Recessions can last for a considerable length of time. On average, you will see from the chart that US recessions last 518 days. (Click on chart to see in larger scale.)
There have been 33 recessions (counting the Great Depression period) over the past 152 years.
You may be surprised to find that in 31% of our days over this time the US has experienced a recession! Did you know recession was that common?
We are now approaching the average mark. How long will it last?
We don't know for sure. There are various outlooks for the economy--and for a review, you might wish to visit my L U V article on February 4 that defines three points of view, and follow up articles in mid-March on Hope Rising from Gloom and L or U: Counterpoint V.
Public Choice Theory uses modern economic tools to study problems that are traditionally in the province of political science.
Public Choice began with Duncan Black. In 1948 he identified the underlying concepts. Later he wrote The Theory of Committees and Elections. He is known as the father of public choice theory.
James M. Buchanan and Gordon Tullock coauthored The Calculus of Consent: Logical Foundations of Constitutional Democracy in 1962. This is one of the landmark works that founded the discipline of public choice theory.
Public Choice theory explains how politicians do things that conflict with the preferences of the general public.
For example, pork barrel projects are not the desire of the overall democracy. However, it makes sense for politicians to support these projects.
It may make them feel powerful and important.
Politicians can benefit financially by opening the door to future wealth as lobbyists.
The project may be of interest to the politician's local constituency, increasing district votes or campaign contributions.
The politician pays little or no cost to gain these benefits since it is public money being spent.
Special-interest lobbyists are also behaving rationally. They can gain government favors worth millions for relatively small investments.
The taxpayer is also behaving rationally.
The cost of defeating any one government give-away is very high, while the benefits to the individual taxpayer are very small.
Each citizen pays only a few pennies or a few dollars for any given government favor, while the costs of ending that favor would be many times higher.
Everyone involved has rational incentives to do exactly what they're doing, even though the desire of the general constituency is opposite.
Over time government tends to grow in excess of what a true democracy really wants. Occasionally there is a spontaneous eruption when the average voter finds the energy to fight back. That is what happened recently with the Tax Day Tea Parties.
Take a look at how Chicago protesters responded to aggressive CNN questioning. Astute observers will notice a sharp contrast between such "reporting" and the sympathetic ear from some news networks that is afforded to protests involving gay rights, Christian bashing and immigration.
Instead of just reporting the event, CNN attempted to "spin" the news--trying to make it appear to be a right wing, Republican-driven event. This reporter was the news, instead of just covering the news. That alone will make a good case study in journalism school!
However, if you watch more of the clip you will discover these are common Americans voicing their concern about run-away government spending--and are apt to criticize both parties.
Many who did not have the ability to attend a tea party still wanted to watch on TV. The balanced coverage of the events by Fox News attracted more viewers than MSNBC, CNN and CNN Headline News combined. This shows that millions more were paying attention, and suggests wider support for the protests.
Some say that Americans are not overtaxed & the protests are not justified. But this misses the point.
Government spending is exploding, with the Congressional Budget Office projecting $9.3 trillion in deficits over the next ten years.
State and local taxes are going up. At least 10 states are planning hiking taxes. And promised future spending on Social Security and health care must be paid.
Under the Obama Administration’s budget, federal government spending in the next ten years will average 24% of GDP--almost triple what it was back in the 1930s.
As a result, when we add taxes today and expected future taxes, Americans face a bigger tax burden than at anytime in history.
How is our government responding? Here is an initial attempt:
President Obama has asked his Cabinet to identify a combined $100 million in budget cuts over the next 90 days.
Economics professor Greg Mankiw put this into perspective:
Imagine that the head of a household with annual spending of $100,000 called everyone in the family together to deal with a $34,000 budget shortfall.
How much would he or she announce that spending had be cut? By $3 over the course of the year--approximately the cost of one latte at Starbucks.
The other $33,997? We can put that on the family credit card and worry about it next year.
Economist Brian Wesbury says, The Tax Day Tea Parties are a very interesting case study for Public Choice Theory. Whether or not they suggest a shift in the political landscape is another issue. If government continues to grow and cost more, we would expect to see more spontaneous voter response.
In a recent Rassmussen Reports national telephone survey, 85% of of Mainstream Americans say the government has too much power and money.
Would you be classified as a Mainstream American? Rassmussen Reports determines this by the answers to three questions measuring general attitudes about government:
Do you trust the judgment of the public more than political leaders,
Do you view the federal government as a special interest group, and
Do you believe that big business and big government work together against the interests of investors and consumers?
By the way, those who share the opposite view are categorized by Rassmussen Reports as the Political Class. In this group, just 2% believe the government has too much power and money and 68% say it has about the right amount of each.
Life is difficult for many Americans these days. One measure is that of unemployment. Currently the US unemployment rate is 8.5%. It is likely to rise in coming months.
Even if we have a recovery from this recession in the next few months--which is predominately measured by Gross Domestic Product (GDP)--many people will continue to be unemployed for months following the US recovery and advancement in GDP growth. This is typical for a recession. Jobs recovery to more normal levels typically follows many months after the overall economic recovery.
There is a wide diversity of unemployment rates across the states.
Michigan is hit the hardest, largely because of their dependence on the Big Three auto industry. Their unemployment rate is 12.6%.
Did you know that Oregon ranks second, with an unemployment rate of 12.1%? Why, you might ask. Some say it is due in part to an exceptionally high minimum wage law. Economist have often argued that minimum wage laws, in their effort to help the lower wage earners, have a tendency to suppress hiring.
Oregon's minimum wage rose by 45 cents an hour, to $8.40 on January 1, even as the state's jobless rate was rocketing up 1% a month. This substantial jump in wages at the same time the economy was crumbling seems certain to have forced businesses to cut more employees from their workforce.
Oregon lawmakers are considering a bill that would override a 2002 citizen initiative and block future minimum wage increases indexed to inflation.
Now lets look at a brighter side. Early this year Wyatt Watson surveyed major companies to assess whether they intended further layoffs. You can see that by February, 2009 many companies in this survey had already made their moves, with just 13% expecting further cuts in the coming twelve months.
Weekly unemployment claims seems to be signaling the end of the current recession. They recently dropped unexpectedly by a fairly large amount (610K instead of the expected 660K). This claims growth peaked in early March and has since dropped meaningfully. We need to see more follow-through but this could mark an inflection point in the economy and jobs market.
Robert Gordon, an economics professor at Northwestern University, says that as far back to the late 1960s, he has found that the four-week average of new claims peaks about a month before the declared end of recessions.
This four-week average claims series reached a level of 659,500 in the week ending April 4. This would mean the recession ended somewhere between late March and early May!
That's a very optimistic outlook on the economy. The latest Wall Street Journal survey of economists shows on average they expect the recession to end in September.
Professor Gordon's observation relating weekly unemployment claims and the end of the current US recession is a very big "IF." It remains to be seen whether jobless claims will have the same predictive power they’ve shown in the past.
The Misery Index was developed by Arthur Okun, an adviser to President Lyndon Johnson in the 1960's.
It is simply the unemployment rate added to the inflation rate.
It is assumed that both a higher rate of unemployment and a worsening of inflation both create economic and social costs for the US. A combination of rising inflation and more people out of work implies a deterioration in economic performance and a rise in the misery index.
During the Presidential campaign of 1976, Jimmy Carter made frequent reference to the Misery Index, which by the summer of 1976 was at 13.6%. Carter stated that no man responsible for giving a country a misery index that high had a right to even ask to be President.
Carter won the 1976 election. However, by 1980, when President Carter was running for re-election against Ronald Reagan, the Misery Index had reached a high of 22%. Carter lost the election to Reagan.
In February, 2009 the Misery Index stood at 8.3% That's mostly on account of unemployment, as inflation is virtually non-existent.
Ronald Reagan once said, it’s a recession when your neighbor loses his job...
It’s a depression if you lose yours...
And the Gipper offered a bit of humor during the 1980 Presidential campaign by saying...
And it's a recovery when Jimmy Carter loses his.
Back in the early 80s unemployment was high. It reached 10.8%. We're a ways from that yet--and hopefully it won't reach that level with the current recession. Let's take a look at what is currently happening.
The Bureau of Labor Statistics (BLS) keeps the official record on US unemployment. There are two definitions which I'd like to call to your attention:
The unemployment rate, or U-3. This is a measure of someone without work, available for work and who has actively searched for work within the last month. U-3 is the most commonly publicized statistic regarding employment.
It is currently 8.5 percent.
The labor underutilization rate, or U-6. This is U-3 plus people who have not actively looked for work in the past month because they got discouraged and gave up.
U-6 also measures the number of people who aren't able to find enough work, i.e. people who are working part-time when they want to work full-time. They are called the under-employed.
It is currently 15.6 percent.
Here is a chart showing U-3 unemployment statistics though the last 11 recessions, dating back to just after WWII. (Note that the latest data in this graph is only through February.)
Now let's take a look at the labor underutilization rate, U-6. Since the metric was revised in 1994, we are looking at an estimate of U-6 (upper line in orange) compared with U-3 (lower line in blue) all the way back to 1900.
Times are hard now--but you'll quickly notice that times were hard in the early 1980s--and particularly brutal during the Great Recession.
Our parents and great-grandparents faced tough times, too. There were bread lines. And there were people wondering if things would ever get better.
Well, things did get better for them--and if you're looking for work, things will get better for you, too. It can be tough. Hang in there. There will be blue skies for you...just as lyricist Irving Berlin wrote:
Blue skies Smiling at me Nothing but blue skies Do I see
Bluebirds Singing a song Nothing but bluebirds All day long
Never saw the sun shining so bright Never saw things going so right Noticing the days hurrying by When you're in love, my how they fly
Blue days All of them gone Nothing but blue skies From now on
Earlier this week, Mike Mayo, analyst for Calyon Securities, downgraded several banks, including Wells Fargo. This had a profound effect on the outlook of the banking sector, and investors experienced a significant drop in the US stock market. Mayo expects loan losses at the banks to be as bad as the Great Depression by 2010.
But will he be right in this assessment? Well, maybe it didn't take long to find out!
Later in the week, Wells Fargo surprised us with an earning pre-announcement. They said they made about $3 billion in the 1st quarter. They declared that their buy-out of Wachovia was a success.
Wells Fargo went on to say that the low cost of money combined with a strong demand for mortgage loan financing was the elixir they needed for success.
It makes we wonder if we will receive other favorable reports from the banking sector over the coming two weeks of "earnings season." Recall that the US stock market began to rally in early March after an internal memo from Citigroup's Vikram Pandit said they were enjoying a couple good months.
He wrote in addition to our strong capital position, I am most encouraged with the strength of our business so far in 2009. In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007. In January and February alone, our revenues excluding externally disclosed marks were $19 billion.
Then on top of that the FASB accounting group revised the mark-to-market rule (for more on this, see my March 19 article) in a way that provides a much fairer means of valuing stressed assets. Instead of being forced to use fire-sale accounting, a more reasonable cash flow basis will now be used for the 1st quarter to value assets that are otherwise performing on a long-term basis.
From time to time I truly wonder about the value of commentary made by experts. I even wonder about their integrity--wondering if sometimes dire pronouncements are made in order for immediate gain for their own company--at the expense of many investors and even employees at these banks.
I don't have any way of knowing about this--I'm just wondering--but as for me, the next time I'm offered Mayo, I am going to pass--and use the butter instead!!!
Milton Friedman was the grandmaster of free-market economic theory in the postwar era and a prime force in the movement of nations toward less government and greater reliance on individual responsibility.
His philosophy influenced world leaders such as President Reagan and former British Prime Minister Margaret Thatcher--and this in turn has helped YOU to benefit economically through the prosperity in the United States.
Friedman led the postwar challenge to the hallowed theories of John Maynard Keynes, the British economist who maintained that governments had a duty to help capitalistic economies through periods of recession and to prevent boom times from exploding into high inflation.
In Friedman's view, government had the opposite obligation: to keep its hands off the economy, to let the free market do its work. The only economic lever that Friedman would allow government to use was the one that controlled the supply of money - a monetarist view that had gone out of favor when he embraced it in the 1950s.
He went on to record a signal achievement, predicting the unprecedented combination of rising unemployment and rising inflation that came to be called stagflation.
If you remember anything about the 70s--Carter's govermental interferences and wage controls earlier in the decade--you'll remember our monumental problems with recession and super-inflation.
His work earned him the Nobel Memorial Prize in Economic Science in 1976.
To Alan Greenspan, Friedman came along at an opportune time. The Keynesian consensus among economists, he said - one that had worked well from the 1930s - could not explain the stagflation of the 1970s. But he also said that Friedman had made a broader political argument: that you have to have economic freedom to have political freedom.
Friedman was interviewed by TV host, Phil Donahue, in this classic dialog about the nature of greed in societies.
Swiss-born psychiatrist Elisabeth Kübler-Ross' five stages of grief are a core component of modern psychoanalysis and are used to help people deal with tragedies.
Diane Garnick, investment strategist at Invesco, indentifies the five stages as they apply to investors, some of whom might be saying (or thinking) the following:
Stage 1, Denial: "I should throw away my 401(k) statement without even opening it.
Stage 2, Anger: "Why did this happen to me? It is unfair that Wall Street benefited at my expense." Or, "Why in the world is AIG's bailout money going to its counterparties like Goldman and Deutsche Bank?"
Stage 3, Bargaining: "Just give me one relief rally and I can make it all back and sell."
Stage 4, Depression: "The market stinks, no one is hiring anywhere. Why should I bother?"
Stage 5, Acceptance: "It's bad, but these things don't last forever. I'm going to work on my career and portfolio to be prepared for the opportunities when they do come."
Here is a recent interview with her on this subject.
Larry is an avid golf & racquetball player. He enjoys developing web sites. He is president of Fox Valley Huskers, a Nebraska football fan club. He enjoys topical studies in diverse areas as ancient history, energy, German language, macro-economics, psychology, religion and science.
