- employment and labor usage
- productivity, GDP, and spending
- investment, and its decomposition between residential and non-residential
- the impotence of public policy
I have significantly revised my thinking on employment, but in the other three areas it seems my model does quite well.
EMPLOYMENT. I initially thought that the adverse wealth effects experienced in 2007 and 2008 would soon induce people to work more. I still believe that will happen, but not in the next couple of months. I started to change my thinking a bit already in November when I realized that mortgage modification was in essence paying people lots of money not to work. Other bad incentives like this have come along. I have not yet done the hard work required to quantify the impact of these incentives, but at this point I don't see how that could reduce employment by 3 or 4 million. So I have more to do here if I am going to be able to accurately predict when the employment situation turns around. My only consolation is that most economists and commentators are still barking up the wrong tree -- that spending and a credit crunch are the root problems.
PRODUCTIVITY. Whatever is happening to employment, I continue to believe that productivity will advance. And it has. So, even if employment continues down, GDP and spending will not be dragged down that much. Thus, I am more confident than ever with my prediction that real GDP will stay above $11 trillion. There is still a good chance that, when this recession is over, it will be considered mild by GDP standards. It is impossible to have a second Great Depression with advancing productivity.
INVESTMENT. I predicted earlier that residential investment would continue to decline. It has. I am staying with that prediction through May or June. I predicted that nonresidential investment will increase. It has for most of this recession, but not for Q4. So maybe this category is more like other recessions than I thought. But still not bad, let alone disastrous. Going forward, I predict that non-residential investment will do fine, and will be one of the first activities to improve when we move out of this recession.
PUBLIC POLICY IMPOTENCE. I was right that the bank bailout would no nothing but disappoint and embarrass the Congressmen who voted for it. The "fiscal stimulus" will be more wasteful, although probably less embarrassing politically because it has so many disparate pieces. Most of the pieces will eventually be acknowledged as wastes. But by (blind squirrel) luck a couple of small pieces will look pretty good, and those will get the spotlight from our politicians.
In summary, I am thinking about the neoclassical growth model with a labor market distortion, but close to efficiency on all of the other margins. For the reasons cited above, I am now giving the labor market distortion piece more emphasis than I did last fall.
Low spending is a symptom in this recession, not a cause. The fundamental problem is somewhere in the labor market (I don't yet know exactly what, although mortgage modification is part of it). That is why total spending is doing much better than employment and hours.
[update: Donald P. Morgan left a comment with links to a lot of interesting results. I haven't digested them yet, but I highlight them so readers can take a look themselves.]