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ing rapidly then the gray looks similar to the red line s fall from 4 to 2 5 the recession ends just as the gray falls below 3 just like the red line perhaps it is no coincidence that the kansas city fed article considers how long it takes for the data to climb back up to the 3 level after a recession ends both lines continue to fall after the recession ends the red until 2012 10 and the gray until 2008 09 september 1992 the red line shows increase since the 2012 10 bottom this improvement in average hourly earnings is concurrent with an increase in the gray line but the gray increase is higher and runs for a longer time the two increases peak together around 2014 03 and neither line shows much increase thereafter these observations seem to suggest the view that the recovery after the great recession was much weaker than the recovery after the 1990 91 recession and they seem to suggest that growth is behind us and we now await the onset of the next recession such views are widely held today but i believe them to be incorrect i think the after effects of the great recession follow the same pattern as that of the 1990 91 recession magnified by a factor of 2 5 or so the magnification delays the timing of events everything is happening in slow motion this time around to get a feel for the slow motion pace of events since around 2006 i took the gray line from graph 3 and multiplied its time increment values by 2 5 thus on graph 3 the gray line shows a peak around 2014 03 but on graph 4 that same peak is delayed until well after 2025 graph 4 comparison of recessions with the 1990 91 recession in slow motion to my eye there is great similarity between red and gray on this graph far more than on graph 3 the red drops much lower than the gray by 2011 or 2012 indicating greater severity of recession but there is a striking similarity of timing from the 2006 peak to the 2012 trough clearly visible on this graph one effect of the severity of the great recession was to slow things down more than a normal recession with the gray data slowed by a factor of 2 5 the declines hit bottom concurrently and the slow motion effect becomes evident to the naked eye no comparable similarity is visible on graph 3 from its low point the red data bounces up to the 2 5 level where it meets the gray data i don t see that as coincidence i see it as part of the similarity of these two recessions the recession s severity gives the red line some waviness while the gray runs flat at the 2 5 level but the red persistently returns to 2 5 and the waviness dissipates over time that brings us to the present moment and the end of the red line what does the future hold if the similarity of red and gray persists average hourly earnings growth will show increase from now to 2026 and wouldn t that be something in 2016 john taylor wrote because the economy has grown from the start of this recovery at a pace no greater than the prerecession trend it has left a vulnerable gap of unrealized potential that can and should be closed with faster economic growth in several key ways the us economy resembles an economy at the bottom of a recession ready for a restart even though the unemployment rate has reached 5 percent in the last two years the unemployment rate has dropped even more and there has been some talk of improved growth warnings of another recession continue to arise from those who are thinking in terms of graph 3 i agree with john taylor that in 2016 our economy resembled an economy at the bottom of a recession ready for a restart in the last two years our economy has been preparing for that restart as graph 4 shows it is now ready prepare to be astounded by the vigor edit 16 june 2018 see also my follow up post recessions happen when the economy slows down recoveries happen when the economy speeds up at may 24 2018 13 comments email this blogthis share to x share to facebook share to pinterest sunday may 20 2018 wage inflation the equation of exchange you know it central to monetarism is the equation mv pq m is the money supply v is velocity the number of times per year the average dollar is spent p is prices of goods and services and q is quantity of goods and services hey only p and q today price and quantity p is the price level q is the quantity of output if q by itself is real gdp then p times q is nominal gdp but that doesn t only work for gdp it works for things with varying prices to convert from nominal to real you divide by price to convert from real to nominal you multiply by price to see the prices you divide nominal by real mind your p s and q s i was looking at my list of fred data on productivity and suddenly realized it includes both the real and nominal versions of compensation per hour i could divide the nominal by the real and see wage inflation that might be interesting i m leaving output out of it i m not considering productivity here only varying wages i m using business sector data nominal divided by real compensation per hour i show it in blue for comparison in red i m showing the cpi indexing make the two series equal at the start graph 1 wage inflation blue and the cpi red both indexed to 1948 08 01 red and blue run tight together until around 1980 since the 1980s then wages fall behind prices i thought that was pretty interesting since around 1980 wages don t keep up with prices maybe that s why the fed has had such a hard time reaching its 2 inflation target and maybe it s why wage earners have such hard times wondering by how much the wages have fallen behind i rearranged this data to show wage inflation relative to cpi inflation what i found was pretty surprising graph 2 wage inflation as a percent of consumer price inflation again indexed to make them equal at the start the blue line runs at 100 0 consistently from 1947q1 to 1977q4 then suddenly falls beginning in 1978q1 that s pretty weird it almost looks like they were using business sector compensation costs to figure the cpi and then suddenly they weren t see also kitov s warning at may 20 2018 no comments email this blogthis share to x share to facebook share to pinterest friday may 18 2018 the consensus is dangerously wrong palley says following up on palley s latest nirp has quickly become a consensus policy within the economics establishment this paper argues that consensus is dangerously wrong resting on flawed theory and flawed policy assessment if the consensus is wrong it means our solution is part of the problem if the consensus is dangerously wrong it means the problem is bigger than we think in a growing civilization arnold j toynbee wrote a challenge meets with a successful response which proceeds to generate another and a different challenge which meets with another successful response there is no term to this process of growth there is no end to it he says unless and until a challenge arises which the civilization in question fails to meet a tragic event which means a cessation of growth and what we have called a breakdown here the correlative rhythm begins the challenge has not been met but it nonetheless continues to present itself a second convulsive effort is made to meet it and if this succeeds growth will of course be resumed the depressions and great recessions of the capitalist era are the rhythmical challenge that we have failed to meet our economic troubles will defeat us unless we rise to the challenge and by they will defeat us i mean civilization dies as toynbee said it s on us people who speak of the end of the american century people who express concern about the rise of totalitarian governments they see it coming the breakdown the nature of the breakdown can be summed up in three points toynbee wrote a failure of creative power in the creative minority which henceforth becomes a merely dominant minority an answering withdrawal of allegiance and mimesis on the part of the majority a consequent loss of social unity in the society as a whole losing its creativity the creative minority becomes a merely dominant minority government becomes more oppressive a common complaint today government is more oppressive everybody complains about government these days withdrawal of allegiance that is but we can t solve our problems by focusing on government what s missing is the creativity to fix the problem we need the right solution to the right problem changing the government doesn t necessarily do it toynbee thought creativity solves the problem by creativity toynbee meant the problem solving ability if it sounds like circular argument when i say it then i m not saying it right where we are now is late in the process things now are so bad that we see government as the problem but that s a cascade effect when a challenge meets with a successful response civilization continues to grow but when there is no successful response there are consequences these consequences we call problems they are problems but they are consequences they are cascade effect problems they are results and you can t solve results you have to solve the problem identify and solve the problem we have to solve the original problem the one that keeps coming back here the correlative rhythm begins toynbee said the challenge has not been met but it nonetheless continues to present itself what causes depressions and great recessions thomas palley identifies the problem the flawed model of growth based on debt and asset price inflation which has already done such harm it is a problem of our own making that s what makes it so difficult to solve we think of it as our solution our solution is part of the problem and the problem is bigger than we think at may 18 2018 no comments email this blogthis share to x share to facebook share to pinterest labels arnold j toynbee cycle of civilization thursday may 17 2018 tom palley exactly not sure what i did to get on thomas palley s mailing list oh i contacted him by email one time i m sure of that but i don t remember what economic detail i focused on or what i might have said about it and i don t know whether palley liked what i said and put me on his mailing list because he liked what i said or hated what i said and put me on his mailing list as a form of harassment or none of the above but here s what i do know about once a month maybe less frequently i get an email from thomas palley that opens with the words dear friends colleagues and for some reason that opening is just exactly right i m not a colleague so i must be a friend and the once a month thing is nice it doesn t feel like i m being harassed it doesn t feel like spam it is something that quite frankly i m starting to look forward to and i am a total curmudgeon opening my email early this morning this is part of what i found from palley my own website has a new peri working paper titled negative interest rate policy nirp and the fallacy of the natural rate of interest why nirp may worsen keynesian unemployment which i hope is of interest which i hope is of interest he says such understatement palley s ego is so small that you can t even see it i like that then this abstract nirp has quickly become a consensus policy within the economics establishment this paper argues that consensus is dangerously wrong resting on flawed theory and flawed policy assessment regarding theory nirp draws on fallacious pre keynesian classical economic logic that asserts there is a natural rate of interest which can ensure full employment that pre keynesian logic has been augmented by zlb economics which claims the natural rate may be negative in times of severe demand shortage so that policy must deliver it since the market cannot in contrast keynes argued investment could become saturated so lower interest rates cannot increase aggregate demand ad and no natural interest rate exists okay here s what i think not knowing anything we should still know that consensus can be a problem ten years ago the consensus was that the financial crisis was not a problem eleven years ago the consensus was that the central problem of depression prevention has been solved consensus is a dangerous thing ooh look at that palley said that consensus is dangerously wrong palley s view nirp draws on fallacious pre keynesian classical economic logic that asserts there is a natural rate of interest which can ensure full employment that pre keynesian logic has been augmented by zlb economics which claims the natural rate may be negative in times of severe demand shortage so that policy must deliver it since the market cannot in contrast keynes argued investment could become saturated so lower interest rates cannot increase aggregate demand ad and no natural interest rate exists ooh and then he says regarding policy assessment nirp turns a blind eye to the possibility that negative interest rates may reduce ad cause financial fragility create a macroeconomics of whiplash owing to contradictions between policy today and tomorrow promote currency wars that undermine the international economy and foster a political economy that spawns toxic politics saving the best for last he adds this thought worst of all nirp maintains and encourages the flawed model of growth based on debt and asset price inflation which has already done such harm exactly the flawed model of growth based on debt exactly debt and asset price inflation which has already done such harm exactly exactly the link at peri at may 17 2018 no comments email this blogthis share to x share to facebook share to pinterest tuesday may 15 2018 cost income and markets as a rule it is a problem when cost is too high but not when income is too high to the recipient there is no such thing as income being too high excessive cost however can bring transactions to a dead stop cost is a problem income is not and yet one person s income is another person s cost if there is any limit to income it is because every dollar of income is somebody s cost in other words the limit to income is a cost side limit when cost is widely distributed and income narrowly the cost side limit to income is less effective the larger the market for your product the less effective is the limit to your income markets allow inequality of income larger markets allow greater inequality now you know why the wealthy favor globalization at may 15 2018 1 comment email this blogthis share to x share to facebook share to pinterest sunday may 13 2018 the 10 year average 10 years out springtime time for mowing the lawn every fourth day between that and binge watching with the wife who has time for blogging expect these posts to be intermittent on the 10th i showed this graph of rgdp growth gordon growth i called it and some other stuff graph 1 gordon growth and productivity incremental 10 year periods today i keep the blue line and drop the rest in that earlier post i said that last little tic it shows from 2017 to 2018 is an uptick ooh ooh trump but it isn t trump i said the old data is gradually dropping 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