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Saturday, February 04, 2012

Policymakers are Too Anxious to Reverse Course

I am worried that policymakers are too anxious to reverse course. That is, despite recent communications suggesting that policy will remain on hold or even be eased further, I'm worried that the Fed will increase interest rates too soon. In the past, any sign of green shoots has brought inflation worries to the forefront, and this time is unlikely to be different even though those fears have been groundless to date. But I'm even more worried that large scale deficit reduction will begin before the economy is strong enough to withstand a large negative shock to demand. Congress is clearly anxious to get on with it.

So here are two views of why we shouldn't relax just yet about the employment situation (beyond risks such as oil price spikes from trouble in the middle east and fallout from rekindled troubles in Europe), and why we should do more, not less, to promote recovery of employment:

Employment: Some good news, some bad news, by Julie Hotchkiss, macroblog:  ...The median three-digit..AICS ... industry lost 7 percent of its jobs during the most recent recession. ... Industries faring the worst (those in the 75th percentile of job losses) shed 13 percent of their jobs. And what might be considered "fortunate" industries (those in the 25th percentile of job losses) saw only 3 percent of their jobs disappear over this time period. ... At the current rate of growth, those industries that experienced above-median job loss during the recession will not regain prerecession employment levels until the end of 2015. ... [note: prerecession levels is not full recovery since it ignores subsequent population growth.]
Does the projected labored employment recovery among these particularly hard-hit industries suggest there are more serious structural impediments to the efficient operation of the labor market today than there were after the previous two recessions? ...
Plotting the annual growth rates back to 1990 illustrates that the industries that were hardest hit during the most recent recession were also those with the greatest job losses during the previous two recessions. So there appears to be nothing special about these industries that led to their suffering during the most recent recession.
Additionally, the pattern of recovery of these hardest-hit industries is similar to that experienced after the previous two recessions. Like before, the worst performing industries (those with job losses in the 75th percentile) ... added jobs in 2011 at an average monthly rate of 0.22 percent; industries with below-median losses added jobs at an average monthly rate of 0.12 percent. This analysis does not suggest to me that unique structural features of this recession or recovery are holding employment growth back—it appears that the culprit is simply the extraordinarily deep hole the economy, and thus the job market, fell into this time around. The bad news, then, is that time may be the only answer for those industries to fully recover.

Time, or more help from policymakers (however, as noted above, forget about more help -- we'll be lucky if policymakers don't reverse course too soon). Here's more on why we shouldn't turn our backs on the unemployed anytime soon:

Still losing the war on unemployment, by Mohamed A. El-Erian, Commentary, Washington Post: ...While the [employment] numbers have markedly improved over the past year, too much of the commentary has been overly partial and, sometimes, dangerously misleading...
The pace of job creation is certainly picking up but, as yet, is insufficient to overcome our unemployment crisis. ... Meanwhile, attention is diverted from something critical to the future of the economy — namely, what is happening to the composition of U.S. joblessness.
The composition indicators have been flashing yellow, if not red, for a while. With 43.9 percent of the unemployed (5.5 million people) out of work for 27 weeks or more, today’s America faces the unusual challenge of “long-term unemployment”: The longer people are unemployed, the harder it is for them to return to the labor force at the same level of productivity and earnings, and the poorer the prospects for national competitiveness and prosperity.
The numbers for youth unemployment are even more disturbing. A staggering 23.2 percent of 16- to 19-year-olds in the labor force do not have jobs. A prolonged period of inactivity at that stage of life risks turning these younger adults from unemployed to unemployable.
These disturbing realities ... don’t cover the significant number of workers who are no longer counted because they have dropped out of the labor force... The longer that corrective measures are delayed, the harder the task at hand will be and the greater the eventual costs to society. ... In fact, our current unemployment crisis ...will ... further polarize an unusually dysfunctional political discourse, worsen income inequality, and fuel protest movements around the country. ...
Congress and the administration need to [do more]... Have no doubt, this is a complex, multiyear effort... One would think that, given all this, it has become more than paramount for Washington to elevate — not just in rhetoric but, critically, through sustained actions — the urgency of today’s unemployment crisis to the same level that it placed the financial crisis three years ago. ...

[Time to hit the road -- will post again when I can...]

    Posted by on Saturday, February 4, 2012 at 10:51 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (19)


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