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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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Sun, 03/25/2012 - 01:28 | 2287924 Mary Wilbur
Mary Wilbur's picture

Take a rest and give yourself a break.

Sat, 03/24/2012 - 15:59 | 2286974 ekm
ekm's picture

Dear Ben Shalom Bernanke:

Next time you go to sinagogue, please pay attention to Torah, Ecclesiastes particularly:

THERE IS A TIME FOR EVERYTHING, even for a crash whether you like it or not.

A reminder for you:


Ecclesiastes 3 A Time for Everything

 1 There is a time for everything, 
   and a season for every activity under the heavens:

 2 a time to be born and a time to die, 
   a time to plant and a time to uproot, 
 3 a time to kill and a time to heal, 
   a time to tear down and a time to build, 
 4 a time to weep and a time to laugh, 
   a time to mourn and a time to dance, 
 5 a time to scatter stones and a time to gather them, 
   a time to embrace and a time to refrain from embracing, 
 6 a time to search and a time to give up, 
   a time to keep and a time to throw away, 
 7 a time to tear and a time to mend, 
   a time to be silent and a time to speak, 
 8 a time to love and a time to hate, 
   a time for war and a time for peace.


My take:

Time for a crash.


Sat, 03/24/2012 - 17:42 | 2287159 Hulk
Hulk's picture

Its the time to uproot that I hate, August is a hell of a month to uproot...

Sat, 03/24/2012 - 20:58 | 2287559 Yen Cross
Yen Cross's picture

 Hulk? Come on? It's the weekend.  Let it rip GREEN MAN "o" Steel!  Come on buddy? I'm taunting " David Banner"!

Sat, 03/24/2012 - 21:00 | 2287565 Yen Cross
Yen Cross's picture

 Blue Oyster Cult , " Reincarnated"?  Nice " Poem".  Well done EKM.

Sat, 03/24/2012 - 21:20 | 2287609 ekm
ekm's picture

You are on my top 5 list of follows. It was about time you came back to the "entertaining main blog", for some entertainment of course.

Sun, 03/25/2012 - 06:31 | 2288074 Yen Cross
Yen Cross's picture

  Z/H has a watch list? I guess you will like that usd/jpy follow thru in a few hours then. I actually have a job, so it's hard to keep up with the rest of the crew. My time zone is a bit off right now.

  I like you EKM. Are you that usd/cad savy trader?

Sat, 03/24/2012 - 21:40 | 2287632 ekm
ekm's picture

By the way, it's called Judaism and Christianity. In case you've never heard about them.

Sat, 03/24/2012 - 17:18 | 2287101 rsnoble
rsnoble's picture

Oh bullfucking shit! JPM has been sucking Ben's sorry ass excuse for a cock for years!  This is just save-face, good cop bad cop horseshit!!  I'm headed for the creek now with a plethora of empty beer bottles and past dimon's face on them for target practice. I may even piss in a few.

If it weren't for the fed.........JPM would be in wasteland. What a bunch of rotten motherfuckers!

Sat, 03/24/2012 - 20:18 | 2287465 laurelweiner@ya...'s picture

Gregg. Abbot. Go get em

Sat, 03/24/2012 - 20:18 | 2287466 laurelweiner@ya...'s picture

Gregg. Abbot. Go get em

Sat, 03/24/2012 - 20:19 | 2287471 laurelweiner@ya...'s picture

Gregg. Abbot. Go get em

Sat, 03/24/2012 - 20:16 | 2287462 laurelweiner@ya...'s picture

Simple. Words


Sat, 03/24/2012 - 21:33 | 2287621 Marc_W
Marc_W's picture

Gee, all those affirmative action welfare job holders "working" (if you can call it that) for the government aren't pulling their weight in productivity contributed to GDP?  Who'd have thunk it?


Make work "jobs."  Welfare.  Handouts.  Smoke and mirrors.

Sat, 03/24/2012 - 22:54 | 2287738 Davalicious
Davalicious's picture

The plan is for the government to rely more and more on big corporations for revenue. That will excuse competition crushing measures in their favor. 

Sat, 03/24/2012 - 23:41 | 2287790 onlooker
onlooker's picture

Willie Sutton replied to why he robbed banks “because that’s where the money is”. NOW, lemme explain why the Government and Wall Street are looting the USA and any one else they can nail. but, What happens when all the money is gone? Think about it.


Sun, 03/25/2012 - 08:45 | 2288152 Antipodeus
Antipodeus's picture

They'll just print some more.  Easy-peasy.  No wucking forries.  I dunno why these Big-Brains have to make everything so complicated.  ;]

Sun, 03/25/2012 - 00:11 | 2287831 ekm
ekm's picture

On the Unemployment topic, does anybody feel really bad about these guys?

"Glut Leads Lawyers to (Surprise) Sue Law Schools"

Sun, 03/25/2012 - 01:40 | 2287932 Antipodeus
Antipodeus's picture

WTF!?  GS & JPM talking about 'virtue'?!  HA ... HAHA! ... HAHAHA!!! ... HAHAHAHA!!!! ... HAHAHAHAHA!!!!! ... HAHAHAHAHAHAHHA!!!!!! ... STOP IT!  YOU GUYS ARE KILLING ME!  ;]

Sun, 03/25/2012 - 02:12 | 2287959 Expositor
Expositor's picture

Maybe Okuns law isn't broken. Maybe long term growth is -.5%. This would explain a lot of other things as well.

Mon, 03/26/2012 - 01:19 | 2290066 Bansters-in-my-...
Bansters-in-my- feces's picture

Resistance is futile....

FUCK YOU's J P Morgan

Tue, 03/27/2012 - 01:15 | 2293497 ChoppednScrewed
ChoppednScrewed's picture

The young man shot was no saint by any means. He was involved with drugs and gangs for starters. He was in the area because he was suspended from school for causing trouble.  Here's the skinny. The media and those looking to further divide the men and women of this geographical land base that we call a "country" will do anything to maintain control. None of them work for you.

Fri, 04/06/2012 - 09:35 | 2321874 Shizzmoney
Shizzmoney's picture

I cannot wait until the proletariat goes Galt on all of these banking and corporate motherfuckers.  It's gonna be awesome.

Wed, 09/12/2012 - 14:42 | 2786806 Ryuukai
Ryuukai's picture

"everything you know about the economic virtuous cycle is now irrelevant" ?

No surprise there. Every conspiracy theory you write here is irrelevant

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