There’s plenty of commentary on the ongoing China-US Strategic and Economic Dialog, from the Economist [1], Reuters [2], [3], and Bloomberg [4] [5]. Here are three pictures to place some of the issues in perspective.
My first observation is while the nominal USD/CNY had stabilized in recent months, the exchange rate that matters most for global imbalances, the Chinese real trade weighted CNY, has moved around a bit, as the dollar has appreciated and depreciated.
Casey Mulligan rebuts my post asserting slack in the economy by posing the scenario “Construction Workers Teaching Kindergarten” (Note: Mulligan’s blog is down; here is an alternative link currently working – 8/2/09). He writes:
Econbrowser now claims* that the stimulus bill can be effective, because unemployment rates are high (whatever that means) in health care and education. Let’s take a look at employment changes Dec 2007 – June 2009 (millions) by industry:
Total nonfarm payrolls: -6.5
Construction: -1.3
Manufacturering: -1.9
Education and Health: +0.7
How exactly is fiscal policy going to create 3.5 million jobs by primarily hiring people in education and health? I see only two scenarios, both absurd and/or dishonest:
He argues these two scenarios are: (1) “The construction workers become kindergarten teachers” or (2) “The people in construction and manufacturing stay unemployed.”
Different concepts of potential GDP
For serious macroeconomists, the magnitude (or existence) of the output gap is a central factor for determining the appropriate policy actions (see for instance Weidner and Williams). In several recent posts, I’ve discussed the variety of approaches to estimating the output gap [0] [1]. A recent symposium on Projecting Potential Growth published by the Federal Reserve Bank of St. Louis is an excellent resource for anybody who wants to think seriously and carefully about the challenges in estimating this variable. In the lead article entitled “What Do We Know (And Not Know) About Potential Output?”, the authors Susanto Basu and John Fernald write:
This must be the period of soul searching, with the Economist engaging upon multi-article exegeses on where mainstream macro went wrong [1], [2], [3]. Alternatively, I think this is a happy time for some economists outside the (perceived) mainstream, who can now chortle “I told you so”. One recent example is by Mario Rizzo.
In today’s Economix post, Casey Mulligan argues that the greater than predicted unemployment numbers should not be ascribed to the negative effect of the stimulus, but rather to bigger than anticipated negative shocks.
We cannot blame the Obama administration for failing to predict June’s 9.5 percent unemployment rate. That result just shows the size of the shocks hitting the economy: Even the best forecasters can miss the unemployment rate by almost two percentage points, even when forecasting fewer than six months ahead.
For people who want an impartial survey of multipliers, see Patrick Van Brusselen, “Fiscal Stabilisation Plans and the Outlook for the World Economy”. It’s a useful antidote to the blogposts that cherry-pick multipliers from a given model to make a given point. The survey ranges over US, euro-area, and Japan; and structural macroeconometric models, DSGEs, and VARs.
There’s been a lot of breast beating over the fact that the Administration underestimated the severity of the downturn. From this has come a lot of confused argument — sometimes not internally consistent — over whether this invalidates the usefulness of the stimulus package, whether the stimulus worsened the economic outlook, etc. I’ll dispense with the clearly economically illogical arguments and try to tease out what is the “surprise” element in the 2009Q1 figures, and from that infer how much worse the economy was relative to what private sector forecasters predicted, conditional upon the passage of the ARRA.
From the WSJ editorial page:
Only a small share of the spending will occur in 2009, even though Keynesians would argue that stimulus spending should be frontloaded to kick-start growth. The Congressional Budget Office estimates that the largest share of the spending will occur in 2010, with the amount in 2011 being slightly larger than in 2009. Again, the timing exacerbates the problem: It will be tough to cut back on spending written into budgets as far out as 2011.
Several months ago, I discussed the indicators of financial stress developed by the IMF in two posts [1] [2]. The working paper documenting and extending the results in the World Economic Outlook has just been released.
Sunday’s NYT had a great interactive graphics by Amanda Cox detailing the dynamics of recessions and recoveries. One interesting graph pertained to the OECD Leading Indicators: