[Marxism] Prosperity is just around the corner...( Milton Friedman 2.0)

J Rothermel jayroth6 at cox.net
Mon Apr 6 22:08:57 MDT 2009


Milton Friedman’s ‘Pluck’ Gives Hope to Jobless: Kevin Hassett

Commentary by Kevin Hassett

April 6 (Bloomberg) -- The U.S. unemployment rate skyrocketed to 8.5 
percent in March, and there is every reason to expect that it will soon 
be above 10 percent. Given how bad things are, it will probably break 
the postwar record of 10.8 percent, set in late 1982.

Even if we don’t challenge that record, this recession is already worse 
than its 1980s counterpart. Back then, unemployment had been quite high 
for many years before it spiked. The unemployment rate in late 1982 was 
just 2.3 percentage points higher than it had been a year earlier.

This time, the turnaround in our fortunes has been sudden and sharp. It 
seems almost impossible, given how bad things are now, that in March 
2008 the unemployment rate stood at 5.1 percent -- 3.4 percentage points 
lower than it is now. That means the surge in unemployment over the past 
year is even more radical than the one that produced the modern record. 
The economy has fallen off a cliff.

Almost everyone has now been affected. A recent ABC News/ Washington 
Post poll found 
that 60 percent of Americans had a close friend or family member who had 
been laid off.

Unemployment this high brings with it widespread suffering that hasn’t 
been felt by an entire generation, suffering that feels worse because 
recent times were so good. Americans seem to be more somber now than at 
any moment in my lifetime.

But while the rapid reversal in fortunes is challenging emotionally, the 
steepness of our fall is cause for hope. The latest evidence from the 
economics literature shows that steep economic drops might actually 
portend good news ahead.

Friedman’s Plucking

The reason is that economists have developed models that have, in many 
ways, confirmed an observation of Nobel Prize- winning economist Milton 

Back in 1964, Friedman speculated that the economy might be thought of 
as a plucked string: The farther you pull it, the more forcefully it 
snaps back. That analogy gave the Friedman idea its name, “the plucking 

The economy can go down for many reasons. If the world suddenly and 
permanently demands less of our best product, then a decline today is a 
harbinger of bad times ahead.

If, however, panic drives everyone to stop buying just about everything, 
then buying will resume when the panic subsides, and we could easily -- 
and quickly -- end up back where we started. A panic like that would fit 
the bill for a Friedman “pluck.”

So if the economy is going to decline, it’s good news to find out that 
it’s been plucked. That means a snap-back is imminent.

Butterfly at Ceiling

I find it useful when thinking about the Friedman model to use an 
alternate analogy. Imagine that you are in a room with an upward sloping 
ceiling. There is a butterfly in the room that wants to escape, and it 
follows the ceiling up and up over time.

If the height of the butterfly represents gross domestic product, we can 
say that the economy is generally trending higher. If it happens to 
flutter down far away from the ceiling, that means its next movement is 
likely to be steeply back up.

The hard part, of course, is figuring out whether a given decline is 
lasting bad news or a temporary pluck.

Until recently, that problem seemed intractable. But over the past few 
years, econometricians have developed sophisticated models that have 
solved the problem.

The frontier of this literature has been stretched by a fascinating new 
working paper <http://home.gwu.edu/%7Etsinc/Asymmetry.pdf> by George 
Washington University’s Tara Sinclair. Sinclair’s model can take the 
data for an economy and filter out an estimate of whether any plucks 

Cause of Recessions

Looking back at postwar U.S. history, Sinclair finds strong evidence 
that plucks explain many of our recessions 
<http://www.nber.org/cycles/cyclesmain.html>, but not all. That is, she 
has confirmed that the Friedman analogy is a useful one for policy 
makers, who can better concoct responses if they know whether one should 
rationally expect a given slump to reverse itself on its own.

Sinclair told me last week that she recently detected something that may 
be good news for the outlook going forward: “My updated results show 
that the ‘pluck’ part of the latest recession began in the fourth 
quarter of 2008.”

That means that the first part of this recession was a lasting 
adjustment to the collapse of our financial sector, unlikely to reverse 
itself anytime soon. On the other hand, the radical declines of the past 
two quarters are likely transitory, presaging strong quarters to reverse 
the pluck.

While Sinclair was reluctant to offer a forecast on the outlook, she 
added that “on average, plucks last just under four quarters.”

With that history as a guide, then, it would seem that the recovery may 
well be rapid and begin later this year.

Sinclair’s results also imply that the lateness of the pluck means that 
permanent damage has been suffered. When we do recover, we will go back 
to where we were late last year, with unemployment in the 7 percent 
range, rather than to the halcyon days. After that, we can expect a slow 
and painful drift to full employment.

Sadly, from where we are sitting, 7 percent unemployment looks pretty 
good, and the news that we have been plucked provides some comfort as 
more awful news arrives.

(Kevin Hassett 
director of economic-policy studies at the American Enterprise 
Institute, is a Bloomberg News columnist. He was an adviser to 
Republican Senator John McCain 
of Arizona in the 2008 presidential election. The opinions expressed are 
his own.)

To contact the writer of this column: Kevin Hassett 
at khassett at bloomberg <mailto:khassett at bloomberg.net>

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