Category Archive for: Unemployment [Return to Main]

Wednesday, October 19, 2011

A Convenient Excuse

If you don't have a job, many in the GOP think it's your own fault. Never mind that there are fewer jobs than people looking by a wide margin, somehow if the unemployed would try harder, the jobs will magically appear:

GOP debate crowd cheers idea that jobless are to blame for their plight, by Greg Sargent: ...This moment from last night’s debate, in which the audience cheered the idea that the unemployed are solely to blame for not having a job, strikes me as one of the most iconic moments we’ve seen at the debates yet...
Anderson Cooper says: “Herman Cain, I’ve got to ask you — two weeks ago, you said, `Don’t blame Wall Street, don’t blame the big banks. If you don’t have a job, and you’re not rich, blame yourself.’ That was two weeks ago. Do you still say that?” At this point applause starts, and after Cain stands by the claim, the applause crescendos and hoots of approval can be heard.
Lovely,... the crowd is applauding the idea that the unemployed are solely to blame for their plight. The basic suggestion here is that ... it’s morally correct to place all the blame for unemployment on the jobless themselves. ...

Convenient, isn't it? It gives people who don't think they have any obligation to contribute to social insurance a reason to turn their backs on the unemployed.

Tuesday, October 18, 2011

The GOP's (Lack of a) Jobs Plan

The GOP wants to take us backwards:

GOP: ‘Deregulate Wall Street!’, by Ezra Klein: In recent days, more than 900 cities have hosted protests under the Occupy Wall Street banner. But the enthusiasm ... hasn’t trickled up to the GOP presidential campaign. There, the candidates want to leave Wall Street alone. ... They want to deregulate -- actively and aggressively.

“I introduced the bill to repeal Dodd-Frank,” bragged Rep. Rep. Michele Bachmann... But Herman Cain was not to be outdone. “Repeal Dodd-Frank, and get rid of the capital gains tax,” he countered. Repealing the capital gains tax would make it vastly more profitable to earn a living through investment income rather than wage income. A hedge-fund manager, for instance, might escape income taxation entirely. It would give smart, young college students even more reason than they have now to go into the hedge fund game than, say, medicine.
“Dodd-Frank obviously is a disaster,” agreed Rep. Ron Paul. “But Sarbanes-Oxley costs a trillion dollars, too. Let’s repeal that, too!” Sarbanes-Oxley ... is the law passed in the wake on the Enron scandals. It sought to make balance sheets more transparent and financial statements more trustworthy. It is not well liked by the financial sector.
Mitt Romney, while not quite as carefree in his denunciations of the financial-regulation reforms, largely agrees with his co-candidates. His jobs plan promises that a Romney presidency would “seek to repeal Dodd-Frank and replace it with a streamlined regulatory framework,” though it doesn’t give much detail on what that streamlined framework would be. He also says that “the Sarbanes-Oxley law passed in the wake of the accounting scandals of the early 2000s should also be modified as part of any financial reform.”
So three years after the worst financial crisis since the Great Depression, the consensus in the Republican Primary is that we should deregulate Wall Street not just to where it was before the bubble burst, but to somewhere nearer to where it was before Enron crashed. ...

Romney's jobs plan is to repeal Dodd-Frank? Speaking of jobs, how about the GOP jobs plan?:

Republicans Getting a Pass on Their Jobs Plans, by Kevin Drum: Greg Sargent wants to know why the media is giving Republicans a huge pass on their various "jobs plans":

Obama and the Senate GOP have both introduced jobs plans. In reporting on the Senate plan, many news organizations described it as a “GOP jobs plan.” And that’s fine — Rand Paul said it would create five million of them. But few if any of the same news orgs that amplified the GOP offering of a jobs plan are making any serious effort to determine whether independent experts think there’s anything to it. And independent experts don’t think there’s anything to it — they think the GOP jobs plan would not create any jobs in the near term, and could even hurt the economy. By contrast, they do think the Obama plan would create jobs and lead to growth.
Why aren’t these facts in every single news story about the ongoing jobs debate? Why aren’t they being broadcast far and wide? ...

I ... suspect that reporters are simply so used to Republicans embracing nonsense that they evaluate it on a whole different plane than they do "serious" proposals. GOP campaign plans are treated more as optics than as actual policy, as ways to signal a candidate's conservative bona fides more than as blueprints for actual legislation.

But Greg is right: this should stop. There's no reason to give these guys a pass on their laughable jobs plans that virtually no one thinks will create any actual jobs. ...

Perry's jobs program -- have people drill holes in the ground and then, for the most part, fill them up again -- sounds quite Keynesian. But it's mostly a way to argue for deregulation of his bread and butter, the energy industry, rather than a serious job creation proposal (the claim that it is a favor to the energy industry rather than a serious jobs proposal is bolstered by the other leg of his jobs plan, to dismantle the Environmental Protection Agency). This is characteristic of all the GOP jobs proposals -- pick something that you don't like, the EPA, Dodd-Frank, health care legislation, Sarbanes-Oxley, etc. -- and then argue that eliminating it will create jobs. Then wait for the press to report it as a serious job creation proposal (or at least fail to point out that the claims can't withstand scrutiny).

Monday, October 17, 2011

Spence: The Global Jobs Challenge

Michael Spence:

The Global Jobs Challenge, by Michael Spence, Commentary, Project Syndicate: ...The third challenge is distributional. As the tradable part of the global economy (goods and services that can be produced in one country and consumed in another) expands, competition for economic activity and jobs broadens. That affects the price of labor and the range of employment opportunities within all globally integrated economies. Subsets of the population gain, and others lose, certainly relative to expectations – and often absolutely.
Many advanced countries – in fact, most of them – have experienced limited middle-income growth. ... In the United States, income inequality has risen as the upper end of the income and education spectrum benefits from globalization, while the rest experience declining employment opportunities in the tradable sector. ...
What does it mean – for individuals, businesses, and governments – that structural adjustment is falling further and further behind the global forces that are causing pressure for structural change?
Above all, it means that expectations are broadly inconsistent with reality, and need to adjust, in some cases downward. But distributional effects need to be taken seriously and addressed. The burden of weak or non-existent recoveries should not be borne by the unemployed, including the young. In the interest of social cohesion, market outcomes need to be modified to create a more even distribution of incomes and benefits, both now and in inter-temporal terms. ...
None of this will be easy. ... Nevertheless, the unemployed and underemployed, especially younger people, expect their leaders and institutions to try.

I don't like the call to accept that things will be worse in the future, and to get used to it. It is generally based upon the idea that much of our growth was due to the bubble - it was false growth -- and hence led to the perception that we can grow faster than is actually possible.

But if the resources hadn't have been invested in the financial industry, they wouldn't have been wasted, they would have gone elsewhere. If we had taken all the resources (and talent) that went into the financial sector and directed it elsewhere, it would have promoted growth and employment -- and likely of a far more stable and broad-based variety. In my view the challenge is to redirect these resources into productive uses, and to fix the mal-distribution of income gains. But simply accepting that expectations need to adjust downward -- that the fate of the middle and lower classes is a diminished future -- is not acceptable. We can do better than that.

Friday, October 14, 2011

Wanted: Job Creation

I wish I could find a way to adequately express the frustration I feel over the way Congress has all but turned its back on the unemployed. Even now, the only reason we're hearing anything from Democrats about job creation is because there's an election ahead. The legislation is timed for the politicians -- it needs to maximize reelection chances -- minimizing the struggles of the unemployed is a secondary consideration (if that). If the election were further away it's unlikely we'd be hearing about this much at all. And Republicans are worse, they have no plans at all except to use unemployment as an excuse to further ideological goals (balanced budget amendments, tax cuts for the wealthy, etc.). How can politicians be so indifferent to the struggles that the unemployed face daily? Are they really so disconnected from the lives of ordinary people that they don't understand how devastating this is to those who lost jobs due to the recession, people who can't find a way to get hired again no matter how hard they try?

Anyway, I can't seem to find a way to say this with the shrillness it deserves, and I apologize for that, but I just don't understand why the unemployment crisis isn't a national emergency.

Fulfilling Free Trade's Promise

Richard Green:

For free trade to fulfill its promise, the national government must redistribute income: As a card-carrying economist, I like trade--overall, it potentially enriches countries that engage in it. The problem is the meaning of enrichment.
Trade theory says that trade enlarges the pie that people share.  But among the most important contributions to trade theory is the Samuelson-Stolper Theorem, which says that relatively scarce factors of production see their returns fall when trade is introduced. In the context of an economy like the US, this means that low skilled workers see their wages fall in the presence of trade. The trajectory of wages in the US over the past 20 years or so are consistent with the predictions of Samuelson and Stolper.
NAFTA was sold to the US public as something that would make everyone better off. And it principle, it could have done so, had some of the gains to those who benefited from NAFTA been redistributed to those who lost as a result of it. Instead we got the NAFTA but not redistribution. This likely explains the widening disparity of incomes.

Thursday, October 13, 2011

"A Breathtaking Act of Economic Vandalism"

As this says, everyone expected Republicans to block President Obama’s jobs bill, but it's still disappointing to see the "you're on your ownership socety" in action:

No Jobs Bill, and No Ideas, Editorial, NY Times: It was all predicted, but the unanimous decision by Senate Republicans on Tuesday to filibuster and thus kill President Obama’s jobs bill was still a breathtaking act of economic vandalism. There are 14 million people out of work, wages are falling, poverty is rising, and a second recession may be blowing in, but not a single Republican would even allow debate on a sound plan to cut middle-class taxes and increase public-works spending.
The bill the Republicans shot down is not a panacea, but independent economists say it would have a significant and swift effect on the current stagnation. Macroeconomic Advisers ... said it could raise economic growth by 1.25 percentage points and create 1.3 million jobs in 2012. Moody’s Analytics estimated new growth at 2 percentage points and 1.9 million jobs. ...
The Republicans offer no actual economic plans, only tired slogans about cutting regulations and spending, and ending health care reform. The party seems content to run out the clock on Mr. Obama’s term while doing very little. On Tuesday, Mr. Obama’s campaign manager, Jim Messina, accused Republicans of trying to “suffocate the economy” in hopes that the pain would work to their political advantage. They are doing little to refute that charge. ...

Sunday, October 09, 2011

How Long Will It Take for the Labor Market to Recover?

To state the obvious, we need to create a lot more jobs per month than we have so far. If we continue at present rates, the unemployment rate will stay constant or increase even further. Even if we duplicate the performance of the economy prior to the recession, it will take four years to reach an unemployment rate of 7%. Thus, to get out of this in a reasonable amount of time we need job creation to accelerate considerably, and it's hard to see that happening without help from Congress. Unfortunately, Congress pretends to "feel your pain," but they don't seem to really understand how hard it is for those who are struggling with unemployment -- that this is a crisis requiring immediate, agressive action -- and it's hard to imagine that Congress will give labor markets the amount of help they need. So no need to hold on to your hats, it looks like we're headed for a very slow ride:

Two more job market charts, macroblog: ...Payroll employment growth has averaged about 110,000 jobs a month since February 2010, the jobs low point associated with the crisis and recession. This growth level compares, unfavorably, with the 158,000 jobs added per month during the last jobs recovery period from August 2003 (the low point following the 2001 recession) through November 2007 (the month before the recent recession began). One hundred and ten thousand jobs a month compares favorably, however, to the 96,000 job creation pace so far this year.
Are these sorts of differences material? ...[W]ith a few assumptions, such as the presumptions that the labor force will grow at the same rate as census population projections (for the aficionados, my calculations also assume that the ratio of household employment to establishment employment is equal to its average value since January of this year), the unemployment rates associated with job growth of 158,000, 110,000, and 96,000 per month would look something like this:
These paths are just suggestive, of course, but I think they tell the story. The same jobs recovery rate of the prerecession period would get the unemployment rate down below 7 percent in four years or so. But at the pace we have been going this year, things get worse, not better.

Friday, October 07, 2011

The Employment Report: Still Moving Sideways

A few comments on the employment report:

The Employment Report: Still Moving Sideways

Monday, October 03, 2011

Cantor Says Obama’s Job Bill Is Dead

That the jobs bill is dead is not a surprise, but given the national unemployment crisis we face the lack of will and urgency in Congress to do anything about it ought to add fuel to whatever fire recent protests have ignited. We need to do something to help the unemployed now, not tomorrow -- more should have been done already -- and the action needs to be bold and aggressive. Don't these people have any sense what it's like to look for a job for months and months and not be able to find one while every bit of hard-earned savings and then some withers away (if there's any savings to begin with given the stagnation in wages in recent decades)? Do they understand what the unemployed face in their day to day lives? Where's the compassionate conservatism we heard so much about? Do Republicans really think that trade agreements and tax cuts for government contractors -- while opposing a payroll tax cut -- is going to provide the help that is needed? And what's wrong with the centrist Democrats who are voting against Obama's plan? Whose interests are they protecting? It sure isn't the jobless. Like I said, this isn't unexpected, but (obviously) it still irks me to see it play out in this way:

Cantor: Obama’s Job Bill Is Dead in Congress, by Janet Hook and Carol E. Lee, Washington Wire: President Barack Obama’s $447 billion jobs bill was declared dead in Congress Monday, as Majority Leader Eric Cantor (R., Va.) said he did not expect the House to take it up as a package.
Mr. Cantor announced the House would consider elements of Mr. Obama’s jobs agenda in the coming month, including trade agreements ... and a tax break for government contractors. But asked if the president’s jobs bill as a whole is dead, Mr. Cantor replied, “Yes.”
“The president continues to say, ‘Pass my bill in its entirety,’” Mr. Cantor said in a press briefing. “As I’ve said from the outset, the all-or-nothing approach is just unacceptable.”...
Mr. Obama ... has been flying around the country holding up a copy of his jobs bill and insisting that the House and Senate pass it “right away.”Earlier on Monday, Mr. Obama said he wants Congress to schedule a vote this month and will “be insisting that we have a vote on this bill” in upcoming discussions with House and Senate leaders.
The Republican-led House isn’t Mr. Obama’s only obstacle. In the Senate,... top Democrats concede they would not have the votes within their own party ranks to pass the bill. Some conservative Democrats say the bill calls for spending too much. Oil state Democrats oppose proposed tax increases on oil and gas companies. ...
Although some Republicans have indicated they are willing to go along with Mr. Obama’s payroll tax extension, that was not among the elements of the bill that Mr. Cantor said would be brought to the House floor. ...
Officials said the White House’s goal over the next few months is to get elements of Mr. Obama’s jobs bill passed, and in the process work to isolate Republicans as obstructionist in the event that doesn’t happen.
Noting that Democrats have criticized elements of the president’s jobs bill, Mr. Cantor said, “The president’s got some whipping to do on his own side.” ...

The administration ought to be able to make Republicans pay for their obstructionism if they have any political skill at all, but their past history leads to doubts that they can. This is a big part of the problem.

Paul Krugman: Holding China to Account

Improving our trade balance would help with the recovery:

Holding China to Account, by Paul Krugman, Commentary, NY Times: The dire state of the world economy reflects destructive actions on the part of many players. Still, the fact that so many have behaved badly shouldn’t stop us from holding individual bad actors to account.
And that’s what Senate leaders will be doing this week, as they take up legislation that would threaten sanctions against China and other currency manipulators.
Respectable opinion is aghast. But respectable opinion has been consistently wrong lately, and the currency issue is no exception.
Ask yourself: Why is it so hard to restore full employment? ... The answer is that we used to run much smaller trade deficits. A return to economic health would look much more achievable if we weren’t spending $500 billion more each year on imported goods and services than foreigners spent on our exports.
To get our trade deficit down, however, we need to make American products more competitive, which in practice means that we need the dollar’s value to fall in terms of other currencies. Yes, some people will shriek about “debasing” the dollar. But sensible policy makers have long known that sometimes a weaker currency means a stronger economy... Switzerland, for example, has intervened massively to keep the franc from getting too strong against the euro. ...
The United States, given its special global role, can’t and shouldn’t be equally aggressive. But given our economy’s desperate need for more jobs, a weaker dollar is very much in our national interest — and we can and should take action against countries that are keeping their currencies undervalued, and thereby standing in the way of a much-needed decline in our trade deficit.
That, above all, means China. ... And the reality of the unemployment disaster is also my answer to those who warn that getting tough with China might unleash a trade war or damage world commercial diplomacy. Those are real risks, although I think they’re exaggerated. But they need to be set against the fact — not the mere possibility — that high unemployment is inflicting tremendous cumulative damage as we speak.
Ben Bernanke, the chairman of the Federal Reserve, said it clearly last week: unemployment is a “national crisis,” with so many workers now among the long-term unemployed that the economy is at risk of suffering long-run as well as short-run damage.
And we can’t afford to neglect any important means of alleviating that national crisis. Holding China accountable won’t solve our economic problems on its own, but it can contribute to a solution — and it’s an action that’s long overdue.

Saturday, October 01, 2011

Fed Watch: Too Late for the Unemployed?

Tim Duy says that while Ben Bernanke suggested that the main unemployment problem was cyclical, not structural in his speech at Jackson Hole, Federal Reserve policymakers are increasingly adopting the structural view. Unfortunately, the belief that unemployment is mostly structural is a self-fulfilling proposition:

Too Late For The Unemployed?, by Tim Duy: The debate about whether unemployment is cyclical or structural unemployment arose last year. At this point, it looks like Federal Reserve policymakers increasingly favor the structural side of the debate.

Federal Reserve Chairman Ben Bernanke, speaking at Jackson Hole, suggested that cyclical unemployment remains the primary economic challenge:

Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view--the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow.

Note that he does not conclude the long-term unemployed are by definition structurally unemployed. Still, he continues to suggest that cyclical unemployment can turn structural:

In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.

But, as is well known, he throws the ball to the fiscal authorities:

Notwithstanding this observation, which adds urgency to the need to achieve a cyclical recovery in employment, most of the economic policies that support robust economic growth in the long run are outside the province of the central bank. We have heard a great deal lately about federal fiscal policy in the United States, so I will close with some thoughts on that topic, focusing on the role of fiscal policy in promoting stability and growth.

But is it already too late? Has the cyclical unemployment turned structural? This week, serial-dissenter Philadelphia Federal Reserve President Charles Plosser embraced the structural view:

These numbers are troubling, especially when more than 40 percent of the unemployed, or some 6 million people, have been out of work for 27 weeks or longer. This underscores that we should not expect any easy solution. Millions of unemployed workers may take longer to find jobs because their skills have depreciated or they may need to seek employment in other sectors. These structural issues will take time to resolve. Jobs and workers will need to be reallocated across the economy, which is a long and slow process.

Plosser takes the rise in long-term unemployment as an indication of structural unemployment. He then extends the point to fight the last war:

We have provided a great deal of monetary accommodation to the economy, and given the stubbornness of the unemployment rate in responding to these efforts, we should be cautious and vigilant that our previous accommodative policies do not translate into a steady rise in inflation over the medium term even while the unemployment rate remains elevated. Creating an environment of stagflation, reminiscent of the 1970s, will not help businesses, the unemployed, or the consumer. It is an outcome we must carefully guard against.

Likewise, the centrist Atlanta Federal Reserve President Dennis Lockhart also speaks of structural factors with respect to the long-term unemployed, even invoking a comparison with Europe:

I was concerned by not only the persistence of high unemployment but also the complicated internal dynamics of the current labor market. To me, it is not clear to what degree structural factors are impeding the filling of job vacancies. And with some 43 percent of the unemployed out of work for more than six months, it is not clear to what extent the long-term unemployed are becoming a class of permanently unemployed, creating a problem resembling the so-called structural unemployment of some European countries. Further, it is not clear why participation in the labor force continues to fall. Finally, it is not clear what level of unemployment should be considered the natural or equilibrium rate under current circumstances.

Not to be outdone, the difficult-to-categorize St. Louis Federal Reserve Chairman James Bullard also looks to Europe for guidance. From his presentation this week:

  • Unfortunately, unemployment rates have a checkered history in advanced economies over the last several decades.
  • In particular, “hysteresis” has been a common problem, in which unemployment rises and simply stays high.
  • This occurred in Europe during the last 30 years.
  • If such an outcome happened in the U.S., and monetary policy was explicitly tied to unemployment outcomes, monetary policy could be pulled off course for a generation.

Now, it seems to me premature to be looking to Europe as an example. It seems reasonably obvious the unemployment problem is the result of a severe negative shock to spending. You might say no, it is structural in that we can no longer rely on housing to support incomes. But that just boils down to a spending problem - unemployment was at the natural rate as long as households and firms had the ability and willingness to spend. Moreover, I am a bit hard pressed to see how America was transformed into Europe in just three years. That said, I am not the policymaker. It appears Federal Reserve members increasingly embrace the structural unemployment story, and that suggests they will hesitate to bring out substantial additional stimulus until the see greater evidence of deflation. Of course, the longer we drag our heels on the unemployment crisis, the more easily it will be for policymakers to wash their hands of the issue, as the cyclical unemployment eventually will become structural.

Thursday, September 29, 2011

Plosser: Recent Stimulus Will Hurt the Fed's Credibility

Federal Reserve Bank of Philadelphia President Charles Plosser voted against Operation Twist -- the recent attempt for the Fed to help the economy -- because:

“The actions taken in August and September tend to undermine the Fed’s credibility by giving the impression that we think such policies can have a major impact on the speed of the recovery. It is my assessment that they will not,” ... “We should not take certain actions simply because we can.”
“If we act as if the Fed has the ability to solve all our economic problems, the credibility of the institution is undermined,” Plosser said. “The loss of that credibility and confidence could be costly to the economy because it will make it much harder for the Fed to implement effective monetary policy in the future,” he said.

He certainly isn't acting like "the Fed has the ability to solve all our economic problems," (and two other Fed officials dissented along with him). In addition, the Fed officials who voted for this action have been careful to say this won't, in fact, solve all of our problems. They've said it can help modestly, and given the state of the economy even modest help is vary valuable, but they have not implied this will suddenly and magically fix our problems. So I really don't see how this action undermines credibility. Fed officials have been clear this is no magic bullet, but they think it could help some and things are so bad -- and the threat of inflation so low -- that they feel compelled to try.

But from Plosser's point of view, the Fed can't do much at all at this point, and the fear of inflation down the road trumps concerns about unemployment now. Plus, the Fed can't do anything about unemployment anyway:

“I am skeptical that this will do much to spur businesses to hire or consumers to spend, given the ongoing structural adjustments occurring in the economy and the uncertainties posed by the fiscal challenges both here and abroad,” Plosser said. Meanwhile, “we should be cautious and vigilant that our previous accommodative policies do not translate into a steady rise in inflation over the medium term even while the unemployment rate remains elevated.”

He is saying that unemployment is largely structural ("given the ongoing structural adjustments") even though it's clear that a large part of it is cyclical, and that uncertainty over fiscal policy is holding the economy back even though bond yields show no sign of this whatsoever. Thus, in his view the structural problems combined with uncertainty are holding back employment, and there's nothing the Fed can do about it.

Is he worried about inflation in the near term? No:

with many commodity prices now leveling off or falling, and inflation expectations relatively stable, inflation will moderate in the near-term

And why should we trust his forecasts in any case? He keeps seeing green shoots that aren't there:

“I was expecting GDP growth in 2011 to be 3% to 3.5%. Now, I expect GDP growth to be less than 2% in 2011, but to gradually accelerate to around 3% in 2012.” He added “I do not believe the current data signal that we are on the precipice of a so-called double-dip recession.”

So he keeps expecting growth that never comes, and uses those expectations along with the excuse that it's structural/uncertainty forestall policy action. What if his forecast for 3% growth in 2012 is as wrong as his previous forecast, and what if there is a double-dip? What if the unemployment problem is largely cyclical like most analysts say? What if, as many have concluded, uncertainty is not the problem? Is he really so certain about his forecasts and views about what's holding the economy back given his track record? With near term inflation falling, why not at least try to do more? Why should inflation risk trump the risk of continued sluggish growth (which in and of itself alleviates inflation concerns if it happens)? Is somewhat higher inflation down the road -- if it even happens -- really more worrisome than a period of elevated unemployment?

And why should this action produce inflation in any case? Operation Twist doesn't change the size of the Fed's balance sheet, it changes the average duration of the assets the Fed holds. If the balance sheet doesn't expand how, exactly, does that create inflation pressure to any significant degree? If there's no inflation pressure, what is the real concern? It appears to be the credibility argument and the fact that unemployment can't be helped -- it's structural/uncertainty -- but as noted above the structural/uncertainty claim is easy to rebut, and the concerns over credibility ring hollow. So he might at least consider the possibility that he has this wrong.

For me, one of the most frustrating thing about policy over the last several years is the continued insistence from some Fed officials that good times are just around the corner so any action they take will be inflationary. They have been wrong again and again, yet the optimism about future growth -- green shoots -- remains. Like Paul Krugman, I have been warning about a slow recovery since at least 2008, and warning about seeing green shoots that aren't there for almost as long, and it's disappointing to see policymakers continue to use the promise of good times just ahead -- especially policymakers who have been wrong again and again -- along with the easily refuted claim that the problem is all uncertainty and structural issues as an excuse to stand against doing more to try to help the unemployed (however modestly).

A Free Lunch for America

Brad DeLong explains how to get A Free Lunch for America.

Wednesday, September 28, 2011

"Wages and Recovery"

Laurence Kotlikoff misrepresents the views of Paul Krugman and Jamie Galbraith:

Five Prescriptions to Heal Economy’s Ills, by Laurence Kotlikoff, Bloomberg: Desperate times call for creative measures. We’re in desperate times, but we’ve had little creative thinking from the Obama administration on how to fix the economy. ... I see five things policy makers can do to get the economy going. ...
4. Get prices and wages unstuck.
Some prices and wages are set too high, thereby damping demand for output and for the workers needed to produce it. This is the standard sticky wage and price explanation for our economic malaise offered by Keynesian economists such as Paul Krugman and James Galbraith. I think there are fewer markets suffering from this problem than Krugman and Galbraith do, but there are enough such markets to make the case for government intervention. Indeed, the president should put these economists in charge of identifying the markets suffering from this problem and helping their participants set market-clearing prices and wages.
One example is the market for construction workers. A 1931 law called the Davis-Bacon Act effectively requires contractors using federal money to pay union wages. If the act were suspended or repealed, federal spending on much-needed infrastructure projects could create a lot more jobs.  

In comments, Jamie Galbraith corrects the record:

...I have never written, argued or believed that unemployment can be cured by cutting wages. Nor does that position have anything to do with Keynes, who wrote The General Theory to debunk this view. Keynes favored stable money wages, writing: "it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, inasmuch as they resist reductions of money wages..."
It seems likely that Professor Kotlikoff has never read Keynes either.

Here's Paul Krugman's dismissal of this idea: Wages and recovery.

Saturday, September 24, 2011

Romer: A Plan on Jobs Deserves a Hearing

Christina Romer takes on several arguments against Obama's job creation proposal, e.g. that worry about the deficit is standing in the way:

A Plan on Jobs Deserves a Hearing, by Christina Romer, Commentary, NY Times: ... People are concerned about the deficit, and this concern is holding back the recovery. Fiscal austerity, not more stimulus, is the answer.
This argument makes me crazy. There’s simply no evidence that concern about the current deficit is a significant factor limiting consumer spending or business investment. And government borrowing rates are at record lows, suggesting that financial markets are not worried about the deficit, either.
Moreover, as I discussed in a previous column, the best evidence shows that fiscal austerity depresses growth and raises unemployment in the near term. That’s the experience of countries like Greece, Portugal and Britain... Cut the current deficit and you will raise unemployment, not lower it.
Like many other countries, the United States has two terrible problems: a devastating lack of jobs right now and an unsustainable budget deficit over the longer run. The right question is not whether we can reduce unemployment by lowering the deficit (we can’t), but whether we can make progress on both problems.
With 14 million Americans unemployed and no prospect of rapid recovery on the horizon, we really have no choice: we must take additional measures to create jobs. ... Just as important, policy makers should be discussing how to make meaningful progress on the long-run deficit at the same time. We need a credible plan that phases in aggressive deficit reduction as the economy recovers.
The president has started a discussion about job creation. His proposal deserves a full debate based on facts, evidence and careful analysis.

One thing -- I wouldn't say that long-run deficit reduction is "Just as important" as job creation. Job creation is the more important concern right now.

Tuesday, September 20, 2011

Job Creation Overshadowed by Debt Reduction Speech

For a few days, we were actually talking about a job creation program instead of debt reduction. However, Obama's speech yesterday seems to have turned the conversation back to the debt. In his speech he did talk about how to pay for job creation, but his plans for over $3 trillion in debt reduction (on top of the cuts that were already in place as part of the deficit ceiling negotiations) is the message that stuck in the media. Job creation is no longer at the forefront of the conversation, and unless Obama is willing to lead on this issue, that won't change.

Sunday, September 18, 2011

"House Republicans Whittle Down $447 Billion American Jobs Act to $11 Billion"

I think this might be a political mistake if Republicans follow through on blocking all but $11 billion of Obama's jobs proposal. But this is likely just the opening bid, which is intentionally low. As I've noted before, I expect Republicans to go along with just enough to be able to defend against the charge they didn't do anything to help the jobless, and not a penny more -- and they will insist on tax cuts as a large fraction of whatever is done. (If Democrats reject a proposal heavily tilted toward tax cuts, Republicans will try to make it seem as though Democrats are the ones standing in the way. If Democrats play the game right, that shouldn't be a problem, but that's a big if):

House Republicans Whittle Down $447 Billion American Jobs Act to $11 Billion, by: David Dayen: The House GOP leadership has written a memo to their caucus picking and choosing what they would be willing to support in the American Jobs Act. The numbers come out to support for 1/44th of the overall price tag, about 2% of the total bill.
As you may know, the AJA is comprised of about 57% tax cuts and 43% spending initiatives. So in the main, House Republican leaders tossed out the spending and embraced a few of the tax cuts. They also rejected the tax hikes on corporations and the wealthy to pay for the bill.
John Boehner, Eric Cantor, Kevin McCarthy and Jeb Hensarling, who wrote the memo, took advantage of the President’s backtracking of an “all or nothing” approach to the bill, and stressed “areas of common agreement” in the plan. ...
So at best, you’re talking about a $447 billion jobs bill whittled down to no more than $11 billion. The memo closes by saying that “We are, however, committed to passing legislation to implement the policies in the areas where agreement can be found to support job creation and long-term economic growth.” With these numbers, I’m not sure why they’re even bothering.

Meanwhile, the millions of unemployed continue to struggle.

The American and European Jobs Machines

Conservatives have long argued that high taxes, regulation, and lack of mobility were hurting the European job machine. However, as Antonio Fatas notes, according to this measure, European labor markets have been outperforming US markets for over a decade:

The American and European jobs machines, by Antonio Fatas: Via Mark Thoma I read about the recent failure of the American jobs machine, unable to keep up with the strong dynamics it displayed during the 80s and 90s. After the 2001 recession the performance of the labor market as measured by the number of jobs or the employment rate (employment relative to population) has been much weaker than in the previous two decades. And it is a combination of very limited job creation during the 2001-2007 period and an extremely high rate of destruction during the last recession.
To add an international perspective, here is a comparison between the American, European and German job machines for the last 18 years.
The variable plotted is the employment rate for individuals in the 15-64 age group. During the 90s the US employment rate increased, at a time where the European (and German) employment rate was declining. This was a period where the US economy, in particular its labor market, was used as an embarrassing example for the Europeans. A lot of talk about how high taxes, regulation, lack of mobility in Europe were hurting the European job machine.
But starting with the late 90s we see a reversal of this trend. While the US employment rate flattens and then drops, the European rate, more so the German one, increases and by 2009/10, the German employment rate is above that of the US. Of course, this is just a partial view of the labor market (there are other age groups, there is the issue of number of hours worked), but it illustrates well the change in the performance of the US labor market, not just in isolation, but in comparison with similar economies. And what it is interesting is that this is not just the outcome of the great recession, it is a trend that had started more than a decade ago.

Saturday, September 17, 2011

"Unusually Severe and Persistent Earnings Losses"

The impact of job loss during recessions:

Recession Job Losers Take Bigger Hit to Future Earnings, by Sara Murray, WSJ: Workers who lose jobs in a recession suffer nearly twice the hit to future earnings compared to those who are displaced in more prosperous times, a new study shows. ...
[A]ccording to a paper ... by Columbia University’s Till von Wachter and the University of Chicago’s Steven Davis ... “workers who have experienced job displacements events since 2008 are likely to experience unusually severe and persistent earnings losses.”
The researchers tracked workers ... between 1980 and 2003. They focused on workers 50 years old and younger. ...
Workers who were laid off in recessions experienced, on average, $112,095 in income losses — three years of pre-layoff earnings. Those laid off in expansionary times experienced a $65,424 loss.
The negative impacts of job losses extended beyond the financial hit, affecting workers’ health, mortality outcomes, child achievement levels and happiness.
“The negative consequences of job displacement, and fears of job displacement, are among the main reasons that recessions and high levels of unemployment create so much concern in the general population and among politicians,” the paper states.

Concern among politicians? To the extent it's there, it's far short of what's needed. In any case, it certainly hasn't resulted in the kind of action you'd expect when there is a crisis. And our unemployment rate is at crisis levels.

If politicians were truly concerned, they would have done something to try to help already -- a year ago would not have been too early. But all we have at this point is talk of a job creation program, and the unemployed will be lucky if anything meaningful is done.

In the meantime, as I discussed recently (and have discussed many times before), the longer unemployment persists, the larger the permanent impact:

"Many employers shy away from workers who have been unemployed for a considerable period of time. That is, the longer a person is unemployed, the more negatively he or she will be viewed by the job market. In response, many of the long-term unemployed will drop out of the labor force. For example, some workers in their late 50s or early 60s might give up even looking for a job and find a way to hang on until retirement by living with a family member, etc. Others will take any job they can get, perhaps one that is ill-suited to their talents or in the underground labor market, and get stuck in these jobs long-term. Because the jobs do not make the best use of their talents, their output will be less than it might be otherwise."

"This is one source of aggregate losses, and it's not confined to older workers. There's evidence that the first job a person takes has a large influence on their lifetime earnings. When young workers have trouble finding employment and settle for a job that doesn't make the best use of their talents, and then get stuck in those jobs as they buy cars, houses, have families to support, etc., they suffer permanent losses of income."

Lives are being permanently and negatively affected, and what are politicians on the right up to? They are playing deficit games and wasting valuable Congressional time:

House GOP proves Standard & Poor’s right, by Ezra Klein: ...The vote ... on Wednesday nigh ... saw 232 members formally disapproving of what was, in effect, a motion not to default on our debt and cause a global financial panic, and 186 members voting to keep current on our bills. The Treasury’s new borrowing authority amounts to only $500 billion, so the House and the Senate will have to hold a number of these votes between now and 2013. But no one seems to care. As Rosalind Helderman reported, the vote “had no practical impact but allowed Republicans to once again express their displeasure at government borrowing.” ...
Republicans ... weren’t exactly a profile in courage. Fully 174 of them voted for the August deal that gave the White House between $2.1 trillion and $2.4 trillion in borrowing authority. But not one among that 174 voted to approve of the White House actually using that authority to avert default -- even in the presence of more than $900 billion in discretionary spending cuts, and a supercommittee charged with finding another $1.5 trillion in deficit reduction. ... It’s a meaningless statement of fiscal irresponsibility rather than an actual moment of brinksmanship, but it sets a new precedent for how these votes will occur, and it makes it harder for any of those 178 members to ever vote to raise the debt ceiling again. ...

It also makes it harder to support job creation. If they ever get to it.

"A Jobless Future?"

Dan Little:

A jobless future?, by Daniel Little: Stanley Aronowitz and William DiFazio wrote a pretty gloomy book in 1994 with the striking title, The Jobless Future. Here is a Harvard Educational Review discussion of the book (link). What is most discomforting in reading the book today is the degree to which the factors they identify seem to be today's headlines. What does jobless mean here? In a word, it means that the US and other OECD countries will never recover the number and quality of jobs they need in order to regain the middle class affluence they had in the 1950s and 1960s. The future will involve work -- but not enough jobs to ensure a low unemployment rate. Here is their assessment in 1994:

For there is no doubt that we have yet to feel the long-term effects on American living standards that will result from the elimination of well-paid professional, technical, and production jobs. At the same time, nearly everyone admits that many of these jobs are gone forever. (xi)

The central structural factors they identified in 1994 are still key parts of our economic environment today: technology innovation replacing labor, rising productivity producing persistently flat labor demand, shifts in the structure of the economy towards finance and service sectors, and internationalization of production.

Technological progress and capital accumulation seem to disrupt the social fabric in the United States. A weakened position in the international economy demands that American industry increase its productivity and cut its unit labor cost. As Carl G. Thor, president of the American Productivity Center in Houston, says, "The trick is to get more output without a surge in employment." Technological change and competition in the world market guarantee that increasing numbers of workers will be displaced and that these workers will tend to be rehired in jobs that do not pay comparable wages and salaries. Women and minorities will suffer the most as the result of these changes; the increased participation in an occupational sector by women and minorities is often an indicator of falling wages in that occupation. (3)
The second explanation, more sobering, emphasized the role of huge federal and consumer debt accumulated beween the late 1970s and the early 1990s that has drained public and private investment, inhibiting recovery and growth. (5)
This, in brief, is the context within which a severely reduced job "market" began to take shape, not only for U.S. workers, but potentially for all workers. In this book we argue that the progressive destruction of high-quality, well-paid, permanent jobs is produced by three closely related developments. (8)

The implication they draw is stark: new jobs will never be created at a rate to satisfy rising demand for jobs.

Our first argument—that the Western dream of upward mobility has died and it is time to give it a respectful funeral—may have at long last seeped into the bones of most Americans, even the most optimistic economist. The dream has died because the scientific-technological revolution of our time, which is not confined to new electronic processes but also affects organizational changes in the structure of corporations, has fundamentally altered the forms of work, skill, and occupation. The whole notion of tradition and identity of persons with their work has been radically changed. (15)

They've also got a vision of what the future could look like: satisfying lives with a decent standard of living, based on a combination of paid work and guaranteed social income.

The aim of this work is to suggest political and social solutions that take us in a direction in which it is clear that jobs are no longer the solution, that we must find another way to ensure a just standard of living for all. (xii)
Accordingly, if unwork is fated to be no longer the exception to the rule of nearly full employment, we need an entirely new approach to the social wage and, more generally, "welfare" policy. If there is work to be done, everyone should do some of it; additional remuneration would depend on the kind of work an individual performs. (353)

They are as interested in the "satisfying" part of the question as the "standard of living" part. They want to know what sources of meaning, worth, and value are possible for a whole civilization in which work and career are no longer the primary focus? It is an existential question as much as it is an economic one -- which takes us back to an earlier post on income and wellbeing.

But here is someone else who has a vision of a jobless future: William Gibson. His pictures of the Sprawl (an urban agglomeration extending from Atlanta to Boston) and the Bridge (the improvised "off the grid" community living on the earthquake-damaged Oakland Bridge) offer a grim picture of life for people scraping by in a cyberpunk world. There is talent, technology innovation, wealth, economic competition in Gibson's world -- but there's nothing that looks like a middle class life for ordinary people. (Here are a couple of the novels: Neuromancer, All Tomorrow's Parties.)

It seems inescapable that the rising inequalities of income and wealth we have experienced for thirty years are strongly linked to the jobless state of 15% to 20% of us (counting discouraged workers and underemployed workers) and the fairly stagnant living standards of another 50%. By tolerating this acceleration of inequality, our society is also silently sanctioning the end of social solidarity and the compact that we've had according to which everyone benefits from economic activity. Our graph seems to be pointing more in the direction of Gibson than Aronowitz. But maybe this is the fundamental goal of right wing rhetoric after all: to decisively break the bonds of social solidarity and mutual obligation altogether and to allow privilege to have its way unconstrained by social obligations. Surely we owe each other more than this.

So far the strategies on the table about employment are either about job creation (Democrats) or providing even more tax relief for business and the wealthy (Republican). None of these voices consider the more radical implication: we may need to consider a dramatically new way of thinking about income, work, social distribution, and lifestyle in the future. And that's what Aronowitz and DiFazio proposed almost 20 years ago.

Friday, September 16, 2011

Shovel Ready

Yes we can:

Infrastructure in the Real World, by Jared Bernstein: One critique you’re beginning to hear about the infrastructure ideas in the President’s jobs proposal is that the Recovery Act’s infrastructure programs were some kind of bust, of never got started, or whatever.
Demonstrably untrue..., here’s a graph of ... work underway by day 200 on 192 airports and over 2,200 highway projects across the country.
I’m sure you’ll hear claims to the contrary in coming days as we debate the infrastructure initiatives in the American Jobs Act, but the fact is that these projects were solidly in the economy by last summer.  The problem is we needed more of them this summer, and we’ll need more next summer as well. ...

Infra

Thursday, September 15, 2011

Weekly Initial Unemployment Claims increased to 428,000

From Calculated Risk:

The DOL reports:

In the week ending September 10, the advance figure for seasonally adjusted initial claims was 428,000, an increase of 11,000 from the previous week's revised figure of 417,000. The 4-week moving average was 419,500, an increase of 4,000 from the previous week's revised average of 415,500.

The following graph shows the 4-week moving average of weekly claims since January 2000:

Click on graph for larger image in graph gallery.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased this week to 419,500.

The 4-week average has been increasing recently and this is the highest level since early July.

Usually we hear all the reasons why special factors -- weather, strikes, etc. -- can explain the elevated numbers, and policymakers nod their heads and promise good times are just around the corner. I wonder if this time will be different.

[Also from CR: Industrial Production increased 0.2% in August, Capacity Utilization increases slightly, but "After the fairly rapid increase last year, increases in industrial production and capacity utilization have slowed recently."]

Tuesday, September 13, 2011

The Poverty Report: 'Doubling-Up’ Is on the Rise

A quick reaction to one aspect of the poverty report the Census released today:

The Poverty Report: 'Doubling-Up’ Is on the Rise

Why a Working-Class Revolt Might Not Be Unthinkable

New column:

Why a Working-Class Revolt Might Not Be Unthinkable

The main point is about how unbalanced political power has tilted policy away from the needs of the unemployed, and the need for that to change.

Friday, September 09, 2011

Paul Krugman: Setting Their Hair on Fire

Obama's jobs plan was "bigger and bolder than expected':

Setting Their Hair on Fire, by Paul Krugman, Commentary, NY Times: First things first: I was favorably surprised by the new Obama jobs plan, which is significantly bolder and better than I expected. It’s not nearly as bold as the plan I’d want in an ideal world. But if it actually became law, it would probably make a significant dent in unemployment. ...
Before I get to the Obama plan, let me talk about the other important economic speech of the week ... given by Charles Evans, the president of the Federal Reserve of Chicago. Mr. Evans said, forthrightly, what some of us have been hoping to hear from Fed officials for years now.
As Mr. Evans pointed out, the Fed, both as a matter of law and as a matter of social responsibility, should try to keep both inflation and unemployment low — and while inflation seems likely to stay near or below the Fed’s target of around 2 percent, unemployment remains extremely high.
So how should the Fed be reacting? Mr. Evans: “Imagine that inflation was running at 5 percent against our inflation objective of 2 percent. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.”
But the Fed’s hair is manifestly not on fire, nor do most politicians seem to see any urgency about the situation. ...
O.K., about the Obama plan: It calls for about $200 billion in new spending ... and $240 billion in tax cuts. That may sound like a lot, but it actually isn’t. ... And it’s unclear, in particular, how effective the tax cuts would be at boosting spending.
Still, the plan would be a lot better than nothing... As I said, it’s much bolder and better than I expected. President Obama’s hair may not be on fire, but it’s definitely smoking; clearly and gratifyingly, he does grasp how desperate the jobs situation is.
But his plan isn’t likely to become law, thanks to Republican opposition. And it’s worth noting just how much that opposition has hardened over time... Republicans are against tax cuts — at least if they benefit working Americans rather than rich people and corporations. And they’re against monetary policy, too. ...
So, at this point, leading Republicans are basically against anything that might help the unemployed. ...
The good news in all this is that by going bigger and bolder than expected, Mr. Obama may finally have set the stage for a political debate about job creation. For, in the end, nothing will be done until the American people demand action.

Thursday, September 08, 2011

Obama's Jobs Speech: Bolder Than Expected

Here's my reaction to the speech:

Obama's Jobs Speech: Bolder Than Expected

What did you think?

"The Postrecession Job Picture"

David Altig has questions:

Another cut at the postrecession job picture, macroblog: There is not much to be said about the August employment report released last Friday—or not much good, anyway. The ongoing updates at Calculated Risk provide a chronicle of the questions and challenges that have characterized the postrecession period. An exhaustive set of graphs are spread across several posts, here, here, and here. The last post in the series focused on construction employment specifically and includes this observation, which is based on the addition of 26,000 construction jobs in 2011 through August:

"After five consecutive years of job losses for residential construction (and four years for total construction), this is a baby step in the right direction. However there will not be a strong increase in residential construction until the excess supply of housing is absorbed."

Given the likely pace of turnaround in the housing market, that sounds like a problem. It is not much surprise that employment in the construction sector is, and likely will continue to be, significantly weaker than it was before the recession. Can the same be said of most other sectors? The following chart shows pre- and postrecession, cross-sector average monthly changes in payroll employment, broadly defined according to U.S. Bureau of Labor Statistics' classifications. For reference, the size of the circles in the chart reflect the relative prerecession size of the sector in terms of employment.

A few points:

  • The 45-degree line represents points where average monthly employment changes before the recession (from December 2001 through November 2007, precisely) are exactly the same as the average changes after the recession (July 2009 through August 2011). Consistent with the slow pace of overall employment growth during this recovery, the majority of circles representing different sectors lie below the 45-degree line.
  • In general, the pattern of circles is such that those sectors with relatively high employment changes prerecession are those that have exhibited relatively high changes during the recovery. In other words, we have not yet seen a widespread reshuffling of cross-sectoral employment trends outside of the recession. For example, employment changes in the education and health care sector led the pack before the recession, and that sector has led the pack thus far in the recovery. At the opposite end of the scale, job growth in the information sector has remained on a negative trend in the recovery period, just as it was prior to the recession.
  • I want to note a few exceptions to the preceding observation... As noted, employment in the construction sector is well off its prerecession pace. What may be less appreciated is the fact that manufacturing employment, outside of the motor vehicles and auto parts sector, has experienced monthly employment gains that are better than the prerecession rate. Employment in the government sector, on the other hand, has noticeably flipped from positive to negative. This shift is also true of job growth in the financial activities sector, though the change is less dramatic than in the government sector.

Manufacturing and government represent relatively big shares of employment. Including motor vehicles and parts, manufacturing payroll employment was over 11 percent of total U.S. jobs for the period from 2002 through 2007. Government employment was about 16.5 percent (and had the largest single share of sectoral employment in the breakdown used in the chart above). The bad news in the big picture is that the better performance in manufacturing job creation is really a shift from negative job creation in the prerecession period to zero job creation in the postrecession period. And as for government employment, it seems unlikely that the forces will soon align to move job growth in the public sector back into positive territory. (The same could probably be said of financial activities employment.)

I am not pushing any particular interpretation of these facts, but a couple of questions come to mind. Will non-auto manufacturing employment revert to the contracting trend in place prior to the recession? Will employment in the financial activities and government sectors continue to shrink? If so, will these jobs be absorbed by increased employment in other sectors, and how long will that take?

Too long, and too timid policy from monetary and fiscal policymakers isn't helping.

Obama's Speech: What are the Best Policies to Help the Unemployed?

At MoneyWatch:

Obama's Speech: What are the Best Policies to Help the Unemployed?

The bottom line: "I am not very confident that anything will make it through Congress in this political climate. So the final recommendation is for the White House to take whatever steps it can on its own, and to view this as the first step in a much longer battle to provide help to the unemployed."

Wednesday, September 07, 2011

Channeling FDR: The Moral Case Against Unemployment

Justin Wolfers:

Channeling FDR: The Moral Case Against Unemployment: My last weekend in D.C. provided a final chance to enjoy my favorite haunts. And so I found myself walking ... through the FDR Memorial, where I stumbled across the ... message below. ... A reminder, if you like, of why we care. ... If my photo isn’t entirely clear, let me reproduce the full quote:

No country, however rich, can afford the waste of its human resources.  Demoralization caused by vast unemployment is our greatest extravagance.  Morally, it is the greatest menace to our social order.

I’m sure FDR would acknowledge the usual economic case against unemployment—billions of dollars of lost output and rising fiscal pressure. And certainly, we hear this a lot in Washington. But I find FDR so persuasive because he advocates an explicitly moral argument, reminding us of the corrosive and demoralizing effects of unemployment.

This speech continues beyond the parts that were memorialized, and it is just as important:

I stand or fall by my refusal to accept as a necessary condition of our future a permanent army of unemployed. On the contrary, we must make it a national principle that we will not tolerate a large army of unemployed and that we will arrange our national economy to end our present unemployment as soon as we can and then to take wise measures against its return.

Wise words, worth bearing in mind when the policy debate heats up.

Unmatched Opportunity

There are plenty of things that need to be done, and people of people willing to do them.

What we need is for politicians who wrongly think matching workers to needed projects is a net loss rather than a net benefit to get out of the way so that we can bring the two together. Unfortunately for households struggling with the recession and for the nation's infrastructure needs, there's little chance that will happen.

The Fed's Dual Mandate: Responsibilities and Challenges Facing U.S. Monetary Policy

It's nice to see that at least one member of the FOMC gets it, and is willing to act:

The Fed's Dual Mandate Responsibilities and Challenges Facing U.S. Monetary Policy, by Charles Evans, President, FRB Chicago: In the summer of 2009, the U.S. economy began to emerge from its deepest recession since the 1930s. But today, two years later, conditions still aren’t much different from an economy actually in recession. GDP growth was barely positive in the first half of the year. The unemployment rate is 9.1%, much higher than anything we have experienced for decades before the recession. And job gains over the last several months have been barely enough to keep pace with the natural growth in the labor force, so we’ve made virtually no progress in closing the "jobs gap".

The Federal Reserve has responded aggressively to the deep recession and weak recovery, cutting short-term interest rates to essentially zero and purchasing assets that expanded its balance sheet by a factor of three. But since undertaking the so-called QE2 round of asset purchases last fall, the Fed’s aggressive policy actions have been on hold.

Some believe that this pause is entirely appropriate. They claim that the economy faces some kind of impediment that limits how much more monetary policy can do to stimulate growth. And, on the price front, they note that the disinflationary pressures of 2009 and 2010 have given way to inflation rates closer to what I and the majority of Fed policymakers see as the Fed’s objective of 2%. These considerations lead many to say that when adding up the costs and benefits of further accommodation, the risk of over-shooting our inflation objective through further policy accommodation exceeds the potential benefits of speeding the improvement in labor markets.

I would argue that this view is extremely, and inappropriately, asymmetric in its weighting of the Fed’s dual objectives to support maximum employment and price stability.

Suppose we faced a very different economic environment: Imagine that inflation was running at 5% against our inflation objective of 2%. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.

In the United States, the Federal Reserve Act charges us with maintaining monetary and financial conditions that support maximum employment and price stability. This is referred to as the Fed’s dual mandate and it has the force of law behind it.

The most reasonable interpretation of our maximum employment objective is an unemployment rate near its natural rate, and a fairly conservative estimate of that natural rate is 6%. So, when unemployment stands at 9%, we’re missing on our employment mandate by 3 full percentage points. That’s just as bad as 5% inflation versus a 2% target. So, if 5% inflation would have our hair on fire, so should 9% unemployment. ...[continue reading]...

What Should Obama Do?

Brad DeLong:

...What in most important is not just what Obama proposes on Thursday (because nothing will get done by congress), but rather what he does in the weeks and months afterwards to actually tune the economy so that it creates more jobs. I think Obama should:

  1. Apply a full-court press to the Federal Reserve to get it to target nominal GDP to close the spending gap, for it is fear of risk that nobody will spend to buy what you make and confidence that your purchasing power is safe in cash that is holding back businesses from spending money to hire people.

  2. Apply a full-court press to the Federal Reserve to get it to engage in more quantitative easing--into taking more risk onto its own balance sheet, for it is an unwillingness on the part of Wall Street to hold the risk currently out there that is making it very difficult for a wide range of risky spending projects to get financing.

  3. Quantitative easing does not have to be done by the Fed: the Treasury can use residual TARP authority to take tail risk onto its own books as well, and should be doing so as much as possible.

  4. Expansion does not require that the federal government spend: using Treasury (and Fed!) money to grease the financing of infrastructure and other investments by states would pay enormous dividends.

  5. For the Treasury Secretary to announce that a weak dollar is in America's interest right now would not only boost exports, but it would immediately lead to a shift in monetary policy in Europe toward a much more expansionary profile--which would be good for the world.

None of these is first-best. All of these are likely to do some good. All should be tried.

What's discouraging is that there doesn't seem to be any sense of urgency about the employment crisis itself. It's more of a reluctant and begrudging response driven by a shift in the political winds. If the polls weren't falling, I doubt we'd even be hearing a speech on job creation. So I hope there's follow-through as well -- these things should be happening already -- but we'll see.

Monday, September 05, 2011

Paul Krugman: The Fatal Distraction

Time to change the conversation:

The Fatal Distraction, by Paul Krugman, Commentary, NY Times: Friday brought two numbers that should have everyone in Washington saying, “My God, what have we done?”
One of these numbers was zero — the number of jobs created in August. The other was two — the interest rate on 10-year U.S. bonds, almost as low as this rate has ever gone. Taken together, these numbers almost scream that the inside-the-Beltway crowd has been worrying about the wrong things, and inflicting grievous harm as a result.
Ever since the acute phase of the financial crisis ended, policy discussion in Washington has been dominated not by unemployment, but by the alleged dangers posed by budget deficits. ... For example, in May 2009 The Wall Street Journal declared that the “bond vigilantes” were “returning with a vengeance,” telling readers that the Obama administration’s “epic spending spree” would send interest rates soaring.

The interest rate when that editorial was published was 3.7 percent. As of Friday, as I’ve already mentioned, it was only 2 percent.

I don’t mean to dismiss concerns about the long-run U.S. budget picture. ... But the ... deficits we’re running right now — deficits we should be running, because deficit spending helps support a depressed economy — are no threat at all.
And by obsessing over a nonexistent threat, Washington has been making the real problem — mass unemployment, which is eating away at the foundations of our nation — much worse. ...
Which brings me to President Obama’s planned speech on the economy.
I find it useful to think in terms of three questions: What should we be doing to create jobs? What will Republicans in Congress agree to? And given that political reality, what should the president propose?
The answer to the first question is that we should have a lot of job-creating spending on the part of the federal government ... to repair and upgrade the nation’s infrastructure. Oh, and we need more aid to state and local governments, so that they can stop laying off schoolteachers.
But what will Republicans agree to? That’s easy: nothing. They will oppose anything Mr. Obama proposes...
This reality makes the third question — what the president should propose — hard to answer, since nothing he proposes will actually happen anytime soon. So I’m personally prepared to cut Mr. Obama a lot of slack on the specifics of his proposal, as long as it’s big and bold. For what he mostly needs to do now is to change the conversation — to get Washington talking again about jobs and how the government can help create them.
For the sake of the nation, and especially for millions of unemployed Americans who see little prospect of finding another job, I hope he pulls it off.

Friday, September 02, 2011

Mean vs. Median Income Growth

Comparing income growth per capita to median income growth is telling:

What Does ‘Economic Growth’ Mean for Americans?, by Uwe E. Reinhardt, Economix: ...The third chart, below, exhibits the growth path of real G.D.P. per capita in the United States over the period 1975-2009 and the corresponding path of real median household income. The data show that over the 34-year period, real G.D.P. per capita rose by an annual compound rate of 1.9 percent. ... [H]owever, median household income in the United States rose by less than 0.5 percent a year..., that 1.9 percent average economic growth does not mean much for the experience of the median household in the United States.

Sources: Economic Report of the President (GDP); Census Bureau (income)

In this regard, I found even more interesting this comment...:

Average real income per family in the United States grew by 32.2 percent from 1975 to 2006, while they grew only by 27.1 percent in France during the same period, showing that the macroeconomic performance in the United States was better than the French one during this period. Excluding the top percentile, average United States real incomes grew by only 17.9 percent during the period while average French real incomes — excluding the top percentile — still grew at much the same rate (26.4 percent) as for the whole French population. Therefore, the better macroeconomic performance of the United States and France is reversed when excluding the top 1 percent.

In other words, if one took away the top 1 percent highest-income recipients and their share of income and focused on what was left for the bottom 99 percent, the median representative of that cohort should not be all that impressed by economic performance in the United States relative to their peers in other countries.

It can help explain why the so-called median American voter ... seems so angry at this time... It also can help explain why the high-income groups in the United States have accounted for a growing share of total federal taxes paid in the United States.

I wonder how many people know that our superiority over France during this time period is only because of the top 1%?

How Will the Fed Respond to Today's Bad News on Employment?

There is a lot of discussion on how the Fed will react to the jobs report in its meeting this month, e.g. here and here. My view is that if the Fed is moved to action by the report -- and it is not at all certain that they will be -- they will do the least they possibly can while still looking like they are doing something about the problem.

What is the least they can do while still satisfying the demand for action? One option is to change the average duration of the assets they hold on their balance sheet by trading short-term for long-term assets (i.e. lengthen the average duration of the portfolio). This could bring down the long end of the yield curve a bit -- not much as there isn't all that much room for long-term rates to fall -- and perhaps stimulate economic activity. However, it's hard to see how a fall in long-term interest rates of such a small magnitude will produce a change in investment and a change in the consumption of durables such as cars and refrigerators of the magnitude that is needed. If there is a response from consumers and businesses to a small drop in the long-term rate, it will be far, far short of what we need.

Another option would be to cut the rate the Fed is paying on reserves held in banks. Ben Bernanke has stated this would disrupt the overnight federal funds market, so I think this is unlikely, but it could be cut, say in half from its current level of 0.25%, or even to zero. Any change in this rate can be reversed quickly if needed, so it's not a very risky option -- that's why I think it is one potential response -- but again I don't think it would do a lot of good. The problem isn't the supply of loans, it's the demand, and this wouldn't do much to stimulate new demand.

The Fed has already used up another option that doesn't require much actual action -- committing to low interest rates for an extended period of time -- but so far that hasn't seemed to have helped much. The options after that such as QE3 or adopting (and then trying to hit) a higher inflation target require much more action from the Fed and are likely to be resisted.

But things are much worse than the Fed thought they would be, the green shoots they keep pointing to whither away as soon as they depend upon them, and it's time -- way past time actually -- to quit hoping things improve and take the possibility of an extended period of stagnation seriously. I blame fiscal policymakers more than the Fed, fiscal policy is our best hope for job creation and we should have had a large job creation program in place long ago. But we need both policy barrels pointed at this problem, it's too large to solve without both policies working together, and it's time for the Fed to quit hoping a miracle saves them from the hard decisions they need to make and to move forward with more aggressive policy.

[Also posted at MoneyWatch.]

The Employment Report: Employment was Unchanged In August

Here's my reaction to today's employment report:

The Employment Report: Employment was Unchanged In August

Let me add that we should have moved aggressively on a job creation program already, it takes time to get these programs in place and there's been plenty of warning this was coming. Yeah, I know, political realities prevented action before now. But the unemployed don't want to hear about political realities, they want policymakers to understand their reality -- it's not pleasant -- and at least try to do something about it. Think, for example, about how much discussion there has been about taxes and the wealthy, the deficit, etc., and how little of the discussion in Washington and in the media has been about the problems of the unemployed and how to help. The unemployed have been neglected -- they have good reason to be disillusioned with Washington and to suspect that any help they do get is more for political purposes than from true concern for their welfare.

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

Vox-gordon

Conclusion

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.

References

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.

Footnotes

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.
Sincerely,
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.