Everything you need to know about macro

by Russ Roberts on March 12, 2013

in State of Macro, Stimulus

As the Washington Post explains, it’s really simple:

The U.S. economy is creating jobs faster than expected, a sign that the recovery is taking flight just as severe government spending cuts threaten to clip its wings.

Businesses added 236,000 workers in February, according to data from the Labor Department released Friday, exceeding even the most optimistic expectations. Many of the jobs were in construction, providing further evidence of healing in the housing market. The unemployment rate also fell to 7.7 percent — the lowest level since December 2008.

The surprising strength of the labor market suggests an economy at the crossroads: Has the recovery finally generated enough momentum to clear obstacles like the across-the-board spending cuts known as the sequester? Or are the cuts coming at precisely the wrong time, knocking the economy off track again?

Thanks to the “fiscal cliff” deal passed by Congress earlier this year, taxes have risen for all working Americans, eating into household budgets. The sequester’s spending cuts will indiscriminately ax $85 billion from the federal budget this year. Furloughs are slated to begin next month for thousands of government employees, on top of continued decline in public-sector employment in states and cities around the country. And lawmakers still must negotiate a compromise over spending to avert a federal shutdown.

Those headwinds could have thwarted the recovery already — as they did at the end of last year when economic growth came to a standstill. Instead, the jobs data are this year’s latest example of the private sector picking up steam.

So the economy is doing great despite the drag from those spending “cuts.” Or it’s doing great because of the spending cuts:

In some respects, the resolution of the fiscal cliff and impending sequester actually could be viewed as helping the recovery: They help remove the uncertainty over taxes and government spending that businesses say have been clouding their decisions.

An index tracking that uncertainty, created by economists at Stanford and the University of Chicago, is at one of its lowest points since the recession ended. That means employers have the clearest picture in years of their economic environment, which should help them make critical decisions about staffing.

“The perceived unpredictability of policy may now be passing, with firms getting back to hiring and investment,” said Stanford economics professor Nicholas Bloom, one of the creators of the index. “My guess is this is the turning point of the five-year era of roller-coaster policy, with growth finally restarting.”

While I am sympathetic to the idea that uncertainty affects decision-making, I don’t believe it is easy or maybe even possible to create an “index” of uncertainty.What I do know is that it’s really hard (impossible?) to figure out or reliably measure which of the two theories outlined in this news story is the correct one.

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