3 ms·

Your thesis is surprising, so I'll have to look more into your data. For now I will say that (1) because of the tight correlation between employment and demand

by lyudmil 15y ago

Your thesis is surprising, so I'll have to look more into your data. For now I will say that (1) because of the tight correlation between employment and demand, you'd need a very solid argument that demand has recovered but employment hasn't and why and (2) the data you have in your comment doesn't show that conclusively. The only measure of demand you site is Manufacturer's New Orders, which does show an increase. However, most of it is due to airplanes, which are volatile by nature (and is partly fueled by public defense spending). Also, the best predictor of future growth in that category (Core capital goods), while growing, isn't back to 2007 levels yet. [1] I think it's too early to say demand is back, and it's lack also explains unemployment well. [1] http://www.economicpopulist.org/content/durable-goods-new-orders-19-advance-report-may-2011 http://www.economicpopulist.org/content/durable-goods-new-or...

yummyfajitas 15y ago
...because of the tight correlation between employment and demand... This "tight correlation" is a conclusion of Keynesian economics, and is strongly dependent on an assumed correlation between production and employment. The logic goes: production and employment are highly correlated (i.e., you can't increase production much without increasing employment). Weak AD reduces production, therefore stimulating AD can increase production and employment. As my data shows, the correlation between production and employment is quite weak, and we can therefore not use employment as a proxy for demand.
- nl 15y ago
  I don't think what you are saying is the full story - demand hasn't recovered completely. For example, I believe real estate demand is very low (and real estate sales has major flow on effects)[1]. However, I do think there is a significant structural change that reflects a little of what you are saying. There is an interesting question on Quora somewhat related: http://www.quora.com/Why-does-the-US-economy-take-increasingly-longer-time-to-recover-from-recessions http://www.quora.com/Why-does-the-US-economy-take-increasing... and my answer http://www.quora.com/Why-does-the-US-economy-take-increasingly-longer-time-to-recover-from-recessions/answer/Nick-Lothian http://www.quora.com/Why-does-the-US-economy-take-increasing... [1] This is from 2010, but I can't find anything more recent: http://www.guardian.co.uk/business/2010/aug/24/us-home-sales-slump http://www.guardian.co.uk/business/2010/aug/24/us-home-sales...
  - lyudmil 15y ago
    You shouldn't look to real estate to evaluate demand. The housing bubble is the primary cause of the crisis. By most estimates prices have to dip another 10% in order for the market to return to its historical trend (which is to grow at the rate of inflation). There is no demand now because everyone knows housing is overpriced. That's a good thing.
    - nl 15y ago
      I specifically avoided looking at real estate prices. House sale numbers are generally a reasonable way to measure economic activity, though.
  - yummyfajitas 15y ago
    If you believe in Keynesian economics, it doesn't matter that real estate hasn't recovered. The only quantity that matters is aggregate demand and aggregate supply. (Employment should be slaved to AS.) Taking the Keynesian assumption that AD and production are monotonically related to each other, we can conclude that AD has recovered. If you push theories in which you you treat real estate separately from the rest of the economy (i.e., you assume construction workers don't immediately go out and become nurses), you are a structuralist rather than a Keynesian. In any case, the Keynesian assumption that employment increases with production is simply not true of the modern economy. This is quite easy to establish empirically - just compare graphs of production to graphs of employment. By the way, here is more data on employment across the economy. http://crazybear.posterous.com/structural-shift-in-the-economy http://crazybear.posterous.com/structural-shift-in-the-econo...
    - nl 15y ago
      Taking the Keynesian assumption that AD and production are monotonically related to each other, we can conclude that AD has recovered. I think most Keynesian have moved on from that simplistic view. Stagflation in the 1970s showed that the inflation/unemployment relationship could move, and few would argue against structural change having a similar effect. In any case, the Keynesian assumption that employment increases with production is simply not true of the modern economy. That's an effect, not a cause. Traditionally it has happened like that, but anyone who argued it had to be that way would be stupid. I think we are strongly agreeing about the importance of structural change? (And hence I agree with you about the lack of a strong relationship between production and employment). I don't agree with you that demand has recovered though. Your data (http://research.stlouisfed.org/fred2/series/DGORDER http://research.stlouisfed.org/fred2/series/DGORDER) shows it still at levels around that in 2004/05.

by lyudmil 15y ago

yummyfajitas 15y ago

...because of the tight correlation between employment and demand... This "tight correlation" is a conclusion of Keynesian economics, and is strongly dependent on an assumed correlation between production and employment. The logic goes: production and employment are highly correlated (i.e., you can't increase production much without increasing employment). Weak AD reduces production, therefore stimulating AD can increase production and employment. As my data shows, the correlation between production and employment is quite weak, and we can therefore not use employment as a proxy for demand.

nl 15y ago
I don't think what you are saying is the full story - demand hasn't recovered completely. For example, I believe real estate demand is very low (and real estate sales has major flow on effects)[1]. However, I do think there is a significant structural change that reflects a little of what you are saying. There is an interesting question on Quora somewhat related: http://www.quora.com/Why-does-the-US-economy-take-increasingly-longer-time-to-recover-from-recessions http://www.quora.com/Why-does-the-US-economy-take-increasing... and my answer http://www.quora.com/Why-does-the-US-economy-take-increasingly-longer-time-to-recover-from-recessions/answer/Nick-Lothian http://www.quora.com/Why-does-the-US-economy-take-increasing... [1] This is from 2010, but I can't find anything more recent: http://www.guardian.co.uk/business/2010/aug/24/us-home-sales-slump http://www.guardian.co.uk/business/2010/aug/24/us-home-sales...
- lyudmil 15y ago
  You shouldn't look to real estate to evaluate demand. The housing bubble is the primary cause of the crisis. By most estimates prices have to dip another 10% in order for the market to return to its historical trend (which is to grow at the rate of inflation). There is no demand now because everyone knows housing is overpriced. That's a good thing.
  - nl 15y ago
    I specifically avoided looking at real estate prices. House sale numbers are generally a reasonable way to measure economic activity, though.
- yummyfajitas 15y ago
  If you believe in Keynesian economics, it doesn't matter that real estate hasn't recovered. The only quantity that matters is aggregate demand and aggregate supply. (Employment should be slaved to AS.) Taking the Keynesian assumption that AD and production are monotonically related to each other, we can conclude that AD has recovered. If you push theories in which you you treat real estate separately from the rest of the economy (i.e., you assume construction workers don't immediately go out and become nurses), you are a structuralist rather than a Keynesian. In any case, the Keynesian assumption that employment increases with production is simply not true of the modern economy. This is quite easy to establish empirically - just compare graphs of production to graphs of employment. By the way, here is more data on employment across the economy. http://crazybear.posterous.com/structural-shift-in-the-economy http://crazybear.posterous.com/structural-shift-in-the-econo...
  - nl 15y ago
    Taking the Keynesian assumption that AD and production are monotonically related to each other, we can conclude that AD has recovered. I think most Keynesian have moved on from that simplistic view. Stagflation in the 1970s showed that the inflation/unemployment relationship could move, and few would argue against structural change having a similar effect. In any case, the Keynesian assumption that employment increases with production is simply not true of the modern economy. That's an effect, not a cause. Traditionally it has happened like that, but anyone who argued it had to be that way would be stupid. I think we are strongly agreeing about the importance of structural change? (And hence I agree with you about the lack of a strong relationship between production and employment). I don't agree with you that demand has recovered though. Your data (http://research.stlouisfed.org/fred2/series/DGORDER http://research.stlouisfed.org/fred2/series/DGORDER) shows it still at levels around that in 2004/05.