[Marxism] Prosperity is just around the corner...( Milton Friedman 2.0)
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.
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
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.
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
To contact the writer of this column: Kevin Hassett
at khassett at bloomberg <mailto:khassett at bloomberg.net>
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