John Irons's Blog


Economic News, Data and Analysis

Recession: Two Year Anniversary

This past month (March) marked the two-year anniversary of the recession that began in 2001.
Some observations…
* If the economy were still in recession, April would be the 25th month of the contraction, making it the longest recession in 100 years (save for the great depression); and more than twice the average duration. See Recession dates and durations. The NBER has not yet made a determination as to whether the recession has ended, or, additionally, if a second one has started.
* Despite a stable 5.8% unemployment rate, employment is still very week. A recent data analysis by the Economic Policy Institute shows that the current recession has an unusually large the decline in private sector jobs two years after the recession began. (See graph below…)
* Overall, the recession is/was rather mild as measured by output reductions. GDP has been slow but positive over the past year. Industrial production has improved significantly from its trough, and real manufacturing and wholesale-retail sales has more than surpassed the March 2001 level. (See NBER’s memo.)
* People in the know are suggesting that the first quarter of this year was particularly weak. Industrial production fell by 0.6% in the past two months after a 0.8% gain in January. However, the relatively quick end of the Iraq war is likely to improve consumer and business confidence – and hopefully this will be reflected in increased consumer spending and higher businesses investment.
* One potentially significant drag on the economy is still the continuing fiscal crisis at the state level which, at the very least, is likely to further harm the employment situation.
* Turning points in the macroeconomic situation are notoriously hard to predict, but I think, despite the current weakness, there is a strong possibility that economy may start to improve in the near future. However, I am fully aware that the lovely spring weather might be biasing me in this regard!

(Click for large version)

How Deep Is the Current Recession?: Archive Entry From Brad DeLong’s Webjournal
The Economic Policy Institute has found a measure according to which the current recession is actually the deepest and most severe of post-WWII recessions. The measure? The percentage by which private employment is below its peak level two years after the recession began: “In the two years since the recession began in March 2001, total payrolls have fallen by 2.1 million and private sector payrolls are down by 2.6 million.”
This is, of course, only part of the story: the current recession is very shallow insofar as production is concerned (in large part because of the rapid underlying productivity growth trend), moderate as far as the unemployment rate is concerned (in part because lots of people have dropped out of the labor force during this recession), and deep as far as private-sector employment is concerned.
Which is the “right” measure? Well, it depends on what you are interested in, of course. A balanced picture of the perhaps-still-ongoing recession needs to comprehend all three…

Filed under: Data, Economics, Economy, Recession, State Economy

States’ Troubles

A recent article by the Christian Science Monitor highlights some of the measures states are taking in response to their budget problems.
According to the Center on Budget and Policy Priorities, deficits are estimated to be between $70 and $85 billion for the upcoming state fiscal year (2004). Since most states have a balanced budget requirement, these states face immediate cuts in expenditures or increases in taxes.
The article above highlights some of the measures being taken, which include raising college tuition, closing libraries and other services early, and even unscrewing ever third light bulb in the Governor’s office (Missouri). In addition, almost half of the states have “raided tobacco settlement funds.”
Of course, there are more serious consequences as well. Since Medicaid is administered at the state level, several states are considering reducing health care aid to lower income individuals and families (see the CBPP report for details). Cuts in education, welfare, childcare, and even jury trials have also been enacted.
Is there a solution?
In the short term, states are in trouble without aid from the federal government. At the federal level, the government is allowed to borrow, and thus reduce the effects of a recession on spending and taxes. In fact, Bush has proposed increases in spending and decreases in taxes, the exact opposite of most states.
It makes sense that the federal government could play a roll in easing the states’ problems by providing aid in the form of grants, loans, or an increase in the federal share of certain services such as Medicaid.
In the longer-term, perhaps after the economy has recovered, there are several reforms that might help ease the impact of future budget shortfalls.
Alice Rivlin of Brookings suggests several reforms:

  • Enact counter-cyclical revenue sharing, i.e. federal assistance triggered by national or state economic indicators.
  • Accumulate larger “rainy-day funds” at the state level.
  • Insure that tax base includes less volatile revenue sources, such as sales taxes. (For example, a Virginia government economist posted that Virginia state revenue is more volatile than GDP, in part because of a reliance on capital gains and corporate tax revenues.)

State governments will face a test after the recession ends – will they be able to make hard choices in a boom to prevent another crisis from happening, or will they forget the lessons from the 2001 recession?

Filed under: Economy, Fiscal Policy, Policy, State Economy

State Personal Income

How’s your state doing? Click on the graph for a larger version.

State Personal Income
Personal income growth for the nation was 1.3 percent in the second quarter 2002, roughly the same as in the first quarter (1.2 percent), and up from an average of 0.5 percent for the four quarters of 2001, according to estimates released today by the U.S. Bureau of Economic Analysis. Growth in the second quarter reflected faster growth in larger states such as California, New York, and Texas, that more than offset a slowdown in growth elsewhere.
[Map of States showing personal income, percent change 2002:I-2002:II]
For the nation, personal income growth was little changed, as an upturn in dividends, interest, and rent was largely offset by a slowdown in transfer payments. Earnings growth was unchanged. The upturn in dividends, interest, and rent was due in part to step-ups in the growth in rental income of persons and in interest income, the latter reflecting faster accumulation of interest-bearing assets. The slowdown in transfers followed a typical first-quarter uptick, when cost-of-living adjustments boosted payments for social security and other federal programs.

Filed under: Data, Economics, State Economy

States’ troubles (more)

Alice Rivlin at Brookings has a very nice (draft) policy brief on the states’ financial troubles.
She points out the financial difficulties of states and outlines some of the repercussions, especially for lower-income residents.
In addition to laying out how the states got into the current situation, she also suggests some practical policy to address the issues.
Some suggestions made by Rivlin:
* Immediate: Federal government aid to states
* Long term: automatic trigger of federal grants in recessions or state crisis.
* States can adopt rules to save more money when times are good.
* Adjust tax mix to keep/include less volatile taxes (like sales taxes).
* Improve sales tax collection/coordination across state borders.
Overall, these recommendations sound like good ideas to me. There does seem to be one (potentially major) problem.
Rivlin suggests that “[c]ongress could enact a permanent program of counter-cyclical revenue sharing, which would trigger automatic federal grants in a recession based on national or state economic indicators or combination of both.”
However, if the federal government does come to the aid of states, or if they adopt a mechanism for providing aid in the future, then the states will have less of an incentive to follow responsible policies in good years. Why run a surplus to create a “rainy day fund” when you know that the federal government will ride to the rescue? (This is simply a moral hazard problem at the state/federal level).
Perhaps one way to solve this problem is to charge the states a premium or require states to put money away in a reserve fund (perhaps a percentage of outlays) when times are good – in essence “forcing” states to save – as a precondition to qualify for recession-time aid.
Anyway, I recommend the reading to better understand what’s going on with states’ budgets.

The State Fiscal Mismatch: Doing More with Less
Unlike the federal government, states must balance their budgets even in a weak economy. They have already dipped heavily into their reserves. Hence, they are once again being forced to make painful choices to maintain budget balance. Some are raising taxes or delaying planned tax reductions. Most are cutting spending substantially. The spending cuts are falling heavily on low-income people at a time when poverty is rising and many low-wage workers are losing jobs. So, once again, state budgets collectively are acting as automatic destabilizers. In the name of budget balance, states are taking actions that delay economic recovery, off-set the economic stimulus coming from the federal budget and monetary policy, and increase the hardship of those already feeling the economic pain.
The story is not a new one–it happened in 1980-82 and again in 1990-91–but the severity of the current crisis dramatizes the pro-cyclical swings in state budgets and the need to seek greater stability. Moreover, state finances matter more than they used to because states have greater responsibilities. States are being asked to raise educational standards, bear the rapidly rising costs of Medicaid, help low-income people find and keep jobs, and enhance homeland security. Since Americans are asking so much of state governments, they need to look for ways of shoring up state finances and mitigating their instability.

Filed under: Economics, Policy, State Economy, , , , ,

State Fiscal Conditions

State Fiscal Conditions Continue to Deteriorate; Federal Assistance Badly Needed, 9/20/02
States around the country continue to struggle with dismal fiscal conditions. State revenues have declined for four consecutive quarters. According to the Rockefeller Institute, revenues for the period April-June 2002 ? the final quarter of the fiscal year in most states ? were 10.4 percent below revenues for the same period in 2001. This is the sharpest decline at least since the 1980s.

Filed under: Economics, Fiscal Policy, Policy, Recession, State Economy

State’s Economic Troubles

Like many other states, Virginia is having economic trouble – the recession has caused revenues to drop, thus creating a budget imbalance.
It seems like there is collective bipartisan lunacy in the all-too-predictable response: decreases in expenditures.
In Virginia (as reported by the Washington Post) this will likely lead to layoffs at government agencies, reduced funding for local universities as well as across-the-board cut-backs in the neighborhood of 15%. Other states seem to have the same response.
The expenditure reductions will, of course, make the economic situation worse. Isn’t this something we teach in Introductory Economics? Why do states not get the picture that cutting back in a recession is NOT a good idea?
I realize that some states have a balanced budget provision in their constitution (which is a bad idea to begin with) – but these states, and others with balanced budget rules, should have built a buffer stock of revenue that would last them at least through a mild recession (which this one is/was).
Those without such provisions need, at the very least, to sit tight, run a deficit, and then, once the economy recovers, pay off its bills.
Perhaps someone can explain to me why this kind of basic economic thinking cannot be used in practice.
Virginia Predicts Deeper Shortfall

“a fiscal crisis that Republicans and Democrats agree will force dramatically deeper cuts in nearly every facet of government spending across the Old Dominion.” …
“Nationally, budget gaps in 43 states add up to roughly $40 billion, a figure that will increase to nearly $60 billion in the coming year, according to national associations of governors, legislatures and state budget officers.”

Filed under: Economics, Policy, Recession, State Economy