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<\/a>There are several ways to hide bad unemployment data under the rug (for instance, someone who has given up looking for a job is no longer considered unemployed for statistical purposes), so instead I look at employment since it’s harder to fake.<\/p>\nThe graph shows that employment plummeted in the aftermath of the financial crisis in 2008, and hasn’t recovered an inch of territory in the past 4 years.<\/p>\n
The population of the USA grows by 1% a year, so our economy has to add that many jobs every year (roughly 150k jobs per month) just to stand still.\u00a0 The economy has only added 139k new jobs per month since the start of 2012. \u00a0 You do the math.<\/p>\n
Ugly Truth #2:\u00a0 Our economy isn’t actually recovering<\/h3>\n
Compare the potential GDP of the country (what it would be if our factories and employees were all humming along at full capacity, in blue) vs actual GDP (in red).<\/p>\n GDP plunged sharply as the financial crisis unfolded.\u00a0 In previous recessions, that gap closed quickly once the economy began picking up.\u00a0\u00a0 But not this time.\u00a0\u00a0 Either the gap is not closing at all, or at best will take years, possibly over a decade, to close at current rates.\u00a0\u00a0 And here is the cost:<\/p>\n This bar graph shows how far below potential the economy has run.\u00a0 $323 billion in 2008, $987 billion in 2009, $887 billion in 2010, $867 billion in 2011, and $817 billion in 2012.\u00a0 That’s $3.9 trillion in wealth our country has foregone in 5 years.\u00a0\u00a0 In human terms, that’s $25,000 per household.<\/p>\n No one likes to see government borrow money to stimulate the economy.\u00a0\u00a0 But in the bad spot we’re in, it would have made much more financial sense to spend $2 trillion dollars on fiscal stimulus in 2008 to avoid losing over $3.8 trillion since then.<\/p>\n The problem is, the financial shock caused by the housing bubble bust was so huge, that the Fed would have to lower the interest rate below zero to stimulate the economy sufficiently.\u00a0 But no one is going to loan you $100 this year, expecting to get $93 back the next year.\u00a0 That’s what economists call the “zero bound”.<\/p>\n The above graph shows what the Fed fund rate is, versus what it *should* be to properly stimulate the economy (the “Mankiw rule”, using coefficients derived by Paul Krugman).\u00a0 The red line delineates the economic hole we’ve been trying to extract ourselves from.\u00a0 The economy has been trapped against the zero bound since 2008, and if we’re lucky we’ll escape the bound next year.<\/p>\n To a large degree, the zero bound is the defining difference between a mere recession and a depression.\u00a0\u00a0 The economy is more sensitive to bad news in a depression than in a recession.\u00a0\u00a0 Bad news that would simply slow down recovery in a recession can set off another catastrophic economic downturn in a depression.<\/p>\n So if we have a outburst of austerity, or Congress fails to extend the Bush tax cuts for people under $250k, or a conflict with Iran raises the cost of oil substantially, or Europe fails to get its economic crisis under control, or the real estate bubble in China pops, or any number of the things I can’t predict happen, and the economy will get worse, quicker than it would in normal times.<\/p>\n The graph shows that the interest rate the market charges Uncle Sam on 10-year debt has been *decreasing* for a decade.\u00a0 And after adjusting for inflation, today the market is actually *paying* the government 0.68% return a year<\/a> (as of 5\/4\/2012) to borrow their money for 10 years.<\/p>\n The interest people earn is based on supply-and-demand.\u00a0 If there’s a little money, and a lot of people want to borrow it, the lenders can charge a high interest rate.\u00a0\u00a0 If there’s a lot of money, and no one wants to borrow it, the interest rate can drop all the way to zero.<\/p>\n Plus, with all the uncertainty in the world, people are willing to leave a little money on the table in order to have their investments stored in something safe, and the USA is the best of a lot of bad choices.\u00a0 That’s why the real interest rate is negative.<\/p>\n Rather than being afraid of government borrowing, the market is screaming, in flaming letters 50 stories high, “Please borrow *more* of our money so that the increased demand for money will raise the interest rates so we can get a decent return on our bonds and CD’s”.<\/p>\n Inflation is actually well within its usual historical range of 2-3%.\u00a0 Last year we were actually in danger of *deflation*.<\/p>\n People mistakenly believe inflation is causing prices to go up mostly due to three things:<\/p>\n 1.\u00a0 Supply-and-demand.\u00a0\u00a0 The price of oil is increasing because people in China and India and elsewhere desire the same comfortable life with cars and air conditioning that we have.\u00a0\u00a0 The problem is, the demand for oil is growing faster than the supply of oil.\u00a0 Econ 101 tells you that means rising prices.\u00a0 The price of food has gone up as well, partly because oil has gone up (oil is used to make fertilizer, drive tractors, and haul things to market) and because unusual patterns of drought and flooding killed an above-average number of crops in 2011.<\/p>\n 2. Increased volatility.\u00a0 Back in the 90’s when there was an oil disruption, we just asked the Saudis to open the spigot a little wider.\u00a0\u00a0 They had more than enough spare capacity.\u00a0\u00a0 But today they’re pumping all-out and don’t have any slack.\u00a0 That means whenever Iran rattles its sabers and threatens war, the price goes up because the market knows there isn’t any spare capacity to cover up a disruption.\u00a0\u00a0 But it also means when the market calms, prices can drop quickly<\/a>.<\/p>\n 3.\u00a0 Frequency bias.\u00a0\u00a0 People notice price changes in things they buy more often.\u00a0 You buy food and gas twice a week, so when the price goes up you notice it quickly.\u00a0\u00a0 You buy a house every 20 years, so while the price of housing is still dropping like a rock, you don’t notice it.<\/p>\n While that might sound good to the conservative ear, the Wall Street Journal<\/a> estimates that had those government jobs been preserved, unemployment would now be 7.1% instead of 8.1%.<\/p>\n","protected":false},"excerpt":{"rendered":" Trying to understand the economy is hard enough if you’re an actual economist.\u00a0\u00a0 But if your a normal person trying to filter through all the people who are just repeating the latest crazy they read on the Drudge Report and … Continue reading <\/a><\/p>\n<\/a><\/p>\nUgly Truth #3:\u00a0 Our economy isn’t out of danger yet<\/h3>\n
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\n<\/a>In normal recessions, the Federal Reserve lowers the Fed rate to banks, which makes it cheaper for businesses to borrow, which helps stimulate the economy and gets things moving again.<\/p>\nUgly Lie #1:\u00a0 The market is afraid that the government is borrowing too much.<\/h3>\n
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\nIf someone asked you for a loan, and you were afraid they couldn’t pay you back, you would increase the interest rate you charge them to compensate you for the additional risk you were taking.<\/p>\nUgly Lie #2:\u00a0 Inflation is out of control<\/h3>\n
<\/a><\/p>\nUgly Lie #3:\u00a0 Obama has led to an unprecedented expansion in government<\/h3>\n
<\/a>The graph shows the total number of federal, state, and local workers, graphed by month beginning with the president’s inauguration.\u00a0\u00a0 Government during Obama’s presidency has shrunk by nearly 3%.<\/p>\n