How Should Policymakers Respond to the Employment Report?

Here's more on the employment report from The Economist:

Postpone the optimism, The Economist: Not long ago economists and policymakers in America clung to hopes that the economy, after lurching through the depths of a financial crisis earlier this year, would rebound in the second six months. Such hopes look all the more forlorn now. On Friday September 5th a depressingly downbeat August employment report was released. The unemployment rate leapt to 6.1% from 5.7% in July. It now stands only just below the 6.3% peak that it reached in the last slump, in mid-2003.  ...

If there is a silver lining to the payroll report it is that, despite eight straight months of declining payroll employment, the pace of contraction has yet to approach that which is typically seen in recessions. On average, since December, 76,000 jobs have been lost each month, equivalent to a monthly decline of 0.06%. From March 2001 to February 2002, the average decline was 169,000, or 0.13%. The better position today may be explained, in part, by the relative strength of exports, without which manufacturing would be shedding jobs at an even faster pace. No doubt the speed with which monetary and fiscal stimulus was brought to bear has also helped. Another factor may be that, during the economic expansion, employers were not quick to hire workers, which left little obvious fat for them to cut now. ...

[P]oliticians ... must now respond in the heat of a campaign. The weak economy probably plays to the advantage of congressional Democrats and the Democratic presidential candidate Barack Obama, who have been pressing for a second stimulus package focused more on government spending than on tax rebates. The latest news may weaken Republican opposition to such a package both in Congress and by John McCain.

The news, unhappily, also makes the job of the Federal Reserve a bit simpler. Its inflation worries in the past month have receded because of welcome news (the big drop in oil prices) and because of less welcome news, such as the higher unemployment figures. That makes it all the more likely that the Fed will not raise interest rates from the current 2% before the end of the year. The latest news may also mollify hawks on the policymaking Federal Open Market Committee...

I think that's right with respect to monetary policy, increasing the interest rate is not a chance we should take at the moment. We should probably be satisfied if monetary policy can simply keep the economy treading water for the moment, any stimulus beyond that will need to come from fiscal policy, or from the economy self-healing (which is unlikely in the short-run).

If we go the fiscal policy route, and I think we need to, my preference is for government spending rather than for tax cuts because it has a more certain effect on aggregate demand, and within the government spending category the preference is for spending on government investment (infrastructure). However, government investment is difficult to bring online quickly (though compensating for losses in state revenue can be implemented quickly, and this can help by preventing states from cutting back on existing infrastructure projects), so some combination of government consumption or transfer payments for the short-run impact, and government investment for the more sustained impact, would be required. The first stimulus package was a one-shot tax cut rather than a sustained stimulus, and that wasn't enough, so if a fiscal policy package is implemented, hopefully this time will be different.

Comments

[Al DeVito]

Lord knows we have to do something about our bridges and roads. A dollar spent on preventing a bridge from collapsing is a better use of our money than a dollar spent on weapons that are obsolete by the time they are ready to be used.

[ken melvin]

76k + 125k for pop grwth = 200k

[save_the_rustbelt]

"Under employment" is a bigger problem still than unemployment, has been for a decade or more, and will need a more sophisticated response.

Major repairs and/or new infrastructure have a considerable lead time, minor repairs and maintenance could begin very quickly (highway repairs, water and sewer line repairs, etc.).

Crazy idea - many police departments need new cruisers desperately, the lead time is small, and we get 3 - 4 years of value - and the Big 3 get a small boost (but no welfare).

[Rebate]

I would prefer another rebate check.

[anne]

"How Should Policymakers Respond to the Employment Report?"

While the question has a simple answer, we should stimulate the economy, there is a problem because I have yet to find a reasonable theoretical answer as to why the economy has grown relatively weakly and why the market for ordinary workers has been relatively poor since November 2001 and recently is worse than just poor. With all the reasons for faster growth, why have we not grown faster for so long?

[Short Run Versus Long Run]

"With all the reasons for faster growth, why have we not grown faster for so long?"

Over the long run, supply creates its own demand. We need to put more resources into increasing productivity to grow the economy over the long run.

Over the short run, demand creates its own supply (mostly keeping outdated factories running a bit longer than they otherwise would). All of the stimulation has been of the short run variety. That is, keeping outdated factories running a bit longer to reduce unemployment really does not grow the economy in the long run.

[save_the_rustbelt]

Anne:

My guess is a combination of factors:

1. hangover from the tech/fraud bubble
2. generally bad Bush-ite policies
3. faster globalization than anticipated
4. computer hardware becomes a cheap commodity
5. lack of coordinated energy policies
6. ????

[anne]

STR

"4. computer hardware becomes a cheap commodity"

Which reminds me to look back to the financial panic that occurred in the 1880s, when there had been wild speculative growth of the railroads but investors came to understand the capacity developed could not be used for years to come. Who used this analogy at Berkeley? I am not remembering, but I will. Ah, Hal Varian.

[anne]

http://www.nytimes.com/2003/10/23/business/23SCEN.html?ex=1382328000&en=79234ba87ff79dde&ei=5007&partner=USERLAND

October 23, 2003

The Mixed Bag of Productivity
By HAL R. VARIAN

RECENTLY productivity has been growing at a rate of about 4 percent a year. For the country as a whole, this means that each year we can work as much as we did last year and consume 4 percent more; or we can consume as much as we did last year and work 4 percent less.

That's got to be a good thing, right?

Well, it depends on whom you ask. In truth, those productivity gains have resulted in some people's working 100 percent less, with the rest of us consuming 4.01 percent more. If you are one of the unemployed, chances are you are less enthusiastic about the productivity gains than are those who have enjoyed the increased consumption.

Strangely, productivity growth is not getting much blame for the "jobless recovery." Criticizing technological progress is downright un-American. On the other hand, criticizing foreign trade is a traditional pastime here, as in every other country.

To economists, trade and productivity growth have a lot in common: each allows you to produce more with less.

James Ingram's economics text tells the story of how an entrepreneur built a factory that was significantly more productive than his competitors' plants, and was hailed far and wide for his brilliance.

But then his dirty little secret was revealed: all he was doing was importing goods from abroad through the back door.

In terms of impact on employment, trade is usually better than productivity growth; those dollars sent abroad eventually come back to purchase American products, and employ more workers. By contrast, jobs lost to productivity increases stay lost; try to find someone today who can make buggy whips.

Gains from trade or technology initially tend to accrue to owners of capital. When a company fires a computer programmer and shifts the job to India, the company captures the difference in wages.

It wouldn't have to work that way. Suppose the programmer found his doppelganger in India, and started exporting tasks on his own. "Dear Sanjay, please write a subroutine to sort these accounts and send it back to me by 5 p.m. (California time)." Each week the programmer could cash his $1,000 paycheck and send $100 to Sanjay.

This is only a thought experiment, not a policy proposal. But it illustrates the point that the controversy over trade and technology is not about whether or not they are good things -- of course they are -- but about who will capture their benefits and who will bear their costs.

There is little doubt who wins in the long run: consumers. Virtually all the gains in the standard of living in the last two centuries have come from technology. Trade has had a smaller but still significant effect on growth in per capita consumption.

Achieving the gains from technological advances can be tortuous. Back in 1886, when America's railroads standardized on one gauge, it became substantially cheaper to transport goods. A great boon for everyone, right? Well, tell that to the workers who unloaded and loaded freight at the cities where different-gauge railroads met. They rioted over the change, and understandably so -- the benefits from technological progress came at the expense of their jobs.

Eighty years later, the longshoremen's union was more farsighted. It saw new technology coming for unloading ships and negotiated lifetime employment at high wages. The result was that by 2002 a full-time longshoreman earned $80,000 to $107,000, depending on whether you ask the union or management.

The crucial issue in last year's West Coast port strike was not whether technology for managing shipyards would be introduced -- both sides were in favor -- but whether the new information-processing jobs went to union workers.

The longshoremen's union has tried to ensure that a significant part of the gains from productivity increases accrued to its members. But even the longshoremen recognize, though they might be loath to admit it, that there has to be something for both sides in the negotiation; if all the gains go to labor, there will be no incentive for capitalists to adopt more productive technology.

Capitalists have to get their piece, so they will have an incentive to pony up the money. How much labor ends up with depends on its bargaining power. If workers do not have much bargaining power, they get the short end of the deal.

In the long run, as the new technology becomes widely adopted, competition pushes prices down. The gains that originally accrued to the owners of capital are competed away, and consumers -- meaning workers for the most part -- end up with the benefits....

[2slugbaits]

The first fiscal stimulus package earlier this year should have been "Phase One" (sounds kind of Nixonian) that would have bridged the gap until a "Phase Two" package of public infrastructure investment could be brought on line. Another blown opportunity. Now our options are limited because additional road construction monies this late in the season won't help for much of the country.

[reason]

In the long run, as the new technology becomes widely adopted, competition pushes prices down.

Notice the key word there - competition. Why isn't the difference between crony monopoly capitalism and genuine competition the heart of "free enterprise" rhetoric and policy? Just asking.

[anne]

"Why isn't the difference between crony monopoly capitalism and genuine competition the heart of 'free enterprise' rhetoric and policy?"

Please explain this question, when possible.

[Inflation is the Enemy]

"In the long run, as the new technology becomes widely adopted, competition pushes prices down."

Not here it doesn't. New money is created to keep prices rising. Since the new money is distributed to only a few people, the favored few get all of the benefits of competition. Everyone else slowly loses ground to inflation.

The CPI never falls, no matter how much competition there is. Good point about crony capitalism though. Rules are promulgated to restrict competition in number of industries.

[donna]

Why aren't we growing? If you don't pay people enough, they can't buy stuff. They've shifted all the wealth to the top, and the rich can only buy so much crap. After that, they start putting the money into investments, and when they run out of good investments, they start investing in bad investments. Plus, they had too much money to buy too many houses, and the second and third and seventh houses all pushed housing prices sky high. Lots of people lived on their false housing wealth for a while, and bought stuff, but that's gone now. So, we're all screwed, except the rich, who can handle the deflation but will still buy less stuff.

A brief, silly summary of the Bush economy. Where do we go from here? Good question. Obama has some ideas, McCain doesn't, but if he smears Obama enough and plays to the base enough, then he may get in, and we're screwed for another four years while he gives more tax cuts to the well off and we continue to crash and burn.

We'll see how dumb Americans really are. We've all paid for years now for our stupidity. I really hope enough of us are sick of this that we start to change it.

[macquechoux]

What about the minimum wage increase? When I was a small business man whenever I was faced with mandatory wage increases I always found a way to do more with less workers. In short, I fired people. Perhaps that should be number six on Rust Belt's list?

[Bruce Wilder]

anne: "Which reminds me to look back to the financial panic that occurred in the 1880s, when there had been wild speculative growth of the railroads but investors came to understand the capacity developed could not be used for years to come."

There was a Panic of 1884, but it was really about a shortage of specie (gold) -- part of the general gold-standard deflation that weighed down on the whole period, 1869-1896, and induced many bank panics and waves of business failure.

The Panic of 1873 is sometimes attributed to the effects of railroad overbuilding and shaky railroad finance -- whether the dramas associated with railroad finance were cause or effect is open to dispute. The U.S. moved from bimetallism more firmly to the gold standard in 1873, with deflationary effect. An equine flu epizootic beginning in 1872 had huge economic effects, as did a series of massive urban fires.

The Panic of 1893, which set off a massive Depression, also centrally involved railroad building, primarily in the West. Every major Western road, save JJ Hill's Great Northern, went bankrupt in the Depression that followed the Panic of 1893.

[anne]

Bruce Wilder:

"The Panic of 1893, which set off a massive Depression, also centrally involved railroad building, primarily in the West. Every major Western road, save JJ Hill's Great Northern, went bankrupt in the Depression that followed the Panic of 1893."

Right; that was what I was trying to remember and that Hal Varian lectured on several years before the article. Thank you.

[Bruce Wilder]

"Inflation is the Enemy"

Monetary inflation in modest, steady doses is of great benefit.

[ken melvin]

"What about the minimum wage increase? When I was a small business man whenever I was faced with mandatory wage increases I always found a way to do more with less workers. In short, I fired people. Perhaps that should be number six on Rust Belt's list?"

Some people doing business have no sense of business at all.

[Inflation is the Enemy]

"...great benefit..."

It only greatly benefits those first in line to receive newly created money. Everyone else experiences an equal and opposite reduced standard of living over time. What a rip off.

[Bruce Wilder]

Inflation i. t. e.: "Everyone else experiences an equal and opposite reduced standard of living over time."

Changes in relative prices affect incomes. If wages, say, decline relative to the prices of food, fuel, clothing, entertainment and shelter, then, sure, that reduces the wage-earner's standard of living. But, those changes in relative prices are independent of a general monetary inflation, in which the value of money declines relative to goods and services in general.

It should not be a difficult distinction. And, there are plenty of historical examples of rising real incomes during periods, when there's also monetary inflation.

[Red Baron]

"I think... increasing the interest rate is not a chance we should take"

"my preference is for government spending... (on)... infrastructure"

How is this any different than what Japan did (cut interest rates, massive increases in public infrastructure)?

How will we therefore avoid suffering Japan's fate?

[Mark]

Red Baron: "How will we therefore avoid suffering Japan's fate?"

By making public infrastructure _investments_ that increase long term productivity and quality of life, rather than funnel monies to politically powerful constituencies with parochial, short term interests.

I'm skeptical, but I'd love to be proven wrong.

[Ask Dean Baker]

The question of what ails the U.S. economy has an answer. However, it is something that can not be mentioned in polite company. Since mentioning certains things isn't appropriate...

Read Dean Baker instead.

"Why Obama Should Have Picked Me"
http://economistsview.typepad.com/economistsview/2008/09/how-should-poli.html

[public infrastructure _investments_ that]

Good idea on its merits. But won't help the economy much if Japan is any guide. Japan has poured countless Yen in public sector projects. The economy is still a mess.

See World's Longest Suspension Bridge Opens in Japan http://www.tfhrc.gov/pubrds/julaug98/worlds.htm for an awesome example.

[bakho]

Massive misallocations have put us where we are today. Housing overbuilt and larger houses than people can afford. A vehicle fleet that uses gasoline too inefficiently. Interest rates and lending policies that have sold many Americans to the company store. Unaffordable tuition costs that encourage grads to take a safe job. Overpaying for medical care that is under delivery. Failure to adjust our economy higher demand for increasingly scarce commodities. Allowing Telecoms to erect toll booth on the information superhighway.

Just dumping a bunch of money on road projects is not a long term strategy as the Japanese learned. However, it should be in the short term mix. The old economy needs to be transformed. Worker training is a growing gap. People out of work are not getting updated on their training. Youth unemployment is too high, another missed training opportunity. Government needs to jump start markets for conservation and alternative energy. Auto needs time to retool for more efficient vehicles. Iraq is a drag on our economy that has tied up hundreds of thousands of our best trained workers. We better incentives that expand the world economy instead of predatory win-lose strategies. We have been headed in the wrong direction for so long, it will take a decade to reverse. That is why there are no simple short term solutions.

[Inflation is the Enemy]

Bruce Wilder..."If wages, say, decline relative to the prices of food, fuel, clothing, entertainment and shelter, then, sure, that reduces the wage-earner's standard of living. But, those changes in relative prices are independent of a general monetary inflation, in which the value of money declines relative to goods and services in general."

It depends upon the details of the particular monetary transmission mechanism employed. If newly created money is distributed equally, then what you have said is true. If newly created money is given to a small group, then inflation becomes a redistribution mechanism.

In our country, COLA wages/pensions lead to a wage/price spiral that stagnates the economy. That is because inflation is used for redistribution purposes here. To extract useful purchasing power (funds for operations) via inflation, someone else necessarily must to lose an equivalent purchasing power over the long run. No free lunch.

Over the short run, this relationship can fluctuate. Over the long run, it always comes back to the relationship that if some group gains from inflation, then someone else loses an equal amount of purchasing power.

[ken melvin]

Much consequence to the right wing dominance of the past few. America is really in need of some forward thinking. Unfortunately, the dems aren't exactly stepping up to the plate. If we were as forward thinking as say the French were forty years ago we'd be spending tons on mass transit. The focus should be on the future.

[paine]

mark:

"The first stimulus package was a one-shot tax cut rather than a sustained stimulus, and that wasn't enough, so if a fiscal policy package is implemented, hopefully this time will be different."

exactly ..a chock full of demand job market
i submit
we need a target for this
a target that trumps all other such poli econ targets
like budget balances trade balances price level rates
credit market conditions etc etc
i suggest the target not a state ratio like x rate of job seekers over job positions
but
a welfare maxing job search time metric

lets optimize that number
and enfrce it like we now enforce price level change

ilets start with my idol
wild bill vickrey's suggested
number two days
unfurled to the world
just before his sudden death
at about minute 8 of his equally sudden
15 minutes of fame

two days is of coure obviously
not an average type target
we have a distribution to contend with here
the target perhaps
might be
only the bottom x percentile
oughta take longer then two days

at any rate
nothing like the grotesque calamity
the time distribution
can become
under job market conditions like we seem
to have sailed into over the last 10 months or so

[Red Baron]

Mark, which is it?

Improving productivity (and whose productivity?) or improving quality of life (and whose quality of life)?

Most of what I call my 'luddite' or 'anti-development' friends justifiably see improving productivity as diminishing their quality of life. While I don't usually agree with them (I love new technology/growth/change), I have come to see that from their point of view, they are absolutely correct (kind of like your Democrats need to learn respect posting).

http://www.ted.com/index.php/talks/dan_dennett_on_dangerous_memes.html

For what it's worth, I too would love you to be proven wrong AND I also share your skepticism.

[Lafayette]

Non job-creation growth

Two good questions from anne: I have yet to find a reasonable theoretical answer as to (1) why the economy has grown relatively weakly and (2) why the market for ordinary workers has been relatively poor since November 2001 and recently is worse than just poor.

I’ll take a pot-shot at explaining, to see if it stimulates a genuine debate.

It has its roots in the dot-com boom. What no one realized is that demand was not sufficient to reemploy people after the dot.com bubble burst. We had a no-job-creation recovery, if one can call it that. The question remains, nonetheless, why?

In early 2001 the stock market crested and began its long road down. Stock markets were, previously, one way of printing money during the 1990 dot.com years of aggressive stock market valuation growth which induced Demand. That spendthrift propensity came to a screeching halt by early 2001.

The “recovery” from mid-2003 to 2007 in fact only shaved a bit more than one and a half points off the unemployment rate, going from 6.3% to 4.5%. (See historical unemployment rate here).

By the beginning of 2007, the rate was spiking north again in the range of 5%, currently reaching more than 6%. One and a half points is not bad, but apparently the 5.8% CGR between mid-2003 and end-2006 was insufficient to build jobs fast enough.

All of which, admittedly, still does not answer the initial question. Why did a strong GDP CGR (of 5.8%) not generate more jobs to bring the unemployment rate down lower than 4.5%? (See historical GDP here.) Where did all that growth go to? It went to non-job creating sectoral growth.

My take: It went to Finance, which creates much wealth but not that many real jobs. (This is pure speculation on my part.)

In fact, given the circumstances, there is every reason to believe that any further expansion by Federal stimulus will have, alas, exactly the same consequence as last time.

So, the question begs itself, what must be done to assure that Federal stimulus increases jobs and not just GDP?

My answer, real infrastructural investments in tangible projects that create jobs (ala JM Keynes and the New Deal). This could be in construction, but not necessarily only construction. The services sector can also create durable employment.

Let's broaden our understanding of "infrastructure" from brawn-power to brain-power.