Category Archive for: Unemployment [Return to Main]

Thursday, September 01, 2011

"White House Will Consider Any Online Petition That Gets 5,000 Signatures"

The White House has a new initiative:

“The idea behind ‘We the People’ – as the new program will be known – is that anyone with an idea or cause can go to the White House’s website, and make a public pitch for support. If the idea gets 5,000 backers within 30 days, said White House spokeswoman Sandra Abrevaya, a ‘working group of policy officials’ will respond.” You can check out the White House website here.

It won't get 5,000 comments, but I have a petition:

The administration should propose an aggressive job creation package as soon as possible, and apologize for not doing so sooner.

The White House website says:

Creating or signing a petition is just the first step. It’s up to you to build support...

I was kind of hoping the administration would help to "build support" for a job creation package, that's been a problem all along. But I suppose I shouldn't expect things to change now.

Maybe Obama will surprise us when he gives his jobs speech later this week (if Boehner will let him talk), and unlike the last time maybe the administration will follow up and do what they can to build the support such a program would require -- given the size of the employment problem it's worth trying -- but I'm not expecting that to happen.

Jobs, Jobs, Jobs?

Remember the White House Jobs Summit? It was in December, 2009:

White House Jobs Summit: Real Progress or PR Stunt?, ABC News: President Obama said today that he is not interested in "taking a wait-and-see approach" when it comes to job creation, as his administration faces unemployment numbers at their worst levels since 1983.
"What I'm interested in is taking action right now to help businesses create jobs right now, in the near term," the president said at the opening session of the White House jobs summit.
The summit, announced a week after the Bureau of Labor Statistics said unemployment reached 10.2 percent, is the administration's latest effort to do just that.
However, some critics dismiss it as little more than a publicity stunt.
Obama acknowledged the skepticism that the summit would produce tangible results, but said he was confident there would be some progress...

Obama was not interested in "taking a wait-and-see approach"? Here we are almost two years later and I would be hard-pressed to make a case that the summit marked the beginning of a serious attempt to create jobs. Apparently, being serious about job creation means that when poll numbers are down and a reelection can be seen in the distance, then it's time to pretend like you are doing something.

Robert Reich wonders how bold the plan will be:

Obama’s Jobs Plan: Will He Offer Policy Miniatures or Give ‘em Hell?, by Robert Reich: Next Wednesday President Obama will unveil his jobs plan.

He’ll choose either Plan A or Plan B.

Plan A would be big enough to restart the economy (now barely growing) and reduce unemployment (which continues to grow). That means spending another trillion dollars over the next two years – rebuilding the nation’s infrastructure, creating a new WPA and Civilian Conservation Corps, and lending money to cash-starved states and cities.

Republicans will oppose it, of course. They’ll say the stimulus didn’t work the first time (they’re wrong – it saved 3 million jobs but it was way too small given the drop in consumer spending as well as budget cuts by states and cities), and we can’t afford it (wrong again – the yield on 10-year Treasury bills is now 2 percent, meaning this is the best time to borrow. And if growth isn’t restored soon, the debt/GDP ratio will balloon beyond belief). But their real hope is to keep the economy anemic through Election Day 2012 so voters will send Obama home.

That means the President would have to fight for it. He’d have to barnstorm the country, demanding Republican votes. He’d build his 2012 campaign around it, attacking the Republican “do nothing” Congress. He’d give ‘em hell.

Plan B would be a bunch of policy miniatures that would have almost no effect on the economy or employment but would nonetheless be good things to do (extending the Social Security tax cut, extending unemployment benefits, reauthorizing the highway building trust fund, giving employers a tax incentive to hire the long-term unemployed, ratifying trade agreements).

Republicans will oppose it, of course. They’ll say this is no time for new initiatives, that our biggest problem is the size of government, debt, and over-regulation. They’ve been saying almost exactly the same thing for eighty years.

The President would present each of his policy miniatures as a separate piece of legislation hoping to attract enough Republican votes to get something – anything – enacted and declare a victory. He’d then campaign as a leader who can “get things done,” even though the economy is still a basket case.

Which will it be — Plan A or B? Early indications suggest Plan B. ...

Bad choice. ... The winner of the 2012 presidential election will be the person who comes off as the toughest fighter for average Americans.

Earth to Obama: Remember Harry (Give ‘em Hell) Truman. Here’s Truman’s acceptance speech at the Philadelphia convention that nominated him prior to the 1948 election:

Senator Barkley and I will win this election and make those Republicans like it… We will do that because they are wrong and we are right… [T]he people know the Democratic Party is the people’s party, and the Republican Party is the party of special interests and it always has been and always will be… The Republican Party… favors the privileged few and not the common, every-day man. Ever since its inception that Party has been under the control of special privilege, and they concretely proved it in the 80th Congress. They proved it by the things they did to the people and not for them. They proved it by the things they failed to do.

Give em hell, Barack.

I appreciate what he is saying, but the framing is about what's best for Obama rather than what's best for the unemployed. I'm sure the administration justifies its actions based upon the idea that getting reelected is the best thing for the unemployed. I'm sure they tell themselves that if Republicans take over in the next election, then it would be much worse for those in need of jobs. I'm guessing that underlies Reich's 'give em hell' advice as well. But at some point -- and it should have happened already -- the unemployed rather than Obama have to come first. And I think providing jobs and reducing the unemployment rate is the best strategy for reelection in any case.

Yes, there would have been political difficulties. But we don't know how things might have differed had Obama used the December, 2009 summit to mark the beginning of a focus on jobs, jobs, jobs and nothing else. If every speech, and every bit of effort had been devoted to job creation proposals instead of stupidly falling into the deficit reduction trap set by Republicans, we don't know how things would have differed. At the very least, workers would know without any doubt which side the administration was on. Right now, that isn't clear.

Wednesday, August 31, 2011

"Job Insecurity Remains High"

Workers don't feel very secure:

Job Insecurity Remains High, by Catherine Rampell, NY Times: ...workers still employed remain anxious about their job security... A USA Today/Gallup Poll conducted in mid-August, based on a survey of 489 adults employed full or part time, found that 30 percent said they were worried about being laid off, similar to the 31 percent who answered this way in August 2009. The survey also found that workers were concerned that their hours, wages and benefits would be cut back. Benefit cuts were the most common worry...
Lower-income workers were especially likely to be concerned about their job security...

The prospect of long-term unemployment, which is very high right now, makes the expected cost of unemployment particularly large. A strong social safety net can help to offset the negative economic consequences that uncertainty causes (e.g. unwillingness to make long-term commitments such as the purchase of a new car). Conversely, a weakened social safety net -- which if anything is the direction we are headed -- makes the problem worse.

The Balanced Budget Multiplier: Job Creation without Increasing the Deficit

[Here is an op-ed I started, and then abandoned in favor of another topic (so it hasn't been thoroughly edited and is several hundred words too long). I decided to post it because I want to at least raise the possibility of using the balanced budget multiplier as a way of using budget neutral policies to stimulate the economy. As explained below, those policies would work best if we ask the wealthy to finance job creation programs. It's not as powerful as deficit spending, but it's better than nothing at all:]

Despite the advice from many economists urging the Fed to do more to help the economy, and despite hopes in the business community that the Fed would follow this advice, Ben Bernanke made it clear in his speech at Jackson Hole last Friday that policy is on hold. He noted they will discuss this at their September meeting, but I am not very hopeful that policy will change at that time. I disagree strongly with the Fed's decision to remain on hold, we need to attack the employment crisis with all the policy tools at our disposal, but the Fed disagrees.

With the Fed unlikely to ease policy any further, what about fiscal policy? Would another round of fiscal policy be helpful, or would it do more harm than good? There are very clear political problems involved with fiscal policy, more on that below, but what about the economics? Would further stimulus be beneficial?

The economics does provide a further case for intervention. As I’ve explained previously on these pages, not all recessions are alike. They have different causes, e.g. recessions can be caused by oil price shocks, productivity shocks, monetary policy shocks, and bursting asset price bubbles. When a bubble bursts wiping out household retirement, education, and other savings households rely upon for security it is known as a balance sheet recession. Recovering losses from this type of recession, i.e. rebuilding the balance sheet, are notoriously difficult and “lost decades” such as Japan experienced in the 1990s are not uncommon.

What to do? The slow recovery can be attributed in large part to the fact that households must reduce consumption and increase savings in order to recover their losses, and so long as consumption remains low the economy will continue have problems. In ordinary, mild recessions monetary policy is the best approach, and it can generally handle the problem on its own. But in a deep balance sheet recession monetary policy alone isn’t enough. In large recessions fiscal policy that targets the problem – balance sheets in this case – has an important role to play.

How can fiscal policy be used to attack the type of recession we are having?  Mortgage relief, and debt relief more generally, is first on the list. Debt relief improves household balance sheets, and hence directly targets the problem. There were a few half-hearted attempts to do something like this, but nothing like what is needed.

Thus, fiscal policy directed at two goals, balance sheet repair and job creation, would do a lot to ease current conditions and to allow us to exit the recession sooner.

But is there any way at all to get more fiscal policy through Congress? Probably not. But the problem is important enough, and the crack in the door is open just enough (and opening more with each new piece of information indicating a sluggish recovery at best), that it’s worth it to at least try.

We do have a long run debt problem to bring under control, but in the short-run we need more, not less deficit spending. But the political atmosphere will not allow any further increase in government debt. If anything, it will move in the other (and wrong) direction. However, there is something called the balanced budget multiplier that could still be useful and would perhaps -- emphasis on perhaps -- find political support.

How could, say, an increase in government spending of $100 on new goods and services financed by a $100 increase in taxes stimulate the economy? The $100 purchase by the government increases aggregate demand by the same amount. But the increase in taxes does not fully offset the increase in demand because the tax bill will be paid, in part, from savings. For example, suppose that the household pays its tax bill by reducing consumption by $80 and reducing saving by $20. Then the net impact on aggregate demand will be the $100 in government spending minus the $80 reduction in consumption for a net change of $20. That’s not as large as the $100 we could get from deficit spending, i.e. increasing government expenditures without increasing taxes, but it’s better than not doing anything at all (and this is just the impact effect, the $20 will create more than $20 in spending due to standard multiplier effects).

This also tells us who should be asked to pay these taxes if we want to have the maximum impact on the economy. If more of the bill is paid from saving, e.g. $30 instead of $20, then the net impact will be bigger. Thus taxes that are levied on those most likely to pay out of saving, the wealthy, will have the largest impact on aggregate demand (e.g. if it is paid fully out of saving, there is no offset at all). I don't have any illusions about the difficulty of getting a tax increase on the wealthy through Congress, but it could be done -- perhaps -- by closing loopholes, credits, deductions, exclusions, etc. which seems to have a bit more support.

On the other side, what should the government spend its money on? The usual answer is infrastructure since it stimulates the economy in the short-run and also helps with long-run growth. But one thing we learned from the previous round of infrastructure spending is that infrastructure construction has a relatively low labor intensity per dollar spent. But long-run growth is not the only goal of this spending, job creation is just as important. In addition emphasizing employment keeps people connected to the labor market, and this can also have positive effects on long-run growth (by, for example, keeping people from permanently dropping out of the labor force). The first round of spending emphasized long-run growth, but I would like to see this round concentrate spending in areas where it is likely to have the most effect on employment.

The spending programs should end once the economy improves, e.g., I would link the spending to the unemployment rate and end it once unemployment falls below some threshold (and include automatic, distasteful cuts in the legislation if the two sides do not reverse the spending to help to ensure it is temporary -- that will help to mollify the concerns of those who worry about using stabilization policy to increase the size of government). But the tax increases/closed loopholes, credits, deductions, etc. on the wealthy should continue so that in the long-run the tax increase can help with deficit reduction.

I don’t have any doubt about the need for such initiatives, nor do I have any illusions about politicians endorsing this or any other stimulus plan – raising taxes on the wealthy is most likely a non-starter. But taxes on the wealthy are going to go up, if not sooner than later. Our long-run budget picture demands it and recent polls show that the public is behind this. So why not do it now when it can help with the employment, household debt, infrastructure problems immediately and improve our long-run debt outlook instead of waiting until we can only help with a subset of those problems? The answer, of course, is that helping households overcome debt problems and helping the unemployed would cause taxes on the wealthy to go up, and that is very unlikely to happen. And the dismal chances of providing help to middle and lower class households struggling with debt problems and high unemployment by asking the wealthy to pay more says a lot about who has power in Washington.

[Update: I probably should have noted that both Robert Shiller and Joe Stiglitz, among others, have suggested the same thing.]

Sunday, August 28, 2011

"Welfare to Work Doesn’t Work Without Work"

The program Jared Bernstein is highlighting (here) has not received enough attention:

Welfare to Work Doesn’t Work Without Work, by Jared Bernstein: There have been a number of posts and articles on the 1996 welfare reform law (TANF—Temporary Assistance for Needy Families), as it turned 15 last week. I argued that it’s a fair weather ship, performing far better amidst strong labor demand, foundering otherwise. My CBPP colleague Donna Pavetti posts some compelling evidence in that regard here too.

Rep Dave Camp, the Republican chairman of the House Ways and Means Committee, feels differently. He released a statement including this point:

Welfare reform has worked to reduce dependence by promoting work, as intended. But the job is not finished. Not only are more reforms needed to ensure that all families on welfare can and do prepare for work, but other programs can and should be reformed to follow suit. Welfare reform proved that low-income families want to work and support themselves. We ought to build on those successes by taking steps to ensure that government programs support and not undermine that enduring American work ethic.

Now, look at this trend in employment rates—share of the group with jobs—for low-income single moms (family income below two times the poverty level) from 1995 to 2009. If Rep Camp had made this statement in 1999, he might have had a case. But since then, the share of low-income single moms with jobs has consistently fallen, and, given a welfare program now conditioned on work, the safety net failed to adequately catch them and their kids.

Source: Census ASEC data, analyzed by Arloc Sherman

His whole statement is pure “supply-side” as if promoting work, wanting to work, being prepared to work, gets you a job. In fact, when the strong demand side conditions of the latter 1990s faded, the fair-weather ship of welfare reform hit the shoals....

I happen to think he’s right that families want to support themselves, but go ahead and make all the rules in the world...: if there are not enough jobs for people, they won’t be able to support themselves or their families through work.

In this regard, ensuring “that gov’t programs support…that enduring American work ethic” means making sure people have jobs. It so happens there’s a great way to do that—a jobs program from the Recovery Act that was highly successful in helping the TANF population find work—read about it here.

If Rep Camp and others want to preserve the work ethic, they’re going to need to help create some work.

"The United States of Unemployment"

David Wessel:

The United States of Unemployment, by David Wessel: There are 13.9 million unemployed people in the U.S. – and that just counts those looking for work. That works out to 9.1% of the labor force, the widely publicized unemployed rate.
But here are a few more ways to look at it.
There are more unemployed people in the U.S. than there are people in the state of Illinois, the fifth largest state.
In fact there, there are more unemployed people in the U.S. than there are people in 46 of the 50 states, all but Florida, New York, Texas and California.
There are more unemployed than the combined populations of Wyoming, Vermont, North Dakota, Alaska, South Dakota, Delaware, Montana, Rhode Island, Hawaii, Maine, New Hampshire, Idaho and the District of Columbia.
If they were a country, the 13.9 million unemployed Americans would be the 68th largest country in the world...

Maybe we should do something.

Tuesday, August 23, 2011

Future Skill Shortages in the US Economy?

Via Vox EU:

Future skill shortages in the US economy? Sorting out the evidence, by Marisol Cuellar Mejia, Hans Johnson, and David Neumark, Vox EU: Ageing workforces pose challenges to governments around the world. While fiscal issues surrounding pension and social security have been very much in the news, a less well-known issue concerns skills.
The impending retirement of the baby-boom cohort brings with it the potential for skill shortages. The boomers are well-educated, having come into adulthood as the nation was rapidly expanding post-secondary educational opportunities. In earlier decades, younger workers replacing older workers were both much more educated and much more numerous. But the baby boomers are nearly as educated as current younger cohorts (Figure 1) and are large in number. Thus, their retirement will slow the growth of skill levels in the workforce, leading to shortages if skill demands continue to increase.

Figure 1. Number of adults with at least a bachelor’s degree
by age group (25-44 and 45-64)
Source: Decennial Census (1990 and 2000); American Community Survey (2008).

Carnevale et al (2010) recently projected large shortages by the end of this decade: “By 2018, the postsecondary system will have produced 3 million fewer college graduates than demanded by the labour market” (p 16). But Harrington and Sum (2010) criticise these projections, instead seeing over-education or “mal-employment” – college workers in jobs that do not require college degrees – as “perhaps the most pressing problem facing college graduates in the nation today ….”

Our projections of skill supplies and demands for the US economy stake out a middle ground. We foresee rising demand for highly-educated workers. But in the near term this rising demand will by and large be met by rising education levels among the US population, suggesting little risk of a substantial workforce skills gap. At the same time, there are greater risks of skill shortages in states with large and growing, and less-educated, immigrant populations. And over the longer-term, as more baby boomers retire, there is greater risk of substantial skill shortages nationwide.

Projections of skill supplies and demands through 2018

Our demand projections rest on US Bureau of Labour Statistics (BLS) projections of employment growth by occupation to 2018 (Lacey and Wright 2009). To project the education requirements of future jobs, we could also rely on the BLS, which classifies occupations by educational requirements. However, using data from the American Community Survey (ACS), we find substantial labour market returns, within occupations, to educational levels beyond those that the BLS deems “required” (see Neumark et al 2011). We therefore instead use empirical evidence on employment practices to estimate and project workforce skills needs, starting with the baseline education distribution of workers by occupation in 2008 and applying recent trend growth in education distributions within occupation (using ACS and Decennial Census data). Applying these estimates to the occupational projections, we obtain projected skill (education) demands.

To project supply, we construct new population forecasts that take account of nativity (unlike US Census Bureau population projections), and we project population by education, and labour force participation. Three important factors underlie our projections:

Continue reading "Future Skill Shortages in the US Economy?" »

Monday, August 22, 2011

The US Jobless Recovery: Assertive Management Meets the Double Hangover

Robert Gordon says the changing balance of power between labor and management helps to explain the jobless recovery:

The case of the US jobless recovery: Assertive management meets the double hangover, by Robert J. Gordon, Vox EU: High and persistent unemployment in the US has emerged as one of the most important macroeconomic legacies of the 2007–09 world economic crisis. While the decline of business activity in the US was no larger than in Europe, the US is an outlier in its outsized response of the unemployment rate to its decline in output (IMF 2011).

Here we quantify the shortfall of US employment—some 10.4 million missing jobs—and ask: Why did the number of jobs decline so much and why has it recovered so little? Two sets of causes stand out.

  • First, there has been a changing balance of economic power in the US between management and labour in the past two decades that has led to more aggressive firing of workers when business profits head south.
  • Second, the large negative output gap (actual real GDP below trend or potential) is not shrinking, due to the “double hangover” persisting in the aftermath of the housing bubble.

By explaining why the recovery of aggregate demand has been so weak, we provide an understanding of the refusal of the large negative output gap to shrink—a refusal shared by its twin, the employment gap.

Dimensions of the job shortfall: 10.4 million missing jobs in the recovery

Part of the job shortfall is reflected in the rise of measured unemployment. The rest comes from a decline in labour-force participation. The employment-population ratio (E/P in the figures) measure combines the two.1 As shown in Figure 1, the ratio (as shown by the green line) was 64.3% at the NBER business cycle peak in 2001:Q1. By the next peak (2007:Q4) it had fallen to 62.8% (blue line).

  • This descent from 64.3% to 62.8% led numerous commentators to lament that the 2001-07 US economic recovery was not a complete recovery. Indeed, the seemingly ‘minor’ 1.5% drop in the ratio represents more than 3.6 million “missing” jobs—even before the recent recession.
  • In mid-2011, the ratio (wavering red line) is only 58.1%—far below 2001 and 2007 levels.

How many jobs are lacking? Figure 2 shows that the shortfall amounts to 10.4 million missing jobs compared to the 2007 version of normality and a much higher 14.1 million missing jobs compared to the 2001 definition. In the rest of this analysis, we take the less ambitious 2007 value for the ratio of 62.8% as the relevant benchmark.

Figure 1. Actual vs. two criteria of normal employment per capita (2000 Q1—2011 Q2)

Figure 2. Actual vs hypothetical employment, 2000 Q1—2011 Q2

What caused the destruction of 10.4 million jobs?

The first explanation is the change in managerial power. For decades I have been tracking the responsiveness of labour market variables to the output gap (see most recently Gordon 2003 and 2010).

  • Before the mid-80s a 1% change in the output gap would generate roughly a response of 0.45% in the similarly-defined gap of the Employment-Population ratio.
  • The rest of the 1% shortfall of real GDP would show up in declining productivity and in hours per employee.

The observed ratios in the data for 1954–86 are roughly consistent with the predictions made by Arthur Okun (1962) in what soon became christened as ‘Okun’s Law’.

After the mid-1980s, however, these responses changed in a process I have described as the “Demise of Okun’s Law”. The response of the ratio jumped from 0.45 in the 1954–86 interval to 0.78 in an otherwise identical regression equation applied to 1986–2011. This means that when output slumps, employment drops much more than it would have done previously.

The disposable worker hypothesis

When the economy begins to sink—like the Titanic after the iceberg struck—firms begin to cut costs any way they can; tossing employees overboard is the most direct way. For every worker tossed overboard in a sinking economy prior to 1986, about 1.5 are now tossed overboard. Why are firms so much more aggressive in cutting employment costs? My “disposable worker hypothesis” (Gordon 2010) attributes this shift of behaviour to a complementary set of factors that amounts to “workers are weak and management is strong.” The weakened bargaining position of workers is explained by the same set of four factors that underlie higher inequality among the bottom 90% of the American income distribution since the 1970s—weaker unions, a lower real minimum wage, competition from imports, and competition from low-skilled immigrants.

But the rise of inequality has also boosted the income share of the top 1% relative to the rest of the top 10%. In the 1990s corporate management values shifted toward more emphasis on shareholder value and executive compensation, with less importance placed on the welfare of workers, and a key driver of this change in attitudes was the sharply higher role of stock options in executive compensation. When stock market values plunged by 50% in 2000–02, corporate managers, seeing their compensation collapse with profits and the stock market, turned with all guns blazing to every type of costs, laying off employees in unprecedented numbers. This hypothesis was validated by Steven Oliner et al (2007), who showed using cross-sectional data that industries experiencing the steepest declines in profits in 2000–02 had the largest declines in employment and largest increases in productivity.

Why was employment cut by so much in 2008–09? Again, as in 2000–02, profits collapsed and the stock market fell by half. Beyond that was the psychological trauma of the crisis; fear was evident in risk spreads on junk bonds, and the market for many types of securities dried up. Firms naturally feared for their own survival and tossed many workers overboard.

Three million missing jobs due to altered management response to recession

Figure 3 provides the results of a simple experiment regarding the loss of jobs.

  • Labour-market responses to business-cycle shortfalls were quite different when estimated with regressions over the 1954–1986 (“early”) and 1986–2011 (“late”) sample periods.
  • Responses of employment and other labour market variables were much larger in the “late” period (as predicted by the disposable worker hypothesis).

Given the decline in the output gap, simulated employment fell short by 9.82 million with the “late” dynamic adjustment behaviour, quite close to the 10.39 million actual shortfall. Yet with the “early” coefficients employment fell by a substantial but significantly smaller total of 6.72 million.

Figure 3. Actual vs hypothetical and dynamic simulation employment 2007 Q4—2011 Q2

Thus labour’s weakened bargaining situation with changes in management behaviour toward greater emphasis on cost-cutting in recessions accounts for roughly 3 million lost jobs in the current jobless recovery. The other 6.72 million would have been lost even with the earlier responses because the output gap was so large.

Why is aggregate demand so weak? The double hangover explanation

This explains the outsized job cuts that came in response to the recession. But we are still left with the question of explaining why the output gap is still so negative 2 years after the NBER business-cycle trough (June 2009).

America’s double hangover goes back to the consumption binge that accompanied the 2000–06 housing bubble.

  • The residential construction industry was building houses at a pace much higher than the underlying rate of household formation.
  • Housing demand was boosted by speculators who bought new condominiums hoping to “flip” them for easy profits and by mortgage brokers who were out combing the weeds for low-income families to whom they could peddle dangerous adjustable-rate interest-only mortgages.
  • Consumption of all types, particularly of durable goods like autos and appliances and services like nail salons and child tutoring, grew faster than income, implying an ever-declining personal saving rate.

Households could use not only their own income to buy consumer goods and services but could finance expenditures in excess of income through second mortgages and refinancing that allowed them to drain cash from their appreciating residences.

Once the bubble burst and house prices began to tumble, the double hangover began.

  • The first hangover was the excess supply of housing.

This led to a glut of unsold houses and condos that put continuous downward pressure on home prices. Foreclosures added to the glut; each foreclosure raises the supply of vacant housing units by one unit while increasing the demand for housing units by zero, because the foreclosed family has by definition defaulted on its mortgage and cannot obtain credit for several years into the future. Many homeowners avoided foreclosure but were “underwater,” with houses now worth less than the face value of the mortgage and thus faced the hapless choice of draining resources to pay the mortgages or defaulting, with the consequence of a ruined credit rating.

  • The second hangover was the impact of excessive indebtedness.

Just as consumption could exceed income as debts were being run up, so the second hangover required consumption to be below income while debts were paid off. The ratio of total household indebtedness to personal disposable income rose from 90% in 1995 to 133% in 2007 and has since fallen just to 120%. Year after year of saving and underconsumption will continue as households continue to pay off debts.

Just as hangovers have negative impacts on family members and job performance, so the double hangover of the slump in residential housing investment and in personal consumption expenditures has spilled over to other components of GDP. Nonresidential investment was hit as firms supplying consumers and home builders reduced their need for new computers, machinery, factories, office buildings, and hotels. State and local governments, by law required to balance their current budgets, began to lay off school teachers and other employees.

Translating lost spending into lost jobs

Table 1 lists the major components of spending and the subcomponents and displays the percentage shortfalls in output. Then we use the shares of each subcomponent in the total output shortfall to calculate the jobs shortfall for each subcomponent. Notice that this method treats all components of spending as equally labour-intensive, an acceptable approximation for this exercise.

  • The shortfall of consumer-services spending is the largest subcomponent; it translates into 3.59 million missing jobs.2
  • Next come the 2.17 million lost jobs in residential construction (on top of those lost between 2006:Q1 and 2007:Q4),
  • The 1.76 million in nonresidential structures,
  • 1.65 million in consumer durables,
  • 1.47 million in state and local government, and
  • 1.38 million in equipment and software.
The overall simulated job shortage would have been 11.88 million but for the helpful performance of net exports. Its positive contribution brings the figure to a smaller but still unfortunate 10.39 million.

Table 1. Contribution of GDP components to output gap and employment shortfall 2011:Q2



A change in labour market dynamics accounts for about 3 million of the over 10 million missing jobs in mid-2011. This shift can be traced to weakness of labour and growing assertiveness of management. But even with the labour-market institutions of 1955 through 1985, the weakness of aggregate demand in the recession and recovery would have cost roughly 7 million jobs instead of the 10 million jobs that are actually missing compared to normal economic conditions such as occurred in 2007.

The recession itself is usually and correctly traced to the collapse of the housing bubble and the post-Lehman financial panic. But the recovery has been unusually weak, completely unlike the economy’s rapid bounce-back in 1983–84, and this requires an explanation as well. The best place to start is the double-hangover approach, which explains not just the collapse of residential structures investment but also the continued and growing weakness in consumer spending. Perhaps the most surprising result of this essay is that the spending component responsible for the largest share of the missing jobs is not residential investment but consumer spending on services.

This is not the place to talk about remedies.

  • The spending decomposition shows that fiscal policy has failed in that the government spending sector has made the output gap shortfall worse, not better.
  • The double-hangover theory helps to explain why monetary policy is impotent, no matter how much quantitative easing is attempted.

Authors including Hall (2011) focus on the zero lower bound as the crux of the Fed’s problem and ignore the complementary problem of low interest-insensitivity of consumers who are trying to pay off old debt instead of taking on new debt.

The failure of consumer and investment spending (IS) to respond to an ever-lower 10-year government bond rate, which fell below 2.3% this past week, demonstrates that the problem is an IS curve that is very steep if not vertical at an output level far below that necessary to generate a normal level of employment. The vertical IS curve is just as relevant for understanding today’s economy as that of the 1930s, and it plays an essential role in the twelfth edition of my macro textbook (2012) in explaining why monetary policy may at times be impotent, just as it did in the first edition more than three decades ago.


Estevão, Marcello and Evridiki Tsounta (2011), ‘Has the Great Recession Raised US Structural Unemployment?’, IMF Working Paper, WP/11/105, May.

Gordon, Robert J (2003), ‘Exploding Productivity Growth: Context, Causes, and Implications’, Brookings Papers on Economic Activity. 2:207-279.

Gordon, Robert J (2010), ‘Okun’s Law and Productivity Innovations’, American Economic Review Papers and Proceedings,100(2):11-15.

Gordon, Robert J (2012), Macroeconomics, 12th edition. Pearson/Addison-Wesley.

Hall, Robert E (2011), ‘The Long Slump’, American Economic Review,101(2):431-469.

Okun, Arthur M (1962), ‘The Gap between Actual and Potential Output’, Proceedings of the American Statistical Association, in Edmund S Phelps (ed.), Problems of the Modern Economy. Norton, 1965.

Oliner, Stephen D, Daniel E Sichel, and Kevin J Stiroh (2007), ‘Explaining a Productive Decade’, Brookings Papers on Economic Activity, 1:81-137.


1 This is defined as the employment rate (ratio of employment to the labour force) times the labour-force participation rate.

2 Compared to the jobs that would be available if the economy were operating at potential real GDP as in 2007:Q4

Thursday, August 18, 2011

Double Dip or Not, the Unemployed Need Help

The big news on the economy today is Philadelphia Fed's report that its index of manufacturing fell precipitously. The index is just for the Philadelphia Fed region, so it may not be representative, but the report notes a close correlation between the Philly index and the ISM index (which is for the economy as a whole) so it's at least worth noting. In addition, the fall in the markets today, which can be attributed at least in part to this news, shows that the financial sector is taking the news and the threat of a second dip seriously.

Does this news increase the likelihood that a double dip is ahead? Perhaps, but the data on new claims for unemployment insurance which were also released today don't support the double-dip scenario. They have been stuck in the neighborhood of 400,000 for several months -- a number too low to allow the 14 million people who have lost jobs to be reabsorbed into the workplace but high enough to stop things from getting much worse -- and are therefore more consistent with being stuck at a suboptimal level of employment.

One reason that I don't like the framing of the "are we headed for a second dip" question is that it leads to a sigh of relief when we are told that we might get lucky and merely have an extended period of stagnation instead. It makes it appear that the answer to the "should we do more to help the unemployed" question depends upon whether a double dip is ahead. But an extended period of stagnation or even a slow, slow recovery (which almost seems like a good outcome at this point) are also problematic and cry out for more help for the unemployed. With so many eyes on the double-dip question, and with policy seeming to depend upon the answer, I'm worried we've forgotten how unacceptable alternative but not quite as bad outcomes would be. Unless there is a miracle recovery ahead, and that's pretty unlikely at this point, policymakers need to do what they can to increase the pace of the recovery in any case, not just if there's a double dip. In fact, policymakers should have provided more help already -- at the very least plans should be ready.

The president has promised a job creation program will be unleashed next month, but I'll believe it when I see it and it's hard not to wonder what took them so long. They can't possibly just be figuring out that they need a plan to deal with this, can they? I realize there's a legislative cycle to worry about, that they are waiting until Congress reconvene before moving forward, and it's not like this is an emergency or anything that demands immediate action. After all, the people writing the legislation have jobs, so what's the rush?

[Updated, also posted at MoneyWatch]

Wednesday, August 17, 2011

Blinder: The FOMC Majority is Very Worried

Alan Blinder says the Fed is very worried. and likely to take further action:

Meeting on Aug. 9, the Federal Open Market Committee (FOMC) downgraded its near-term assessment of the U.S. economy sharply. Since the Fed's code of conduct mandates the use of Fedspeak instead of English, let me offer a quick translation: "Yikes! Things have sure deteriorated quickly!"
The Fed expressed its alarm in two ways, both remarkable. The first was Mr. Bernanke's willingness to push ahead despite a level of discord that is almost unheard of...: on a far-from-resounding 7-3 vote. Second, his policy innovation stunned veteran Fed watchers (including me): The Committee more or less promised to maintain the current rock-bottom federal funds rate for almost two more years.
In so doing, the Fed violated one of the most revered canons of central banking: Always keep your options open. ... A booming economy by, say, Christmas 2012 doesn't look too likely right now, but it could happen. And if it does, the Fed won't want to keep the federal-funds rate near zero. So why risk the loss of credibility?
The answer is that the FOMC majority was so concerned about the health of our economy that they felt a duty to offer some support... But they had used up all their good ammunition long ago. The two-year interest-rate commitment is based on a wing and a prayer. ...
What all this says to me is that the FOMC majority is very worried. So unless the storm clouds lift quickly, there is probably more easing to come. That could mean another round of quantitative easing, such as the Fed buying more Treasury bonds. Or it could mean paying a lower interest rate on excess reserves. Or the brilliant and creative Mr. Bernanke could pull another rabbit out of his oft-used hat. So stay tuned...

If the Fed is so worried, why 'wait and see' yet again, especially given the lags in the process? Why not take stronger action now? It seems to me the answer must be that a majority of the Fed isn't that worried.

I suppose one of these days the Fed could end up marking up a forecast instead of marking it down, but so far monetary policy has been based upon an overly hopeful outlook at every stage along the way.

Tuesday, August 16, 2011

"The Need to Make Employment the Top Priority of Our Government"

It's nice to see some senators pushing for job creation. But let's hope there's more to this than just a letter to a committee:

August 11, 2011
Hon. Mitch McConnell
Republican Leader
United States Senate
Washington, DC 20510
Dear Leader McConnell:
Given that the single best deficit reduction strategy is economic growth, we urge you to ensure that your appointments to the new joint select committee (“JSC”) created by the debt limit bill are committed to a policy of job creation.
The recent spate of discouraging economic news underscores the need to make employment the top priority of our government. For families across the country, the biggest economic problem is high unemployment. As you know, the lack of jobs and anemic growth rate of the economy are not only enormous problems in their own right, causing great pain for millions of Americans, they are a major component of our deficit. Indeed, the loss of revenue resulting from the recession accounts for nearly $4 trillion of the projected deficits over the next 10 years.
At the same time, jobless workers put additional strain on our critical social safety net programs. As more and more Americans rely on unemployment benefits, food stamps and Medicaid, our deficits go up. Getting those individuals back to work not only allows them to be self-sufficient, it reduces federal government spending.
It is therefore appropriate and important that the JSC explicitly embrace job creation as a part of its mission. Targeted investments in economic growth and job creation can complement and even enhance long-term deficit reduction efforts and should be a priority that the JSC embraces. Indeed, failure to make such investments could have a serious negative impact on our fiscal situation.
Just as we can all acknowledge that reducing our deficits over the medium and long term is a national imperative, we would hope that all 100 Senators could agree that sacrificing job creation in the near term to pursue that imperative would be a grave mistake. Over the course of the last few months, the default debate sounded to many Americans as if it was taking place in a vacuum that did not include enough discussion of the recession and its aftermath. Let us be very clear: our fiscal challenge is directly linked to the jobs crisis and we cannot solve the former without tackling the latter.
We look forward to working with you and the Republican conference towards both objectives and hope the JSC can help advance policies that get America back to work.
Sen. Jeff Merkley (D-OR)
Sen. Daniel Akaka (D-HI)
Sen. Mark Begich (D-AK)
Sen. Richard Blumenthal (D-CT)
Sen. Barbara Boxer (D-CA)
Sen. Sherrod Brown (D-OH)
Sen. Dick Durbin (D-IL)
Sen. Dianne Feinstein (D-CA)
Sen. Al Franken (D-MN)
Sen. Kirsten Gillibrand (D-NY)
Sen. Tom Harkin (D-IA)
Sen. Tim Johnson (D-SD)
Sen. Frank Lautenberg (D-NJ)
Sen. Robert Menendez (D-NJ)
Sen. Barbara Mikulski (D-MD)
Sen. Jack Reed (D-RI)
Sen. Bernie Sanders (I-VT)
Sen. Charles Schumer (D-NY)
Sen. Debbie Stabenow (D-MI)
Sen. Mark Udall (D-CO)
Sen. Tom Udall (D-NM)
Sen. Mark Warner (D-VA)
Sen. Sheldon Whitehouse (D-RI)

Monday, August 15, 2011

"This isn't Hard"

How to cure the unemployment problem?:

This isn't hard. Hire people to build things with the free money the world is offering us.

Saturday, August 13, 2011

GOP on Defensive over Fiscal Policy

I wish I could believe that the tide is starting to turn against Republicans:

GOP on Defensive as Analysts Question Party’s Fiscal Policy, by Jackie Calmes, NY Times: The boasts of Congressional Republicans about their cost-cutting victories are ringing hollow to some well-known economists, financial analysts and corporate leaders, including some Republicans, who are expressing increasing alarm over Washington’s new austerity and anti-tax orthodoxy.
Their critiques have grown sharper since last week, when President Obama signed his deficit reduction deal with Republicans and, a few days later, when Standard & Poor’s downgraded the credit rating of the United States.
But even before that, macroeconomists and private sector forecasters were warning that the direction in which the new House Republican majority had pushed the White House and Congress this year — for immediate spending cuts, no further stimulus measures and no tax increases, ever — was wrong for addressing the nation’s two main ills, a weak economy now and projections of unsustainably high federal debt in coming years.
Instead, these critics say, Washington should be focusing on stimulating the economy in the near term to induce people to spend money and create jobs, while settling on a long-term plan for spending cuts and tax increases to take effect only after the economy recovers. ...
S.& P. based its downgrade ... partly on the assumption that Bush-era tax cuts for high incomes would be extended past their 2012 expiration, “because the majority of Republicans in Congress continue to resist any measure that would raise revenues.” S.& P. said it could change its outlook to stable if the tax cuts ended.
Yet Republicans insist that taxes will not be on the table for the bipartisan Congressional committee created by the deficit deal. ... The prospect of further reductions worries forecasters. ...
Low borrowing costs, analysts say, are more reason to bolster the economy now. “At the very least,” said Mark Zandi..., Congress should renew for another year two measures that expire after 2011 — payroll tax relief for employees and extended unemployment compensation — as Mr. Obama has proposed. If either expired, Mr. Zandi said, that could shave roughly a half-percentage point from economic growth next year.
Republicans are resistant. And Democrats are too cowed to counter much, given polls that show many Americans believe Mr. Obama’s 2009-10 stimulus package did not work, despite studies to the contrary.
A Democratic Congressional adviser, granted anonymity to discuss party deliberations, said: “We’re at a loss to figure out a way to articulate the argument in a way that doesn’t get us pegged as tax-and-spenders.” ...

This isn't my preferred way of doing it, I'd rather simply run deficits in the short-run and put a plan in place to address long-run issues, but one option is to raise taxes on upper incomes and use the money to finance infrastructure and job creation on a dollar for dollar basis for two years (three would be better), and not a day more. After that, the spending on the projects ends and the tax increase goes solely to deficit reduction. That is, in the short-run build a fixed number of infrastructure projects financed by the tax increase on upper incomes and chosen in part based on the project's ability to create jobs -- once the number of the projects is set it cannot be increased -- and when that ends, that's it. But the higher taxes persist. That should yield a net budget reduction over ten years without harming the economy or making the deficit worse in the short-run, and help with growth in the long-run. Job-and-growth-creating-tax-and-reduce-the-deficit liberals seems like a decent label to me.

Friday, August 12, 2011

What Was Kocherlakota Thinking When He Dissented on Monetary Policy?

Narayana Kocherlakota makes it clear that the rate at which the recovery is proceeding is just fine with him. No more accommodation from the Fed is necessary given that "Since November, inflation has risen and unemployment has fallen."

But he doesn't acknowledge that the November date is cherry-picked to some extent. Since January -- just two months from when he starts his measurement -- unemployment has actually risen. He's happy with that? As for inflation -- the worry that is stopping him from endorsing a more aggressive policy -- using his preferred time period from last November until now, core PCE has risen from 1.0% to 1.3%. And it didn't move at all between May and June, it was 1.3% in both months. Uh oh, hyperinflation! Assuming a target of 2.0%, at this rate the Fed will reach it's inflation target in about a year and a half. Sounds kind of like the guidance they issued (and there is a good argument that the Fed should overshoot its target in the short-run). Perhaps lag effects can explain his response, if we tighten now we may not feel it until a year later, but that doesn't seem to be his argument:

In its August 9 meeting, the Committee changed this “extended period” language to say instead that it “currently anticipates economic conditions … are likely to warrant extraordinarily low levels of the federal funds rate through mid-2013.” This statement is designed to let the public know that the fed funds rate is likely to stay between 0 and 25 basis points over the next two years, not just over the next three to six months. Hence, the new language is intended to provide more monetary accommodation than before.
I dissented from this change in language because the evolution of macroeconomic data did not reflect a need to make monetary policy more accommodative than in November 2010. In particular, personal consumption expenditure (PCE) inflation rose notably in the first half of 2011, whether or not one includes food and energy. At the same time, while unemployment does remain disturbingly high, it has fallen since November. I can summarize my reasoning as follows. I believe that in November, the Committee judiciously chose a level of accommodation that was well calibrated for the prevailing economic conditions. Since November, inflation has risen and unemployment has fallen. I do not believe that providing more accommodation—easing monetary policy—is the appropriate response to these changes in the economy.

Again, "well-calibrated" should include both the direction and pace of change. Even if the direction is correct, is he satisfied with the pace of change for employment? I realize he thinks we will have to tighten in 3-6 months, but it's hard to see how a data-based projection takes you to this outcome (even more so if you believe, as I do, that the risks are asymmetric, i.e. that unemployment is more costly than inflation).

Finally, this is not a rock solid commitment from the Fed. This is their view of the most likely path for the federal funds rate, they have not said this is what they will do independent of how the data evolve. All they have said is that economic conditions are likely to warrant this outcome. The dissenters seem to believe that another outcome is more likely, the view is that economic conditions will force the Fed into a different posture -- you know, that high inflation and rapid recovery we've been seeing to date -- in as soon as 3-6 months. Anything is possible, but again, it's hard to see how recent data point to this outcome.

Update: See Matt Rognlie: Macroeconomics in Action (I've made this point several times in the past, and should have mentioned it here as well).

Update: Here's the view from the right.

Paul Krugman: The Hijacked Crisis

Why are policymakers so worried about reducing the debt instead of reducing unemployment?:

The Hijacked Crisis, by Paul Krugman, Commentary, NY Times: ...For more than a year and a half ... we’ve had a public conversation that has been dominated by budget concerns, while almost ignoring unemployment. The supposedly urgent need to reduce deficits has so dominated the discourse that on Monday, in the midst of a market panic, Mr. Obama devoted most of his remarks to the deficit rather than to the clear and present danger of renewed recession.
What made this so bizarre was the fact that markets were ... saying — almost shouting — was, “We’re not worried about the deficit! We’re worried about the weak economy!” ...
So how did Washington discourse come to be dominated by the wrong issue? Hard-line Republicans have, of course, played a role... — they have found harping on deficits a useful way to attack government programs.
But our discourse wouldn’t have gone so far off-track if other influential people hadn’t been eager to ... hijack the crisis on behalf of their pre-existing agendas.
Check out the opinion page of any major newspaper, or listen to any news-discussion program, and you’re likely to encounter some self-proclaimed centrist declaring that there are no short-run fixes for our economic difficulties, that the responsible thing is to focus on long-run solutions and, in particular, on “entitlement reform” — that is, cuts in Social Security and Medicare. And... you should be aware that people like that are a major reason we’re in so much trouble.
For the fact is that right now the economy desperately needs a short-run fix. When you’re bleeding profusely from an open wound, you want a doctor who binds that wound up, not a doctor who lectures you on the importance of maintaining a healthy lifestyle as you get older. ...
What would a real response to our problems involve? First of all, it would involve more, not less, government spending for the time being — with mass unemployment and incredibly low borrowing costs, we should be rebuilding our schools, our roads, our water systems and more. It would involve aggressive moves to reduce household debt via mortgage forgiveness and refinancing. And it would involve an all-out effort by the Federal Reserve to get the economy moving, with the deliberate goal of generating higher inflation to help alleviate debt problems.
The usual suspects will, of course, denounce such ideas as irresponsible. But you know what’s really irresponsible? Hijacking the debate over a crisis to push for the same things you were advocating before the crisis, and letting the economy continue to bleed.

Wednesday, August 10, 2011

Shaping the Debate over Job Creation

Robert Reich explains why the Obama administration will not pursue a "bold jobs plan":

Why the President Doesn’t Present a Bold Plan to Create Jobs and Jumpstart the Economy, by Robert Reich: ...Even though the President’s two former top economic advisors (Larry Summers and Christy Roemer) have called for a major fiscal boost to the economy, the President has remained mum. Why?
I’m told White House political operatives are against a bold jobs plan. They believe the only jobs plan that could get through Congress would be so watered down as to have almost no impact by Election Day. They also worry the public wouldn’t understand how more government spending in the near term can be consistent with long-term deficit reduction. And they fear Republicans would use any such initiative to further bash Obama as a big spender.
So rather than fight for a bold jobs plan, the White House has apparently decided it’s politically wiser to continue fighting about the deficit. The idea is to keep the public focused on the deficit drama – to convince them their current economic woes have something to do with it, decry Washington’s paralysis over fixing it, and then claim victory over whatever outcome emerges from the process recently negotiated to fix it. They hope all this will distract the public’s attention from the President’s failure to do anything about continuing high unemployment and economic anemia. ...
There’s still time for political operatives in the White House – and the person they work for – to change their minds. ... But for now the President is being badly advised. The magnitude of the current jobs and growth crisis demands a boldness and urgency that’s utterly lacking. As the President continues to wallow in the quagmire of long-term debt reduction, Congress is on summer recess and the rest of Washington is asleep.
The President should present a bold plan, summon lawmakers back to Washington to pass it, and, if they don’t, vow to fight for it right up through Election Day.

It seems to me what the president and his advisors are really saying is that they are no match for the Republicans when it comes to shaping a debate in their favor. Instead of cowering under the threat of what Republicans might do if they take certain steps, e.g. not allowing a sufficient jobs plan to pass, and then hanging any failures on the obstructionists, they have given up before even trying. They are convinced Republicans will win the debate.

And the real problem is that they are probably right.

Monday, August 08, 2011

It's the Jobs

Even though it would probably be rejected by the evidence, I am supposed to be on vacation. I'm about to head to northern New Mexico to see what I can see, and not so sure about connectivity along the way (I'll post as I can). But before I leave, I want to note that I'm falling into the trap I warned about, discussing the S&P clown show rather than what's really important, jobs, jobs, and more jobs.

That's what we need to be talking about.

Friday, August 05, 2011

The Employment Report: Moving Sideways Isn't Good Enough

I have a reaction to the employment report at MoneyWatch:

The Employment Report: Moving Sideways Isn't Good Enough

The report "is not as bad as many people expected, but it's still nothing to cheer about."

Paul Krugman: The Wrong Worries

Now would be a good time for policymakers to finally get serious about job creation:

The Wrong Worries, by Paul Krugman, Commentary, NY Times: In case you had any doubts, Thursday’s more than 500-point plunge in the Dow Jones industrial average and the drop in interest rates to near-record lows confirmed it: The economy isn’t recovering, and Washington has been worrying about the wrong things. ...
For two years, officials at the Federal Reserve, international organizations and, sad to say, within the Obama administration have insisted that the economy was on the mend. Every setback was attributed to temporary factors — It’s the Greeks! It’s the tsunami! — that would soon fade away. And the focus of policy turned from jobs and growth to the supposedly urgent issue of deficit reduction.
But the economy wasn’t on the mend. ... Where was growth supposed to come from? Consumers, still burdened by the debt that they ran up during the housing bubble, aren’t ready to spend. Businesses see no reason to expand given the lack of consumer demand. And thanks to that deficit obsession, government, which could and should be supporting the economy..., has been pulling back.
Now it looks as if it’s all about to get even worse. So what’s the response?
To turn this disaster around, a lot of people are going to have to admit, to themselves at least, that they’ve been wrong and need to change their priorities, right away. ... Those plunging interest rates and stock prices say that the markets aren’t worried about either U.S. solvency or inflation. They’re worried about U.S. lack of growth. And they’re right...
Earlier this week, the word was that the Obama administration would “pivot” to jobs now that the debt ceiling has been raised. But what that pivot would mean, as far as I can tell, was proposing some minor measures that would be more symbolic than substantive. And, at this point, that kind of proposal would just make President Obama look ridiculous.
The point is that it’s now time — long past time — to get serious about the real crisis the economy faces. The Fed needs to stop making excuses, while the president needs to come up with real job-creation proposals. And if Republicans block those proposals, he needs to make a Harry Truman-style campaign against the do-nothing G.O.P.
This might or might not work. But we already know what isn’t working: the economic policy of the past two years — and the millions of Americans who should have jobs, but don’t.

Wednesday, August 03, 2011

"The Strike That Busted Unions"

 It's the anniversary of Reagan's confrontation with Patco:

The Strike That Busted Unions, by Joseph A. McCartin, Commentary, NY Times: Thirty years ago today, when he threatened to fire nearly 13,000 air traffic controllers unless they called off an illegal strike, Ronald Reagan not only transformed his presidency, but also shaped the world of the modern workplace. ... Reagan’s confrontation with the Professional Air Traffic Controllers Organization, or Patco, undermined the bargaining power of American workers and their labor unions. ...
Although a conservative, Reagan often argued that private sector workers’ rights to organize were fundamental in a democracy. ... Over time, however, his crushing of the controllers’ walkout — which he believed was justified because federal workers were not allowed under the law to strike — has helped undermine the private-sector rights he once defended.
Workers in the private sector had used the strike as a tool of leverage in labor-management conflicts between World War II and 1981... But after Patco, that weapon was largely lost. Reagan’s unprecedented dismissal of skilled strikers encouraged private employers to do likewise. ... Many ... employers followed suit. ...
Reagan supported government workers’ efforts to unionize and bargain collectively. ... But ... Over time the rightward-shifting Republican Party has come to view Reagan’s mass firings not as a focused effort to stop one union from breaking the law — as Reagan portrayed it — but rather as a blow against public sector unionism itself. ...
With ... workers less able to defend their interests in the workplace than at any time since the Depression, the long-term consequences continue to unfold in ways Reagan himself ... never advocated.

There is an imbalance between workers and firms, but in a global economy I'm not sure unions have enough power to act as an effective counterbalance to firms (though, importantly, they still have a role to play as a political force if they can control large blocks of votes). As I've argued in the past:

The only institution powerful enough to protect workers now is government. By providing the things unions once fought for on behalf of workers, government can help to correct inequities and reduce the insecurity workers face. Ensuring that working-class households have the health and dental care they need, security in old age, a safe place to work, insurance against job loss, higher education that is essentially free, and the benefits of a tax policy that redistributes income so economic gains are shared more equitably would go a long way toward remedying what workers have lost since the 1970s.

The institution has the power, but this assumes a government that wants to do what's right for the nation as a whole, not just what's right for the vested interests that fill campaign coffers.

Though there's been some progress on health care it's far from enough and it may not last, and in general government seems to have little interest in filling the void created by the decline in unions. In fact, government has aided and abetted the decline in unions, and government seems intent on reducing the (already too few) things it does to help working class families.

So long as government serves vested rather than general interests, the rules and regulations will be stacked against unions and they will not be able to exert the political influence necessary to get government to be responsive to the needs of workers and their families. When Democrats took control after Bush left office, I thought we had some chance of making small inroads on this problem. But as government has all but turned its back on the millions of unemployed, and potentially made things even worse through deficit reduction, it's clear the vested interests are still in control.

Tuesday, August 02, 2011

The Club for Employment

Dean Baker:

US debt deal: how Washington lost the plot, by Dean Baker: President Obama and the Republicans in Congress have finally worked out a deal over the debt ceiling. It appears as though the Republicans got most of what they wanted: big cuts to domestic spending and no tax increases.
On the plus side, social security and Medicaid appear to be largely intact, although the deal commits Congress to set up another one of those dreadful "bipartisan" commissions, and some cuts to Medicare are on the table. ...
What we should be worrying about is all the news that Washington has ignored while it was doing the debt ceiling shuffle. Most importantly, the economy has almost stopped growing and unemployment is again on the rise.
On Friday, the commerce department released data showing the economy grew just 1.3% in the second quarter. Even worse, it revised down the first quarter growth number from 1.9% to just 0.3%. ...
Of course, unemployment has been rising, with the June figure hitting 9.2%. That is up from a post-recession low of 8.8% in March. .... The employment to population ratio ... has fallen back almost to its low point for the downturn. The EPOP for African Americans has hit new lows in each of the last three months.
The revisions also provided other interesting pieces of information. For example, corporate profits were revised sharply higher for both 2009 and 2010. The share of profits in corporate sector output hit a new record high, more than a full percentage point above its previous peak. Finance was the biggest winner..., accounting for 31.7% of corporate profits, also a record high.
In short, we now have an economy that is stuck in the doldrums. It is operating well below its potential... And the Wall Street guys are fat and happy. ...
But in Washington, concerns about matters like growth and unemployment have no place. We just have to keep talking about the debt and the deficit.

The Republicans have the Club for Growth to promote the "limited government, low taxes, and economic freedom" favored by the business and wealthy interests it represents. This group has used the deficit as an excuse to implement its limited government, low tax agenda.

But who will stand up for workers? Certainly not Washington. The unemployed have been all but forgotten during the debt ceiling and deficit reduction debate. Thus, what we need is a Club for Employment to stand up for the interests of the working class.

Saturday, July 30, 2011

Blinder: Forget Debt, the Emergency is Unemployment


Thursday, July 28, 2011

Better News on Labor Markets, But Will It Continue?

I  have some comments at MoneyWatch on today's news that new claims for unemployment insurance fell below 400,000:

Better News on Labor Markets, But Will It Continue?

Update: The post includes a graph from Macroadvisors giving their forecast of how the Boehner and Reid plans will slow economic growth. Brad DeLong describes their forecast:

Congress Debates Making the Economy Weaker: Macro Advisers:

Macroadvisers: Dueling Debt Proposals: How Much Fiscal Drag?: The House and the Senate have advanced separate but dueling plans to cut federal spending as a way to break the current impasse over raising the debt ceiling. Both plans would initially limit spending through 2021 with caps on discretionary budget authority while promising to convene commissions to identify more savings later…. CBO has now scored both of these plans relative to its March adjusted baseline…. The cuts in primary spending (that is, excluding interest payments) in the House (or Boehner) plan cumulate to just $715 billion ($851 billion including interest). The cuts in primary spending in the Senate (or Reid) plan cumulate to $1.8 trillion ($2.2 trillion including interest). The cuts in the Senate plan are so much larger because that plan quickly cuts budget authority for the wars….

We estimate that the Reid plan would slow GDP growth (again, statically) by about ¼ percentage point on average from fiscal year (FY) 2012 through FY 2015, with the peak effect being almost ½ percentage point in FY 2013.

We estimate that the Boehner plan would slow GDP growth by only about 0.1 percentage point on average over the same period, with the peak effect being a little over 0.2 percentage point in FY 2014.

Can't anybody play this game?

Wednesday, July 27, 2011

Low End Job Growth

 Quick one before getting back on the road:

Where the Job Growth Is: At the Low End, by Steven Greenhouse, NY Times: There’s more unhappy news for the millions of Americans hoping for a surge in the number of good, high-paying jobs — a new report concludes that the great bulk of new jobs created since the economic recovery began are in lower-wage occupations, paying $13.52 or less an hour.
The report by the National Employment Law Project, a liberal research and advocacy group, found that while 60 percent of the jobs lost during the downturn were in midwage occupations, 73 percent of the jobs added since the recession ended had been in lower-wage occupations, like cashier, stocking clerk or food preparation worker.
According to the report, “The Good Jobs Deficit,” the number of jobs in midwage and high-wage occupations remains significantly below the prerecession peak, while the number of jobs in lower-wage occupations has climbed back close to its former peak. ...
The report gives additional ammunition to those who argue, like David Autor, an economics professor at M.I.T., that there is a distinct hollowing out of the middle. ...“We should emphasize that it is too early in the recovery to predict whether these trends will continue,” the report said. ...

Net Change in Occupational Employment During and after the Great Recession
Net change in occupational employment during and after the Great Recession.
Source: National Employment Law Project analysis of Current Population Survey

Thursday, July 21, 2011

Weekly Unemployment Claims Increase

I keep expecting -- hoping more than expecting I suppose -- that my pessimistic view of the labor market will be overturned by incoming data. So far, that hasn't happened:

Weekly Initial Unemployment Claims increase to 418,000

With the two political parties competing to see which party can cut the most from the deficit immediately and make things even worse, as Paul Krugman says, "The Serious People are determined to destroy all the advanced economies in the name of prudence."

Is There a Viable Progressive Politics without Unions?

A strong labor movement seems to be the key to progressive policies. But if, as in the US, labor unions are losing power, is there a viable alernative?

Is there a viable progressive politics that doesn’t hinge on a strong labor movement?, by Lane Kenworthy: ...Here’s what we know from the experiences of the world’s rich democracies: Relative to other nations, those in which labor is highly organized are more likely to have an influential social democratic and/or Catholic center-right (emphasis on center) political party, a proportional representation electoral system, well-organized employers, formal or informal-but-institutionalized participation by labor and business associations in the policy-making process, generous social insurance programs and complementary programs to help households that fall between the social insurance cracks, expansive public services, similar long-run economic growth, a fairly egalitarian distribution of individual wages and household incomes, reliable economic security, extensive economic mobility, and generous holiday and vacation time.
Sorting out the causality is a bit tricky, but it seems probable that labor organization has contributed to most, if not all, of these outcomes. If you want progressive policies, the comparative historical evidence suggests it’s very helpful to have a strong labor movement. Indeed, after democracy, it might well be the single most valuable thing to have.
But what if you live in a country with labor unions that are weak, and getting weaker? What if your country is the United States?
You might choose to focus on strengthening the union movement. Or you might seek an alternative view (“theory of politics”) about conditions for feasible and sustainable progressive policy change. Is there any such view? I think so.
Forge whatever electoral coalition you can, including but not necessarily centered on unions. Organize sympathetic interest groups into single- or multi-issue movements and coalitions. Build up a network of think tanks, journalists, bloggers, and other organizations and individuals to identify and expose the strategies and plans of opposing forces. Offer worthy, workable policy ideas and try to get them (or some acceptable version of them) passed when possible. Aim for big policy advances in rare favorable moments and small ones the rest of the time. (Examples of big ones in American social policy: universal public K-12 schooling, Social Security, unemployment insurance, AFDC, minimum wage, Medicare, Medicaid, Food Stamps, Affordable Care Act. Examples of smaller ones: Head Start, indexing of Social Security benefits to inflation, EITC (it later got big), expansion of EITC and indexing it to inflation, child tax credit, S-CHIP, periodic minimum wage increases.) If your favored programs work well, people will like them. They’ll therefore be difficult — not impossible, but difficult — for the other side to weaken or remove when it’s in power. This last element of the strategy, avoiding policy reversals, is critical, and it’s aided by the array of veto points in the American policy-making process (though there’s also this).
This is a second-best strategy, to be sure. But in the American context it may be the only practicable one. ...

For the moment, the only institution powerful enough to counterbalance the power of firms is government, and even its powers are doubtful given the degree to which wealthy interests can influence policy. Ensuring that working class households have the health and dental care they need, security in old age, a safe place to work, insurance against job loss, affordable higher education, and an equitable share of economic gains would do a lot to help restore what workers have lost since the 1970s.

Got Jobs?

Casey Mulligan's claim that the unemployment problem is largely due to lack of motivation among younger workers ("the degree to which people would like to have a job"), and that this disproves Keynesian economics, prompts a shrill response from Arin Dube:

Searching for jobs: good thing Casey Mulligan doesn’t need to, by Arin Dube: Tearing down Casey Mulligan’s “discoveries” of evidence against Keynesianism is probably ill-advised: these are not serious arguments, and rebutting them may dull one’s acumen.  Nevertheless, once again I will sacrifice some brain cells and bite the bullet—consider it the provision of a minor public good.
OK, so in his most recent post, Mulligan claims that the differential trends in employment among older and younger workers over the Great Recession shows that Keynesian arguments are wrong.  He says:
Many elderly people, for example, saw the market values of their homes and retirement assets plummet in 2008 and feel they can no longer afford to be retired. Naturally, many of them react by looking for work. The blue and green lines in the chart show that the elderly have been much more successful than the general population at obtaining and retaining jobs. These findings contradict the Keynesian narrative of the labor market, in which the marketplace fails to recognize the degree to which people would like to have a job.
Except that they do no such thing. Being in a Keynesian demand-constrained equilibrium, where there are less jobs (say N) than people looking for them (say L), says nothing about who gets those jobs.  If older people are finding it harder to retire due to the bursting of the housing bubble and hence stay in the labor force, that adds to L. If everyone searching for a job has an equal chance of getting one, this will mechanically increase the employment-to-population rates among the elderly, even while the total number of jobs stays constant at N. It just means that someone else didn’t get that job, which tends to push down the employment rates of non-elderly.
If further the elderly search more intensely due to retirement asset losses, then they will be even more likely to find jobs and will be even more likely to displace others looking for jobs, even as the total number of jobs remains constant at N. Comparing trends in employment across different groups cannot help us understand if the total number of jobs is rationed. There is literally nothing in any of the “findings” that Mulligan reports in that post that has any bearing on whether we are in a demand constrained equilibrium. 
Along with Mulligan’s fallacious use of seasonality to detect the power of labor supply in deep recessions, this constitutes the set of variation that is orthogonal to what’s required for credible identification of job rationing. Less technically, Mulligan is hating on Keynes in all the wrong places.
By the way, there are serious researchers who have looked at rationing versus other types of unemployment (like search frictions) in the labor market, and characterized equilbria that differ by the phase of the business cycle. An important paper is by Emmanuel Saez and coauthors, who show why unemployment insurance should be countercyclical because jobs tend to be rationed during recessions—one person’s getting a job means another person not getting one—while during booms that is not the case. 

Is the problem, as Mulligan claims, that there are plenty of jobs for motivated, workers, but workers aren't willing to work? Or is it that workers are willing to work, but no jobs are available?

Workers were plenty willing to work before the economy crashed, and despite claims that unemployment insurance and other social insurance programs have somehow eroded the will to work, the evidence points overwhelmingly to lack of demand as the fundamental problem. Telling workers it's their own fault, they aren't trying hard enough, puts blame where it doesn't belong and misdirects attention from the true problem. When the jobs return -- sooner with the help of job creation programs or later without -- people will take them.

Thursday, July 14, 2011

Seasonal Adjustment and New Unemployment Insurance Claims

Brad DeLong makes a good point about interpreting this morning's news that new claims for unemployment insurance fell a bit to 405,000 (though last week's number was revised upward):

Economagic Economic Chart Dispenser

New Unemployment Insurance Claims, by Brad DeLong: In both July 2009 and July 2010 the BLS's seasonal adjustment algorithm overestimated the extent of the seasonal jump in new unemployment insurance claims in July. Thus both in 2009 and 2010 the seasonally-adjusted series "saw" a July fall in unemployment insurance claims that was not really there.

Is the same thing happening this year? Perhaps. Thus I am not as pleased with this week's decline in seasonally-adjusted UI claims as I would be normally...

Leaving the microphone in Brad's hands, in another post he notes that:

worrying about deficit reduction right now stops us from worrying about things we could do something about--like high unemployment, idle capacity, slow growth, and crumbling infrastructure.

But instead of doing anything about it, the Fed watches and waits -- by Bernanke's own admission -- and hope's that, unlike all the other times it watched and waited to see if things got better and they didn't, this time is different (Bernanke said today that "We are uncertain about the near-term developments in the economy. We’d like to see if, in fact, the economy does pick up, as we are projecting."). And Congress is all but hopeless -- they'll be lucky if they don't wreck the economy over the debt ceiling, let alone take steps to improve it.

Tuesday, July 12, 2011

Why Has the Reducing the Deficit Trumped Unemployment?

Why aren't politicians more concerned with the unemployed?:

Unemployment? Who Cares?: ...Why isn’t unemployment reduction front and center on the policy agenda? More specifically, why has the debate over deficit reduction shoved it aside?
Here are three possible reasons. First, unemployment is concentrated among the less educated, blacks and Hispanics who lack political or economic clout.
Second, high unemployment is not hurting overall business profits, which have soared to historic heights. ... Today, our largest corporations and richest investors are well positioned to take advantage of growing demand in emerging markets far from our shores...
Third, the jobless individuals, public employees and small-business owners who could, in theory, form a strong political coalition to support more active job creation are constantly subjected to a barrage of arguments that we should do nothing but cut government spending and hope for the best. ...
A conspicuously large repertoire of more targeted job-creation proposals could significantly lower unemployment... But political interest is low...

Monday, July 11, 2011

Paul Krugman: No, We Can’t? Or Won’t?

Excuses, excuses:

No, We Can’t? Or Won’t?, by Paul Krugman, Commentary, NY Times: ...The ... United States economy has been stuck in a rut for a year and a half. Yet a destructive passivity has overtaken our discourse. Turn on your TV and you’ll see some self-satisfied pundit declaring that nothing much can be done about the economy’s short-run problems..., that we should focus on the long run instead.
This gets things exactly wrong. ... Our failure to create jobs is a choice, not a necessity — a choice rationalized by an ever-shifting set of excuses.
Excuse No. 1: Just around the corner, there’s a rainbow in the sky.
Remember “green shoots”? Remember the “summer of recovery”? Policy makers keep declaring that the economy is on the mend — and ... these delusions of recovery have been an excuse for doing nothing as the jobs crisis festers.
Excuse No. 2: Fear the bond market.
Two years ago The Wall Street Journal declared that interest rates on United States debt would soon soar unless Washington stopped trying to fight the economic slump. Ever since, warnings about the imminent attack of the “bond vigilantes” have been used to attack any spending on job creation.
But basic economics said that rates would stay low as long as the economy was depressed — and basic economics was right. ...
Excuse No. 3: It’s the workers’ fault.
Unemployment soared during the financial crisis and its aftermath. So it seems bizarre to argue that the real problem lies with the workers — that the millions of Americans who were working four years ago ... somehow lack the skills the economy needs...: high unemployment is “structural,” they say, and requires long-term solutions (which means, in practice, doing nothing).
Well, if there really was a mismatch..., workers who do have the right skills ... should be getting big wage increases. They aren’t. ...
Excuse No. 4: We tried to stimulate the economy, and it didn’t work.
Everybody knows that President Obama tried to stimulate the economy with a huge increase in government spending, and that it didn’t work. But what everyone knows is wrong.
Think about it: Where are the big public works projects? Where are the armies of government workers? There are actually half a million fewer government employees now than there were when Mr. Obama took office. ... This ... wasn’t the kind of job-creation program we could and should have had. ...
It’s also worth noting that in another area where government could make a big difference — help for troubled homeowners — almost nothing has been done. ...
Listening to what supposedly serious people say about the economy, you’d think the problem was “no, we can’t.” But the reality is “no, we won’t.” And every pundit who reinforces that destructive passivity is part of the problem.

Sunday, July 10, 2011

Historical Patterns, Okun's Law, and the Great Recession

Arin Dube shows that estimates of Okun's law are inconsistent with the assertion that most of the unemployment problem is structural rather than cyclical:

Historical Patterns, Okun's Law, and the Great Recession, by Arin Dube: After reading Paul Krugman's post today, I decided to follow up by actually estimating out-of-sample unemployment rate change forecasts during the Great Recession based on a pre-2007 Okun's law relationship (i.e., a regression of change in the unemployment rate on percentage change in real GDP).
As a starting point, let's estimate the pre-2007 Okun's Law relationship using data from 1948 to 2006. (I use 2007 instead of 2008 just because the unemployment rate started rising in 2007 - but as you will see, this makes no real difference for any of the conclusions below.)


As expected, it shows that you need GDP growth above 2 percent or so to bring down the unemployment rate.
So what happens if we use this historical Okun's law to predict unemployment rate changes in the 2007-2011 period? In the next graph I plot the actual unemployment change by quarter with the predicted amount. The red line is just the 45 degree line to help us see what the actual change in unemployment would be if it behaved exactly according to the historical Okun's Law relationship. (The labels are a little bit off here: "01jan2010" really means "2010q1," "01apr2010" means "2010q2," etc.) I think this chart shows quite clearly what's going on:


Several things jump out:
1. First of all, note that over this period, during 9 quarters the historical forecast underpredicted the change in the unemployment rate, while during 8 quarters it overpredicted it. The forecast error ranged from -0.85 to 0.73, with a mean of 0.03. So there is absolutely no evidence that the unemployment rate stands at a much higher level than would be predicted by movements in GDP.
2. In fact, during the past 6 quarters, the actual reduction in unemployment rate has been greater than what would be predicted by real GDP growth--i.e., the forecast errors have been negative.
3. However, it is also the case that during the initial downturn (especially 2008-2009), the unemployment change was greater than would have been predicted by GDP reduction - i.e., positive forecast errors. (You can also see that the inclusion of 2007 makes very little difference here - as those data points are quite close to the predictions.)
4. Overall, the main conclusion is that based on a historical Okun's Law and actual GDP growth, at least as of 2011q1, both the initial rise in unemployment and the subsequent reduction had been more amplified. This not the signature of structural unemployment. A structural unemployment scenario would show an asymmetry: a growth in unemployment that is near or even above the norm based on GDP slowdown, but a reduction in unemployment that is muted in comparison to the GDP growth. This is not what we see. The point is made even more sharply in the next graph which simply plots the same red 45 degree line along with the in-sample linear fit (with data from 2007 forward).


The blue in-sample linear regression line has a slope of around 1.96 - in other words, the sensitivity of the unemployment rate to GDP growth during the Great Recession seems to have been twice as large as compared to historical norms - and this is true both in the downturn and the "expansion." (Split sample regressions confirm this point, which is also clearly shown in the earlier scatterplot.)
Now what is behind the "excess sensitivity" of unemployment rate to GDP growth? This is indeed an interesting question - and deserves to be studied further. It's possible that financial accelerators played a role early on, and as the financial markets stabilized, this effect unwound - leaving (normal) aggregate demand as the main constraint. This of course is just speculation, and I myself have some doubts about this story. However, what is not in question is that growth has been anemic, and that this anemic growth can more than explain the unemployment trajectory during the "expansion." Structural unemployment? Not so much. Reality-sensitive economists (and dare we say politicians?) should digest this simple fact.
Data Source:
The two data series are UNRATE and GDPC1

Friday, July 08, 2011

Fed Watch: Grim

Tim Duy:

The employment report polishes off what was already a depressing week. The turn of events in the budget negotiations was deeply distressing. It just seemed like it should be impossible to imagine that budget cutting is the order of the day when unemployment is over 9%, 10-year Treasuries hover near 3%, and a Democrat is in the White House. Yet possible it is.

The extent to which our leadership seems determined to follow in the path of the Japanese is absolutely stunning. My impression of the last two decades is that Japanese policymakers were never able to keep their eyes on the weak economy, instead always eager to turn their attention back to "normalizing" policy – raising interest rates, raising taxes, cutting spending. Our leadership suffers from the same obsession.

The employment report should be a wake up call. A slap in the face. A bucket of cold water poured over your head. But it won’t. I suspect it will be seen as further evidence that stimulus is pointless, that austerity is the only solution.

Weakness spread far and wide throughout the report. No way to put lipstick on this pig. As others have noted, the labor force fell, the participation rate fell, the employment to population ratio fell, the number of employed plummeted, and the number of unemployed climbed. Private nonfarm payrolls gains a paltry 57k, and the drag from government cutbacks pulled the overall jobs gain to just 18k. Far short of the numbers needed to even hold unemployment steady.

And wages fell. Just a penny an hour, to be sure. But that penny is meaningful given the desperate fears of inflation that appeared to take hold on Constitution Ave. Without sharply rising wages, those fears are simply unfounded. This was the lesson of the post-1984 period. Why monetary policymakers are fixated on the pre-1984 period is a mystery.

What I noticed was the number of short-term unemployed:


A sharp rise in the number of people thrown into unemployment is definitely a red flag. The overall data picture is not pointing at recession yet, but this number reeks of something bad.

We can only hope some of the downward pressure on growth is relieved as the tsunami related disruptions fade and, more importantly in my mind, the sharp rise in oil prices has been arrested, at least for the moment. But even as these restraints lift, what remains? Oil prices have not plummeted like in 2008 to provide a big positive boost to real spending. And interest rates are no longer falling to provide and opportunity for a refinancing boom. So at best we return to trend growth, maybe a little above? Trend growth that was never sufficient in the first place?

Moreover, we still face significant headwinds in the second half of the year. The Europeans are determined to avoid resolution in their ongoing debt crisis. The ECB is determined to raise interest rates. And Congress and the White House are determined to pursue a path of fiscal austerity.

Bottom Line: Simply a weak report – unbelievably weak given the “recovery” is two years old. Weak enough – especially given falling wages – that it should prompt Bernanke & Co. to revisit their commitment to end large scale asset purchases. The next round of Fedspeak will be very interesting. Watch closely for the focus on “temporary” factors - code for watch and wait. At this juncture, they are still out of the game. I think the Fed will need to see another quarter of data before they begin to take seriously the possibility that they once again erred with a premature policy shift.

A Day Away (Update: And Some Comments on the Employment Report)

I was on the road most of Thursday (I'm in Dallas), have commitments almost all of today, and then travel back to Oregon Friday night. So not sure if I'll have the time to say much. (I haven't missed a day posting since I started doing this, but I can't say that all days have been equally productive.)

Let me know how the jobs report comes out, or whatever else is on your mind.

Update: Wow (the bad kind of wow) -- The economy added only 18,000 jobs in June and the unemployment rate rose to 9.2% (and previous months were revised downward):

Jobs Data Dim Recovery Hopes, WSJ: Nonfarm payrolls rose 18,000 last month... Payrolls data for the previous two months were revised down by a total 44,000 to show increases of only 25,000 jobs in May and 217,000 in April.

The jobless rate, which is obtained from a separate household survey, increased for the third straight month to 9.2% in June, from 9.1% in May. ...

Friday's report showed private-sector employers, which account for about 70% of the workforce, added only 57,000 jobs in June, down from 73,000 in May. The weakness was broad-based.

Manufacturing employment remained weak, adding only 6,000 jobs. Economists were expecting a bounce back as disruptions to manufacturing production stemming from Japan's earthquake should be easing by now. Employment in the battered construction sector was broadly unchanged. The housing sector remains a big drag on the economy.

Employment in professional and business services, which had shown strong gains in previous months, rose by only 12,000.

Government employment fell by 39,000, the eighth drop in a row, following declines in all levels of government struggling to close budget gaps.

Remembering that we need around 100,000 to 150,000 jobs per month just to keep up with population growth, this represents a net reduction in employment.

We have 14.1 million unemployed according to the report, with 6.3 million out of work for six months or longer. Wages fell slightly.

Why, again, are we spending so much legislative time trying to figure out how to cut the deficit in the short-run -- which will make things even worse -- instead of focusing on job creation? We do need to get the budget under control in the long-run, but deficit reduction can wait until the economy is on better footing. We need more help for job markets right now, not the creation of additional headwinds that work against the recovery.

[Echoed at Moneywatch.]

Only Further Stimulus Can Tackle America’s Jobless, Wage-Less Recovery

Brad DeLong says to go read Laura Tyson. So why, oh why don't you? That is all.

Thursday, June 30, 2011

Fed Watch: The Lost Jobs Opportunity

Tim Duy:

The Lost Jobs Opportunity, by Tim Duy: This kind of chart has always bothered me:

It is not the content or format that worries me. And, to be sure, the magnitude of the labor market damage wrought by the recession weighs heavily on my mind. Moreover, the length of time to recovery seems immense. And, on top of both of these, we effectively reduce our expectations of "recovery" with this chart - recovery should be about capturing the previous trend, not the previous peak.

Despite all this, it has always seemed to me that I was missing some even darker point. I think I finally identified that issue. Consider that the US economy remains about 7 million jobs shy of the previous peak of nonfarm payrolls. At 200k jobs a month - a seemingly optimistic forecast at this point - we regain the peak in about 35 months. We are already (believe it or not) 23 months into the expansion, which means that we recover the jobs lost in this cycle after a 57 month expansion.

Now consider this: The average post-WWII expansion is only 59 months.

If this expansion is typical, then we can expect just 2 months of job growth beyond the previous peak before the next recession hits.

Now suppose that job growth limps along at a monthly average of 150k a month. Then we are 46 months away from the payroll peak, or an expansion time of 69 months. Ten months shorter than the post-WWII average. In other words, even without resorting to an immediate double-dip scenario, we could very well be in recession prior to regaining the jobs peak.

Perhaps we should take some comfort in the fact that the average of the past three expansions is 95 months - which provides some room to grow jobs beyond the peak, but not much in historical perspective. Moreover, given the likelihood that the Fed begins a tightening cycle well before the payroll peak is in sight, and that fiscal policy looks poised to turn contractionary very soon, I have trouble thinking this recovery will be more like the past three (one of which included massive technological change) than the entire post-WWII average. That said, hope springs eternal.

The very real possibility that we will slip into recession prior to regaining the previous jobs peak casts the current situation in an even darker light than that of Federal Reserve Governor Sarah Raskin. Not only is the depth and duration of the unemployment crisis immense, but so too are the long-term consequences. The failure to design a coordinated package of monetary and fiscal policy to engineer a V-shaped employment recovery looks increasingly like a massive lost opportunity. And with that opportunity now lost, a return to even something sort of like the pre-recession jobs trend seems essentially impossible.

Saturday, June 25, 2011

We Need to Bury the "Shovel-Ready" Objection to Infrastructure Spending

Robert Frank joins the chorus calling for something to be done about unemployment:

The Payroll Tax Needs a Vacation, by Robert Frank, Commentary, NY Times: The federal budget deficit is a distraction. It’s important, yes, and must be addressed. But by a wide margin, it’s not the nation’s most pressing economic problem. That would be the widespread and persistent joblessness...
Almost 14 million people ... were officially counted as unemployed last month. But that’s just the tip of the iceberg. There were almost 9 million part-time workers who wanted, but couldn’t find, full-time jobs; 28 million in jobs they would have quit under normal conditions; and an additional 2.2 million who wanted work but couldn’t find any and dropped out of the labor force.
If the economy could generate jobs at the median wage for even half of these people, national income would grow by more than 10 times the total interest cost of the 2011 deficit (which was less than $40 billion). So anyone who says that reducing the deficit is more urgent than reducing unemployment is saying, in effect, that we should burn hundreds of billions of dollars worth of goods and services in a national bonfire.
We ought to be tackling both problems at once. But in today’s fractious political climate, many promising dual-purpose remedies — like infrastructure investments that would generate large and rapid returns — are called unthinkable...
We need to keep posing hard questions to deficit hawks who argue that we shouldn’t be hiring unemployed workers to maintain our crumbling roads and bridges, even though postponing such projects will make them much more expensive in the future. These projects don’t impoverish our grandchildren. They enrich them.
The important point is that bringing down federal deficits is a long-run problem... But our immediate concern must be getting people back to work.

He also talks about, and favors, a payroll tax as one of the few politically viable options. About that, if we go the payroll tax reduction route, we need to design the policy in a way that protects Social Security financing. Many conservatives will try to make the payroll tax reduction permanent, and then use it to starve the Social Security program. From a previous post:

...for those who want to scale back or eliminate Social Security, this would be seen as an opportunity to starve Social Security of finances, create a crisis, then argue for cutbacks. But there are ways to do this that don't involve cutting the payroll tax per se, so the political optics are different yet amount to the same thing. For example, continue collecting Social Security taxes as before, but give workers a temporary rebate that is clearly designated as temporary, and is independent of Social Security taxes. I'm sure there are better ways to do it, but the point is that we can help workers without interrupting the usual payroll tax flow and putting Social Security at risk.

But back to infrastructure. I can't help but think about all of those people who objected to putting more infrastructure spending into the stimulus package back in late 2008 and the early months of 2009. The argument was that there weren't enough shovel ready projects available. If we tried to do too much of this type of stimulus, the economy would already be recovering by the time we put those projects into place, and it would cause the economy to become overheated. 

Of course it turned out that we actually needed to provide sustained stimulus, the forecasts for a quick end to the recession were way off.

Presently, the spending is ending and creating a drag just as the economy is struggling to turn upward. The forecasts for a quick end to the recession were wrong, and a larger, more sustained stimulus effort was needed (as many of us argued at the time). Having additional projects coming online now would have been very helpful to the recovery effort.

However, when infrastructure projects are suggested now as a way to help the unemployed and our crumbling infrastrucutre at the same time, the same voices tell us that the first round of stimulus spending showed there aren't enough shovel ready projects available. There's no way to get these projects going in time to do much good.

The best response to that argument  -- besides the fact that they were wrong about this before, there was plenty of time to develop projects, and they are wrong again -- is this graph:

Fed Forecast of the Unemployment Rate


There's plenty of time, plenty of unemployed resources, and interest costs are as low as they'll ever be. And, of course, there's plenty of need for investment in infrastructure so there are large benefits from this type of spending.

But we're too pennywise for this.

[Also posted at MoneyWatch]

Thursday, June 23, 2011

Weekly Initial Unemployment Claims Increase to 429,000

Quick note, and not a good one:

Weekly Initial Unemployment Claims Increase to 429,000

[Update: Graph and a few comments here.]

Wednesday, June 22, 2011

The Costs of War

One of the costs of war is higher unemployment:

Gender Values: The Costs of War, by Susan Feiner: At ten years and counting, the wars in Iraq and Afghanistan are the longest in U.S. history. Not surprisingly, they are the most expensive, with total war spending poised to top two trillion dollars early this summer. ... The U.S. government's spent over $2,000 per capita on all aspects and accouterments of war. ...
Spending on the military counts for a huge share -- 58 percent -- of U.S. discretionary federal spending. If military funding were redirected to meet critically important social needs, the nation as a whole would reap enormous benefits. ...[gives examples]
This military spending has yet another negative economic impact, and that's on the labor market. The largest share of military spending goes to weapons procurement, not to pay soldiers or other military personnel. The consequence of this is that it closes off employment opportunities in fields where women are most likely to earn decent salaries.
Dollars spent on the military and dollars spent on domestic programs like health care and education call very different jobs into existence. According to an important study by the Political Economy Research Institute (PERI),... one billion dollars spent on education or health care would create many more jobs than does spending the same amount on military projects. When the nation spends one billion dollars on the military, 11,600 jobs are created. If that billion dollars was spent instead on education 29,100 jobs would be created. And if it were spent on health care almost 20,000 jobs would be created. The military currently rips through more than $600 billion per year. If ... $300 billion were spent instead on education and health care, the employment picture would shift dramatically. The sum of $150 billion spent on education would create over four million jobs. Spending another $150 billion on health care would create about three million jobs. Adding the two sets of new jobs together, and subtracting out the military jobs that are lost, yields 3.8 million new jobs,... driving the unemployment rate to down from the current level of nine percent to under seven percent.
The positive benefits of such a change for women can't be understated. ...

[Also see Stiglitz and Bilmes.]

Wednesday, June 15, 2011

Structural Unemployment or Not, Jobs, Jobs, Jobs is Part of the Answer

I don't think the idea that the unemployment problem is mostly structural stands up to the evidence, see here for example, but for the sake of argument suppose it is. How should we respond? There are several choices:

1. Do nothing to help. Even though the problems facing the unemployed were created by events out of their control -- they did nothing to deserve unemployment and the struggles that come with it -- and even though those who did cause the problem have received lots of help from bailouts, unemployed workers should not get anything from the government. They're on their own.

2. Provide government help in the form of transfer payments (i.e. cash or the equivalent, e.g. food stamps, from the government), but don't expect anything useful in return. Just send checks and vouchers.

3. Provide the same amount of support as under 2, or better yet even more support, in return for jobs that do useful things for the community. That is, bridge the time while structural adjustments are underway with useful employment for those waiting for the structural changes to be completed.

4. Provide job retraining, use tax incentives to promote better matching by inducing workers and firms to move, and implement tax and other incentives that encourage more business investment and hence faster adjustment from firms.

Importantly, with cyclical unemployment there is also a fifth option, increasing aggregate demand, that does not exist when the problem is structural. But if we cannot increase aggregate demand sufficiently due to political or technical reasons, we also need to bridge the gap while demand recovers by providing jobs for those who will not be able to find employment no matter how hard they try.

To me, the choice is easy. For long-term structural unemployment, 3 is best. There is an argument for 2, we want workers to have the resources they need to search for jobs that suit them best, so we shouldn't eliminate this type of help. But the structurally unemployed will not be able to find a job easily even with an extended, dedicated search supported by unemployment compensation. They need jobs to provide income for their households and to keep them connected to the labor market.

But there is one potential caveat to a jobs program for the structurally unemployed -- it might reduce labor mobility. Workers who might have been inclined to move to take a new job will be less inclined to do so if they have a temporary, community value enhancing job from the government. I don't think that's a significant worry even when the problem is largely structural, but it's worth noting. (Remember that I am assuming structural unemployment for the sake of argument. If the problem is mostly cyclical, as I think it is, this isn't an issue.)

But even if reduced mobility is an issue (and, again, I don't think it is), there is an important offsetting effect. Long-term unemployment, the type that occurs with slow structural adjustment, has long-term negative consequences for the economy (and this is true for both the cyclically and structurally unemployed). The longer people are unemployed, the higher the chance of them dropping out of the labor market permanently. Workers close to retirement will find a way to hang on for a few years by living with family, doing odd jobs, etc., and their experience and skills will go to waste. Younger workers tend to drop out, or work in the underground job market, e.g. doing construction outside of the formal job market. Or they take whatever job they can get and then buy a car, a house, have a kid, etc. and get stuck in a job that does not make full use of their capabilities. They are part of the long-term under-employed. We are all worse off when this happens. The point is that long-term unemployment causes the labor force to erode in both numbers and skill, and that is costly to society. Simply keeping workers connected to the labor market with a job of any type -- doing things the community needs for example -- avoids the erosion of the workforce and the negative consequences (lower economic growth rate) that come with it.

Thus, contrary to what you sometimes hear, we can help the structurally unemployed through job creation. Those who insist, contrary to the evidence, that the problem we face right now is mostly structural cannot use this to argue against a job creation program. In fact, since increasing demand is unlikely to work in the case of structural unemployment in the way it will for a cyclical problem, there is a sense in which the argument for job creation to bridge the long adjustment gap is even more compelling when the problem is structural.

So it doesn't matter whether the problem is the inability to offset the slow recovery of demand through monetary and fiscal policy due to political or technical problems, or long-term structural adjustment, we need jobs, jobs, jobs.

Kash Mansori: Has the Bad Housing Market Reduced Labor Mobility?

Kash Mansori:

Has the Bad Housing Market Reduced Labor Mobility?, by Kash Mansori: Economists Colleen Donovan and Calvin Schnure have written an interesting new paper examining whether the fall in house prices since 2007 in the US -- which has left many home-owners owing more on their house than it is worth -- created a lock-in effect that depressed labor mobility. ...

The evidence presented in this paper indicates that the fall in house prices has indeed caused a "lock-in" effect, but has not significantly impacted labor market efficiency. Here's the abstract:

Locked in the House: Do Underwater Mortgages Reduce Labor Mobility?: The collapse of the housing boom led to an unprecedented number of homeowners who are “underwater”... These homeowners cannot move without incurring significant losses on their homes, possibly causing a “lock-in” effect reducing geographic mobility. This raises concerns that a reduction in labor market mobility may hamper the ability to move to accept employment in another geographic market, degrading labor market efficiency and contributing to higher structural unemployment.

This paper ... finds significant evidence of a lock-in effect. The lock-in, however, results almost entirely from a decline in within-county moves. As local moves are generally within the same geographic job market, this decline is not likely to affect labor market matching. In contrast, moves out-of-state, which are more likely to be in response to new employment opportunities, show no decline, and in fact are higher in counties with greater house price declines. Housing market lock-in does not appear to have degraded the efficiency of the labor market and does not appear to have contributed to a higher unemployment rate.

This is a significant piece of evidence against the "structural unemployment" explanation for the US's high and persistent unemployment rate... [T]he underwater mortgage "lock-in" phenomenon that has been cited as the primary reason why the US's labor market suddenly got so much worse starting in 2008 simply does not match the evidence. As a result, if we want to understand why unemployment has been so persistently high in the US since 2008, we have to look beyond "structural" or supply-side explanations. Once again, the far simpler explanation seems to better match the evidence: there's just not enough demand, so businesses aren't hiring, and people remain unemployed.

If the problem is structural, there's not a lot that policy can do to help in the short-run. Social insurance can ease the pain. Government can provide short-term employment to tide workers over, create incentives for both workers and firms to relocate, provide retraining, etc., but these problems take time to work themselves out. However, if the problem is lack of demand, then there is much more that policymakers can do to help the economy get back on its feet. The key is to offset the fall in demand through monetary and fiscal policy measures so that businesses will be willing to hire people again.

Tuesday, June 14, 2011

Jobs Program?

Robert Reich visits Washington D.C. and asks about a jobs program:

... I made the rounds of Washington Democrats, repeatedly asking why no bold jobs plan is emerging. Here’s a sample of their responses:
“Dead in the water. We’ll be lucky if we get votes to raise the debt ceiling without major spending cuts this year and next.”
“Are you kidding? It’s all budget deficit, budget deficit, budget deficit. Nobody’s thinking about anything else.”
“Republicans beat us up so bad over the first stimulus there’s no way we’re gonna try for a second.”
“We got [Republicans] cornered on Medicare. Now they want to change the subject to jobs. Forget it.”
“No need. We’ll see job growth in the second half of the year.”
“The President doesn’t want to put anything on the table he can’t get through Congress.”
And so it went. Not a shred of urgency. ...

Karl Smith: Capital vs. Labor

Karl Smith makes a good point:

Capital vs. Labor, by Karl Smith: Catherine Rampell is exploring a thesis about the hiring practices. A sample

On Friday, I wrote about how equipment and software prices are getting rapidly cheaper while the cost of labor has been getting more expensive, making capital a more attractive investment to companies than people. Tax incentives that encourage earlier capital investment may be helping, too.

Importantly this only makes sense if capital and labor are substitutes in production. Typically we think of them as complements.

Lets take some obvious examples. Suppose to create welded metal I need both a welder and welding torch. The welding torch goes down in price. That means that its actually cheaper to create each piece of welded metal. This will allow me as a factory owner to either lower my price, sell more welded metal while maintaining my profit margin.

However, to do this I will need more welders. So a fall in the price of welding torches, increases the demand for welders.

On the other hand suppose that I am an airline considering whether to have more booking agents or whether to invest in more sophisticated booking software. Specialized software can run well into the multi-millions but if it gets just cheap enough it might actually be a better deal than new agents.

So the falling price of capital alone isn’t enough. It depends on how the capital interacts with the workers. Moreover, it would take some fancy math to show this, but until capital can do everything labor can do – that is until the singularity – some types of jobs must be complements to capital.

Those jobs will always be in more demand as capital get cheaper. The question is how much skill you need to do those jobs. This is the whole issue of skill-biased technological change.

Let me add that within this framing of the question, one fear is that technology is producing more and more substitutes for labor than ever before, digital technology in particular, and there is uncertainty about what that means for the future.

Saturday, June 11, 2011

Are All Labor Market Matching Problems Structural?

I had a radio interview not too long ago on cyclical versus structural unemployment, and in rereading some old posts on the topic I came across this statement from Brad DeLong:

Let us remember what structural unemployment looks like. The economy is depressed and unemployment is high not because of slack aggregate demand generated by a collapse in spending, but instead because “structural” factors have produced a mismatch between the skills of the labor force and the distribution of demand.

That reminded me of a point I've been meaning to make. With all the talk about whether our unemployment problem is cyclical or structural (it's mostly cyclical), many people are looking at measures of mismatches to assess how much of the problem is structural. But care needs to be taken in the interpretation of mismatch numbers. Here's why.

Suppose that you run a business in Town A and you need someone to run a complicated piece of equipment. Unfortunately, the size of your town is relatively moderate, and there are no qualified job applicants available. You have advertised the job for weeks, but no takers. This sounds like a classic case of structural unemployment -- there is a need for workers with a different skill set -- but it may not be a structural problem.

Suppose also that the economy is in a recession, and business has not been good. Because of that, you can't offer a very high wage. It turns out that in the very next town, Town B, there is a qualified worker who was laid off due to a business failure caused by the recession, but at the wage you are offering the worker is not willing to move. The worker has a job and is surviving, though the pay is much less than before and the worker is underemployed -- the worker is mismatched -- but the family is getting by.

However, if things were better -- if the economy was humming away at full employment -- the employer in Town A could offer a higher wage and induce the worker in Town B to move. If so, then this unemployment is cyclical, not structural. There is a mismatch, but the mismatch is driven by lack of demand.

The point is that when we talk about structural unemployment, we assume aggregate demand is not the problem. Thus, structural unemployment must be measured under an assumption that demand is sufficient to return us to full employment. Structural unemployment is driven by changes in tastes, technology, etc. that produce geographic, skill, or other mismatches that prevent reemployment. For example, if there is a change in tastes that causes the demand for hula hoops to fall and the demand for skateboards to increase, or a change in technology that causes the demand for typewriters to fall and the demand for word processing software to increase, then we have to move workers and other resources out of hula hoop and typewriter production and into the skateboard and word processing businesses. That will take time if there are geographic, training, or other barriers that prevent the quick translation of resources from one use or one place to another. Note, however, that the problem is not lack of demand. People want more skateboards and word processors than they currently have, so that unlike the example above where higher demand and the higher wages that come with it cause the worker to move and eliminate the mismatch, an increase in demand won't fix the problem. If an increase in demand will fix the problem, as in the example above, then it's not a structural problem.

The bottom line is that to measure structural unemployment in a recession, it's not enough to simply survey the labor market and count the mismatches. You have to know if those mismatches would persist at a level of demand consistent with full employment. To the extent that the mismatch problem is due to lack of demand, and wages and prices that are too low to induce resource movements to their best use, the problem is cyclical, not structural.

Friday, June 10, 2011

Fed Watch: More on Geithner, Deficit Reduction, and Expenditure Switching

Tim Duy:

More on Geithner, Deficit Reduction, and Expenditure Switching, by Tim Duy: Zach Goldfarb’s profile on Treasury Secretary Timothy Geithner ignited a firestorm among bloggers with the money quote:

The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.

Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”

Reactions on the shift to a deficit-reduction strategy come from Ryan Avent, Felix Salmon, and Mike Konzcal, among others. The general view is that Geithner has pushed the Administration into an economically dangerous position, guaranteeing millions remain unemployed, for absolutely no good reason. The yield on the 10-year Treasury is mired at 3%. Where is this loss of confidence that is so feared in Washington?

Salmon gets to the heart of Geithner’s thinking here:

Geithner cut his teeth in a world of bond vigilantes, an era when James Carville said that he would like to be reincarnated as the bond market, because then he could intimidate everybody. And after that, Geithner dealt with a series of international sovereign-debt crises where countries found themselves hammered by enormous bond spreads.

I suspect - guessing, really - that Geithner is very much concerned the US is uncomfortably close to a currency crisis. Indeed, I think that we were closer to such a crisis in 2008 than many realize:


That kind of shift in asset flows is sort of difficult to dismiss as irrelevant. The only thing that pulled us out of the fire was the willingness of foreign central banks to accumulate dollar assets to compensate for private outflows, no strings attached (of course, those banks arguably had no choice, as their accumulation of dollars helped support the imbalances that made a currency crisis possible). If the IMF had been called upon, they surely would have wanted strings attached, and one such string would almost certainly have been a deficit reduction program.

Crazy, you say? Look to Greece.

That’s all ancient history. Now, the goal is to prevent it from happening again. And that is where Geithner is trying to engineer what a massive expenditure switching program. That program was thoroughly described by New York Federal Reserve President William Dudley in a speech that was lost in excitement surrounding Federal Reserve Chairman Ben Bernanke’s latest assessment of the US economy. Greg Ip gives the short version:

To get the federal deficit from its current 10% of GDP to a more manageable 3% will require America to generate additional consumption, investment and net exports equal to 7% of GDP. Since it already consumes too much, that leaves business investment and net exports.

Monetary policy can help achieve this by accommodating the shift in relative prices that rebalancing requires. Mr Dudley notes that surging EME growth has driven up prices of both commodities and their own exports as domestic wages rise. That has driven up headline inflation in America. But Mr Dudley makes the crucial point that this represents a deterioration in America’s terms of trade and thus its standard of living. It is not a generalised inflation problem unless it leads to second-round wage and price catch-up, of which there is no sign. Not only does such a terms of trade shock not call for tighter monetary policy, it is essential to rebalancing. As foreign prices rise relative to American prices, America will export more and import less.

(Note also that Yves Smith linked to the Dudley topic even sooner). I have tended to think in similar terms – that, over time, the US economy needs to shift away from reliance on consumer spending toward nonresidential investment. Absent the US consumer, where, you ask, will the demand come from to support such investment? Increased exports and import competition, both of which are facilitated by a weaker dollar.

Would such a decline become disorderly? That is probably what Geithner fears, and his response is that it is less likely to occur, and more easily managed should it occur, if the US fiscal position is stabilized, the sooner the better. Others, particularly China, must participate as well – hence the push to revalue the yuan.

Obviously, the conundrum here is that this process involves structural adjustment, which involves – you guessed it – structural unemployment. Which, understandably, raises the ire of left-leaning economists and bloggers. And we go full circle – how can we accept high unemployment when interest rates are so low?

I am a bit stuck on this issue. Most mornings I wake up and think the Administration’s focus on deficits is insane. There have been predictions of a dollar collapse for a decade. Should we deny employment opportunities to millions for another decade on the basis of such failed predictions?

A few months ago, I rushed back to Eugene from a Portland Business Alliance meeting where I was given a lapel pin that read “JOBS.” While picking up my son from soccer practice, another parent noticed the pin and said “Nice pin. I wish I had one of those.” “A pin,” I replied, thinking I have another in my pocket. Duhhh – dumb economist. “No, a job,” was the response. Those are the times you think, yes more stimulus, lots more, now.

And, admittedly, at other times I think the costs of a currency crisis would be very, very high, with a rapid imposition of massive structural adjustment. Given the possibility of such an outcome, which, I reiterate, was not inconceivable during the recent financial crisis, don’t policymakers have a responsibility to work toward a more balanced pattern of growth?

In addition to clearly differentiating between the short and long run deficits, I think if you want to meld these to positions into a consistent policy framework, the objective is to support deficit reduction via higher taxes on upper-income groups, those least impacted by the structural adjustment away from consumer spending, while maintaining spending on the social safety net. Whether this ultimately occurs, or if instead the weight of deficit reduction falls most on those negatively impacted by structural adjustment, remains to be seen.

Thursday, June 09, 2011

The Unemployment Crisis Continues...

New claims for unemployment insurance remain elevated:

In the week ending June 4, the advance figure for seasonally adjusted initial claims was 427,000, an increase of 1,000 from the previous week's revised figure of 426,000. The 4-week moving average was 424,000, a decrease of 2,750 from the previous week's revised average of 426,750.


There is finally talk of doing something, but Robert Reich isn't happy that the president's discussions are focused on supply-side initiatives (I've argued that the administration's focus on supply-side policies has hurt the ability of policymakers to help employment recover):

Why the President Must Come Up With Demand-Side Solutions, And Not Go Over to the Supply Side, by Robert Reich: “I am concerned about the fact that the recovery that we’re on is not producing jobs as fast as I want it to happen,” President Obama said Tuesday, amid the flood of bad economic news...
Does this mean we’re about to see a bold package of ideas from the White House for spurring growth of jobs and wages? Sadly, it doesn’t seem so.
Obama says he’s interested in exploring with Republicans extending some of the measures that were part of that tax-cut package “to make sure that we get this recovery up and running in a robust way.”
Accordingly, the White House is mulling a temporary cut in the payroll taxes businesses pay on wages. White House advisors figure this may appeal to Republican lawmakers who have been discussing the same idea. ...
Other ideas under consideration at the White House include a corporate tax cut, accompanied by the closing of some corporate tax loopholes.
Can we get real for a moment? ... The problem isn’t on the supply side. It’s on the demand side. Businesses are reluctant to spend more and create more jobs because there aren’t enough consumers out there able and willing to buy what businesses have to sell. ...
All this translates into a continuing crisis on the demand side. ... How to get jobs back, then? By reigniting demand. Put more money in consumers’ pockets and help them renegotiate their mortgage loans.
For example: Enlarge the payroll tax break for workers — not just for employers. ... Create a WPA for the long-term unemployed. Allow distressed homeowners to declare bankruptcy on their primary residence, thereby giving them more clout with lenders to reorganize their mortgage loans. Lend federal money to (rather than bail out) states and cities that are now firing platoons of teachers, fire fighters, and other workers because state and local coffers are empty.
But we’re not hearing any of these sorts of demand-side solutions from the White House. In seeking Republican votes, Obama is putting forth Republican supply-side ideas – lowering the employer costs of hiring, cutting corporate taxes – that have nothing to do with this demand-side crisis. ...
Supply-side economics doesn’t work ... when our continuing economic crisis is so palpably being driven by inadequate demand...

At this point I'll take what I can get, and practically it's probably true that Republicans won't support anything that is inconsistent with their supply-side beliefs. However, that doesn't mean the president has to accept these constraints when he proposes policies. He doesn't have to limit himself to business tax cuts in one form or the other. He should put forth the policies he thinks are best for stimulating employment, including direct job creation initiatives. Then, he should use his bully pulpit to make it absolutely clear that Republican allegiance to the business sector couched as supply-side policies is standing in the way of doing what's best for the unemployed. He may very well end up with the policies described above in order to get something done, but it should be with great reluctance if he thinks another path would be better, and it should extract a political price from the other side.

Of course, Obama and his advisors mayd believe supply-side polices are optimal at this point, in which case I just want to throw up my hands and give up. And he may believe that negotiation over the policies would simply delay getting needed help to the unemployed without changing the policy in the end. On the last point, the fact that the administration waited until there was little time to negotiate when so many people were urging them to tackle the unemployment crisis months, if not years ago is their own fault (and the time crunch seems to be more about getting re-elected than helping struggling families anyway). Perhaps if the administration hadn't wasted so much time figuring out how to cut make the emplyment problem worse by cutting the deficit and had targeted unemployment instead, they would have had the time to negotiate properly.

As I said, I'll take what I can get at this point, and at least they're finally talking about the problem. It's just too bad the administration seems so willing to go along with policies that enable Republicans to achieve their ideological goals regarding taxes, the size of government, and the nature of government policy.

Update: See also Will a Payroll Tax Cut Stimulate the Economy?

Fed Watch: Output Has Not Fully Recovered

Tim Duy:

Output Has Not Fully Recovered, by Tim Duy: Kathleen Madigan at the Wall Street Journal claims:

In a speech given Tuesday, the chairman discussed the aggregate hours of production workers, which had fallen by nearly 10% from the beginning of the recent recession through October 2009. “Although hours of work have increased during the expansion,” he said, “this measure still remains about 6 1/2% below its pre-recession level.” In other words, labor markets are nowhere near where they were before the financial collapse and recession.

Output, on the other hand, is fully recovered. Real gross domestic product — which at its worst had shrunk 4.1% — surpassed its 2007 peak at the end of 2010 and expanded further in the first quarter of 2011.

True, output has surpassed its previous peak, but this in no way should be the measure by which we determine if output has fully recovered. Full output recovery would require that activity return to potential output, and by that measure, output recovery remains little more than a fantasy:


See also Mark Thoma's link to Justin Wolfers. Madigan continues:

The gap between output and jobs is why the economy is in an expansion cycle by economists’ standards — but it doesn’t feel even close to recovery mode for the average consumer.

No, because if the economy were in fact fully recovered, unemployment rates would be at normal levels. Again, just because output regains its previous peak does not mean the economy has recovered. More:

Output has surged ahead of labor because of strong productivity. Robust productivity gains are good for profits and inflation outlook, but bad for workers and consumer spending.

This shouldn’t be true – higher productivity is absolutely not supposed to be bad for workers. It is supposed to allow for higher real wages, higher standards of living. But when aggregate demand falls short of that necessary to compensate for productivity growth, the economy remains mired in persistent disinflationary state, with high levels of unemployment. To solve this, something needs to boost aggregate demand. Not the Federal Reserve, claims Madigan:

Although the Fed is tasked with promoting full employment, there isn’t much the central bank can do at this point to push private businesses to hire.

It’s not that policymakers have no appetite for a third round of quantitative easing. It’s that another round probably isn’t going to help.

The Fed is not powerless, even at this juncture. Arguably, they have not even attempted to ease in line with that required to boost activity further. As Jim Hamilton points out, the numbers involved in QE2 should have been expected to have only a modest impact. The Fed could also raise inflation expectations. And I have always felt the Fed’s repeated insistence that their actions were only temporary helps ensure their policy will be less effectual than would otherwise be the case. Why should banks expand lending when they know the Fed is only going to mop up excess reserves and jerk up the short end of the yield curve the first chance they get?

That the Fed chooses to not take a more aggressive stance should not be confused with the inability to offer additional economic support. And by no means should we trick ourselves into believing that output is fully recovered.

The graph in the article essentially draws a horizontal line through the 2007 peak in the graph shown above:


Notice that if you allow for a trend, output has not fully recovered --Tim's point -- and the employment problem is even worse than this graph makes it seem.

Wednesday, June 08, 2011

Is the Summer Surge All about Labor Supply?

Arin Dube rebuts Casey Mulligan's contention that "supply is the primary reason that jobs are created during the summer" (Mulligan is *trying* to counter this post from Tim Duy):

Sweating over Seasonality: Is the Summer Surge all about Labor Supply? In a series of blog posts (most recently here), Casey Mulligan has argued rise in summer employment when school is out shows that labor supply always matters, even in a recession. Mulligan states that “[t]he economy creates jobs in the summer — even during the last several years, when our economy supposedly suffered from a lack of demand — because millions of people become willing and available to work,” and that even today “greater labor supply remains one route to higher employment.” However, as I show in this note, drawing this policy implication from seasonality, however, is a highly problematic exercise.

Most generally, production decisions over the whole year are planned knowing the greater availability of teens and young adults during the summer months. For example, some businesses and households plan to wait for the summer months to hire painters or landscapers. Second, demand for some types of work like camp counselors and babysitters rise during the summer months precisely because that’s when school is out.  For both these reasons, employment changes in the summer can easily reflect higher demand during these months as well as an increase in labor supply.  Some of this increased demand comes from inter-temporal substitution across months (the first example), while other part of this reflects a higher net demand (the second example).

Mulligan’s main evidence that summer is all about labor supply and not demand is that for teens and young adults, unemployment rises and average wages fall. However, this is not a great test – as there is likely to be systematic differences in the composition of both workers and jobs between the school year and the summer – precisely because a lot more youth work during the summer. Then there are data related challenges, like how to deal with unpaid (or barely paid) internships. For these reasons, looking at changes in average wages between summer and non-summer months for youth is problematic.

However, there is one simple way of assessing the claim that the summer surge in employment is only about labor supply – and that is to look at job vacancies.  If summer is mainly a time of a big labor supply shock, we should not see any systematic seasonal patterns in job openings. Moreover, we should expect to see a lot of labor market slack – which economists typically measure using the “unemployment-to-vacancy” (U-to-V) ratio. The higher is the ratio, the more unemployed workers there are for a given job opening: if Mulligan is correct we should see the rise in employment (and unemployment rate) be matched by a parallel sharp rise in the U-to-V ratio, while vacancies should be stable.

To test this, I obtained the seasonally unadjusted monthly “job openings” rate from BLS between 2001 and 2010 (this comes from the JOLTS data). For the same years, I also obtained the seasonally-unadjusted monthly unemployment and employment-to-population (EPOP) rates between 2001 and 2010 for ages 16 or greater. To construct the average seasonality measure for a variable x, I first calculate the deviation of x from its annual mean, i.e., x(month,year) – x(year).  Next I average the mean deviated values across the years. This is a standard measure – in technical terms, it measures the “month fixed effects” after taking out “year fixed effects.”  It represents the “excess value of x” in a given month from its annual average.

Below I plot the monthly excesses of EPOP, unemployment, vacancy and U-to-V rates.

Dube1 Dube2
Dube3 Dube4

The top two graphs confirm that the summer months of June and July see an increase in employment (roughly 0.5 percentage point), accompanied by an increase in unemployment rate (roughly 0.2 percentage point). These two pieces of evidence would be consistent with a “labor supply only” story. However it turns out that job openings also increase over those months (by roughly 0.1 percentage point). This is particularly true for July, when the unemployment and vacancy rates move up by roughly equal amounts.  As a result, the overall unemployment-to-vacancy rates show much less seasonality during the summer than the unemployment rate. Averaged together, June and July do not look like a period with particularly high amount of slack in the labor market as measured by the U-to-V ratio – which would have been the case if the only thing changing in the summer were labor supply. While there is a big “summer excess” in employment and also some in unemployment, it is much less true for the unemployment-to-vacancy rate – because job vacancies also tend to rise. That should be a big flashing warning sign to anyone wanting to attribute the summer surge to only labor supply factors.

So what does this tell us about the efficacy of Keynesian demand management? Nothing really, and that’s the point. For that, you’d have to look elsewhere – in whatever season.

Arindrajit Dube
Assistant Professor
Dept of Economics
University of Massachusetts-Amherst

Romer versus Geithner

Geithner is the only economic advisor I can think of that's been there from the start, and with the departure of others his influence has likely increased. If you are unemployed, that's not good news:

Geithner: Stimulus is ‘sugar’ for the economy, by Ezra Klein: From Zach Goldfarb’s excellent profile of Treasury Secretary Timothy Geithner’s success inside the Obama administration:

The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as [then chairwoman of the Council of Economic Advisers Christina] Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.

Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”

In the end, Obama signed into law only a relatively modest $13 billion jobs program, much less than what was favored by Romer and many other economists in the administration.

So Geithner argued against job creation and for deficit reduction? Quoting from a tweet from Andy Harless on a different topic (Bernanke's speech), "depressing (pun intended)."

Tuesday, June 07, 2011

Trading Tax Cuts and Wars for Working Class Misery

We are, as they say, live:

Trading Tax Cuts for Working Class Misery

I explain that:

What we did, in essence, was trade tax cuts for the wealthy and spending on wars for increased working class misery – higher unemployment, insufficient social service support, and a slower recovery from the recession.

Sunday, June 05, 2011

Austan Goolsbee: It’s Now Up to the Private Sector

Scarecrow is unhappy. As you read this, remember that the administration has been seeing green shoots just around the corner for some time now, and using this to argue against taking action on the unemployment problem:

Scarecrow’s Nightmare: Austan Goolsbee Defends President Romney’s Economic Plan, by Scarecrow: If I’d been asleep for the last decade and woke up to ABC This Week’s interview of Presidential economic advisor Austan Goolsbee, I would assume that Mitt Romney won the 2008 election, that he was predictably following Republican dogma about how to recover from a severe financial collapse and recession...
Goolsbee correctly told us that a smart economist wouldn’t get overly excited about one month’s jobs and growth numbers but would instead look at the overall trend. Of course what he wouldn’t want to concede is that GDP grew at a meager annual rate of 1.8 percent over the first three months of 2011 and ... the overall trend for job growth was still not enough to make a serious dent in unemployment unless you believe taking 5-10 years to get back to full employment is okay. ...
When Amanpour asked him what the Administration could or should be doing to improve conditions, he ticked off items you’d expect to hear from a typical GOP Presidential adviser: we’ve got to get the debt under control; we have a White House effort to identify and get rid of governmental regulations that are preventing the private sector from growing the economy; we should pass “free trade” agreements backed by the Chamber of Commerce; and we should leverage limited public dollars to release billions in private funding for investments.
Goolsbee’s bottom line: “It’s now up to the private sector.” That’s exactly what you’d expect from President Romney’s economic adviser.
It took Paul Krugman and Chrystia Freeland, over the absurd denials by Martin Regalia of the Chamber of Commerce, to remind ABC’s audience that business confidence and concerns about taxes and regulations aren’t the problem... Demand is weak because the recession and the housing market crash depleted consumers’ wealth and they’re worried about losing their homes and jobs. ...

Policymakers have been telling us to have patience for some time now, but patience ran thin long ago. We need action, not excuses to do nothing based upon Republican talking points. We have millions of people out of work, we face the prospect of a five to ten year recovery for employment, yet the administration has no plans to even try to push Congress to do more. I understand that Congress is unlikely to go along, but at least people would realize whose side the administration is on. Because right now -- as the above makes clear -- it's hard to conclude that the unemployed are anywhere near the top of the list.