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arterly changes in the unrate the increase in unemployment associated with recession typically takes time to build up this is most easily seen in the 1949 the 1974 and the 2009 recessions but pretty much all the recessions show the same pattern of gradual or at least non instantaneous increase but here we are in the first covid recession hopefully the only covid recession with an instantaneous spike in unemployment that is as big as the biggest increase of the 1975 recession and that was definitely a bad one does this mean the recession that we are falling into just now will be a big bad one jamie dimon thinks so but as the graph shows unemployment has not been building up it took a massive leap because everybody all at once reacted to the covid 19 during the last half of march okay maybe not everybody maybe during the first half of april the massive covid layoffs will continue but that should be it as far as the response to covid 19 is concerned after that we have to go back to the economic consequences of the march and april layoffs the typical buildup effects it is easy to picture a buildup like we saw in the 1949 or 1974 or 2009 recessions only on a massive scale because the first small step this time was so very large easy to picture but not necessarily correct from the october 1973 low of 4 6 it took until july 1974 for the unemployment rate to climb 0 9 percentage points between february and march of 2020 one month unemployment climbed 0 9 percentage points one month instead of eight months from the may 2007 low of 4 4 it took until april 2008 to reach the 5 0 level an increase of 0 6 percentage points and another month to reach 5 4 eleven or 12 months that time one month this time if it normally takes 8 months to a year for the unemployment rate to rise as much as it did between february and march of this year then we simply don t have enough people employed to allow the sort of unemployment buildup that we normally get on the massive scale suggested by the march increase it s not going to happen it should be obvious that the march increase was so big not because a recession was developing but because we are shutting down the economy in order to fight the pandemic granted shutting down the economy has consequences at april 07 2020 1 comment email this blogthis share to x share to facebook share to pinterest monday april 6 2020 the social distancing recession as you know in the past two weeks ten million people signed up for unemployment the typical number before two weeks ago was was less than a quarter million per week so 10 million versus half a million wow egad what s going to happen to the economy how bad will the recession be i expect you ve heard of okun s law okun s law says you can tell what effect a change in unemployment will have on economic growth so if unemployment increases by ten million people or by 20 million or however high it goes in the next few weeks we can estimate how much gdp growth will slow down and how bad the recession will be we ll look into that today i ll be using the growth rate version of okun s law from an old 2006 pdf from miles brian cahill at researchgate in the paper cahill looks at three time periods and figures real gdp trend growth estimates for each from 1949 to 1972 4 09 growth from 1973 to 1996 3 01 growth from 1997 to 2004 3 40 growth i will figure growth from 2010 to the last data before the big jumps in unemployment and compare that to growth after the increase of ten million having gone unemployed i started by figuring the same time periods as cahill my results are close to his from 1949 to 1972 4 16 growth from 1973 to 1996 3 05 growth from 1997 to 2004 3 45 growth my results differ some from his there have been revisions to the data since cahill wrote his paper and i think this explains the differences my results are close enough to cahill s that i am satisfied i got the arithmetic right here are my three graphs graph 1 graph 2 graph 3 i kept the x and y axis limits the same on these graphs so that the window is always the same size what we see in that window changes from one graph to the next on the third graph the cluster is much smaller than on the others in part this is because there are only one third as many dots on graph 3 in part the reduced variation is probably an effect of the great moderation in the trend line equation on each graph the number before the x is the okun s law parameter cahill says that number relates unemployment to gdp growth and we can use it to estimate how bad our social distancing recession might be if the number is close to 2 it means that when the unemployment rate rises by one percentage point gdp falls about two percentage points so far all these parameter values are close to 2 cahill s values are 2 2 1 83 and 1 95 mine are 2 15 1 83 and 1 99 remember though that all these values are for the year 2004 or before i m checking my work before we compare the 2010 2019 economy to the covid 19 economy something i didn t know according to cahill the number after the sign in the trend line equation gives the trend growth rate of gdp that surprised me but here again the results i got are a good match to cahill s because these and the parameter values all turned out close to cahill s i figure i got the math right another explanation of okun s law this from investopedia okun s law states that when unemployment falls by 1 gnp rises by 3 when unemployment falls a certain amount gdp rises a certain amount that s cut and dry they say 3 not 2 i ll get to that in a moment investopedia continues however the law only holds true for the u s economy and only applies when the unemployment rate is between 3 and 7 5 that s an interesting constraint we re looking at the us economy and our unemployment rate has been between 3 and 7 5 since mid 2013 so i ll say the constraint is not a problem on the 2 versus 3 difference in the impact on gdp investopedia says in the united states the okun coefficient estimates that when unemployment falls by 1 gnp will rise by 3 and gdp will rise by 2 when unemployment rises by 1 then gnp is expected to fall by 3 and gdp is expected to fall by 2 the 3 number applies to gnp gross national product economists talked gnp back in the 1960s when okun came up with his law today economists talk gdp gross domestic product the change occurred in the 1990s cahill uses gdp in his paper i m using gdp in this post the 2 number applies so we have an answer already the unemployment rate in february was 3 5 in march it went to 4 4 the difference is almost one percent call it a 1 rise in unemployment so we can expect gdp to fall by 2 that s based on cahill s parameter value of 2 which i duplicated and which investopedia confirms let me put the 2 decline in context graph 4 real gdp growth and the hp trend since 2002 the red line shows a smoothed trend of the growth rates shown in blue the trend line starts in 2002 just a little above the 2 0 level it gradually falls closer to 2 0 by mid graph it reaches 2 006 in 2011 2012 and it increases ever so slightly but visibly in 2018 and 2019 call it a trend growth rate of 2 if we have a rise in unemployment of 1 from february to march and if the parameter value 2 is accurate we can expect the gdp growth rate to fall by two percentage points if we have an rgdp trend growth rate of 2 as graph 4 shows and the growth rate slows by 2 we end up with a growth rate of zero by the way this is the effect of only one month s change in unemployment if unemployment continues to fall we can expect rgdp growth to go below zero how long might it last not long i think as i said the other day this recession is not the result of something wrong with the economy it is the result of our response to the pandemic a necessary response i think but when the pandemic eases and our response can relent employment will rise again probably rapidly and gdp growth will rise also but i don t want to make guesses about what will happen with the unemployment rate i want to look at the numbers we have on the unemployment rate and see if i can estimate the effect of those numbers on economic growth but first i want to check that last graph this next graph shows the same rgdp growth data as on 4 but this time to figure the trend i only look at the years since 2010 the trend line here shows more increase than we saw on graph 4 graph 5 real gdp growth and the hp trend since 2010 one of the funky things about the hodrick prescott hp calculation is that adding a new value to the end of the series can cause the trend to change as much as 10 or 15 years back i didn t change or add anything in the rgdp growth numbers shown by the blue line the blue line is exactly the same on graph 5 as it is on 4 but when i figured the red line on 5 i omitted the blue values from before 2010 and the red line changed as a result the start and end values for the hp line on graph 5 are 2 04 for 2010 q1 and 2 51 for 2019 q4 say 2 0 and 2 5 the trend shows a gradual increase in the rgdp growth rate so we should figure a trend rate of 2 5 for the early months of 2020 when our response to the pandemic started pushing the unemployment rate up and pulling economic growth down we had a 1 rise in unemployment between february and march of this year if the okun s law parameter is close to 2 then that one month s change in unemployment is enough that we can expect real gdp growth to fall by two percentage points if recent trend growth is 2 5 as on graph 5 and the growth rate falls by two percentage points we can expect economic growth to slow to around 0 5 as a result of march unemployment or i should say it this way we can expect economic growth to vary around the 0 5 level rather than around the 2 5 level as a result of the march unemployment but that is only true if the okun s law parameter still has a value close to 2 i don t think it does i think the parameter value is much lower now over the past several years unemployment fell several percentage points but sluggish gdp growth suggests that the parameter value is low i ll be following up in a day or so with an estimate of what the parameter value may now be and how it may impact economic growth links excel file for graphs 1 2 3 excel file for graphs 4 5 note these files contain vba macros at april 06 2020 2 comments email this blogthis share to x share to facebook share to pinterest sunday april 5 2020 the accounting view of money money as equity for an accounting view of money by biagio bossone and massimo costa at economonitor feb 12 2018 strikes me as a significant statement in fact even though the law says that money is debt a correct application of the general principles of accounting does raise deep doubts about such a conception of money debt typically involves an obligation between lender and borrower as contracting parties we wonder which obligation may fall upon the state from the rights entertained by the holders of coins or which obligation may fall upon the central bank from the rights entertained by the holders of banknotes or by the banks holding reserves we specifically refer to these three species of money because they are all legal tender that is in force of a legal power they absolve their issuers of any responsibility to convert them into other forms of value and from the conclusion the foregoing discussion offers a broad outline of a new approach that we refer to as the accounting view of legal tender money the proposed new approach calls for understanding money by correctly applying to it the principles of general accounting we think it will be important to further deepen the study of the implications of the new approach at april 05 2020 no comments email this blogthis share to x share to facebook share to pinterest thursday april 2 2020 how might that affect the unemployment rate the graph from monitoring real activity in real time the weekly economic index the sudden drop at the recent end of the graph is mostly the result of new initial unemployment claims in response to the pandemic from the article at liberty street economics the effects of the pandemic become visible in the week ending march 21 this week saw an unprecedented 3 28 million ui claims a sharp decline in consumer confidence and fuel sales and a more modest decline in steel production but also a countervailing surge in retail sales as consumers took to stores to stock up in spite of this positive signal from retail sales and the relatively mild declines in some other series the ui release drove the wei to a level not seen since the 2008 financial crisis their graph goes back just far enough in time to show that the decline of 2008 09 was a relatively slow one as compared to the drop of the week ending march 21st even one week before 21 march the graph shows no indication that such a drop was coming yes we might have known but even in closeup the initial claims data offer only the slightest hint initial claims for the week ending 21 march what struck me about this is that there is not something wrong with the economy back in 08 when there was clearly something wrong with the economy it took time for the crisis to develop i ve seen a few graphs that show the peak as far back as 2005 or 2004 here initial unemployment claims were decreasing thru the seventh of march they show what would ordinarily be a substantial but still ordinary increase on the 14th and then the increase of over three million the following week there was something wrong with the economy 15 years back which led to the financial crisis of 2008 but given the new normal where 2 growth is called good there was nothing wrong with our economy in mid march i think that s good i think it means we should be able to have a rapid recovery once the pandemic is behind us because there s nothing wrong with the economy economic declines are always more rapid than recoveries of course because recoveries require rebuilding declines don t all we have to do is stop our economy could not possibly recover in a week but it should be able to recover back to that new normal much more quickly than it did after the financial crisis if all goes well what could go wrong we could default on our debts enough to start a chain reaction which creates another financial crisis i m sure there are other things that could go wrong but my mind always goes back to debt if our debt was low not the federal debt our debt the chance of a chain reaction would be less the federal debt back at the end of world war two was more than gdp but debt for the rest of us was only about half the size of gdp our debt today is more than twice the size of federal and two and a half times the size of gdp federal debt blue and everyone else s debt red as percent of gdp if our debt went from half of gdp to two and a half of gdp the risk of a chain reaction debt implosion became what five times worse the initial claims for 21 march indicates that 3 283 000 people filed for unemployment benefits that week how might ...
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