Tinkering the Numbers: An Economy at Risk Part Two
Filed under: Economic Outlook, Global Economy — admin @ 10:41 am
Despite the side-stepping of Labor Secretary Elaine Chow and others in Washington, there are very few people in the real world that don’t recognize that the economy is sick. And we just can’t spin it away. Unfortunately, we can’t even rely on the accuracy of the numbers produced by the Bureau of Labor Statistics to create sound policy. At issue is the slow and steady erosion of the meaning of these numbers by changing the formula, while leaving the definition unchanged. The entire country cringed when Clinton tried to debate the definition of the word “is.” It is because at our core we have to believe in the truism… by definition right? However, what if you could turn that into naiveté not by adjusting the definition but by adjusting the formula? Most econometric models rely on the sanctity of specific numbers, like the CPI, for setting COLA, rates, etc… and finding the real numbers involves editing out that spin.
While the unemployment rate is relatively low, there are indications that the overall economy is considerably worse. The economy has lost jobs in every month of 2008 for a total of 324,000 jobs.
Congress is responding with legislation extending unemployment benefits an additional 13 weeks. The bill is tied to the supplementary Iraq war funding bill. The bill struggled with White House opposition as an attachment to a funding bill, and argued the need for an extension of benefits while the numbers are so “low historically.” In late negotiations, the Administration has given the bill its approval, while contesting the attachment. The changes to the BLS method of determining unemployment makes historical comparison useful politically, but not necessarily sound for making policy.
An ancillary consequence of this decision not to extend benefits would have been an acceleration of the foreclosure crisis. As the AP reported this week:
“A swing from a prevailing expectation that house prices will rise to an expectation that they will fall causes a major tightening of underwriting requirements. Indeed, the only reason the tightening has not been even larger is that the house price declines expected are temporary. The prevailing view is that they will last only until we get out from under the foreclosure crunch.
“This places the foreclosure problem front and center as the critical policy issue. Most of the emphasis has been on the human toll from having families forced out of their homes, which is understandable. But reducing the number of foreclosures also is the key to reestablishing a well-functioning mortgage market going forward.”
The MBA reported on this month that mortgage delinquency was at its highest rate since they started measuring it in 1979. With the expiration of benefits for 1.5 million Americans, it is hard to imagine that these numbers won’t continue to grow. While the $57 billion dollar stimulus check initiative may have some effect, much of it will be absorbed by the accelerating costs of food and fuel. Congressional advocates of the extension cite these “at risk” Americans as most in need of support and the economic need to address the housing crisis at its source. Once again, it is a policy conundrum…further spending is dangerous – weakening the value of the dollar and borrowing the burden from our future; on the other hand, precarious investor optimism will not be enhanced as foreclosures grow.
In addition, this report will pressure Ben Bernanke to back off plans to start increasing interest rates to forestall inflation and bolster the value of the dollar. Don’t get excited yet originators. This places the Fed in an interesting conundrum. If the Fed uses monetary policy to ease a recession, they lower rates. However, with the value of the dollar at historic lows and the costs of goods and services at historic highs, especially food and fuel, further reductions in interest rates could spur more inflation. Are we in a spiral towards a period of dreaded “stagflation?”
More to come as the situation continues to unfold…
Stumble it!