Here's a quick reaction to today's employment report:
It won't, but it should.
Here's a quick reaction to today's employment report:
It won't, but it should.
Philadelphia Fed president Charles Plosser on the risks from Europe:
Q&A: Philadelphia Fed President Charles Plosser, by Brian Blackstone, WSJ: On whether Europe could have a significant effect on the U.S. economy:
Plosser: Europe is clearly near recession. That impacts the U.S. in part through trade ... but Europe is not our largest trading partner at the end of the day. The thing that people really worry about is you have some financial implosion in Europe and markets freeze up and you have some serious financial disruptions.
There are several ways this could go. At one level the U.S. has been trying to insulate itself from that risk. The Fed and regulators have tried to stress to money market funds, for example, to reduce their exposure to European financial institutions. So on a pure exposure basis I would say U.S. financial institutions are taking the steps they need to ensure that ... financial distress in Europe it doesn’t necessarily lead to distress for them...
People have made the analogy that an implosion in Europe would be a Lehman Brothers-type event. It might be a Lehman Brothers-kind of event for Europe. And if the market is sort of indiscriminate in whom they withdraw funding to, you could have indiscriminate funding restrictions on U.S. institutions just because everybody’s scared.
There’s another scenario that is exactly the opposite. There might be–and you already see some of this–a flight to safety. So rather than the markets freezing access to short-term funding for U.S. institutions, you could have a flood of liquidity that gets withdrawn from European institutions ... and floods into the United States. That’s exactly the opposite problem.
On which scenario is more likely:
Plosser: I don’t have the answer to that. ... I don’t think a flood of liquidity is a huge problem. That would be manageable. The bigger problem is if it dries up for everybody. The Fed still has the tools it used during the crisis. ... So I think we have the tools at our disposal if they become necessary. ...
Thus, he thinks the Fed can handle whatever comes its way, and hence sees no need to alter his forecast:
On his economic forecasts:
Plosser: I’m still looking for 2.5% to 3% growth over the course of this year. I think the unemployment rate is going to continue to drift downward to 7.8% by the end of this year. I would think for 2013 we’ll see similar developments. As long as that’s continuing then I don’t see the case for ever increasing degree of accommodation.
Since he believes output will grow no matter what happens in Europe, inflation is the biggest risk:
Plosser: I think headline will drift down just because of oil and gasoline. It will be interesting to see what happens with the core. The inflation risk we have is longer term. The problem is that as the U.S. economy grows we have provided substantial amounts of accommodation. We have $1.5 trillion in excess reserves. Inflation is going to occur when those excess reserves start flowing into the economy. When that begins to happen we’ll have to restrain it somehow. The challenge for the Fed is will we act quickly enough or aggressively enough to prevent that from happening.
It may be a challenge politically when we have to start selling assets, particularly if we have to start selling (mortgage backed securities) to shrink the balance sheet and to prevent those reserves from becoming money.
My view is different. I'm more worried about output and employment being affected by events in Europe than he is, and less worried about long-run risks from inflation (both the chance that it will happen and the consequences if it does). So I see a far greater need for policymakers -- monetary and fiscal -- to take action now as insurance against potential problems down the road.
It is interesting, however, that he sees the political risk as the primary challenge for controlling inflation for a supposedly independent Fed, especially since several Fed presidents recently assured us that politics plays no role whatsoever in the Fed's decision making process (I also wonder why he didn't mention raising the amount paid on reserves as a way of keeping reserves in the banks).
Finally, I'm glad he said "I don’t see the case for ever increasing degree of accommodation," rather than saying he thought we needed to begin reducing accommodation. We may not get any further easing, but perhaps there's a chance we can keep what we have, at least for now.
Stan Collender is very unhappy with John Boehner:
The Irresponsibility of Speaker John Boehner, by Stan Collender: ...Speaker John Boehner’s (R-Ohio) choreographed events last week in which he repeatedly said he would prevent the debt ceiling increase that will be needed at the end of 2012 or the start of 2013 from happening unless he got what he wanted — was so exceptionally irresponsible.
I’m using the word “irresponsible” very deliberately.
Boehner is more than just a Member of Congress. As Speaker, he is next in line to the presidency after the vice president and the most powerful person in the House. That magnifies the importance of everything he says. ... The Constitution gives Congress specific fiscal policy responsibilities — that makes what this or any Speaker says something that makes headlines and is taken very seriously.
Coming on the heels of last year’s downgrade, the very public way Boehner repeatedly issued his debt ceiling threat made it the equivalent of alerting S&P and the other rating agencies that little had changed since last summer. It also was an invitation to again downgrade U.S. debt. ... There’s no word for that other than irresponsible.
Boehner’s threat also was irresponsible because the immediate spending cuts he said were the only way he would allow a debt ceiling increase to be considered is the wrong fiscal policy for the current economic situation. At a time when businesses and consumers are still not spending and most state and local governments are continuing to cut back, the federal government is the only major gross domestic product component enhancing growth and creating jobs. Given the current slow recovery, the large spending cuts Boehner is demanding could push the economy back into recession. ...
One of the points I was trying to make here is that if you look at the constituency Boehner is trying to satisfy, a constituency that has changed over time as wealth and power have become more concentrated, his tactics become more transparent and understandable. That doesn't excuse the fact that Republicans have turned their backs on the unemployed, nor does it excuse holding the economy hostage in order to make ideological gains, but it does help to explain the behavior.
Republicans didn't always oppose the use of monetary and fiscal policy to stabilize the economy, but they do now. Why the change?:
Jonathon Portes bangs his head against the wall over economic policy in the UK:
Four charts and why history will judge us harshly, Not the Treasury View: When I'm asked in interview or articles to sum up concisely why I think the government should change course on fiscal policy, I usually say something like this:"with long-term government borrowing as cheap as in living memory, with unemployed workers and plenty of spare capacity and with the UK suffering from both creaking infrastructure and a chronic lack of housing supply, now is the time for government to borrow and invest. This is not just basic macroeconomics, it is common sense. "
The charts below (click on each to enlarge) try to illustrate this. ...
[P]ublic sector net investment - spending on building roads, schools and hospitals - has been cut by about half over the last three years, and will be cut even further over the next two. Hardly surprising that the construction sector has been a heavy drag on output and jobs recently.
But, at the same time, the cost to the government of borrowing money - the real interest rate on gilts - is at historically low levels. Not to put too fine a point on it, the government can borrow money for basically nothing. ...
What does this mean in practice? It means that if the government were, as I suggest, to fund a £30 billion (2% of GDP) investment programme, and fund it by borrowing through issuing long-term index-linked gilts, the cost to taxpayers - the interest on those gilts - would be something like £150 million a year. To put this in perspective, it's roughly the revenue the OBR estimates will be raised by the "loophole-closing VAT measures" in the last Budget. In other words, we could fund a massive job-creating infrastructure programme with the pasty tax.
Twenty, or fifty, years from now, economic historians will look back at the decisions we are taking now. I cannot imagine that they will be anything but incredulous and horrified that - presented with these charts and figures - policymakers did nothing, international organisations staffed with professional economists encouraged them in their inaction, and commentators and academic economists (thankfully, few in the UK) came up with ever more tortuous justifications. In Simon Wren-Lewis' words, they will ask why "a large section of the profession, and the majority of policymakers, appeared to ignore what mainstream macro [and, I would add, basic common sense] tells us". Their judgement will be harsh.
Regarding a recent debate, that sure looks like a form of austerity to me (though the graph begins in 2008 and I'm not sure what a longer series would show). But in any case, the same comments about the need for public investment apply here in the US, and the judgment of history will be just as "incredulous and horrified."
This article on why ending unemployment benefits will hurt individuals and the economy has quite a bit of editing, e.g. the figures noted in the title were added, but it's mostly me:
Some people claim that cutting benefits will motivate people to get jobs, but that is unlikely, especially when there are still so few jobs to be found and the net effect of these cuts will be negative.
How likely is it that the unemployment rate will fall to 7.5% by the end of 2013? The answer depends critically on assumptions about the labor force participation rate (I suppose I should add that while policymakers are likely to hope for the best course for unemployment, they should avoid the temptation to use the best possible scenario as an excuse to avoid hard policy decisions -- they should be prepared for, and take actions to prevent the worst outcome):
A take on labor force participation and the unemployment rate, by David Altig, macroblog: By now, if you've been paying attention to the coverage following the April employment report, you know the following:
• The March to April decline in the unemployment rate from 8.2 percent to 8.1 percent was arithmetically driven by yet another decline in the labor force participation rate (LFPR). • The decline in the LFPR, now at its lowest level since the early 1980s, is itself being influenced by a confounding mix of demographic change and other behavioral changes that nobody seems to understand—a point emphasized by a gaggle of blogs and bloggers such as Brad DeLong, Carpe Diem, Conversable Economist, Free Exchange, and Rortybomb, to name a few.
With respect to the first observation, in a previous post my colleague Julie Hotchkiss described how to use our Jobs Calculator to get a ballpark sense of what the unemployment rate would have been had the LFPR not changed. If you follow those procedures and assume that the LFPR had stayed at the March level of 63.8 percent instead of falling to 63.6 percent, the unemployment rate would have risen to 8.4 percent instead of falling to 8.1 percent.
It is clear that interpreting this sort of counterfactual experiment depends critically on how you think about the decline in the LFPR. The aforementioned post at Rortybomb cites two Federal Reserve studies—from the Chicago Fed and the Kansas City Fed—that attempt to disentangle the change in the LFPR that can be explained by trends in the age and composition of the labor force. These changes are presumably permanent and have little to do with questions of whether the labor market is performing up to snuff.
The following chart, which throws our own estimates into the mix, illustrates the evolution of the actual LFPR along with an estimate of the LFPR adjusted for demographic changes:
As the header on the chart indicates, our estimates suggest that roughly 40 percent of the change in the LFPR since 2000 can be accounted for by changes in age and composition of the population—in essentially the same range as the Chicago and Kansas City Fed studies. (If you are interested in the technical details you can find a description of the methodology used to generate the chart above, based on work by the University of Chicago's Rob Shimer.
In other words, 0.9 percentage points of the decline in the LFPR since the beginning of the past recession can be explained by demographic trends (as the baby boomers age, the labor force will grow more slowly than the total population [ages 16 and up]). Subtracting the demographic trends still leaves 1.5 percentage points to be explained, a number right in line with Brad DeLong's back-of-the-envelope calculation of "cyclical" LFPR change.
As DeLong's comments make clear, the interpretation of the nondemographic piece of the LFPR change requires, well, interpretation. And the consequences of connecting the dots between changes in the unemployment rate and broader labor market performance are enormous.
In the recently released Summary of Economic Projections following the last meeting of the Federal Reserve's Federal Open Market Committee, the midpoint of the projections for the unemployment rate at the end of 2013 is 7.5 percent. Turning again to our Jobs Calculator, we can get a sense of what sort of job creation over the next 20 months will be required given different values of the LFPR. For these estimates, I consider three alternatives: The LFPR stays at its April level, the LFPR reverts to our current estimate of the demographically adjusted level (that is, increases by 1.5 percentage points), and an intermediate case in which the LFPR increases by 0.7 percentage points—the lower end of DeLong's estimate of "people who really ought to be in the labor force right now, but who are not."
"Are [people who really ought to be in the labor force right now, but who are not] now part of the 'structurally' non-employed who we will never see back at work, barring a high-pressure economy of a kind we see at most once in a generation?"
As you can see, the answer to that question matters a lot to how we should think about progress on the unemployment rate going forward.
In the Financial Times, Roger Farmer notes a close association between Fed policy and stock market values:
 Is the date at which QE1 began,  Is the date at which the Fed started to buy mortgage backed securities,  Is the date at which QE1 ended, and  Is the date of the Jackson Hole conference at which the Fed announced that it would begin QE2.
How can central banks use this information? He says the stock market crash *caused* the Great Recession. Thus, if the Fed can raise stock market values, and the graph above suggests it can, it will turn the economy around and reduce unemployment:
The stock market crash of 2008 caused the Great Recession. If this relation is truly causal, then central banks can do a great deal to alleviate persistent unemployment. ...
The chart shows that when the Fed began to purchase mortgage backed securities in March of 2009, the stock market began to rally. When QE1 ended a year later, the market tanked and equities did not recover until the Fed saw the error of its ways. When the Fed announced the beginning of QE2, at the Jackson Hole conference in April of 2010, there was a third turning point in the market and the beginning of a new bull market.
The coincidence of these market turning points with the beginning and ending of Fed asset purchase programs is not accidental. The Fed moves markets!
So what! Who cares if a bunch of Wall Street investors make money? ... There is a connection between the stock market and the welfare of the average citizen... When the stock market plummets, so do the prospects of the average worker.
In the paper he cites as making the case that the relationship is causal, i.e. that stock market values cause unemployment (the argument is theoretical), he says:
I realize that correlation is not causation and these graphs do not prove that the stock market crash caused the Great Depression. However, they do suggest to me that a theory that does make that causal link deserves further consideration.
The paper includes the following graphs:
I am not yet fully convinced that causality runs from stock values to unemployment, it seems more likely that economic conditions cause both. However, I agree that central banks should do more, and this is evidence that the case for doing more can be derived from more than one theoretical construct, i.e. that it is relatively robust.
...How severe is the problem of unemployment? That question calls for a bit of discussion.
Clearly, what we're interested in is involuntary unemployment. People who aren't working because they have chosen not to work, or at least not to work in the market economy--retirees who are glad to be retired, or those who have decided to be full-time housewives or househusbands--don't count. Neither do the disabled, whose inability to work is unfortunate, but not driven by economic issues.
Now, there have always been people claiming that there's no such thing as involuntary unemployment, that anyone can find a job if he or she is really willing to work and isn't too finicky about wages or working conditions. There's Sharron Angle, the Republican candidate for the Senate, who declared in 2010 that the unemployed were "spoiled," choosing to live off unemployment benefits instead of taking jobs. There are the people at the Chicago Board of Trade who, in October 2011, mocked anti-inequality demonstrators by showering them with copies of McDonald's job application forms. And there are economists like the University of Chicago's Casey Mulligan, who has written multiple articles for the New York Times website insisting that the sharp drop in employment after the 2008 financial crisis reflected not a lack of employment opportunities but diminished willingness to work.
The classic answer to such people comes from a passage near the beginning of the novel The Treasure of the Sierra Madre (best known for the 1948 film adaptation starring Humphrey Bogart and Walter Huston): "Anyone who is willing to work and is serious about it will certainly find a job. Only you must not go to the man who tells you this, for he has no job to offer and doesn't know anyone who knows of a vacancy. This is exactly the reason why he gives you such generous advice, out of brotherly love, and to demonstrate how little he knows the world."
Quite. Also, about those McDonald's applications: in April 2011, as it happens, McDonald's did announce 50,000 new job openings. Roughly a million people applied.
If you have any familiarity with the world, in short, you know that involuntary unemployment is very real. And it's currently a very big deal...: for millions, the damage from the bad economy runs very deep. ...
And we aren't doing nearly enough to try to fix the unemployment problem, in part because of those who say unemployment is the fault of the unemployed -- they aren't trying hard enough, they're lazy, they're addicted to the benefits, and other such nonsense. They tell us that it's all structural and hence there's little we can do, that we can afford wars and tax cuts, but not this. In short, what we hear is any excuse Republicans can think of to forestall government action. And they're winning the ideological battle. Government is shrinking -- the Republicans are making good on the adage to "never let a crisis go to waste" -- all the while accusing Democrats of out of control spending and stoking fears of impending budget doom in the hopes of getting even more reductions in the size of government. Under those circumstances, we aren't going to get much help for the unemployed, especially if Democrats continue to roll over rather than making a strong, winning case for an alternative path.
Via the WSJ's Real Time Economics, a calculation of how costly the "sharp cuts in state and local government spending" have been:
Unemployment Rate Without Government Cuts: 7.1%, by Justin Lahart: One reason the unemployment rate may have remained persistently high: The sharp cuts in state and local government spending in the wake of the 2008 financial crisis, and the layoffs those cuts wrought.
The Labor Department’s establishment survey of employers — the jobs count that it bases its payroll figures on — shows that the government has been steadily shedding workers since the crisis struck, with 586,000 fewer jobs than in December 2008. ... But the survey of households that the unemployment rate is based on suggests the government job cuts have been much, much worse.
In April the household survey showed that that there were 442,000 fewer people working in government than in March. The household survey has a much smaller sample size than the establishment survey, and so is prone to volatility, but the magnitude of the drop is striking: It marks the largest decline on both an absolute and a percentage basis on record going back to 1948. Moreover, the household survey has consistently showed bigger drops in government employment than the establishment survey has.
The unemployment rate would be far lower if it hadn’t been for those cuts: If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%.
Ceteris is rarely paribus, of course: If there were more government jobs now, for example, it’s likely that not as many people would have left the labor force, and so the actual unemployment rate would be north of 7.1%. ...
It's possible to quarrel with the exact figure given above, but not the general message. One of the biggest policy mistakes that has been made during this recession is allowing government employment to fall by this magnitude. Stabilization policy calls for the opposite, a temporary increase in employment to provide employment for people who cannot find private sector jobs, and at the very least we should have kept government employment stable.
I talked a bit yesterday about the political hurdles standing in the way of more help for job creation, something that is desperately needed if we want to avoid the permanent scars of high unemployment. Robin Wells has more on the hurdles, in this case "learned helplessness" (though I might have called it something like "convenient claims of helplessness"):
In weakened economy, policymakers give in to learned helplessness, by Robin Wells, Commentary, guardian.co.uk: Yet another disappointing statistic today from the US labor market – only 115,000 jobs added in April, barely enough to keep the unemployment rate from rising given the growth in population... While not necessarily a sign that the economy is headed for another turn downward, April's job numbers signal a repeat of the pattern seen in 2011 – a recovery that is halting, unpredictable, and agonizingly slow. ...
And it's not surprising given the continued heavy drag on the economy from high levels of household debt, high oil prices, and significant budget cutbacks by state and local governments. Moreover, the longer the economy limps along, the harder it appears to be for policymakers to accept that another outcome is possible. ... Learned helplessness sets in.
One could not have asked for a clearer example of learned helplessness than Ben Bernanke's recent press conference, where he labeled calls for further Fed stimulus "reckless" and appeals for a higher inflation target "irresponsible" because it would, in his view, sacrifice its commitment to a 2% inflation target. Higher inflation helps stimulate a depressed economy... But that is just one example of the implicit deference given by policymakers to views that ignore the plight of the unemployed.
Another variant of this mindset is the appeals to "structural unemployment" as the problem. ... [W]e are not in normal times, and appeals to structural unemployment is a red herring that only serves to distract from what focusing on pushing for we can do. It's a travesty given the state of public education in the US that we've laid off hundreds of thousands of schoolteachers; rehiring them would not only help the economy but it would also improve our long-run growth potential. Ditto for hiring laid-off construction workers to repair falling-down bridges and schools and repairing broken roads.
Perhaps the most maddening area of willful policy blindness is failure to address the foreclosure crisis. Obama's own inspector general has roundly criticized the treasury department for its glacial approach in helping underwater homeowners and its unwillingness to pressure the big banks – recipients of Tarp bailouts, mind you – to help. ...
So where does this leave us? First, we need to understand that a "slow bleed" of the economy – chronically high but not catastrophic rates of unemployment, low levels of private investment, and deteriorating public infrastructure – are nonetheless devastating. Many workers will lead permanently diminished careers, and the economy's long-run productive capacity may be permanently lowered. Second, recognize that it is all too likely that policymakers will fail to advocate for policies to get this economy going. Learned helpless is, unfortunately, a comfortable state of affairs.
Finally, that leaves us with the distinct possibility that without a political sea-change in favor of more progressive policies, we have reached the limits of what is possible. It's up to US voters to overcome their habit of learned helplessness as well.
I have to fight the feeling that it's too late to do much more about the unemployment problem. It's not. Unemployment is still several percentage points above the full employment level and falling slowly -- far too slow to provide any comfort -- and there is every reason to believe that it could be years yet before we reach acceptable employment levels (barring further troubles along the way). We know that unemployment is costly, and that the longer the problem persists the more permanent and damaging it becomes. We also know that we could help to overcome this problem by using idle labor and idle resources to build needed infrastructure. The price of doing so -- the cost of labor, materials, and interest on the borrowing needed to build infrastructure -- is as low as it is likely to get. The cost is low, the need is great, yet we do nothing. Why?
Politics. That's what makes me want to throw up my hands and give up. As I've noted in the past, it seems useless to even try since politicians aren't going to act. Political gridlock will not allow it. But I've also been careful to say that "I'll still complain -- there's no reason to let policymakers off the hook."
And there's good reason for that. One of the frustrating things about the Obama administration is its inability to put Republicans on the spot -- to back them into a corner with an unpopular vote on proposed legislation. Republicans do this all the time. They give legislation a name like "The Revitalization of the American Dream Act," or something better -- they are much better at this than me -- throw in something Democrats can't stomach so they vote against it, and then never let voters forget the vote against America.
Democrats did very little of this when they controlled the agenda in Congress, and the opportunity to bring legislation to an actual vote is now diminished. But that shouldn't stop the Democrats from using policy proposals to point out the stark difference between the parties on issues such as job creation.
Importantly, doing so may be provide benefits beyond political gains. Paul Krugman believes there's still hope for additional policy measures devoted to job creation if Democrats play their policy cards correctly:
...It’s not at all clear what the political landscape will look like after the election. But there do seem to be three main possibilities: President Obama is reelected and Democrats also regain control of Congress; Mitt Romney wins the presidential election and Republicans add a Senate majority to their control of the House; the president is reelected but faces at least one hostile house of Congress. What can be done in each of these cases?
The first case—Obama triumphant—obviously makes it easiest to imagine America doing what it takes to restore full employment. In effect, the Obama administration would get an opportunity at a do-over, taking the strong steps it failed to take in 2009. Since Obama is unlikely to have a filibuster-proof majority in the Senate, taking these strong steps would require making use of reconciliation, the procedure that the Democrats used to pass health care reform and that Bush used to pass both of his tax cuts. So be it. If nervous advisers warn about the political fallout, Obama should remember the hard-learned lesson of his first term: the best economic strategy from a political point of view is the one that delivers tangible progress.
A Romney victory would naturally create a very different situation; if Romney adhered to Republican orthodoxy, he would of course reject any government action... It’s not clear, however, whether Romney believes any of the things he is currently saying. His two chief economic advisers, Harvard’s N. Gregory Mankiw and Columbia’s Glenn Hubbard, are committed Republicans but also quite Keynesian..., we can at least hope that Romney’s inner circle holds views that are much more realistic than anything the candidate says in his speeches, and that once in office he would rip off his mask, revealing his true pragmatic, Keynesian nature.
Of course, a great nation should not have to depend on the hope that a politician is in fact a complete fraud who doesn’t believe any of the things he claims to believe. And such a hope is certainly not a reason to vote for that politician. Still, making the case for job creation may not be a wasted effort, even if Republicans take it all this November.
Finally, what about the fairly likely case in which Obama is returned to office but a Democratic Congress is not? What should Obama do, and what are the prospects for action? My answer is that the president, other Democrats, and every Keynesian-minded economist with a public profile should make the case for job creation forcefully and often, and keep pressure on those in Congress who are blocking job-creation efforts.
This is not the way the Obama administration operated for its first two and a half years. ... The result ... was ... that as ... the president bought into deficit obsession and calls for austerity, the whole national discourse shifted away from job creation. ...
In September 2011 the White House finally changed tack, offering a job-creation proposal that fell far short of what was needed, but was nonetheless much bigger than expected. There was no chance that the plan would actually pass the Republican-led House of Representatives, and Noam Scheiber of The New Republic tells us that White House political operatives “began to worry that the size of the package would be a liability and urged the wonks to scale it back.” This time, however, Obama sided with the economists... Public reaction was generally favorable, while Republicans were put on the spot for their obstruction.
And early this year, with the debate having shifted perceptibly toward a renewed focus on jobs, Republicans were on the defensive. As a result, the Obama administration was able to get a significant fraction of what it wanted—an extension of the payroll tax credit, not an ideal stimulus but nonetheless a measure that puts cash in workers’ pockets, and maintenance for a shorter period of extended unemployment benefits—without making any major concessions.
In short, the experience of Obama’s first term suggests that not talking about jobs simply because you don’t think you can pass job-creation legislation doesn’t work even as a political strategy. On the other hand, hammering on the need for job creation can be good politics, and it can put enough pressure on the other side to bring about better policy too.
Or to put it more simply, there is no reason not to tell the truth about this depression.
How can we help workers at the lower end of the income scale? Laura Tyson:
...The integration of poorly educated workers – particularly those with a high school education or less – into the work force will be an increasing challenge. Sector-specific programs that link the training of participants to the needs of employers are proving to be an effective way to provide relevant postsecondary education for such workers.
Successful programs often rely on input from or partnerships with company and industry partners to design courses, to provide internships and apprenticeships, and to encourage workers to invest in courses and fields of study required by available jobs.
Cooperating with local business leaders, community colleges, which account for nearly half of all college enrollments, can play a major role in the design and delivery of such programs. ... Unfortunately, projected steep cuts in federal, state and local funds for education and training threaten ... such programs.
Finally, it is important to note that the skills of the new workers entering the labor force during the next decade will depend on the education of today’s children and youth. And there are some very worrisome trends.
The fraction of Americans with more education than their parents of the same sex is falling. ... The percentage of children living in poverty in the United States has increased to about 22 percent... Children raised in poverty are more likely to drop out of high school and less likely to complete college.
The inequality in the educational opportunities of children is stark... As a recent McKinsey report said, “The gaps in education by income in the U.S. impose the economic equivalent of a permanent national recession.” ...
The list of options is pretty short. There are a substantial number of people who do not get education beyond high school, and won't no matter what we do. So it's hard not to worry about how this group will fare as the global economy continues to develop (we already have some answers, and the two-tiered economy that has emerged in recent decades is not encouraging).
Here's my take on the jobs report:
The answer: It could, but don't get your hopes up.
Since this makes many points I've made in the past, I can hardly disagree:
Who Are the Extractive Elites?, by Daron Acemoglu and James Robinson: Key to our argument in Why Nations Fail is the idea that elites, when sufficiently political powerful, will often support economic institutions and policies inimical to sustained economic growth. Sometimes they will block new technologies; sometimes they will create a non-level playing field...; sometimes they will simply violate others’ rights destroying investment and innovation incentives.
An interesting article in The Economist’s Buttonwood column asks: Who are these rapacious elites in today’s Western economies? Buttonwood suggests that two plausible candidates are too-big-fail huge-risk-taking bankers and ... public-sector unions.
Banks, which have huge political clout,... are a great candidate indeed. ... But what about public-sector employees? What about unions? Don’t they, as Buttonwood suggests, also exercise their power to block new technologies and create similar distortions?
On the face of it, this is a plausible hypothesis. ... But here is the problem... In most cases, unions and workers, even if they appear politically powerful, don’t seem to be able to stop the introduction of new technologies. Luddites feature in history books not as successful blockers, but to illustrate the futility of standing on the path of new technologies. ...
And there is a good reason for this. ... Unions can mobilize their members to strike and can act as a powerful interest group, but their power is also probably limited relative to those of the very rich both in democratic and non-democratic societies — and in the US, the power of unions was probably seriously, perhaps irreversibly, damaged by Ronald Reagan’s victory over the air traffic controllers’ strike.
In consequence, in the US today, the fear is not that unions will take over the political process, but that the rich elite — including but not limited to the banking elites — will and in fact have already done so. ... We think that some sort of organization to counterbalance the political power of the mega-rich is ... necessary. Whether this role can be — and should be — played by unions is a question that requires more thought and research (i.e., we don’t know the answer).
The words "private sector," "education," and "regulatory uncertainty" play a starring role in this session on job creation (this was one of the more annoying sessions I attended, especially towards the end when Richard Fisher elevates teaching Congress a lesson over job creation - he says low interest rate policy allows Congress to escape accountability, and stopping that comes first):
Jobs for America Monday, April 30, 2012 2:30 PM - 3:45 PM
Here's the conclusion from a summary of a recent FRBSF conference on whether labor market mismatches (structural issues) are holding back employment:
The recent San Francisco Federal Reserve Bank conference on workforce skills examined labor market changes that may have accelerated during the Great Recession. These changes may have increased mismatches between employer needs and worker skills. In general, we find that this doesn’t appear to be the case. Estimates of the extent of skill mismatches in recent years indicate that it has been limited and is likely to dissipate. Moreover, the conference’s research presentations and a panel of workforce development specialists did not identify a noticeable increase in mismatches in recent years. Thus, concerns about growing skill mismatches may be overblown. On the other hand, successful integration of low-skilled workers into the workforce represents a continuing problem. Conference participants offered useful ideas on how to meet this challenge, stressing the roles of community colleges and well-designed training programs.
The problem is lack of demand.
Nancy Folbre says the evidence does not support the contention that people aren't trying very hard to find jobs "because they would prefer to live off unemployment insurance or other social benefits" (I wonder if the editors at Economix will ever tire of having their economics correspondents waste valuable space explaining why another correspondent, Casey Mulligan, is wrong):
Not Wanting Jobs, by Nancy Folbre, Commentary, NY Times: A significant number of American voters seem to believe that the unemployed don’t really want jobs because they would prefer to live off unemployment insurance or other social benefits. ...
Many such voters are also drawn to a particular austerity strategy my fellow Economix blogger Casey B. Mulligan laid out last week: cutting taxes for high earners and cutting subsidies for low earners. This strategy makes perfect sense if you believe that most people who are struggling to pay their bills aren’t trying hard enough.
This argument appeals for several reasons. It absolves believers of any responsibility for other people’s hardships. It lends credence to the assertion that the labor market would work just fine if it weren’t jammed up by a social safety net. It lays the blame for persistent unemployment squarely on President Obama...
But the ... social safety net is not a hammock that workers can luxuriate in. In a New York Times/CBS News poll conducted last fall, two-thirds of those receiving benefits said they were not enough to pay for basics like housing and food. Another poll conducted by National Public Radio and the Kaiser Family Foundation ... found that only 22 percent of the long-term unemployed were receiving unemployment benefits.
One widely cited study published by the Federal Reserve Bank of San Francisco ... found that extended unemployment benefits could not account for more than eight-tenths of one percentage point of the increased unemployment rate in the later years.
A paper by Jesse Rothstein ... of ... the University of California, Berkeley, asserts that extensions of unemployment insurance added at most two-tenths to six-tenths of a percentage point to the unemployment rate. ...
The unemployed want jobs badly enough. But many Americans don’t seem to care much about helping them get some. ...
I find this argument -- blaming the unemployed and the meager help they get for the unemployment problem -- really annoying (insert shrill comment).
College graduates are struggling, and the "war on the young" is "doing immense harm, not just to the young, but to the nation’s future":
Wasting Our Minds, by Paul Krugman, Commentary, NY Times: In Spain, the unemployment rate among workers under 25 is more than 50 percent. In Ireland almost a third of the young are unemployed. Here in America, youth unemployment is “only” 16.5 percent, which is still terrible — but things could be worse.
And sure enough, many politicians are doing all they can to guarantee that things will, in fact, get worse. ... Let’s start with some advice Mitt Romney gave to college students..., “Take a shot, go for it, take a risk, get the education, borrow money if you have to from your parents, start a business.”
The first thing you notice .. is ... the distinctive lack of empathy for those who ... can’t rely on the Bank of Mom and Dad to finance their ambitions. ... I mean, “get the education”? And pay for it how? Tuition ... has soared... Mr. Romney ... would drastically cut federal student aid, causing roughly a million students to lose their Pell grants. ...
There is, however, a larger issue: even if students do manage, somehow, to “get the education,” which they do all too often by incurring a lot of debt, they’ll be graduating into an economy that doesn’t seem to want them. ... And research tells us that the price isn’t temporary..., their earnings are depressed for life.
What the young need most of all, then, is a better job market. People like Mr. Romney claim that they have the recipe for job creation: slash taxes on corporations and the rich, slash spending on public services and the poor. But we now have plenty of evidence on how these policies actually work in a depressed economy — and they clearly destroy jobs rather than create them. ...
What should we do to help America’s young? Basically, the opposite of what Mr. Romney and his friends want. We should be expanding student aid, not slashing it. And we should reverse the de facto austerity policies that are holding back the U.S. economy — the unprecedented cutbacks at the state and local level, which have been hitting education especially hard.
Yes, such a policy reversal would cost money. But refusing to spend that money is foolish and shortsighted even in purely fiscal terms. Remember, the young aren’t just America’s future; they’re the future of the tax base, too.
A mind is a terrible thing to waste; wasting the minds of a whole generation is even more terrible. Let’s stop doing it.
GDP growth for the first quarter, as noted in the post below this one, is estimated to be 2.2%. That is not as high as it needs to be to recover in a decent amount of time, and one of the problems is that government spending has declined during the recession. This has been driven largely by cuts at the state and local level, and it is holding back GDP growth.
I probably should have used the mediocre growth in the first quarter to call, yet again for more aggressive monetary and fiscal policy -- fiscal policy in particular. What are we thinking making cuts like this as the economy is trying to recover from such a severe recession? But what's the use? Policymakers have made it very clear they are unwilling to do more to try to help the unemployed. In fact, many policymakers would like to do less and it's only because of gridlock on Congress, and gridlock on the Fed's monetary policy committee that the cuts (austerity) haven't been worse, and interest rates are still low.
So I probably should have noted the need for more aggressive policy, but thought, why bother? I suppose there's value in pointing out the failure, but at this point that shouldn't be news.
More on "duration matters":
No End in Sight, by James Surowiecki, New Yorker: The talk in Washington these days is all about budget deficits, tax rates, and the “fiscal crisis” that supposedly looms in our near future. But this chatter has eclipsed a much more pressing crisis here and now: almost thirteen million Americans are still unemployed. ...
Being unemployed is even more disastrous for individuals than you’d expect. Aside from the obvious harm—poverty, difficulty paying off debts—it seems to directly affect people’s health, particularly that of older workers. ...
Unemployment doesn’t hurt just the unemployed, though. It’s bad for all of us. Jobless workers, having no income, aren’t paying taxes, which adds to the budget deficit. More important, when a substantial portion of the workforce is sitting on its hands, the economy is going to grow more slowly...
Most worrying... Right now, unemployment is mainly the result of what economists call cyclical factors... But if high long-term unemployment continues there’s a danger that ... cyclical unemployment could become structural unemployment... The longer people are unemployed, the harder it is for them to find a job... Being out of a job can erode people’s confidence and their sense of possibility; and employers, often unfairly, tend to take long-term unemployment as a signal that something is wrong. A more insidious factor is that long-term unemployment can start to erode job skills...
You’d think that Congress and the Federal Reserve would be straining every sinew to avoid such a fate. It isn’t as if they’re out of tools. ... Sadly, there’s little sign that policymakers have much interest in using these tools. ...
I don't know how many ways, or how many times I can say that labor markets need more help than they are getting. It's futile, I know -- Congress turned its back on the unemployed long ago and the Fed is not inclined to fill the gap any more than it already has -- but I can't help trying.
This is from two years ago:
I've been pushing hard for more help for labor markets for quite awhile -- at times I've thought it was a bit repetitive, but necessary -- but it's probably time for me to give up and accept that we are going to have a slower recovery than we could have had with more aggressive fiscal policy. ... Congress is not going to provide anything more than token help from here forward. ...
I'll still complain -- there's no reason to let policymakers off the hook -- but it's time to give up the hope that anything more will be done to help the unemployed find jobs.
If we'd done more then -- or even earlier like many of us were calling for -- we'd be in much better shape today. The thing is, it's still not too late. If we do more now, two years from now we'll be happy that we did.
Background for a column I'm working on:
Update: A larger sample (from here):
Jobless claims fell by 2,000 to 386,000 in the week ended April 14 from a revised 388,000 the prior period that was higher than initially estimated, Labor Department figures showed today in Washington. The median forecast of 47 economists surveyed by Bloomberg News called for a drop to 370,000. Revisions to previous data have been larger than normal and the government is trying to determine the cause, a Labor Department spokesman said as the figures were released to the press.
Recent softness is pulling the 4-week moving average higher:
Cause for concern? Given the history of this series, I have trouble see the recent increase as anything but consistent with the normal behavior of claims:
While I would like to see a steady, consistent decline to something closer to 300k, that was never really in the cards. I would become more concerned if claims backed up as they did in the beginning of last year, but that is not yet the case.
That said, arguably we are seeing further evidence that job growth will continue to fall short of what many would like to see, which I think is something closer to 300k/per month rather than the 210k average of the last three months. Indeed, we could be seeing the impact of slowing productivity growth - absent a more rapid pace of final demand growth to boost sales and profits, firms are turning to labor to save costs. In short, slow and steady continues to be the rule - also from Bloomberg:
“Progress in the labor market is not quite as strong as people had hoped, but we are still on a recovery track here,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida.
That sounds about right.
Do Small Businesses Create Jobs?, by Bruce Bartlett, Commentary, NY Times: ... Congress is, of course, always keen to find ways of aiding small businesses, which are akin to mom and apple pie in its eyes. Just recently, it approved the JOBS Act, which is intended to ease access to credit by “emerging growth” companies. Congressional Republicans are anxious to enact a new tax cut for small businesses, as well. The Small Business Tax Cut Act, which was reported out by the House Ways and Means Committee on April 10, would give a one-year, 20 percent tax cut to every business with 500 or fewer employees.
The Joint Committee on Taxation estimates that it will reduce federal revenues by $46 billion. The committee report offered virtually no rationale for the legislation other than that small businesses are good and deserve a tax cut, period. The linkage between a small business’s tax burden and job creation, however, is tenuous at best. ...
The Tax Policy Center estimates that the benefits would accrue overwhelming to the wealthy, with 49 percent of the total tax cut going to those making more than $1 million.
There may be policies that would increase the number of business start-ups and aid employment this way. But an across-the-board tax cut for every small business, defined only in terms of employment, is nothing but an election-year giveaway unlikely to create any jobs whatsoever.
Instead, let's use the $46 billion this would cost (and mostly waste in terms of job creation) to build infrastructure. If it helps to sell it, make it infrastructure that would be useful to small businesses -- it can probably be argued that most infrastructure projects would help small businesses in one way or the other. This way, even apart from the better prospects for job creation from infratructure spending, at least we'll have something to show for the money when all is said and done.
There is a growing contingent at the Fed advocating interest rate increases sooner rather than later. I continue to think that is a mistake.
The reasoning from those who think it's time to begin reducing monetary stimulus is that the natural rate of output -- the full employment level of output -- has fallen so much that even though the recovery to date has been slow, nevertheless we are nearing potential output. Thus, any further push to increase output further could be highly inflationary.
Why do I think this is incorrect? I believe there are several types of shocks that can hit the economy. There are both permanent and temporary shocks to aggregate demand, and there are both permanent and temporary shocks to aggregate supply. As I explained here, analysts who conclude we are almost back to potential output may very well be confusing permanent and temporary shocks to aggregate supply.
As Charlie Plosser explained to me recently, it is difficult to sort aggregate demand and aggregate supply shocks. Aggregate demand shocks can produce supply shocks, and supply shocks can have an effect on demand. The explanation I was given by Plosser was, I think, intended to convince me that what look like aggregate demand shocks are actually the result of supply shocks. However, I think the explanation works better in the other direction. For example, repeating a previous argument:
When there as a large AD shock in the form of a change in preferences, say that people no longer like good A as it has gone out of fashion and have now decided B is the must have good, then there will be high unemployment in industry A and excess demand for labor and other resources in industry B. As workers and resources leave industry A, our productive capacity falls and it stays lower until the workers and other resources eventually find their way into industry B. When this process is complete, productive capacity returns to where it was before, or perhaps goes even higher. Thus, there is a short-run cycle in productive capacity that mirrors the business cycle.
Even a standard business cycle type AD shock will temporarily depress capacity and produce similar effects. Suppose that interest rates go up, taxes go up, government spending goes down, investment falls --pick your story -- causing aggregate demand to fall. When, as a result, businesses lay people off, close factories, etc., productive capacity will fall. It can be cranked up again, and will be when the economy recovers, but rehiring labor and taking equipment out of mothballs takes time. In the interim the natural rate of output falls and, just as with a change in the preference for good A versus good B, a negative aggregate demand shock can cause "frictions" on the supply side that temporarily increase the natural rate of unemployment. And there are many other ways this can happen as well.
The point is that there can be short-run cyclical AS effects, and failing to account for these can lead to policy errors.
So it may be true that productive capacity has fallen, but I beleive the fall is largely temporary, not permanent. (To be clear, I think there is a permanent component, but it is nowhere near as large as the inflation hawks are assuming -- i.e. the full employment target, once temporary effects have been cleared out of the way, is higher than the estimates that are behind the hawkery. Essentially, what I am arguing is that the temporary supply shocks are, in part, a function of AD shocks, but the effect of the AD shocks on AS wanes over time.)
If this is correct, policymakers should not be concluding that the shocks are permanent, throwing up their hands, and saying there is nothing more we can do. Instead, if, as I believe, much of the fall in productive capacity is temporary, then the job of policymakers is to make sure that employment recovers as fast as the temporary supply shocks wane. That won't be easy, employment so far has been very slow to recover and if that continues it's entirely possible that productive capacity will recover faster than employment. If policymakers try to freeze employment at a level that is too high out of misguided worries about inflation, then they will hold back the recovery and make this problem worse. That's the opposite of what they should be doing.
I could be wrong, which is what I'd like the hawks to consider. That is, what are the costs of being wrong versus the costs of being correct? My view is that the costs of doing too much -- the inflation cost -- is much lower than the costs of doing too little, i.e. the costs of higher than necessary unemployment (though see David Altig). I'm aware that we differ on this point, those in favor of relatively immediate interest rate increases see the costs of inflation as very high and it's this point that I hope will generate further discussion. In reality, how high are the costs of a temporary bout of inflation -- I have faith that the Fed won't allow an increase in inflation to become a permanent problem -- and are they so high that they justify erring on the side of doing too little rather than too much? I don't think they are, but am willing to listen to other views.
I would say that it would be appropriate to change the Fed’s current forward guidance to the public about the future course of interest rates. Currently, the FOMC statement reads that the Committee believes that conditions will warrant extraordinarily low interest rates through late 2014. My own belief is that we will need to initiate our somewhat lengthy exit strategy sometime in the next six to nine months or so, and that conditions will warrant raising rates sometime in 2013 or, possibly, late 2012.
But I hope that John Williams, and others with similar views, carry the day:
Let me summarize where the Fed stands in terms of achieving its congressionally mandated goals. We are far below maximum employment and are likely to remain there for some time. The housing bust and financial crisis set in motion an extraordinarily harsh recession, which has held down consumer, businesses, and government spending. By contrast, inflation is contained and may even fall next year below our 2% target.
Under these circumstances, it’s essential that we keep strong monetary stimulus in place. The recovery has been sluggish nationwide... High unemployment, restrained demand, and idle production capacity are national in scope. These are just the sorts of problems monetary policy can address. ...
The hawks will keep pushing to tighten sooner rather than later, so let's hope those who want to do more, or at least not do less, can at least produce the gridlock needed to keep current policy in palce.
Labor Market Softens in March, by Tim Duy: If the employment report falls on a holiday weekend, does it make a sound? Yes it does, at least when it comes in far below expectations, with 120k nonfarm payroll gain compared to a consensus of 205k. Treasury yields collapsed on the news, and are now once again hovering around 2 percent on the ten-year bond. In my opinion, this is yet another data point that confirms what has become my baseline view of this recovery - neither an optimist nor a pessimist should one be. The economy is grinding away at rate close to its potential growth rate, perhaps a little above. Certainly not a disaster in terms of expecting another recession, but also certainly also not a success story.
First off, should we be terribly concerned with the headline NFP number in and of itself? No. There is a lot of variance in the month to month changes:
Reading too much into a single data point is simply a dangerous game. During the first quarter of 2012, the average gain was 211k a month. Part of the story is likely that warmer weather boosted the numbers in January and February, and there was some give-back in March - though note again the variance of this number. You almost always need some story to explain the month to month deviations from the trend. The question is whether or not this one data point should deter you from believing the trend is intact. My view is that it should not. That said, if you thought the last two reports were really indicative of the underlying trend, I would say that that was overly optimistic. Slow and steady, slow and steady.
On the surface, some good news in that the unemployment rate continued to decline:
Still, the improvement was driven by a decline in the labor force, which fell by more than the decline in the number of unemployed. I tend to think Fed hawks will fixated on the decline in the unemployment rate itself rather than the underlying reason for the declines. One way to "solve" the unemployment problem is to drive people from the labor force, let their skills deteriorate, and ensure that a cyclical problem becomes a structural one. In other words, the view of St. Louis Federal Reserve President that the economy is operating near potential is almost certain to become a self-fulfilling prophesy given the unwillingness of the Fed to implement a more aggressive policy stance.
Support for the "structural not cyclical" view will be found in the persistence of long-term unemployment:
That said, if we were truly operating near potential, one would not expect the wages of those employed to continue to stagnate:
True enough, average hourly wages increased a nickel in March, but note that this was offset by a decline in hours so that average weekly wages fell. On net, not much help to support still weak disposable personal income growth:
For further evidence that the economy remains well below trend, note the ongoing high levels of those employed part-time for economic reasons:
An improvement, to be sure, but still a long way to go before the labor market is normalized.
As far as other views, a couple caught my eye this morning. The first was from spencer at Angry Bear:
The index of hours worked has been raising a red flag about the numerous other signs of stronger employment and an acceleration of economic growth. They are not showing the recent improvement that other employment data have been reporting Recently, unit labor cost has been rising faster than prices, implying margin pressure and very weak profits. To sustain profits growth, firms have to reestablish stronger productivity growth. The weakness in March employment is a strong indicator that business is trying to rebuild productivity growth and profits growth.
This bodes poorly for the sustainability of the recent upward trend in equities. Another issue is what does this mean for monetary policy? I think Ryan Avent (via Brad DeLong as the Economist server appears to be down at the moment) captures the general spirit:
This report will be widely analysed within the context of this year's political elections, despite the fact that the single most important influence on employment growth now and over the next four years will be the stance of monetary policy. As this report is consistent with recent Federal Reserve forecasts, indicating that the Federal Open Market Committee is satisfied with present employment trends, policy is unlikely to change in reaction to anything released today
The data is sufficiently disappointing as to not alter the view of the doves, and notably Federal Reserve Chairman Ben Bernanke, that there is no need to tighten policy in the near future, leaving the 2014 timing intact. Thinking about the trends as noted above, there is no reason on the basis of this report to believe that a significant deterioration in the outlook has or is about to occur, and thus no reason to expect this will nudge the FOMC toward another round of QE. This I find unfortunate because, as I noted earlier, the longer the Fed continues to operate policy along the post-recession growth trend the more likely it is that this will indeed become the new trend for potential output.
Bottom Line: A disappointing jobs report for those who expected the US economy was about to rocket forward, but one consistent with the slow and steady trend into which the US economy appears to have settled. And no reason to change the basic outlook for monetary policy - the Fed is on hold until the data breaks cleanly one direction or the other.
Here's my reaction to the jobs report:
Jobs Report Show Weakness. Will Policymakers Respond? (CBS MoneyWatch) COMMENTARY The Employment Report for March was weaker than many analysts expected. The unemployment rate fell slightly from 8.3 percent to 8.2 percent, and on the surface that seems like good news. But the 120,000 jobs created during the month was barely enough to keep up with population growth, the labor force participation rate actually fell from 63.9 percent to 63.8 percent, and the employment to population ratio also fell from 58.6 to 58.5 percent. Thus, the fall in unemployment reflects fewer people searching for jobs more than an uptick in job creation.
This is just one month's worth of data, and monthly data can be noisy so it's not time to panic yet. The recovery could pick up steam again next month. But the possibility that it won't pick up, e.g. because unseasonably good weather distorted the numbers for the last few months, has to be taken seriously by policymakers. ...[continue reading]...
The unemployed need more help from the Fed:
Not Enough Inflation, by Paul Krugman, Commentary, NY Times: A few days ago, Alan Greenspan ... spoke out in defense of his successor. Attacks on Ben Bernanke by Republicans, he told The Financial Times, are “wholly inappropriate and destructive.” He’s right...
But why are the attacks on Mr. Bernanke so destructive? ... The attackers want the Fed to slam on the brakes when it should be stepping on the gas... Fundamentally, the right wants the Fed to obsess over inflation, when the truth is that we’d be better off if the Fed paid ... more attention to unemployment. ...
O.K.,... let me take this in stages. First, about inflation obsession: For at least three years, right-wing economists, pundits and politicians have been warning that runaway inflation is just around the corner, and they keep being wrong. ... At this point, inflation is ... a bit below the Fed’s self-declared target of 2 percent.
Now, the Fed has, by law, a dual mandate: It’s supposed to be concerned with full employment as well as price stability. And while we more or less have price stability by the Fed’s definition, we’re nowhere near full employment. So this says that the Fed is doing too little, not too much. ...
To be sure, more aggressive Fed policies to fight unemployment might lead to inflation above that 2 percent target. But remember that dual mandate: If the Fed refuses to take even the slightest risk on the inflation front, despite a disastrous performance on the employment front, it’s violating its own charter. And, beyond that,... a rise in inflation to 3 percent or even 4 percent ... would almost surely help the economy. ...
Which brings me back to those Republican attacks and their chilling effect on policy.
True, Mr. Bernanke likes to insist that he and his colleagues aren’t affected by politics. But that claim is hard to square with the Fed’s actions, or rather lack of action. As many observers have noted, the Fed’s own forecasts indicate that ... it still expects low inflation and high unemployment for years to come. Given that prospect, more of the “quantitative easing” ... should be a no-brainer. Yet the recently released minutes from a March 13 meeting show a Fed inclined to do nothing unless things take a turn for the worse.
So what’s going on? I think that Fed officials, whether they admit it to themselves or not, are feeling intimidated — and that American workers are paying the price for their timidity.
Behind the "Trend is the Cycle", by Tim Duy: Via Mark Thoma, David Andolfatto finds evidence of a permanent component to recent job losses. Reviewing a recent paper (which I enjoyed) by Nir Jaimovich (Duke University) and Henry Siu (University of British Columbia), Andolfatto notes:
The conclusion is that jobless recoveries are due entirely to jobless recoveries in routine occupations. In this group, employment never recovers beyond its trough level, nor does it come anywhere near its pre-recession peak. This is in stark contrast to earlier recessions.
He further sees a smoking gun in this chart:
And again notes:
This last figure is quite dramatic. It shows how, prior to 1990, routine employment rebounded strongly following a recession. But since 1990, it appears not to rebound at all. Indeed, the pattern appears to be one of a precipitous decline in recession, followed by a period of relative stability in the subsequent expansion.
I have to admit that I was perplexed by Andolfatto's surprise with this result - the basic patterns of this chart should be easily recognizable as simply the path of manufacturing employment in the US:
That employment in this sector has not rebounded after the past two recessions is not exactly a secret (there is likely some construction element in the first chart as well, but I am putting that aside for the moment). That said, I think there is an interesting question here - should we define these job losses as primarily structural (supply) or cyclical (demand)? To be honest, I admit that I have gone back and forth on this topic.
If I am in a mercantilist frame of mind (see here), I would say this becomes an issue in the mid-1990's when China devalues and fixes the renminbi. This act of currency manipulation to gain a competitive advantage is ignored by the Clinton Administration, and the offshoring craze goes into hyperdrive. Non-durable goods manufacturing begins to slide immediately, and durable goods employment contracts during the 2001 recession and never rebounds as firms choose to restart production in China rather than the US. I anticipated the same after the 2007-2009 recession, a prediction that has not been entirely true.
Somewhere in here is also a construction story, in which the flow of capital into the US finds its way into the housing market, which in turn boosts construction jobs which are subsequently lost. The construction jobs would fall into the routine manual worker category that appears to have suffered from permanent dislocation.
Is this a structural story, or rather just an outcome of a global savings glut/demand shortfall? If domestic demand in China had been higher, wouldn't the Chinese current account surplus have been smaller? And shouldn't the same be true of Japan and Germany? And if this was the case, would the US current account deficit also been smaller, suggesting external factors were less of a drag on demand? And if that were the case, would job losses in manufacturing have been so severe? Would the housing bubble have erupted as it did? And would other sectors have grown more quickly to compensate for job losses in manufacturing?
What I am thinking is that in a world with a global demand shortfall combined with currency manipulation, international trade can become a zero-sum game that leads to dislocations that appear to be structural but are in fact largely cyclical or more broadly demand related.
Alternatively, rather than rely on the global imbalances story, you can argue that the drop in manufacturing is entirely the result of productivity increases. I really don't think this helps, as it doesn't explain why the displaced workers have not been entirely reabsorbed elsewhere in the economy. Remember, we used to argue that all those displaced workers would simply find jobs in the rapidly growing sectors of the economy. Apparently, this has yet to happen. It is kind of hard to argue that the problem is retraining or skills. Perhaps this is true in the short-run, but we are talking about trends that are nearly two-decades or more old. Surely a greater degree of adjustment should have happened by now. It is just as easy to believe that the demand is lacking to absorb the released resources (a euphemism, by the way, for fired workers), which fits with a global savings glut/demand shortfall story as well.
Moreover, a structural story doesn't answer the problem of sticky wages. If in fact the jobless recovery was simply an artifact of job losses for employees with routine skills, why is wage growth for remaining workers so muted? Why such a high proportion of zero wage gains?
Finally, I would add that if you believed that fundamentally a global demand shortfall and related imbalance story was at play, some rebalancing, due, for example, to a mixture of higher foreign wages and a weaker dollar, would have predictable impacts in stimulating export and import competing industries. Some evidence for this can be found in the upswing in durable goods manufacturing:
This is where I was wrong; it is more of increase than I would have expected given my mood in 2010. See also recent stories about the re-shoring phenomenon. For example, from the FT:
Jeff Immelt, General Electric’s chief executive, says the decision to put $1bn into the group’s domestic appliances business is “as risky an investment as we have ever made”.
He may well be right. The decision to bring back to Louisville, Kentucky, hundreds of jobs that had been outsourced to Mexico and China is emblematic of his strategy for GE. If it fails, it will be hung around his neck forever.
“Reshoring” production is a strategy being tried by many American manufacturers, as rapid wage growth in emerging economies and sluggish pay in the US erodes the labour cost advantage of offshore plants.
The US has added 429,000 factory jobs in the past two years, replacing almost a fifth of the losses during the recession.
Trend or fad? Too early to tell.
Bottom Line: I don't think the results Andolfatto cites should come as much of a surprise. If you were looking for a jobless recovery two years ago, the "routine" task sectors of construction and manufacturing were cause for concern. But I think the dynamics in those sectors can be explained in the context of a global demand shortfall rather than entirely structural phenomena.
From the NBER Digest:
Recessions and the Cost of Job Loss, NBER: ...Using Social Security records for U.S. workers covering more than 30 years (1974-2005), researchers Steven J. Davis and Till von Wachter explore the cumulative earnings losses associated with what they call "job displacement." They are particularly interested in the role of labor market conditions at the time of job displacement in determining the magnitude of these losses.
In "Recessions and the Cost of Job Loss" (NBER Working Paper No. 17638 [open link]), they find that for men under the age of 50 with three or more years of job tenure, job loss reduces the present value of earnings by an estimated $77,557 (2000 dollars). This amount is estimated over a 20-year period using a 5 percent annual discount rate. The estimated losses are even larger for men with more job tenure, but are smaller for women.
The researchers further find that earnings losses rise steeply with the unemployment rate at the time of displacement. If the unemployment rate at the time of displacement is less than 6 percent, then the average earnings loss equals 1.4 years of pre-displacement earnings. If the unemployment rate is above 8 percent, the average earnings loss equals 2.8 years of pre-displacement earnings. ...
Or, to put it another way, "For high-tenure workers who experience job displacement in a recession, the losses amount to about three years of earnings at pre-displacement levels and 19% of the present value earnings of otherwise similar workers who retain jobs."
The longer that the unemployment rate stays high, the larger the permanent losses -- losses that fall mostly on individuals who have done nothing to deserve such a fate except choose the wrong occupation, be born at the wrong time and enter the workforce during a recession, and so on. And there are societal costs as well that we all pay in one way or the other.
To say what ought to be obvious, but apparently isn't, we should be doing more than we are to help with job creation.
David Andolfatto continues to press the case that the downturn in the economy has a large, permanent component:
The Trend is the Cycle, Macromania: Nir Jaimovich (Duke University) and Henry Siu (University of British Columbia) appear to have made a very interesting discovery. Evidently, there appears to be a very strong link between two much talked about phenomena: job polarization and jobless recoveries. ...
What's the bottom line? After separating jobs into various categories:
The conclusion is that jobless recoveries are due entirely to jobless recoveries in routine occupations. In this group, employment never recovers beyond its trough level, nor does it come anywhere near its pre-recession peak. This is in stark contrast to earlier recessions.
And the prediction is that the routine jobs lost during the recession are gone forever. If so, then we are much closer to a full recovery than most people think and it's time to start considering reversing stimulative policies. However, as noted at the end of the post:
The work here is still very preliminary... Needless to say, it is hardly the last word on the subject.
There is plenty of evidence pointing in the other direction, i.e. plenty of evidence indicating the problem is cyclical and we are nowhere near full recovery.
With so much uncertainty remaining, the advice from Stevenson and Wolfers in a post earlier today about how policymakers should react when they are unsure of how strong the recovery will be is appropriate:
the cost of too little growth far outweighs the cost of too much. If we readily bear the burden of carrying an umbrella when there’s a reasonable chance of getting wet, we should certainly be willing to stimulate the economy when there’s a reasonable risk that doing nothing could yield a jobless generation.
The fact that the costs are asymmetric and what this means for policy -- it should lean against the more costly outcome -- seems strangely absent from policy discussions and decisions.
More on Rigid Nominal Wage Growth, By Tim Duy: Paul Krugman looks at the evidence on nominal wage rigidities here and sees additional reason to believe the primary economic challenge is a demand shortfall. He concludes with this point:
Oh, and someone is sure to chime in and say that this proves that the solution to unemployment is to make wages more flexible. No, it isn’t: in a liquidity trapped, deleveraging economy lower wages would actually worsen the situation.
It is important to emphasize this point, and Japan provides a good example. Via the Financial Times:
..Bonuses have been coming under heavy pressure in Japan for years as part of a wider effort to restrain incomes.
And while workers around the developed world have been complaining of a squeeze on incomes over the past two decades, in Japan thinner pay packets fuel wider deflation. That makes it even harder for the government to rein in its runaway debt and for the central bank to use monetary policy to boost growth...
...While policymakers bemoan the salary squeeze, political pressure is growing for heavy cuts to public sector pay as a quid pro quo for a proposed doubling of Japan’s 5 per cent consumption tax. Shortly after becoming prime minister last year, Yoshihiko Noda – already Japan’s poorest premier on record – gave himself a 30 per cent pay cut.
I think the role of role of bonuses in driving Japan's deflation is underappreciated. The bonus system allows for more flexible wages, thus allowing for the real possibility of negative nominal wage growth and thus deflation. In contrast, downward nominal wage rigidities in the US reduce the likelihood of deflation, but lessen the resolve of monetary policymakers to stimulate activity - for example, see the efforts by St. Louis Federal Reserve President James Bullard to argue that existence of low rates of inflation is evidence that the economy is operating at potential rather than see the flattening of the relationship between unemployment and inflation as a straightforward outcome of downward nominal wage rigidities.
I've been trying to get the Federal Reserve banks to engage more with the public through blogs, with economics bloggers in particular. We'll see how that goes, but it's encouraging to see that they are starting to converse and debate among themselves:
Are unemployed construction workers really doing better?, Pedro Silos and Lei Feng, macroblog: Two New York Fed economists, Richard Crump and Ayşegül Şahin, writing in Liberty Street Economics, have shared some interesting findings regarding developments in the labor market during the ongoing recovery. Their conclusion is that unemployed construction workers, according to several indicators, seem to be doing better than workers who lost jobs in other sectors. ...
These facts, according to the authors, provide support to the hypothesis that problems in the labor market cannot be blamed on the degree of mismatch between displaced construction workers and job vacancies in other sectors.
In this post, we present an alternative view of the fate of unemployed construction workers...
Hope to see more of this.
Via the NY Fed's Liberty Street Economics blog:
Skills Mismatch, Construction Workers, and the Labor Market, by Richard Crump and Ayşegül Şahin: Recessions and recoveries typically have been times of substantial reallocation in the economy and the labor market, and the current cycle does not appear to be an exception. The speed and smoothness of reallocation depend in part on the structure of the labor market, particularly the degree of mismatch between the characteristics of available workers and newly available jobs. Such mismatches could occur because of differences in skills between workers and jobs (skills mismatch) or because of differences in the location of the available jobs and available workers (geographic mismatch). In this post, we focus on skills mismatch to assess the extent to which the slow pace of the labor market recovery from the Great Recession can be attributed to such problems. If skills mismatch is much more severe than usual, we would expect the unemployment rate to remain higher for longer and the workers subject to such mismatch to have worse labor market outcomes.
We concentrate particularly on construction workers, who many have thought are prone to a high degree of skills mismatch because of the housing boom and bust. Contrary to this view, we find that (1) general measures of mismatch, after rising sharply in the recession, are now near their pre-recession level as they continue to display a pronounced cyclical pattern; and (2) construction workers are not experiencing relatively worse labor market outcomes. ...[continue reading]...
These two points support the argument I've been making that many of the structural factors that people are seeing are likely to be temporary and hence should not constrain monetary policy (i.e. to the extent that natural rates have changed, much of the change is temporary).
Travel day coming up, so a series of quick hits. Let's start with this. Long-term unemployment has permanent effects:
The Enduring Consequences of Unemployment, by Binyamin Appelbaum, Commentary, NY Times: Our economic malaise has spurred a wave of research about the impact of unemployment on individuals and the broader economy. The findings are disheartening. The consequences are both devastating and enduring.
People who lose jobs, even if they eventually find new ones, suffer lasting damage to their earnings potential, their health, and the prospects of their children. And the longer it takes to find a new job, the deeper the damage appears to be. ...
Maybe we should do something.
According to this, for now and into the foreseeable future, "jobless recoveries will be the norm":
Disentangling the channels of the 2007-2009 recession, by Jim Hamilton: Harvard Professor James Stock and Princeton Professor Mark Watson presented a very interesting paper last week at the Spring 2012 Conference for the Brookings Papers on Economic Activity. Their paper studied similarities and differences between the 2007-2009 recession and other U.S. business cycles.
Stock and Watson characterized the comovements over 1959:Q1-2007:Q3 of 198 different U.S. macroeconomic variables...
Their first question was whether the observed U.S. macroeconomic data continued to track those factors in the same way during the most recent recession and recovery as they had historically. Stock and Watson's answer was, for the most part, yes. ...
But if the Great Recession can be interpreted as normal responses to abnormally large shocks, what about the anemic recovery? Stock and Watson attribute this to a slowdown in trend growth rates... Again quoting from Stock and Watson's paper:
The explanation for this declining trend growth rate which we find the most compelling rests on changes in underlying demographic factors, primarily the plateau over the past decade in the female labor force participation rate (after rising sharply during the 1970s through 1990s) and the aging of the U.S. workforce. Because the net change in mean productivity growth over this period is small, this slower trend growth in employment corresponds directly to slowdown in trend GDP growth. These demographic changes imply continued low or even declining trend growth rates in employment, which in turn imply that future recessions will be deeper, and will have slower recoveries, than historically has been the case. In other words, jobless recoveries will be the norm.
So why are we talking about reducing rather than enhancing social support for the jobless?
DeLong and Summers, the debate over potential output, and whether Bernanke has the courage, foresight, and persuasiveness to follow Greenspan's lead:
I wrote this before Bernanke's speech on the labor market on Monday. He says, echoing the topic of the column:
Is the current high level of long-term unemployment primarily the result of cyclical factors, such as insufficient aggregate demand, or of structural changes, such as a worsening mismatch between workers' skills and employers' requirements? ... I will argue today that ... the continued weakness in aggregate demand is likely the predominant factor.
So maybe the structural impediment, inflation hawk types at the Fed will be vanquished after all. We shall see. [See Tim Duy's comments on as well.]
...The target of all versions of fair trade is “free trade,” and the most damaging attacks on FAIRTRADE have come from free traders. In Unfair Trade, a pamphlet published in 2008 by the Adam Smith Institute, Mark Sidwell argues that FAIRTRADE keeps uncompetitive farmers on the land, holding back diversification and mechanization. According to Sidwell, the FAIRTRADE scheme turns developing countries into low-profit, labor-intensive agrarian ghettos, denying future generations the chance of a better life.
This is without considering the effect that FAIRTRADE has on the poorest people in these countries – not farmers but casual laborers – who are excluded from the scheme by its expensive regulations and labor standards. In other words, FAIRTRADE protects farmers against their rivals and against agricultural laborers.
Consumers, Sidwell argues, are also being duped. Only a tiny proportion – as little as 1% – of the premium that we pay for a FAIRTRADE chocolate bar will ever make it to cocoa producers. Nor is FAIRTRADE necessarily a guarantee of quality: because producers get a minimum price for fair-trade goods, they sell the best of their crop on the open market.
But, despite its shaky economics, the fair-trade movement should not be despised. While cynics say that its only achievement is to make consumers feel better about their purchases – rather like buying indulgences in the old Catholic Church – this is to sell fair trade short. In fact, the movement represents a spark of protest against mindless consumerism, grass-roots resistance against an impersonal logic, and an expression of communal activism.
That justification will not convince economists, who prefer a dryer sort of reasoning. But it is not out of place to remind ourselves that economists and bureaucrats need not always have things their own way.
Not sure how much time I'll have -- I'm traveling today and have to meet a deadline along the way -- so let me turn the conversation over to someone who might know a bit about this topic, Paul Krugman:
What Should Trade Negotiators Negotiate About? A Review Essay, by Paul Krugman: If economists ruled the world, there would be no need for a World Trade Organization. The economist's case for free trade is essentially a unilateral case - that is, it says that a country serves its own interests by pursuing free trade regardless of what other countries may do. Or as Frederic Bastiat put it, it makes no more sense to be protectionist because other countries have tariffs than it would to block up our harbors because other countries have rocky coasts. So if our theories really held sway, there would be no need for trade treaties: global free trade would emerge spontaneously from the unrestricted pursuit of national interest. (Students of international trade theory know that there is actually a theoretical caveat to this statement: large countries have an incentive to limit imports - and exports - to improve their terms of trade, even if it is in their collective interest to refrain from doing so. This "optimal tariff" argument, however, plays almost no role in real-world disputes over trade policy.)
Fortunately or unfortunately, however, the world is not ruled by economists. The compelling economic case for unilateral free trade carries hardly any weight among people who really matter. If we nonetheless have a fairly liberal world trading system, it is only because countries have been persuaded to open their markets in return for comparable market-opening on the part of their trading partners. Never mind that the "concessions" trade negotiators are so proud of wresting from other nations are almost always actions these nations should have taken in their own interest anyway; in practice countries seem willing to do themselves good only if others promise to do the same.
But in that case why should the tits we demand in return for our tats consist only of trade liberalization? Why not demand that other countries match us, not only in what they do at the border, but in internal policies? This question has been asked with increasing force in the last few years. In particular, environmental advocates and supporters of the labor movement have sought with growing intensity to expand the obligations of WTO members beyond the conventional rules on trade policy, making adherence to international environmental and labor standards part of the required package; meanwhile, business groups have sought to require a "level playing field" in terms of competition policy and domestic taxation. Depending on your point of view, the idea that there must be global harmonization of standards on employment, environment, and taxation is either the logical next step in global trade negotiations or a dangerous overstepping of boundaries that threatens to undermine all the progress we have made so far.
In 1992 Columbia's Jagdish Bhagwati (one of the world's leading international trade economists) and Robert E. Hudec (an experienced trade lawyer and former official now teaching at Minnesota) brought together an impressive group of legal and economic experts in a three-year research project intended to address the new demands for an enlarged scope of trade negotiations. Fair Trade and Harmonization: Prerequisites for Free Trade? (Cambridge MA: MIT Press, 1996) is the result of that project. This massive two-volume collection of papers is unavoidably a bit repetitious. One also wonders why only economists and lawyers were involved - what happened to the political scientists? (More on that later). But the volumes contain a number of first-rate papers and offer a valuable overview of the debate.
In this essay I will not try to offer a comprehensive review of the papers; in particular I will give short shrift to those on competition and tax policy. Nor will I try to deal with the quite different question of how much coordination of technical standards - e.g. health regulations on food (remember the Eurosausage!), or safety regulations on consumer durables - is essential if countries are to achieve "deep integration". Instead, I will try to sort through what seem to be the main issues raised by new demands for international labor and environmental standards..
The economics and politics of free trade
In a way, the most interesting paper in the Bhagwati-Hudec volumes is interesting precisely because the author seems not to understand the logic of the economic case for free trade - and in his incomprehension reveals the dilemmas that practical free traders face. Brian Alexander Langille, a Canadian lawyer, points out correctly that domestic policies such as subsidies and regulations may influence a country's international trade just as surely as explicit trade policies such as tariffs and import quotas. Why then, he asks, should trade negotiations stop with policies explicitly applied at the border? He seems to view this as a deep problem with economic theory, referring repeatedly to the "rabbit hole" into which free traders have fallen.
But the problem free traders face is not that their theory has dropped them into Wonderland, but that political pragmatism requires them to imagine themselves on the wrong side of the looking glass. There is no inconsistency or ambiguity in the economic case for free trade; but policy-oriented economists must deal with a world that does not understand or accept that case. Anyone who has tried to make sense of international trade negotiations eventually realizes that they can only be understood by realizing that they are a game scored according to mercantilist rules, in which an increase in exports - no matter how expensive to produce in terms of other opportunities foregone - is a victory, and an increase in imports - no matter how many resources it releases for other uses - is a defeat. The implicit mercantilist theory that underlies trade negotiations does not make sense on any level, indeed is inconsistent with simple adding-up constraints; but it nonetheless governs actual policy. The economist who wants to influence that policy, as opposed to merely jeering at its foolishness, must not forget that the economic theory underlying trade negotiations is nonsense - but he must also be willing to think as the negotiators think, accepting for the sake of argument their view of the world.
What Langille fails to understand, then, is that serious free-traders have never accepted as valid economics the demand that our trade liberalization be matched by comparable market-opening abroad; and so they are not being inconsistent in rejecting demands for an extension of such reciprocity to domestic standards. If economists are sometimes indulgent toward the mercantilist language of trade negotiations, it is not because they have accepted its intellectual legitimacy but either because they have grown weary of saying the obvious or because they have found that in practice this particular set of bad ideas has led to pretty good results.
One way to answer the demand for harmonization of standards, then, is to go back to basics. The fundamental logic of free trade can be stated a number of different ways, but one particularly useful version - the one that James Mill stated even before Ricardo - is to say that international trade is really just a production technique, a way to produce importables indirectly by first producing exportables, then exchanging them. There will be gains to be had from this technique as long as world relative prices differ from domestic opportunity costs - regardless of the source of that difference. That is, it does not matter from the point of view of the national gains from trade whether other countries have different relative prices because they have different resources, different technologies, different tastes, different labor laws, or different environmental standards. All that matters is that they be different - then we can gain from trading with them.
This way of looking at things, among its other virtues, offers an en passant refutation of the instinctive feeling of most non-economists that a country that imposes strong environmental or labor standards will necessarily experience difficulties when it trades with other countries that are not equally high-minded. The point is that all that matters for the gains from trade are the prices at which you trade - it makes absolutely no difference what forces lie behind those prices. Suppose your country has been cheerfully exporting airplanes and importing clothing in return, believing that the comparative advantage of your trading partners in clothing is "fairly" earned through exceptional productive efficiency. Then one day an investigative journalist, hot in pursuit of Kathie Lee Gifford, reveals that the clothing is actually produced in 60-cent-an-hour sweatshops that foul the local air and water. (If they hurt the global environment, say by damaging the ozone layer, that is another matter - but that is not the issue).You may be outraged; but the beneficial trade you thought you had yesterday has not become any less economically beneficial to your country now that you know that it is based on these objectionable practices. Perhaps you want to impose your standards on these matters, but this has nothing to do with trade per se - and there are worse things in the world than low wages and local pollution to excite our moral indignation.
This back-to-basics case for rejecting calls for harmonization of standards is elaborated in two of the papers in Volume 1 of Bhagwati-Hudec: a discussion of environmental standards by Bhagwati and T.N. Srinivasan, and a discussion of labor standards by Drusilla Brown, Alan Deardorff, and Robert Stern. In each case the central theme is that neither the ability of a country to impose such standards nor its benefits from so doing depend in any important way on whether other countries do the same; so why not leave countries free to choose?
Bhagwati and Srinivasan also raise two other arguments on behalf of a laissez-faire approach to standards, arguments echoed by several other authors in the volume. The first is that nations may legitimately have different ideas about what is a reasonable standard. (The authors quote one environmentalist who asserts that "geopolitical boundaries should not override the word of God who directed Noah" to preserve all species, then drily note that "as two Hindus .. we find this moral argument culture-specific"). Moreover, even nations that share the same values will typically choose different standards if they have different incomes: advanced-country standards for environmental quality and labor relations may look like expensive luxuries to a very poor nation. Second, to the extent that nations for whatever reason choose different environmental standards, this difference, like any difference in preferences, actually offers not a reason to shun international trade but an extra opportunity to gain from such trade. It is very difficult to be more explicit about this without being misrepresented as an enemy of the environment - an excerpt from the entirely sensible memo along these lines that Lawrence Summers signed but did not write at the World Bank a few years ago is reprinted in my copy of The 776 Stupidest Things Ever Said - so it is left as an exercise for readers.
The back-to-basics argument against harmonization of standards, then, is completely consistent and persuasive. And yet it is also somehow unsatisfying. Perhaps the problem is that we know all too well how little success economists have had in convincing policymakers of the case for unilateral free trade. Why, then, should we imagine that restating that case yet again will be an effective argument against the advocates of international harmonization of standards? Confronted with the failure of the public to buy the classical case for free trade, and unwilling simply to preach the truth to each other, trade economists have traditionally followed one of two paths. Some try to give the skeptics the benefit of the doubt, attempting to find coherent models that make sense of their concerns. Others try to make sense not of the skeptics' ideas but their motives, attempting to seek guidance from models of political economy. The same two paths are followed in these volumes, with several papers following each approach.
Second-best considerations and the "race to the bottom"
The general theory of the second best tells us that if incentives are distorted in some markets, and for some reason these distortions cannot be directly addressed, policies in other markets should in principle take the distortions into account. For example, environmental economists have become sensitized to the likely interactions between pollution fees - designed to correct one distortion of incentives - with other taxes, which have nothing to do with environmental issues but which, because they distort incentives to work, save, and invest may crucially affect the welfare evaluation of any given environmental policy.
There is a long history of protectionist arguments along second-best lines. (Among Jagdish Bhagwati's seminal contributions to international trade theory was, in fact, his work showing that many critiques of free trade are really second-best arguments - and that the first-best response rarely involves protection). Here's an easy one: suppose that an industry generates negative environmental externalities that are not properly priced, and that international trade leads to an expansion of that industry in your country. Then that trade may indeed reduce national welfare (although of course trade may equally well have the opposite effect: it may cause your country to move out of "dirty" into "clean" industries, and thereby lead to large welfare gains). However, the advocates of international environmental and labor standards seem to be offering a more subtle argument. They seem to be claiming that an environmental (or labor) policy that would raise welfare in a closed economy - or that would raise world welfare if implemented by all countries simultaneously - will reduce national welfare if implemented unilaterally. Thus the independent actions of national governments in the absence of international standards on these issues can lead to a "race to the bottom", with global standards far too lax.
What sort of model might justify this fear? In an extremely clear paper in Volume 1, John D. Wilson gives the issue his (second) best shot, showing that international competition for capital - in a world in which the social return to capital exceeds its private return, for example due to capital taxation - could do the trick. Other things being the same, tighter environmental or labor regulation will presumably decrease the rate of return on investments, and thus any country which has a pre-existing tendency to attract too little capital will have an incentive to avoid such regulations; whereas a collective, international decision to impose higher standards would not lead to capital flight, since the capital would have nowhere to go.
Is this a clinching argument? Not necessarily. For one thing, like all second-best arguments it is very sensitive to tweaking of its assumptions. As Wilson points out, capital importation may have adverse as well as positive effects, especially from the point of view of an environment-conscious country. In that case a positive rate of taxation is appropriate - and if the actual rate of taxation is too low, countries may adopt excessively strong environmental standards in a "race to the top". If this seems implausible, Wilson reminds us of the NIMBY (not in my backyard) phenomenon in which no local jurisdiction is willing to be the site for facilities the public collectively needs to locate somewhere.
Even if you regard a race to the bottom as more likely than one to the top, there is still the question of whether such second-best arguments are really very important. This is doubtful, especially where environmental standards are concerned. The alleged impact of such standards on firms' location decisions looms large in the demands of activists who want these standards harmonized. But the chapter by Arik Levinson, surveying the evidence, finds little reason to think that international differences in these standards actually have much effect on the global allocation of capital.
So while it is possible to devise second-best models that offer some justification for demands for harmonization of standards, these models - on the evidence of this collection, at any rate - do not seem particularly convincing. The classical case for laissez-faire on national economic policies is surely not precisely right, but it does not seem wrong enough to warrant the heat now being generated over the issue of harmonization. Simply pointing this out, however, while important, does not make the phenomenon go away. So it is at least equally important to try to understand the political impulse behind demands for harmonization, and in particular to ask whether the political economy of standard-setting offers some indirect rationale for insisting on harmonization of such standards.
The political economy of standards
Consider - as Brown, Deardorff, and Stern do - a single industry, small enough to be analyzed using partial equilibrium, in which a country is considering imposing a new environmental or labor regulation that will raise production costs. As they point out, if the costs of the regulation are less than the social costs imposed by the industry in its absence, then it is worth doing regardless of whether other countries follow suit. But the distribution of gains between producers and consumers does depend on whether the action is unilateral or coordinated. If one country imposes a costly regulation while others do not, the world price will remain unchanged and all of the burden will fall on producers; if many countries impose the regulation, world prices will rise and some of the burden will be shifted to consumers.
So what? Well, it is a fact of life, presumably rooted in the public-goods character of political action, that trade policy tends to place a much higher weight on producers than on consumers. So even though the national welfare case for the regulation is not weakened at all by the fact that the good is traded, the practical political calculus of getting the regulation implemented could quite possibly depend on whether other countries agree to do the same. This suggests an alternative version of the "race to the bottom" story. The problem, one might argue, is not that countries have an incentive to set standards too low in a trading world. Rather, it is that politicians, who respond to the demands of special-interest groups, have such an incentive. And one might argue that this failure of the political market, rather than distortions in goods or factor markets, is what justifies demands for international harmonization of standards.
An environmentalist or defender of workers' rights might also make a related argument. He or she might say "You know that countries aren't in a zero-sum competition, and I know that they aren't, but the public and the politicians think they are - and industry lobbies consistently use that misconception as an argument against standards that we ought to have. So we need to set those standards internationally in order to neutralize that bogus but effective political ploy". It is very difficult for trade economists to reject this line of argument on principle. After all, it is very close to the reason why free-traders who know that the economic case for liberal trade is essentially unilateral are nonetheless usually staunch defenders of the GATT: trade negotiations may be based on a false theory, but by setting exporters as counterweights to producers facing import competition they nonetheless are politically crucial to maintaining more or less free trade. That is, the true purpose of international negotiations is arguably not to protect us from unfair foreign competition, but to protect us from ourselves. (When the United States recently imposed utterly indefensible restrictions on Mexican tomato exports, an Administration official remarked off the record that Florida has a lot of electoral votes while Mexico has none. The economically correct rebuttal to this sort of thing is to point out that the other 49 states contain a lot of pizza lovers; the politically effective answer is to subject US-Mexican trade to a set of rules and arbitration procedures in which the Mexicans do too have a vote).
While one cannot dismiss such political-economy arguments as foolish, however, the problem is to know where to stop. Here is where it would have been useful to hear from some political scientists, who might be able to tell us more about when international negotiations over standards are likely to improve domestic policies, and when they are likely simply to serve as a cover for protectionist motives. But while I would have liked to see an analysis from that point of view, much of the legal analysis that occupies Volume 2 of the Bhagwati-Hudec books does shed light on the problem.
Standards and the rule of law
Economists pronounce on legal matters at their peril: law, even international trade law, is a discipline all its own, with a jargon just as impenetrable to us as ours is to them. Let me therefore tread cautiously in interpreting the arguments here. As I understand it, the problem involved in defining the limits of fair trade is not too different from that of defining the limits of free speech. Take it as a given that countries can do things that are perceived to be economically harmful to other countries - it does not necessarily matter whether this perception is correct. Which of these things can realistically be prohibited, and which should be tolerated? The answer is a matter of degree. The fellow at the next table who insists on talking loudly to his partner about marketing is annoying, but one cannot reasonably ask the law to do anything about him; the person who shouts "Fire" in a crowded theater is something else again.
Where does one draw the line in international economic relations? The prevailing principle of international law derives from the 17th-century Peace of Westphalia, which ended the Thirty Years' War by establishing the rule that states may do whatever they like (such as imposing the sovereign's religion) within their borders - only external relations are the proper concern of the international community. By this principle labor law, or environmental policies that do not spill across borders, should be off limits.
Now in practice we do not always honor the principle of the hard-shell Westphalian state. We are sometimes willing to impose sanctions or even invade to protect human rights. Even in trade negotiations it is an understood principle that if a country de facto undoes its trade concessions with domestic policies - for example, offsetting a tariff cut with an equal production subsidy - it is considered to have failed to honor its agreement. But while borders are fuzzier in legal practice than they are on a map, the basic structure of trade negotiations is still basically Westphalian. The demand for harmonization of standards is, in effect, a demand that this should change.
We have seen that the strictly economic case for that demand is fairly weak, but there may be a stronger case on grounds of political economy. But what do the legal experts say? The general answer, as I understand it, is that they don't think it is a good idea. A lucid chapter by Frieder Rousseler grants that the political argument for harmonization has some force, but concludes that to give in to it would open up too wide a range of potential complaints, much the same as would happen if I were allowed to sue people whose words annoy rather than actually slander me. Other authors, such as Virginia Leary and Robert Hudec himself, seem to have a similar point of view, suggesting only that nations might want to enter into specific environmental and labor agreements that would then be enforced by the same institutions that enforce trade agreements. (One essay, however, a piece by Daniel Gifford and Mitsuo Matsushita on competition policy, seems more economistic than the economists: it argues that the international acceptability of competition policies should be judged on whether they seem likely, or at least motivated by the desire, to enhance efficiency).
To an economist, at least, the legal case here seems fairly similar to the economic case for trade negotiations. We have a purist principle: unilateral free trade, the Westphalian state. We recognize based on experience that it is useful to compromise that principle a bit, so that we work with mercantilists rather than simply castigating them and allow a bit of international meddling in internal affairs. But while a bit of pragmatism is allowed, the principle remains there; and it is not a good idea to stray too far. On the evidence of these volumes, then, the demand for harmonization is by and large ill-founded both in economics and in law; realistic political economy requires that we give it some credence, but not too much. Unfortunately, that will surely not make the issue go away. Expect many more, equally massive volumes to come.
David Altig, research director at the Cleveland Fed, looks at how close labor markets are to being "normalized":
Why we debate, by David Altig: It's been a while since we featured one of my favorite charts—a "bubble graph" comparing average monthly job changes during this recovery with average changes during the previous recovery, sector by sector.
If you try, it isn't too hard to see in this chart a picture of a labor market that is very close to "normalized," excepting a few sectors that are experiencing longer-term structural issues. First, most sectors—that is, most of the bubbles in the chart—lie above the horizontal zero axis, meaning that they are now in positive growth territory for this recovery. Second, most sector bubbles are aligning along the 45-degree line, meaning jobs in these areas are expanding (or in the case of the information sector, contracting) at about the same pace as they were before the "Great Recession." Third, the exceptions are exactly what we would expect—employment in the construction, financial activities, and government sectors continues to fall, and the manufacturing sector (a job-shedder for quite some time) is growing slightly.
For the skeptics, I below offer a familiar chart, which traces the level of total employment pre- and post-December 2009, compared with the average path of pre- and post-recession employment for the previous five downturns:
We are now more than 16 quarters past the beginning of the recession that began in the fourth quarter of 2007, and total employment is still 4 percent lower than it was at the beginning of the downturn. In the previous five recessions by the time 16 quarters had passed, employment had increased by about 6 percent. Even in the worst case, indicated by the lower edge of the gray shaded area, employment growth was flat—and that observation is qualified by the fact that the recovery from the 1980 recession was interrupted by the 1981–82 recession.
This unhappy comparison is not driven by the construction, financial activities, and government sectors. In the area of professional and business services, which has logged the largest average monthly employment gains in the current recovery, the number of jobs still sits 2.7 percent below the level at the outset of the last recession, as the chart below shows.
Total private-sector jobs in education and health services, which never actually contracted during the recession, nonetheless remain abnormally low in historical context.
In these charts lies the crux of some very basic disagreements about the appropriate course of policy. The last three graphs draw a clear picture of labor markets that are underperforming by historical standards—a position that I take to be the conventional wisdom. An argument against following that conventional wisdom centers on the question of whether historical standards represent the appropriate yardstick today. In other words, is the correct reference point the level of employment or the pace of improvement in the labor market from a permanently lower level? For the proponents of the latter view, the bubble chart might very well look like a return to normal, despite the fact that employment has not returned to prerecession levels.
One way to adjudicate the debate, in theory, is to rely on the trajectory of inflation. If there remains a significant amount of slack in labor markets, as the conventional interpretation of things suggest, there ought to be consistent downward pressure on prices. The case for consistent downward pressure on prices is not so obvious. Measured inflation appears to moving in the direction of the Federal Open Market Committee's 2 percent long-term objective.
Also, the Atlanta Fed's own monthly survey of business inflation expectations, which surveys a panel of businesses from our Reserve Bank district, indicates that this inflation number (shown in our March release from earlier this week) is in line with what private-sector decision makers anticipate:
"Survey respondents indicated that, on average, they expect unit costs to rise 2.0 percent over the next 12 months. That number is up from 1.9 percent in February and comparable to recent year-ahead inflation forecasts of private economists. Firms also reported that their unit costs had risen 1.8 percent compared to this time last year, which is unchanged from their assessment in February. Inflation uncertainty, as measured by the average respondent's variance, declined from 2.8 percent in February to 2.4 percent in March, the lowest variance since the survey was launched in October 2011."
Does that settle it? Not quite. There may not be much evidence of building disinflationary pressure, but neither is there building evidence of an inflationary push that you would expect to see if the economy were bumping up against capacity constraints. Obviously, the story isn't over yet.
Good news via CR:
In the week ending March 17, the advance figure for seasonally adjusted initial claims was 348,000, a decrease of 5,000 from the previous week's revised figure of 353,000. The 4-week moving average was 355,000, a decrease of 1,250 from the previous week's revised average of 356,250.The previous week was revised up to 353,000 from 351,000. ...
The ongoing decline in initial weekly claims is good news. Even in "good times" weekly claims are usually just above 300 thousand, and claims are getting there.
Another reason to attack the unemployment problem aggressively -- unemployment causes foreclosues:
The Changing Face of Foreclosures, by Joshua Abel and Joseph Tracy, Liberty Street: The foreclosure crisis in America continues to grow, with more than 3 million homes foreclosed since 2008 and another 2 million in the process of foreclosure. President Obama, in his speech of February 2, 2012, argued for expanded refinancing opportunities for homeowners and programs to expedite the transition of foreclosed homes into rental housing. In this post, we document the changing face of foreclosures since 2006 and the transformation of the crisis from a subprime mortgage problem to a prime mortgage problem owing to the housing bust and persistent high unemployment. Recognizing this change is critical because the design of housing policies should reflect the types of homeowners who are at risk of foreclosure today rather than those who were at risk at the onset of the financial crisis.
It is well known that problems with nonprime lending helped to spark the housing crisis, which was a catalyst for the financial crisis and ensuing recession. Also well known is the progressive erosion of underwriting standards in nonprime lending toward the end of the housing boom. As a result, many nonprime loans were made to borrowers who did not have the ability to pay for them, especially if house prices did not continue to increase. Not surprisingly, then, as house prices began to flatten and decline in 2006, foreclosure starts were dominated by nonprime borrowers. As shown in our first chart, nonprime borrowers accounted for about 65 percent of foreclosure starts in 2006. However, as the financial crisis led to the Great Recession (indicated in grey), the composition of borrowers entering foreclosure shifted quite dramatically. By 2009, prime borrowers had eclipsed nonprime borrowers as the dominant source of new foreclosures. In fact, from 2009 until the present, prime borrowers have accounted for the majority of all new foreclosure starts. A fairly steady 10 percent of foreclosure starts were associated with mortgages guaranteed by the Federal Housing Administration or the Department of Veterans Affairs.
What accounts for the dramatic change in the composition of foreclosure starts since 2006? Our next chart shows two important economic factors that have affected homeowners over this period—house prices and unemployment. For each mortgage that enters foreclosure, we calculate the percentage change in metropolitan area house prices from the time that the mortgage was originated to the time it entered foreclosure. We report average changes across all new foreclosures by year and quarter. From 2006 through 2008, as the share of new foreclosures was shifting from nonprime to prime borrowers, we see that initially foreclosures involved properties that were on average still increasing in value
(as measured by the positive cumulative change in the metro area house price index defined above), but then shifted to properties with declining house prices (in 2008), and eventually to properties where on average house prices had declined by 20 percent (in 2009). In fact, since 2009, properties entering foreclosure have continued to face a 20 percent decline in value on average.
We also calculate the change in the local (defined as the metropolitan area) unemployment rate. Just as foreclosure starts were initially associated with properties whose value was still rising, so foreclosures in 2006 and 2007 were linked to local labor markets where the unemployment rate was still declining. In 2008, however, foreclosures shifted to markets where unemployment was beginning to rise and, in 2009, to markets where unemployment had increased on average by more than 2 percentage points. In 2010, foreclosure starts occurred in markets where the increase in the local unemployment rate exceeded 5 percentage points on average since the mortgages were originated. The shift in the composition of new foreclosures from borrowers with nonprime mortgages to those with prime mortgages reflects the fact that falling house prices and rising unemployment tend to impact all borrowers in a local housing market, not just nonprime borrowers. As a result, traditionally safe borrowers began falling behind on their payments as they felt the severe effects of the housing bust and high unemployment.
In the design of housing policy, an important consideration is the extent to which foreclosures result from situations where borrowers cannot afford their mortgage from the outset. In these circumstances, foreclosures can be viewed as the market process for removing borrowers who should not have been approved for a mortgage in the first place or who cannot sustain their mortgage going forward. When affordability is the key determinant of foreclosures, policies aimed at reducing the flow into foreclosure run the risk of slowing an adjustment process necessary for an eventual housing market recovery. A useful metric for the ability of a borrower to afford a mortgage is the “debt-to-income” (DTI) ratio. This measures the cost of the mortgage (monthly payments, property taxes, and homeowner’s insurance) relative to the borrower’s income. Unfortunately, because the data that we use from Lender Processing Services do not consistently report the DTI ratio, we cannot assess this affordability measure across time for foreclosure starts.
However, we provide an alternative indirect measure of affordability. The basic idea is that in cases where a borrower cannot afford a mortgage from the outset, payment problems are likely to materialize sooner rather than later. In the chart below, we look at the time between the origination of a mortgage and the beginning of the string of missed payments that ultimately led to foreclosure. We show the 25th percentile (25 percent of the times were shorter, P25), the median (50 percent of the times were shorter, P50), and the 75th percentile (75 percent of the times were shorter, P75). Initially, when most foreclosure starts were associated with nonprime mortgages, 25 percent of the borrowers had been in the house fewer than eight months before falling behind on their payments, and 50 percent fewer than eighteen months. However, more recently, as the composition of foreclosures shifted to prime borrowers, 75 percent had been in the house more than three years, and 50 percent more than four years. This suggests that as the recession hit, foreclosures shifted from borrowers who often could not afford their houses to borrowers who had demonstrated that they could (by virtue of making payment for several years) but began to fall behind on their payments when they were hit by the dual crises of house price declines and high unemployment.
This change in the face of foreclosures is mirrored in many other dimensions. Our last chart shows the evolution in the distribution of origination credit (FICO) scores over time for new foreclosures. In 2006, 25 percent of foreclosure starts were associated with borrowers who had a credit score of 580 or below at the time they took out the mortgage, and 50 percent had credit scores of 620 or below. However, by 2009, as the recession set in and shifted the mix of foreclosures to prime borrowers, 50 percent of new foreclosures had origination credit scores of nearly 680, and 25 percent had credit scores of 720 or higher.
Nonprime lending during the housing boom was concentrated in what were called “exotic” mortgages with little down payment, initial “teaser” rates and, in some cases, negative amortization. However, since 2010, 65 percent of foreclosure starts have been associated with borrowers who took out thirty-year fixed-rate amortizing mortgages (viewed by consumer advocates as the “safest” mortgage product)—up from 40 percent early in the crisis. Similarly, the prime borrowers who have entered foreclosure in the past several years have on average made a meaningful down payment of 20 percent.
A large foreclosure pipeline hangs over U.S. housing markets, creating headwinds for housing market recovery. What began as a nonprime mortgage problem has evolved into a prime mortgage problem with the onset of the recession. The inability to afford a home has been replaced by declining house prices and high unemployment as the primary driver of new foreclosures. Clearly, these changes have implications for the design of housing policy: By recognizing the shifting face of foreclosures, policymakers can make more informed choices about the most effective forms of intervention and the groups of borrowers that could best be served by them.
[Travel day -- I am going to visit the St. Louis Fed for a week -- will post as I can. (The post earlier today is related to the visit. I am going to talk about potential output and the controversy that erupted on economics blogs in a talk during the visit and I wanted to clarify my thinking on a few points. I also met the president of the Philadelphia Fed Charles Plosser on Friday, and he was well aware of my view on this from the blog. He was the one who motivated me to think about how demand side shocks can produce temporary supply-side effects, and the degree to which the supply side effects pose a constraint for policy. On that point, I see I have an ally in the view that much of the current change in the natural rate of output is temporary.)]
Calculated Risk notes a difference between public sector employment during the Bush and Obama administrations. After the stock market crash, public sector employment continued to rise during the Bush administration, but after the housing market crash public sector employment declined. This made the recession worse, and it's working against the recovery:
Public and Private Sector Payroll Jobs: Bush and Obama, by Calculated Risk: This is a follow up to the previous post showing the year-over-year change in private and public sector payroll jobs. ...
The employment recovery during Mr. Bush's first term was very sluggish, and private employment was down 913,000 jobs at the end of his first term. The recovery has been sluggish under Mr. Obama's presidency too, and there are still 247,000 fewer payroll jobs than when Mr. Obama's term started (although it appears this will turn positive in a couple of months).
A big difference between Mr. Bush's first term and Mr. Obama's presidency has been public sector employment. The public sector grew during Mr. Bush's term (up 900,000 jobs), but the public sector has declined since Obama took office (down 590,000 jobs). These job losses are at the state and local level, but they are still a significant drag on overall employment.
It appears the public sector jobs losses are slowing, and it looks likely that the decline in public payrolls will probably end mid-year 2012.
That's a big difference in public sector employment -- just short of 1.5 million more public sector jobs were created or saved under Bush.
Thoughts on Okun's Law, by Tim Duy: I have been thinking about Jon Hilsenrath's article describing the breakdown of Okun's Law. First off, consider the chart:
Note that while Hilsenrath describes Okun's Law as the relationship between changes in the unemployment rates and the difference between actual and potential GDP growth, the chart that accompanies his article relates changes in unemployment rates and output growth. My chart illustrates the relationship between the year-over-year change in the unemployment rate (DIFFU) and the output growth gap (GAP), defined as the difference between the year-over-year changes in real GDP and and CBO potential GDP. The slope of the line above can be obtained from the regression equation:
DIFFUt = beta*GAPt
For the 1970:1 to 2011:4 sample, the slope (beta) is -0.41, suggesting that growth 1 percentage point in excess of potential growth yields a 0.4 percentage point decline in the unemployment rate. So far, so good. That said, even a cursory look at the chart will tell you that it would be a mistake to place too much weight on this relationship when considering near term forecasts. Observations are dispersed widely around the trend line; the R-squared is 0.71, leaving plenty of the change in unemployment unexplained by the output growth gap alone. Moreover, there are some curious points in the lower left-hand and upper right-hand quadrants which seem to be at odds with Okun's Law. Indeed, the last two quarters of 2011 were such points, with unemployment falling despite output growth just below potential growth (year-over-year basis).
This suggests to me that Okun's "Law" might break down on a fairly regular basis, which would not be a surprise given short run variations in productivity and labor force growth. To get at this question, collect the estimates of beta from three-year rolling windows beginning with the 1960:1-1963:1 sample and ending with the 2008:4-2011:4 sample:
And that is what we call job security for reporters and economists alike. The sensitivity of unemployment to the output growth gap ranges from almost 0 to almost -0.6, with recent estimates at the low end. Indeed, in the past few years, changes in unemployment have become more sensitive to the output growth gap. That said, how much should weight should we place on this deviation? After all, at something closer to business cycle frequencies, we can discuss the "breakdown" of Okun's Law every few years as productivity fluctuates with the business cycle.
What about a longer estimation period that smooths the cyclical variation? Consider a ten-year rolling window:
As one might expect, the range of estimates is much more narrow. But still, the ten-year estimates following the three-year estimates down in recent years. Maybe something more persistent is happening, with the sensitivity of unemployment to the output growth gap changing from -0.3 to -0.5 over the last decade, a record low at this horizon. And notice that estimates of beta at the three-year horizon were decreasing prior to the recession; maybe what happened during the recession was in part just the continuation of an existing trend? Perhaps this is additional evidence of a trend productivity slowdown underway (I hope to tackle this issue more later).
Will the old Okun's Law soon reassert itself? I don't know, but looking at the ten-year trend suggests that we could continue to see fairly solid job growth even in a environment of relatively tepid GDP growth.
The US labour market is still a shambles, by Joseph Stiglitz, Commentary, Financial Times: It is understandable, given the number of times green shoots have been seen since the downturn began in December 2007, that there might be some skepticism about claims the recovery is finally under way. To me the question is what does it imply for policy? Does it mean we can be more relaxed about the demands for budget cuts emanating from fiscal conservatives? Or that the US Federal Reserve should start paying more attention to inflation, and begin contemplating raising interest rates? Even if this is not one of the many green shoots that soon turn brown, the economy will almost certainly need more stimulus if it is to return to full employment any time soon.
This is the inevitable conclusion from looking at the state of the labour market today. It is a shambles. ...
Today the American economy faces three big risks. First, a steeper European downturn, as a result of the excessive austerity and the euro crisis. Second, complacency that the economy will recover quickly without government support. Though every downturn comes to an end, that should not be of much comfort. Third, that we accept that an unemployment rate above 7 per cent is inevitable.
If my Cassandra forecast turns out to be wrong, stimulus can be cut. But if it turns out to be right, and we do too little, we will live to regret it.
I hope you know by now that I agree.
I missed this post from Tim Duy earlier today:
Another Positive Employment Report. by Tim Duy: It is increasingly difficult if not impossible to deny the real improvements in labor markets in recent months. First, the ongoing declines in initial jobless claims clearly suggested the recovery was gaining depth and sustainability:
Then comes the February employment report along with upward revisions to the December and January numbers:
Nonfarm payroll gains are averaging a solid 245K per month over the last three months. Does this mean the Federal Reserve can pull back on the throttle? No, although I am sure you will hear the more hawkish policymakers using this report as evidence that policy reversal will happen sooner than markets anticipate. To be sure, that may still turn out to be true, but this data still reveals the depth of the hole left behind by the recession. But he majority of the FOMC will notice the stagnant unemployment rate (8.3%), a consequence of a small gain in labor force participation. If labor force participation rates begin to rebound, the improvement in the unemployment rate will stall, and the Fed could find itself willing to ease again later this year as suggested in this week's well documented Wall Street Journal article.
Moreover, note that wage gains remain anemic, both for all workers:
and for non supervisory and production workers:
Of course, if labor force participation rates stagnate while job growth continues unabated, the Fed will find themselves facing a more rapid drop in unemployment. That would certainly take QE3 off the table, and turn attention back to the timing of the next tightening cycle. This is not my expectation, but it certainly bears watching.
Bottom Line: Another good report, although still suggestive of the beginning of recovery. In my mind, true recovery will come when the cyclical declines in labor force participation are further reversed. At this point, there is no reason for the Fed to pull their foot off the gas. On net though, the employment report does push back the timing of any additional easing. The Fed will move to the sidelines while policymakers assess the level of slack in labor markets. If the cyclical downturn resulted in sustained structural damage, there may be little slack. But if an influx of returning workers puts a floor under the unemployment rate, the Fed will have more work still to do.
Here are my comments on the employment report:
The labor market continues to improve, CBS News
Job growth is better, but still too slow -- at this rate it will take years to get back to full employment -- so the question is whether job growth will continue to accelerate, level off, or (shudder) perhaps even slow down. I'm hoping for acceleration, but there's no certainty it will come.
[Editing is slow today, no link yet, so here's the post:]
The employment report brings good news. According to the the Bureau of Labor Statistics, nonfarm payroll employment rose by 227,000 in February, and the unemployment rate was unchanged at 8.3 percent.
How can an unchanged unemployment rate be good news? The unemployment rate falls when more people get jobs, and it increases when more people enter the labor force and begin looking for jobs. In the current report these two factors offset each other leaving the unemployment rate unchanged. There were more jobs, but also more people looking. As the BLS reports, "The civilian labor force participation rate, at 63.9 percent, and the employment-population ratio, at 58.6 percent, edged up over the month." The fact that more people are looking for jobs can be viewed in a positive light since it reflects increased optimism about their chances of finding employment.
The job creation number is also good news even though the 227,000 jobs that were created falls short of the amount we need to recover in an acceptable amount of time. At this rate, it will be several years before we reach full employment. That's too long, and I have been hoping to see signs that job growth is accelerating. In past recessions recoveries there have been several months with 300,000 or 400,000 created and we need job creation of this magnitude to keep up with population growth and provide jobs for the millions of people still looking for work.
This report does show signs that job creation is accelerating. The increase in employment is broad-based, each month the job creation figures look a bit better, and if the acceleration in job growth continues that will be a very welcome development. Will it continue? It would be a mistake not to expect rough spots on the road to recovery, there will inevitably be setbacks and in any case we cannot be certain that the needed acceleration will occur. Trouble in Iran could cause oil prices to spike and that would be very bad news. Europe looks better, but surprises are always possible, and there are other risks as well.
Thus, although the labor market is improving it's still too soon for policymakers to forget about the job market and turn their attention elsewhere, though they have mostly done that anyway. And it's certainly too soon to begin reversing course through interest increases or deficit reduction. The economy is looking more hopeful, but until the hopes are realized we need to keep doing all we can to help the labor market recover.
Cuts to state and local workforces have not been qually distributed between men and women. It's not even close (ideally, state and local employment would have been protected during the recession so that we wouldn't have to worry about this at all, but policy has been far from ideal):
...cuts to state and local government workforces, while a significant drag on the economy as a whole, are particularly damaging for women. In 2011, women made up 46.6 percent of the overall labor force, but among state and local workers, about 60 percent are women. Because women are so disproportionately represented in state and local jobs, they also have taken the brunt of the job losses in state and local governments. Of the net change in total state and local employment between 2007 and 2011—a decline of roughly 765,000 jobs—70 percent of the drop is from female employees. Today, there are about 540,000 fewer women in state and local jobs than in 2007, compared with about 225,000 fewer men. ...