By Oct 2009, U.S. labor usage was more than 10 percent below trend. Even if it returned to trend by the end of 2010, that would put labor usage about 20 year x percentage points below trend (i.e., an average 6-7 percentage points below trend for each of three years). A year's labor income is about $10 trillion, so that's $2 trillion that labor income has been reduced over the three years.

How to Purchase a Recession
Suppose for the moment you had a lot of $ to bribe people not to work, or employers not to hire. What method of allocating the bribes would reduce employment the most? How much would it cost you to purchase a recession like this one?

A couple of housing price indices, plus national accounts revisions were released today. Much of the new data is not newsworthy, but I did notice that real nonresidential investment was even lower in Q3 than it was in Q2 -- another indicator that employment is not coming back soon.

I also noticed that the BEA price index for residential structures investment was (marginally) lower for the seventh quarter in a row. Here is a comparison of quarterly Case-Shiller, OFHEO, and BEA (all expressed relative to the PPI for housing construction).

Robert asks:

In our industry, the manufacturers claim to be holding prices, but are quietly making all kinds of deals to "help" us be more competitive.

The housing PPI looks pretty flat over the last six months. That is one indicator that housing prices will be flat, which means that mortgages will not be going further underwater. click to enlarge

What happens next? I'm not sure. My version of the real business cycle model (some of my academic papers on it are here and here. I began applying it to this recession about a year ago, such as here and here). It does not give a definite answer, but it does drastically narrow the possibilities.

My model has no adverse productivity shocks, no shocks to capital markets (these variables just react to events in the labor market), no monetary policy, and no fiscal stimulus. Simply put: I view this as a one (type of) shock recession, and the labor market is ground zero for that shock.

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]