If someone calls you a slacker, it is not meant to be a compliment. A slacker is one who doesn't do work or does it poorly.
We use this terminology to describe the economy. Today, our US economy is a real slacker. I know that because I went to the Saint Louis Fed and created the below graph. The graph displays two common measures of slack in the US economy since 1948, from around the time the Tuna was learning how to swim.
The red line is the quarterly unemployment rate; the blue line is the difference between real GDP and potential real GDP.
Economic slack is highest when resources are sitting around unused when they should be working. In the graph, more slack is evidenced when:
1. the unemployment rate gets higher, and/or
2. output real GDP is low compared to how much we could be producing if more people were employed (potential real GDP).
The rightmost part of the graph shows you that the slack sisters are telling you the same thing -- slack was incredibly high in the third quarter of 2020. Slack improved compared to the second quarter, but it remained very high.
Notice that slack worsens predictably in recessions. The graph's shaded vertical areas show you US recessions since 1948 and what you generally see is unemployment rising and output falling relative to potential output.
During the periods of slack, we often see policymakers reacting by applying stimulus to the economy -- whether from the Fed, the Treasury, or some combination of the two.
Notice that that while Q3 of 2020 stands out on the graph, it is not the worst we have seen. The early 1980s and early 20-teens saw very high slack. Following each of those time periods, we saw improvement, albeit gradual improvement, with declining slack for about a decade.
This raises the question of policies. Recent Fed chairs have advocated very strong stimulus. The Fed wants zero interest rates for three years. Janet Yellen may be confirmed as the next Secretary of the Treasury, and it is pretty certain she will want very strong stimulus from Congress.
That means we have to wonder about the future behavior of slack. We don't like slack because it means we are not operating the economy efficiently. But the trick is to do the stimulus in the right way because too little slack can also be a problem. Too little slack creates its own problems -- for example, firms having increased difficulty in finding enough qualified workers and rapidly rising costs and prices, rising so rapidly that they often to lead to the next recession.
How do we eliminate harmful slack in a way that does not come back to bite us? Two things to watch:
1. Don't push policies until slack is dangerously low.
2. Don't reduce slack so quickly that it creates imbalances and inefficiencies.
Do you want to go on a diet after Christmas? Sure, most of us will. But don't do two things. Don't try to lose all that weight in one month. Second, don't try to get into your 1980 wedding outfit. Be kind to yourself. Toss out the pecan pies and get down to a reasonable weight in a reasonable time.
Do you think Janet Yellen and our leaders will figure out how to do that with national slack? I guess we will have to wait and see.
The cause of this recession is different because a virus resulted in using means to prevent the spread. Part of the cure ( if it works) was to close down business where people are close together and that included offices and sports events. It also had a domino impact. Sports events, movies and some other items. resources such as us advertising as well as paying participants. Many were or became unemployed. Colleges semi closed down resulting reducing education for tech jobs. A stimulus would help but has to be measured one not a gift for all. There has to be a structured overall plan otherwise failure is eminent. Combine that with the surge which we all knew the high amount of touchy feely and the normal course of any virus is to surge in the colder months. There was and still not a plan.
ReplyDeleteDear LSD. Tunas don’t learn to swim—we enter the water knowing how. I watched a robin pop out’a de egg ‘n fly . . . no Rock’n Robin mama/papa to teach it.
ReplyDeleteYer graph reminds me of the projective Rorschach ink test psycho workers use to measure thought disorder for the purpose of identifying mental illness. I looked hard but couldn’t find any iron butterflies, lava lamps, beanbag chairz, kaleidoscope images, or boddles of cold chardonnay therein. But, as it is projective please allow this humble pisces a modicum of projection. As personalities are the manifestation of numerous inner-workings ‘n hidden mechanisms so is the U.S. economy. Some personalities are sound thus embodying mores and values that result in efficient and productive behaviors ‘n outcomes. A sound ‘n efficient economy similarly reflects domestic/international/fiscal/monetary etc. policies that increase employment ‘n productivity as the graph depicts when its red-blue lines converge. The virus disrupted the favorable recent convergence ‘n only the next four years’ graph will show whether sound policies remain to re-converge the lines or whether they diverge due to economic schizophrenia resulting from dysfunctional polices. Ya git my drift?
Though the ink blot didn’t show any boddles of cold chardonnay I’m shure I’ll find a couple in the frig in two hours EST. Cheerz!
Thanks for the swimming lesson. I hope your dive into the fridge is satisfactory. My points about policy were mostly aimed at Biden and his gang of big spenders. Me hope is that they don't overdo the stimulus thing -- but I am also hoping to see Santa on the 25th.
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