This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• Jason Clenfield and Norihiko Kosaka (Bloomberg): US risks Japan-like “lost decade” on stimulus exit, Koo says, October 23, 2009. US officials contemplating an exit from record fiscal stimulus are in danger of repeating mistakes that plunged Japan into its lost decade of stagnant growth, according to Richard Koo of Nomura Research Institute. “This isn’t a cold, its more like pneumonia,” said Koo, author of “Balance Sheet Recession,” a 2003 book about the malaise that hit Japan after its stock and real-estate markets crashed in 1990. “We still need more government spending,” he said, adding it could take “three to five years to get out of this mess, even under the best of circumstances.”

• Brad DeLong (Caijing.com.cn): A moment too soon after the

...

In an Economix post today, titled "The Panic of '08: Recession Cause or Effect?" Professor Mulligan writes:

...recent research questions the claim that the financial panics themselves contributed to their contemporaneous and severe employment downturns.

The post continues:

The timing was different in this recession -- the largest employment drops seemed to come immediately after the financial panic -- but a recent paper by Ravi Jagannathan, Mudit Kapoor and Ernst Schaumburg of Northwestern argues that the coincidence is just as misleading. They argue that the changing global economy -- with more employment of residents in developing countries like China -- created a glut of savings in those countries, and was destined to reduce employment in developed countries regardless of whether there had been a financial panic.

This paper was discussed earlier on this weblog, and Professor Jagannathan provided some clearly exposited counterarguments to my criticisms in his comments. Indeed, I

...

Richard Posner has a critique of public intellectuals who work in the public sphere (with special reference to Christina Romer), either in government service, or in journalistic fora. Mark Thoma and Brad Delong have already made clear the (many) points at which Mr. Posner has gone astray. Parenthetically, I'll add that I wonder about the analytical abilities of anybody who lumps Phillip Glass (!) and Elliott Carter together into the highbrow music category (see page 18 in his tome Public Intellectuals: A Study of Decline (1991)). More substantively, I have a few of additional observations, some of which are amplifications of Brad Delong's points.

First, I agree with Mark Thoma that Mr. Posner apparently has little understanding of macroeconomics, either of old-style Keynesian type, or the new(er) real business cycle type, or certainly New Keynesian approaches. His charge that her current pronouncements are at sharp variance with

...

This must be the period of soul searching, with the Economist engaging upon multi-article exegeses on where mainstream macro went wrong [1], [2], [3]. Alternatively, I think this is a happy time for some economists outside the (perceived) mainstream, who can now chortle "I told you so". One recent example is by Mario Rizzo.

The objective facts are far easier to handle in the models than the shifting, subjective expectations of people trying to deal with radically uncertain futures. This is what may get reflected in financial markets. Attempting to understand all of this requires conceding that some knowledge will be imprecise and will lie outside of the box (model). The model is simply a toy that can be thrown out when it no longer suits. This means that it is indeed possible to have valuable knowledge outside of hyper-models (although, of course, all thinking proceeds in

...

Just a quick post to highlight the OECD's recent forecast [0] for the US (-7.2% SAAR decline in 2009Q1), and e-forecasting's latest take (6.8% SAAR decline in 2009M03).

Figure 1: Real GDP from BEA (blue bars), and Macroeconomic Advisers 3/13 (red), e-forecasting 4/3 (blue). Tan shaded area indicates OECD 3/31 forecast for 2009Q1. Source: BEA, GDP release of 26 March 2009; Macroeconomic Advisers [xls], e-forecasting, OECD, and NBER.

Note that forecasted GDP (in the tan shaded area) is above the level implied by e-forecasting. E-forecasting's estimate is that GDP will be down by 9.9% (SAAR) in 2009Q1. If this more dire forecast proves accurate (Deutsche Bank predicts -8.0% SAAR), then -- as Brad Delong likes to say -- we'll need a bigger stimulus package.

See also Calculated Risk's discussion of the employment report: [1], [2], [3].

Side note: for those wanting to

...

pa href="http://feedads.googleadservices.com/~a/O-tZmZdhmyXoelNcUEPFbFLjCmo/a"img src="http://feedads.googleadservices.com/~a/O-tZmZdhmyXoelNcUEPFbFLjCmo/i" border="0" ismap="true"/img/a/pYesterday you read one scenario for a style="color: rgb(51, 51, 255);" href="http://mast-economy.blogspot.com/2009/03/how-toxic-assets-turn-to-gold.html"toxic asset appreciation/a over time. That would spell good news for big bank liquidity in the short term and good news for private investors and taxpayer equity gains in the long run.br /br /You may have heard that not all economists agree on the efficacy of the plan. But there were surprisingly many positive comments on the the government's new roadmap:br /br /From Mark Thoma in the Economist's View's article a style="font-style: italic;" href="http://economistsview.typepad.com/economistsview/2009/03/which-bailout-plan-is-best.html"Which Bailout Plan is Best?/a, "I am willing to get behind this plan and to try to make it work. It wasn't my first choice... but like it or not this is the plan we are going with and the important thing now is to do the best that we can to try and make it work."br /br /Scott Anderson, ...

The exchange between Brad Delong and Greg Mankiw ([1] [2], followed up by [3] [4]) reminded me of some earlier work Iqd done with Yin-Wong Cheung on the time series properties of real GDP, back in the "unit root" wars. Briefly, Mankiw was alluding to work with Campbell indicating GDP was well approximated as an ARIMA process, while Delong is arguing that using unemployment, which is trend stationary, indicates that indeed sharper increases in unemployment presage more rapid GDP growth. The former characterization is univariate in nature and the latter is bivariate. Of course, we've moved on since those days -- the entire VAR and SVAR literature expands the set of variables, but at the cost of greater complexity -- but simple characterizations can still be useful.

This brings me to the results Cheung and I obtained. In "Further Investigation of the Uncertain Unit Root in U.S.

...

The BEA released its preliminary numbers for 2008Q4 GDP. There was little good news in it, as many have observed. [0], [1], [2], [3] Consumption fell even further than first estimated. In an accounting sense, support from exports collapsed. Even the downward revision in inventories, which might have suggested a production rebound in this quarter, seems to incorporate more of a signal of further anticipated declines in demand, at least given the high inventory to sales ratios. And while declining imports add, in a mechanical sense, to output, it certainly hints at a sustained decrease in anticipated economic activity. Figure 1 shows these GDP components.

Figure 1: Real GDP growth (blue bars), and accounting contributions to GDP growth. NBER defined peak at dashed gray line. All in Ch.2000$ SAAR. Source: BEA GDP preliminary release of 27 February 2009.

This is "news", insofar as the

...

CBO has now released an analysis of spend rates of the final stimulus bill to be signed by the President on Tuesday. While the proportions of expenditures and tax cuts are changed, the time profile is little changed from the original House bill -- wherein most of the stimulus takes place in the next 19.5 months.

Figure 1: Estimated spending and tax revenue reductions, per fiscal year, embodied in HR 1 final version. Shaded areas pertain to spending occurring outside of the 19.5 month time frame. Source: CBO, H.R. 1, American Recovery and Reinvestment Act of 2009 (February 13, 2009).

Once again, I want to stress the adjectives "massive stimulus" conjoined to the noun "bill" is a matter of context. Dividing by baseline GDP shows that in a proportional (rather than dollar) sense the bill is rather modest. The fiscal impulse to GDP ratio never exceeds

...

Or, how come you used to say that if consumers don’t save more, it will wreck the economy, and now you say, if consumers do save more, it will wreck the economy?

For the record, I am certainly among those who had been suggesting that America’s low saving rate was a significant problem. Let me begin by reviewing why I said that. Recall that we can separate the various components of GDP (Y) in terms of goods and services purchased by consumers (C), government purchases (G), investment spending (I), and net exports (X):

Y = C + I + G + X

Subtracting C and G from both sides of the equation,

Y – C – G = I + X

The two terms on the right-hand side are the critical determinants of what kind of economic future we’ll have. Investment in plant and equipment is the single most important variable

…