“All of this points to the need for an in-depth analysis of what is optimal in the way of government taxation, spending, and debt to make the economy hum along. Are there “tipping points” for too little government and too much government? Is there a “guiding principle”? If “some” is not enough and “more” is good, when do we reach “too much”? Or is this all about change upsetting some equilibrium that needs time to reset? How do we know when we’ve screwed the pooch?
Would Kansas be thriving by increasing taxes versus prior levels versus lowering them? Wisconsin? Or is this “working out the kinks” whether we raise or lower taxes?”
There are plenty of articles about high taxes stunting growth, but no where is “too high” or “too low” defined. Value judgments are not helpful.
http://www.express.co.uk/finance/city/571717/British-economy-inhibited-high-level-tax-stunts-growth
http://www.commonwealthfoundation.org/policyblog/detail/new-evidence-taxes-stunt-economic-growth
http://www.investmentnews.com/article/20140413/FREE/140419967/higher-tax-rates-fail-to-dent-economic-growth
I’m of the opinion that many other factors besides taxes affect growth. There is certainly evidence that, in the U.S., people are flocking toward milder climates (self-initiated climate change). Without population growth and some overriding factor (such as the recent oil boom that has benefited North Dakota … low taxes… and western Minnesota … high taxes) the midwest is sliding into stagnation. Watch for corn-producing states to have an economic crisis when ethanol subsidies are removed http://www.wsj.com/articles/dirty-rotten-ethanol-scoundrels-1433716070.
Health care now amounts to almost 18% of the U.S. economy. States with larger health care industries are significantly benefiting from the ACA. http://blogs.mprnews.org/newscut/2015/01/minnesota-economy-beats-wisconsin-7-charts-1-table/ …
“Much of that was driven by Minnesota’s health care industry, from hospitals to ambulatory care and other services. As we’ve noted before, that job growth saved Minnesota’s bacon in the Great Recession. It continues to drive Minnesota’s post-recession success.
Hard to believe that 10 years ago Minnesota and Wisconsin had nearly an equal number of health and education jobs. As of November, Minnesota had 74,000 more.”
But, hey, let’s be simplistic and blame it on not enough taxes.
Well duh. A big problem these supply siding supporters can’t seem to figure out, is that states with no assets turn away business. This is what that sleazy, elitist scoundrel Alexander Hamilton figured out way before anybody else. To bad he didn’t live long enough to see Jefferson,Madison and Monroe mutter under their breath “Hamilton was right” while they championed the American System late in their lives. Either you are a country or your not. A public sector that doesn’t invest, doesn’t have assets and that country doesn’t exist. That is the paradox that causes strife in capital. Some capital want to be the one that controls the creation of assets(Kochs Market State) by disinvesting publicly like we have for 40 years. The other wants to continue the American System onward and upward(Nation State). It creates a system of perverse incentives that want to pump profits to shareholders rather than labor. Use outsourcing as a method to that means and disinvest. Capitalism was devised as the merging of money/state. The State builds the assets and legal structure of markets. Business provides the goods through those markets. Market statism is removing the “nation state” and running by a market state. Where the monied and property owning classes create the assets and legal structures.
Right on, Bruce Hall! Much that counts can’t be counted.
c thomson: I see — we should put faith in “things unseen”?
No – just faith in the inability of academic economists to forecast the future in any useful way. 364 learned British economists predicted that civilization as we know would end when Mrs. Thatcher slashed spending.
Predicting that a cut in government spending will reduce GDP isn’t useful.
Data is great as a tool for understanding the world – especially the past.
c Thomson I don’t think those academic economists were wrong about Thatcher’s economic policies. Go look at the data. GDP plunged for five years and did not get back to where it was until 1987. And the unemployment rate was around 12 percent and remained above 10% for most of the decade, which was about double the pre-Thatcher era unemployment rate. Thatcherism was great if you were a rich rentier. If you weren’t, then not so much.
Regarding you post about growth rates and taxes. First, let’s distinguish between growth rates due to the business cycle and long run growth rates due to population and technology. For the most part macroeconomics is about the former; viz., managing aggregate demand to match the long run supply curve. There is very little that a governor can do to stimulate aggregate demand without assistance from
Washington; but there is plenty that a governor can do to make things worse. So a governor’s control options are asymmetrical. One thing that a governor can do to make things worse is to cut back on spending when the federal government offers additional revenues. On that count Walker and many GOP governors are guilty as charged. A governor can also try to increase both taxes on the wealthy to support higher spending on infrastructure projects that are likely to employ lower income folks. It’s called a balanced budget multiplier.
Governors do have some control over long run growth. Most growth comes from the technology and human capital component of the standard growth model, so investing in education is a good way to increase growth over the long run. Unfortunately, typical GOP supporters are not interested in growth rates a generation away because those voters will be among the celestial choir…or worse. That;s why you can’t pass a school bond initiative in a town with a lot of elderly voters. They may say they care about future generations, but they seldom put their money where their mouths are.
As to optimal tax rates, there are two ways to interpret that. One way is in terms of the revenue maximizing rate. There’s been plenty of research on this and the top rate is in the 60%-70% range. So we’re well below that threshold. But I suspect you meant optimal tax rate in terms of maximizing growth. In truth, no one knows what that rate is. I believe the empirical data and history shows us that as countries become richer and population centers become more dense, there is increased demand for public and quasi-public goods. That means we will need higher tax revenues as a percent of GDP as we get richer and more urban.
Bruce Hall: If you consult BLS data for Wisconsin (all available online, via BLS or via FRED), you will see over the last three months health and education employment is flat. On the other hand, government is down. So, you are right — what the government does does matter. If you cut taxes and demand cuts in government employment, well, something will happen.
Thanks for the point!
Menzie, the point I was attempting to make is that there doesn’t seem to be any real analytical basis for determining the right… optimal… balance of taxation and spending. There are plenty of opinions that too little government is bad and too much government is bad… and I provided links.
There is also plenty of evidence that the amount of government spending and taxation is secondary to other factors such as the oil boom in North Dakota, a low tax/spend state or the lack of population growth/aging population … http://worknet.wisconsin.gov/worknet_info/articles/impact_of_aging_population_paper12-2009.pdf
I recognize that you have shown underperformance in Kansas and Wisconsin during the recent period of tax cuts, but I’m yet to be convinced that any change in taxation/spending would not cause a temporary adjustment period. Certainly, it is intuitive that cutting taxes either increases debt or forces spending cuts that can slow the economy at least temporarily. What is not intuitive to me is that the reduction of taxes causes a permanent drag on the economy or is even the primary driver of the economy of various states. And while it is intuitive that an increase in government taxation and spending can “prime the pump”, it is not clear that this temporary effect translates into longer-term health for a state’s economy. I’d say a lot depends on the nature of the spending.
The reason you don’t get an answer is that the question is ignorant and foolish. You don’t define the mission by the money. Do we want a military that can fight 2 major wars simultaneously without major loss of our soldiers? If the answer is yes then the price is very substantial. Do we want a security system that reduce the number of terrorist casualties in our country to single digits per year? That is very expensive. How extensive and well-maintained do we want our system of roads to be? Do we want a first, second or third world infrastructure? Name the product and you will get the price.
The infrastructure issue also raise the question of how to pay for it; through a progressive income tax, a gasoline based “user fee”, or a per mile user fee. This also points to the stupidity of separating public and private spending (as if those are somehow “different” entities). Not only does it not matter for the economy whether money is spend privately or collectively, the exact same thing can seamlessly be moved from one category to the other. The crossing a bridge “user fee” can be a tax or the purchase of a private service, depending on who owns the bridge and collect the fee.
If the mission is a growing economy you have to get money into the pockets of the consumer class. Preferably by giving people jobs so they can earn a good salary and have money to spend. Cutting good paying jobs out of government to hand out as tax cuts for the rich investor class, is not going to work. Businesses and investor class people have nothing to invest in, until and unless the consumer class has more money to spend. Consumption is the horse and buisnesses are the cart – being pulled along for a free ride.
Professor Chinn’s latest analyses for both Kansas and Wisconsin are definitely improved over preceding ones – it at least provides the basis for a proper event analysis, where real causes for changes in trajectory may be identified, which is as easy as identifying what industries in each state are currently experiencing distress. Your hint for Wisconsin is to consider the timing of major changes in the price of oil and fuel.
Ironman: I’ve added an update. Mining and logging, and manufacturing employment do not account for much of the decline in employment witnessed in Wisconsin. Hence, your hint to me does not seem particularly useful. In addition, the correlation between oil price changes and coincident index growth 2010-present goes the wrong direction.
Please elaborate.
Why on earth would you assume that changes in oil and fuel prices only have an effect upon mining and logging or manufacturing? You might want to apply expand your focus to include other industries that are especially sensitive to recent changes in oil prices (since July 2014), where you will find first a rather dramatic surge in output as prices fell, then a top-off and decline as they recovered. Think at the margins.
Ironman: Please help me out and tell me where you expect a negative impact from oil price changes.
I’ll be happy to hold your hand, but do I really need to? Just think of what kinds of businesses saw growth when oil prices fell and you’ll have your answer for what firms would see negative impacts when oil prices rose.
Ironman: I think you are asking me to “fish” for the sectors with downswings, and then attribute to oil prices the downswing. I think there is a phrase for that which you wish me to practice. I suggest you implement that on your own blog.
The goal seems to be to shrink government. Federal, state, and local government spending has reached 35% of GDP and federal regulations alone cost $2 trillion a year.
The rich will find ways to avoid taxes and the poor don’t pay much in taxes. So, the burden falls mostly on the “middle class,” including on potential small business entrepreneurs.
There are budget constraints and trade-offs. We all want protections for consumers, labor, the environment, etc.. Yet, many businesses cannot afford all the regulations, in practice, and are forced to cut corners to survive. Then, government can fine them or lawyers can sue them.
Over the past few years, we’ve ramped-up government spending and regulations, along with keeping monetary policy in emergency mode, and the country is still in depression with much more government debt. Now, cooling global warming is our top priority?
“The rich will find ways to avoid taxes and the poor don’t pay much in taxes. ”
true. but we have the ability to keep the rich from avoiding taxes, we just do not enforce that ability. we choose to let the wealthy operate off of the backs of the middle class. very poor choice. and lest somebody argues you need to pamper the rich or let them leave, then let them leave. there are millions in the upper middle class/lower upper class which would gladly take their place even with the taxes.
2Slugbaits, my point wasn’t that there is a fixed ratio between growth and taxes – or that some Laffer curve nonsense works. The kind of taxes also matters – I think there is broad agreement that taxing consumption is better than taxing income, for example. There is no reason that taxing consumption can’t be progressive and indeed may be the best way to tackle hedge fund guys with ski lodges.
So I agree with Bruce Hall. There may be qualitative reasons for cutting taxes or changing the tax mix. The results can’t be forecast using stat packages. Now as for trading market anomalies – or simply for numerical bullshit – stats are terrific.
2Slugs, I lived in the UK before, during and after Thatcher. That remarkable woman changed the culture of the UK, not just taxes. She achieved something that Reagan failed to do; she made being a sniveling leftie of the trad beards and sandals type ridiculous – little bleating dweebs that were parodied on TV. Sort of Jon Stewart in reverse.
And the benefit to the UK went across the board. Talking to the working poor in Fulham after Thatcher was a revelation. Pity you weren’t there.
I wasn’t there, but my wife was.
In any event, you didn’t dispute the basic economic facts…unemployment was twice as high as it was before Thatcher and GDP fell for five consecutive years. Apparently you believe manly virtues and tough guy attitudes trump sound economic policies. We disagree.
There are some economists that prefer consumption based taxes. I’m not sure that the rich wouldn’t be able to find ways around those taxes as well if they really put their accountants to work. But Saez has an interesting paper that argues we should tax the hell out of the ultra super rich, then tax the hell out of the super rich, then tax the hell out of the merely rich. That would introduce the least distortion and maximize welfare, assuming that dollars have declining marginal utility. And what if the rich don’t want to pay those taxes? Are there no work houses? Are there no prisons?
Is heavily-subsidized loss-making coal mining really contributing to GDP? Is letting a young guy go down into the mines thinking it is a job for life a kind or even decent thing to do? Should unions have a veto on cutting jobs in tax-supported industries? Above all, who runs the country?
2Slugs, these are the kinds of questions that Mrs. Thatcher addressed. In 1979 the UK was at a crossroads. One direction led to Argentina. Or Greece. The UK electorate, fed up with the ‘winter of discontent’ when bodies went unburied and shop stewards decided who was admitted to hospital for treatment, choose another direction. Such decisions can’t be based upon a few years of GDP growth – they are outside any quant framework. The 364 economists were flat-ass wrong about the larger issues.
I assume that your wife was young in 1979? And was she English? She may not have understood what was going on.
c thomsen,
She was young and an Iowa kid who wanted to live in the midlands (Derbyshire) for a few years.
The economists predicted that unemployment would increase and GDP would fall. That’s what happened. I believe you’re trying to make the argument that high interest rates, a weak economy and high unemployment were necessary evils in the service of modernizing the British economy. In other words, you’re equating quasi-socialist policies pursued by Labour with Keynesian economics. The two are very different, and anyone who posts on this blog really should understand why they are very different. In any event, there are plenty of contemporaneous examples of countries that were able to invigorate their economies without the Thatcherite medicine. At bottom Maggie Thatcher’s policies were never about economic growth; they were always political with a mind hell bent on breaking labor’s power relative to capital. Not terribly different from today’s Tory politicians who are utterly clueless about economics but quite skilled at fooling dimwitted voters.
Those damn voters! If only we could get rid of them, we economists could run things perfectly. And there are so many of the dimwitted fools!
Priceless, 2Slugs. So this site is a shrine to Keynesian economics? And pious liberal elitism?
Mrs. Thatcher brought change – in buckets – and change is always resented by the establishment. There are many forms of conservatism.
Incidentally, my wife is from the UK midlands, I went to Oxford, worked and lived in the UK for decades, my cousin was a long-serving MP, I canvassed in many UK general elections and generally know the place pretty well. 2Slugs – you don’t. Stick to models and academia.
I wasn’t being sarcastic in stating that the current proposed budget in Wisconsin seems to be creating uncertainty and destroying jobs.
There is some evidence that the proposed budget is destroying jobs: GeminiCares owner blames layoffs on state actions, uncertainty on Gov. Walker’s proposal http://www.bizjournals.com/milwaukee/blog/2015/04/geminicares-owner-blames-layoffs-on-state-actions.html
Also some researchers are leaving the state and taking research funding with them: Faculty uneasy about working at UW after cuts, tenure changes
Read more: http://host.madison.com/news/local/education/university/faculty-uneasy-about-working-at-uw-after-cuts-tenure-changes/article_79135697-7e0e-5a11-8b86-49eccf2cc909.html#ixzz3eNBmBJmZ
By the way, Robert M. La Follette Sr. was a Republican, maybe we need more like him: https://en.wikipedia.org/wiki/Robert_M._La_Follette_Sr.
Dear Professor Chinn,
John Kasich, governor of Ohio, appeared on Face The Nation on Sunday, June28. He touted Ohio’s tax cuts over the past few years. If I understand correctly, an income tax cut was made around September 2013. There also seems to have been a slight increase in sales taxes about the same time period. If one graphs the log coincident indicators from the Philadelphia Fed. normalizing to 2011 when Kasich entered office or to 2014, similar to your analyses of Kansas, Ohio seems to have out performed the US. Also if one does a forecast similar to your parsimonious Kansas forecast, it seems that the actual performance of Ohio’s coincident indicators had deviated below the dynamic forecast from about 1st qtr. 2012 until about 2nd qtr. 2013 and then started to approach the forecast(seemingly coinciding with the tax cuts), and now shows a slight tail-off from the dynamic forecast starting about 1st qtr. 2015. The leading indicator seems quite positive, however.
It would be instructive to see your forecast and comments, since Ohio may be a state where a Republican governor has made tax cuts and the state seems to be prospering as measured by the Philadelphia Fed. coincident indicator. Maybe some Ohio readers see the situation differently.
AS: I think some of it is the depth of the downturn. The OH trough was 15% (log terms) lower than 2007M12, while WI was on ly 9% (compared to 5% for US). Now why didn’t WI bounce back faster, given its downturn was bigger than the US? Frankly, I don’t know; I haven’t done a statistical analysis of OH.
I think it is interesting that OH has consistently ranked lower by the ALEC-Laffer Economic Outlook Rank than WI. Let me reiterate this — OH has been pursuing a policy regime that is less tax cut friendly, less deregulatory, less anti-union than WI since 2007 (data used in the RSPS2008), and yet has been growing faster than WI since 2010. It makes you think…
Professor Chinn,
Thank you for your comments. I appreciate your analyses, explanations and comments. It would be interesting if someone ranked the various states related to the degree of the tax cuts, deregulation, anti-union efforts as you mention and then show relative performance. I imagine that the difference in the nature of various state economies would complicate the analysis, but the ranking may be an interesting first-cut for non-expert readers like me to better understand the impact of the various policies you mention.
Professor Chinn,
Based upon your comments above, I looked at the ALEC rankings. It is interesting to note that a scatter diagram showing the ALEC-Laffer Economic Outlook Rank and the rank of state coincident index performance by state from January 2014 to May 2015, there is no correlation between the ALEC rank and the state performance rank.
Any additional comments you want to share?
I meant about ALEC not Ohio.
AS: I am unsurprised; see this post.
Professor Chinn
Sorry, I see you answered my ALEC question. And also, sorry, I forgot about your former post. I don’t understand why what one would think is a legitimate organization, forecasts are made about state performance when there appears to be no correlation with forecast and actual performance.
AS: For those who believe, it is the triumph of ideology over knowledge.
Three months or six years… different pictures. http://www.michigancapitolconfidential.com/21460
Click on the image.
Interestingly, Walker and Snyder have implemented similar policies.
I may be wrong but I believe that nonfarm payroll employment includes government workers. Now with Wisconsin being significantly an agricultural state removing farm payroll will significantly reduce the base of employment relative to other more industrial states. What this does it exaggerate any reductions in the government workforce. What is actually a good trend, reducing government workers, is distorted as bad news when looking at statistics that over emphasize government employment. It would be interesting to see the results for farm employment.
Ricardo: Agricultural value added in Wisconsin in 2013 was 2%.
Thanks Menzie. I thought you might have it at your fingertips.
Do you have the same for government employment?
Ricardo: 10.3% for state & local. So stripping out ag doesn’t have a big impact.
Thanks Menzie.
Interesting to see how Wisconsin’s economy compares to that of the rest of the midwest and of the nation. I think Wisconsin has a solid base of talent and natural resources. Looking forward to future posts!
It seems to me that with declining wages, there is declining demand, thus declining profit potential, and thus declining reason to invest. Or hire. Etc.
Wisconsinites have much to thank Scott Walker for.
As for prepping the economy for interstate competition, I think the state is still at an absolute disadvantage with respect to Texas and the rest of the South, and as for improving its international competitiveness that is – unlikely.
There are a couple of points I would like to make. First, is that singling out KS and WI with a few years of data is disingenuous. However, I am well-assured that Menzie realizes this. I realize that he is poking fun of RWers and their claims, and this is just another example in their long lines of conservative economics never living up to their promises.
It is not just WI or KS. We have ample evidence. The Bush tax cuts resulted in some of the lowest growth in decades while exploding deficits. Lets not forget about the great libertarian experiment in the Northern Marianas and Jack Abramoff or neoliberals running Brooksley Born out of a job.
We have the world to look at. Every wealthy nation has adopted a large degree of liberalism, with a large government and high taxation. We will never return to an era before the New Deal, with no income tax and no safety nets, and limited government. Why should we?
Austerity, during times of ZLB interest rates, are counterproductive and do great human harm (Re: Greece). It creates too much human suffering.
As we have seen time and time again, Conservatives promise everyone a pony when they slash taxes on the rich and deregulate big businesses, but it never comes true.
“Austerity, during times of ZLB interest rates, are counterproductive and do great human harm (Re: Greece). It creates too much human suffering.”
Greece is caught in a socialist trap of low competitiveness and great debt. But go ahead and blame it on the IMF. It just isn’t fair that creditors want to be paid back.
Greek government debt as percent of GDP is now over 150% annually. The U.S. is over 100% and trending upward. What is your fix?
bruce, “It just isn’t fair that creditors want to be paid back.”
most people fairly understand that a creditor wants to be paid back. but most people do not agree with a debtor’s prison. a creditor is the other half of a debtors transaction. do they not bear responsibility for lending their funds wisely? this is the reason for bankruptcy courts in the usa. or put another way, how violent of a reaction are you willing to permit a creditor in the name of reclaiming its debt? how much has greek debt per GDP risen since the the troika implemented austerity as the solution? perhaps austerity was a solution, but obviously not to the problems of greece.
Backed by the full faith and credit of the Greek government. Yeah. The same people who profess full confidence in the free-wheeling spending of government as the cure for fiscal malaise are the same who decry “debtors prison” when the bills come due.
bruce
no. i simply believe when two parties engage in a deal, and when both sides know the terms of the deal will never be met, the morality play no longer exists. bankers and investors understood greece was taking on debt they could not repay. they were not innocent bystanders in this event. this is not absolving greece of poor behavior. but you cannot knowingly enter into a deal which cannot be satisfied, and then cry foul and commit economic warfare. there is a price to be paid for bad investments as well. or you don’t believe in letting the free markets work? the inability to discharge unpayable debt is a market failure, created solely for the benefit of the creditors. the possibility of bankruptcy forces creditors to be much more careful with their capital. we simply have a market failure.
Baffling,
I’m with you, no one should loan any more to Greece, since there may be a big probability of not getting repaid.
AS, that is how the bond market should work. you don’t invest in junk bonds, with high interest rates, without the expectation that a default will occur on some of them. perhaps we should revisit any credit rating agencies who gave greek debt a passing grade? we don’t have a bankruptcy court for sovereign nations, so this creates a problem on the national level. if a country owns its own currency, it can inflate its way out of the debt. other problems may result, for sure, but at least the debt problem goes away. but a country operating with another entity’s monetary policy, as greece does, really has no options in a fiscal crisis. we have recreated the debtor’s prison, or the modern form of economic warfare, with the greek exercise. governments left the gold standard decades ago to avoid this “sins of our fathers” conundrum.
Wonder how this would work in Wisconsin?
http://www.ft.com/intl/cms/s/0/1110b86c-2558-11e5-bd83-71cb60e8f08c.html#axzz3fKlHRil3
Let me lead off saying im not an economist, but this is my take, if you make that plot for just about any date from 2/1/2013- 10/1/2014 WI is leading MN. Additionally, if you take the lagging 12 month moving average of the coincident index the growth rate for 2014 was higher in WI than MN, and the growth rate measured by the moving average for WI has been increasing since February of 2013 while MN was holding steady. That is significant considering MN also had a higher population growth rate. Basically for the last 2 years wisconsin has grown faster than minnisota, but it does appear that wisonsin is headed for a slowdown.
In addition, outside of MI, it appears that WI, IA, IL, MN all have similar growth rates for the past couple of years, so probobly a lot more at work here than government policy. There are somethings that government is good at, and somethings its not, and growing the economy is probably not one of them. How do you explain the dramatic booms and busts within different states within this framework?
Kirk: Well, according to my estimates, Wisconsin has veered from what was to be expected according to historical correlations. See the statistical analysis here.
Ok, I think I understand. So Wisconsin’s economic performance has under performed if we use 2011 as a frame of reference and compare to historical growth rates and relationships between the US growth rate. My only question is the why? I bet if you ran that model for every year since 07 it would show that due to the fact that Wisconsin’s population growth has begun to lag the US population growth much more than it has historically. When you frame the question this way its clear the Wisconsin is probably not under performing due to a shock from a drop in government spending but due to longer term patterns that are starting to emerge in the economy.
Kirk: I don’t think you quite understand the econometric methodology used in “A Parsimonious…”. The use of a cointegrating vector with coefficient less than unity (as explicitly stated in the text, the elasticity is 0.62) incorporates the historical lagging of Wisconsin in terms of output. This is the mathematical interpretation of what the error correction model is doing, and how the ex post out of sample forecasting exercise is conducted. If you are interested in the specifics, please consult Enders’ econometrics text, or this paper (old, but gets across the ideas of cointegration and of error correction models).
So since 2011, Wisconsin has been lagging more than what it has been doing historically. And it has been doing so with statistical significance.
I understand, why?
Kirk: You wrote:
Which clearly demonstrated that you did not understand the modeling approach. Well let’s say you now understand the post-2011 performance is worse than the historical lagging.
You ask why? I suspect contractionary fiscal policy; see this post
How do you know its only been since 2011? Could it have been 2007 or 2008? According to your model could Wisconsin have been lagging before then and this is just a continuation of a trend?
Kirk: I know because I did some robustness test. The next time I do the analysis, I’ll include those tests (people keep on asking me these things — sometimes it’s 2013 that’s the real date, sometimes it’s another date. Why don’t you try doing the analysis yourself — all the data are available online?).
Also, a lot of the “mining” jobs in wisconsin probobly roll up under transportation due to frac sand mining, which was one of the states fastest growing industries that just got hammered due to lower oil prices.
Kirk: Maybe. But Trade, Transportation and Utilities was essentially same level as it was in Dec. 2014.