Last week I noted the evolving thinking on unemployment and the recovery--in particular, the growing number of analysts who think the job numbers might increase pretty quickly over the next several months. The most compelling argument I'd read came courtesy of a Deutsche Bank report arguing that companies overshot with their layoffs during the recession, so they'd have to hire more than the increase in GDP would normally justify during the recovery.

Alas, a few days later, the ultra-sharp economics team at Goldman Sachs came out with a report (not online) explicitly rebutting this view.

Deutsche Bank's optimism derived from an empirical regularity known as "Okun's law," which suggests that, for every one-point change in GDP (relative to potential), the unemployment rate changes by half a percentage point. The DB economists noted that unemployment had risen significantly faster than would normally be associated with the drop in GDP that we observed during the recession, so it should fall significantly faster as GDP increases.

The Goldman economists made three arguments in response:

1.) If you look at the Okun's Law relationship over the last 25 years, rather than all the way back to World War II (as most analyses do), the last two years (i.e., the recession) look pretty similar to the previous 23. So it's possible that the world simply changed a bit in the 1980s. 

2.) If you look at the Okun relationship in terms of payrolls (i.e., number of people employed) rather than the unemployment rate (which can fluctuate for arbitrary reasons), the relationship look like it's been pretty stable during the recession--i.e., that there was no overshooting on the way down.

3.) Most compellingly to my eyes, to the extent the unemployment rate did overshoot a bit during the recession relative to the post-war experience, it actually overshot on the upside a bit for a couple years beforehand, so we may just be seeing an evening out of sorts. As the Goldman team puts it:

The good folks at Grant's Interest Rate Observer must have felt pretty lonely six weeks ago when they suggested the recovery might be "jobful" rather than jobless, as almost everyone was insisting at the time.

Josef Ackermann, chief executive of Deutsche Bank and chairman of the Institute of International Finance (an influential group, reflecting the interests of global finance in Washington) is opposed to breaking up big banks. According to the FT, he said,

“The idea that we could run modern, sophisticated, prosperous economies with a population of mid-sized savings banks is totally misguided.”

This is clever rhetoric--aiming to portray proponents of reform as populists with no notion of how a modern economy operates. But the problem is that some leading voices for breaking up banks come from people who are far from being populists, such as the UK authorities (in the news today) and the U.S.’s Thomas Hoenig.

The shock of the financial meltdown has had congressional committees scrambling for their gavels for the better part of a year. Politicians have been discussing how to make sure that such a near-cataclysm never happens again, and, for the most part, they've focused on the need for new regulation. What's called for, President Obama said in March, is "a financial regulatory mechanism that prevents the kind of systemic risks that have done so much damage over the last several months."

But all the talk of regulation misses a key point: If we don't know which institutions are doing what--if we don't actually monitor what we've regulated--then that regulation won't work.