Saturday, October 8, 2011

High persistent unemployment: a statistical outlier or an indicator?

An item heard over and over from pundits, talking-heads, and media types, regarding firms in association with job creation, is expectations [uncertainty]. And yes, there is a difference between general uncertainty which is with us all the time and extreme uncertainty which is with us now.

Another item, which you hear less of, is the persistent below trend number in GDP and the associated “snap back” after recession [in trend] for several quarters settling back to trend. The snap back which is associated with job creation (in most instances).

Consider for a moment the persistent below trend GDP number and lack of snap back eventually settling to trend. GDP has remained well below historical trend since the second quarter on 2007. (1) Therefore, GDP has remained well below trend for four years and one quarter. The recession according to economic indicators ended June 2009. (2) (3)

The “snap back” is really Milton Friedman’s “Plucking Model”. Basically, when an economy goes into recession, based on historical economic cycle statistics, the GDP trend acts like the plucking of the string of a guitar [hence Plucking Model]. That is, when the economy recedes, like pushing a guitar string, it snaps back [like a guitar string] and trends above historical GDP trend for several quarters before returning to trend [a still guitar string]. (4) (5) Generally speaking, the “snap back” would have occurred and continued surrounding the June 2009 date.

Consider the “snap back” aka Plucking Model in conjunction with expectations [uncertainty and extreme uncertainty]. Pundits currently depict the persistent below trend GDP and persistent poor economic expectation (uncertainty and extreme uncertainty) as outlier phenomena. Yes, statistically speaking you could make the outlier argument given historical economic cycle statistics.

-Or- is the statistical phenomena not an outlier but an indicator of summation. Does GDP trend fall and remain below trend and snap back becomes eliminated due to the summation of factors?

At some unknown but certain point does the historical summation of a political tax code, the funding of a politically promised social welfare state, continuing and historical class warfare rhetoric, mountains of regulation associated with a nanny state, crony capitalism, failure to foster private capital formation, etc. (lending itself to a summation-effect regarding expectations), finally create such a bottle neck that the current phenomena is not an outlier, rather an indicator of the summation?
(2)    The Recession Has (Officially) Ended, NYT,
(3)    Recession officially ended in June 2009, CNN Money,
(4)    Milton Friedman’s ‘Pluck’ Gives Hope to Jobless, Bloomberg, 04/06/2009,
(5)    In-Depth Look - Snap Back In The Economy – Bloomberg,

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