Economist's View

Average Weekly Hours

"Hire the Unemployed"

The stimulus package had two components, new spending and tax cuts. Everybody knew that the spending component would take time to put into place, six months or more for a lot of the infrastructure projects, and that meant that we needed something to increase demand and provide a bridge until the new spending comes online.

Enter the tax cuts that the GOP insisted upon, tax cuts that were a larger part of the stimulus package than I thought justified. These cuts were to come online immediately and stimulate demand until the spending could begin taking up some of the slack later in the year. I would have preferred targeted, non-infrastructure spending that could have been put in place almost as fast as the tax cuts (particularly those that simply require making existing programs more generous), but that type of spending was considered wasteful because it didn't add to our long-run capacity for growth and hence had little chance of being part of the stimulus package.

The problem was partly bad luck. A crisis hit and we had the bad luck of having an administration that opposed active intervention and though there was a bit of a stimulus attempt through a one time tax rebate, a strategy theory predicts won't do much to help, the real action in terms of stimulating the economy was left to the new administration. So nothing was done, nothing could have been done until the new administration took over, and given the insistence that any new spending be on infrastructure projects with clear benefits, tax cuts were the main hope for an immediate effect.

So if the policy has failed at this point, it is not the spending component since, fully consistent with predictions when it was enacted, it was going to be months before it could be of any help. What failed is the GOP's insistence that tax cuts be used to provide an immediate boost to the economy. Increasing food stamps, unemployment compensation, payments to help states with declining revenues and increasing demands for social services, payments to help unemployed workers maintain health care, digging (needed) holes, there were many, many other ways to provide more immediate relief and stimulate the economy at the same time, but no, it had to be tax cuts or nothing.

Finally, I want to note that what we maximize matters. For example, we can maximize GDP growth over the next ten or twenty years, or we can maximize employment over the next few months. Which we choose to maximize has a big effect on the policies we put in place. If we use the stimulus money to maximize GDP and growth - which is essentially what we did - that will have a much slower effect on employment than if we maximize employment directly. The efficiency argument always leads you to maximize output, and efficiency prevailed in the structure of the current package, but I think an argument can also be made that maximizing employment provides social benefits that are just as large, or larger.

Just noticed this, which makes a surprisingly similar point:

A Message to President Obama: Stop Priming the Pump, Hire the Unemployed, by Pavlina R. Tcherneva: Many have called President Obama’s stimulus plan a return to Keynesian policy. Some of us who like reading Keynes professionally or for leisure have already been scratching our heads. I have wondered in particular whether the plan isn’t set up to work in a manner completely backwards from what Keynes himself had in mind when he advocated economic stabilization by government.

There are two things to remember about Keynes’s fiscal policy proposals: 1) government spending was always linked to the goal of full employment... and 2) to achieve macro-stability and full employment, the government had to employ the unemployed directly into public works.

By contrast, most modern economists believe that 1) there is some natural level of unemployment that includes the structurally unemployed, which governments cannot generally tackle, and that 2) public employment is an inefficient use of public resources.

So, when the government is called to action, the economic profession has replaced Keynes’s “fiscal policy via public works” with a “leaky bucket pump-priming mechanism.”

How is the latter policy supposed to work? Instead of employing the unemployed directly, the idea is to generate large enough government expenditures to produce a level of economic growth that would, in turn, gradually reduce unemployment. For example, the government could spend money on various private sector contracts, stimulate different private industries, offer investment subsidies and tax cuts, and increase unemployment insurance payments, in hope that it will boost GDP sufficiently to reduce unemployment to desired levels. This is essentially the underlying logic behind President Obama’s stimulus package. But it is also a bit of a gamble.

Not all of these injections will be effective because the fiscal stimulus enters the economy through “a leaky bucket”. Some of the money will be lost in transit (because of administrative costs, for example) and much of it will have no direct job creation effects (e.g. the tax cut component of the recovery act). Nevertheless, despite this leaky bucket, the theory goes, sooner or later, large enough government expenditures will produce the kind of growth that would reduce unemployment. ...

All of this is ... why Keynes never had any “leaky bucket” or “pump priming” idea in mind. For him “the real problem fundamental yet essentially simple…[is] to provide employment for everyone” (Keynes 1980, 267) and the most bang for the buck from fiscal policy would be achieved via direct job creation. This he called “on the spot” employment via public works.

As I have argued elsewhere, it is useful to think of Keynesian fiscal policy, not as aggregate demand management, but as labor demand management. ...

Commentators often call this a policy of “make work” but Keynes didn’t advocate digging holes, burying jars with money and digging them out, or any other similarly worthless projects. The key was to marry the two goals: to employ the unemployed directly and to make sure that they do useful things. Once they are put to work on a particular project, Keynes argued, “there can be only one object in the economy, namely to substitute some other, better, and wiser piece of expenditure for it” (Keynes 1982, 146). We might as well ask a very basic question: is there really a shortage of useful things to do?

If we insist on calling ourselves Keynesians again, and more importantly, if President Obama’s plan for economic stabilization should generate rapid reduction in unemployment, it would help to set fiscal policy straight. Instead of relying on “leaky fiscal buckets” we could return to “labor demand management” a la Keynes that provides immediate employment opportunities to the unemployed via bold and creative public works projects, which generate useful output and services for all.

"Europeans Rely on Concessions to Save Jobs"

Some of the ways European labor markets are reacting to the economic slowdown:

Europeans Rely on a Mix of Concessions to Save Jobs, by Mathew Saltmarsh, NY Times: Rising European unemployment has business and government looking to offset the pain, and some of the solutions belie the region’s reputation for inflexibility.

A report released ... by the European Union found that some 1.9 million jobs were lost in the first quarter, the worst drop since figures were first collected starting in 1995. The unemployment rate was 8.6 percent in April, up from 6.8 percent a year earlier.

But analysts and labor experts say the figures would have been even starker without some of the job-saving measures used to combat the worst recession in decades. ...

Many countries have short-time compensation programs, tailored for the manufacturing sector, under which employers can apply for temporary assistance to lift the wages of workers working reduced hours.

France has a publicly financed partial unemployment plan, allowing companies experiencing difficulties to temporarily lay off workers and draw on state money to pay them during those periods. ... In the Netherlands,... companies ... use... a similar program...

Germany also has several measures to reduce working time, many of which are specifically framed as employment-saving measures. ... German unions have also shown some flexibility. ...

In France, as in other European countries, employers are not normally allowed to lower contracted salaries without employee consent.

But if a business with operations in France has “serious grounds” to think that its economic viability is in danger, and employees refuse a reduced salary, then a company could proceed to layoffs.

To avoid this kind of situation, some companies have tried to negotiate salary reductions. The auto rental company Hertz ... asked French management ... to swallow a pay cut of around 5 percent over three months, without offsetting time off. Slightly more than two-thirds of the 150 managers offered the deal agreed... Hewlett-Packard ... confirmed that it was engaged in similar negotiations to cut the salaries ... ranging from 2.5 to 15 percent.

The Finnish carrier Finnair announced in December plans to temporarily lay off 1,700 cabin crew members on a staggered basis this year to cut costs. The layoffs will last two to three weeks a worker.

"A Lost Decade for Jobs"

Michael Mandel looks at job growth over the last decade, and it's not a pretty picture:

A Lost Decade for Jobs, Economics Unbound: Private sector job growth was almost non-existent over the past ten years. Take a look at this horrifying chart:

Between May 1999 and May 2009, employment in the private sector sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period.

It’s impossible to overstate how bad this is. ...

Over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs.

But even that gives the private sector too much credit. Remember that the private sector includes health care, social assistance, and education, all areas which receive a lot of government support. I’ve been talking about the HealthEdGov sector. ...

Most of the industries which had positive job growth over the past ten years were in the HealthEdGov sector. In fact, financial job growth was nearly nonexistent once we take out the health insurers.

Let me finish with a final chart.

Without a decade of growing government support from rising health and education spending and soaring budget deficits, the labor market would have been flat on its back.

Re-Interpreting the Blinder Numbers in the Light of New Trade Theory

According to this, "the US is actually a net insourcer" of jobs:

How many jobs are onshorable? Re-interpreting the Blinder numbers in the light of new trade theory, by Richard Baldwin, Vox EU: Before the global crisis hit, offshoring was one of the scarcest things on rich nations’ economic radar screens – especially the offshoring of “good” service sector jobs. Alan Blinder was one of the first to point out the threat in his 2006 Foreign Affairs article “Offshoring: The Next Industrial Revolution?” He wrote: “constant improvements in technology and global communications virtually guarantee that the future will bring much more offshoring of ‘impersonal services’’— that is, services that can be delivered electronically over long distances with little or no degradation in quality.”

Blinder has more recently produced some estimates of the size of the revolution. And they make it look like “the big one”. Blinder (2009): "I estimated that 30 million to 40 million US jobs are potentially offshorable."

This sort of media-friendly statement is part of what I consider to be very confused thinking by non-specialists – not that the economists involved are necessarily confused, but tacitly or not, they are allowing the media to misinterpret the numbers.

Let me start off by saying that I consider Alan Blinder to be one of the world’s leading macroeconomic policy specialists. Moreover, I greatly appreciate the way he uses his knowledge of economics to make this a better world (rather than focusing entirely on impressing the other inhabitants of academe). This time, however, I’m not sure it has worked out right.

I don’t wish to take issue with his numbers or methods. I wish to question the implications of those numbers. The trouble is that his numbers are being interpreted in the light of the “old paradigm” of globalisation – the world of trade theory that existed before Paul Krugman, Elhanan Helpman, and others led the “new trade theory” revolution in the 1980s.

Contributions to the Change in Nonfarm Payroll Employment

[click to enlarge]

The graph is from "Are there green shoots in the labor market?" by Melinda Pitts and Menbere Shiferaw of the Atlanta Fed. They say "it is promising that the labor market is at least producing some variation from the negative trends." However, see also Jobless Recovery Redux? from Mary Daly, Bart Hobijn, and Joyce Kwok of the SF Fed. They say "Our analysis generally supports projections that labor market weakness will persist, but our findings offer a basis for even greater pessimism about the outlook for the labor market."

Update: Jeff Frankel, a member of the NBER Business Cycle Dating Committee, says we haven't hit bottom yet:

The labor market has NOT yet signaled a turning point: The rate of decline in employment fell abruptly 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. ...

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 have be the bottom of the recession. The May employment report encouraged speculation that the answer was “yes.” The stock market went up.

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... But all of us agree, 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. But I believe that we also agree, 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, as reported by Forbes, pursuing this logic leads to second thoughts about whether the most recent BLS announcement was really good news after all. The length of the average work week fell to its lowest since 1964 ! 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 minor 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? My bottom line: the labor market does not quite yet suggest that the economy has hit bottom.

He has a graph of hours worked. Also see: The ‘part-timezation’ of America at FT Alphaville.

Uneven Unemployment Rates

Stratified unemployment rates reveal substantial differences by race, gender, education, and occupation:

16.4%, by Richard Florida: That’s the overall rate of unemployment, according to the Bureau of Labor Statistics’ newly released U-6 measure which includes “marginally attached workers” as well as those who work part-time for economic reasons. That’s quite a bit higher than the widely reported 9.4 percent figure...

And, unemployment continues to fall unevenly by gender, race, class, and occupation.

Reich: The Future of Manufacturing, GM, and American Workers

In this discussion, Robert Reich defines the term "symbolic analyst""

A growing percent of every consumer dollar goes to people who analyze, manipulate, innovate and create. These people are responsible for research and development, design and engineering. Or for high-level sales, marketing and advertising. They're composers, writers and producers. They're lawyers, journalists, doctors and management consultants. I call this "symbolic analytic" work because most of it has to do with analyzing, manipulating and communicating through numbers, shapes, words, ideas.

He continues:

The Future of Manufacturing, GM, and American Workers (Part II), by Robert Reich: Symbolic analysts have been hit by the current downturn, just as everyone else has. But over the long term, symbolic analysts will do just fine – as long as they stay away from job functions that are becoming routinized. ... The global market gives them more potential customers for their insights.

To be sure, symbolic analysts are popping up all over the world. ... But apart from recessions, demand for symbolic analysts in the U.S. will continue to grow faster than the supply. ... In decades to come, nations with the highest percentages of their working populations able to do symbolic-analytic tasks will have the highest standard of living and be the most competitive internationally.

America’s biggest challenge is to educate more of our people sufficiently to excel at such tasks. We do remarkably well with the children from relatively affluent families. ... But we’re in danger of losing ground because too many of our kids, especially those from lower-middle class and poor families, can’t get the foundational education they need. The consequence is a yawning gap in income and wealth which continues to widen. More and more of our working people finds themselves in the local service economy -- in hotels, hospitals, restaurant chains, and big-box retailers -- earning low wages with little or no benefits. Unions could help raise their wages... A higher minimum wage and larger Earned Income Tax Credit could help as well. Not all of our young people can or should receive a four-year college degree, but we can do far better for them than we're doing now. At the least, every young person should have access...

Some argue that ... we need more manufacturing in the U.S. ..., that ... the market is fallible,... that ... sometimes we need to consider what’s good for our economy and society as a whole regardless of where the market may lead us. But that’s exactly where I depart from those who believe we need to protect or bring back traditional manufacturing in the United States. To do so would be enormously costly. I just don’t get how those costs can possibly be justified.

"Incarceration as a Labor Market Outcome"

John Quiggin makes a good point:

Incarceration as a labor market outcome, by John Quiggin: I wasn’t all that surprised that Bryan Caplan didn’t like my interpretation of our bet on EU and US unemployment rates, which was that the combined rates of unemployment and incarceration in the US would exceed those in the EU over the next ten years. I was, however, surprised by the vehemence with which libertarian-inclined* commenters here and at Crooked Timber objected to this interpretation.

A string of them echoed Caplan’s argument that

From a labor market perspective, though, Quiggin’s incarceration adjustment would only make sense if you thought that most or all of the people in jail would be unemployed if they were released.

Caplan has missed my main point. I’m not suggesting that incarceration is disguised unemployment (though obviously it reduces measured unemployment). Rather, I’m saying that, like unemployment, incarceration should be regarded as a (bad) labor market outcome. If you want to evaluate the performance of the labor market, you need to look at both.

There’s nothing radical or leftist about this viewpoint: it’s one that is at least implicit in all economic models of the labor market of which I’m aware, and is most particularly explicit in that of the Chicago School*. Most of the crimes for which people are imprisoned in the US can be understood as reflecting economic choices which in turn are determined primarily by the labor market in which those choices are made. This is obviously true of property crime and drug dealing, and it’s true, directly or indirectly, of lots of violent crime as well. As Gary Becker put it (quoting from memory here) “a burglar is a burglar for the same reasons as I am a professor”. ...

"Housing Starts, Remittances and Macroeconomic Developments"

Federico Mandelman of the Atlanta Fed:

Housing starts, remittances and macroeconomic developments, by Federico Mandelman: Recent evidence collected by the Dallas Fed's Pia Orrenius suggests that apprehensions of undocumented workers attempting to cross the U.S.–Mexican border are a good predictor of the overall American job market. Simply put, if one wanted to predict job market conditions in July of a given year, one should examine immigrant apprehensions in January. Orrenius finds that more immigrants attempt to cross the border from Mexico (and more of them are caught doing so) when immigrants believe the U.S. economy would offer more jobs in the near future.

One area of the economy that relied heavily on immigrant labor was housing. The following chart plots monthly U.S. housing starts (lagged five months) and remittances to Mexico. ... I use remittances as a proxy for migrant Mexican labor.

US and European Employment Rates

How do employment rates in the US compare to those in Europe?:

How does the U.S. labor market compare now?, Lane Kenworthy: In a new CEPR report, John Schmitt, Hye Jin Rho, and Shawn Fremstad note that while the U.S. unemployment rate had been lower than those of many rich European countries in the 1980s and 1990s, it now has caught up to and surpassed most of them. In March of this year our unemployment rate was tied for fourth-highest among the major OECD nations. This, they say, “has turned the case for the U.S. model almost entirely on its head.” ... I’m sympathetic to the conclusion, but I’d prefer it to be based on a different measure of labor market performance. ...

If our interest is in an economy’s success in creating jobs, a better indicator for cross-country comparison is the employment rate: the share of working-age people (age 15 to 64 is the standard) that are employed. The following chart shows employment rates for the two most recent business-cycle peak years: 2000 and 2007. The U.S. is one of just a few nations in which the employment rate declined during this period, though it’s in the middle of the pack rather than at the bottom.

...The American labor market hasn’t been the worst at creating and maintaining jobs in the 2000s (though bear in mind that we’re talking here solely about the number of jobs, not their quality). Yet as Schmitt, Rho, and Fremstad rightly suggest, things have changed sharply relative to the 1980s and 1990s when our performance was near the top of the comparative heap.

The Decline of Merit Pay in Journalism

David Cay Johnston on the job market for journalists:

Welcome to the Jungle, by David Cay Johnston, CJR: Reporter Dan Browning’s piece on coming newsroom cuts at the St. Paul Pioneer-Press contains a curious detail that perhaps will encourage rigorous thinking in articles covering compensation. “The company said it wants… the elimination of merit pay….” Browning wrote... The term “merit pay” usually means that management rewards superior performance with superior compensation. ...

There is an adage among business owners ... that properly priced labor pays for itself. Workers whose pay equals their economic value-added receive just what they contribute and, in effect, cost the employer nothing. Those who are underpaid, however, damage profits through inefficiency, because when you underpay you attract less efficient workers. On the other end, those ... who are overpaid rob the owners of part of their profits.

So what does it say that Pioneer Press ... wants to stop rewarding superior performance with appropriately superior pay?

In theory, the best workers will go elsewhere. After all, the highest performers will be in demand and others will bid for their talent. The theory of market economics says that ... the quality of the labor ... will diminish, with appropriate damage to ... equity.

The Ratio of Short-term to Long-Term Unemployment

[via Dirk van Dijk]

When this value is high, and the overall level of unemployment is low, I think we can reasonably argue that it is a sign of a healthy, dynamic economy. No surprise, but right now the ratio is at its lowest value since 1980.

Paul Krugman: Falling Wage Syndrome

Are we doing enough to reduce the risk that we’ll face a sustained period of deflation and stagnation?:

Falling Wage Syndrome, by Paul Krugman, Commentary, NY Times: Wages are falling all across America. Some of the wage cuts, like the givebacks by Chrysler workers, are the price of federal aid. Others, like the tentative agreement on a salary cut here at The Times, are the result of discussions between employers and their union employees. Still others reflect the brute fact of a weak labor market: workers don’t dare protest when their wages are cut, because they don’t think they can find other jobs.

Whatever the specifics, however, falling wages are a symptom of a sick economy. And they’re a symptom that can make the economy even sicker.

First things first: anecdotes about falling wages are proliferating, but how broad is the phenomenon? The answer is, very.

It’s true that many workers are still getting pay increases. But there are enough pay cuts out there that, according to the Bureau of Labor Statistics, the average cost of employing workers ... rose only two-tenths of a percent in the first quarter of this year — the lowest increase on record. Since the job market is still getting worse, it wouldn’t be at all surprising if overall wages started falling later this year.

But why is that a bad thing? After all, many workers are accepting pay cuts in order to save jobs. What’s wrong with that?

The answer lies in one of those paradoxes...: workers at any one company can help save their jobs by accepting lower wages, but when employers across the economy cut wages at the same time, the result is higher unemployment. ... So there’s no benefit to the economy from lower wages. Meanwhile, the fall in wages can worsen the economy’s problems on other fronts.

In particular, falling wages, and hence falling incomes, worsen the problem of excessive debt: your monthly mortgage payments don’t go down with your paycheck. America came into this crisis with household debt as a percentage of income at its highest level since the 1930s. Families are trying to work that debt down by saving more ... but as wages fall, they’re chasing a moving target. ... Things get even worse if businesses and consumers expect wages to fall further in the future. ...

Concern about falling wages isn’t just theory. Japan ... is an object lesson in how wage deflation can contribute to economic stagnation.

So what should we conclude from the growing evidence of sagging wages in America? Mainly that stabilizing the economy isn’t enough: we need a real recovery.

There has been a lot of talk lately about green shoots and all that, and there are indeed indications that the economic plunge that began last fall may be leveling off. The National Bureau of Economic Research might even declare the recession over later this year.

But the unemployment rate is almost certainly still rising. And all signs point to a terrible job market for many months if not years to come — which is a recipe for continuing wage cuts, which will in turn keep the economy weak.

To break that vicious circle, we basically need more: more stimulus, more decisive action on the banks, more job creation.

Credit where credit is due: President Obama and his economic advisers seem to have steered the economy away from the abyss. But the risk that America will turn into Japan — that we’ll face years of deflation and stagnation — seems, if anything, to be rising.

Here's a graph of the Phillips curve over the last two and a half years (2006:Q3 - 2008Q4) as measured by the year over year percentage change in the employment cost index (total compensation) versus the civilian unemployment rate:

Artificially restraining wages from falling is not the correct response, the key is to drive the unemployment rate down so that the labor market tightens and wages rise in response. That is why it's essential that stimulus programs provide a boost to employment, and I've wondered from the start if the stimulus programs we enacted have focused enough on providing employment opportunities. Building new infrastructure does provide long-term benefits, and that gives political cover to the large government expenditure and tax cuts that were enacted, but infrastructure projects alone do not give the maximum possible boost to employment. Providing jobs - some of which may not directly boost long-run productivity - is an essential component of short-run stabilization policy, and there is more that we could do to give unemployed workers opportunities for employment until jobs begin to reappear in the private sector.

"Can Unemployment Claims Predict the End of the American Recession?"

When will the US economy turn around? Robert Gordon – a member of the NBER Business Cycle Dating Committee since 1978 – use "a surprisingly robust link between the business cycle tough and the lagged peak in unemployment claims" to predict that the trough of the recession will be this month, or maybe next month. Along the way, he answers two questions I had, how do we know this recession will follow the same pattern as recent previous recessions given that the cause is so different, and how do we know that the peak in unemployment claims - the key predictive variable - has reached a global rather than a local maximum? I'll let you decide if the answers are convincing, but I still have doubts about how much we can learn about the likely path of this recession from looking at the recessions that have occurred since 1975:

Green shoot or dead twig: Can unemployment claims predict the end of the American recession?, by Robert J. Gordon, Vox EU:  “No one can possibly know how long the current recession will last or how deep it will go,” says Nobel Laureate Robert M. Solow in a new review article written only two weeks ago (Solow 2009). The American economy led the world into the current economic downturn, by numerous measures already the worst since the Great Depression. The catalyst was the sub-prime mortgage debacle and subsequent meltdown of America’s financial sector, more recently interacting with the real economy through a multidirectional interplay of ripple and multiplier effects. The US downturn has spread around the world with unprecedented velocity and ferocity.

If the U. S. started it all, when will the US economy turn around? The rest of the world is eager to know, as a US revival seems an essential precondition to break the momentum of the worldwide economic free-fall.

Revisions to Payroll Employment

[months yet to be revised are omitted from source graph]

Rationality prevents us from making persistent, one-sided estimation and forecasting errors.

It's a Zoo Out There. Or Maybe Not.

[via Discover]

"The Cyclicality of Geographic Mobility"

Chris Nekarda disagrees with Connor Dougherty's assertion that geographic mobility is procyclical, i.e. that more people move when times are good than when times are bad:

Cyclicality of Geographic Mobility, by Chris Nekarda: Connor Dougherty discusses a dramatic decline in geographic mobility during 2008 (via Economist’s View):

U.S. Migration Falls Sharply, by Conor Dougherty, WSJ: Migration around the U.S. slowed to a crawl last year, especially for this decade’s boom towns, as a weak housing market and job insecurity forced many Americans to stay put. ...

As asset values rose fairly steadily in the past decade, Americans young and old moved around the country in search of jobs or better weather. In many cases, people living in higher-cost housing markets such as San Francisco and New York cashed in their real-estate winnings and moved to outlying counties, or to states like Florida and Nevada, hoping to find a cheaper house and pocket the difference. Now, “people are hanging tight; they’re too scared to do anything,” said Mr. Frey.

Migration typically slows during recessions. But in past downturns, the slowdown has been more regional in scope, with workers fleeing weaker job markets for places where companies were still hiring. In the deep 1980s recession, for instance, laid-off auto workers fled the industrial Midwest for energy-rich states in the South with more plentiful jobs.

What’s unique this time is migration has slowed almost everywhere. The sharpest year-to-year changes were among what demographers call “domestic migrants,” people who moved within the U.S. That doesn’t count population changes that result from births, deaths or immigration.

Although I agree with the trend behavior described above, Dougherty is incorrect about the cyclicality of geographic mobility. In fact, geographic mobility is moderately countercyclical—that is, more people move during recessions than during booms (relative to trend). This may seem counter-intuitive but makes economic sense.

Geographic mobility is a means of reallocating resources, in this case labor, to more efficient uses. In the past, 70 percent of people who move indicated having moved for economic reasons and up to 50 percent of those moves occurred because of a job separation [Lansing and Morgan (1967); Bartel (1979)]. In particular, there is a significant positive relationship between unemployment and geographic mobility [Bartel (1979); Schlottmann and Herzog Jr. (1981, 1984)]. Thus, countercyclical mobility is consistent with reallocation of idle workers across space.

I assess the cyclicality of geographic mobility in a recent working paper. I the measure the rate of geographic mobility as one minus the share of persons living at the same address one year later reported by the U.S. Census Bureau. These data come from the March supplement to the Current Population Survey, so the 2007 data do not reflect much of the distress in mortgage markets—and any concomitant effects on mobility—that began later in 2007.

Removing the low-frequency trend is important because it represents structural changes—such as demographic changes or, say, innovations in mortgage finance—that are unassociated with the business cycle. I isolate the component of the time series that moves at business cycle frequency using an unobserved components model (see paper for details). The figure below plots the cyclical component of the mobility rate together with that of the unemployment rate for comparison.

The cyclical component of mobility tends to follow the unemployment rate, indicating that more people move during recessions than during booms. This is consistent with geographic mobility as a means for reallocating idle labor to more productive uses. The contemporaneous correlation of the cyclical component of the mobility rate with the unemployment rate is 0.50, indicating moderate countercyclicality. Also note that mobility is substantially less volatile over the business cycle than unemployment.

Of course, the problems in the housing market beginning in 2007, notably the dramatic decline in prices, will undoubtedly reduce geographic mobility during this recession. This will further slow recovery because unemployed persons cannot move to areas with more favorable labor markets as easily or quickly as before.

"People are Hanging Tight"

The end of the great migration:

U.S. Migration Falls Sharply, by Conor Dougherty, WSJ: Migration around the U.S. slowed to a crawl last year ... as a weak housing market and job insecurity forced many Americans to stay put.

Demographers say the dropoff in migration, shown in Census data to be released Thursday, is among the sharpest since the Great Depression. It marks the end of what Brookings Institution demographer William Frey calls a "migration bubble."

As asset values rose fairly steadily in the past decade, Americans young and old moved around the country in search of jobs or better weather. In many cases, people living in higher-cost housing markets such as San Francisco and New York cashed in their real-estate winnings and moved to outlying counties, or to states like Florida and Nevada, hoping to find a cheaper house and pocket the difference. Now, "people are hanging tight; they're too scared to do anything," said Mr. Frey. ...

Migration typically slows during recessions. But in past downturns, the slowdown has been more regional in scope, with workers fleeing weaker job markets for places where companies were still hiring. ... What's unique this time is migration has slowed almost everywhere. The sharpest year-to-year changes were among what demographers call "domestic migrants," people who moved within the U.S. ... The Census data show that the biggest falloffs were in the worst housing markets. ...

Having a key resource - labor - largely frozen in place doesn't help the economy at all. People are in no mood to take risks by moving to a new job, they probably can't find a job anyway, and if they do, will they be able to sell their house? And if all that goes right, they find a job, it's a good enough opportunity to be a risk they're willing to take, and they found a buyer for their house, will the loan be so far underwater that they can't afford to sell it?

The Hiring Activity Index

Andrew Gelman sends this along:

Are Small Businesses Starting to Hire Again?, by Andrew Gelman: Some statistical analysis says yes:

The HAI [Hiring Activity Index] is essentially a measure of how actively our [Criteria Corp's] customers (made up mostly of SMBs of between 10 and 500 employees) are administering pre-employment tests through our system (and presumably, therefore, hiring) . . . the HAI is the percentage of our customers who are actively hiring (administering tests) in a given month. From January 2008 (when we began tracking the HAI) to October 2008 the HAI remained very steady, within a few points of 65%. (If this seems low, consider that even in the best of times many 30 or 40 person companies will not be hiring every month.)

But as the financial markets plummeted and the unemployment rate surged in November, the HAI sunk about ten points, and by January reached its lowest level since we started tracking it, 53.28%. . . . So I [Josh Millet] was very pleasantly surprised to see a fairly strong uptick in the HAI in February, to 61.41%.

Tim Duy: The Oregon Employment Report

Tim Duy on today's employment report for Oregon. It's not good.

"Should we Still Make Things?

There is a symposium on Should We Still Make Things? at Dissent Magazine. Here's part of Dean Baker's entry:

Should We Still Make Things?, by Dean Baker: I have often thought that economists should be required to have a better grasp of simple arithmetic. It would prevent them from repeating many silly comments that pass for conventional wisdom, such as that the United States will no longer be a manufacturing country in the future.

Those who know arithmetic can quickly detect the absurdity of this assertion. The implication of course is that the United States will import nearly all of its manufactured goods. The problem is that unless we can find some country that will give us manufactured goods for free forever, we have to find some mechanism to pay for our imports.

The end of manufacturing school argues that we will pay by exporting services. This is where arithmetic is so useful. The volume of U.S. trade in goods is approximately three and half times the volume of its trade in services. If the deficit in goods trade were to continue to expand, we would need an incredible growth rate in both the volume and surplus of service trade and our surplus on this trade in order to get to anything close to balanced trade.

For example, if we lose half of our manufacturing over the next twenty years, and imported services continue to rise at the same pace as the past decade, then we would have to see exports of services rise at an average annual rate of almost 15 percent over the next two decades if we are to have balanced trade in the year 2028. ... It would take a very creative story to explain how we can anticipate the doubling of the growth rate of service exports on a sustained basis. ...

[Also], the idea that U.S. workers are somehow too educated to be doing for manufacturing work, but instead will be making the beds, bussing the tables, and cleaning hotel toilets for foreign tourists is a bit laughable. Of course, with the right institutional structure (e.g. strong unions) these jobs can be well-paying jobs, but it is certainly not apparent that they require more skills than manufacturing. ...

In short, the idea that the United States can survive without manufacturing is implausible: It implies an absurdly rapid rate of growth of service exports for which there is no historical precedent. Many economists and economic pundits asserted that house prices could keep rising forever in spite of the blatant absurdity of this position. The claim that the U.S. economy can be sustained without a sizable manufacturing sector is an equally absurd proposition. 

I thought that if you looked at the value of US manufacturing, it hasn't fallen nearly as much as manufacturing employment. Thus, much of the change that has affected workers is due to changes in technology, not the exporting of jobs (this comes from a study done by the Peterson Institutute, more here). But from a worker's perspective, it doesn't matter all that much whether it's technology or jobs moving to other countries, the job is gone either way. The key, then, is to have good jobs waiting for workers when they are displaced due to inevitable (and desirable) technological change or to jobs moving overseas, jobs that are every bit as good or better than the jobs they left. That is where we are falling short. The new jobs we are creating are not as good as the jobs we are losing, when workers are forced to find new jobs they don't tend to do as well as they did in their previous job, and that is the source some of the stagnation we have seen in middle class incomes over the last few decades.

Tax Cuts and Work Effort across Income Levels

A revenue neutral change that makes taxes more progressive increases work effort. That is, when taxes on the middle class go down by a dollar and taxes on the wealthy go up by a dollar, the increase in work effort by middle class workers more than offsets and fall in work effort by the wealthy:

So, based on my research, if a need to raise some revenue means tax rates have to be increased for someone, raising them on the wealthiest will result in a smaller reduction in work effort than raising tax rates on the middle class.

That's Julie Hotchkiss reporting on her research in macroblog. There is a catch:

An additional relevant question remains: What is the implication of changing work effort for GDP growth? The relationship between work effort and value of output is not necessarily the same across income levels. In other words, one hour of high-income (higher education) labor is expected to yield a higher value of output in the economy than one hour of labor from a middle-income (lower education) worker. A complete analysis of the aggregate impact of the administration's tax plan would have to also take this into account.

However, the effect on growth is only one metric by which to judge this policy, e.g. the benefits to the household that come from one more hour of work may also differ across income levels, particularly if the additional money is used to buy necessities in one case, and luxuries in the other.

The Shrinking Middle Class?

If the trends over the last 25 years continue, as is likely, when the economy finally starts to recover and create new jobs, many of those who lost jobs during the downturn will find that the jobs available to them are not as attractive as the jobs they left:

The middle-age, middle-income squeeze, by Stephanie Schorow, MIT News Office: ...Dramatic shifts in the U.S. labor market in the last 25 years are relegating older workers -- even those with a college education -- to lower-wage jobs... This trend appears likely to steepen in the current recession, as employers accelerate the rate at which they shed nonessential positions.

In a paper co-authored with graduate student David Dorn, "This Job is 'Getting Old'...,"... Autor analyzes a phenomenon that he refers to as the "hollowing out" of the U.S. job market from 1980 to 2005.

"One of the most remarkable developments in the U.S. labor market of the past two and a half decades has been the rapid, simultaneous growth of employment in both the highest- and lowest-skilled jobs," Autor says. European labor markets echo this shift.

Automation, computerization and offshoring are reducing the number of middle-wage, skilled occupations -- stock clerks, inspectors, telemarketers, payroll workers, sales agents and software programmers -- Autor finds. These jobs are particularly vulnerable to automation because their core tasks follow well-understood routines that can increasingly be codified in software and executed by machinery.

Ironically, many jobs that require less formal education -- such as construction workers, janitors, truck drivers, auto mechanics, home health workers and wait staff -- are more difficult to automate than these white-collar positions because they demand physical flexibility and rapid adaptation to unpredictable circumstances (e.g., oncoming traffic, unhappy customers). Humans excel at this form of flexibility while current technology falls short. Demand also remains high for high-wage, high-skill jobs, such as attorneys, physicians, engineers and top managers -- all of which perform analytic, interpersonal and problem-solving tasks requiring both expertise and intellectual flexibility.

As the labor market "hollows out," workers who in a previous generation would have occupied middle-skill, white-collar positions must increasingly find their fortunes elsewhere -- either in high-skill, high-education professional, technical and managerial positions, or in less-educated manual labor and in-person service jobs. Autor's data indicate that since 1980, older workers with at least some college education are increasingly doing what was once thought of as "non-college" work, i.e. non-routine, but not highly skilled jobs.

According to data compiled by Autor and Dorn, the share of college-educated workers found in low-wage, non-routine occupations rose from 19.9 percent to 23.6 percent from 1980 to 2005. Moreover, the average age of those with college education working in such jobs rose by 6.7 years during this time. ... And as computers and offshore sourcing continue to reduce jobs in areas such as accounting and sales, this trend has accelerated. ...

Autor also suspects employers facing rising health costs and falling profit margins are more likely to hire young people because of the higher health care costs associated with older workers.

Thus, Autor's findings underscore the importance of both career retraining and, potentially, public assistance with health coverage in softening the brunt of the economic downturn on older workers. But they also challenge assumptions about the long-term value of a college education.

Higher education, particularly an advanced degree, is still the best way of ensuring future income, Autor says. However, "the degree to which a college education insulates you from downturns and from loss of prestige and earning power of your occupation is unfortunately smaller than it used to be."

Divergent Unemployment Rates

Tim Duy:

Divergent Unemployment Rates, by Tim Duy: It is common knowledge that educational achievement significantly impacts labor market outcomes.  Still, I was struck by the increase in that disparity as I prepared the following charts for a presentation last week.  Consider the year over year change in unemployment rates by educational achievement since 1993:

Note that the increase in unemployment rates for no high school and high school graduates are increasing at a very rapid rate over the past year (note this also reflects rising labor force participation for the no high school group (Jan. 2008 - Jan. 2009), in contrast to falling participation among other groups).  In contrast, during the 2001 recession, increases in unemployment rates were comparable.  For a closer look at 2001:

And the current recession:

A few thoughts come to mind:

1. Rising structural unemployment.  If the housing/consumer debt dynamic led us into this downturn, and, as I think is reasonable to expect, will not lead us out of the downturn, then we can expect that those persons unemployed as a result will continue to face relatively higher rates of unemployment in the future.  In essence, it is not clear to which sector these labor resources will be reallocated, especially given anticipated lethargic rates of labor growth on the other side of this recession.  I suspect that very strong growth will be required to revitalize a labor market for these individuals (such as that experienced during the information technology boom).  No such growth forecast exists.
2. Hysteresis?  That is a term that has not cross my mind for many years.  Suppose the economy is undergoing a structural adjustment that promises to deliver low growth rates for the next decade, with cycles driven by the start-stop process of fiscal stimulus.  Could each new "boom" end with an unemployment rate higher than the low of the previous boom as structural unemployment edges up? 
3. Stimulus may also have a differential impact on unemployment.  If the jobs generated by fiscal stimulus tend toward workers with higher education levels, then stimulus will not alleviate the problem of rising structural unemployment.  Note - this is NOT an argument against stimulus.  It highlights the importance of proper structure of the stimulus package.
4. Us versus them.  I hate to say this, but certain political partisans could turn this into a morality play...why should your tax dollars be wasted supporting the bottom end of the educational level?  They had their chance.  
5. Inflation risk?  If significant structural issues are in play, perhaps we are fooling ourselves about the low risk of inflation.  Consider Jim Hamilton:

I have in my research instead stressed technological frictions. For example, when spending on cars abruptly falls, there is a physical, technological challenge with getting the specialized labor and capital formerly employed in manufacturing cars into some alternative activity. In my mind, it is a mistake to pretend that any federal program is capable of immediately re-employing those resources into an alternative, equally productive enterprise. More fundamentally, I have suggested that our present situation is as if someone had quite successfully sabotaged the basic functionality of our financial system. Until we once again have a financial sector that can successfully allocate credit to worthy projects, we're not possibly going to be able to produce as much in the way or real goods and services, no matter what the level of aggregate demand or stimulus package might be. In terms of the textbook Keynesian models that people play with, I'm suggesting that "potential" GDP growth for 2009:Q1-- that growth rate which, if we try to exceed it by stimulating aggregate demand, we primarily just get more inflation-- is in fact a negative number.

I not ready to declare the end of deflation risks.  But I can easily make a story in which structural adjustment combined with misdirected stimulus yielded a higher than expected inflation rate.  As always, it is wise to consider the full range of risks to your outlook.

Bottom Line:  Yet another thing to worry about.

How Bad Will it Get?

It's not looking good. Many people have been trying to make the case that the current downturn is no worse than the downturns in the 1970s and 1980s, but there's reason to think this downturn is following a different, more worrisome trajectory:

Unemployment in the current crisis, by Mike Elsby, Bart Hobijn, and Aysegul Sahin, Vox EU: ...A useful rule of thumb exploited in recent research is that the percentage increase in unemployment is well-approximated by the percentage increase in inflows plus the percentage increase in duration of unemployment (Elsby, Michaels, and Solon 2009). Figure 1 plots these for each US recession since 1969, including the current crisis (shaded). In some ways, the current recession looks much like previous downturns. Inflows as well as duration have contributed to increased unemployment in much the same way as in the recessions of 1969 and 1974. But other dimensions of the current crisis are more alarming. Unemployment inflows have already grown by more than 30% since the beginning of the unemployment ramp up – faster rates of job loss have played a particularly dominant role relative to previous downturns.

If the current crisis evolves similarly to earlier episodes, these elevated rates of job loss do not bode well for unemployment prospects in 2009. A pattern observed in prior recessions has been that increased inflows are often a precursor to increased duration and further increases in unemployment (see Figure 1). This pattern suggests that further weakening of the labour market looms on the horizon, an outcome that would amount to a recession more severe than any seen in the US in the last forty years. This highlights the important need for a successful US stimulus package to stem the tide of a worsening macroeconomic situation in 2009.

Figure 1. Percent changes in US unemployment inflow rate and duration by recession

Figure 1 also highlights a curious fact absent in popular discussions of the crisis. Unemployment in the US had already begun to ramp up in early 2007, long before the official recession start date in December 2007 and the vagaries of the financial crisis that came to a head in the latter half of 2008. Figure 1 suggests that the initial impulse to the current recession may not have been the credit crunch, but rather that the credit crunch aggravated already worsening economic conditions. ...

"Tax Cuts vs. Government Spending"

Justin Wolfers summarizes a paper that suggests government spending would be better than tax cuts at reviving the economy:

Tax Cuts vs. Government Spending, by Justin Wolfers: As the Senate and the House look to reconcile competing stimulus plans, the big debate is whether to emphasize government spending or tax cuts. A new paper by the New York Fed’s Gauti Eggertsson argues that the risk of deflation should tilt the balance to government spending.

Our current problem is deficient aggregate demand. The government can raise total spending either by buying more stuff, or it can lower taxes and hope that consumers take their tax breaks to the mall. ...

But that’s not the whole story. Tax cuts stimulate both aggregate demand and aggregate supply. If taxes are temporarily lower, they make working today more attractive than working tomorrow, and thus increase labor supply. This boost to the nation’s productive capacity means that a tax-cut-based stimulus doesn’t do as much to narrow the gap between output and what we can produce.

Under normal circumstances, this doesn’t present a problem, because the Fed can lower interest rates to close this output gap. But right now, the Fed has set interest rates as low as they can go, and so different principles apply. Eggertsson’s concern is that a big output gap will lead inflation to fall, leading real interest rates to rise in the middle of the recession. These higher real interest rates further dampen economic activity, and with the Fed powerless to offset this, there’s the very real risk of a deflationary spiral. And so a tax-cut-based fiscal stimulus might actually backfire. In fact, Eggertsson reckons there’s a chance that tax cuts could even deepen the recession.

Is Eggertson’s conjecture right? Unfortunately the historical record can’t tell us: there’s never been an episode in which we’ve tried reducing taxes when interest rates were this low. When we’re in uncharted waters, we’ve got nothing but economic theory to guide us. And the theory says it’s safer to stick to a spending-based stimulus plan.

I'd like to be able to rely on this as one more piece of evidence for government spending over taxes, but I have doubts that the aggregate supply (labor supply) effect would be large enough to make much of a difference. The author also suggests caution:

I am bit hesitant to draw the lesson from this paper that it would be ideal to raise payroll taxes to stimulate the US economy today, although this clearly is a direct implication of the analysis

And he also says:

What should we take out of all of this? ...[One] lesson is that policymakers today should view with great deal of skepticisms any empirical evidence on the effect of tax cuts or government spending based on post war US data. The number of these studies is high, and they are frequently cited in the current debate. The model presented here, which has by now become a workhorse model in macroeconomics, predicts that the effect of tax cuts and government spending is fundamentally different at zero nominal interest rates than under normal circumstances.

"Countervailing Power Vacuum"

This is my first entry in TPMCafe Book Club's discussion of Eric Rauchway's book, The Great Depression and the New Deal: A Very Short Introduction. Eric's post to start the discussion asked two questions, (1) why was there a Great Depression in the first place?, and (2) what happened to the principle of countervailing power after the New Deal?

Here's the post:

Countervailing Power Vacuum: I want to come back to Eric's first question in a later post, the question of how depressions come about, and turn to his second question, "what happened to the principle of countervailing power after the New Deal? Did it remain a core concept of American politics, and if so, for how long?"

The idea that countervailing power is needed to balance labor markets has faded over time, and I think the movement toward deregulation in the 1970s is part of the reason for this, and that economists were one of the driving forces behind this change. We hear a lot about the role that Nixon and the Republicans played in bringing about a push for deregulation, a push that found success, but we hear less about the role that the economics profession played in setting the stage for the deregulatory phase that began in the 1970s, a phase that continued for decades and has only recently been muted - perhaps - by the present crisis in the US and world economies. Thus, I'd like to focus on changes within economics that set the stage for the anti-union movement and gave intellectual credence to this movement.

Two changes within the profession that provided the intellectual foundation for the deregulatory movement come to mind (and I'll be interested to hear other takes on this). The first big event was the failure of the Keynesian model to provide an adequate framework for understanding and responding to the economic events and turmoil of the 1970s. The model did not have an adequate theory of supply, it had a relatively naive view of expectations, and it did not have much to say about inflation, a key question in the 1970s.

The failure of the Keynesian model left a void in the profession, and it was quickly filled by the Chicago School's New Classical model, a model that dragged a good deal of ideology about government intervention into the public discourse. The model was hailed as a great intellectual and scientific leap forward. It was claimed to have microfoundations unlike it's ad hoc Keynesian predecessor, i.e. it was based upon optimizing behavior of households and firms. In addition, unlike the Keynesian model which simply imposed things like rigid wages without thinking through whether such arrangements were consistent with optimizing behavior, the model was built from the ground up and hence was based upon defensible economic principles. The Keynesian model could not make such a claim (not so for the New Keynesian model used today, microfoundations are one thing that separates the New Keynesian model from the Traditional Keynesian model). And finally, the Keynesian model had a very naive model of expectations that was no match for the rational expectations embedded in the New Classical structure. So Keynesianism, and it's belief that government intervention could make things better, gave way to a new paradigm.

A key element of the New Classical model was its ability to explain why money and output appeared to be correlated in the data without admitting that government intervention could be useful in stabilizing the economy. The ability to explain this correlation was one of the Keynesian model's triumphs over the older Classical model that existed before the New Classical revolution. In the old classical model, money is neutral - it does not change real variables such as output and employment - so prior to the New Classical model, classical economists had a difficult time explaining why money and output appeared correlated (and causal) in the data. The New Classical argument was that any policy that can be anticipated in advance will be offset by private sector responses to the policy - it will be completely ineffective - unless the policy is unexpected. So policy rules that move money in predictable ways - up in recessions, down when there is inflation - will be useless. But if the policy is unexpected, in which case it is non-neutral and does change real output and employment, it makes people worse off rather than better off because it drives us away from the optimal full information solution.

The result of this was the idea that government intervention always makes us worse off. Policy rules don't work, and unexpected random policy is counterproductive. The best thing the government can do is to provide transparent, certain policy so that nothing unexpected ever happens. Best to just let the money supply grow at a fixed, known rate than try to manage the economy by manipulating the money supply. To buttress the result that government intervention was counterproductive, the New Classical economists also began to challenge the idea that fiscal policy could be used as a stabilization tool in place of monetary policy. The government, in this way of thinking, has no business whatsoever intervening in markets. It always makes us worse off, never better off, so the best thing to do is to simply get out of the way and leave it to the private sector to take care of itself.

The other factor was an assault on the idea of monopoly power in markets. For example, one idea that emerged was the idea was that markets, even markets that looked relatively concentrated, were actually quite competitive, i.e. they were contestable. That is, as soon as a firm in a top heavy industry begins trying to exploit its monopoly power, even when it is the sole or one of the few producers in markets, another firm waiting in the wings will quickly enter and contest the market (the nature of capital is important here, it needs to be able to move into these markets quickly). This discipline by the firms waiting to pounce at the first opportunity, it was believed, was sufficient to ensure that markets that appeared highly concentrated would in fact be competitive in terms of pricing and other behavior. (Globalization of markets was another factor that led people to discount market power at the firm level.)

I don't want to oversell the contestable markets story, it was but one of many developments, but the point I am making is that there was widespread belief that markets that appeared to be quite top heavy were, in fact, quite competitive. And, importantly, if they weren't competitive, an automatic self-correction mechanism would take care of the problem, there was no need for government to do anything, natural forces would intervene as needed and solve the problem.

The point, then, is that economists by and large began to believe that markets were self-correcting, even with respect to monopoly power, and anything governments do, from intervening to break up monopolies to supporting union power, gets in the way of this natural, self-correction process. Thus, unions were not needed as a countervailing force, markets would take care of the problem until there was nothing left to countervail, i.e. markets would naturally produce a competitive marketplace. All government had to do was step aside and watch the magic happen. Market power was bad, whether it be in the hands of firms or workers, and since firms operated in competitive markets, there was no need for unions to balance power. They would just make things worse by causing departures from competitive ideals and making it harder for business to compete in world markets.

We have now observed how well the idea of self-correction and self-regulation worked in financial markets - it didn't work well at all - and I see no reason why it should work any better in bringing about a competitive labor market where one does not exist previously. I don't think the self-correction ideas lived up to their promise, there was and still is an imbalance of power in labor markets with firms surely having the upper hand, and some means of balancing the negotiations between laborers and firms is needed. The only question for me, and it's one I don't have the answer to, is whether the old institutional structure supporting unions is the best possible institutional structure going forward in a highly globalized, interdependent, and flexible world economy. I'm not sure that it is, but I do believe that more balance is needed in labor markets, and until we have something better, unions will certainly more than suffice.

[Note: I'm not sure this is the main reason behind the change, so please feel free to offer other theories for the decline of the principle of countervailing power.]

FRBSF: Labor Supply Responses to Changes in Wealth and Credit

How much does labor supply respond to changes in wealth and credit? If this research is correct, the recent declines in wealth and credit may cause increased entry into the labor market, resulting in an even higher unemployment than is currently being forecast:

Labor Supply Responses to Changes in Wealth and Credit, by Mary Daly, Bart Hobijn, and Joyce Kwok, FRBSF Economic Letter: Recent declines in house prices and the stock market have led to the most substantial contraction in household wealth since the Great Depression. From the third quarter of 2007 through the third quarter of 2008, household wealth shrank by $6.7 trillion (Federal Reserve Board of Governors 2008). Further declines in financial markets and house prices in the fourth quarter undoubtedly made losses for the full year 2008 even greater. At the same time, the severe disruptions in financial markets have made credit unavailable or too expensive for many households. Indeed, the third quarter of 2008 was the first time in the postwar period that household borrowing was negative. The combination of wealth declines and increased liquidity constraints is having a profound effect on household and aggregate consumption. In this Economic Letter we examine how it may also be affecting household and aggregate labor supply. Using monthly data from the Household Survey of the Current Employment Situation Report, we find evidence suggestive that sharply reduced wealth and liquidity are prompting certain demographic groups to enter the labor force in greater numbers.

Borjas: Advice on Immigration

George Borjas with his advice for the incoming administration:

Some Advice for President Obama, by George Borjas: Immigration, both legal and illegal, was the silent issue in the presidential campaign--despite the rapidly deteriorating economic conditions. I suspect that the worsening labor market will force President Obama to wrestle with the immigration issue sooner rather than later. It'll be hard to justify a system that lets in nearly 1.5 million new immigrants each year at a time when millions of Americans are losing their jobs.

The editors at the New York Post asked me if I had any constructive advice to give our new president about how one could approach the problem. Here is an excerpt:

Our economic woes also create an opportunity - for they will encourage many illegals to return home, potentially removing a red flag that has made rational policymaking politically impossible.

The failure of the Bush "comprehensive immigration reform" shows us that many Americans are unwilling to provide amnesty (under any name) to 12 million illegals, especially when the border remains porous and we would simply have to consider yet another amnesty a few years down the road. A real solution is one that resolves the issue for the long term - several decades, at the least.

How does the downturn make it easier to address this issue? Simply put, illegal immigration is highly responsive to economic conditions - when times are bad, fewer come (and more return home).

President Obama can take a very simple step to complement this "natural" reduction: speed up the widespread adoption of the E-Verify program. This program lets employers compare the records of their new hires with more than 500 million records held by the Department of Homeland Security and the Social Security Administration.

A simple scan - no more complex than scanning your bank card at the grocery store - would quickly tell employers if their new hire is authorized to work.

Many employers will object - especially those who prefer to hide behind claims that they don't know if any given worker is illegal. Nor does expanding E-Verify provide the "showy" symbol that some politicians prefer - like building a taller and stronger fence on the Mexican border. But any fence, no matter how tall and strong, is bound to be ineffective. Around 40 percent of illegal immigrants don't enter through that border.

Instead, E-Verify detects illegal immigrants at the place where such detection is costliest to them - as they try to get a job. It also makes employers more accountable for their actions. It should greatly slow down the number of illegals entering the country.

With those tensions reduced, Americans would be much more willing to revisit the issue of what to do with the illegals already here. And a little patience and benign neglect can have a large payoff in this matter.

A widespread amnesty may not be needed in just a few years. The deep recession and stricter enforcement will encourage many illegal immigrants to return.

Meanwhile, millions of those who remain will sprout deep roots by marrying and having children (who will be US citizens by birth). These family ties will make many illegal immigrants eligible for legal status within existing law.

And in a world with greatly reduced illegal immigration, it would be easier to enact minor changes in current law to speed up the granting of permanent visas to relatives of citizens.

The economy also presents a unique opportunity for reforming legal immigration. Most of the legal immigrants enter the country without regard to how their skills match our labor-market needs. The lack of any skill filters - combined with the high volume of low-skill illegal immigration - aggravates the economic hardships faced by disadvantaged Americans.

We can both improve the status of our low-skill workforce and substantially increase the economic benefits to the nation from immigration by adopting a system that encourages the entry of high-skill immigrants. Surely, in time of economic duress, it's wise to fashion immigration policy in a way that is most beneficial to the country.

One little-noticed provision in the failed Bush proposal was the introduction of what is called a "point system" - which awards points to applicants with particular skills, and grants visas only to those who exceed a threshold level of points...Used wisely, immigration policy can be a tool that can help Americans even during difficult times. The new president has a historic opportunity to set the system right.

Sweatshops

Nicholas Kristof defends sweatshops:

Where Sweatshops Are a Dream, by Nicholas Kristof, Commentary, NY Times: Before Barack Obama and his team act on their talk about “labor standards,” I’d like to offer them a tour of the vast garbage dump here in Phnom Penh. This is a Dante-like vision of hell. It’s a mountain of festering refuse, a half-hour hike across, emitting clouds of smoke from subterranean fires.

The miasma of toxic stink leaves you gasping... Then the smoke parts and you come across a child ambling barefoot, searching for old plastic cups that recyclers will buy for five cents a pound. Many families actually live in shacks on this smoking garbage.

Mr. Obama and the Democrats who favor labor standards in trade agreements mean well... But while it shocks Americans to hear it, the central challenge in the poorest countries is not that sweatshops exploit too many people, but that they don’t exploit enough.

Talk to these families in the dump, and a job in a sweatshop is a cherished dream, an escalator out of poverty, the kind of gauzy if probably unrealistic ambition that parents everywhere often have for their children. ...

Vath Sam Oeun, hopes her 10-year-old boy, scavenging beside her, grows up to get a factory job, partly because she has seen other children run over by garbage trucks. Her boy has never been to a doctor or a dentist, and last bathed when he was 2, so a sweatshop job by comparison would be far more pleasant and less dangerous. ...

At a time of tremendous economic distress and protectionist pressures, there’s a special danger that tighter labor standards will be used as an excuse to curb trade. ...

My views on sweatshops are shaped by years living in East Asia, watching as living standards soared ... because of sweatshop jobs. ... The best way to help people in the poorest countries isn’t to campaign against sweatshops but to promote manufacturing there. ...

Look, I know that Americans have a hard time accepting that sweatshops can help people. But take it from 13-year-old Neuo Chanthou, who earns a bit less than $1 a day scavenging in the dump. She’s wearing a “Playboy” shirt and hat that she found amid the filth, and she worries about her sister, who lost part of her hand when a garbage truck ran over her.

“It’s dirty, hot and smelly here,” she said wistfully. “A factory is better.”

Ezra Klein:

Nick Kristof's ... point is an uncomfortable one: These children dream of working in sweatshops. Their parents see sweatshops as a glittering ambition, an escape from poverty. ... It's a troubling point: ... Keeping [labor standards] high means fewer children offend our conscience by working in sweatshops and more children spend their days in the stench of the landfills. Lowering them means the American working class loses jobs and the Burmese poor gain them.

The Employment Report

Calculated Risk on today's employment report:

Employment Declines Sharply, Unemployment Rises to 7.2 Percent: From the BLS:

Nonfarm payroll employment declined sharply in December, and the unemployment rate rose from 6.8 to 7.2 percent... Payroll employment fell by 524,000 over the month and by 1.9 million over the last 4 months of 2008. In December, job losses were large and widespread across most major industry sectors.

Click on graph for larger image.

This graph shows the unemployment rate and the year over year change in employment vs. recessions.

Nonfarm payrolls decreased by 524,00 in December, and November payrolls were revised down to a loss of 584,000 jobs. The economy has lost over 1.5 million jobs over the last 3 months alone!

The unemployment rate rose to 7.2 percent; the highest level since January 1993. Year over year employment is now strongly negative (there were 2.6 million fewer Americans employed in Dec 2008 than in Dec 2007). This is another extremely weak employment report ...

Brad DeLong:

And U-6 at 13.5%: And U-6--unemployed plus discouraged workers plus unable to fond a full-time job--is now at 13.5% of the labor force--and BLS "discouraged workers" are a big undercount of the concept...

More from Calculated Risk:

Over 8 Million Part Time Workers: From the BLS report:

In December, the number of persons who worked part time for economic reasons (some-times referred to as involuntary part-time workers) continued to increase, reaching 8.0 million. The number of such workers rose by 3.4 million over the past 12 months. This category includes persons who would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs.

Click on graph for larger image.

Not only has the unemployment rate risen sharply to 7.2%, but the number of workers only able to find part time jobs (or have had their hours cut for economic reasons) is now over 8 million.

Of course the U.S. population is significantly larger today (about 305 million) than in the early '80s (about 228 million) when the number of part time workers almost reached 7 million, but the rapid increase in part time workers is pretty stunning.

Others: Menzie Chinn pgl, spencer, cbpp, Justin Fox, RTE, RTE2, Felix Salmon, Greg Ip.

Starving the Unemployed

During the Bush administration, the federal debt " nearly doubled," going from $5.7 trillion to $10.6 trillion. This was no accident, but rather part of the Republican's "starve the beast" strategy for shrinking government. While this was going on, many of us warned that if big trouble hit, and if we had high deficits at the time, it would limit our ability to respond in the most effective manner. E.g., from January 2006:

We are in a better position with respect to monetary policy now, but for awhile we had very low interest rates coupled with very high budget deficits. In such a case, when you've already thrown your two best punches, what do you do if trouble hits? It's important to reload the policy guns - get deficits and interest rates in order - so when trouble hits you won't have already fired your best shots. I also wonder if we are saving enough for the next rainy day.

We weren't, and as I said, that was intentional. You see, the advocates of starve the beast policies believed that capitalism had entered a new era since Reagan. We had thrown off the limitations imposed by intrusive government making us, unlike Europeans who had not followed suit to anywhere near the same degree, highly resistant to shocks. Much was written about how effectively the relatively government free U.S. economy could absorb shocks relative to Europe (Phelps comes to mind). We could take a licking and keep on ticking. So they saw no real danger in pushing a large deficit, starve the beast type policy. Many denied that government could help, government is always the problem, never the solution, but in any case big shocks - the kind that produce depressions - couldn't happen in a free, capitalist system, and they would point to the Great Moderation and events such as Katrina where the economy hardly lost a breath as evidence for that position.

But they were wrong about that, and what many of us were so worried about has now come to pass. Because of the high levels of government debt, our hands are not as free as they should be to deal with the crisis. Republicans - the very party that created the such a large problem by denying that it could ever occur - are now the ones wringing their hands about increasing the deficit any further. But instead of complaining, they should be apologizing profusely for leaving us in such a bad position. Their belief that capitalist economies, if only freed of government, can absorb any shock almost without blinking, and their conscious decision to try to starve government, particularly social insurance programs so necessary in a downturn like this one, has left us in a bad position. We may not be able to do as much as we need to do because of the objections to increasing the debt as much as will be needed. And if we cannot do what we need to do, it won't be the beast that is starved, it will be families who no longer have jobs, healthcare, etc., and have no place to turn to get the help that they need, at least not in sufficient quantity. "Starving the unemployed" may not have been the goal, but if Republicans get their way and limit the recovery package based upon deficit fears, it could very well be the result.

"A Safety Net in Need of Repair"

As we tinker with the social insurance system in response to the crisis, here's an area that could use some work:

A safety net in need of repair, The Economist: Compared with ... other industrialised countries, the American unemployment-insurance (UI) scheme pays lower benefits for less time and to a smaller share of the unemployed. In expansions this encourages the jobless to return quickly to work—and unemployed Americans do indeed work harder at finding jobs than their European counterparts (see chart). But in recessions, when there is less work to return to, it causes hardship. ...

Like much of the social safety net, the current UI system was a product of Franklin Roosevelt’s New Deal. ... But the system has not kept up with changes in America’s labour force.

Is the Recession Driven by "A Reduced Willingness to Work"?

David Beckworth responds to the claim that this recession is due to "a reduced willingness to work," and that "Labor demand shifts explain no more than 10 percent of what has happened in this recession":

What Happened to the 1,911,000 Lost Jobs?, by David Beckworth: Mark Thoma directs us to a stunning claim made by Casey Mulligan in the New York Times:

[T]he decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).

If true, this claim means most of the 1,911,000 jobs lost since December 2007 are the result of voluntary choices made by employees. This interpretation probably strikes most observers as ridiculous, but before we dismiss it out of hand let's take a look at the employment data. The place for data on this question is the BLS's Job Opportunity and Labor Turnover Survey (JOLTS). This survey provides data on job openings, hires, and separations, and goes back to December 2000.

Are Green Jobs Bogus?

Tim Haab at Environmental Economics weighs in on the question of whether green fiscal policy can create jobs:

Weighing in on green jobs, by Tim Haab: I've intentionally laid low in the brewhaha over green jobs...  But Mark Thoma's post raises some questions that I don't know the answers to, but am willing to opine about, so I'll put in my two cents. 

Disclaimer:  I'm nowhere near as versed in macroeconomics as John is...  I've never even taught a macro course.  Take that for what it's worth.  Onward...

My questions center around the seemingly conflicting (but not mutually exclusive) goals embedded in the green jobs/economic stimulus discussion.  As Mark points out, one goal is broadscale economic stabilization.  My take on John's original intent is a discussion of reductions in short-term unemployment (goal 2) and long-term job creation (goal 3).  Many of the comments focus on the use of green subsidies to alleviate environmental externalities (goal 4a) and dependence on fossil fuels (goal 5b). 

With these five goals in mind, I'd like to lay out what seems to me an inherent inconsistency in using the broad umbrella of 'economic stimulus' to meet all five goals.

To me, the big question is what are immediate needs/goals to reduce the length of the recession versus long-term desires for an economically efficient energy sector.  The inconsistency arises from using policies designed to induce long-term shifts in technology (subsidizing green technologies) under the mask of meeting short term goals (reduce unemployment and stabilize the economy).

I agree with Mark that in times of high unemployment, public investments in any industry won't result in crowding out of private investments in the short-run, and might generate temporary increases in employment.  But

1) although there's no consensus on a definition of a depression, one tell-tale sign is high unemployment.  7% is not high. and,

2) any net job gains in new industries for currently unemployed workers must mean fewer jobs in the industries those workers came from which may or may not be an efficient allocation of resources (one of John's points), and

3) public investments take time to create jobs--it's not a short term quick fix.  Especially with something like investments in new technologies (green?) where the sector is still in the R&D mode and not yet ready to build the infrastructure.

So what do we end up with?  A quick expenditure of public funds on an industry where the technology is not yet developed.  It doesn't seem to me that the employment effects are going to happen very quickly so the end result is inconsistent with the original goal of short-term economic stimulus.  It doesn't seem to me this is going to result in short-term economic stabilization.  I could be wrong.

But, you say, the end result is more green jobs (and a bigger green sector) and fewer brown jobs and that's a good thing right?  Maybe, but there are easier ways to reach that rather than hide behind the mask of saving the economy.  This is probably where my free-market tendencies come out, but if the goal is to achieve the socially optimal (efficient) balance between green and brown industries, then the simplest way to go about it is to get the relative prices right (capture all of the costs and benefits in the price) and then let the incentives that creates establish the right balance. 

Will public investment in green industries have the same effect?  Again, maybe, if designed optimally, but it's not a short-run fix for unemployment or stabilization.

I guess my broader point is that I perceive a time inconsistency between the short-term economic stimulus goals of stabilizing incomes/reducing unemployment and the long-term goals of reducing environmental externalities.  Using strategies designed for the latter won't necessarily achieve the former.

But then again, I'm a micro-economist.  I'm probably wrong.

For the reasons I explained here, I don't necessarily agree with point 2. If the employment of idle resources in the short-run enhances growth prospects, then the number of jobs and hence employment can increase overall. In that case, it's possible for jobs to grow in all sectors. That may not happen -  I'm not saying it will - and I don't think long-run job growth is the primary goal of short-run stabilization policy, but it's not out of the realm of possibility.

College-Educated Drop Outs

College graduates are dropping out of the labor force:

The Job Market for College Graduates, by Alan B. Krueger, Economix: On Friday, David Leonhardt pointed out that the increase in the unemployment rate in November understated the weakening of the job market because many workers have given up looking for work. ... There is even more to the story. ...

Last month, the number of college graduates who were working fell by 282,000, while only 2,000 more college graduates were classified as unemployed. ...

Since March 2008, college-educated workers have been abandoning the labor force...

More Bad Employment News

Why isn't a stimulus package already in place?:

US job losses steepest since 1974, FT:  The US economy lost a stunning 533,000 jobs in November – the largest monthly drop in more than three decades – as the unemployment rate jumped to 6.7 per cent...

The report marked the 11th consecutive month of job losses in the US economy...

With upward revisions to both September and October showing sharper job cuts than previously reported, the economy has lost more than 1.2m jobs in the last three month alone, bringing the tally for the year to more than 2m, the data showed. ...

The job losses were coupled with disheartening data for the broader market. The number of people who worked part-time for economic reasons – including those who would like to work full-time – continued to increase and reached 7.3m, having risen by 2.8m in the past 12 months. Though the average hourly earnings rose by 7 cents, or 0.4 per cent, the average work week fell by 0.1 hour to 33.5 hours. ...

Update: David Leonhardt at Economix:

Workers Give Up By David Leonhardt: How bad was today’s jobs report? The unemployment rate rose to 6.7 percent, its highest level since 1993 — and that understated the weakness in the labor market.

According to the Labor Department, the number of unemployed workers rose by 251,000 in November. But the number of people who were outside of the labor force — that is, neither working nor looking for work — rose by much more: 637,000. These people aren’t counted as unemployed in the government’s statistics, because they are not looking for work. Many of them, presumably, have stopped looking for work because they didn’t think they could find a good job. ...

Update:

Broader Unemployment Rate Hits 12.5%, RTE:  The headline unemployment rate of 6.7% in November isn’t the only one the Labor Department reports. They also break the rate down by age, gender, ethnicity, and education. And in table A-12, on page 19 of the report, they also share their broadest estimate of the unemployment rate, which includes the total unemployed (the standard rate) plus “all marginally attached workers, plus total employed part time for economic reasons… plus all marginally attached workers.”

That rate (called “U-6”) in November? A whopping 12.5%. ...

How Much Does it Cost to Create a Job?

Some people are claiming that Obama's job package will cost $280,000 per job. The actual cost is not trivial, but I don't think that figure is correct (it simply divides a proposed stimulus amount, $700 billion, by the stated job goal of 2.5 million). I've also seen the claim that the $700 billion number is simply pulled out of a hat, but that's not right either, it's based upon transparent calculations.

So let's do the calculations.

Is Unemployment Due to Decreased Demand or More Expensive Financing?

"In short, cheap capital is important for employment.":

Assessing the impact of the financial crisis on the US labour market, by Peter Auer, Raphael Auer, and Simon Wehrmüller, VoxEU.org: ...In this column, we examine the extent to which the high cost of obtaining external funds has affected employment in US industries... We document that employment in sectors that are relatively more in need of external finance has indeed decreased to a much larger extent than employment in sectors less dependent on external sources of financing. In the aggregate, our results suggest that the increasing cost of external finance can account for much of the decline in employment witnessed in US industry since August 2007. ...

Conclusion ... We are now witnessing the start of potentially severe real consequences of the financial crisis. Our results suggest that much of these real consequences are driven by credit constraints rather than negative demand shocks or layoffs in sectors that are directly affected by the crisis.

Consequently, our results strengthen the case for measures aimed directly at restoring well-functioning financial markets. However, while reconstructing sustainable financial systems will be necessary, this alone will most probably not be sufficient for leading out of the crisis. Indeed, as the financial crisis enters more deeply into the real economy, also aggregate demand falters, which may justify demand-supporting policies. ...

While freeing financial markets will certainly help, at this point we need a fiscal stimulus package, and we needed it to be in place months ago. I am disappointed that Congress is not giving the employment crisis the same amount of attention and concern that has been given to the financial sector. This is an economic emergency and every day that we wait to put a fiscal stimulus package in place costs more jobs and ruins more lives. There's no excuse for taking those lives lightly. Congress needs to be working on this night and day, Democrats need to use every means at its disposal to round up the votes needed to override a potential veto from Bush, and they need to use public opinion to pressure Bush to sign the bill once it is ready (and why isn't it ready now?). It may be fruitless presently given the administration's opposition to offering the help that is needed, but the situation is dire and that's not an excuse not to try. If there is strong public support for action, who knows, the administration may come around. In any case, by starting now we are more likely to have the stage set for immediate action once the new administration takes over. Even if the plan is vetoed, having the necessary debate and getting the stimulus package ready now lets those who will be responsible for implementing the plans once the new administration takes over know the broad outlines of what will be done, and this will give then a head start in planning for action. There's no time to waste.

Slow Recovery of Labor Markets

How long will the recession last? I don't know for sure, but we may be able to say something about how long labor markets will continue to struggle even after output growth begins to increase. The next two graphs show the unemployment rate and the employment to population ratio since 1948:

"The Economics of Labour Market Intermediation"

Why hasn't the increased availability of information reduced the demand for labor market intermediaries?

The economics of labour market intermediation, by David Autor, Vox EU: The labour market depicted by undergraduate textbooks (e.g. Mankiw 2006) is a pure spot market with complete information and atomistic price-taking. Labour economists have long understood that this model is highly incomplete. Search is costly, information is typically imperfect and often asymmetric, firms are not always price takers, and atomistic actors are typically unable to resolve coordination and collective action failures.

In this ‘second-best of all worlds,’ numerous third parties inevitably arise to respond to, and profit from, market imperfections. I refer to these third parties as Labour Market Intermediaries – entities or institutions that interpose themselves between workers and firms to influence who is matched to whom, how work is accomplished, and how conflicts are resolved.[1]

Labour market intermediaries have been around in various guises for centuries, as labour unions, craft guilds, and occupational licensing boards. But they have also gained prominence in contemporary incarnations as temporary help agencies, Internet job search boards, and centralised job-matching institutions like the ‘medical match’ that allocates physicians completing medical school to medical residencies. The venerable history and continued re-emergence of intermediaries in various forms raises the question: what precise economic function do these institutions serve? And are they likely to improve labour market operation or merely tax it?

Though heterogeneous, it is my contention that labour market intermediaries serve a common role. They address – and in some case exploit – a set of endemic departures of labour market operation from the first-best benchmark of full information, perfect competition, and decentralised price taking. Three labour market deficiencies, in particular, appear to ‘call forth’ the involvement of intermediaries: costly information, adverse selection, and (failures of) coordination or collective action. I give examples of each below. A unifying observation that ties these examples together is that participation in the activities of a given labour market intermediary is typically voluntary for one side of the market and compulsory for the other; workers cannot, for example, elect to suppress their criminal records and firms cannot opt out of collective bargaining. I argue below that the nature of participation in an intermediary’s activities – voluntary or compulsory, and for which parties – is largely dictated by the market imperfection that it addresses, and thus tells us much about its economic function.

"Focus on the Unemployed"

Robert Reich says you should never trust a lame duck:

The Lame-Duck Stimulus, by Robert Reich: When even the chairman of the Federal Reserve Board says Congress should pass a stimulus package we know we're in trouble. The last stimulus of tax rebates stimulated lots of people to pay off some of their debts, which hardly stimulated the economy at all.

The coming stimulus package could be even more nonsensical. It will be voted on by a lame-duck Congress, many of whose members will want to reward campaign donors with juicy pieces of pork. Other lawmakers will see it as their last opportunity to include their pet project or tax perk, and some who won't be accountable because they'll be out of office in a few weeks anyway. In other words, it'll be less a stimulus than a Christmas Tree.

Instead of this, Congress should do just one thing when it returns right after Election Day: Extend unemployment benefits. ...

More than 1 in every 5 people out of work the unemployed have been looking for six months or more. And many are running out of unemployment benefits. ... That means they won't be able to pay their bills, including their mortgages. Already this year, almost half of mortgage delinquencies have been caused by homeowners' lacking of income or employment.

America needs a comprehensive stimulus package, but it should be voted on by the next Congress under a new Administration. And it should be part of a broader jobs strategy that would include rebuilding the nation's crumbling infrastructure, funding alternative sources of energy, and creating tax incentives for businesses that generate new jobs.

For now, focus on the unemployed.

One reason we don't extend unemployment benefits is that we worry about moral hazard, i.e. that some people will simply live off the benefits until they run out, however long that might be, and only then will they be motivated to look for and accept a job (or some milder version of this behavior). However, given our willingness to overlook moral hazard concerns for the time being in the bailout of financial institutions due to the urgency of the situation, is it fair to use the argument that a few people will misbehave as a reason to deny extending benefits to all the people who really need it? Shouldn't the seriousness of the situation and our desire to avoid a severe downturn play a role here too?

"The Best Way to Help the Unemployed"

As we begin to worry about a prolonged period of economic weakness due to the ongoing effects of the financial market crisis, we should start to think about how best to help people who face unemployment as a consequence. Alan Krueger says good research on this topic has been "buried" by the Bush administration to the detriment of job seekers:

The Best Way to Help the Unemployed, by Alan B. Krueger, Economix: You would think that if the government spent over a million dollars on research and discovered that a new way of helping the unemployed find jobs was less effective and more costly than the old way, it would continue with the old way. Yet the Bush administration has done the opposite. It buried a careful study that found that outsourcing job placement services for the unemployed at the local level was less effective than traditional state public labor exchange services, and continued with its pursuit to contract-out and devolve a cost-effective program. ...

Public labor exchange offices were established in the early days of the New Deal to help the unemployed find jobs. This function is now done in One-Stop Career Centers, which help to match workers to job openings and monitor that Unemployment Insurance recipients are actively searching for work. Some 3 million unemployment insurance beneficiaries a year are placed in jobs through the labor exchanges, and 9 million utilize their services. ...

Just as it has tried to with other government functions..., the Bush administration has been trying to outsource or eliminate services for the unemployed. The agenda has been to ... hand over control to local areas and the private sector. ...

In the late 1990s, a ... team of well-regarded researchers at WESTAT conducted a thorough five-year study that was completed in February 2004. Release of the report was delayed for four and a half years. The Labor Department quietly released it on the Web on Sept. 11, 2008. In fact, the report is so deeply buried that even if you Google its title, “Evaluation of Labor Exchange Services in a One-Stop Delivery System Environment”, it does not come up. If you want to find it, click here.

The major findings are:

1) Traditional public labor exchanges are highly cost-effective, with benefits exceeding costs by as much as two to three times.

2) The benefits were considerably smaller in states with non-traditional placement services than in states with a traditional labor exchange model because the non-traditional states tended to devote relatively less resources to placing unemployment insurance recipients.

3) There is much to be gained by maintaining the labor exchange agencies’ separate identity and financing structures;

4) “Devolving control to local areas greatly diminished use of statewide computerized systems, and increased job development geared to the needs of W.I.A. target groups rather than the general population of job seekers and employers.” ...

Another study financed by the Labor Department whose results were delayed for four years and quietly released last month found that, “Overall, work force development services in rural areas appear to be meeting the needs of the majority of rural customers.” And a study of a One-Stop Career Center in Baltimore found that the traditional employment services were meeting the needs of inner city job seekers. These studies failed to turn up serious problems with the traditional mode of providing employment services... It is unfortunate that the Department of Labor withheld these reports from public view for years and ignored their conclusions...

Nearly 3 million workers have been added to the ranks of the unemployed since October 2006. That number will surely grow in the current economic crisis. It is unfortunate that the best available research was not used to help place the unemployed back in jobs. Unfortunately, employers, employees and taxpayers will be left paying the bill for higher unemployment insurance costs as a result, and job seekers will suffer longer spells of unemployment.

FRBSF: Sectoral Reallocation and Unemployment

Is the recent downturn in the economy and the increase in unemployment that has come along with it mostly from structural unemployment as Phelps has argued, or is it mostly a cyclical event? This is important because if it is from sectoral reallocation, the natural rate of unemployment should rise, and this would lead the Fed to be more willing to tighten interest rates to prevent inflation (because the deviation of unemployment from the new, higher target would be smaller). However, according to this research, the evidence does not favor Phelps' interpretation:

Sectoral Reallocation and Unemployment, by Rob Valletta and Aisling Cleary, Economic Letter, FRBSF: The current downturn has caused the U.S. unemployment rate to rise by nearly 2 percentage points and approach the high of 6.3% reached in the aftermath of the 2001 recession. High unemployment generally is associated with increased slack in labor markets, hence reduced pressure for wage inflation. However, Phelps (2008) has outlined an alternative interpretation for much of the recent increase in unemployment, emphasizing structural imbalances in the economy that require substantial movements of workers across industry sectors. He argues that this reallocation of workers across sectors has led to an increase in the nonaccelerating inflation rate of unemployment (NAIRU). Because the NAIRU plays a central role in the inflationary process, and because many economists agree that the NAIRU has fluctuated substantially in past decades, this argument merits serious consideration.

This Economic Letter examines the evidence for this “sectoral reallocation” interpretation of the current downturn. After describing the specifics of the argument, we turn to two primary sources of empirical evidence regarding its extent: the Beveridge curve, which depicts the relationship between vacancies and unemployment, hence the effectiveness of the job matching process; and direct evidence on the degree of sectoral reallocation of employment. Recent changes in the unemployment/vacancy plot are consistent with a modest decline in the efficiency of the job matching process, which may be associated with sectoral imbalances. However, these movements are consistent with cyclical as well as secular changes. More critically, direct measurement of the degree of sectoral dispersion in employment growth suggests that its extent has been limited thus far, providing little support for the claim of a higher NAIRU.

The Wages of Recession

Robert Reich, myth buster:

Post-Meltdown Mythologies (I): Americans Have Been Living Beyond Their Means, by Robert Reich: What brought on the economic meltdown of 2008? Besides the bursting of the housing bubble, Wall Street's malfeasance and non-feasance, and Washington's massive failure to oversee Wall Street, fingers are also being pointed at average Americans. Some of them took on mortgages they couldn't afford, of course, but we're also hearing ... something like this: For too long, Americans have been living beyond our means. We went too deeply into debt. And now we're paying the inevitable price.

The "living beyond our means" argument, with its thinly-veiled suggestion of moral terpitude, is technically correct. Over the last fifteen years, average household debt has soared to record levels...

But this story leaves out one very important fact. Since the year 2000, median family income has been dropping, adjusted for inflation. One of the main reasons the typical family has taken on more debt has been to maintain its living standards in the face of these declining real incomes.

It's not as if the typical family suddenly went on a spending binge... No, the typical family just tried to keep going as it had before. But with real incomes dropping, and the costs of necessities like gas, heating oil, food, health insurance, and even college tuitions all soaring, the only way to keep going as before was to borrow more. You might see this as a moral failure, but I think it's more accurate to view it as an ongoing struggle to stay afloat when the boat's sinking. ...

The real answer over the long term is to restore middle-class earnings so families don't have to go deep into debt to maintain what was a middle-class standard of living. ...

The short-term outlook isn't so good:

Next Victim of Turmoil: Your Salary, by David Leonhardt, NY Times: ..What ... will the next stage of the downturn be about? It is likely to revolve around the worst slump in worker pay since — you knew this was coming — the Great Depression. This slump won’t be anywhere near as bad as the one during the Depression, but it also won’t be like anything the country has experienced in a long time. ...

The events of the last several weeks have removed any serious doubt that the economy is in a recession. ... As the chart next to this column makes clear, every recent recession has brought an effective pay cut of somewhere between 3 and 7 percent for the typical family. The drop typically happens over a period of about three years, lasting longer than the recession officially does, as pay fails to keep up with inflation. ...

What will make this recession different, no matter how deep or shallow it is, is that it’s following an expansion in which most families received little or no raise. The median household made $50,200 last year, slightly less than the $50,600 that the equivalent household earned in 2000...

For two decades, consumer spending has been an enormous driver of economic growth, thanks in good measure to a long bull market, a housing bubble and a boom in consumer debt.

The bull market, the housing bubble and the debt boom have all ended — and now paychecks are shrinking, too.

At some point, the next big economic engine will indeed arrive. It always does. This time, however, it’s going to have some stiff head winds to overcome.

Reich: Why Main Street Needs to be Helped Too

Robert Reich makes an argument for including help for Main Street as part of the bailout package:

Why Paulson and Bernanke are only Partly Correct, and Why Main Street Needs More Direct Help, by Robert Reich: ...Here's Paulson's and Bernanke's logic, made explicit at the Senate hearing today: There's only a certain amount of bad debt on Wall Street's books, left over from the wild and woolly days of lax mortgage lending. Once removed from the Streets’ books, credit will flow again. And once credit flows again, even Main Street can breath a sigh of relief.

P&B failed to mention that bad debts are growing even among people recently considered good credit risks. At end of August, 6.6 percent of mortgages were at least 30 days past due. That’s up from 5.8 percent at end of June. We’re also seeing a growing amount of credit card and auto payments past due.

The culprit isn’t just those sub-prime loans. With jobs and wages are dropping across America, many people who had been able to pay their bills no longer can.

It’s no coincidence that states where mortgage delinquencies are highest are also states with the highest rates of job losses. ...

[F]ewer jobs are listed on the nation’s payrolls than were there last year. Millions more Americans are too discouraged even to look for work. And as employers squeeze their payrolls, even people with jobs are putting in fewer hours. ...

Many of the average taxpayers being asked to take on Wall Street’s bad loans are the same people whose incomes are dropping, which means they’re struggling to pay their debts and potentially creating even more bad loans.

Congress should drive the hardest deal it can with Wall Street. But Congress also needs to pay direct attention to Main Street. It should extend unemployment insurance, freeze mortgage rates, and pass a stimulus package that generates more jobs.

Bottom line: Unless Americans on Main Street have more money in their pockets, Wall Street’s bad debts will continue to rise -- which means the Bailout of All Bailouts grows even larger, which means taxpayers take on even more risk and cost.

"The Bailout of All Bailouts is a Bad Idea"

Robert Reich:

The Bailout of All Bailouts is a Bad Idea, Robert Reich: ...On Capitol Hill, Senator Charles Schumer suggested that government inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages and make them more affordable. At the other end of Pennsylvania Avenue, Hank Paulson reportedly is considering an agency like the Resolution Trust Corporation ... to take bad debts off the balance sheets of financial institutions.

Problems are: (1) It's not likely to do all that much good because no one knows how much bad debt there is out there. Even if the government bought a lot of it, investors and lenders still couldn't be sure how much remained. ... As the economy slows, bad debts will grow. Again, the problem isn't a liquidity or solvency crisis; it's a crisis of trust.

(2) However much bad debt there may be, that amount is surely far greater than the $394 billion of real estate, mortgages, and other assets that the old RTC bought from hundreds of failed savings-and-loans -- thereafter selling them off form whatever it could get for them. The Bailout of All Bailouts would therefore put taxpayers at far greater risk than they are even today, and require an unprecedented role for government in reselling assets. Another major step toward socialized capitalism.

A better idea would be for the Fed and Treasury to organize a giant workout of Wall Street -- essentially, a reorganization under bankruptcy, for whatever firms wanted to join in. Equity would be eliminated, along with most preferred stock, creditors would be paid off to the extent possible. And then the participants would start over with clean balance sheets that reflected new, agreed-upon rules for full disclosure, along with minimum capitalization. Everyone would know where they stood. Bad debts would be eliminated. Taxpayers wouldn't get left holding the bag. And there would be no "moral hazard"...

Congress, the Fed, and the Administration shouldn't be giving more help to Wall Street. Policymakers should focus instead on people who really need a safety net right now -- workers who have lost or are about to lose their jobs, who need extended unemployment insurance and health insurance for themselves and their families; homeowners who have lost or are likely to lose their homes, who need additional help meeting mortgage payments and reorganizing their debts; and people who have lost or are in danger of losing their savings or pensions, who need better insurance against possible loss.

The only way Wall Street's meltdown doesn't spill over to Main Street is if policymakers begin to pay adequate attention to the people whose wallets really keep the economy going, and who merit more help than the Wall Street tycoons whose carelessness and negligence have put it in such jeopardy.

I've been arguing we don't have to choose one or the other, the best approach is a portfolio of policies, so we should do both. We should help to eliminate the toxic financial paper as soon as possible, and we should help workers and others who have been (or will be) hurt by the crisis.

"How Many People Have Lost their Jobs?"

knzn says some people might be misinterpreting what Obama is saying:

How many people have lost their jobs?, knzn: According to Barack Obama, 600 thousand Americans have lost their jobs since January. Actually, he's wrong: something like 20 million Americans have lost their jobs since January. It's just that most of them found new jobs. Probably the new jobs generally weren't as good as the ones they lost. And almost certainly, more than 600 thousand of them were unable to find new jobs...

Like almost everyone else..., Senator Obama is making the mistake of using a net job loss figure with language that, if taken in its plain sense, clearly implies he is talking about gross job loss. And it seems to me that gross job loss is the appropriate concept: losing your job is a pretty serious bummer...

There has been a lot of talk about Senator McCain and how he has been saying things that aren't true in order benefit himself politically. It turns out that Senator Obama is also (obviously unintentionally) saying things that aren't true, but in this case they benefit his opponent.

"Labor Markets and Business Cycles"

Robert Shimer has a nice - and extensive - summary of his work on the relationship between labor markets and business cycles. This is from the NBER Reporter:

Labor Markets and Business Cycles, by Robert Shimer, NBER Reporter: Why are workers unemployed sometimes? Why do unemployed workers coexist with job vacancies? How much does the incidence and the duration of unemployment rise during economic downturns, and why? Much of my research during the last five years has tried to answer these questions by developing quantitative models of labor market dynamics and comparing the models' predictions with data, especially from the United States.

Lucas and Rapping's theory of intertemporal substitution in labor supply is the starting point for any modern analysis of employment fluctuations,[1] including the real business cycle model[2] and the New Keynesian model.[3] The key assumption is that workers decide how much to work at each point in time, taking the prevailing wage as given. To the extent that labor supply is elastic, hours of work fluctuate with movements in the wage.

While models based on intertemporal substitution are qualitatively consistent with the movement of hours of work over the business cycle, they run into at least two problems. First, a number of authors have argued that, from the perspective of a labor-market-clearing model, hours of work fluctuate too much at business cycle frequencies. Recessions look like times when the disutility of work increases. Equivalently, they look like times when labor income taxes rise, discouraging workers from supplying labor.[4] Neither possibility is empirically tenable. Second, models where workers can decide how much to work at each point in time can generate movements in hours worked but do not generate unemployment, that is, non-employed workers who would like to work at the prevailing wage. This omission may have important implications for welfare, because workers who cannot find jobs at the prevailing wage but would like to have them are, by revealed preference, worse off than if they simply chose not to work at that wage. It also may have important consequences for the positive analysis of business cycles, because most cyclical movements in aggregate hours of work are explained by movements between employment and unemployment, not by movements in hours worked by employed workers.