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Friday, May 28, 2004

The Sky is NOT falling...

We have not heard much about the overall economy lately. Not only do the democrats and the media have more juicy things to talk about - prison scandal, Iraqi handover, and Al Gore's newfound intensity - but the overall status of the economy looks really good. I have stared at the following graphs (available in the Dallas Fed's 2003 Annual Report which deals with productivity) for a few minutes and have decided that it is very difficult to put a convincing negative spin on the overall trend of things.

1. Unemployment Rate

2.Labor Force Participation Rate

3. Consumption as a Share of Income

4. Productivity

5. Average Workweek

6. Consumption per Person
I do remember a couple of months ago that there was a day of outrage that the workweek was declining - of course there were two days of outrage last fall when the average workweek had crept up a few minutes. The latter was a clear example of the corporate black box grinding up the individual, working him to death; the declining work week is a clear example of people not being able to work as much as they want because of outsourcing, or some other such nonsense.

Overall, things are going good. Some general comments. Is productivity nonstationary?* Productivity growth looks pretty stable, and it makes sense that productivity would be nonstationary as long as human ingenuity and imagination is allowed to flourish. If the level of knowledge is non-stationary then productivity, which is a function of human imagination and ingenuity, would likewise be non-stationary.

But the payoff is in the bottom two graphs. Consumption per person is increasing while the average work week is declining. The upshot: More consumin' and less workin'. Put in economic terms, people can spend time working or in leisure. Leisure time is when we do the most consuming. In order to consume we need income which we get through working. Hence the (often distasteful) tradeoff between leisure and work. The bottom two graphs show that we are able to work less and consume more, which is what improves "utility" or satisfaction.

* For those who are not specialists in econometrics, non-stationary variables continue to increase or decrease without "reverting to a mean." Reversion to the mean is a commonplace in many areas of economics, for example the stock market which has historically had average annual returns of approximately 10%. While in some years stock market returns can be high, like last year's 18%, and other years can be low like in 2000, there is reversion to the mean. For non-stationary variables, there is no reversion to a stable mean.

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