Category Archive for: Unemployment [Return to Main]

Saturday, September 01, 2012

Credible Promises about 'Irresponsible' Policy

Paul Krugman discusses Michael Woodford's important paper:

Woodford on Monetary Policy (Sort of Wonkish), by Paul Krugman: I’m not in Jackson Hole... No matter. I can still read the papers — and the most important one was by Mike Woodford (pdf). Woodford’s paper is long and really dense... But the bottom line is “Ben, ur doing it wrong”.
The topic is what, if anything, monetary policy can do when interest rates are up against the zero lower bound... Under these conditions, conventional monetary policy ... has no traction.
Yet this need not mean that the central bank is without options. I think I was the first to make a point (pdf) that Woodford and Gauti Eggertsson greatly expanded in 2003, namely, that the central bank can still gain traction if it can convince the public that it will pursue a more inflationary policy than previously expected after the economy recovers. As I wrote way back then, the central bank needs to credibly promise to be irresponsible.
But can it really do this? Woodford devotes the first half of the paper to an extended review of the evidence on “forward guidance”, in which central banks signal their future intentions — and finds strong evidence that such talk matters. So his answer is yes, the Fed could boost the economy by making a commitment to hold off on raising interest rates when recovery finally kicks in.
But that isn’t what the Fed has mainly done... So what should the Fed be doing? Woodford concludes that ... it needs to promulgate a view of its intentions that would lead it to be slower to raise rates following a big slump than it would in other circumstances. And let me repeat the past tense: following a big slump, not just when you’re in it.
How to do this? Nominal GDP targeting would be one answer, because it would give the Fed a reason to hold off for a long time on rate hikes. Other schemes might also do the trick.
The point is that this is exactly what the Fed has not done. Bernanke has gone to great lengths to reassure politicians that policy will revert to normal as soon as possible, that the Fed remains as vigilant as ever about inflation; and while Woodford doesn’t quite say this, all this amounts to offering forward guidance in exactly the wrong direction.
Important stuff.

As I explained long ago, here's the problem:

[The effectiveness of policy] relies upon changing expectations of future inflation (which changes the real interest rate). People must believe that the Fed will actually be willing to create inflation in the future when it comes time to do so. However, it's unlikely that it will be optimal for the Fed to cause inflation when the time comes. Because of that, the best policy is to promise to create inflation, then renege on the promise when it comes time to follow through. Since people know this, and expect the Fed will not actually carry through and create inflation, it's hard to get them to change their expectations now. All that credibility the Fed has built up and protected concerning their inflation fighting credentials works against them here.

That's why Krugman says repeatedly that the Fed "needs to credibly promise to be irresponsible."

One more note. While everyone has jumped on the statement about nominal GDP targeting, Woodford also says that tying policy to specific goals, e.g. promising to leave interest rates low until unemployment or inflation crosses some threshold, say 4% for inflation or 6.5% for unemployment, "would be an 'important improvement' on what the Fed is doing now, though he said it had flaws." In the short-run, this is probably much more politically viable than moving to a nominal GDP target (Charles Evans, president of the Chicago Fed has been the most vocal proponent of this approach, and I have endorsed it as well).

But let me turn the microphone back to Paul Krugman:

Monetary Versus Fiscal Policy, Revisited, by Paul Krugman: One recurring complaint from commenters on this blog is that they can’t figure out where I stand on monetary versus fiscal policy as a response to a deeply depressed economy. Sometimes, they say, I declare that monetary policy is ineffective once you’re at the zero lower bound; other times I berate Ben Bernanke for not doing more. Which is it?
But it’s not a contradiction. Mike Woodford’s latest paper, especially taken in tandem with his paper last year at the Cambridge Keynes conference, actually explains it all.
What Mike demonstrates is the point that liquidity-trap worriers have been making for a long time – actually, ever since my 1998 piece. Current monetary policy is indeed ineffective in a liquidity trap; but there is still scope for central bank action in the form of credible commitments to keep monetary policy easy in the future, when the economy is no longer at the zero lower bound.
The trouble is how to make those credible commitments. ...
What about fiscal policy? As Mike pointed out in his earlier paper, fiscal stimulus in a liquidity trap doesn’t require that you convince the market that you’re going to behave differently once the crisis is past. It doesn’t depend on expectations at all; the government just goes out and creates jobs. So it made a lot of sense to argue for stimulus as the main immediate response to the slump.
But isn’t fiscal stimulus also a hard sell politically? Yes, indeed...
So what should well-meaning economists do now, with both fiscal and monetary policy falling short? The answer is, campaign on both fronts...

Which is very much the approach I've pushed -- don't put all our policy eggs in either the monetary or fiscal policy basket. I've worried that there has been too much focus on monetary policy lately, and that has let fiscal policymakers -- who must join the battle to lower our crisis level of unemployment -- off the hook. Fiscal policy has an important role to play: of the points that Eggertsson makes is that government spending does not have the credibility problem that plagues monetary policy. He says:

...Expansionary monetary policy can be difficult if the central bank cannot commit to future policy. The problem is that an inflation promise is not credible for a discretionary policy maker. ...
This credibility problem is what Eggertsson (2006) calls the "deflation bias" of discretionary monetary policy at zero interest rates. Government spending does not have this problem. ... The intuition is that fiscal policy not only requires promises about what the government will do in the future, but also involves direct actions today. And those actions are fully consistent with those the government promises in the future (namely, increasing government spending throughout the recession period). ...

We need to push on both the monetary and fiscal policy fronts. Neither policy alone will be sufficient to get the job done (even without the political hurdles standing in the way), and it's far past the time for both Congress and the Fed to do more about our crisis level unemployment problem.

Wednesday, August 29, 2012

'Changing Views of Globalization’s Impact'

Edward Alden of the Council on Foreign Relations:

Changing Views of Globalization’s Impact, by Edward Allen, Commentary, NY Times: ...For decades, economists resisted the conclusion that trade – for all of its many benefits — has also played a significant role in job loss and the stagnation of middle-class incomes in the United States. ...
Rather than focusing on trade, economists argued that other factors – especially “skill-biased technical change,” technological innovation that puts an added premium on skilled workers – played the biggest role in holding down middle-class wages. But now economists are beginning to change their minds. Responding to The Times’s recent survey about the causes of income stagnation, many top economists have cited globalization as a leading cause.
While the evidence is still not conclusive, it is pretty strong. Trade’s effect on jobs and income, which was probably modest through the 1990’s, now seems to be growing much larger. [list and discussion of recent studies]...
The usual rebuttal to these findings is to argue that they stem mostly from manufacturing. And manufacturing, the argument goes, is facing a long-run, secular decline in employment that is largely technology-driven, not unlike the story of agriculture in the 20th century. The job losses in manufacturing may seem as if they have been caused by trade,... but they have actually been caused by technological change.
Through the 1990s, that story was largely plausible. But over the last decade it is not. ... There is no question that over the last decade United States manufacturing has declined, taking away jobs and driving down wages for those who are still employed. Robert Atkinson and colleagues have a useful paper on this topic, showing that the loss of more than five million jobs in manufacturing in a decade was not primarily a technology and productivity story.
The real-world evidence makes it surprising that it has taken economists so long to catch on...
I've expressed pro-trade views in the past, and I still have them. But it's not enough to say, as we do, that the gains from trade are such that (under fairly general conditions) we can make everyone better off and no one worse off. If the actual result is that all the gains go to the top of the income distribution, and all the costs go to the working class -- if the distribution of the gains results in a large class of losers -- then it is much harder to defend. We must find a way to ensure that trade realizes the promise of "lifting all boats" instead of just the yachts.

Friday, August 24, 2012

'People Lucky Enough to Find New Work are often Taking Steep Wage Cuts'

Are you surprised?:

New Jobs Come With Lower Wages, by Sudeep Reddy, WSJ: During the recession, people who lost long-held jobs struggled to find new employment and often took substantial pay cuts if they did find new work. Little appears to have changed after the recession ended, a new Labor Department report shows. ...
People lucky enough to find new work are often taking steep wage cuts. Of the displaced workers who lost full-time wage and salary jobs from 2009-2011 and were reemployed by January, just 46% were earning as much or more than they did in their lost job. A third of them reported earnings losses of 20% or more. Both figures are almost identical to those from the prior report. (See our article from last year about these workers: “Downturn’s Ugly Trademark: Steep, Lasting Drop in Wages”)

Friday, August 03, 2012

One More Employment Day Update

Here are my remarks on the employment report:

July Jobs Report Gives Mixed Signals

Like Tim, I don't see this as prompting the Fed to action:

...this report will raise speculation that the Fed will do more to stimulate the economy at its next meeting. But the Fed was already aware of the risks from Europe and elsewhere, and if weaker numbers over the last few months weren't enough to prompt the Fed to do more, it's hard to see how the slight improvement in the numbers would alter the Fed's course, particularly if subsequent data reinforces the "things aren't as bad as they seemed over the last few months" point of view.

The null hypothesis for the Fed could be "we'll do more to stimulate the economy at the next meeting unless there is overwhelming evidence that we shouldn't," or it could be "We'll keep policy on hold unless there is overwhelming evidence we should do more." I believe the Fed is looking for reasons not to act, i.e. it has the second null, and that this report is not the overwhelming evidence they need to change their view.

Fed Watch: Employment Day Updates

Tim Duy:

Employment Day Updates, by Tim Duy: I am on a tight schedule this morning, leaving in a few minutes for a meeting in Salem, so I don't have time for extended comments on this morning's employment report. The report surprised on the upside, with nonfarm payrolls adding 163k jobs, a clear improvement from the last three months:


On the surface, this would seem to weigh against additional Fed action at their September meeting. I would say the counterargument is two-fold. First, wage growth continues to stagnate:


Low wage growth is a consequence of sustained weakness in labor markets and should be seen as further evidence inflation will remain "at or below" levels consistent with the Fed's mandate. Second, the internals on household survey were weak. Employment dropped 195k, reducing the employment to population ratio to 58.4, while the ranks of the unemployed grew by 45k. The labor force participation rate declined further to 63.7, down from 64.0 a year ago. No progress on the unemployment rate, which edged up a notch.
The establishment survey argues for a steady hand, the household survey argues for easier policy (arguably, even the establishment survey argues for easier policy, but I don't think the Fed sees it this way). Also note that we have another employment report before the next meeting. That said, if I had to choose today, I think that the establishment report would get the upper hand, pointing to steady policy in September. But there is lots of data between now and then.
For more employment charts, visit Calculated Risk. Gotta run...

Wednesday, August 01, 2012

'Jobless Generation'

Policymakers need to do more about the unemployment problem:

Jobless generation puts brakes on US, by Shannon Bond, FT: ...The share of American 18- to 24-year-olds who were employed fell to 54 per cent last year, the lowest since the labor department began tracking data in 1948, according to the Pew Research Center. The share who are in college has risen, but the researchers say this only partly explains the drop. The jobless rate for Americans age 16 to 24 is above 16 per cent, more than twice the national rate.
Youth unemployment has reached crisis levels around the world, with almost 13 per cent of the global youth labor force out of work this year... But the problem has a unique flavor in the US, where the weak job market has collided with record levels of educational debt – about $25,000 for the average graduate. Together, they pose a threat to the future earning power of young Americans ... and could have long-lasting effects on US growth. ...

Tuesday, July 31, 2012

DeLong: Hopeless Unemployment

Brad DeLong also has a column today (and I no longer have this complaint):

Hopeless Unemployment, by Brad DeLong, Commentary, Project Syndicate: ...At first, the long-term unemployed in the Great Depression searched eagerly and diligently for alternative sources of work. But, after six months or so passed without successful reemployment, they tended to become discouraged and distraught. After 12 months of continuous unemployment, the typical unemployed worker still searched for a job, but in a desultory fashion, without much hope. And, after two years of unemployment, the worker, accurately expecting to be at the end of every hiring queue, had lost hope and, for all practical purposes, left the labor market.
This was the pattern of the long-term unemployed in the Great Depression. It was also the pattern of the long-term unemployed in Western Europe at the end of the 1980s. And, in a year or two, it will be the pattern again for the long-term unemployed in the North Atlantic region.
I have been arguing for four years that our business-cycle problems call for more aggressively expansionary monetary and fiscal policies, and that our biggest problems would quickly melt away were such policies to be adopted. That is still true. But, over the next two years, barring a sudden and unexpected interruption of current trends, it will become less true.
The current balance of probabilities is that two years from now, the North Atlantic’s principal labor-market failures will not be demand-side market failures that could be easily remedied by more aggressive policies to boost economic activity and employment. Rather, they will be structural market failures of participation that are not amenable to any straightforward and easily implemented cure.

Wednesday, July 11, 2012

House GOP Wastes Valuable Time with Health Care Vote

Floor time in Congress is scarce and valuable. So why is are House Republicans wasting time with a bill they know will be vetoed when there are much bigger problems to address, the unemployment crisis for example? You'd think that politics is more important than the struggles of the unemployed:

House GOP set for health care law repeal vote, but offering no alternatives, CBS News: House Republicans generally avoided talk of replacement measures on Tuesday as they mobilized for an election-season vote to repeal the health care law that stands as President Barack Obama's signature domestic accomplishment. ... [T]he repeal vote ... will lead to nothing as the Democratic Senate won't consider it, and even if the House and Senate somehow agreed to repeal the law, Mr. Obama has the ultimate say with his veto pen. ...

I understand what's going on, but it's still disappointing to see the unemployed fall by the wayside.

Saturday, July 07, 2012

The Failure of the Federal Gvernment to Offset State and Local Austerity is Hurting Job Growth

As I've emphasized many times in the past, austerity at the state and local level forced by balanced budget requirements, falling tax revenues, and increasing demand for public services due to the recession had a large, negative effect on the economy. The failure of the federal government to backfill state and local budgets and stop this from happening was a big policy mistake:

Three years into recovery, just how much has state and local austerity hurt job growth?, by Josh Bivens and Heidi Shierholz: ...the public sector has seen massive job loss in the current recovery—largely due to budget cuts at the state and local level — which represents a serious drag that was not weighing on earlier recoveries. ...
How many more jobs would we have if the public sector hadn’t been shedding jobs for the last three years?  The simplest answer is that the public sector has shed 627,000 jobs since June 2009.  However, this raw job-loss figure understates the drag of public-sector employment relative to how the economy functions normally.
Over this same period the overall population grew by 6.9 million. In June 2009 there were 7.3 public-sector workers for every 100 people in the US; to keep that ratio constant given population growth, the public sector should have added roughly 505,000 jobs in the last three years.  This means that, relative to a much more economically relevant trend, the public sector is now down more than 1.1 million jobs. And even against this more-realistic trend, these public-sector losses are dominated by austerity at the state and local level, with federal employment contributing only around 6% of this entire gap.
It should be noted that this counter-factual of 1.1 million additional public sector jobs is a perfectly reasonable benchmark.  Before the Great Recession, the number of public-sector workers per 100 people had averaged right around 7.3 since the late 1980s.  In other words, having 1.1 million more public-sector workers, which would put us back at 7.3 public-sector workers per 100 people, would simply restore our economy to a normal level of government employment.  ...
However, even that 1.1 million public-sector jobs gap leaves out an important component:  public-sector job cuts also cause job loss in the private sector, for a couple of reasons. First, public-sector workers need to use inputs into their work that are sourced by the private sector. Firefighters need trucks and hoses, police officers need cars and radios, and teachers need books and desks. When public-sector jobs are lost, it stands to reason that the inputs into these jobs will fall as well, and indeed research shows that for every public-sector job lost, roughly 0.43 supplier jobs are lost.[3]
Second, the economic “multiplier” of state and local spending (not including transfer payments) is large – around 1.24.[4] This means that for every dollar cut in salary and supplies of public-sector workers, another $0.24 is lost in purchasing power throughout the rest of the economy. Teachers and firefighters stop going to restaurants and buying cars if they’re laid off, which reduces demand for waitstaff and autoworkers and so on. Add these two influences together (supplier jobs and jobs supported by this multiplier impact) and roughly 0.67 private sector jobs are lost for every public sector job cut. This means that the public sector being down 1.1 million jobs has likely cost the private sector 1.1 million*0.67 = 751,000 jobs.
Further, it should be noted that this 0.67 figure only accounts for private-sector job loss that is due to direct public-sector job loss. But state and local austerity has components besides cutting direct jobs; when these governments cut back, they often don’t just cut jobs, they also cut transfer payments (generally safety-net programs like Medicaid and unemployment insurance...).
A rough estimate of this additional impact of jobs lost due to cutbacks in transfer spending can be constructed using the fact that that transfer payments constitute roughly a quarter of state and local spending, and tend to have slightly higher economic “multipliers” than the direct state and local spending. If we assume that the labor intensity of jobs supported by these transfer payments are the same as that spending undertaken directly by states, this implies that the 1.1 million in state and local job losses is likely matched by 275,000 jobs lost due to reduced transfers as well. Applying a standard multiplier to this number (the 1.52 multiplier for unemployment insurance benefits, for example), yields another 412,500 jobs likely lost as states cut back on transfer payments as well as direct jobs.
This estimate of reduced transfers actually is conservative...
Putting our four components together – the jobs lost in the public sector, the jobs the public sector should have gained just to keep up with population growth, the jobs lost in the private sector due to direct public-sector job declines, and the jobs likely lost when state spending cutbacks on transfer programs were made– we find that if it weren’t for state and local austerity, the labor market would have 2.3 million more jobs today – and half of these jobs would be in the private sector.
This is more than a fifth of our 9.8 million “jobs gap”, the number of jobs needed to bring the economy back to full employment. If all of these 2.3 million jobs had been filled, it is likely that the unemployment rate would now be between 6.7% and 7.5% instead of 8.2%, and the labor force participation rate ... would be up to three-tenths of a percentage point higher than it is.
The public sector continues to shed jobs, causing job loss throughout the economy and creating an enormous drag on the recovery.  To reduce these job losses and the suffering for American families they cause, Congress should provide aid to state and local governments to keep austerity in that sector from continuing to weigh down the recovery.

Here's evidence that help from the federal government mattered. If only there had been more help, the numbers above wouldn't be so large (conversely, without any help at all from the ARRA, the numbers would have been even larger):

The Role of Fiscal Stimulus in the Ongoing Recovery, by Michael Greenstone and Adam Looney, Brookings: ... This conclusion comes from a pair of new academic studies on the American Recovery and Reinvestment Act (ARRA) or the 2009 stimulus plan; both studies find robust evidence that government policy helped reduce the extent of the downturn and improve job growth. ...
The Great Recession resulted in significant increases in unemployment, but it did not impact all states equally. In fact, one contributor to the disparities appears to have been the differences in state government spending. Those states that increased per-capita expenditures the most experienced the smallest rises in unemployment rates, while those that increased expenditures the least experienced the largest rises in unemployment. Although state governments certainly played a role in shaping their economic situations, much of the increased state spending was financed by the American Recovery and Reinvestment Act (the federal stimulus plan), which put significant amounts of money directly into depleted state coffers.
Given the serious challenge of the long-run budget outlook, it will be necessary to take difficult steps to address the imbalance between what the federal government spends and how much it raises in revenues. But it is also important to recognize that, despite the boost from the temporary stimulus, millions of Americans remain out of work and more than 40 percent of the unemployed have not worked for six months or longer. As policymakers grapple with these dual fiscal and economic challenges, it is important to recognize that they need not be at odds. The best prescription for improving the budget deficit over the next few years is to return the economy to health. To that end, it is instructive to consider the latest evidence that active budget policies enacted today can help boost employment and speed recovery

Even now, it's not too late to do more.

Friday, July 06, 2012

Private In-Equity: How Outsourcing affected Wage Standards

This is from Arin Dube:

Private In-Equity: How Outsourcing affected Wage Standards

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

There is renewed interest in the issue of onshore outsourcing or subcontracting as we evaluate the societal implications of the private equity model exemplified by Bain Capital. Yes, that would be the Bain Capital that is the main source of earned income for candidate Romney.  Writing on this topic, Paul Krugman recently reported some relevant findings from my research in his blog as well as his column. I thought it would be useful to share some more details from that research that was jointly conducted with Ethan Kaplan.

Over the past 3 decades, a rising share of work that used to be done “in-house” has been outsourced to outside contractors. Sometimes, the exact same work is being done at the same physical location—but by someone with a different employer of record. So what is the point of re-labeling people as outsourced workers as opposed to in-house employees? After all, a janitor cleaning the floor of your building after work hours is doing the same job whether they wear a uniform with a contractor logo or that of your company.  Yet, we have seen companies spin off work that is outside of their “core competencies” to such outside contractors.  While the idea of “core competency” makes us think of knowledge and efficiency, it is also plausible that the primary motivation for companies is to spin off low-wage work to contractors who could—and would—pay lower wages and benefits.    

In our research, we specifically considered two occupations where the contracting status was easy to identify using the data: security guards and janitors. These two occupations also saw extensive contracting out during the 1980s and 1990s.  We found that subcontracted employees earned lower compensation than their in-house counterparts (between 7 and 12 percent for janitors and 13 and 26 percent for security guards depending on the specification).  The evidence for wage reduction held even as we considered individuals within the same occupation switching jobs between in-house and outsourced varieties.

Interestingly, we found that the main impact of outsourcing was to reduce “good jobs” within these occupations: janitors and security guards in the upper half of their respective wage distributions saw substantial reduction in wages due to outsourcing.  The pictures below shows the actual occupational wage distributions in 1983 and 2000, as well as “counterfactual” ones had the level of outsourcing remained constant. The story that these pictures tell is one where good in-house janitorial and security jobs were replaced with worse subcontracted jobs: the top quartile of these service jobs saw the greatest reduction in wages (typically above 15%) due to the growth in outsourcing.  

[click on figure for larger version]

Finally, we found that industries and areas that were outsourcing tended to be those who historically paid better wages and benefits. This is exactly the pattern you would expect if companies outsourced primarily to cut pay for these workers—for instance to break previous implicit contracts without upsetting their “core” workforce or changing company wages and benefit norms.

There were many factors behind the fall in the wages of low-credentialed workers during the 1980s and 1990s. Our research suggests that one of those factors was change in institutional arrangements—such as outsourcing—which further reduced the bargaining position of workers in low-wage occupations. To the extent that companies were rescued—and profits restored—by breaking implicit contracts on wages and benefits, we should rightfully be wary of the societal value of such practices.

Employment Report Shows Little Change from Last Month

Here's my reaction to the employment report (let me add what is implicit below, my disappointment with policymakers at the Fed and in Congress -- it doesn't have to be like this. So I hope I've erred in my assessment that the Fed will remain in wait and see mode until the next report.):

Employment Report Shows Little Change from Last Month: (MoneyWatch) The employment report released earlier today was not as strong as many analysts had predicted. Nonfarm payroll employment increased by 80,000, just under what is needed to keep up with population growth, and the unemployment rate was unchanged from the previous month at 8.2 percent.

The report highlights the fact that the economy is treading water rather than making progress on the unemployment problem. The number of long-term unemployed, which accounts for 41.9 percent of the unemployed, was essentially unchanged as was the civilian labor force participation rate (63.8 percent), the employment- population ratio (58.6 percent), and the number of part-time workers (8.2 million). Jill Schlesinger has more details, and a discussion of why the economy is stagnating.

The report is not a disaster in the sense that it shows that things are getting worse. But it is very worrisome that things are not getting better, particularly the long-term unemployment problem. Long-term unemployment is, of course, disastrous for the individuals who cannot find jobs, from health effects to reduced lifetime earnings potential, but it is also a problem for the economy as a whole. Evidence from previous recessions shows that long-term unemployment can turn into permanent unemployment, and this reduces our long run growth potential. That has implications for future taxes, which will be lower, future spending on social programs, which will be higher, and for our ability to provide decent jobs in the future.

Does this mean that policymakers will take action? If the report had been stronger, policymakers at the Fed would have likely started thinking about whether and when to break the commitment to keep interest rates low through the end of 2013. It would take several months of strong employment growth before they would seriously entertain doing this, but it would certainly be on their minds. Had the report been weaker, the members of the Fed who want more aggressive action would have had a stronger hand, and there is a good chance that some type of easing would come in the near future, even before the next FOMC meeting. As it stands, with the employment situation essentially unchanged from last month, the Fed is likely to remain in "wait and see" mode, particularly since the data are only preliminary and subject to large revisions down the road (Fed officials will hope for large upward revisions to this month's report). But if the incoming data continues to be weak prior to the next FOMC meeting, which comes just before the next jobs report, the Fed is likely to ease policy further.

As for fiscal policy, more aggressive action could help, for example a large scale infrastructure spending program could provide needed employment opportunities, but that would be a tough sell in this Congress at any time, and is even tougher in an election year. So it's not very likely at all that fiscal policy -- tax cuts or more spending -- will come to the rescue.

All in all, this is not the report we've been waiting for. There are millions of people who want to work but cannot find jobs, and this report does not give much hope that will change anytime soon.

Paul Krugman: Off and Out With Mitt Romney

Mitt Romney's record in the business world -- a cornerstone of his campaign -- should be a cause for concern rather than comfort:

Off and Out With Mitt Romney, by Paul Krugman, Commentary, NY Times: In a better America, Mitt Romney would be running for president on the strength of his major achievement as governor of Massachusetts... In reality, however, Mr. Romney is ... bitterly denouncing the Supreme Court for upholding the constitutionality of his own health care plan. His case for becoming president relies, instead, on his claim that, having been a successful businessman, he knows how to create jobs.
This, in turn, means that ... the nature of that business career is fair game. ... Was ... what was good for Bain Capital, the private equity firm that made him rich, ... also ... good for America?
And the answer is no..., the tools of macroeconomic policy — interest rates, tax rates, spending programs — have no counterparts on a corporate organization chart. Did I mention that Herbert Hoover ... was a great businessman...?
In any case, however,... Bain didn’t build businesses; it bought and sold them. Sometimes its takeovers led to new hiring; often they led to layoffs, wage cuts and lost benefits. On some occasions, Bain made a profit even as its takeover target was driven out of business. ... And then there’s the business about outsourcing.
Two weeks ago, The Washington Post reported that Bain had invested in companies whose specialty was helping other companies move jobs overseas. The Romney campaign went ballistic... What was more interesting was the campaign’s insistence that The Post had misled readers by failing to distinguish between “offshoring” — moving jobs abroad — and “outsourcing,”... having an external contractor perform services that could have been performed in-house.
Now, if the Romney campaign really believed in ... free-market principles, it would have defended the right of corporations to do whatever maximizes their profits, even if that means shipping jobs overseas. Instead..., the campaign effectively conceded that offshoring is bad but insisted that outsourcing is O.K....
That is, however, a very dubious assertion... Why, for example, do many large companies now outsource cleaning and security...? Surely the answer is, in large part, that outside contractors can hire cheap labor that isn’t represented by the union and can’t participate in the company health and retirement plans. ...
[I]f Bain got involved with your company, one way or another, the odds were pretty good that even if your job survived you ended up with lower pay and diminished benefits. In short, what was good for Bain Capital definitely wasn’t good for America. And ... the Obama campaign has every right to point that out.

Tuesday, July 03, 2012

Obama versus Romney on Jobs

Laura Tyson:

Obama versus Romney on Jobs, by Laura Tyson, Commentary, Project Syndicate: The United States has just completed its third year of economic recovery, but the unemployment rate remains above 8%, and there are worrisome signs of a slowdown. So it is no surprise that jobs have become a major focus in the presidential campaign – or that the candidates have very different ideas about how to boost employment.
Last autumn, President Barack Obama proposed the American Jobs Act, a $450 billion package of fiscal measures aimed at job creation. The AJA amounted to about 3% of GDP and was designed to take effect in 2012... Most of its measures had enjoyed bipartisan support in the past; tax cuts comprised about 56% of the total cost; and the package was paid for in Obama’s long-term deficit reduction plan.
Several independent economists concluded that Obama’s plan would provide a significant lift to the job market in 2012-2013...
The AJA was filibustered by Senate Republicans, and the Republican-controlled House of Representatives likewise prevented the bill from coming to a vote. ...
Altogether, Congress left at least one million jobs on the negotiating table, holding unemployed workers hostage to the outcome of November’s election.
Meanwhile, in response to persistent media pressure, Romney has unveiled his policies to boost short-term job creation. ...Obama’s proposals to boost job creation are convincing, whereas Romney’s proposals would have little or no effect – and some could even make matters worse. Voters need to know the difference. 

There are more details on the two proposals in the article.

[Also, I probably should have done more to highlight her Economix piece on the European crisis. It appeared on Friday afternoon and was one of the first pieces that talked about the recent Summit, along with a roadmap of what else needs to be done to solve the European crisis.]

Tuesday, June 26, 2012

The Political Empowerment of the Working Class is the Key to Better Employment Policy

A recent column:

The Political Empowerment of the Working Class is the Key to Better Employment Policy, by Mark Thoma: The high unemployment rate ought to be a national emergency. There are millions of people in need of jobs, the lost income as a result of the recession totals hundreds of billions of dollars annually, and the longer the problem persists, the more permanent the damage becomes.

Why doesn’t the unemployment problem get more attention? Why have other worries such as inflation and debt reduction dominated the conversation instead? As I noted at the end of my last column, the increased concentration of political power at the top of the income distribution provides much of the explanation.

Consider the Federal Reserve. Again and again we hear Federal Reserve officials say that an outbreak of inflation could undermine the Fed’s hard-earned credibility and threaten its independence from Congress. But why is the Fed only worried about inflation? Why aren’t officials at the Fed just as worried about Congress reducing the Fed’s independence because of high and persistent unemployment?

Similar questions can be asked about fiscal policy. Why is most of the discussion in Congress focused on the national debt rather than the unemployed? Is it because the wealthy fear that they will be the ones asked to pay for monetary and fiscal policies that mostly benefit others, and since they have the most political power their interests – keeping inflation low, cutting spending, and lowering tax burdens – dominate policy discussions? There was, of course, a stimulus program at the beginning of Obama’s presidency, but it was much too small and relied far more on tax cuts than most people realize. The need to shape the package in a way that satisfied the politically powerful, especially the interests that have captured the Republican Party, made it far less effective than it might have been. In the end, it had no chance of fully meeting the challenge posed by such a severe recession, and when it became clear that additional help was needed, those same interests stood in the way of doing more.

Republican policymakers give us all sorts of excuses for blocking further action to help the unemployed. We are told the problem is structural – there is a geographical or talent mismatch between labor availability and labor needs – and nothing can be done to help. But something can be done. We can help workers move to where the jobs are, encourage firms to locate in areas where workers are readily available, and help with job retraining. If mismatches are really the problem, why aren’t Republicans leading the charge on these policies? If they care about the unemployed rather than the tax burden of the wealthy, then why are they allowing community colleges – one of the best ways we have of providing job training for new and displaced workers – to be gutted with budget cuts?

We are also told that the deficit is too large already, but there’s still plenty of room to do more for the unemployed so long as we have a plan to address the long-run debt problem. But even if the deficit is a problem, why won’t Republicans support one of the many balanced budget approaches to stimulating the economy? Could it be that these policies invariably require higher income households to give something up so that we can help the less fortunate? Tax cuts for the wealthy are always welcome among Republicans no matter how it impacts the debt, but creating job opportunities through, say, investing in infrastructure? Forget it. Even though the costs of many highly beneficial infrastructure projects are as low as they get, and even though investing in infrastructure now would save us from much larger costs down the road – it’s a budget saver not a budget buster – Republicans leaders in the House are balking at even modest attempts to provide needed job opportunities for the unemployed.

The imbalance in political power, obstructionism from Republicans designed to improve their election chances, and attempts by Republicans to implement a small government ideology are a large part of the explanation for why the unemployed aren’t getting the help they deserve. But Democrats aren’t completely off the hook either. Centrist Democrats beholden to big money interests are definitely a problem, and Democrats in general have utterly failed to bring enough attention to the unemployment problem. Would these things happen if workers had more political power?

When we talk about leveling the playing field, it is generally in terms of economic opportunity. However, leveling the political playing field is just as important, and in the past unions provided workers with a powerful voice in the political arena. But unions have largely faded from the scene leaving workers with very little organized power. Correcting the political imbalance this has created through the renewed political empowerment of the working class must be part of any attempt to improve our response to serious recessions.

Tuesday, June 12, 2012

Eichengreen: Share the Work

One more from Barry Eichengreen -- like Dean Baker, he supports work sharing as a way to create more jobs and increase employment:

Share the Work, by Barry Eichengreen, Commentary, Project Syndicate: The United States today is facing a crisis of long-term unemployment unlike anything it has seen since the 1930’s. Some 40% of the unemployed have been out of work for six months or more... For those unfortunate enough to experience it, long-term unemployment ... is a tragedy. And, for society as a whole, there is the danger that the productive capacity of a significant portion of the labor force will be impaired.
What is not well known, however, is that in the 1930’s, the United States, to a much greater extent than today, succeeded in mitigating these problems. Rather than resorting to extensive layoffs, firms had their employees work a partial week. ... The 24% unemployment reached at the depths of the Great Depression was no picnic. But that rate would have been even higher had average weekly hours for workers in manufacturing remained at 45. Cutting hours by 20% allowed millions of additional workers to stay on the job. ...
Why was there so much work-sharing in the 1930’s? One reason is that government pushed for it. ... Second, legislation encouraged it. ... [Today,] unemployment insurance ... could be restructured to encourage it. Partial benefits could be paid to workers on short hours...
In fact, the US already has something along these lines: a program known as Short-Time Compensation. Workers can collect unemployment benefits pro-rated according to their hours... Unfortunately, the financial incentives that the federal government provides are ... limited... And those programs, in turn, are too modest...
Other countries have gone further. ...Germany, for example... The US federal government could emulate this example by compensating the states more generously for their Short-Term Compensation programs. Its failure to do so not only inflicts avoidable pain and suffering on the unemployed, but also threatens to inflict long-term costs on American society.

The unemployment problem ought to be a national emergency. The fact that it's not tells me that our political institutions are broken, at least when it comes to defending the interests of the working class (other interests are anything but ignored). Millions of people are struggling to get by without a job, and instead of mobilizing on their behalf and finding some way to make things better -- there is plenty to do and plenty of people who would be glad to do it -- some policymakers are calling them lazy and trying to make it even worse by cutting what help they do get, while others who ought to know better stand by passively watching this happen, or worse join the cause. We can do better than this, but it has to be a priority for those who control the levers of power. Unfortunately, in our dysfunctional political system, improving the lives of the working class is less a priority than serving the interests of those who finance, and hence hold the keys to, reelection.

Monday, June 11, 2012

Paul Krugman: Another Bank Bailout

Why won't central banks do more to help the unemployed?:

Another Bank Bailout, by Paul Krugman, Commentary, NY Times: Oh, wow — another bank bailout, this time in Spain. Who could have predicted that?
The answer, of course, is everybody. In fact, the whole story is starting to feel like a comedy routine: yet again the economy slides, unemployment soars, banks get into trouble, governments rush to the rescue — but somehow it’s only the banks that get rescued, not the unemployed.
Just to be clear, Spanish banks did indeed need a bailout. ... What’s striking, however, is that even as European leaders were putting together this rescue, they were signaling strongly that they have no intention of changing the policies that have left almost a quarter of Spain’s workers — and more than half its young people — jobless.
Most notably, last week the European Central Bank declined to cut interest rates. This decision was widely expected, but that shouldn’t blind us to the fact that it was deeply bizarre. Unemployment in the euro area has soared, and all indications are that the Continent is entering a new recession. Meanwhile, inflation is slowing, and market expectations of future inflation have plunged. By any of the usual rules of monetary policy, the situation calls for aggressive rate cuts. But the central bank won’t move.
And that doesn’t even take into account the growing risk of a euro crackup. ...
Put all of this together and you get a picture of a European policy elite always ready to spring into action to defend the banks, but otherwise completely unwilling to admit that its policies are failing the people the economy is supposed to serve.
Still, are we much better? America’s near-term outlook isn’t quite as dire as Europe’s, but the Federal Reserve’s own forecasts predict low inflation and very high unemployment for years to come — precisely the conditions under which the Fed should be leaping into action to boost the economy. But the Fed won’t move.
What explains this trans-Atlantic paralysis in the face of an ongoing human and economic disaster? Politics is surely part of it — whatever they may say, Fed officials are clearly intimidated by warnings that any expansionary policy will be seen as coming to the rescue of President Obama. So, too, is a mentality that sees economic pain as somehow redeeming, a mentality that a British journalist once dubbed “sado-monetarism.”
Whatever the deep roots of this paralysis, it’s becoming increasingly clear that it will take utter catastrophe to get any real policy action that goes beyond bank bailouts. But don’t despair: at the rate things are going, especially in Europe, utter catastrophe may be just around the corner.

Thursday, June 07, 2012

What Skills Gap?

David Altig of the Atlanta Fed agrees with his colleagues at Chicago that "the facts just don't support skill gaps as the major source of our current labor market woes." Here's the overly condensed version:

The skills gap: Still trying to separate myth from fact, by David Altig, macroblog: Peter Capelli has looked at the skills gap explanation for labor market weakness and sees more myth than fact... To some extent, the issue is semantic...
In the language of economists, Capelli is defining skill as the possession of generalized human capital, while businesses are defining skill as the possession of firm- or job-specific human capital. In more familiar language, Capelli appears to be focused on innate skill levels and education, while businesses are looking for the types of skills that would be attained through past on-the-job training. In even more colloquial language, Capelli wants businesses to appreciate book-learning, and businesses prefer those who have already survived the school of hard knocks.
We have recently completed our own version of the Manpower survey Capelli references. ... We infer a couple of lessons from all of this information. First, it does appear that there is a long-term skill level problem in the U.S. economy. Adopting Capelli's definition of skill does not mean the existence of skill mismatch is a myth.
But turning to the short run, we've been pretty sympathetic to structural explanations for the slow pace of the recovery. Nonetheless, we have yet to find much evidence that problems with skill-mismatch are more important postrecession than they were prerecession. We'll keep looking, but—as our colleagues at the Chicago Fed conclude in their most recent Chicago Fed Letter—so far the facts just don't support skill gaps as the major source of our current labor market woes.

Wednesday, June 06, 2012

"Limited Evidence of Skills Mismatch"

The Chicago Fed examines the evidence and says:

we find limited evidence of skills mismatch

They do find a few places where a mismatch might be present, but this is not the problem in most sectors (it's lack of demand). [via David Wessel]

Saturday, June 02, 2012

Catastrophic Credibility

Paul Krugman today:

Catastrophic Credibility, by Paul Krugman: A little while ago Ben Bernanke responded to suggestions that the Fed needed to do more — in particular, that it should raise the inflation target — by insisting that this would undermine the institution’s “hard-won credibility”. May I say that what recent events in Europe, and to some extent in the US, really suggest is that central banks have too much credibility? Or more accurately, their credibility as inflation-haters is very clear, while their willingness to tolerate even as much inflation as they say they want, let alone take some risks with inflation to rescue the real economy, is very much in doubt. ...

I took this up in a recent column:

Breaking through the Inflation Ceiling: At some point during the recovery, the Fed may face an important decision. If the inflation rate begins to rise above the Fed’s 2 percent target and the unemployment rate is still relatively high, will the Fed be willing to leave interest rates low and tolerate a temporary increase in the inflation rate?
Probably not. Even though higher inflation can help to stimulate a depressed economy, Ben Bernanke, Chairman of the Federal Reserve, is not in favor of allowing higher inflation because it could undermine the Fed’s “hard-won inflation credibility.” And recent Fed communications seem to be setting the stage for the Fed to abandon its commitment to keep interest rates low through the end of 2014. This adds to the likelihood that the Fed will raise interest rates quickly if inflation begins increasing above the 2 percent target even if the economy has not yet fully recovered.
As I’ll explain in a moment, that’s the wrong thing to do. But first, why does the Fed put so much value on its credibility?
An abundance of credibility allows the Fed to bring the inflation rate down from, for example, 5 percent to 2 percent at minimal cost to the economy. It also makes it less likely that inflation will become a problem in the first place, because high credibility makes long-run inflation expectations less sensitive to temporary spells of inflation. So maintaining high credibility has substantial benefits.
Does this mean the Fed should do its best to keep the inflation rate at 2 percent?
Sticking to a 2 percent target independent of circumstances is not optimal. There are times, such as now, when allowing the inflation rate to drift above target would help the economy. Higher inflation during a recession encourages consumers and businesses to spend cash instead of sitting on it, it reduces the burden of pre-existing debt, and it can have favorable effects on our trade with other countries.  
If inflation begins to rise before the recovery is complete the Fed could, for example, announce that it is willing to allow the inflation rate to stay above target temporarily in the interest of helping the economy. But once unemployment hits a pre-set rate, for example 6.25 percent,  or core inflation rises above some predetermined threshold, for example,  5 percent, then, and only then, will the Fed step in and take action. And it should leave no doubt at all about its commitment to step in if either condition is met.
But there is a tradeoff to consider. Allowing a temporary spell of higher inflation during the recovery does pose some risk to the Fed’s credibility. I think the risk is small precisely because the Fed has been so careful to establish its inflation fighting credibility in the past. And the risk is even smaller with the 5 percent limit on the Fed’s tolerance for inflation described above. But the risk is there.
When the economy is near full employment, the tradeoff between the risk to credibility and the prospect for a faster recovery is unattractive. There’s little room to stimulate the economy and hence little room to benefit from a higher inflation rate. And the loss of credibility is potentially large because creating inflation in such a circumstance – when the economy is already growing robustly – would be viewed as irresponsible. Thus, the tradeoff is negative overall.
But when there is considerable room for the economy to expand, as there is now, the potential benefits from the increase in employment  that this policy is likely to bring about are much larger. Why the Fed places so little weight on these benefits when unemployment remains so high is a mystery.
In comparison to the risks to credibility, which are smaller than they are near full employment, the benefits are large and the tradeoff is positive rather than negative. There does come a point when the tradeoff is negative again – hence the 6.25 percent unemployment and 5 percent inflation triggers described above – but in the interim we should be willing to allow modestly higher inflation. I have no doubt that, once the economy has finally recovered, the Fed will ensure that the inflation rate is near its target value, so long-run credibility is not at risk.
If inflation begins to rise before the economy has fully recovered, the Fed shouldn’t react as though its world is coming to an end and immediately begin reversing its stimulus efforts. The resulting increase in interest rates would make the recovery even slower. In fact, given the net benefits that more inflation would provide right now, the Fed should try to raise the inflation rate through additional stimulus programs.
Unfortunately, the Fed has made it abundantly clear that’s not going to happen. But at the very least the Fed should continue its present attempts to help the economy, even if that means a temporary increase in the inflation rate.

Friday, June 01, 2012

Will the weak employment report prompt action from policymakers?

Here's a quick reaction to today's employment report:

Will the weak employment report prompt action from policymakers?

It won't, but it should.

Monday, May 28, 2012

Plosser on the Risks from Europe

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:

On inflation:
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.

Tuesday, May 22, 2012

"The Irresponsibility of Speaker John Boehner"

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.

Why Have Politicians Neglected the Unemployed?

Republicans didn't always oppose the use of monetary and fiscal policy to stabilize the economy, but they do now. Why the change?:

Why Have Politicians Neglected the Unemployed?

Saturday, May 12, 2012

"Incredulous and Horrified"

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.

[Source: OBR, March 2012]

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."

Friday, May 11, 2012

Cutting Extended Unemployment Benefits Will Not Solve the Unemployment Problem

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:

Cutting Unemployment Benefits will not Solve the Unemployment Problem

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.

Thursday, May 10, 2012

David Altig: Labor Force Participation and the Unemployment Rate

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."

DeLong asks:

"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.

Wednesday, May 09, 2012

"Central Banks Should Do Much More"

In the Financial Times, Roger Farmer notes a close association between Fed policy and stock market values:

[1] Is the date at which QE1 began, [2] Is the date at which the Fed started to buy mortgage backed securities, [3] Is the date at which QE1 ended, and [4] 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:

Figure 1: Unemployment and the Stock Market During the Great Depression

Figure 2: Unemployment and the Stock Market over the Last DecadeFarmer4

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.

Tuesday, May 08, 2012

Krugman: How Bad Things Are

This is from chapter 1 of Paul Krugman's new book "End This Depression Now" (the full chapter 1 is here):

...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.

"The Unemployment Rate Without Government Cuts: 7.1 Percent"

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.

Sunday, May 06, 2012

"Learned Helplessness"

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, 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.

Saturday, May 05, 2012

"How to End This Depression"

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.

Friday, May 04, 2012

Integrating Poorly Educated Workers into the Workforce

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).

The Disappointing Employment Report: Will Job Creation Improve in Coming Months?

Here's my take on the jobs report:

The Disappointing Employment Report: Will Job Creation Improve in Coming Months?

The answer: It could, but don't get your hopes up.

Wednesday, May 02, 2012

Who Are the Extractive Elites?

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).

Tuesday, May 01, 2012

Milken Global Conference Video: Jobs for America

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



Monday, April 30, 2012

No "Noticeable Increase in Mismatches in Recent Years"

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.

Wanting Non-Existent Jobs

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).

Paul Krugman: Wasting Our Minds

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.

Friday, April 27, 2012

GDP Growth Could be Higher

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.

Monday, April 23, 2012

No End to the Unemployment Problem in Sight

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.

Sunday, April 22, 2012

US and European Unemployment Rates

Background for a column I'm working on:

Source: BLS - Unemployment rates adjusted to U.S. concepts, 10 countries, seasonally adjusted

Update: A larger sample (from here):


Friday, April 20, 2012

Duration Matters



Thursday, April 19, 2012

Fed Watch: Initial Claims Up - Time to Worry?

Tim Duy:

Initial Claims Up - Time to Worry?, by Tim Duy: From Bloomberg:

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.

Tuesday, April 17, 2012

"An Election-Year Giveaway Unlikely To Create Any Jobs"

Bruce Bartlett:

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.

Thursday, April 12, 2012

Are the Hawks Correct about the Fall in Productive Capacity?

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.

Wednesday, April 11, 2012

Monetary Policy: More or Less?

Narayana Kocherlakota recently says (and Jason Rave is not happy):

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.

Friday, April 06, 2012

Fed Watch: Labor Market Softens in March

Tim Duy:

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.

Jobs Report Shows Weakness. Will Policymakers Respond?

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]...

Paul Krugman: Not Enough Inflation

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.

The Change in Public Sector Employment During the Recovery is a Drag