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.
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.
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.
Here's my reaction to the speech:
What did you think?
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.
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."
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.
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.
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 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:
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.
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.
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.
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.
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.
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.
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.
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%?
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.
Here's my reaction to today's employment report:
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.
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.
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.
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.
[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.]
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.
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, 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.
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:
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 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.
- 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.
Table 1. Contribution of GDP components to output gap and employment shortfall 2011:Q2
A change in labour market dynamics accounts for about 3 million of the over 10 million missing jobs in mid-2011. This shift can be traced to weakness of labour and growing assertiveness of management. But even with the labour-market institutions of 1955 through 1985, the weakness of aggregate demand in the recession and recovery would have cost roughly 7 million jobs instead of the 10 million jobs that are actually missing compared to normal economic conditions such as occurred in 2007.
The recession itself is usually and correctly traced to the collapse of the housing bubble and the post-Lehman financial panic. But the recovery has been unusually weak, completely unlike the economy’s rapid bounce-back in 1983–84, and this requires an explanation as well. The best place to start is the double-hangover approach, which explains not just the collapse of residential structures investment but also the continued and growing weakness in consumer spending. Perhaps the most surprising result of this essay is that the spending component responsible for the largest share of the missing jobs is not residential investment but consumer spending on services.
This is not the place to talk about remedies.
- The spending decomposition shows that fiscal policy has failed in that the government spending sector has made the output gap shortfall worse, not better.
- The double-hangover theory helps to explain why monetary policy is impotent, no matter how much quantitative easing is attempted.
Authors including Hall (2011) focus on the zero lower bound as the crux of the Fed’s problem and ignore the complementary problem of low interest-insensitivity of consumers who are trying to pay off old debt instead of taking on new debt.
The failure of consumer and investment spending (IS) to respond to an ever-lower 10-year government bond rate, which fell below 2.3% this past week, demonstrates that the problem is an IS curve that is very steep if not vertical at an output level far below that necessary to generate a normal level of employment. The vertical IS curve is just as relevant for understanding today’s economy as that of the 1930s, and it plays an essential role in the twelfth edition of my macro textbook (2012) in explaining why monetary policy may at times be impotent, just as it did in the first edition more than three decades ago.
Estevão, Marcello and Evridiki Tsounta (2011), ‘Has the Great Recession Raised US Structural Unemployment?’, IMF Working Paper, WP/11/105, May.
Gordon, Robert J (2003), ‘Exploding Productivity Growth: Context, Causes, and Implications’, Brookings Papers on Economic Activity. 2:207-279.
Gordon, Robert J (2010), ‘Okun’s Law and Productivity Innovations’, American Economic Review Papers and Proceedings,100(2):11-15.
Gordon, Robert J (2012), Macroeconomics, 12th edition. Pearson/Addison-Wesley.
Hall, Robert E (2011), ‘The Long Slump’, American Economic Review,101(2):431-469.
Okun, Arthur M (1962), ‘The Gap between Actual and Potential Output’, Proceedings of the American Statistical Association, in Edmund S Phelps (ed.), Problems of the Modern Economy. Norton, 1965.
Oliner, Stephen D, Daniel E Sichel, and Kevin J Stiroh (2007), ‘Explaining a Productive Decade’, Brookings Papers on Economic Activity, 1:81-137.
1 This is defined as the employment rate (ratio of employment to the labour force) times the labour-force participation rate.
2 Compared to the jobs that would be available if the economy were operating at potential real GDP as in 2007:Q4
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]
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.
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
United States Senate
Washington, DC 20510
Dear Leader McConnell:
Given that the single best deficit reduction strategy is economic growth, we urge you to ensure that your appointments to the new joint select committee (“JSC”) created by the debt limit bill are committed to a policy of job creation.
The recent spate of discouraging economic news underscores the need to make employment the top priority of our government. For families across the country, the biggest economic problem is high unemployment. As you know, the lack of jobs and anemic growth rate of the economy are not only enormous problems in their own right, causing great pain for millions of Americans, they are a major component of our deficit. Indeed, the loss of revenue resulting from the recession accounts for nearly $4 trillion of the projected deficits over the next 10 years.
At the same time, jobless workers put additional strain on our critical social safety net programs. As more and more Americans rely on unemployment benefits, food stamps and Medicaid, our deficits go up. Getting those individuals back to work not only allows them to be self-sufficient, it reduces federal government spending.
It is therefore appropriate and important that the JSC explicitly embrace job creation as a part of its mission. Targeted investments in economic growth and job creation can complement and even enhance long-term deficit reduction efforts and should be a priority that the JSC embraces. Indeed, failure to make such investments could have a serious negative impact on our fiscal situation.
Just as we can all acknowledge that reducing our deficits over the medium and long term is a national imperative, we would hope that all 100 Senators could agree that sacrificing job creation in the near term to pursue that imperative would be a grave mistake. Over the course of the last few months, the default debate sounded to many Americans as if it was taking place in a vacuum that did not include enough discussion of the recession and its aftermath. Let us be very clear: our fiscal challenge is directly linked to the jobs crisis and we cannot solve the former without tackling the latter.
We look forward to working with you and the Republican conference towards both objectives and hope the JSC can help advance policies that get America back to work.
Sen. Jeff Merkley (D-OR)
Sen. Daniel Akaka (D-HI)
Sen. Mark Begich (D-AK)
Sen. Richard Blumenthal (D-CT)
Sen. Barbara Boxer (D-CA)
Sen. Sherrod Brown (D-OH)
Sen. Dick Durbin (D-IL)
Sen. Dianne Feinstein (D-CA)
Sen. Al Franken (D-MN)
Sen. Kirsten Gillibrand (D-NY)
Sen. Tom Harkin (D-IA)
Sen. Tim Johnson (D-SD)
Sen. Frank Lautenberg (D-NJ)
Sen. Robert Menendez (D-NJ)
Sen. Barbara Mikulski (D-MD)
Sen. Jack Reed (D-RI)
Sen. Bernie Sanders (I-VT)
Sen. Charles Schumer (D-NY)
Sen. Debbie Stabenow (D-MI)
Sen. Mark Udall (D-CO)
Sen. Tom Udall (D-NM)
Sen. Mark Warner (D-VA)
Sen. Sheldon Whitehouse (D-RI)
How to cure the unemployment problem?:
This isn't hard. Hire people to build things with the free money the world is offering us.
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.
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: Here's the view from the right.
Why are policymakers so worried about reducing the debt instead of reducing unemployment?:
The Hijacked Crisis, by Paul Krugman, Commentary, NY Times: ...For more than a year and a half ... we’ve had a public conversation that has been dominated by budget concerns, while almost ignoring unemployment. The supposedly urgent need to reduce deficits has so dominated the discourse that on Monday, in the midst of a market panic, Mr. Obama devoted most of his remarks to the deficit rather than to the clear and present danger of renewed recession.
What made this so bizarre was the fact that markets were ... saying — almost shouting — was, “We’re not worried about the deficit! We’re worried about the weak economy!” ...
So how did Washington discourse come to be dominated by the wrong issue? Hard-line Republicans have, of course, played a role... — they have found harping on deficits a useful way to attack government programs.
But our discourse wouldn’t have gone so far off-track if other influential people hadn’t been eager to ... hijack the crisis on behalf of their pre-existing agendas.
Check out the opinion page of any major newspaper, or listen to any news-discussion program, and you’re likely to encounter some self-proclaimed centrist declaring that there are no short-run fixes for our economic difficulties, that the responsible thing is to focus on long-run solutions and, in particular, on “entitlement reform” — that is, cuts in Social Security and Medicare. And... you should be aware that people like that are a major reason we’re in so much trouble.
For the fact is that right now the economy desperately needs a short-run fix. When you’re bleeding profusely from an open wound, you want a doctor who binds that wound up, not a doctor who lectures you on the importance of maintaining a healthy lifestyle as you get older. ...
What would a real response to our problems involve? First of all, it would involve more, not less, government spending for the time being — with mass unemployment and incredibly low borrowing costs, we should be rebuilding our schools, our roads, our water systems and more. It would involve aggressive moves to reduce household debt via mortgage forgiveness and refinancing. And it would involve an all-out effort by the Federal Reserve to get the economy moving, with the deliberate goal of generating higher inflation to help alleviate debt problems.
The usual suspects will, of course, denounce such ideas as irresponsible. But you know what’s really irresponsible? Hijacking the debate over a crisis to push for the same things you were advocating before the crisis, and letting the economy continue to bleed.
Robert Reich explains why the Obama administration will not pursue a "bold jobs plan":
Why the President Doesn’t Present a Bold Plan to Create Jobs and Jumpstart the Economy, by Robert Reich: ...Even though the President’s two former top economic advisors (Larry Summers and Christy Roemer) have called for a major fiscal boost to the economy, the President has remained mum. Why?
I’m told White House political operatives are against a bold jobs plan. They believe the only jobs plan that could get through Congress would be so watered down as to have almost no impact by Election Day. They also worry the public wouldn’t understand how more government spending in the near term can be consistent with long-term deficit reduction. And they fear Republicans would use any such initiative to further bash Obama as a big spender.
So rather than fight for a bold jobs plan, the White House has apparently decided it’s politically wiser to continue fighting about the deficit. The idea is to keep the public focused on the deficit drama – to convince them their current economic woes have something to do with it, decry Washington’s paralysis over fixing it, and then claim victory over whatever outcome emerges from the process recently negotiated to fix it. They hope all this will distract the public’s attention from the President’s failure to do anything about continuing high unemployment and economic anemia. ...
There’s still time for political operatives in the White House – and the person they work for – to change their minds. ... But for now the President is being badly advised. The magnitude of the current jobs and growth crisis demands a boldness and urgency that’s utterly lacking. As the President continues to wallow in the quagmire of long-term debt reduction, Congress is on summer recess and the rest of Washington is asleep.
The President should present a bold plan, summon lawmakers back to Washington to pass it, and, if they don’t, vow to fight for it right up through Election Day.
It seems to me what the president and his advisors are really saying is that they are no match for the Republicans when it comes to shaping a debate in their favor. Instead of cowering under the threat of what Republicans might do if they take certain steps, e.g. not allowing a sufficient jobs plan to pass, and then hanging any failures on the obstructionists, they have given up before even trying. They are convinced Republicans will win the debate.
And the real problem is that they are probably right.
Even though it would probably be rejected by the evidence, I am supposed to be on vacation. I'm about to head to northern New Mexico to see what I can see, and not so sure about connectivity along the way (I'll post as I can). But before I leave, I want to note that I'm falling into the trap I warned about, discussing the S&P clown show rather than what's really important, jobs, jobs, and more jobs.
That's what we need to be talking about.
I have a reaction to the employment report at MoneyWatch:
The report "is not as bad as many people expected, but it's still nothing to cheer about."
Now would be a good time for policymakers to finally get serious about job creation:
The Wrong Worries, by Paul Krugman, Commentary, NY Times: In case you had any doubts, Thursday’s more than 500-point plunge in the Dow Jones industrial average and the drop in interest rates to near-record lows confirmed it: The economy isn’t recovering, and Washington has been worrying about the wrong things. ...
For two years, officials at the Federal Reserve, international organizations and, sad to say, within the Obama administration have insisted that the economy was on the mend. Every setback was attributed to temporary factors — It’s the Greeks! It’s the tsunami! — that would soon fade away. And the focus of policy turned from jobs and growth to the supposedly urgent issue of deficit reduction.
But the economy wasn’t on the mend. ... Where was growth supposed to come from? Consumers, still burdened by the debt that they ran up during the housing bubble, aren’t ready to spend. Businesses see no reason to expand given the lack of consumer demand. And thanks to that deficit obsession, government, which could and should be supporting the economy..., has been pulling back.
Now it looks as if it’s all about to get even worse. So what’s the response?
To turn this disaster around, a lot of people are going to have to admit, to themselves at least, that they’ve been wrong and need to change their priorities, right away. ... Those plunging interest rates and stock prices say that the markets aren’t worried about either U.S. solvency or inflation. They’re worried about U.S. lack of growth. And they’re right...
Earlier this week, the word was that the Obama administration would “pivot” to jobs now that the debt ceiling has been raised. But what that pivot would mean, as far as I can tell, was proposing some minor measures that would be more symbolic than substantive. And, at this point, that kind of proposal would just make President Obama look ridiculous.
The point is that it’s now time — long past time — to get serious about the real crisis the economy faces. The Fed needs to stop making excuses, while the president needs to come up with real job-creation proposals. And if Republicans block those proposals, he needs to make a Harry Truman-style campaign against the do-nothing G.O.P.
This might or might not work. But we already know what isn’t working: the economic policy of the past two years — and the millions of Americans who should have jobs, but don’t.
It's the anniversary of Reagan's confrontation with Patco:
The Strike That Busted Unions, by Joseph A. McCartin, Commentary, NY Times: Thirty years ago today, when he threatened to fire nearly 13,000 air traffic controllers unless they called off an illegal strike, Ronald Reagan not only transformed his presidency, but also shaped the world of the modern workplace. ... Reagan’s confrontation with the Professional Air Traffic Controllers Organization, or Patco, undermined the bargaining power of American workers and their labor unions. ...
Although a conservative, Reagan often argued that private sector workers’ rights to organize were fundamental in a democracy. ... Over time, however, his crushing of the controllers’ walkout — which he believed was justified because federal workers were not allowed under the law to strike — has helped undermine the private-sector rights he once defended.
Workers in the private sector had used the strike as a tool of leverage in labor-management conflicts between World War II and 1981... But after Patco, that weapon was largely lost. Reagan’s unprecedented dismissal of skilled strikers encouraged private employers to do likewise. ... Many ... employers followed suit. ...
Reagan supported government workers’ efforts to unionize and bargain collectively. ... But ... Over time the rightward-shifting Republican Party has come to view Reagan’s mass firings not as a focused effort to stop one union from breaking the law — as Reagan portrayed it — but rather as a blow against public sector unionism itself. ...
With ... workers less able to defend their interests in the workplace than at any time since the Depression, the long-term consequences continue to unfold in ways Reagan himself ... never advocated.
There is an imbalance between workers and firms, but in a global economy I'm not sure unions have enough power to act as an effective counterbalance to firms (though, importantly, they still have a role to play as a political force if they can control large blocks of votes). As I've argued in the past:
The only institution powerful enough to protect workers now is government. By providing the things unions once fought for on behalf of workers, government can help to correct inequities and reduce the insecurity workers face. Ensuring that working-class households have the health and dental care they need, security in old age, a safe place to work, insurance against job loss, higher education that is essentially free, and the benefits of a tax policy that redistributes income so economic gains are shared more equitably would go a long way toward remedying what workers have lost since the 1970s.
The institution has the power, but this assumes a government that wants to do what's right for the nation as a whole, not just what's right for the vested interests that fill campaign coffers.
Though there's been some progress on health care it's far from enough and it may not last, and in general government seems to have little interest in filling the void created by the decline in unions. In fact, government has aided and abetted the decline in unions, and government seems intent on reducing the (already too few) things it does to help working class families.
So long as government serves vested rather than general interests, the rules and regulations will be stacked against unions and they will not be able to exert the political influence necessary to get government to be responsive to the needs of workers and their families. When Democrats took control after Bush left office, I thought we had some chance of making small inroads on this problem. But as government has all but turned its back on the millions of unemployed, and potentially made things even worse through deficit reduction, it's clear the vested interests are still in control.
US debt deal: how Washington lost the plot, by Dean Baker: President Obama and the Republicans in Congress have finally worked out a deal over the debt ceiling. It appears as though the Republicans got most of what they wanted: big cuts to domestic spending and no tax increases.
On the plus side, social security and Medicaid appear to be largely intact, although the deal commits Congress to set up another one of those dreadful "bipartisan" commissions, and some cuts to Medicare are on the table. ...
What we should be worrying about is all the news that Washington has ignored while it was doing the debt ceiling shuffle. Most importantly, the economy has almost stopped growing and unemployment is again on the rise.
On Friday, the commerce department released data showing the economy grew just 1.3% in the second quarter. Even worse, it revised down the first quarter growth number from 1.9% to just 0.3%. ...
Of course, unemployment has been rising, with the June figure hitting 9.2%. That is up from a post-recession low of 8.8% in March. .... The employment to population ratio ... has fallen back almost to its low point for the downturn. The EPOP for African Americans has hit new lows in each of the last three months.
The revisions also provided other interesting pieces of information. For example, corporate profits were revised sharply higher for both 2009 and 2010. The share of profits in corporate sector output hit a new record high, more than a full percentage point above its previous peak. Finance was the biggest winner..., accounting for 31.7% of corporate profits, also a record high.
In short, we now have an economy that is stuck in the doldrums. It is operating well below its potential... And the Wall Street guys are fat and happy. ...
But in Washington, concerns about matters like growth and unemployment have no place. We just have to keep talking about the debt and the deficit.
The Republicans have the Club for Growth to promote the "limited government, low taxes, and economic freedom" favored by the business and wealthy interests it represents. This group has used the deficit as an excuse to implement its limited government, low tax agenda.
But who will stand up for workers? Certainly not Washington. The unemployed have been all but forgotten during the debt ceiling and deficit reduction debate. Thus, what we need is a Club for Employment to stand up for the interests of the working class.
I have some comments at MoneyWatch on today's news that new claims for unemployment insurance fell below 400,000:
Update: The post includes a graph from Macroadvisors giving their forecast of how the Boehner and Reid plans will slow economic growth. Brad DeLong describes their forecast:
Congress Debates Making the Economy Weaker: Macro Advisers:
Macroadvisers: Dueling Debt Proposals: How Much Fiscal Drag?: The House and the Senate have advanced separate but dueling plans to cut federal spending as a way to break the current impasse over raising the debt ceiling. Both plans would initially limit spending through 2021 with caps on discretionary budget authority while promising to convene commissions to identify more savings later…. CBO has now scored both of these plans relative to its March adjusted baseline…. The cuts in primary spending (that is, excluding interest payments) in the House (or Boehner) plan cumulate to just $715 billion ($851 billion including interest). The cuts in primary spending in the Senate (or Reid) plan cumulate to $1.8 trillion ($2.2 trillion including interest). The cuts in the Senate plan are so much larger because that plan quickly cuts budget authority for the wars….
We estimate that the Reid plan would slow GDP growth (again, statically) by about ¼ percentage point on average from fiscal year (FY) 2012 through FY 2015, with the peak effect being almost ½ percentage point in FY 2013.
We estimate that the Boehner plan would slow GDP growth by only about 0.1 percentage point on average over the same period, with the peak effect being a little over 0.2 percentage point in FY 2014.
Can't anybody play this game?
Quick one before getting back on the road:
Where the Job Growth Is: At the Low End, by Steven Greenhouse, NY Times: There’s more unhappy news for the millions of Americans hoping for a surge in the number of good, high-paying jobs — a new report concludes that the great bulk of new jobs created since the economic recovery began are in lower-wage occupations, paying $13.52 or less an hour.
The report by the National Employment Law Project, a liberal research and advocacy group, found that while 60 percent of the jobs lost during the downturn were in midwage occupations, 73 percent of the jobs added since the recession ended had been in lower-wage occupations, like cashier, stocking clerk or food preparation worker.
According to the report, “The Good Jobs Deficit,” the number of jobs in midwage and high-wage occupations remains significantly below the prerecession peak, while the number of jobs in lower-wage occupations has climbed back close to its former peak. ...
The report gives additional ammunition to those who argue, like David Autor, an economics professor at M.I.T., that there is a distinct hollowing out of the middle. ...“We should emphasize that it is too early in the recovery to predict whether these trends will continue,” the report said. ...
Net Change in Occupational Employment During and after the Great Recession
Source: National Employment Law Project analysis of Current Population Survey
I keep expecting -- hoping more than expecting I suppose -- that my pessimistic view of the labor market will be overturned by incoming data. So far, that hasn't happened:
With the two political parties competing to see which party can cut the most from the deficit immediately and make things even worse, as Paul Krugman says, "The Serious People are determined to destroy all the advanced economies in the name of prudence."
A strong labor movement seems to be the key to progressive policies. But if, as in the US, labor unions are losing power, is there a viable alernative?
Is there a viable progressive politics that doesn’t hinge on a strong labor movement?, by Lane Kenworthy: ...Here’s what we know from the experiences of the world’s rich democracies: Relative to other nations, those in which labor is highly organized are more likely to have an influential social democratic and/or Catholic center-right (emphasis on center) political party, a proportional representation electoral system, well-organized employers, formal or informal-but-institutionalized participation by labor and business associations in the policy-making process, generous social insurance programs and complementary programs to help households that fall between the social insurance cracks, expansive public services, similar long-run economic growth, a fairly egalitarian distribution of individual wages and household incomes, reliable economic security, extensive economic mobility, and generous holiday and vacation time.
Sorting out the causality is a bit tricky, but it seems probable that labor organization has contributed to most, if not all, of these outcomes. If you want progressive policies, the comparative historical evidence suggests it’s very helpful to have a strong labor movement. Indeed, after democracy, it might well be the single most valuable thing to have.
But what if you live in a country with labor unions that are weak, and getting weaker? What if your country is the United States?
You might choose to focus on strengthening the union movement. Or you might seek an alternative view (“theory of politics”) about conditions for feasible and sustainable progressive policy change. Is there any such view? I think so.
Forge whatever electoral coalition you can, including but not necessarily centered on unions. Organize sympathetic interest groups into single- or multi-issue movements and coalitions. Build up a network of think tanks, journalists, bloggers, and other organizations and individuals to identify and expose the strategies and plans of opposing forces. Offer worthy, workable policy ideas and try to get them (or some acceptable version of them) passed when possible. Aim for big policy advances in rare favorable moments and small ones the rest of the time. (Examples of big ones in American social policy: universal public K-12 schooling, Social Security, unemployment insurance, AFDC, minimum wage, Medicare, Medicaid, Food Stamps, Affordable Care Act. Examples of smaller ones: Head Start, indexing of Social Security benefits to inflation, EITC (it later got big), expansion of EITC and indexing it to inflation, child tax credit, S-CHIP, periodic minimum wage increases.) If your favored programs work well, people will like them. They’ll therefore be difficult — not impossible, but difficult — for the other side to weaken or remove when it’s in power. This last element of the strategy, avoiding policy reversals, is critical, and it’s aided by the array of veto points in the American policy-making process (though there’s also this).
This is a second-best strategy, to be sure. But in the American context it may be the only practicable one. ...
For the moment, the only institution powerful enough to counterbalance the power of firms is government, and even its powers are doubtful given the degree to which wealthy interests can influence policy. Ensuring that working class households have the health and dental care they need, security in old age, a safe place to work, insurance against job loss, affordable higher education, and an equitable share of economic gains would do a lot to help restore what workers have lost since the 1970s.
Casey Mulligan's claim that the unemployment problem is largely due to lack of motivation among younger workers ("the degree to which people would like to have a job"), and that this disproves Keynesian economics, prompts a shrill response from Arin Dube:
Searching for jobs: good thing Casey Mulligan doesn’t need to, by Arin Dube: Tearing down Casey Mulligan’s “discoveries” of evidence against Keynesianism is probably ill-advised: these are not serious arguments, and rebutting them may dull one’s acumen. Nevertheless, once again I will sacrifice some brain cells and bite the bullet—consider it the provision of a minor public good.
OK, so in his most recent post, Mulligan claims that the differential trends in employment among older and younger workers over the Great Recession shows that Keynesian arguments are wrong. He says:
Many elderly people, for example, saw the market values of their homes and retirement assets plummet in 2008 and feel they can no longer afford to be retired. Naturally, many of them react by looking for work. The blue and green lines in the chart show that the elderly have been much more successful than the general population at obtaining and retaining jobs. These findings contradict the Keynesian narrative of the labor market, in which the marketplace fails to recognize the degree to which people would like to have a job.
Except that they do no such thing. Being in a Keynesian demand-constrained equilibrium, where there are less jobs (say N) than people looking for them (say L), says nothing about who gets those jobs. If older people are finding it harder to retire due to the bursting of the housing bubble and hence stay in the labor force, that adds to L. If everyone searching for a job has an equal chance of getting one, this will mechanically increase the employment-to-population rates among the elderly, even while the total number of jobs stays constant at N. It just means that someone else didn’t get that job, which tends to push down the employment rates of non-elderly.
If further the elderly search more intensely due to retirement asset losses, then they will be even more likely to find jobs and will be even more likely to displace others looking for jobs, even as the total number of jobs remains constant at N. Comparing trends in employment across different groups cannot help us understand if the total number of jobs is rationed. There is literally nothing in any of the “findings” that Mulligan reports in that post that has any bearing on whether we are in a demand constrained equilibrium.
Along with Mulligan’s fallacious use of seasonality to detect the power of labor supply in deep recessions, this constitutes the set of variation that is orthogonal to what’s required for credible identification of job rationing. Less technically, Mulligan is hating on Keynes in all the wrong places.
By the way, there are serious researchers who have looked at rationing versus other types of unemployment (like search frictions) in the labor market, and characterized equilbria that differ by the phase of the business cycle. An important paper is by Emmanuel Saez and coauthors, who show why unemployment insurance should be countercyclical because jobs tend to be rationed during recessions—one person’s getting a job means another person not getting one—while during booms that is not the case.
Is the problem, as Mulligan claims, that there are plenty of jobs for motivated, workers, but workers aren't willing to work? Or is it that workers are willing to work, but no jobs are available?
Workers were plenty willing to work before the economy crashed, and despite claims that unemployment insurance and other social insurance programs have somehow eroded the will to work, the evidence points overwhelmingly to lack of demand as the fundamental problem. Telling workers it's their own fault, they aren't trying hard enough, puts blame where it doesn't belong and misdirects attention from the true problem. When the jobs return -- sooner with the help of job creation programs or later without -- people will take them.
Brad DeLong makes a good point about interpreting this morning's news that new claims for unemployment insurance fell a bit to 405,000 (though last week's number was revised upward):
New Unemployment Insurance Claims, by Brad DeLong: In both July 2009 and July 2010 the BLS's seasonal adjustment algorithm overestimated the extent of the seasonal jump in new unemployment insurance claims in July. Thus both in 2009 and 2010 the seasonally-adjusted series "saw" a July fall in unemployment insurance claims that was not really there.
Is the same thing happening this year? Perhaps. Thus I am not as pleased with this week's decline in seasonally-adjusted UI claims as I would be normally...
Leaving the microphone in Brad's hands, in another post he notes that:
worrying about deficit reduction right now stops us from worrying about things we could do something about--like high unemployment, idle capacity, slow growth, and crumbling infrastructure.
But instead of doing anything about it, the Fed watches and waits -- by Bernanke's own admission -- and hope's that, unlike all the other times it watched and waited to see if things got better and they didn't, this time is different (Bernanke said today that "We are uncertain about the near-term developments in the economy. We’d like to see if, in fact, the economy does pick up, as we are projecting."). And Congress is all but hopeless -- they'll be lucky if they don't wreck the economy over the debt ceiling, let alone take steps to improve it.
Why aren't politicians more concerned with the unemployed?:
Unemployment? Who Cares?: ...Why isn’t unemployment reduction front and center on the policy agenda? More specifically, why has the debate over deficit reduction shoved it aside?
Here are three possible reasons. First, unemployment is concentrated among the less educated, blacks and Hispanics who lack political or economic clout.
Second, high unemployment is not hurting overall business profits, which have soared to historic heights. ... Today, our largest corporations and richest investors are well positioned to take advantage of growing demand in emerging markets far from our shores...
Third, the jobless individuals, public employees and small-business owners who could, in theory, form a strong political coalition to support more active job creation are constantly subjected to a barrage of arguments that we should do nothing but cut government spending and hope for the best. ...
A conspicuously large repertoire of more targeted job-creation proposals could significantly lower unemployment... But political interest is low...
No, We Can’t? Or Won’t?, by Paul Krugman, Commentary, NY Times: ...The ... United States economy has been stuck in a rut for a year and a half. Yet a destructive passivity has overtaken our discourse. Turn on your TV and you’ll see some self-satisfied pundit declaring that nothing much can be done about the economy’s short-run problems..., that we should focus on the long run instead.
This gets things exactly wrong. ... Our failure to create jobs is a choice, not a necessity — a choice rationalized by an ever-shifting set of excuses.
Excuse No. 1: Just around the corner, there’s a rainbow in the sky.
Remember “green shoots”? Remember the “summer of recovery”? Policy makers keep declaring that the economy is on the mend — and ... these delusions of recovery have been an excuse for doing nothing as the jobs crisis festers.
Excuse No. 2: Fear the bond market.
Two years ago The Wall Street Journal declared that interest rates on United States debt would soon soar unless Washington stopped trying to fight the economic slump. Ever since, warnings about the imminent attack of the “bond vigilantes” have been used to attack any spending on job creation.
But basic economics said that rates would stay low as long as the economy was depressed — and basic economics was right. ...
Excuse No. 3: It’s the workers’ fault.
Unemployment soared during the financial crisis and its aftermath. So it seems bizarre to argue that the real problem lies with the workers — that the millions of Americans who were working four years ago ... somehow lack the skills the economy needs...: high unemployment is “structural,” they say, and requires long-term solutions (which means, in practice, doing nothing).
Well, if there really was a mismatch..., workers who do have the right skills ... should be getting big wage increases. They aren’t. ...
Excuse No. 4: We tried to stimulate the economy, and it didn’t work.
Everybody knows that President Obama tried to stimulate the economy with a huge increase in government spending, and that it didn’t work. But what everyone knows is wrong.
Think about it: Where are the big public works projects? Where are the armies of government workers? There are actually half a million fewer government employees now than there were when Mr. Obama took office. ... This ... wasn’t the kind of job-creation program we could and should have had. ...
It’s also worth noting that in another area where government could make a big difference — help for troubled homeowners — almost nothing has been done. ...
Listening to what supposedly serious people say about the economy, you’d think the problem was “no, we can’t.” But the reality is “no, we won’t.” And every pundit who reinforces that destructive passivity is part of the problem.
Arin Dube shows that estimates of Okun's law are inconsistent with the assertion that most of the unemployment problem is structural rather than cyclical:
Historical Patterns, Okun's Law, and the Great Recession, by Arin Dube: After reading Paul Krugman's post today, I decided to follow up by actually estimating out-of-sample unemployment rate change forecasts during the Great Recession based on a pre-2007 Okun's law relationship (i.e., a regression of change in the unemployment rate on percentage change in real GDP).
As a starting point, let's estimate the pre-2007 Okun's Law relationship using data from 1948 to 2006. (I use 2007 instead of 2008 just because the unemployment rate started rising in 2007 - but as you will see, this makes no real difference for any of the conclusions below.)
As expected, it shows that you need GDP growth above 2 percent or so to bring down the unemployment rate.
So what happens if we use this historical Okun's law to predict unemployment rate changes in the 2007-2011 period? In the next graph I plot the actual unemployment change by quarter with the predicted amount. The red line is just the 45 degree line to help us see what the actual change in unemployment would be if it behaved exactly according to the historical Okun's Law relationship. (The labels are a little bit off here: "01jan2010" really means "2010q1," "01apr2010" means "2010q2," etc.) I think this chart shows quite clearly what's going on:
Several things jump out:
1. First of all, note that over this period, during 9 quarters the historical forecast underpredicted the change in the unemployment rate, while during 8 quarters it overpredicted it. The forecast error ranged from -0.85 to 0.73, with a mean of 0.03. So there is absolutely no evidence that the unemployment rate stands at a much higher level than would be predicted by movements in GDP.
2. In fact, during the past 6 quarters, the actual reduction in unemployment rate has been greater than what would be predicted by real GDP growth--i.e., the forecast errors have been negative.
3. However, it is also the case that during the initial downturn (especially 2008-2009), the unemployment change was greater than would have been predicted by GDP reduction - i.e., positive forecast errors. (You can also see that the inclusion of 2007 makes very little difference here - as those data points are quite close to the predictions.)
4. Overall, the main conclusion is that based on a historical Okun's Law and actual GDP growth, at least as of 2011q1, both the initial rise in unemployment and the subsequent reduction had been more amplified. This not the signature of structural unemployment. A structural unemployment scenario would show an asymmetry: a growth in unemployment that is near or even above the norm based on GDP slowdown, but a reduction in unemployment that is muted in comparison to the GDP growth. This is not what we see. The point is made even more sharply in the next graph which simply plots the same red 45 degree line along with the in-sample linear fit (with data from 2007 forward).
The blue in-sample linear regression line has a slope of around 1.96 - in other words, the sensitivity of the unemployment rate to GDP growth during the Great Recession seems to have been twice as large as compared to historical norms - and this is true both in the downturn and the "expansion." (Split sample regressions confirm this point, which is also clearly shown in the earlier scatterplot.)
Now what is behind the "excess sensitivity" of unemployment rate to GDP growth? This is indeed an interesting question - and deserves to be studied further. It's possible that financial accelerators played a role early on, and as the financial markets stabilized, this effect unwound - leaving (normal) aggregate demand as the main constraint. This of course is just speculation, and I myself have some doubts about this story. However, what is not in question is that growth has been anemic, and that this anemic growth can more than explain the unemployment trajectory during the "expansion." Structural unemployment? Not so much. Reality-sensitive economists (and dare we say politicians?) should digest this simple fact.
Data Source: http://www.stlouisfed.org/
The two data series are UNRATE and GDPC1
The employment report polishes off what was already a depressing week. The turn of events in the budget negotiations was deeply distressing. It just seemed like it should be impossible to imagine that budget cutting is the order of the day when unemployment is over 9%, 10-year Treasuries hover near 3%, and a Democrat is in the White House. Yet possible it is.
The extent to which our leadership seems determined to follow in the path of the Japanese is absolutely stunning. My impression of the last two decades is that Japanese policymakers were never able to keep their eyes on the weak economy, instead always eager to turn their attention back to "normalizing" policy – raising interest rates, raising taxes, cutting spending. Our leadership suffers from the same obsession.
The employment report should be a wake up call. A slap in the face. A bucket of cold water poured over your head. But it won’t. I suspect it will be seen as further evidence that stimulus is pointless, that austerity is the only solution.
Weakness spread far and wide throughout the report. No way to put lipstick on this pig. As others have noted, the labor force fell, the participation rate fell, the employment to population ratio fell, the number of employed plummeted, and the number of unemployed climbed. Private nonfarm payrolls gains a paltry 57k, and the drag from government cutbacks pulled the overall jobs gain to just 18k. Far short of the numbers needed to even hold unemployment steady.
And wages fell. Just a penny an hour, to be sure. But that penny is meaningful given the desperate fears of inflation that appeared to take hold on Constitution Ave. Without sharply rising wages, those fears are simply unfounded. This was the lesson of the post-1984 period. Why monetary policymakers are fixated on the pre-1984 period is a mystery.
What I noticed was the number of short-term unemployed:
A sharp rise in the number of people thrown into unemployment is definitely a red flag. The overall data picture is not pointing at recession yet, but this number reeks of something bad.
We can only hope some of the downward pressure on growth is relieved as the tsunami related disruptions fade and, more importantly in my mind, the sharp rise in oil prices has been arrested, at least for the moment. But even as these restraints lift, what remains? Oil prices have not plummeted like in 2008 to provide a big positive boost to real spending. And interest rates are no longer falling to provide and opportunity for a refinancing boom. So at best we return to trend growth, maybe a little above? Trend growth that was never sufficient in the first place?
Moreover, we still face significant headwinds in the second half of the year. The Europeans are determined to avoid resolution in their ongoing debt crisis. The ECB is determined to raise interest rates. And Congress and the White House are determined to pursue a path of fiscal austerity.
Bottom Line: Simply a weak report – unbelievably weak given the “recovery” is two years old. Weak enough – especially given falling wages – that it should prompt Bernanke & Co. to revisit their commitment to end large scale asset purchases. The next round of Fedspeak will be very interesting. Watch closely for the focus on “temporary” factors - code for watch and wait. At this juncture, they are still out of the game. I think the Fed will need to see another quarter of data before they begin to take seriously the possibility that they once again erred with a premature policy shift.
I was on the road most of Thursday (I'm in Dallas), have commitments almost all of today, and then travel back to Oregon Friday night. So not sure if I'll have the time to say much. (I haven't missed a day posting since I started doing this, but I can't say that all days have been equally productive.)
Let me know how the jobs report comes out, or whatever else is on your mind.
Update: Wow (the bad kind of wow) -- The economy added only 18,000 jobs in June and the unemployment rate rose to 9.2% (and previous months were revised downward):
Jobs Data Dim Recovery Hopes, WSJ: Nonfarm payrolls rose 18,000 last month... Payrolls data for the previous two months were revised down by a total 44,000 to show increases of only 25,000 jobs in May and 217,000 in April.
The jobless rate, which is obtained from a separate household survey, increased for the third straight month to 9.2% in June, from 9.1% in May. ...
Friday's report showed private-sector employers, which account for about 70% of the workforce, added only 57,000 jobs in June, down from 73,000 in May. The weakness was broad-based.
Manufacturing employment remained weak, adding only 6,000 jobs. Economists were expecting a bounce back as disruptions to manufacturing production stemming from Japan's earthquake should be easing by now. Employment in the battered construction sector was broadly unchanged. The housing sector remains a big drag on the economy.
Employment in professional and business services, which had shown strong gains in previous months, rose by only 12,000.
Government employment fell by 39,000, the eighth drop in a row, following declines in all levels of government struggling to close budget gaps.
Remembering that we need around 100,000 to 150,000 jobs per month just to keep up with population growth, this represents a net reduction in employment.
We have 14.1 million unemployed according to the report, with 6.3 million out of work for six months or longer. Wages fell slightly.
Why, again, are we spending so much legislative time trying to figure out how to cut the deficit in the short-run -- which will make things even worse -- instead of focusing on job creation? We do need to get the budget under control in the long-run, but deficit reduction can wait until the economy is on better footing. We need more help for job markets right now, not the creation of additional headwinds that work against the recovery.
Brad DeLong says to go read Laura Tyson. So why, oh why don't you? That is all.
The Lost Jobs Opportunity, by Tim Duy: This kind of chart has always bothered me:
It is not the content or format that worries me. And, to be sure, the magnitude of the labor market damage wrought by the recession weighs heavily on my mind. Moreover, the length of time to recovery seems immense. And, on top of both of these, we effectively reduce our expectations of "recovery" with this chart - recovery should be about capturing the previous trend, not the previous peak.
Despite all this, it has always seemed to me that I was missing some even darker point. I think I finally identified that issue. Consider that the US economy remains about 7 million jobs shy of the previous peak of nonfarm payrolls. At 200k jobs a month - a seemingly optimistic forecast at this point - we regain the peak in about 35 months. We are already (believe it or not) 23 months into the expansion, which means that we recover the jobs lost in this cycle after a 57 month expansion.
Now consider this: The average post-WWII expansion is only 59 months.
If this expansion is typical, then we can expect just 2 months of job growth beyond the previous peak before the next recession hits.
Now suppose that job growth limps along at a monthly average of 150k a month. Then we are 46 months away from the payroll peak, or an expansion time of 69 months. Ten months shorter than the post-WWII average. In other words, even without resorting to an immediate double-dip scenario, we could very well be in recession prior to regaining the jobs peak.
Perhaps we should take some comfort in the fact that the average of the past three expansions is 95 months - which provides some room to grow jobs beyond the peak, but not much in historical perspective. Moreover, given the likelihood that the Fed begins a tightening cycle well before the payroll peak is in sight, and that fiscal policy looks poised to turn contractionary very soon, I have trouble thinking this recovery will be more like the past three (one of which included massive technological change) than the entire post-WWII average. That said, hope springs eternal.
The very real possibility that we will slip into recession prior to regaining the previous jobs peak casts the current situation in an even darker light than that of Federal Reserve Governor Sarah Raskin. Not only is the depth and duration of the unemployment crisis immense, but so too are the long-term consequences. The failure to design a coordinated package of monetary and fiscal policy to engineer a V-shaped employment recovery looks increasingly like a massive lost opportunity. And with that opportunity now lost, a return to even something sort of like the pre-recession jobs trend seems essentially impossible.
Robert Frank joins the chorus calling for something to be done about unemployment:
The Payroll Tax Needs a Vacation, by Robert Frank, Commentary, NY Times: The federal budget deficit is a distraction. It’s important, yes, and must be addressed. But by a wide margin, it’s not the nation’s most pressing economic problem. That would be the widespread and persistent joblessness...
Almost 14 million people ... were officially counted as unemployed last month. But that’s just the tip of the iceberg. There were almost 9 million part-time workers who wanted, but couldn’t find, full-time jobs; 28 million in jobs they would have quit under normal conditions; and an additional 2.2 million who wanted work but couldn’t find any and dropped out of the labor force.
If the economy could generate jobs at the median wage for even half of these people, national income would grow by more than 10 times the total interest cost of the 2011 deficit (which was less than $40 billion). So anyone who says that reducing the deficit is more urgent than reducing unemployment is saying, in effect, that we should burn hundreds of billions of dollars worth of goods and services in a national bonfire.
We ought to be tackling both problems at once. But in today’s fractious political climate, many promising dual-purpose remedies — like infrastructure investments that would generate large and rapid returns — are called unthinkable...
We need to keep posing hard questions to deficit hawks who argue that we shouldn’t be hiring unemployed workers to maintain our crumbling roads and bridges, even though postponing such projects will make them much more expensive in the future. These projects don’t impoverish our grandchildren. They enrich them.
The important point is that bringing down federal deficits is a long-run problem... But our immediate concern must be getting people back to work.
He also talks about, and favors, a payroll tax as one of the few politically viable options. About that, if we go the payroll tax reduction route, we need to design the policy in a way that protects Social Security financing. Many conservatives will try to make the payroll tax reduction permanent, and then use it to starve the Social Security program. From a previous post:
...for those who want to scale back or eliminate Social Security, this would be seen as an opportunity to starve Social Security of finances, create a crisis, then argue for cutbacks. But there are ways to do this that don't involve cutting the payroll tax per se, so the political optics are different yet amount to the same thing. For example, continue collecting Social Security taxes as before, but give workers a temporary rebate that is clearly designated as temporary, and is independent of Social Security taxes. I'm sure there are better ways to do it, but the point is that we can help workers without interrupting the usual payroll tax flow and putting Social Security at risk.
But back to infrastructure. I can't help but think about all of those people who objected to putting more infrastructure spending into the stimulus package back in late 2008 and the early months of 2009. The argument was that there weren't enough shovel ready projects available. If we tried to do too much of this type of stimulus, the economy would already be recovering by the time we put those projects into place, and it would cause the economy to become overheated.
Of course it turned out that we actually needed to provide sustained stimulus, the forecasts for a quick end to the recession were way off.
Presently, the spending is ending and creating a drag just as the economy is struggling to turn upward. The forecasts for a quick end to the recession were wrong, and a larger, more sustained stimulus effort was needed (as many of us argued at the time). Having additional projects coming online now would have been very helpful to the recovery effort.
However, when infrastructure projects are suggested now as a way to help the unemployed and our crumbling infrastrucutre at the same time, the same voices tell us that the first round of stimulus spending showed there aren't enough shovel ready projects available. There's no way to get these projects going in time to do much good.
The best response to that argument -- besides the fact that they were wrong about this before, there was plenty of time to develop projects, and they are wrong again -- is this graph:
Fed Forecast of the Unemployment Rate
There's plenty of time, plenty of unemployed resources, and interest costs are as low as they'll ever be. And, of course, there's plenty of need for investment in infrastructure so there are large benefits from this type of spending.
But we're too pennywise for this.
Quick note, and not a good one:
[Update: Graph and a few comments here.]