Wednesday, February 18, 2009

(1) A contraction of jobs and (2) a financial meltdown

--Yesterday I linked to an economist's article in the Wall Street Journal arguing that President Obama is using scare tactics when he says we are in the worst economic crisis since 1929-1933.

The article's argument was unconvincing. One problem was that, with little touch, the economist compared unemployment statistics across historical eras. He observed, for example, that today's unemployment rate of 7.6 does not approach the 1930's rates in the twenties. Nominally true. It seems obvious, however, that unemployment statistics, like all data, are put together in social contexts, and these contexts differ across history. In other words, the numbers can't possibly mean today what they meant back then. Different procedures, different motivations, different political pressures, different media environment, different public-relation norms. Without dealing with these differences, or at least acknowledging them, a comparison across social eras can throw analysis down the wrong path.

I suspect it did with this particular economist. Taking just one example, the economist did not cite the U-6 unemployment number, which might be more tenable as a comparison to the 1930's number, and which today is up to 13.9. Also, he made no mention that job losses are growing in intensity just about every month, suggesting that the worst is still to come.

--So, as I've said before, in contrast to this economist, the data of the moment suggest to me we are living through a historic contraction of wealth we haven't seen since precisely the years President Obama cites.

--And it's not just jobs. For example, take stock market data. Some people scoff at these data. I eat them up. To me, the financial markets and the value of the Dow and the S&P are crude but meaningful representations of the wealth of our private organizations.

Mr. Schiller suggested Nov 1 1981 to Nov 2 1982 was as bad as, maybe he was even arguing worse than, today's contraction. But it's hard to make that argument if you believe at all in the data of financial markets.

November 1981 - November 1982:

Dow: Up 16.0 percent

November 2 1981


November 1 1982


In sum: Starting from Nov 2 1981, the Dow was off on August 12 by 10.4 percent, but rallied to be up by 16.0 percent on Nov 1 1982.

December 2007 - February 2009

Dow: Down: 43.25 percent

December 3 2007


February 17, 2009


In sum: The current contraction includes a 43 percent drop in the wealth of America's most prominent economic organizations.

--So what explains these different data?

One difference might have to do with the reasons for the contraction. In the eighties we cut jobs and raised interest rates to fight inflation. Today, we are contracting as our companies are forced to mark down the value of their assets. All their debt is less valuable today than it was in the period leading up to the contraction. This time, we appear to be marking down wealth, not to fight inflation and protect our wealth, but because we aren't as wealthy as previously conceived.

What we have today is a contraction of jobs and a financial meltdown over which we are able to exert very little control.

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