Opinion

The Great Debate

The perils of cliff-diving

The fiscal cliff is a danger to the economy.  Some have argued that cliff diving is benign either because the cliff itself is an illusion – it is really a gentle slope – or because policymakers have the cartoon-like power to reverse going over the cliff without hitting the abyss.

Both arguments miss the key role that would be played by financial markets.  Cliff diving would have a significant impact on financial markets, impairing asset values, exacerbating credit stringency and amplifying the direct effects on the Main Street economy. These effects cannot be “unwound” by retroactively legislating away the fiscal cliff.

Taken at face value, the fiscal cliff is a large negative policy shock.  The tax increases are nearly $400 billion and the spending cuts about $145 billion.  The total, $540 billion is roughly 3 percent of gross domestic product.   For perspective, trend economic growth now appears to be less than 2 percent — but certainly nowhere close to 3 percent.

If one uses the multiplier estimates of Christina Romer and Paul Romer – roughly three – going over the fiscal cliff would trigger a decline in the economy of $1.6 trillion – roughly 10 percent of GDP. This would be biggest year-to-year decline since 1932.

But there are good reasons to take that with a grain of salt, however. First, the size of multipliers is controversial, and they may be much smaller.  But even a multiplier of 1 yields a $540 billion decline – a recession of 3 percent.

‘I sat there every day and cried before going to work’

Editor’s note: This week, Reuters Opinion is publishing five excerpts – one each day – from D.W. Gibson’s new book, Not Working, an oral history of the recession. Gibson spent months traveling across America talking to people who had been laid off.

Teresa Baseler is 55, and has two grown daughters and a husband in Omaha. This is her story.

I worked at M. for 31 years. So yep, I just kept moving up and moving up and doing very well.

‘I have filled out resumes for about 380 to 390 positions’

Editor’s note: This week, Reuters Opinion is publishing five excerpts – one each day – from D.W. Gibson’s new book, Not Working, an oral history of the recession. Gibson spent months traveling across America talking to people who had been laid off.

Dominick Brocato is 58 and has lived in Kansas City his entire life. He was laid off in 2010. This is his story.

For the last 20 years, I’ve worked for D. Systems. In 2009, our existing chief operating officer had made the decision he was going to retire at the end of the year, so a new chief operating officer was brought in. He had different views towards how things should be run. We knew that in the operation that he came from, which was in Boston, he had had 12 layoffs in the last six years. So every six months, he had layoffs. But we felt confident, because our president had said we were never going to have a layoff. And we very much believed in what he had told us.

‘The only crime that I committed’

Editor’s note: This week, Reuters Opinion is publishing five excerpts – one each day – from D.W. Gibson’s new book, Not Working, an oral history of the recession. Gibson spent months traveling across America talking to people who had been laid off.

Today’s story is Christine Zika’s. Christine is a veteran and small-business owner mostly from St. Louis and the surrounding towns. She is 40 and married to an electrical engineer.

Years ago, in a galaxy far, far away, I had an expectation of the life I was going to lead. And that life included being in public relations and communications. Instead, I went into the Army National Guard. After two years in college, I went there, and I served 13 years total, having served three deployments at different times. I served in Desert Storm. I also served during Operation Joint Endeavor, which was the Bosnian conflict, and then I also went to Kosovo.

‘I felt guilty for taking unemployment’

Editor’s note: This week, Reuters Opinion is publishing five excerpts – one each day – from D.W. Gibson’s new book, Not Working, an oral history of the recession. Gibson spent months traveling across America talking to people who had been laid off.

Today’s entry is Jessica Smith’s. Jessica, 32, was born and raised in Alabama. After stints in other states (New York and Virginia) and another country (Sweden), she moved back to Alabama in 2010 with her fiancé, Nick, and this is where they’ve made a home with their newborn.

Jessica has two master’s degrees. She has written for several years, mostly poetry, with some significant publications, but she’s on hiatus these days: “I have a job and a kid, and it’s just not going to happen.” Recently she was hired as a librarian at a nearby private boarding school.

‘If I can’t do that, then I’m worthless’

Editor’s note: This week, Reuters Opinion is going to be publishing five excerpts – one each day – from D.W. Gibson’s new book, Not Working, an oral history of the recession. Gibson spent months traveling across America talking to people who had been laid off.

Today’s entry is Heather Dupree’s. Heather is a 38-year-old who lives in Marietta, Georgia. She grew up in Miami and went to Florida International University. Her dad worked for Pan Am, and her parents relocated to Atlanta when the company was acquired by Delta. After college, Heather followed her parents to Georgia. She shares a home in a wooded neighborhood with her partner, Leslie, and Leslie’s sixth-grade daughter, Gabby, from a previous relationship.

This is Heather’s story.

I actually went to school for a couple different things; I couldn’t figure out what I wanted to do. Originally, I wanted to teach, so I have a minor in education. And then I decided late that I wanted to get into computers. So I got my bachelor’s in communications with a bunch of computer classes underneath it, and I started doing websites when I was in college.

Let’s stop talking about a ‘double-dip’ recession

Barely a day goes by without some expert publicly worrying whether or not the U.S. economy will fall into a “double-dip” recession. In a CNBC interview last September, investor George Soros said he thought the U.S. was already in one. Earlier this month, the former chief global strategist for Morgan Stanley cited an academic study to argue that “after every financial crisis there’s a long period of much slower growth and in almost every case you get a double dip.” Granted, this is a minority view; most economists are predicting sustained modest growth for the near future. Which makes sense, because while few are thrilled with the pace of comeback, the U.S. economy has grown for 11 consecutive quarters, beginning in mid-2009.

But given that the recovery is approaching its third birthday, how far away from the Great Recession do we need to get before another downturn would be considered not a “second dip” but simply a separate recession instead?

For all its ubiquity, there is no uniform definition of what a “double-dip” recession is; even the origins of the term are hazy. One analyst wrote in a 2010 research note that the term dates from about 1994, when there was concern about sliding back into the 1991 recession. But Safire’s Political Dictionary traces the term to a 1975 BusinessWeek article, attributing it to an unidentified economist in the Ford administration. (Tellingly, the “double dip” the government feared back then did not actually materialize.)

Why the unemployed stay unemployed

This is a response to Don Peck’s book excerpt “How chronic joblessness affects us all.”

By Gary Burtless
The opinions expressed are his own.

First, from a labor economics perspective Peck’s analysis is basically correct.  In modern capitalist labor markets, long-term unemployment tends to feed on itself via the mechanism that Peck describes.  It gets increasingly difficult for the unemployed to get re-employed the longer their unemployment lasts.  (There are some hard statistics showing this is true, and that it is true regardless of the state of the economy.)  The impact of this phenomenon on the overall unemployment rate became clear in 1980s Western Europe. Countries like France, Germany, Denmark, and Italy that had enjoyed unemployment rates below those in the U.S. for much of the previous three decades found themselves with jobless rates higher than those in the U.S.  More worryingly, their unemployment rates stayed above the U.S. rate for a very long time.

It became clear than much of the difference was the gap between the two continents in long-term unemployment (that is, joblessness that lasts longer than 6 months or a year).   Europeans who remained in unemployment longer than 6 or 12 months tended to stay unemployed, sometimes up until the age they qualified for an old-age pension.  Even when the European job market improved, these unfortunates stayed unemployed.  Employers hired from the ranks of already-employed workers (i.e., those who were on other employers’ payrolls) or from new graduates.  They tended to shun the long-term unemployed.

How chronic joblessness affects us all

This is an excerpt from “Pinched: How the Great Recession Has Narrowed Our Futures and What We Can Do About It.”

By Don Peck
The opinions expressed are his own.
Last summer, the phone maker Sony Ericsson announced that it was looking to hire 180 new workers in the vicinity of Atlanta, Georgia. But the good news was tempered. An ad for one of the jobs, placed on the recruiting website the People Place, noted the following restriction, in all caps: “NO UNEMPLOYED CANDIDATES WILL BE CONSIDERED AT ALL.”

Ads like this one have been popping up more frequently over the past year or so; sometimes the ads disappear once the media calls attention to them (a spokesperson for Sony Ericsson said its ad was a mistake). But new ones continue to appear.

from MacroScope:

Emerging markets: Soft patch or recession?

Could the dreaded R word come back to haunt the developing world? A study by Goldman Sachs shows how differently financial markets and surveys are assessing the possibility of a recession in emerging markets.
One part of the Goldman study comprising survey-based leading indicators saw the probability of recession as very low across central and eastern Europe, Middle East and Africa. These give a picture of where each economy currently stands in the cycle. This model found risks to be highest in Turkey and South Africa, with a 38-40 percent possibility of recession in these countries.
On the other hand, financial markets, which have sold off sharply over the past month, signalled a more pessimistic outcome. Goldman says these indicators forecast a 67 percent probability of recession in the Czech Republic and 58 percent in Israel, followed by Poland and Turkey. Unlike the survey, financial data were more positive on South Africa than the others, seeing a relatively low 32 percent recession risk.
Goldman analysts say the recession probabilities signalled by the survey-based indicator jell with its own forecasts of a soft patch followed by a broad sustained recovery for CEEMEA economies.
"The slowdown signalled by the financial indicators appears to go beyond the ‘soft patch’ that we are currently forecasting," Goldman says, adding: "The key question now is whether or not the market has gone too far in pricing in a more serious economic downturn."

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