Economic Recovery?

Let me start by saying that this recession has led me to believe that there are only two possibilities for viewing economists and the discipline:

a) We never had a clue what we were talking about, our assumptions were all wrong, our models were wrong, and we got away with it because we were really lucky until now.

b) The structure of the economy has completely changed and our previously correct assumptions and models are now wrong.

Either way, I guess I'm saying that economists don't really have a clue what the hell is happening with the economy right now and it seems that no one wants to admit it.

The National Bureau of Economic Research typically uses the benchmark of two consecutive declining quarters of GDP growth in determining when the United States is entering a recession. The recession beginning in December of 2007 is rare in that it represents one of the few recessions dated without the declining GDP benchmark. Unlike the 2001 recession, which was declared a recession without two successive quarters of declining GDP, the 2007 recession has proven to be long and deep.

Generally it is more common for economists to reach consensus that we are in a recession than to reach consensus that we are recovering. There are multiple reasons for this but largely it has to do with which indicators different economists find most important.

GDP Growth: Those arguing that the economy is recovering right now are staking claim to the rise in GDP the last the quarters. Unlike most economic recoveries though, this GDP growth is not being led by consumers or private domestic investment which not only makes it unusual as recoveries go but also tenuous. Contributing to GDP growth was a spike in manufacturing prompted by record low inventories that will not be sustainable moving forward unless consumer spending recovers and drives manufacturing activity.

Housing Market Recovery: Other indicators garnering a lot of attention in this recession are new housing starts and housing sales, considered to be indicators of economic health because of the decimation of the housing market entering the recession. Unfortunately, these indicators are not universally indicating recovery with tremendous volatility in the numbers from month to month and considerable differences in housing market health geographically. Foreclosures are still increasing driving down prices in many markets and the tenuous stability in our housing markets is likely to fall apart completely when the homebuyer tax credit expires this spring. Housing market equilibrium will require some stability in employment since income and employment are the leading drivers of housing demand. An additional concern about housing market stability is that the impacts of the Federal Reserve’s decision to quit buying mortgage backed securities are unknown, even to its chair, Ben Bernanke who declared on February 25th that he is unsure of what it will do to markets and mortgage rates. In order for the housing market to indicate that the economy is recovering it first will need to achieve stability, and without stabilization in employment and declines in new foreclosures, this appears to be a considerable way off.

Employment: Often employment is considered a lagging indicator, meaning that economic recovery starts to gain speed before employment losses are recouped. This has been true in many of our recessions prior to 2007, but this recession has witnessed a sharper and more sustained decline in unemployment than the others. This means that pronouncing economic recovery from this recession based strictly on GDP may mean that employment recovery could be as far off as three or four years, representing the longest lag in modern history. According to calculations by the Department of Commerce, the United States economy would have to grow at five percent for the next year to reduce unemployment by one percent. In the fourth quarter of 2009 the economy grew at almost six percent, but the forecasts for the next year are much lower than that pace, indicating that employment will not be reaching pre-recession levels anytime soon.

Consumer Spending: Consumer spending is fundamentally the best indicator that the economy is recovering but it only indicates recovery it is sustained, one quarter of growth is not enough to indicate the economy is turning around. People have to increase their spending on goods for an extended period of time before it signals the rest of the economy to pick up the pace. There is a lag between demand at the counter by the consumer and the translation through the signals of the market economy to the producers to increase production. Despite the lag it is a remarkably efficient system and the best indicator we have that economic recovery will be sustainable across manufacturing, distribution, retail, services, and all industries that make up our economy.

Using consumer spending as a barometer we know that true economic recovery is not here yet. Until employment worries decline and labor markets stabilize, consumer confidence will remain shaken and consumer spending cannot be the harbinger of economic recovery. Unlike other recessions, employment may not be as much of a lagging indicator as a vital component of economic recovery.

It is important to consider that despite claims to the contrary, the United States economy has long relied on consumer spending to drive economic growth and recovery. Not only has this been sustainable for more than fifty years (see figure at top), it will continue to drive our economy moving forward. Economic recovery is not real without the consent of the consumer.

Prisoner as Warden

I hate the Federal Reserve. I don't know if I strictly abhor the concept or if the last 10 years of ridiculous policy has tarnished my views, what I do know is that I indeed hate the Federal Reserve.

With Bernanke's confirmation yesterday, I find myself really cranky. The main argument for keeping him in, elucidated by some economists I actually respect, is that there is no better alternative and any change would risk further collapse of the economy. Metaphorically speaking, this is like a spouse staying with their cheating, incompetent and abusive spouse because they are worried they couldn't do better and their world might be worse off in the short run. We know this happens all the time but it certainly isn't desirable and we have created institutions to help people out of these situations. Yet our Senate, an institution that could have gotten us out of this abusive relationship kicked us while we were down.

Is it fair to compare Bernanke to an abusive crappy spouse? I would say its kind.

Bernanke isn't the only culprit in the economic meltdown but he played an instrumental role in the Greenspan (I don't like him either) years and has his hands all over this crisis. Perhaps it is time to recognize that no one in charge of the Federal Reserve will be desirable in the Post OPEC world because of the inherent moral hazard in the Federal Reserve System. Letting Bankers regulate banks and letting bankers regulate monetary policy is a bit like letting the prisoners run the prison. It is a recipe for disaster.

In honor of my contempt for Bernanke, I offer the opinion piece that was published in July. I stand by it:

Federal Reserve Chair Ben Bernanke is on a roll. Beginning with a July 21 opinion piece in The Wall Street Journal and following up with two days of testimony on Capitol Hill, he has both stated the obvious about the economy and chosen strange words to describe his policy.

First, there was the reassuring message of the Fed having an "exit strategy" to control inflation. Typically we think of an exit strategy in military terms -- a plan to reduce further loss of lives and well-being. In the business world, we think of it as a way to minimize financial losses. When he describes an exit strategy, is he making the tacit admission that the Fed helped cause the crisis? It seems as though the inevitable conclusion is that the Fed has been at war with the very economy it intended to help stabilize.

To be fair, Bernanke outlines a plan. But the plan and tools available to the Fed aren’t subject to question. Nothing he has proposed is truly groundbreaking.
The important question is how he plans to pull off the timing of the exit strategy. This is the same man who claimed in 2002 that, “A particularly important protective factor in the current environment is the strength of our financial system.” In 2005, he boldly stated that the housing market was not in a bubble and would at worst be a localized problem. In November 2006, based on one indicator of increased auto production, he claimed the motor vehicle industry was improving. With foresight like that, is this really who we want to trust with the responsibility of pulling the trigger on our exit strategy?

I worry that Bernanke’s fascination with deflation, about which he has written and spoken extensively, has led to an overreaction in the wrong direction. First the Fed artificially suppresses market rates of interest, promoting debt and altering the debt-equity tradeoff for far too long. This has been disastrous for both businesses and households.

Then the Fed promotes the largest increase in the money supply in the last 50 years. Bank reserves are at an all-time high, and the bottom line is, this supply of money has to be reduced soon. The only way this cannot be inflationary is if the economy recovers quickly, and I simply do not see signs that will happen.
If one quarter, or even one month of improvement for a single indicator made Bernanke think we wouldn’t enter a recession in 2006, how can we trust him to recognize what recovery is, or when inflation is imminent?

It is reminiscent of the plight of NASA and the astronauts on Apollo 13. One miscalculation and you run the risk of ricocheting into space or burning up in the atmosphere. Reign in policy too late and inflation spirals. Tighten policy too soon and you stifle growth. The recovery of our economy and our risk of inflation is going to be based on calculations with little margin for error. Unfortunately, the less tinkering option of letting the economy correct itself appears not to be an option Mr. Bernanke or the Treasury has seriously considered.

One might argue that it is the job of our Federal Reserve chair to encourage optimism and reassure markets. The problem is, someone with his responsibility and power shouldn’t be simply a cheerleader for the economy and Wall Street. They already have people to do that – lobbyists. We need the Fed’s actions, predictions and voice to be cohesive and reliable.

Trying to reassure the markets using phrases like “rate of decline is slowing” and “tentative signs of stabilization” is not the same as saying you have the situation under control. I’m just not buying it.

Take This Job and Shove It (when the recession is over...but not before then, o.k.?)

I read an article on Tuesday describing how American's job satisfaction has reached an all time low and I can't stop thinking about how important this is. Often times we ignore information that is not readily quantifiable in favor of hard statistical numbers like GDP or employment. We do so at our own peril because often times it is this qualitative information that could tell us the most about the economy and our society.

I have really had only five jobs in my life. I started out working in my family's retail stores, worked as a bartender and waitress in college and graduate school, became a fisherman for a few years, worked as a loan officer, and have finally ended up in a position that I studied and trained for. There were things I loved about each of those jobs but when I stop and think about it, the things I loved most in each job were largely non-pecuniary. I loved the freedom of being on the ocean, the camaraderie in the retail and restaurant industry, and in academia I love that I basically get paid to get smarter and in turn, use that ability to make other people smarter. The only time that my pay was the most important factor in my job satisfaction was when I was a loan officer and working on commission. I tolerated a psychotic back stabbing boss, bitchy coworkers, hideous hours, and crazy customers because I made a lot of money.

My experience has taught me that money does matter in how we look at job satisfaction but the truth is it matters more to people when the non-financial factors are not favorable. One might tolerate lower wages if they like their coworkers, feel like they are valued by management, or find their job truly interesting. What happens if someone feels underpaid in an uninteresting job with crappy managers and obnoxious coworkers? The answer is that they are less productive and innovative. The more of these unhappy workers in a firm the less competitive that business will be. The more of these unhappy workers in the economy the less competitive the economy will be.

We know that incomes and wages matter in job satisfaction and in how hard we will work at our jobs but I don't think we have paid enough attention to the fact that the structure of the economy has been dictating a fair share of people's job satisfaction for some time. Most recently, we should have been wary during the economic "growth" preceding this recession because it was not accompanied by inflation. I know we are told inflation is a bad thing and it is when there is too much and it is artificially created but true economic growth should result in some inflation. When the economy is growing wages and overall demand should rise, resulting in some inflation. During the huge consumer spending expansion and the housing market growth from about 2003 to the middle of 2007 we really didn't have inflation to speak of and wages and incomes did not rise.

In a nutshell, the U.S. emerged from the 2000-2001 recession only to enter a period of economic growth that wasn't real. A vital component of economic well being is household income which reached a peak in 1999 and has not returned to that level. No wonder people are unhappy with their jobs: It's The Economy Stupid!

So people's incomes don't rise and they get crankier at work then we enter a recession and they feel trapped because there are fewer opportunities outside of their company. Then people fear they will lose their jobs and coworkers start behaving badly, management quits talking to the workers, layoffs happen and morale plummets. That can all explain why more than half of American workers are not satisfied with their jobs.

The real question is how do we fix this? It can't be solved at the aggregate level by a Job Satisfaction Stimulus Bill but it can be solved at the firm or employer level. The firms (or state agencies, universities, etc..) that will be most successful coming out of this recession will be the those that pay attention to job satisfaction. Individual firms cannot control the success of the entire economy but they can take control of their internal economics. These are the factors I think that matter at the organizational level:

1. How a firm handles layoffs. Those that layoff based on tenure and seniority will have issues. Innovation, productivity and adaptation are the keys to future success so layoffs should be handled in a way that focuses on retaining the best and brightest not the oldest and grayest. I think identification of critical workers who are key assets is monumentally important. It may seem counterintuitive and unpopular but organizations that trim the most fat will fare the best and do the most for the economy moving forward. Temporarily layoffs do hurt the economy and the morale at the firm level but this creates the opportunity to be innovative and responsive. It allows the business to better reward its valuable assets, the employees who stay, with higher wages rather than having the best and brightest have their wages constrained by the overall labor pool.

2. Awareness of Sense of Community. When there is a sense of teamwork and community within an organization productivity and innovation grow. A friend of mine who works for a Fortune 1o0 company calls herself a "true believer", meaning she agrees with the mission statement of her company, trusts completely in management's decisions, and feels she is a part of a team and something bigger than herself. If everyone were like her this economy would be productive as hell but I digress. Not everyone has this mindset when they start with a company, it needs to be cultivated. It is cultivated through the organization's culture and through both finanical and non-financial benefits to the employees. The culture from top to bottom must reward the same behaviors and must evaluate outcomes in a systematic manner, there cannot be different rules for different people based on status or tenure. Benefits, whether vacation and sick time or health insurance, must be balanced with wages and non-financial benefits like Ping Pong in the break room to create a place people want to be. This ensures that your top talent stays after the economy recovers rather than jumping ship.

3. Healthy Competition among Employees: When there are not clear directives and communication in a firm, unhealthy competition tends to emerge. This is where those who know how to play the game and manipulate get ahead at the expense of more talented people who don't want to play games. Healthy competition on the other hand makes everyone better and no one knows this better than sales professionals. A little competition that results in more recognition, more pay, or a few extra vacation days can go along way in promoting productivity and innovation. It's all about the incentives you provide workers.

I'm going to stop now with suggestions because I just realized that what was a simple curiosity about why people are unhappy at their jobs has turned into a management lesson.

Beyond the firm level though I think the decline in job satisfaction also means we need to look at our educational system and our expectations about the economy and work in general. Workers under 25 had the highest levels of dissatisfaction. This is due in part to the impact the recession has had on recent college graduates looking for their first job but may also reflect the fact that students educations are not a good match for the job market. This might mean that business needs to be more involved in secondary education.

I think its time all organizations care about the job satisfaction of their employees, if they don't they might end up like Initech.

*For the record I do like my job but if they take away my stapler bad stuff will happen.