Saturday, April 6, 2013

It's the animal spirits!

After DeLong's "LESS THAN 100,000 PAYROLL JOBS, A 58.5% EMPLOYMENT-TO-ADULT-POPULATION RATIO EXACTLY WHERE IT WAS A YEAR AGO, AND LABOR FORCE PARTICIPATION DOWN BY 0.5 PERCENTAGE POINTS IN THE PAST YEAR" I once more started thinking of the Keynesian animal spirits. Keynes attributed the so called "Great 1929 Depression", back in 1933, to the low profit expectations of the business coordinators and other economic agents. As a result, investment was being gravely hindered by the adverse economic environment and by the blunted consumption (demand) resulted by the unemployment. Bradford DeLong is anxiously concerning for what he could reply to future "whippersnapper economic historians who will come to interview him" for the currently sluggish economic activity of the US. I do not blame him! He does not overreact, either! I have something in mind that could serve as an answer to future historical quests.

It has been a while since I first started thinking that US economy may take very long to show significant improvement. As a matter of fact, since the debt crisis in Europe firstly escalated. We are living in a highly interconnected environment in which any single disorder in any economic system rapidly propagates to the entire world; e.g. 2007-2008 bust. American in
vestment coordinators are aware of these nigh linkages- especially between the two major economies- and remain pessimist for the growth prospects of their economy hesitating to invest in expanding their activities. The EMU and the US are significantly interlinked and they have become very tight trade partners, as well. Since the European economy is still straggling to survive the ferocious austerity its aggregate demand and subsequently its demand for imports remain weak. This state of stagnation encapsulates on the expected future returns of any export oriented investment decision. In addition, households curb their optimism for their future income and are intimidated to spend; either they cannot be confident that they will maintain their current job or the unemployed household members cannot be sure that they will be hired in the near future.

In the following graph I have calculated an approximation of Tobin's Q as the Market Value of Equities Outstanding divided by the sum of Replacement Costs (Nonfarm Nonfinancial Corporate Business plus Nonfarm Noncorporate Business of both Residential and Nonresidential [1]). The graph substantiates, at least to a certain degree, my claims about the existence of the animal spirits.

This entire mixture of pessimism described above feeds the animal spirits, makes them more aggressive and consequently constitutes a major impediment for the recovery and the growth of the US economy. Ben Bernanke and the Federal reserve cannot do anything more, if you ask me; so far the copious liquidity is transformed into excessive reserves. Nevertheless, fiscal policy can ignore the unjustified debt concerns and boost aggregate demand even more by investing in infrastructure, science, research and technology and why not by leveraging consumption. If you are not convinced that the debt concerns are unreasonable you may take a look at the latest of Krugman's posts, at another one by DeLonge or at a previous post of mine and if you are not still convinced please, at least, accept that debt should be nothing more that the last concern of the policy makers. In fact, that is the underlying risk: debt fears will reorient policy makers to lower budget deficits or even to austerity with catastrophic consequences not only for the US but for the global economic system.

[1] After the Federal Reserve Economic Data - Federal Reserve Bank of St. Louis timeseries encoding Tobin's W is calculated as follows: (MVEONWMVBSNNCB)÷(RCSNNWMVBSNNCB + RCVSNWBSNNB + RCVSRNWBSNNB + RCVSRNWMVBSNNCB)