Credits in the U.S. balance of payments give rise to a demand for dollars. Debits reflect the supply of dollars. Together, they determined the exchange rate for the dollar. So far, so good. Everybody knows that.

Then why is it that virtually all the commentary on the dollar on financial TV and in blogs fails to mention the balance of payments when discussing the dollar? The dollar is considered super-important these days while the balance of payments isn’t considered important enough to mention. That’s like saying the price is important, but supply and demand don’t matter.

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(Not All Details are Bad)

The front page of today’s Wall Street Journal features a useful breakdown of the third quarter real GDP statistics. On the negative side, it shows that the strength in consumption spending benefited from various temporary government programs: primarily cash for clunkers and the first time home buyers’ credit. Those will eventually go away.

Showing imports as well as exports is almost a breakthrough since commentators typically focus only on exports as a positive to GDP growth. The chart showed exports as contributing 1.5 percentage points of the total increase of 3.5 percentage points. Fair enough. But it also showed imports subtracting 2.0 percentage points, making net exports (exports minus imports) a net drag of 0.5 percentage points.

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I’ve been reading Amity Shlaes’ wonderful book, The Forgotten Man, A New History of the Great Depression, with an eye out for parallels and lessons for our current crisis. You will find some of those and much, much more.

Amity showed great restraint in writing her book. A scholar with her expertise could have driven the ideological lessons home and saved those of us on a practical mission some time. Instead, she patiently let the characters and the circumstances speak for themselves letting the nuance show through for us to savor.

While I wasn’t totally clueless about the depression, not having lived through it, you see, I must admit that my knowledge of many of the details was limited.

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Nonfarm payroll employment declined by another 263,000 jobs in September. According the the Labor Department release, over the recent period . . .

“From May through September, job losses averaged 307,000 per month, compared with losses averaging 645,000 per month from November 2008 to April. Since the start of the recession in December 2007, payroll employment has fallen by 7.2 million.”

As usual, most of the TV commentators gave the impression to their viewers that there was no job creation in September and that there were 263,000 job losses. A typical question was “When are we going to see job creation again?”

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“You can’t spend your way out of recession” is a sound bite heard almost every day on financial TV. Recently a guest commentator combined that sound bite with this one: “You can’t borrow your way out of debt.” Perhaps the second one was intended to divert our attention from the first one. Clever. Perhaps too clever by half.

Of course you can spend your way out of recession, almost by definition. A recession can be defined as a shrinkage of spending and income. More spending is needed to generate more income. Therefore, more spending will do the job.

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Why can’t we learn even the most obvious lessons from the Great Depression? Many policy mistakes were made then, but perhaps the biggest and most destructive was the Smoot-Hawley tariff that contributed to a world-wide trade war and the reinforcement of the depression’s downward spiral. We’ve already dissed our Mexican neighbors by abrogating the trucking provisions of NAFTA. Do we really want to have a tire war with China to pander to domestic unions? The Chrysler bond holders would probably have an opinion on that.

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(The Glass is Half Full; not Half Empty)

The good news that employment declined less in August than in previous months is more important than the bad news of the rise in the unemployment rate. As I've noted here previously, the unemployment rate (from the household survey) had not kept up with employment losses and a convergence was over due. It should not be considered new bad news. The unemployment rate will rise further, even if employment losses continue to decline. One reason is that discouraged workers will come into the labor force as their perceived prospects improve. Keep your eye on employment rather than unemployment as a measure of how the economy is doing.

When I was in graduate school in the olden days (1960s), Professor Waller hired me as his grader in his money and banking and monetary policy classes. At first, he limited my chores to multiple-choice and true-false questions, but he gradually trusted me with essay questions-following his strict guidelines of course.

"Are budget deficits inflationary?" was one of his favorite questions on final exams, and he had a precise idea of the components of an "A" answer. Using T-Accounts (Remember the Chicago Fed's Modern Money Mechanics booklet?), the students were supposed to show the alternate ways of financing government spending, including deficits. The answer to the question, you see, depended almost entirely on the method of financing. Another way of saying that is that the impact of fiscal policy depended almost entirely on the accompanying monetary policy.

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Last year I said that I felt about a strong dollar like St. Augustine felt about chastity. "Lord, make me chaste, but not just yet." My version was, "Lord, give us a strong dollar, but not just yet."

My point was that while a strong dollar had benefits in normal times it would make a recession worse and more difficult to recover from. If someone from on high decrees a stronger dollar in a recession, our exports would be more expensive to potential foreign importers and imports would be more affordable to us at home. The decline implied for net exports pulls down GDP.

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(I'm Hopeful, but not Convinced)

A Technical Answer

The Business Cycle Dating Committee (BCDC) of the National Bureau of Economic Analysis determined that the current recession began when payroll employment started declining in January 2008. I doubt that they well declare the recession over while payrolls continue to decline, even if we get positive GDP growth in the current quarter, especially if the growth results primarily from an inventory rebound and one-time clunker rebates.

My assessment differs from many talking heads who have gotten used to the idea of a "jobless recovery" based on experience of the last two recessions. Many of them have declared the recession over already, expecting a positive third quarter GDP number, even though they expect employment to decline for several more months. However, I think they've misread recent history.

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A Mixed Blessing

Productivity  surged in the second quarter–up 6.3 percent in the business sector and 6.4 percent in the nonfarm business sector. These were the largest increases since the third quarter of 2003. Rising productivity is a blessing. It's a mixed blessing during periods of high unemployment, however, since the alternative is higher employment.

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The decline in payroll jobs of 247, 000 was a pleasant surprise to most observers, including me. It continues the "less bad is the new good" paradigm, but I'll take it. The negative must get smaller before it becomes positive.

More surprising to me was the decline in the unemployment rate from 9.5 percent to 9.4 percent. Since the unemployment rate-measured by the household survey-had risen only a tenth in June with a fairly large decline in payroll employment, I thought it had some catching up to do.

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My local newspaper this morning showed a picture of a guy standing in a line of job seekers at a Career Expo. He had his cap on backwards.

If, in the unlikely event, he were contacted for the household survey of employment, they would ask him if he had a job. He would say no. Then, they would ask if he had looked for a job in the last six weeks. He could truthfully say yes. He would be classified as in the labor force but unemployed.

Perhaps they should add another question to the survey: "Did you wear your cap backwards when you applied for a job?" If so, he would be classified as not in the labor force, and the number of unemployed would go down by one.

Gross Domestic Product (GDP) and real GDP are generated by total U.S. spending on final goods and services. The U.S. national income accounts use the spending categories of Consumption (C) plus Investment (I) plus Government spending (G) plus Exports minus Imports (X-M). GDP = C + I +G + X – M.

(These categories roughly correspond to the categories Keynes outlined in his General Theory of Employment, Interest and Money.)

The net change in second quarter real  U.S. GDP was a decline of 1 percent at an annual rate. This is down from the 6.4 percent rate of decline (revised) in the first quarter of 2009. The percentage contributions of the main categories of spending to the 1 percent decline in the second quarter real GDP are listed below:
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Some Reminders from Econ 101:

GDP is an estimate of the total value of all final goods and services produced during a year (or in a quarter expressed at an annual rate).

It's the broadest most comprehensive estimate of the value of the total output (and income) produced in the economy.

Estimate. Yes, it's an estimate and would look much like making sausage, but don't worry about that. It's as good as smart people can make it, but, perhaps more important, it's reasonably consistent over time. The consistency makes it useful in the same way that my bathroom scales are, or the calorie count on my exercise equipment. You can measure relative performance without perfection on the level of performance.  

Value. Price is the way we add up diverse elements-the common denominator. A three dollar broom adds half as much to GDP as a $6 hamburger.

(Breakdown of GDP Numbers after the Fold)

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The stimulus plan was designed to fail- not deliberately, probably, but in effect. It reflected priorities other than job creation or preservation, as had been advertized. It was not timely- we're still waiting for most of it to be implemented- and it was not focused. It was scattershot. At the time I likened it to "Shooting Wild Hogs with a Shotgun."

But, let's be fair. The fact that employment has continued to fall and unemployment has continued to rise is not sufficient evidence of its failure. That was already baked into the cake, and I expect those trends to continue for some time even if the stimulus package is working. Unemployment will peak above 10 percent, if not 11 percent.

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My recent post on The Illusion of Saving set a new record for me in visits and hits. That made me feel good. I would feel even better if hits and visits didn't come before the reading. In any case, here is some more on saving and savings.

There is a big difference between an economist's view and the educated layman's view of saving. In the years when the personal saving rate was near zero, it was common to hear the opinion that it really wasn't that low since the official measure doesn't count this or that. This or that might be equity in homes, capital gains in assets, 401K's, etc. This line of thinking confuses saving with savings.

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Last Friday's weak jobs report accelerated discussions of a possible second stimulus package. Will wonders never cease?

I agreed that the first stimulus package should've been large and have come soon. We got large and we got soon, if soon is defined by the date of the legislation. Not soon as defined by when it might do some good. What happened to all those "shovel ready" projects? We've been out stimulated by China, and, now, by France. Yes, France!

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It's Just Not a Recovery. . . Yet

Last Friday's disappointing jobs report elicited some strange responses on financial TV. The idea that the recession is over is one I find hard to take seriously. Yet, some commentators have bought into it so completely that the jobs report caused them to start talking about a "jobless recovery." Others hinted at the same thing by emphasizing that employment and unemployment are lagging indicators.

Here I go stating the obvious again: The recovery is not over. We don't have a jobless recovery; we just don't have a recovery yet.

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In my opinion, the average watcher of financial cable TV and reader of the financial press can be forgiven some confusion. Experts are found at opposite extremes of many issues. For example,

*We need more spending, but budget deficits are bad.

*Debt is bad, but we are adding debt at a record pace.

*Consumers and investors need a strong dollar, but won't a strong dollar slow the recovery from recession?

The beginning of clarity on these and related issues is to get clear on the distinction between GDP and related measures of current output and income on the one hand and our standard of living on the other hand. To some extent the distinctions correspond to the difference between the Classical (pre-Keynesian) approaches to macroeconomics, which assumed full employment rate of GDP generation, and Keynesian economics, which is all about getting back to a full employment rate of GDP generation. During a period of deep recession, the Keynesian focus on spending levels, including using government spending to fill any gaps, is appropriate. In more normal times, the Classical focus is more appropriate.

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