Friday marks 200 days in office for President Obama.   “How has he done?” asks Fortune.

The first thing to say is that Barack Obama took over the presidency at an extremely difficult time. A variety of analogies suggest themselves: He is Harry Houdini who has been thrown in the river, in a straitjacket, with chains wrapped around him. Or he has taken over as the captain of a ship with a rotting hull, while the ship is under attack in a hurricane. To capture the state of the economy, perhaps the best metaphor is that Obama took over as pilot of an airplane in the middle of a steep dive. For a president precedent, he is Lincoln, who takes office as the South secedes. Or he is Roosevelt, who takes office at the depth of the Great Depression.

In any case, in light of the difficult circumstances, I think Obama has done amazingly well.

The financial markets were in free-fall six months ago. Bank spreads were at historic highs (a good indicator of just how outside-the-box this financial crisis was). GDP contracted at an annual rate of about 6 % in the last quarter of 2008 and the first quarter of this year.

Since then, the airplane has begun to level off. Those bank spreads are down to more normal levels. GDP declined at an annual rate of “only” 1% according to last Friday’s advance estimate; if I had to guess, we will see a bottom in the second half of the year and could see some positive growth. I give a lot of credit to the fiscal stimulus, to the monetary stimulus, and to the financial repair measures, as messy as those inevitably were.

At the time our new president took office in January, there was a danger that this could be not only the worst of the post-war recessions, but as bad as Japan in the 1990s. I think we have now avoided that. We have learned from mistakes in the past, particularly the mistakes of the Depression – those made by the Federal Reserve, Hoover, and also Roosevelt. Obama has the advantage of the lessons of the 1930s to learn from.   But he has the disadvantage of having inherited an exploding path of debt (unnecessarily incurred by this predecessor).    The debt is the rotting hull of the ship of state.

Regarding February’s stimulus package, some commentators said it was too small, some said it was too large.  In truth, it was both.   It was too small by itself to return us to full employment, to knock out the recession.   In order to bring us back to full employment, we would  need a boost to spending several times as big.  And yet, at the same time, it was too large to guarantee that we avoid losing the confidence of our international creditors.   If they stop buying our bonds, US long-term interest rates could rise sharply.   (China — the largest holder of US Treasuiy securities — has already begun to ask questions about the value of US debt.)     But the Administration struck an appropriate balance between these two competing concerns. 

People are angry about the big bonuses that are still being paid to those in the financial sector who got us into this problem. Entirely understandable. But don’t forget that, from the beginning, the goal was to prevent a depression in the general economy. That has been accomplished. You don’t punish someone who has been smoking in bed by allowing the resultant fire to burn down the block. The Administration and the Fed always admitted freely that helping some undeserving financiers would be an undesirable but necessary side effect of the rescue plan. And do you remember all the pundits who warned that the rescue could not work unless the banks were temporarily nationalized? Or all the cynics who dismissed claims that the Treasury would recoup a share of the budget costs as firms like Goldman Sachs repaid their loans with interest?

In my view, overall, Obama has gotten far more things right than wrong. He has bravely proposed things that most sensible economists — whether Republican or Democrat — have long favored. Proposing is not always the same as enacting; there is the matter of Congress. But he has tried to get them passed, and has tried to do it in a bipartisan way.  (That bipartisanship constraint is one of the Houdini chains.)

Washington has always been stymied by the political constraints of what can pass Congress.  Often presidents figure that special interest groups will block sensible reforms, so why waste political capital trying? But an example, which I find extremely encouraging, including symbolically, is that (with the help of Defense Secretary Robert Gates), Obama proposed to end spending on the F22 fighter. The F22 is probably the most egregious example in the defense budget of spending on hugely expensive weapons systems that the Pentagon doesn’t want because they are not useful for today’s national security needs. To my surprise, Obama actually prevailed  on this.

I can also name two areas where he proposed very sensible legislation that a heavy majority of economists of both parties would support, and yet where he has lost in Congress (at least so far). One is cutting agricultural subsidies to agribusiness and rich farmers. Another is auctioning off most of the greenhouse gas emission permits in any plan like the Waxman-Markey Bill, rather than giving them away to industry.  (Obama’s proposal was to use the proceeds of the auctions to reduce the marginal tax rate on low-income workers, to “Make Work Pay,” which would have been an excellent use of the funds.)

But the fact that he is trying, and that he is winning some of the battles, is important.  He is willing to fight the fight, while yet compromising when politically necessary. It is tremendously important that the public take notice of these details. There are always particular interest groups that stand to lose from any given reform such as farm supports,  military procurement or emission permit auctions; if the general public pays no attention to the details and does not support the President on them, it means special interests will triumph over the general good as so often in the past.

If I had to find one mistake that the White House has made, the initial economic forecasts were too optimistic, at least with respect to the unemployment rate. It was an honest mistake, but a mistake nonetheless… not just with respect to the economics: politically, Obama would have been better to recognize the severity of the recession from day one.

Regarding the health plan, we as yet have no idea what the outcome will be. The big questions, of course, are how to reduce costs and how to pay for getting everybody insured. Instead of proposing an income surcharge on the wealthy, I would have preferred eliminating non-taxability of employer-provided health benefits— that’s what McCain was for in the campaign, and most economists as well. The non-taxability could have been retained for workers in lower income brackets if the White House felt this was essential.  At the least, Senator Kerry’s astute version, which is aimed at curbing the effective taxpayer subsidy in the cases of the most egregiously expensive health care insurers, should be politically saleable.   You can call Obama’s failure, so far, to move in this direction a second mistake. But, since Fortune asked my opinion of how much the President has done right versus wrong, I put the score at 98 to 2. 

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Personal saving rose again in the second quarter. “Does this mean the stimulus tax cut has failed, as the 2008 tax cut stimulus did?”, asks The National Journal.

My answer:

Martin Feldstein and others predicted that the tax-cut component of the 2009 fiscal stimulus package would have substantially less expansionary bang-for-the-buck than the spending component of the package, because much of the tax cut would be saved, as had been the case with the 2008 tax cut.  (“Bang for the buck” in this case could be defined as demand stimulus divided by budget cost.)   We knew this from Milton Friedman’s permanent income hypothesis, or even from good old Keynesian multiplier theory.

But in February President Obama had to get those last three (Republican) votes to pass the stimulus bill in the Senate, and those three Senators insisted on raising the tax cut component of the stimulus package a bit and lowering the spending component. Their motivation presumably was to mollify their fellow Republicans, many of whom still claim that ONLY tax cuts provide stimulus, and that spending does not (and perhaps even has a negative effect) — which is even more extreme than the claim that a tax cut creates stimulus equal to spending. After the failures of the Bush tax cuts (and Reagan’s before him), I don’t know if any economists still cling to such “supply sider” notions — or indeed if these congressmen would be able to state their logic. Regardless, I think the Feldstein prediction has been borne out since then.   Talk about irony!   The Reagan tax cuts of 1981-83 and the Bush tax cuts of 2001-03 were both explicitly designed to boost saving — hence their focus on capital income and higher income brackets — and yet in both cases private saving fell in their aftermath.   The tax cuts of January 2008 and February 2009 were both explicitly designed to boost consumption; yet private saving rose in their aftermath !   

Fortunately, the majority of the Obama stimulus package took the form of increased spending, much of which has yet to come.

None of this is to deny that efficiency is an important consideration, and cost-benefit calculations should always enter into the choice of both what kind of tax cuts to adopt and what kind of spending increases to adopt. But if it is short-term demand stimulus we are after, and we are, then government spending gives more bang for the buck than tax cuts.

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On July 31, the Department of Commerce’s BEA (Bureau of Economic Analysis) released an important set of numbers regarding GDP.  Of most immediate interest, the advance estimate of GDP growth for the second quarter, April-June, 2009, was a very moderate -1 per cent per annum.  The small magnitude of this negative number confirms an inflection point in the second quarter.   As most of us had already thought, the economy is no longer in the free-fall of October 2008 to March 2009 — when the rate of output contraction was approximately 6% per annum – but, rather, is beginning to level out.     

Furthermore, the figures reveal large depletion of inventories in the second quarter, which offers good grounds for hope that firms will begin to produce more in the second half of the year.  In other words, the economy is probably bottoming out even as we speak.

But even if it turns out that the NBER Business Cycle Dating Committee eventually puts the trough sometime in the 2nd half of 2009, it will not make that decision until all the facts are in, which will be a long time.    A major reason is that government statistics, especially for GDP, are always revised subsequently.   That brings us to the other big component of the BEA release on Friday:  comprehensive revisions to the GDP numbers going back many years.    The BEA does a comprehensive revision generally every five years.  In this case the statistics were substantially affected, especially those over the last dozen years, as the results of a number of permanent changes in methodology (such as how natural disasters are treated in the accounts).   

These revisions produced two interesting implications for the current recession, quite aside from the question whether it is now ending.  

First, the recession turns out to have been worse than the previous GDP numbers indicated.  During the course of 2008, the economy apparently contracted 1.9%, more than double the previous estimate of 0.8%.      The cumulative decline through the 2009 Q-I now appears to have been 2.8% (as compared to the previously reported 1.8%).    Add in the latest quarter, and the 3% cumulative decline cements the claim of this recession to be the worst since the 1930s.

Second, that revision includes a conversion of the +0.9% that was previously reported for the first quarter of 2008 to the new estimate for that quarter:  -0.7%.

That is important from the viewpoint of the NBER Business Cycle Dating Committee.   Why?     All through 2008 it was difficult to tell whether a recession had started at the end of 2007.   On the one hand, some measures such as employment and real income had peaked then,  but on the other hand it appeared that GDP had continued to grow in early 2008.     Even after the accelerated deterioration in the autumn of 2008, when it could no longer be doubted that the economy was in recession, the signals as to the date of its beginning still conflicted.     

The Committee ended up, on December 1, 2008, declaring that the peak had occurred in December 2007.    As always, there were critics.   Some didn’t see how we could declare that a recession had begun six months before GDP growth turned negative.   “Everybody knows that a recession is defined as two consecutive negative quarters”     (More common, as usual, was the precisely opposite critique:   “The NBER is just now saying what has long been obvious to everyone but them.”)

The new report from the BEA that the first quarter of 2008 was negative after all is thus another piece of evidence that validates the choice of end-2007 as the business cycle peak.   Similarly, it validates the decision by the Committee to have made the call in December, rather than waiting for the BEA revisions of July 31, 2009.  

The bottom line of all of this?    We are less at sea than we had feared.   The data now tell a story that is fairly well delineated, the story of a recession that, though upsettingly severe in amplitude, appears familiarly sinusoidal in shape.

(This post does not necessarily represent the views of the NBER Business Cycle Dating Committee or its members.  Nor of the BEA or its Advisory Committee members.)

———————————————————————————————————————————————————–

                                                              I 06   II 06 III 06  IV 06                          I 07  II 07 III 07     IV 07                            I 08    II 08      III 08       IV 08                 I 09

Newly reported GDP        5.4    1.4     .1    3.0               1.2    3.2    3.6    2.1                    -.7    1.5       -2.7     -5.4           -6.4       

Previously published.      4.8    2.7     .8    1.5                 .1    4.8    4.8    -.2                    +.9      2.8       -.5       -6.3         -5.5

 

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On her visit to India two days ago, Secretary of State Hillary Clinton was publicly rebuffed when she raised the problem of global climate change.    The Indian environment minister declared “we are simply not in the position to take legally binding emissions targets.”

No single country can address this problem on its own.  Hence the international negotiations that will take place in Copenhagen in December to try to find a successor treaty to the Kyoto Protocol.   But the international effort has run into a seemingly insurmountable roadblock.     On the one hand, the US Congress is clear: it will not impose quantitative limits on US emissions of greenhouse gases if China, India, and other developing countries don’t impose quantitative limits on theirs.   Indeed, that is why the Senate was unwilling to ratify the Kyoto Protocol ten years ago. The logic seems completely reasonable:  why should US firms bear the economic cost of cutting emissions if carbon-intensive activities would just migrate to countries without caps and global emissions continue their rapid rise?   On the other hand, the leaders of India and China are just as clear:   they are unalterably opposed to cutting emissions until after the United States and other rich countries go first.   And why should they?   The industrialized countries created the problem of global warming, in the process of getting rich;  the poor countries should not be denied their turn at economic development.  As the Indians point out, Americans emit more than ten times as much carbon dioxide per person.      

A total impasse.  Or is it?   I see one — and only one – practical solution to this apparent Catch-22:   The United States agrees to binding emission cuts — something like those in the Waxman-Markey bill that passed the House of Representatives on June 26;  and, simultaneously, China, India, and other developing countries agree to a path that immediately imposes on them binding emission targets — but targets that in their early years simply follow the so-called Business-as-Usual (BAU) path.    BAU is defined as the rate of increase in emissions that these countries would have experienced anyway, in the absence of an international agreement, as determined by experts’ projections.

The idea of developing countries committing only to BAU targets would provoke outrage from both environmentalists and US business interests, because it does not obligate these countries to cut emissions.  But both of those groups should realize that this commitment would be far more important than it sounds. It would preclude the carbon leakage which, absent such an agreement, would undermine the environmental goal.  It would mitigate the competitiveness concerns of carbon-intensive industries in the rich countries.  

This approach recognizes the reality that it would be irrational for China and India to agree to substantial cuts in the short term.   Indeed these countries, for their parts, will probably react with outrage at being asked to take on binding targets of any kind at the same time as the United States.   But they should also come to realize that they would actually gain in strictly economic terms from such an agreement, by acquiring the ability to sell emission permits at the world market price.

Of course an environmental solution also requires that China and the others subsequently make cuts below the Business as Usual path in future years, and eventually make cuts in absolute terms.   This can be done in such a way that the developing countries are not asked to make cuts that are different in nature than those made by Europe, the United States, and others who have gone before them, taking due account of differences in income.  But no country – rich or poor – will make sacrifices in any given period that impose huge economic costs on it.   It is time to stop making sweeping proposals that assume otherwise, and to pursue instead the narrow thread of the politically possible.

“Is the recent Return to Saving temporary or permanent?” asks the National Journal .

The famous Paradox of Thrift holds now more than ever: what is good for the individual, and for the economy in the long run — high saving — is bad for the economy in the short run.  During the current worst-post-30s recession we need a boost to demand.   In the longer run we need more saving.

Americans could not have gotten the timing worse. During the three expansions of 1983-2007 the economy grew well, and by the end of the period the first baby boomers had reached their peak earning years. Yet households’ saving rates declined, falling almost to zero in 2005-07.  Meanwhile, the government ran record deficits, reducing national saving even more (in the 1980s and 2000s; the late 1990s saw surpluses). It is ironic that the pro-capital orientation to the Reagan tax cuts of 1981-83 and the Bush tax cuts of 2001-03 was largely sold as an incentive to increase saving and investment, and yet household saving fell sharply subsequent to both policy changes — to say nothing of national saving. The increase in the after-tax return to saving did not lead to a “return to saving.”

The saving rate was so low before the financial crisis that it had nowhere to go but up, even if the timing has been awful. Incidentally, that the first substantial increase in American saving rates in 30 years has come in response to the worst recession in 70 years should put a nail in the coffin of macroeconomists’ practice of lavishing attention in their models on the mathematics of intertemporal optimization.   (But it probably won’t.)

Presumably the magnitude of the current economic dislocation is teaching many blind-sided individuals the value of precautionary saving. We certainly will need further increases in saving as soon as the recession is over. But have we seen a major permanent change in Americans’ anti-saving culture? I fear not. Even now, it does not occur to people that it is desirable to pay cash for auto purchases or other consumer durables, or eventually to pay off their mortgage when possible. Even now, it does not occur to politicians to change the pro-housing bias in the tax law, by eliminating the tax-deductibility of mortgage interest for example.

Moreover, the very first baby-boomers have now started to retire. Increasingly, the higher saving rate of those who see retirement looming ahead (some of whom now “have religion”) will be counteracted by the dis-saving of those who do retire.

The same thing will probably happen in other countries.  Indeed, in Japan, which reached the retirement bulge first, the saving rate fell correspondingly. Europe and China will probably follow. I declare the end of the “global savings glut.”  Real interest rates will have to rise.

[Readers wishing to post a comment are encouraged to go to the versions on the RGE Monitor site or the Seeking Alpha site. ]  

The quip “There are three kinds of lies:  lies, damn lies, and statistics” is variously attributed to Benjamin Disraeli or Mark Twain.   What should the public make of government statistics, such as the monthly employment report released today, Thursday, July 2, by the U.S. Bureau of Labor Statistics (BLS)?  

There is no lying in US government statistics.   But there are always commentators who will use the numbers to make whatever point they want.     One should learn enough to be able to interpret the numbers for oneself.     That is the only way to prevent being misled.

Of the many numbers contained in the BLS reports, I view three as especially important.    

The most salient figure politically is the unemployment rate, which hit 9.5% in June, according to Thursday’s report.    This was the highest level since August 1983 and clearly reflects the current extent of distress in American labor markets.

Critics of the official statistics like to point out that the unemployment rate does not capture discouraged workers who have dropped out of the labor force because they couldn’t find a job.  True.  But the government isn’t trying to make the unemployment number look smaller.   Rather, it is just too difficult to decide who is a “discouraged worker,” as opposed to simply being out of the labor force.   So the BLS always defines only those who have looked for a job recently as being in the measured labor force.   This still allows us to compare changes in unemployment over time, which is the purpose of the unemployment rate.   The agency does compute a measure that attempts to include discouraged workers and part-time workers — the U-6 series — but I don’t think it is right to call this the “real unemployment rate.”   

The second important number in the labor market reports is employment, that is, the number of workers who have jobs, which was down another 467,000 in June.    This is the statistic to which the financial markets and macroeconomic forecasters pay the most attention on a monthly basis.  (In that sense, the question of discouraged workers is a red herring.)     Employment peaked in December 2007, the start of the recession.    Since then, we have lost 6 million jobs altogether.   The current recession is now both the longest-lasting and the deepest since the 1930s.    But at least the period of the steepest rate of job loss –  November 2008 to March 2009 – appears to be behind us.  

Two details about the jobs number.    First, the statisticians get the “employment” number through one method, by surveying establishments (employers), while the unemployment rate uses a measure of employment derived through a different method, by surveying households.   The employment number is generally considered more reliable because it is based on a wider survey — another reason to prefer it.  

The second point is that, for purposes of comparison across different business cycles, we still need to divide employment by something.     If not the labor force, then what?   We must, at a minimum, allow for population growth.    So it is useful to divide employment by total population.  This way we don’t have to attempt distinctions about which Americans might be prepared to take a job under the right circumstances.  The fraction of the population (civilian non-institutional) with jobs peaked at the end of the Clinton Administration, reaching 64 ½  % in January 2001.   It has now declined to 59 ½ %.

Although the financial markets pay most attention to the number of workers with jobs, employment is not much good for forecasting the overall economy, because it tends to be a lagging indicator.   Even when firms see economic activity starting to pick up, they delay hiring, because it is costly to find, hire, and train new workers – not to mention to fire them again if the recovery turns out abortive.   

For this reason, the third indicator is my personal favorite for gauging the business cycle in real time:  the rate of change of total hours worked in the economy.  Total hours worked is equal to the total number of workers employed, multiplied by the length of the workweek for the average worker.   The length of the workweek can be expected to respond at turning points faster than does the number of jobs.  When demand is slowing, firms tend to cut back on overtime, and then switch to part-time workers or in some cases cut workers back to partial workweeks, before they lay them off.    The phenomenon is called “labor hoarding.”  Conversely, when demand begins to rise, firms tend to increase the workweek, before they hire new workers.   (To take two historical examples, the “change in total hours worked” improved in both April 1991 and November 2001, which on other grounds were eventually declared to mark the ends of their respective recessions.)   

The workweek reached a historically short level in June: 33.0 hours.  Not a good sign.    As one consequence, total hours worked fell 0.8% that month, continuing the same rapid deterioration we have seen since last September, the month when Lehman Brothers failed and the recession worsened sharply.  

The bottom line for the economy:   despite signs in other areas that the recession is leveling out – most importantly, production and sales — the labor market indicators in themselves are not yet signaling a turning point.   Thus the June numbers confirm the evaluation I made a month ago, based on hours worked in May, that the apparent good news in the widely reported May employment number was probably an insignificant blip.   The bottom line for newspaper readers:   master your statistics, so that they can’t master you.

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The effects of a changing global climate show up gradually, decade by decade. The effects of a changing US political climate have also been showing up gradually, year by year. A watershed was reached June 25, when the US Congress for the first time approved a bill to limit emissions of Greenhouse Gases (GHGs), by a vote of 219 to 212. But the Senate hurdle will be tougher.  The attempt to address Climate Change still has a very long way to go.

The problem

Climate Change is of course a global externality. Due to the free-rider problem, no single country, especially the United States, is likely to act on its own. The best solution is a multilateral treaty in which all countries commit to serious action together. In December of this year, a Conference of Parties to the UN Framework Convention on Climate Change will meet in Copenhagen, in the hope of negotiating a successor treaty to the Kyoto Protocol.

Three critical attributes were missing from the Kyoto Protocol. These attributes need to be included in any realistic attempt to tackle the reduction of year-2100 GHG concentrations to levels considered less dangerous by scientists:

i) Comprehensive participation – that is, acceptance of quantitative limits on emissions – by all major countries, including the US and developing countries.

ii) A credible framework that can establish a path for emissions reductions extending throughout the century, not just five years ahead.

iii) Some reason to think that all countries will be willing to join and then comply. This precludes targets that impose enormous economic costs on any major countries in any decades relative to the alternative of dropping out of the treaty.

For ten years — since I worked on Kyoto in the Clinton Administration — I have been thinking about how to design such a framework for assigning quantitative limits across countries. I now have a complete proposal to offer. It builds on the foundations of Kyoto, in that it accepts the framework of national targets for emissions and internationally tradable permits. But it attempts to solve the most serious deficiencies of that agreement: incomplete country participation, the need for long-term targets, and the economic incentive for countries to fail to abide by their commitments.

Although there are many ideas to succeed the Kyoto Protocol, the existing proposals are typically based on just one or two out of the following three philosophical approaches:

· science (e.g., capping global concentrations at 450 ppm) or

· equity (e.g., equal emissions per capita across countries) or

· economics (weighing the economic costs of aggressive short-term cuts against the long-term environmental benefits).

My emissions reductions plan is a bid to offer a more practical alternative: in addition to those three considerations, it is based heavily on politics.

More specifically, any future climate agreement must in practice comply with six important political constraints.

1) The US will not commit to quantitative targets if China and other major developing countries do not commit to quantitative targets at the same time, due to concerns about economic competitiveness and carbon leakage.

2) China and other developing countries will not make sacrifices different in character from those made by richer countries that have gone before them.

3) In the long run, no country can be rewarded for having “ramped up” its emissions high above the levels of 1990.

4) No country will agree to participate if the present discounted value of its future expected costs is more than, say, 1% of GDP.

5) No country will continue to abide by targets that cost it more than, say, 5% of GDP in any one budget period.

6) If one major country drops out, others will become discouraged and the system may unravel.

The proposal

The proposed plan sets the emissions caps using formulas that assign quantitative emissions limits to countries in every five-year period from now until 2100. Operationally, four political constraints are particularly important in specifying the formulas.

· First, “carbon leakage” is precluded, by including all countries from the beginning

· Yet developing countries are not asked to bear any cost in the early years.

· Even later, developing countries are not asked to make any sacrifice that is different from the earlier sacrifices of industrialized countries, accounting for differences in incomes.

· Finally, no country is asked to accept targets that cost it more than 1% of GDP cumulatively, nor more than 5% of GDP in any given budget period.

Under the formulas, rich nations begin immediately to make emissions cuts in line with what their leaders have already committed to.  Developing countries agree to maintain their business-as-usual emissions in the first decades, but over the longer term agree to binding targets that ultimately reduce emissions well below business as usual. This structure precludes energy-intensive industries from moving operations to developing countries (i.e., leakage) and gives industries a more level playing field. However, it still preserves developing countries’ ability to grow their economies; they can even raise revenue by selling emission permits. In later decades, the emissions targets asked of developing countries become stricter, following a numerical formula. However, these emissions cuts are no greater than the cuts made by rich nations earlier in the century, accounting for differences in per-capita income, per-capita emissions, and baseline economic growth.

More specifically, the formula incorporates three elements: a Progressive Reductions Factor, a Latecomer Catch-up Factor, and a Gradual Equalization Factor.

· The Progressive Reductions Factor requires richer countries to make more severe cuts (relative to their business-as-usual emissions) than poor countries.

· The Latecomer Catch-up Factor requires nations that did not agree to binding targets under Kyoto to make gradual emissions cuts to account for their additional emissions since 1990. This factor prevents latecomers from being rewarded with higher targets, or from being given incentives to ramp up their emissions before signing the agreement.

· Finally, the Gradual Equalization Factor addresses the fact that rich countries are responsible for most of the carbon dioxide currently in the atmosphere. During each decade of the second half of the century, this factor moves per capita emissions in each country a small step in the direction of the global average of per capita emissions.

The formulas, for some convenient parameter values, turn out to imply that global emissions peak around 2035.  (See graphs below.) This targets result in a world price of carbon dioxide that reaches an estimated $20-$30 per ton in 2020, $100-$160 per ton in 2050, and $700-$800 per ton in 2100, according to economic simulations using the WITCH climate model courtesy of Valentina Bosetti. Most countries sustain economic losses that are under 1% of GDP in the first half of the century, but then rise toward the end of the century. The simulations also show that atmospheric concentrations of CO2 stabilize below 500 ppm in the last quarter of the century, and world temperatures increase by about 3 degrees. Each of the six political constraints listed above is satisfied.

Conclusion

The framework here allocates emission targets across countries in such a way that every country is given reason to feel that it is only doing its fair share, comparable to what  others have done before it. Furthermore, the framework – a decade-by-decade sequence of emission targets determined by a few principles and formulas – is flexible enough that it can accommodate major changes in circumstances during the course of the century. The hope is that only such a combination of continuity and flexibility can make the process dynamically consistent, i.e., credible.

Most climate scientists say that 500 ppm is not a sufficiently aggressive goal. We (my collaborator, Bosetti, and I) have not yet been able to achieve year-2100 concentrations of 450 ppm while obeying the same political-economic constraints. But we are still working on it. Stay tuned.

The detailed proposal is “An Elaborated Proposal for Global Climate Policy Architecture: Specific Formulas and Emission Targets for All Countries in All Decades,” NBER WP, April 2009. Forthcoming, 2009, in a volume edited by Joe Aldy & Rob Stavins for  the Harvard Project on International Climate Agreements, Cambridge University Press. Editors’ summary of the volume is at Post-Kyoto International Climate Policy, Cambridge University Press.   (See also Stavins’ blog, especially, for analysis of the Waxman-Markey bill.)

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The rate of decline in employment moderated substantially in May, according to the BLS figures released June 5, to about half the monthly rate of job loss recorded over the preceding six months (345,000 vs. 642,000).    The news was received in a variety of ways. 

First, the cynics.  They tend to wax sarcastic at the idea of “things are not getting worse quite as fast as they were” as a good-news proposition.    But a wide variety of recent data indicate that the economy is no longer in the state of free-fall that it entered last September, and this is indeed good news.  To begin to level off is the first step toward the start of the recovery.

Second, the academics note (correctly) that there is little information in each individual monthly statistical fluctuation that is measured, because the data are inevitably noisy.   Still, the public wants to know, in real time, what is the best we can glean from the information we have. 

Third, the financial press, in particular, had been asking whether this quarter could turn out to be the bottom of the recession.  The May employment report encouraged enthusiastic speculation that the answer was “yes.”  The stock market reacted positively.

The members of the NBER Business Cycle Dating Committee (of which I am one) will be responsible for calling the trough when the time is right.  We have a range of views regarding the proper place of employment numbers in such deliberations.    But one can say, on the one hand, that a decline in economic activity is a decline in economic activity, and therefore still a state of recession, even if the rate of decline has moderated a lot.    One can also say, on the other hand, that employment is usually a lagging indicator of economic activity.  (For example, the economy continued to lose jobs long after the ends of the 1991 and 2001 recessions.  Hence the “jobless recoveries.”)

Speaking entirely for myself, I like to look at the rate of change of total hours worked in the economy.  Total hours worked is equal to the total number of workers employed multiplied by the average length of the workweek for the average worker.   The length of the workweek tends to respond at turning points faster than does the number of jobs.  When demand is slowing, firms tend to cut back on overtime, and then switch to part-time workers or in some cases cut workers back to partial workweeks, before they lay them off.  Conversely, when demand is rising, firms tend to end furloughs, and if necessary ask workers to work overtime, before they hire new workers.   (The hours worked measure improved in April 1991 and November 2001 which on other grounds were eventually declared to mark the ends of their respective recessions.)     The phenomenon is called “labor hoarding”  and it is attributable to the costs of finding, hiring and training new workers and the costs in terms of severance pay and morale when firing workers.

Unfortunately, pursuing this logic leads to second thoughts about whether the most recent BLS announcement was really good news after all.  Forbes picked up on the point. The length of the average work week fell to its lowest since 1964 !  The graph below shows that, not only did total hours worked decline in May, but the rate of decline (0.7%) was very much in line with the rate of contraction that workers have experienced since September.  Hours worked suggests that the hope-inspiring May moderation in the job loss series may have been a monthly aberration.  If firms were really gearing up to start hiring workers once again, why would they now be cutting back as strongly as ever on the hours that they ask their existing employees to work?   If one factors in falling wages, to compute total weekly earnings, the picture looks still worse.  My bottom line:  the labor market does not quite yet suggest that the economy has hit bottom.