JP Morgan Finds Obama, And US Central Planning, Has Broken The Economic "Virtuous Cycle"

Tyler Durden's picture




 

In the last few months we have presented various analyses, both ours and those of Goldman and even Jon Hilsenrath, on why one of the core economic empirical relationships: Okun's law, is now broken. Subsequently we presented another parallel line of inquiry - namely that in order to preserve the illusion of a recovery, the Obama administration (with help from the Fed) has engaged in a quality-for-quantity job transfer, where America is creating increasingly more jobs of lower quality (the bulk of which are part-time), which in turn is leading to less proportional personal income tax revenues, and thus to a secular shift in an indicator which is even more important for US economic growth than simply the number of jobs "gained" each month - labor productivity. Today, JPM's Michael Feroli ties these two perspectives together in an analysis that has extremely damning implications for the US, and global, economic growth prospects. In a nutshell, Feroli finds that "Productivity, which used to be procyclical, has now turned countercyclical" which in turn means that "if labor is no longer a quasi-fixed factor of production this may eliminate one type of non-convexity in production, thereby reducing the likelihood that the economy has multiple equilibria and is subject to self-fulfilling prophecies" or said somewhat simpler: "the conditions for self-fulfilling prophesies in the macroeconomy may no longer exist." Still confused: central planning, and the Obama vote grab has killed the "virtuous cycle"... Which in turn means that everything America is trying to accomplish is now a lost cause, as every incremental dollar spent, whether by fiscal and monetary policy, is pursuing an outcome that is now theoretically and practically impossible to achieve!

Congratulations central planning - you have just blown your own head off in the latest epic Catch 22. Because this time is never different. 

Feroli lays out the Okun problem quite simply:

Not too long ago Okun’s Law was somewhat obscure, familiar mostly only to economists. Recently, however, given the big move down in the unemployment rate, this empirical relationship has earned wider interest among financial and public policy audiences. The decline in the unemployment rate experienced over the past year is in apparent violation of Okun’s Law, which links changes in the unemployment rate to changes in GDP. What is curious is that two years ago Okun’s Law presented a similar puzzle but with the opposite sign: the rise in the unemployment rate experienced in 2008 and 2009 was in excess of what would have been expected by Okun’s Law given the GDP growth shortfall.

 

Okun’s Law holds that to reduce the unemployment rate down by one percentage point over the course of a year then GDP growth should be about 2%-pts faster than its long-run trend growth. With most estimates of trend growth in the neighborhood of 2.5%, this implies that it takes growth of about 4.5% for a year to lower the unemployment rate by one percentage point. In the year ending in December, the unemployment rate fell by almost a percentage point, a period in which growth was only 1.6%— not only not significantly above trend, but not above trend at all. To understand this violation of Okun’s Law, we return to Okun’s original analysis of the issue.

 

One of the bedrock relations of macroeconomics, even more fundamental than Okun’s Law, is that aggregate GDP (which we label Y) can be represented as function of the amount of capital (K) and labor (L) used to produce output, along with the overall level of technical progress (A) made in using capital and labor. More specifically, the relation Y=A*K1/3*L2/3 seems to describe US production fairly well. This means that a 1% increase in labor input will raise GDP by 2/3%-pt. If the size of the labor force is constant then a 1%-pt drop in the unemployment rate should increase labor input used in aggregate production by 1/(1-u)%, where u is the unemployment rate. This implies that holding all else equal, a 1%-pt drop in the unemployment rate should increase GDP by about 1/(1-.083)*(2/3)=0.7%, a number well below the 2% boost implied by Okun’s Law. The apparent disparity is resolved by the fact that all else is usually not equal: declines in the unemployment rate tend to be correlated with (1) increases in the average workweek, (2) increases in labor force participation rates, and (3) increases in average labor productivity.

Feroli on the labor force participation rate wildcard - nothing but an optical scam to fool the general peasantry into believing that the unemployment rate is dropping, when in reality we are having a historical economic transformation of unprecedented proportions. And call it lost productivity, or a quality outflow of jobs, end result is the same:

The breakdown of correlation (2) has received the most attention recently: instead of increasing, the labor force participation rate has declined even as the unemployment rate has declined. However, Okun himself realized that the correlation of labor usage and productivity was historically the most important reason that the Okun coefficient was so large. The fact that this correlation has gone the “wrong” way over the past few years can explain both why  unemployment increased more than Okun’s Law would have predicted in 2008-2009 and why unemployment has come down so much recently. In fact, if the correlation between productivity growth and changes in the unemployment rate that prevailed between 1947 and 1984 held last year, then the decline in unemployment we have witnessed would have been accompanied by GDP growth of around 4.1%, and there would be little left to explain.

 

Output—GDP—equals productivity, or output per hour, times hours worked. As we noted above, growth in productivity, or correlation (3) listed above, has been weaker than what would have been expected given the decline in unemployment. However, the growth in hours worked has been only a little weaker than what would be expected. Although the labor force participation rate, correlation (2), is weaker than what one would have expected given the decline in unemployment, the average workweek, correlation (1), is stronger than what would have been expected. On net, hours worked have not behaved too abnormally given the decline in unemployment—productivity has.

A historic secular shift: productivity - a core component of GDP, is no longer procyclical.

For most of the postwar period productivity was significantly accelerating in booms and slowing in downturns. The most common explanation for this relates to labor market frictions that make labor a quasi-fixed factor of production. For example, if union contracts stipulate a certain level of employment, then in a downturn less output is spread over the same labor “overhead,” reducing productivity; the opposite happens in a boom.

 

A variety of micro- and macroeconomic evidence suggests that labor market frictions have declined in recent decades, which can be seen less formally in the rise of temp help employment, the decline of unionization, the rise of internet job search, etc. These factors have made labor more of a variable factor of production, rather than a quas-fixed factor of production that is adjusted only occasionally. This trend has likely led to the end of procyclical productivity. Moreover, this trend is not going away, and so we should not expect the old macroeconomic regularities to reassert themselves.

The conclusion is staggering - everything we know about the economic virtuous cycle is now irrelevant!

The new pattern of productivity growth—no longer cyclical with respect to output and countercyclical with respect to employment—has several important implications. For one, we may continue to see the unemployment rate drop more than Okun’s Law implies. Another implication is that the labor share is no longer countercyclical. This also means that profits will be less correlated with improvements in the labor market.

 

A final, somewhat technical, implication is that the conditions for self-fulfilling prophesies in the macroeconomy may no longer exist. The idea that there could exist virtuous/vicious circles between real economic outcomes and confidence (or asset prices, effectively the same thing) was first formally advanced by David Cass and Carl Shell. They referred to these virtuous/vicious circles as “sunspot equilibria;” George Soros dubbed the property “reflexivity.” Subsequent applied macroeconomists appealed to the procyclicality of productivity as evidence of the type of increasing returns to production sufficient to generate confidence feedback loops. If labor is no longer a quasi-fixed factor of production this may eliminate one type of non-convexity in production, thereby reducing the likelihood that the economy has multiple equilibria and is subject to self-fulfilling prophecies. While it is hard to say much definitively, it is interesting to observe that over the last two years the economy has been subject to large swings in investor sentiment and asset prices, and yet actual growth outcomes have been remarkably stable.

And there are those who wonder why we detest "central planned" attempts to attain a fake equilibrium more than anything. Luckily, now that the core driver of economic growth has failed just so a centrally planned administration can get 4 more years of "hope and change" it won't be much longer until the wheels finally and terminaly fall off the centrally panned bus tour.

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Sat, 03/24/2012 - 20:54 | 2287550 UP Forester
UP Forester's picture

And time is like a piece of wax, falling on a termite:  He's choking on a splinter.

Sat, 03/24/2012 - 21:11 | 2287590 vast-dom
vast-dom's picture

Oooooopen the door!

Sat, 03/24/2012 - 22:35 | 2287714 UP Forester
UP Forester's picture

You gettin' crazy with the Cheez-WizTM?

Sun, 03/25/2012 - 00:51 | 2287885 vast-dom
vast-dom's picture

i'm crazier than da wiz son, i am the beast i worship.

Sun, 03/25/2012 - 10:12 | 2288230 smb12321
smb12321's picture

BUT  but but ...inventments have never been ONLY about currently calcuable value but instead, value in the long run.  (At least that's what investing used to be about.) It's why the US and other Western countries are in such a pickle - it's not our current value that is in question, but the future one.  

Markets have always partly on perception.  Many who decried the market runup under Bush as phony eagerly accepted the Clinton doc com bubble  when PE's were in the 500-1000 range.  Percpetion is everything. The sad thing is, there ARE some excellect investments but the black hole of sovereign debt is sure to give them a sucker punch.   

 

Sat, 03/24/2012 - 15:15 | 2286909 Chaffinch
Chaffinch's picture

So it's Obama who is to blame for breaking the virtuous cycle? Everything was going fine until 2009? And we know this to be so because a guy from JPM says so? Yeh, right...

Sat, 03/24/2012 - 15:53 | 2286968 Gully Foyle
Gully Foyle's picture

YesWeKahn

"The key problem is"

We are not privy to the playbook.

I imagine if the majority of Americans understood the direction we are  moving in they would accept it without issue. Even the coming collapse and realignment wouldn't bother the masses.

What troubles me is the amount of people, especially here, who still assume that there is any freedom. Why is it so hard to grasp that the plans made so long ago are being moved along at exactly the pace planned. Maybe there is a glitch here and there, sometimes slowing sometimes speeding up, taking advantage of oppurtunities presented when they arise.

In the end it all runs to the same place, a single world government with a single bank.

 

Sat, 03/24/2012 - 16:18 | 2287007 ToNYC
ToNYC's picture

Machiavelli noted long ago that since the survival of the Prince is the  issue(on Nov 6, 2012), nothing else matters. No power is a morte!

Sat, 03/24/2012 - 16:45 | 2287033 nasdaq99
nasdaq99's picture

Is Zeorhedge gonna audit the P&L on the $75Billion that the Fed claims it "earned" and handed over to the Treasury last week?

Sat, 03/24/2012 - 13:15 | 2286736 Olympia
Olympia's picture

Loan sharks knew that if they took the dollars printing machines under their control they could suffocate the world ...they could initially suffocate USA and after taking the USA from the Americans, they could move and suffocate the whole world and take the countries from their people.

FED printed cheap money and loansharking multiplied this money in an unnatural way within the American economy boarders and they discarded them abroad so that they did not threaten USA. USA became the first state in the world with artificial “breathing”...

It cannot be possible but just in the USA for only the last year, more than one million houses were seized. It cannot be impossible but the New World has returned to tents and shelters ..has returned to the ages of Columbus. It cannot be possible that we allow to a few loan sharks looting the toils and the assets of people...

http://eamb-ydrohoos.blogspot.com/2012/01/global-debt-crisis.html

------------------------
Authored by Panagiotis TRAIANOU 

Sat, 03/24/2012 - 13:17 | 2286742 no life
no life's picture

I've been saying this for years.  Years!

Sat, 03/24/2012 - 13:19 | 2286747 Zero Debt
Zero Debt's picture

All backed by 1 oz of gold

Sun, 03/25/2012 - 00:48 | 2287882 StychoKiller
StychoKiller's picture

And craptons of Tungsten!

Sat, 03/24/2012 - 13:23 | 2286753 tickhound
tickhound's picture

These distortions in the ancient voodoos will continue as the drive for profits forces labor into automation.

Labor as a function in these equations is becoming increasingly worthless. 

Sat, 03/24/2012 - 13:23 | 2286754 Zola
Zola's picture

More specifically, the relation Y=A*K1/3*L2/3 seems to describe US production fairly well.

Where does this come from ??

Sat, 03/24/2012 - 13:29 | 2286761 alexwest
alexwest's picture

it came from heads of Harvard/Prinston/Yale guys..

they missed NASDAQ BUBBLE, biggest housing bubble, so by now they would have been unemployed and/or in 'taking in ass' prisons if US fed gov would not have printed trilions and trilions $$ and bailed them out...

alx

Sat, 03/24/2012 - 13:23 | 2286755 alexwest
alexwest's picture

you know , I almost puked reading this nonsense..WHY ?????????????????

#
One of the bedrock relations of macroeconomics, even more fundamental than Okun’s Law, is that aggregate GDP (which we label Y) can be represented as function of the amount of capital (K) and labor (L) used to produce output, along with the overall level of technical progress (A) made in using capital and labor. More specifically, the relation Y=A*K1/3*L2/3 seems to describe US production fairly well. This means that a 1% increase in labor input will raise GDP by 2/3%-pt. If the size of the labor force is constant then a 1%-pt drop in the unemployment rate should increase labor input used in aggregate production by 1/(1-u)%, where u is the unemployment rate. This implies that holding all else equal, a 1%-pt drop in the unemployment rate should increase GDP by about 1/(1-.083)*(2/3)=0.7%, a number well below the 2% boost implied by Okun’s Law. The apparent disparity is resolved by the fact that all else is usually not equal: declines in the unemployment rate tend to be correlated with (1) increases in the average workweek, (2) increases in labor force participation rates, and (3) increases in average labor productivity.
#

bunch of fancy words, formulas /etc.. and IN WHOLE BULSHIT POST THERE IS NO a FUCKING SINGLE WORD 'DEBT' and 'GOVERMENT'.. true.. try context search

so it didnt occur to author it DOES MATTER.. it seems its ok to print 10% of GDP for 5 years in row...

SO YOU KNOW WHY EACH AND EVERY BANK/BROKER/GOVERMENT IS FUCKED..
they live in fantasy land of formulas/ fancy okuns laws/etc .. they dont live in real world..

alx

Sat, 03/24/2012 - 16:27 | 2287019 JW n FL
JW n FL's picture

 

 

who gave this mexican a scientific calculator?

someone call INS!

sorry! I couldn’t help it!

 

but seriously.. you are trying to use logic? in a world (American numbers) that is make believe.

there is NO REAL ACCURACY! in the numbers provided by ANY! Government Institution.

See this --> http://www.zerohedge.com/news/terminated-cbo-whistleblower-shares-her-full-story-zero-hedge-exposes-deep-conflicts-impartial-

so any assumption that you would like to spring board off of existing ".gov" information for.. is as flawed, if not more so.. for knowingly plugging in tainted figures.

Understand that Wall Street sees MORE! money from the Government than the Military! 3 - 4 times more!

where does it come from?

how can that be?

all you have to do is look at how much the FED has Printed in the Form of Loans on the "New Normal Mark to Market" Collateral! I can show you $16 Triillion(ish) Line Item from the Fed for 2 years(ish).

The system is a LIE! a HUGE Lie and it has gotten worse and worse and instead of trying to fix the system and inject some reality coupled with common sense.. the idiots have injected MORE BULLSHIT! into the System!

Now they are worried what will happen when this house of cards falls over.

Hence the Department of Homeland Security has been beefed up with steroids!

All the better to be able to beat the starving hoards into submission with!

 

It is OVER! Everyone is sitting around waiting for the correction! So that the New, New, New Normal of QE can be twisted, spun and or injected into the LIE of a System that the Greedy Idiots have Fucked Up for EVERYONE!

 

The World is going backwards..

Look at China’s numbers..

Look at Europe’s numbers..

Look at our numbers..

 

It is over! Everything but the Fat Lady Singing!

I understand this is so very negative.. and that it doesn’t make anyone feel good!

You can always plug into some Kramer and ignore the FACTS! All around You!

 

Sat, 03/24/2012 - 13:24 | 2286756 vegas
vegas's picture

And just exactly what did you expect when this dipshit was elected? Growth & prosperity? His goal is to transform the US into a socialist state, not make your life better. So easily predictable except to the Hopey Changey crowd that bought all the Marxist bullshit.

 

http://vegasxau.blogspot.com

Sat, 03/24/2012 - 14:04 | 2286806 spooz
spooz's picture

substitute "fascist" for "marxist" and get a clue that either way you vote will result in the same outcomes.  or do you have that hopey changey thing goin' for the republicans? oh, yeah, and check out how those teapartiers voted on the extension of the patriot act. lolz

Sat, 03/24/2012 - 14:10 | 2286825 Crab Cake
Crab Cake's picture

Hey dipshit, the Repuglicans are no better than the Democraps; different faces of the same coin firmly in th banksters pocket.

How are people still this stupid?

Sat, 03/24/2012 - 13:26 | 2286758 ffart
ffart's picture

More specifically, the relation Y=A*K1/3*L2/3seems to describe US production fairly well. 

Is there still any wonder they call it the dismal science? Hey, if we put a bunch of unrelated terms together they sort of correlate to this graph. Then we can use it as an excuse to create more money out of thin air and loan it to ourselves. Let's go celebrate how brilliant we are with a double-sized portion of hookers and blow.

I bet Ben Ivanovich Bukharin Bernanke sits in his office trying to come up with new functions like this all the time.

 

Sat, 03/24/2012 - 13:33 | 2286767 t_kAyk
t_kAyk's picture

He knows but one function:  Ctrl+P

Sun, 03/25/2012 - 02:04 | 2287954 Mary Wilbur
Mary Wilbur's picture

Why Bukharin?

Sat, 03/24/2012 - 13:30 | 2286762 pleseus
pleseus's picture

This highbrow, pipe smokin', bow tie wearing, ivy league piece of analysis can be summed up in my blue collar, t-shirt wearin', Bud Light drinking, having sex with my best friends mom with no condom two words. "No Shit!"

Sat, 03/24/2012 - 13:32 | 2286766 BobPaulson
BobPaulson's picture

Yeah, cause JPM has everybody's best interests a heart.

Sat, 03/24/2012 - 13:38 | 2286771 hedgehog9999
hedgehog9999's picture

Just like Vegas, Disneyland and all other mega fake environments created for Americans, now we have a mega fake economy to go with it via this politburo style central planning that's in place.

It is a pretty sad state of affairs indeed.

At the core though we are ALL part of it AS LONG AS WE CONTINUE TO PARTAKE IN IT.

Sat, 03/24/2012 - 13:39 | 2286774 carbonmutant
carbonmutant's picture

In other words, ther're pi**ing in the wind...

Sat, 03/24/2012 - 13:47 | 2286779 hedgehog9999
hedgehog9999's picture

AND THE WIND IS BLOWING TOWARDS THEIR FACE.........

Sat, 03/24/2012 - 14:08 | 2286821 Beam Me Up Scotty
Beam Me Up Scotty's picture

Sorry its not the wind.  Its the fan.  And the fan isn't pointed at them, its pointed at us.  First comes the piss.  You know what comes next........the SHIT!!

Sat, 03/24/2012 - 13:41 | 2286778 q99x2
q99x2's picture

If Corzine can be kept alive long enough to sing these JPM's, GS's, Obama's, the Big Bernank, they're going to go down with him.

Sat, 03/24/2012 - 14:14 | 2286833 Kali
Kali's picture

Really?  And who is going to bring them down?  How many years have they been getting away with all their bullshit. Until war breaks out or this house of card collapses NOTHING IS GOING TO HAPPEN.  The "leaders" of our society are getting away with blatant theft/corruption and laughing in our faces.  We are nothing but mice that are roaring. 

Sat, 03/24/2012 - 13:46 | 2286780 DormRoom
DormRoom's picture

Most of the debt is servicing  misallocation and malinvestment during the boom time.  Thus the marginal utility of money has decreased as it's deployed to prop up unproductive uses.

Sat, 03/24/2012 - 14:01 | 2286802 Schmuck Raker
Schmuck Raker's picture

Chimerica the Dutiful.

Sat, 03/24/2012 - 14:16 | 2286836 I am Jobe
I am Jobe's picture

All hail to Foxconn

Sat, 03/24/2012 - 14:11 | 2286828 lasvegaspersona
lasvegaspersona's picture

or as the Weidemers called it in Aftershock...gone to money heaven

Sun, 03/25/2012 - 01:52 | 2287941 Joseph Jones
Joseph Jones's picture

We know so many people collecting SSI that should be denied that it's not even funny. 

Sat, 03/24/2012 - 13:47 | 2286782 booboo
booboo's picture

Ya think maybe the morg finally realized that Ostalin really means it. This dude is on a mission and they are not out of the blast radius.

Sat, 03/24/2012 - 13:51 | 2286785 I am Jobe
I am Jobe's picture

Vodoo Econ- Well well- The Guns vs Butter Model is dead, that is so 80's, 2000 on, Food vs Iphones Bitchezzz. New era, you can have a smoothie the fucking smart phone users.

Sat, 03/24/2012 - 13:51 | 2286786 nestle
nestle's picture

This is Bullish!!

Sat, 03/24/2012 - 13:51 | 2286787 spencer
spencer's picture

Watch this:

 

Battle of the Athens:

http://voxvocispublicus.homestead.com/Battle-of-Athens.html

 

Any resemblance to Ron Paul?


Sat, 03/24/2012 - 14:20 | 2286842 lynnybee
lynnybee's picture

Battle of Athens.   thank you, spencer, for posting that.   it made my day.    if only it were that easy.   

Sat, 03/24/2012 - 15:32 | 2286930 spencer
spencer's picture

you are welcome - I was shocked myself when I saw that. It is absolutely amazing.

Unfortunately for us those people are long gone - we can't pretend we have smart and brave population ready for action in defense of our freedom and the Constitution.

 

 

Sat, 03/24/2012 - 15:31 | 2286929 Optimusprime
Optimusprime's picture

Totally.  Fuckin'. Awesome.  Thanks for the great link.

Sat, 03/24/2012 - 15:48 | 2286937 spencer
spencer's picture

It would be even more awesome if people exposed the current primaries manipulation.

Unfortunately the media are involved on the wrong side of this.

Here is a backup link at youtube:

http://www.youtube.com/watch?v=U5ut6yPrObw

 

Maddow Explains How Ron Paul May Be The Current Republican Front Runner In The Presidential Race!

http://www.youtube.com/watch?v=2OkN2npJR-4

Sat, 03/24/2012 - 21:10 | 2287587 JW n FL
JW n FL's picture

 

 

spencer

Watch this:

 

Battle of the Athens:

http://voxvocispublicus.homestead.com/Battle-of-Athens.html

 

Any resemblance to Ron Paul?

 

All Americans Must Watch Documentary - Hacking Democracy

http://www.youtube.com/watch?v=eYIezJyhGWY

Sun, 03/25/2012 - 01:58 | 2287949 Mary Wilbur
Mary Wilbur's picture

Wow! What a great story. Thanks for the history.

Sat, 03/24/2012 - 13:53 | 2286793 blindman
blindman's picture

so okun's law isn't really a law but more like
a fucking wild guess made by a fucking idiot on
the payroll?
did i get that right? the tests around here just
keep getting harder. sheesh

Sat, 03/24/2012 - 15:31 | 2286920 CrockettAlmanac.com
CrockettAlmanac.com's picture

I think the point is that long standing metrics are no longer functional. It was something along those lines that started John Williams on the path to being the Shadow Stats guy. The broken "law" indicates that something is not adding up the way it used to do.

 

One of my early clients was a large manufacturer of commercial airplanes, who had developed an econometric model for predicting revenue passenger miles. The level of revenue passenger miles was their primary sales forecasting tool, and the model was heavily dependent on the GNP (now GDP) as reported by the Department of Commerce. Suddenly, their model stopped working, and they asked me if I could fix it. I realized the GNP numbers were faulty, corrected them for my client (official reporting was similarly revised a couple of years later) and the model worked again, at least for a while, until GNP methodological changes eventually made the underlying data worthless.

 

 

 

That began a lengthy process of exploring the history and nature of economic reporting and in interviewing key people involved in the process from the early days of government reporting through the present.

 

 

http://www.shadowstats.com/

Sat, 03/24/2012 - 13:54 | 2286794 trulyslide
trulyslide's picture

When all of the easy, redundant, lazy people jobs have been eliminated and the remaining jobs cut in half, there will be those who buckle down and get by - to form some foundation of a real economy - and those who won't know how to because they've never had to work hard.

Do NOT follow this link or you will be banned from the site!