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  • Justin Wolfers Resets the Start of the Recession

    Officially, the recession started in 2007. But at the Freakonomics blog, Justin Wolfers asks us to consider whether it may have started a bit earlier. And he shows us this: Wolfers: The blue line is the usual measure of GDP, which is obtained by adding up total spending. When you read the newspapers, this is the number they report. But the Fed’s Jeremy Nailewaik has convincingly shown that red line—which is the sum of all income—is the more reliable measure. In theory the two lines should be identical—one person’s spending is another’s income—but in practice, the measurements differ. I’ve also plotted the peak, trough, and latest reading of each measure. Focus on the red line, and you’ll see that the recession began in the final quarter of 2006, not the end of 2007. The red line also fell by more, and over a longer period. And today, GDP remains below its levels nearly five years ago. The economy had already run out of steam halfway through Bush’s second term. That’s why I say we are halfway to a lost decade. And he gets more granular in the analysis. Read We’re Halfway to a Lost Decade here .

  • Public Pessimism on Recovery

    Over at the Freakonomics blog, Justin Wolfers takes a look at these findings from a recent Gallup Poll in which the pollsters asked people how long until recovery begins: This is very different from the view of economic forecasters. And, Wolfers writes, it might have something to do with the variable weight of economic terms for the general public: It’s clear people are pessimistic about the economy. Very pessimistic. (I should quibble that the question is sort of leading; while any response was allowed, negative numbers don’t seem like a natural response.) But I think there’s something else at play here. There’s a disjunction between how economists use words like “recession” and “recovery,” versus how the general public understand these terms. According to the NBER approach, “A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.” So the recession has ended and the recovery has begun, but only because things got as bad as they are going to get. The “recovery” that we are in will take us from this low point, through some hard times, and hopefully, eventually, to a brighter place. Read What Is an Economic Recovery? Levels, Changes, and Changes-in-Changes here .

  • William Raabe at Freakonomics: 'Tax Cheating Will Increase Significantly'

    March comes to a close today, which means that tax day is just over two weeks away. William Raabe , tax professor at [The] Ohio State University , expects tax cheating to increase under the Obama Administration. Raabe is one of four participants in an online quorum at the Freakonomics blog about tax cheating. He writes that cheating occurs when three conditions are met: "inclination, reward, and opportunity." In tough economic times, Raabe writes, people are more inclined to cheat, and the rewards are that much greater as money is harder and harder to come by. And, "opportunities to cheat on one’s taxes tend to arise when structural changes in the tax law occur." The Obama team seems to favor the use of tax credits against the federal income tax to carry out the stimulus, health, energy, and education agendas that it is committed to. Tax credits, though, have been easy for tax cheats to use. The Earned Income Tax Credit, a federal welfare system mainly for low-income families, is notorious for attracting improper behavior, often via false taxpayer names and ID numbers. Education credits can be overstated when the taxpayer self-reports qualifying expenditures for supplies and travel. Oversight of energy credits (say for “green” home improvements) is almost nil. So the increased use of a credit of this sort by itself over the next few years will trigger new tax cheating. Read Raabe's full post, along with other analysis from the Freakonomic Tax Cheating Quorum , here .

  • Down on the Dow

    The markets have closed and here's the news on the Dow Jones Industrial Average from the Associated Press : Investors' despair about financial companies and the recession has brought the Dow Jones industrial average to another unwanted milestone: its first drop below 7,000 in more than 11 years. The market's slide Monday, which took the Dow down 300 points, was nowhere near the largest it has seen since last fall, but the tumble below 7,000 was nonetheless painful. The credit crisis and recession have slashed more than half the average's value since it hit a record high over 14,000 in October 2007. And now many investors fear the market could take a long time to regain the lost 7,000. DJIA over last 5 days Now, nobody is looking at this as good news. But it does serve as a good reminder that there are plenty of analysts out there who think that the Dow gets too much attention from the media. For example, Russell Roberts of Cafe Hayek, in talking about the drop in the Dow as a troubling sign for the Obama Administration's goals , writes "I don't think the Dow is a good measure of the economy's prospects. It's a good measure of expected corportate profitability and maybe, investor confidence." When I was developing a radio program a short while ago, Stephen Dubner , co-author of Freakonomics and of the Freakonomics blog , suggested we radio producers stop always pointing to the Dow in newscasts, as it isn't the best indicator. It was an interesting teaching opportunity. David Leonhardt succinctly echoed Dubner's point last September when he wrote: The Dow has a few big problems. It’s based on only 30 stocks. Almost no one owns a mutual fund tied to the Dow. (The performance of the S.&P. 500, on the other hand, roughly describes the performance of mutual funds owned by millions of people.) And thanks to a statistical quirk in the way the Dow is calculated, relatively small companies — like 3M and Caterpillar — end up affecting the index more than much larger companies — like Citigroup and General Electric. On some days, these problems don’t much matter. On other days, though, the Dow performs quite differently from the stock market. Leonhardt points out in the same post that one of the best pieces to read on the Dow's methodology is from Daniel Gross in Slate back in 2003. Read Now, Dow? here . And browse the different companies that have made up the Dow since 1884 here .

  • Freakonomics: 'The Failure of Macroeconomics'

    The econonoblogosphere is ripe with healthy debate of late over macroeconomic theory and fiscal stimulus. And frankly, sometimes even when economists seem to agree, they still disagree. Over at the Freakonomics blog, Justin Wolfers of Wharton makes an argument that we are relatively unprepared to understand fiscal stimulus because macroeconomic theorizing on the subject has evolved so little over the last half century. If you took your first economics class 50 years ago, you’ll recognize all this talk about marginal propensities, multipliers, and crowding out. Fifty years later, it’s still the same debate, and it’s still unresolved. Why are we so reliant on mid-century macro for understanding our current predicament? And why haven’t we developed better answers? Monetary policy, it seems, has been in the driver's seat. Wolfers plugged the numbers and found that since 1970, economic papers published on monetary policy have outpaced papers on fiscal policy 3 to 1. I’m not sure why fiscal policy is the ugly stepsister. Perhaps the problem is ideology, and pro-market economists don’t like any discussion that gives government a greater role. Or perhaps there are just too many temptations for young economists — monetary policy research pays off because there’s a comfortable career path running from monetary research to the money markets. Wolfers goes on to suggest that part of the reason for the imbalance is because of funding. With a dozen Fed branches, funding for monetary policy research has many rich uncles, while there are far fewer funders for fiscal policy research. Might we expect some change there given that fiscal policy discussions are now the rage--and for good reason? You can read the full post here .