The Unassuming Economist

From The Irish Times:

“The US economic expansion, now almost 10 years old, is within seven months of becoming the longest in history. However with stocks falling into bear market territory last month amid mounting fears regarding global growth, is a recession around the corner for the world’s biggest economy?

The year began with stocks enjoying a strong rebound while Merrill Lynch’s latest monthly fund manager survey shows only 14 per cent expect a global recession in 2019.

Still, the “overall judgment of financial markets is that recession is significantly more likely than not in the next two years”, warned Harvard professor and former treasury secretary Larry Summers earlier this month, citing bond market movements, softening commodity prices and widening credit spreads.

Globally, most equity markets have fallen into bear markets notes Goldman Sachs, and almost all have experienced double-digit corrections.

Bulls point out that while the stock market is meant to be a leading economic indicator that anticipates the future, it is far from omniscient and has, as Nobel economist Paul Samuelson once quipped, predicted nine of the last five recessions.

Still, there’s no shortage of concerned experts. Summers thinks there’s “better than a 50/50 chance” of a US recession in 2020. “It wouldn’t surprise me at all if we slipped into a recession real soon,” says Nobel economist Robert Shiller, who famously foresaw the popping of the late 1990s technology bubble as well as the US housing crash that ushered in the global financial crisis.

Economist polls

The US economy is expected to continue growing in 2019 but concerns are growing. There is a 40 per cent chance of a US recession in the next two years, according to a Reuters poll of economists last month. A more recent Bloomberg economist poll found a quarter expect a recession in the next 12 months – the highest number in seven years, and one that closely corresponds to economist polls conducted by CNBC and the Wall Street Journal.

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Still, economists rarely see recessions coming. Only two of the 60 recessions recorded (in 77 countries) during the 1990s were predicted a year in advance, according to a 2008 paper by the International Monetary Fund’s (IMF) Prakash Loungani, and 40 were not spotted just seven months before onset. Forecasters are too slow to update their forecasts and are “also slow to absorb news about developments outside their own economies”, leaving the impression they are “chasing the data rather than being a step ahead of it”.

The IMF updated its analysis last year, but the conclusion was unchanged: forecasts are revised too slowly and while forecasters are “generally aware that recession years will be different from other years”, they miss the magnitude of the downturn until the year is almost over.”

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From the IMF’s latest report on Senegal:

“This paper quantitatively assesses the macroeconomic and distributional impacts of fiscal consolidation in Senegal through value added tax (VAT), personal income tax (PIT), and corporate income tax (CIT). We analyze the trade-offs between growth and equity for each tax instrument. We find that VAT has the least efficiency cost in output and consumption but expands the rural-urban inequality gap because significant VAT tax incidence falls on the rural area. PIT is the most detrimental in terms of growth and inequality. CIT on the other hand, despite causing large efficiency loss, has better distributional implications by distributing the tax burden more evenly across regions. Much of the output and distributional costs can be mitigated by using the additional revenue for infrastructure investment and cash transfer.”

 

From the IMF’s latest report on Senegal:

“For Senegal to meet its goal of reaching emerging market status by 2035, reforms should address development challenges, including gender inequality. Gender inequality is associated with lower economic growth (IMF 2015, Hakura and others 2016; Gonzales and others 2015), higher income inequality (Gonzales and others 2015, IMF 2016), lower economic diversification (Kazandjian and others 2016), and less bank stability (Sahay and others 2017), while it worsens other development indicators.

Senegal still has large gender gaps in both education access and labor opportunities. Authorities should improve incentives for girls to continue their studies, by diminishing indirect costs of studying (such as those in transportation and in school supplies); enforcing civil laws and campaigning against child marriage and early pregnancy; targeting areas with higher gender gaps (especially rural areas); and reducing discrimination in the labor market (thus increasing the financial returns from studying). To improve outcomes in the labor market, authorities should address gender gaps in access to assets, especially credit and land, and employment segregation.

Net costs of policies can be mitigated through an enlargement of the formal sector and an improvement of spending efficiency. As shown in the model simulations, increasing average years of education to 5, combined with increasing the formal sector share of GDP by 10 percentage points can boost government tax revenues to more than cover the costs, generating a net surplus for the government budget. Furthermore, improving education spending efficiency (for instance as pointed out by the experiments in Senegal by Carneiro and others, 2016) would reduce the government’s overall cost of education.

Mixed policies are necessary to tackle all sources of macro-critical gender inequalities. The framework presented is a valuable tool to show how gender gaps should be tackled from different angles simultaneously to end gender gaps in economic opportunities. For instance, although higher expected returns from labor expands female labor force participation (as seen in Figure 6), it is difficult to close the participation gap entirely if policies to address family costs for women to work outside the house (such as those in Table 1) are not implemented. Similarly, wage gaps cannot be closed if authorities address education gaps but ignore gaps in the labor market.”

From the IMF’s latest report on Senegal:

“The natural resource landscape in Senegal has changed substantially following significant oil and gas discoveries between 2014 and 2017. This paper estimates the macroeconomic impact of these discoveries and discusses potential fiscal frameworks for managing related revenues. Pre-production investment (2019-2021) will lead to an increase in the current account deficit, but this will be followed by a boost to exports as hydrocarbon production comes online (2022 onwards). Discoveries are important but will not lead to a major transformation of the economy, with hydrocarbons expected to make up not more than 5 percent of GDP. Fiscal revenues would average about 1.5 percent of GDP over a 25-year period and about 3 percent of GDP when production peaks. Given the relatively small gains in revenue, staff recommends a fiscal framework that allows for an initial draw down of government resources to finance large up-front investment needs, followed by an appropriate target level of the non-resource primary balance which is to serve as a medium-term fiscal anchor. Issues related to managing the volatility of resource revenues are also discussed.”

From VoxEU post by Guay Lim, Robert Dixon, Jan van Ours:

“One version of Okun’s law specifies a relationship between the change in the unemployment rate and output growth. This column uses US labour market flows data to investigate this relationship between 1990 and 2017. It finds that the net flows between employment and unemployment are sensitive to changes in growth but respond differently to positive and negative changes. This implies that the US Okun relationship is stable but asymmetric, the effect of a change being larger in contractionary periods than in expansionary ones.

There is a large body of research based on Okun (1962) in which researchers (like Okun himself) approach the relationship the law specifies in different ways. Most common are the ‘difference approach’ (i.e. examining the relationship between the change in the unemployment rate and output growth) and the ‘gap approach’ (i.e. examining the relationship between the deviation of the actual from the natural or equilibrium unemployment rate, on the one hand, and the gap between the level of actual and potential output on the other).

Recent research on US data has focused on the magnitude, the stability, and the asymmetry of the Okun coefficient over the economic cycle. Owyang and Sekhposyan (2012) show that during recent US recessions – including the Great Recession – unemployment appears to be more sensitive to economic growth than before. Cazes et al. (2013) also find that the Okun coefficient varies over time and appears to be larger during recessions than during expansions. Pereira (2013) concludes that there are asymmetries in the Okun relationship with a weaker relationship during periods of expansion. Valadkhani and Smyth (2015) also find asymmetries and a weakening of the Okun relationship since the early 1980s. Furthermore, Belaire-Franch and Peiro (2015) conclude that there is an asymmetry in the relationship between unemployment and the business cycle. Finally, Ball et al. (2017) find that Okun’s law is a strong, reliable and stable relationship and that a constant (not time-varying) Okun coefficient is a good approximation to reality.

In a recent paper (Lim et al. 2018), we look at the relationship between changes in the unemployment rate and output growth through the lens of US labour market flows. As far as we know, no one has utilised flows data in this context, yet clearly the change in the unemployment rate reflects the balance of flows into and out of unemployment within a period. Therefore it is natural to look at the Okun relationship as one between output growth and labour market flows. Our analysis is based on the ‘difference approach’ to Okun’s law, since labour market flows are informative about the change in the unemployment rate. We also propose focusing on net flows (the balance of the gross flows between any two states) as they more effectively highlight the dynamics (including asymmetries) behind the evolution of the Okun coefficient.

The flows framework provides an encompassing structure to study the relationship between GDP growth and changes in the unemployment rate and in particular, the conditions under which the Okun coefficient (i.e. the coefficient linking the change in the unemployment rate to the output growth rate) is time-varying and/or asymmetric, i.e. the change in the unemployment rate differs for positive/negative shocks to growth. Furthermore, the flows approach allows us to adopt a three-state analysis – namely, flows between employment, unemployment and not in the labour force. Thus we study how shocks to growth affects labour flows and how they, in turn, translate into changes in three summary statistics – the unemployment rate, the participation rate and the employment–population ratio.”