Pause and New Site

The AMU Economics Blog will place a temporary pause on new posts. Our blog host is slowly winding down support and no longer permits the inclusion of images (ARGH!). Luckily, the the university has committed to re-vamp all of the blog sites as part of a university-wide update to the AMU website. We hope to be up and running again by the end of this summer, with periodic posts and updates about our students, faculty, and department events.

We'll continue to make announcements here for our subscribers and we'll announce when the new site is up and running. Much thanks to our subscribers and we look forward to to have things running again soon!

Will there be a recession in 2020?

Will there be a recession in 2020?

From the stock market to the White House, this is the question in everyone’s minds.  Will I get to keep my job?  Will my business do well?  Or will it take recent college graduates a long time to find meaningful employment?  Will bankruptcies and layoffs become common?

While this is difficult to know for certain (try predicting if you will be healthy in December, or how long the coronavirus will be a problem), we can try to answer this question with some fundamental concepts and with some data.  My goal in this post is not to give a full answer – that would take too long – but to give you a hint of the sorts of things you should look at.  Here’s the quick take: the visible symptoms are those that typically precede a recession by about 12 months.

A recessions is a widespread contraction in economic activity – less buying, less selling, less producing, less hiring – across the economy, for an extended period of time.  People have jobs if businesses want to produce, and business want to produce if people want to buy their production.  This suggests some data worth looking at:

·         Retail and food service sales
·         Breaking ground for new housing construction
·         Automobile sales
·         Orders for new machines

Let’s take each of these in turn.  The most obvious sign of a bad economy is empty shopping districts (nowadays, fewer Prime deliveries).  Retail sales took a big dive in the last recession.  In other recessions, we would see a similar pattern – or at least a significant slowdown in retail sales: for example, retail sales flattened out in the 2001 recession.  Retail sales have been growing steadily since the recession ended in June 2009, with very few blips … except for a bad holiday shopping season in 2018 and some significant “flattening” in the last six months.  It’s too early to tell, but is this a sign of a recession later this year?

Let’s take a deeper look.  Of all of the purchases families make, the decision to buy a car might be the most momentous (besides buying a house). Think about a car’s usefulness – also think about the long-term commitment of a monthly car payment.  It tells us a lot about how consumer are feeling about their personal prospects and their outlook for the economy.  Also think about the implications of weak car sales for production and jobs all across the US. 

Car sales were very strong in the nineties.  They never really recovered from the 2001 recession, which is an indication of how weak the economy felt back then, even as housing boomed … but that’s a story for another time.  They collapse when the financial crisis started.  Would you replace your beat-up minivan if your mortgage is underwater (that is, if the price of the home is less than you borrowed for it) and if you are unsure if you will have a job in a month?  Car sales recovered, but (in inflation-adjusted terms) have stayed fairly flat over the last three years.

Can we use car sales as a recession predictor?  You can see that car sales essentially flattened out a year before the 2001 recession started and that they began to fall about two years before the 2008 recession.  Is the slowdown in car sales over the last few years a bad portent?

What about homebuying?  If I buy a new house, I am saying that I believe my personal finances are stable (and that I believe my employer is likely to do well).  So we can use homebuying as a proxy for consumer confidence.

Even better, we can use home builders’ choice to start construction as an indicator of their confidence in the economy.  A “new housing start” is a sign of builders’ beliefs regarding all sorts of things, from the price of construction materials to mortgage interest rate to potential buyers’ purchasing power.  Home construction also impacts a wide variety of supporting industries (from contractors and specialists to the financial industry to moving companies to restaurants that feed the workers).  This indicator used to be the most potent indicator of the health of the economy: the ups and downs of housing starts almost perfectly matching the upswings and downswings of the whole economy.

In 2001 the link was weakened: a combination of aggressively low interest rates and tax cuts kept home starts from falling, although possibly this set up the stage for the housing boom and collapse that followed.  Housing starts in 2009 hit record lows.  Since then, they’ve recovered to about average (even counting the most recent blip in December of 2019, which could very well be reversed or be an error of measurement).  This may be an optimistic sign, a sign of an evenly-keeled economy.  If you were to worry, you would be concerned about the flattening of this indicator between mid-2015 and late 2019.

Suppose you are a manufacturer.  You see all sorts of signs of a booming economy, especially how your factory is working overtime.  Your machines are so overused, you need to replace them – or expand your factory.  So you put in “new orders for durable goods,” meaning new machinery.  In inflation adjusted terms, this indicator also helps us sense when a recession is coming: notice that it stopped growing about a year and a half before the 2001 recession and about a year before the 2008 recession. 

The “recovery” in the last twelve years has felt flat – and indeed is flat for producers of manufacturers’ durable goods.  Since 2012, except for a small boomlet between Aug 2017 and Sept 2018 (perhaps in anticipation of the December 2017 tax cut), durable goods orders have not grown like they did in the previous two expansions, and indeed have been contracting for a year and a half.  Manufacturers do not seem convinced that this is the time to expand their factory.  However, durable goods orders contracted between mid-2014 and mid-2016 without a recession following.

Summarizing: the economy has been behaving in a way that would be consistent with a late-2020 recession.  Some might argue that, no, what we are seeing is a “soft landing” and that the economy will just experience lower growth (but no contraction).  “Soft landings” are mythical creatures.  The flattening of durable-goods sales (for households and businesses) that we are seeing now is typically followed (a few months later) by a recession.

Could this be wrong?  Absolutely!  We’ll know it when we get there.

In later installments, we’ll look at other important determinants of the health of the economy.  In the meantime, I hope I have given you some food for thought!

Essay Winner: Maggie Kennon

Earlier this semester, the Econ dept hosted an essay writing contest inviting students to explore, advance, apply, or illustrate an idea that they found most appealing, counter-intuitive, or poignant in their economics classes. We had 4 winners in no particular order:

• Kealan Vasquez
• Niklas Jenkins
• Max Bodach
• Maggie Kennon

As winners of the essay contest, the students attended the Southern Economics Association conference in late November and they'll have their essays published here. So, without further ado:

Ms. Maggie Kennon: Innovation as the Final Frontier Ideology

One of the most intriguing topics covered in macroeconomics is growth. Long run economic growth, an increase in productivity, is practically synonymous to an increase in technological innovation. In both the endogenous, 𝑌=𝐴𝐾, and exogenous, Δ𝑌/𝑌=Δ𝐴/𝐴+𝛼𝐾(Δ𝐾/𝐾)+𝛼𝑁(Δ𝑁/𝑁), production functions, technology, or A, directly affects output. That is, a percentage increase in technology will lead to the same percentage increase in output. It seems simple to say increasing A will increase productivity, but since there are so many factors that affect technology, the study of economic growth is complex. One such factor that has particularly shaped the American economy is culture.
American culture is defined by a sort of frontier ideology. When Alexis de Tocqueville visited early America, he wrote about a society unlike any he had encountered. He explained this difference as a difference in mores, translated as manners, which is the culture of a country defined by its habits and beliefs. The American mores was encompassed by a spirit of adventure, initiated by the pilgrims that is continued even today. This spirit of adventure could be called a frontier ideology; it is the idea that new possibilities and great rewards are available to those who take risks. The pioneers were those who sought a physical frontier, which continued until America was settled from coast to coast, but the absence of a physical frontier did not signify an end to this frontier ideology. It became manifested in free enterprise and equal opportunity.
This ideology was re-imagined as the American Dream, or the idea that everyone has an equal opportunity to earn reward when risk is taken. America is the frontier of possibility and opportunity, and entrepreneurs became the new pioneers. The frontier was no longer about the quest for land, but about the quest for ideas and innovation.
To appreciate just how much America’s culture has impacted its economic growth, consider other ways in which productivity increases. Increasing capital and labor should increase productivity, but they do not have the long-term effect of technological innovation. By the law of diminishing marginal returns, increasing capital or labor will at some point have very little marginal effect on productivity.
Furthermore, the economy tends to remain at an equilibrium, or steady-state level of capital, where saving per capita is equal to investment, or when enough capital is being invested to replace that which is depreciating and to compensate for the growth in population. Adding capital beyond the steady-state level will not have a long-term effect on productivity because the level of capital will converge to the equilibrium level. Without technological innovation, there would be no real growth in the economy.

Essay Winner: Max Bodach

Earlier this semester, the Econ dept hosted an essay writing contest inviting students to explore, advance, apply, or illustrate an idea that they found most appealing, counter-intuitive, or poignant in their economics classes. We had 4 winners in no particular order:

• Kealan Vasquez
• Niklas Jenkins
• Max Bodach
• Mairead Kennon

As winners of the essay contest, the students attended the Southern Economics Association conference in late November and they'll have their essays published here. So, without further ado:

Mr. Max Bodach: How Economics Solved Famines

My time studying economics as part of the Political Economy & Government major has been extraordinarily fruitful. One idea that has consistently stuck in my head from the very first time we discussed it in Dr. Bartsch’s Principles of Macroeconomics class is the idea of how international trade and the price system virtually eliminate the prospect of famines.

Famines have been with the human race for nearly all our history. Chapter 47 of Genesis relates how Joseph, serving as Pharaoh’s chief executive, expropriated all Egyptian land except for priestly holdings and then levied a 20 percent tax on all grain production in order to stockpile for famines. Famines ravaged European populations, notably in mid-18^th-century Ireland, and sparked mass migrations. Millions of people in the developing world died due to malnutrition and starvation. The scourge of famine has stalked us for millennia, claiming billions of victims.

While many solutions have been proposed and experimented with, only one solution has actually demonstrably reduced the incidence of famines significantly. The twin innovations of international trade and a price system solve a problem that has consistently bedeviled humanity.

Prices communicate an enormous amount of information to an enormous number of people. They incorporate supply of a particular product, demand for a particular product, and the expectations of both producers and consumers in how the price will change. The communication of scarcity is particularly helpful in the famine context because food producers know where to direct their resources in order to take advantage of rising prices (and therefore rising profits). They also help food consumers decide how to allocate and prioritize their scarce resources in order to achieve maximum utility in any given situation,

However, in order for the price system innovation to function effectively, trade liberalization must be in force. Free international trade (or at least trade without significant barriers) enables producers in food-rich countries to meet food demand in diverse markets across the world, which helps stave off famines before they even begin. International trade, prices, and an interconnected world have prevented more famines than ever before in history.

The only famines that occur in the modern era are caused by armed conflict. This is a massively underappreciated aspect to daily life that improves the outcomes of millions of people worldwide. The abstract insights that come from a systematic study of economics have a concrete consequence in millions of lives. This insight helped me understand the value of economics and of economic thinking more broadly, and I am grateful to Dr. Bartsch for explaining it more eloquently than myself.

Essay Winner: Niklas Jenkins

Earlier this semester, the Econ dept hosted an essay writing contest inviting students to explore, advance, apply, or illustrate an idea that they found most appealing, counter-intuitive, or poignant in their economics classes. We had 4 winners in no particular order:

• Kealan Vasquez
• Niklas Jenkins
• Max Bodach
• Mairead Kennon

As winners of the essay contest, the students attended the Southern Economics Association conference in late November and they'll have their essays published here. So, without further ado:

Mr. Niklas Jenkins: Free Trade and Comparative Advantage: Their Importance for the Common Good

The relationship between free trade and comparative advantage deserves a great deal of attention, as it provides the most productive method for mutually beneficial cooperation. They mutually enable each other and encourage specialization to produce more goods more efficiently. This idea, always important, has become particularly crucial in the Information Age, where improved technology allows for much easier trade over long distances and further increases the potential benefits of specialization. However, there are those who would selfishly hurt the rest of society and the world to protect their own interest and restrict the free market. There should be a push-back against such attempts, as it is deeply harmful to the economy at any scale. Free trade and comparative advantage are basic building blocks of a competitive market that work together amazingly well, and should be protected from the interference of self-interested groups.  

In order to understand the importance of the relationship between these two ideas, we must first delve further into them. Free trade essentially means the removal of political barriers to the exchange of good between nations, while comparative advantage refers to the ability of an individual or group to produce a good efficiently relative to others. These are both important to the maximization of total welfare. Comparative advantage lowers costs, thus also lowering prices, and free trade ensures that it is much easier to buy at those lower prices. A nation or group with a comparative advantage in producing a good is thus incentivized to specialize in production of that good, enabling each country to produce where they are relatively most productive. It acts as a larger scale example of removing entry barriers in a smaller scale economy, leading closer to a global version of perfect competition. As perfect competition maximizes welfare, and best encourages a properly functioning and unrestricted market, this seems desirable on a larger scale as well. Therefore, these two functions should be strongly encouraged by all governments. 

Free trade and comparative advantage grow in importance in the Information Age, where improvements in technology and communication increase the potential gains from both. A greater variety of goods and capital means that specialization is even more important, and comparative advantage grows more pronounced as advanced countries are better able to produce high-tech products. As an example of how this results in an improvement overall, better manufacturing opportunities have appeared for less advanced countries. The overall economic growth from various sources also means the magnitude of this improvement will be greater. 

However, there are challenges that must be met to enable this growth. Some groups will be hurt by the additional free trade, as some firms that may previously have been able to sell domestically lose that market due to the greater availability of cheaper foreign goods. This will hurt those firms and their employees to a potentially significant extent. While in the long term it will have good effects such as encouraging more investment in areas with a comparative advantage, in the short term problems such as unemployment do arise. This provides an incentive for some groups to try to prevent free trade. The easiest path to this goal is through lobbying the government for measures like tariffs and quotas that benefit the affected sectors to the detriment of everyone else. Producers in particular benefit from such legislation, which is problematic as they have the resources and unity to make lobbying much easier. Therefore while free trade and comparative advantage are highly beneficial, the problem becomes more complicated in practice.

Overall, the takeaway should be that while challenges will arise, encouragement of free trade and specialization will be for the overall good. Through them, everyone who participates will be better off in the long run with patience. Attempts to attack the practice of these ideas both attacks the freedom of the market and causes long term harm in service of short term considerations.