This is a slightly revised version of a piece that appeared on the Washington Post’s The Hearing today.
In her testimony before the Joint Economic Committee today, Dr. Romer, Chair of the CEA, presented an explication of the progress of the financial crisis and the economic downturn, the anticipated effects of the measures undertaken and planned, and the outlook going forward. On most points, we’re in agreement, so I’ll only highlight some key issues of interest.
I’ve been thinking about trying to convey exactly how startling the drop in U.S. imports has been. First, take a look how much non-oil goods imports (in real terms) have dropped, relative to, for instance, GDP.
Figure 1: Log GDP (blue, left scale), log goods import ex.-oil from NIPA (red, right scale), estimated from trade release (purple, right scale), all in Ch.2000$, SAAR. 2009q1 estimate is based on actual January and February data and March estimate incorporating continued 5% decline from February. NBER recession dates shaded gray. Source: BEA, GDP final release of 26 March 2009, February trade release, NBER, and author’s calculations.
…and the Financial and Economic Crisis
I don’t read very many books. At least not during the academic year. But I have read two books recently that are quite germane to thinking about the buildup to the financial crisis, and thinking about how to respond to the current economic downturn. The first is Akerlof and Shiller’s Animal Spirits. The second one is actually not yet out — it’s Justin Fox’s The Myth of the Rational Market (I got a prepublication copy; here’s a hint of it). They are both important books, well worth reading.
One of the most interesting “boxes” in the IMF’s World Economic Outlook (in Chapter 1) is the one entitled, somewhat innocuously “Global Business Cycles”, by Marco Terrones, Ayhan Kose and Prakash Loungani at the IMF. Yet, it’s important to read until the ending paragraph:
To summarize, the 2009 forecasts
of economic activity, if realized, would qualify this year as the most severe global recession during the postwar period. Most indicators are expected to register sharper declines than in previous
episodes of global recession. In addition to its severity, this global recession also qualifies as the most synchronized, as
virtually all the advanced economies and many emerging and developing economies are in recession.
The IMF’s World Economic Outlook (Chapter 1), released this morning, is grim:
Tables 1.3 and 1.4 (tables) in Chapter 1 bear particularly close attention, although the entire text is useful.
The advance release for 2009Q1 GDP will come out on April 29. Until then, we have some readings from the monthly GDP nowcasts, two of which were released on April 15. e-Forecasting identifies an annualized 9.6% decline in first quarter GDP. Macroeconomic Advisers (whose monthly estimates only extend to February) writes “Our latest tracking estimate of a 5.1% decline in GDP in the first quarter includes a 1.2% decline in monthly GDP in March, reflecting a partial reversal in net exports and weakness in PCE and inventory investment.” A lot hinges, then, on what happens to net exports.
From Daniel Wilson, “Are Fiscal Stimulus Funds
Going to the ‘Right’ States?” at the SF Fed (h/t Torsten Slok at DB):
…While
it is too early to tell whether the overall stimulus
package will have its intended effects, this review
suggests that, by and large, the distribution of federal
stimulus funds is indeed tilted toward those states most
likely to spend the funds quickly and effectively.
Chapter 3 of the IMF’s World Economic Outlook has a great summary figure:
There has been a lot of breast-beating in the press and in the blogosphere about how economists failed to discern the possibility that not all was going well in the years leading up the current financial and economic crisis [1]. I think the notion that all economists were blithely optimistic has been dispelled (well, okay, here’s a couple of exceptions: Dan Gross h/t Free Exchange, A. Kaletsky). At the risk of some gross simplifications, I will speculate that there was —
until recently — less optimism among academic macroeconomists than Wall Street economists. There was probably less anxiety among
say finance professors who focused on asset pricing (as opposed those who worked in banking) than macroeconomists (Dani Rodrik highlights the diversity). One divide that
I think is not particularly relevant in locating the source of the crisis is the most well known one — specifically whether prices
are sticky.
In my opinion, the big divide in thinking relates to how economists conceive of financial markets working. This is a divide that cuts across other divides. For instance, the Hicksian
decomposition (IS-LM), in its simplest incarnation, treats the financial world as one wherein bonds are identical, and the only means of borrowing; there is no separate channel for lending, say via bank loans, to influence aggregate demand (see this post for the many channels of monetary policy). In the real business cycle literature, and many New Keynesian DSGE models, there is a representative bond (and lending rate) which summarizes the asset markets (see Camilo Tovar’s survey of DSGEs for a discussion).