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Signs and Wonders

In honor of the prospective double-dip recession, I made double-dip buttermilk fried chicken for dinner a couple nights ago.  Looks prescient.  (It was yummy, too.)  Another punk jobs report today: a net loss of 131,000 jobs, with job levels from previous months revised downward slightly.  

Meanwhile, taxes are scheduled to go up a lot on January 1, when the Bush tax cuts expire. So I note with interest a 2007 academic paper I have in my files that studied tax increases and concludes: 

"tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increases on investment... In terms of consequences, our results indicate that tax changes have very large effects on output. Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent..."

The author: Christina Romer (along with her husband Paul Romer, also a UC Berkeley economist of substantial reputation), chair of President Obama's Council of Economic Advisers.

Romer announced her resignation this morning.

Categories > Economy

Discussions - 7 Comments

1. What is your basis for saying a 'double-dip' recession is 'impending'? Who forecast this?

2. The article in question appeared in June 2010, not 2007.

3. From the introduction:

Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by nearly three percent.

Which is to say the annual production stream is reduced by roughly 1%.

4. From the introduction:
Our estimates suggest that the response of
output is substantially smaller after 1980 than before.

5. From the conclusion:

Finally, we find suggestive evidence that tax increases to reduce an inherited budget
deficit do not have the large output costs associated with other exogenous tax increases.

Lots of economists are predicting a double dip. (I'll go with John Makin for just one.) Lots aren't. I assume you can read the newspapers and can find both on your own.

I have the Romers' original manuscript, It is dated July 2007.

I'd say a 1% haircut in production is nothing to dismiss at the moment.

1. Lots of people in the WSJ.

2. AD, try this link : http://www.econ.berkeley.edu/~cromer/RomerDraft307.pdf

I merely point out that your use of elipses leaves a false impression. The article refers to the level of production in the three years immediately succeeding such an increase, not necessarily longer term; the recission in production levels is amortized over three years, not one year; and the expression of effects is in the form of production levels lower than they otherwise would have been, not necessarily in the form of a contraction in output.

Your use of the term 'impending' suggests a sure thing, not an opinion among a selection of economists. You said it. I cannot answer well why you say what you do by reading the newspapers.

Presumably the 2007 manuscript was preliminary, subject to revision after peer review. The article appeared in the American Economic Review in June of 2010. That is the definitive text. The qualifications are in that text.

Um, Art, just where did I use the term "impending"? I've re-read the post several times now, and can't find it.

My regrets, 'prospective'.

I know you said 90-110 for an intermediate cap on oil prices(largely because it was a good point for profitable tar sands and increased capacity). A lot of folks are very bullish on the rest of the world (China, Brazil, Germany, India) and I think this pushes oil higher. Your $75 dollar bet with Deenen was outstanding and signaled the global depression. Global economic recovery and a higher crude price eats into american consumption/demand slowing the pace of recovery.

Earnings were good, but a lot of theses earnings have overseas exposure. There has never been such a large disconnect between small business sentiment and the more bullish large secular growth and dividend paying value stocks. There is no double dip because the large caps want to rally. This market wants to rally, buyers are comming in on bad news, every dip is becomming more of an excuse to buy than every rally is to sell. Buying bonds seems pointless, gold has had a huge run up and a lot of folks think there is a gold bubble...

But the serious question is: Does the american economy have recovery potential with higher oil prices?

1 year guess
oil at $90 (trading on the upper part of the 73-98 range)
Gold at $1100(the dollar doesn't improve that much, it just seems like a bubble, as bears take part in sector rotation)
Dow at 11,200(higher, but not incredibly so...it does hit a double high at 11,900 but keeps meeting resistance in guidance because unemployment is stuck at
9.3% (states and local gov continues to shed...but some silver linnings(including even this)...crime rate increases slightly. except in Detroit where crime falls and consumer demand increases)
Republicans control the House, Democrats maintain the Senate.
Obama's popularity is at 43%
Deficits higher.
Ford stock at 20.
Tesla drops to $9 a share before rallying to the mid teens on buyout rumors from Ford and Toyota.
GM IPO a success. AIG a success(remaining derivatives are profitable, wins suit against BP and federal gov. for gulf insurance claims), Citigroup is a success. Discounting energy departement grants and loans, bailout a sucess. Still serious problems with Fannie and Freddie these go to the pink sheets, Fin Reg still not understood.

Transocean, BP and haliburton still in court. Buying up scientists pays dividends for BP. Public becomes more familiar with Hickman v. Taylor and the work product doctrine. Public still not that interested in Civil Procedure, decides to continue filling up at Shell instead.

Dire warnings from the CBO and increased prominance from a fight for speaker that nevertheless results in the victory of Boehner(who at the behest of the chamber of commerce puts the american tax payer on the hook for BP) helps Paul Ryan who along with Pawlenty starts up a conversation about whether or not the duo are too close geographically(Wisconsin, Minnesota) A similar conversation occurs around Scott Brown and Mitt Romney, but folks aren't buying the pickup truck theme comming out of Mass, and similarities to ObamaCare are too much.

Public Confidence in the House of Representatives increases 2% with the ousting of Pelosi, cynics point out that this is still bellow public confidence in China's human rights record. Realists point out that China's human rights record is buyoed by investors who love China and are thus blinded. Secular growth stock Baidu hits $130 a share.

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