From Aug to Oct 2009, the Household Survey shows employment falling 1.4 million (sic).

This is one of the largest two month drops during this recession. That measure of employment hasn't been this low in six years (back when the population was significantly less).

Lehman Brothers (LEHMQ.PK) failed in September 2008, and that started the panic that got the world's attention.

So a year later, in September 2009, after living through a year of "disaster," how did real consumption expenditure (one economists' favorite measures of living standards) compare to what it was in September 2008?

Here is an update of Figure 7 from my NBER working paper.

Of particular interest is the fact that the labor market distortion shows no signs of getting better in Q3. Until that happens, employment could continue down while real GDP rises.

I found this graph on the Huffington Post.


It appears to be for Home Affordable Modification Program, and therefore omits modifications under Home Affordable Refinance Program and under the FDIC's Streamlined Modification.

I have summarized reports by Treasury, FDIC, and the Congressional Oversight Panel in the table below. Pooling and service agreements do not permit term extensions beyond a few months, because each mortgage in the pool is supposed to mature at about the same time. Very little of the monthly payment is principal, so there is not much scope for reducing monthly payments by reducing principal. In practice, the principal balance is a actually bit higher after modification because arrearages are added to the previously scheduled principal.

Thus, modifications reduce interest in order to reduce monthly payments to 31% of AGI. As explained in my papers, this creates a marginal income tax rate in excess of 100%.

Last October, when we were told that spending and incomes were about to collapse, I predicted that "real GDP will not drop below $11 trillion (chained 2000 $)."

Here is a graph (click to enlarge) of real GDP during this recession, through September 2009.

This August, I released a paper explaining why the mortgage modification programs implemented by the Bush and Obama Administrations were probably increasing foreclosures, rather than reducing them. The paper was based on government explanations of the programs rules, and economic reasoning as to how borrowers and lenders would respond. I said that, absent a federal modification program, lenders would have their own programs that allow more borrowers to be eligible, and thereby more borrowers who would have their mortgage modified rather than being induced to leave their home for the lender.

Recently the Congressional Oversight Panel released a report reviewing the federal modification programs. It noted how some mortgage servicers are included in the program by mandate. Others servicers have the option to participate, although non-participation (ie, modifying mortgages by rules that differ from the federal rules) would cause them to forgo the 20K+ per mortgage subsidy for the entire population of mortgages they might modify. So you can understand why those "voluntary" servicers might follow the federal guidelines even if they thought alternative guidelines made more sense.

Last spring I suggested how it was a bad sign that the Chicago Bulls were willing to sell me 180 tickets, rather than the usual 90.

Now, with little effort, I have been able to find people who would like to use the extra 90 (and share proportionally in the cost).

The OFHEO index showed a decline from July to August, which may be notable given that construction costs went up. Yet, over the same time frame, the Case-Shiller index increased even more than construction costs, with the ratio of home price index to residential construction PPI reaching its highest level of the year.

Sean MacLeod also informed me that the RPX index was up a bit in August, although the RPX increase was not enough to offset the increase in construction costs.

The financial panics of last September and October will always be part of the story of this recession, just as bank failures are always part of the Great Depression story. But recent research questions the claim that the financial panics themselves contributed to their contemporaneous and severe employment downturns.

In his academic research, Ben S. Bernanke blamed part of the Great Depression of the 1930s on banking panics. And this time last year (at the height of the panic in the commercial-paper market) he was telling President Bush that if “we don’t act boldly, Mr. President, we could be in a depression greater than the Great Depression.” A lot of taxpayer money was spent based on this theory.

As Professor Mankiw has said, there is nothing that can happen that would cause stimulus advocates to confirm that the stimulus law did not create jobs.

Even, for example, if employment gains were promised for all 50 states, yet only 1 state saw employment rise after the stimulus.

The list of employment-reducing public policies grows yet again:

• Mandating the employers with large payrolls provide health insurance, but that employers with small payrolls do not,

The military has enjoyed recruiting success lately, despite the rather vivid risks associated with "travel" to Afghanistan and Iraq.

I see several interpretations of this observation:

Professor DeLong explains how government spending should have essentially the same multiplier as housing construction spending:

Shocks to spending boost nominal demand: whenever any significant group decides to boost their spending nominal demand rises, whether that group is new businesses seeking to profit from technological progress in high-tech in the 1990s, construction companies that find they can obtain cheap financing via derivatives in 2004, or the U.S. government in 2009. The government's money is as good as anyone's. [emphasis added]

Here's an update to a chart I have shown regularly. Housing PRICES showed a bottom a while ago. Due to crowding out from the fiscal stimulus, it was expected that a housing recovery would be more visible in housing prices than in housing CONSTRUCTION. Nevertheless, it would not be a housing recovery unless construction increased to more normal levels, which is why I have watched the construction activity closely.

I have expected non-residential construction to be high, and it is compared to most of 2007 and all of the years before that. But it appears that construction spending now is just a bit lower than it was when the recession began.

Note that this graph is construction SPENDING, which differs from the VOLUME of construction according to construction prices. 2009's construction prices must be especially low, so a time series for the volume of construction activity should show 2009 to be less below prior years' than shown by the spending series.

I have explained how the FDIC-HASP mortgage modification plan massively distorts the supply of income-earning efforts, because its mortgage modification is large and means-tested: its formula implies that an action taken by a borrower to increase his income would increase his housing payment obligation by 31 percent of the income increment. If the affordable payment (i.e., the payment that would comprise 31 percent of income) were re-evaluated monthly, this would amount to a 31 percent marginal tax rate in each month that a modification could occur.

The OFHEO index for July was released Tuesday. The housing price data have been showing a housing recovery for a while -- the question is when construction activity will get back to normal.

Click to enlarge:

1. Why would someone who genuinely believes that incentives matter, build into mortgage modification marginal tax rates that exceed 100%? Why would they do so without out even commenting on why they think 100+% tax rates are OK in this instance?
2. If incentives really mattered, why did the Obama Administration's stimulus bill analysis neglect to indicate how the bill (either in the form of spending or "tax cuts") would affect incentives to work and to earn?
3. If incentives really mattered, why did the Obama Administration's stimulus bill analysis choose "multipliers" from the economics literature without even a cursory mention of whether the stimulus bill's effects on the incentives to work and earn would be similar to the government spending episodes studied in the literature?
4. When Professor Krugman wrote about the stimulus (e.g., here, here, and here), he did not devote even one sentence to the incentives that would be created by the federal spending. If he thought incentives mattered, why is lots of attention devoted to "multipliers" and none to incentives?

The real straw man in this debate has been the characterization of my analysis:

Like me, you may have noticed that a significant amount of "economics" commentary has little to do with the economy (how people on earth manage its scarce resources), and much more about economists (the small group of people dedicated to studying how people on earth manage its scarce resources).

Reading that commentary, you can learn who among the economists are "foolish", "crazy", and perhaps even which of them qualifies as the "stupidest man alive."