Rising unemployment indicates recession threshold

January 19, 2008 10:05 am

First off it is my brother Paul's birthday today and I repeat my Happy birthday message already sent. Happy birthday ! Paul.

But now to business. Floyd Norris has an extremely useful article in the New York Times this morning `"Job data passses threshold where recessions dwell" which draws on and reproduces data and charts from the US Bureau of Labour statistics via Haver Analytics, National Bureau of economic Research.

The data in chart form shows that whenever   the numbers of unemployed rise 13 % or more over a year the economy has either entered a recession or will do so shortly. The charts detail 4 recessions from the Keynesian era and five from the monetarist era with the sixth the one now emerging.
The dates are late 1953 to the end of 1954; mid 1957 to late 1958; late 1960 to late 1961; early 1970 to mid 1971; to identify the Keynes era recessions.

Early 1974 to late 1975; early 1980 to early 1981; early 1982 to early 1983; early 1990 to early 1992;mid 2001 to late 2002 to identify the monetarist era recessions.

In all of these, the recession was underway or began shortly once unemployment rose above the 13 % threshold increase.

The present one   seems to have either begun or is about to begin in December , 2007. Year to year Dec.2006 to December 2007 the number of unemployed rose   by 13 % once again signalling recession underway or about to begin.Hopefully this will be the last recession which began in the monetarist era.

I say this because I believe at least in the US they have turned the corner on monetarism and   have begun a new era which transcends the two older epochs of Keynesianism and monetarism .

Perhaps we should call it the Keynes- Friedman synthesis since the policies   it draws on are drawn from both thinkers. That is for Keynes' stimulus to work one needs an accomodating monetary policy. For monetary stimulus to work one needs an appropriate supportive fiscal policy which in times of downturn needs to be stimulative. ( although many Keynesians would argue that if Keynes had been properly interpreted from the beginning the distortions of the neo-classical synthesis could have been avoided particularly the unwise dismissal of monetary policy as a relevant policy tool.)

This transition may not yet be clear to some analysts but I am convinced that this is the case.However it will come to be called it is a beginning of something new.


Now that the stimulus package has been announced and hopefully will be implemented shortly after some compromise and accomodation between house and senate Democrats and Republicans over the precise measures we shall see how quickly the recession or slowdown if you prefer this term will be halted and reversed.

I remain cautiously optimistic that the stimulus package will be implented swiftly, be effective and be adequate to the task at hand.

If it is not large enough it would be useful to have on hand a larger package of measures including large capital works and further income transfers through food stamp programs, tax rebates, family allowances, seniors benefits   ready to be implemented where necessary.