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August 7, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

A Little Panic Would be Good

Posted: 07 Aug 2010 02:07 AM PDT

Kenneth Rogoff:

In the short term, it is important that monetary policy in the US and Europe vigilantly fight Japanese-style deflation, which would only exacerbate debt problems by lowering incomes relative to debts. In fact,... it would be far better to have two or three years of mildly elevated inflation, deflating debts across the board, especially if the political, legal, and regulatory systems remain somewhat paralyzed in achieving the necessary write-downs.
With credit markets impaired, further quantitative easing may still be needed. As for fiscal policy, it is already in high gear and needs gradual tightening over several years, lest already troubling government-debt levels deteriorate even faster. Those who believe – often with quasi-religious conviction – that we need even more Keynesian fiscal stimulus, and should ignore government debt, seem to me to be panicking.

Since we're giving opinions -- let's call them "seems to me-isms" -- rather analysis, let me give mine:

Those who believe – often with quasi-religious neoclassical conviction – that no further  Keynesian fiscal stimulus is needed, and that government debt cannot be ignored, seem to me to be insensitive to the needs of the millions of unemployed, and at odds with the available evidence.
As for the snide remark about "panicking," for those who are truly panicking due to the struggles they face finding a job, paying the bills, and so on, some urgency from policymakers would be much appreciated.

There are No Symptoms of Deficient Demand?

Posted: 07 Aug 2010 01:08 AM PDT

Edmund Phelps says:
There are no symptoms of deficient demand, like deflation.

What about disinflation? Is there something special about zero (nope)?:


This is a graph of the year over year percentage change in the CPI less food and energy, but it doesn't much matter which measure of underlying price trends is examined, this "symptom of deficient demand" is very evident. And that's not the only sign that demand is insufficient. It takes effort not to see them.

"Is Health Care Special?"

Posted: 07 Aug 2010 12:42 AM PDT

Uwe Reinhardt:

Is Health Care Special?, by Uwe E. Reinhardt, Economix: On a recent episode of the television talk show "Raw Nerve," the host William Shatner, of "Star Trek" fame, had this exchange with Rush Limbaugh:

Shatner: "Here's my premise, and you agree with it or not. If you have money, you are going to get health care. If you don't have money, it's more difficult."

Limbaugh: "If you have money you're going to get a house on the beach. If you don't have money, you're going to live in a bungalow somewhere." ... "What's the difference?"

Shatner: "The difference is we're talking about health care, not a house or a bungalow."

Limbaugh: "No. No. You're assuming that there is some morally superior aspect to health care than there is to a house. …"

One must wonder whether physicians, nurses and other workers toiling day and night in health care — let alone the medics and helicopter pilots who risk their lives to help the wounded — see their work and its product quite as Mr. Limbaugh casts it. One further wonders whether families with a cancer-stricken member are likely to view going without health care as the moral equivalent of going without a beach house.

But leaving aside speculation on the moral dimensions of health care..., it should be noted that economists, too, have long wrestled with the question of whether  health care stands apart from other goods and services traded in the market place. ...

The question of in what way health care is special, if at all, was first investigated thoroughly by the Nobel laureate economist Kenneth Arrow in his still widely celebrated 1963 article, "Uncertainty and the Welfare Economics of Medical Care." ...

To lay down a standard to which to compare the health care sector, Professor Arrow explained first on what basis economists consider a perfectly competitive market for some good or service as "maximizing human welfare," an outcome economists describe as "efficient." ... If those and some other conditions are met, Professor Arrow explained, then for any given initial distribution of income and wealth that market will settle down at a unique equilibrium... This equilibrium has important attributes.

First, in what Professor Arrow calls the First Optimality Theorem of welfare economics, it can be shown that in this equilibrium ... it would be impossible through any reallocation to make someone happier without making someone else less happy. It is an allocation that economists call Pareto efficient... For any given initial distribution of income and wealth, economists declare the associated Pareto-efficient allocation ... to be "welfare-maximizing"...

Second, and very importantly, in what Arrow calls the Second Optimality Theorem, he explains that if on ethical grounds society wished to distribute a good or service (for example, education or health care or food or beach houses) among people in a particular way — like egalitarian principles — it need not have government directly involved in producing or distributing that good or service. The desired distribution could be attained by redistributing income and wealth among the citizenry in a way that would drive the perfectly competitive private market to achieve the desired allocation of the good or service among the people. Better still, it would do so in the welfare-maximizing way predicted by the First Optimality Theorem.

It is easy to see why Professor Arrow's paper fired the imagination of generations of economists ... in their argument that public health policy should confine itself strictly to making the market of health care perfectly competitive and then to redistribute income — perhaps by means of tax-financed vouchers to help subsidize the purchase by poorer people of needed health care — in order to achieve whatever distributive ethic society wishes to impose on health care. That free-market approach would automatically take care of whatever moral aspect society wishes to impute to health care.

Having established this normative benchmark, Professor Arrow explored in the rest of his paper how close the market for health care actually comes to the characteristics of a perfectly competitive norm. In my next post, I will discuss Professor Arrow's conclusion.

Can you guess what that conclusion will be? These markets are far from the competitive ideal, and conditions such as customers having full knowledge about the relative quality of products in the market will be hard to satisfy in any case.

links for 2010-08-06

Posted: 06 Aug 2010 11:01 PM PDT

The Employment Report

Posted: 06 Aug 2010 10:08 AM PDT

The employment report came out today. Calculated Risk shares my assessment of the overall picture that emerges from the numbers in the report:

This is a very weak report, especially considering the downward revision to June. The participation rate declined again, and that is why the unemployment rate was steady - and that is bad news.

Many observers are looking for "glimmers of hope" in the report and pointing to private sector job growth of 71,000, which is higher than in previous months and thus evidence of acceleration in job growth, to an increase in hours worked, an increase in wages, and a fall in workers involuntarily working part-time.

However, as noted in the "glimmers of hope" link, and as I have noted many, many times, we need 100,000-150,000 jobs per month just to keep up with population growth, and even more than that if we want to make up for past losses. That is, we need faster growth than 100,000-150,000 per month if we want the economy to do more than just keep up with population growth and reemploy the millions and millions of people who are now out of work. So job growth of 71,000 still represents a declining labor market, and does nothing to offset past losses.

Dean Baker reviews the numbers, and adds cautionary notes as to why the glimmers of hope aren't quite the positive signs they might appear to be at first glance:

Job Loss Sends Employment Ratio Downward, by Dean Baker: For the second consecutive month, the economy created virtually no jobs, net of temporary Census jobs. The Labor Department reported that the economy lost 131,000 jobs in July, 12,000 less than the 143,000 drop in the number of temporary Census workers. ...
The job loss corresponds to a decline in labor force participation. While the unemployment rate has edged down by 0.2 percentage points to 9.5 percent since May, this is attributable to people who gave up looking for work and left the labor force. The employment to population ratio fell by 0.3 percentage points to 54.4 percent, only slightly above the 54.2 percent low in December. ...
There were substantial declines in all the measures of duration of unemployment. This likely reflects many long-term unemployed dropping out of the workforce after losing benefits. The percent of multiple jobholders dropped by 0.3 percentage points to the lowest on record. This presumably reflects difficulty in getting jobs.
There are very few obvious sources of job growth on the establishment side. Manufacturing added 36,000 jobs, but most of this increase was attributable to a 20,500 rise in jobs in the auto industry and a 9,100 increase in jobs in fabricated metals. Most of these rises are attributable to the fact that Detroit auto makers did not shut down in July to change models. The underlying rate of job growth in manufacturing is very weak, even if at all positive.
Retail trade added 6,700 jobs, but with a 13,000 downward revision to last month's job loss number, employment is still 14,000 below the May level. Financial services lost 17,000 jobs, with real estate counting for more than half of the loss. Professional and business services are now shedding jobs, with the sector losing 13,000 jobs last month. Employment services lost 23,300 jobs, a bad harbinger for future job growth. Even the restaurant sector is losing jobs, shedding 10,600 workers in July, the 3rd consecutive decline.
State and local governments shed 48,000 jobs in July, a result of budget cutting coinciding with the new fiscal year. The only sectors that added substantial numbers of jobs were health care (27,800) and, strangely, ground transit which added 10,600 jobs in July, 2.5 percent of employment in the sector.
There was a small uptick in average hours (all in the goods-producing sector), but this just returned hours to the May level. ... Nominal wages rose at just a 1.4 percent annual rate, also not a good sign.
With the end of the inventory cycle, a huge wave of state and local cutbacks and further declines in house prices on the way, the situation looks bleak for the second half of 2010.

Robert Reich emphasizes many of the same points:

The economy is still in a deep hole, and we're not climbing out.
Remember, we need 125,000 new jobs per month simply to keep up with the growth of the American population seeking jobs. But according to this morning's job's report, private-sector employers added just 71,000 jobs in July. ... In other words, the hole keeps getting deeper. ...
The only slightly bright news is that manufacturing payrolls increased by 36,000 in July, but those gains are almost surely going to evaporate in August. Manufacturing expanded in July at the slowest pace of the year as orders and production decelerated.
All this blur of numbers means two things: An extraordinary number of Americans are still hurting. And it's more important than ever for the US government to step in with a larger stimulus that puts more people to work (a WPA, for example), and tax cuts for people who will spend them (a two-year payroll tax holiday on the first $20K of income). We cannot get out of this hole without major federal action.

Many of us who worried this was coming have been calling for more action for well over a year now, but to no effect. As the WSJ notes, this will set off a debate within the Fed about whether to try to give the economy more help at it's monetary policy meeting this week. My own view is they will continue to rationalize -- perhaps with those so-called glimmers of hope discussed above -- why there's nothing more they can and should do, and they will continue to sit on their hands. There's more than enough evidence to justify more action, and that was true before this report added to it, but the Fed refuses to see it.

I should add one more thing. My first choice in trying to help the economy would be fiscal policy, I think that has a much better chance of working, creating jobs in particular, than monetary policy. Take a look at what happened to state and local hiring, one place where fiscal policy could clearly help. Thus, I don't want criticism of the Fed to be used to deflect criticism from Congress for their (lack of) response. Fiscal policy authorities have not responded adequately to this crisis, and we see the results in today's report. So we shouldn't let fiscal authorities off the hook as we also criticize the Fed's failure to do more.

For more on the report, see: WSJ, FT, Bloomberg, Washington Post, NY Times, RTE, and Angry Bear. [Also posted at MoneyWatch.]

Update: Let me add this note on the numbers. Above, Dean Baker says the private sector job loss was 12,000 and Calculated Risk says the same thing. However, most reports are citing a figure of 71,000. Why the difference?:

Employment Report: Why the different payroll numbers?, by Calculated Risk: Once again there is some confusion about which payroll number to report.
Basically the media is confusing people. I explained this last month: ...The headline payroll number for July was minus 131,000. The number of temporary decennial Census jobs lost was 143,000.
To be consistent with previous employment reports (and remove the decennial Census), the headline number should be reported as 12,000 ex-Census. ... Instead most media reports have been using the private hiring number of 71,000 apparently because of the complicated math (subtracting -143,000 from -131,000). Private hiring is important too, but leaves out changes in government payroll and is not consistent.
I've posted all the numbers, but I've led with the headline number ex-Census - and that is especially important now since state and local governments are under pressure.

I probably should have noted this earlier and explained why the 12,000 figure should be used, hence the second thoughts and this update only minutes after this was posted. But I thought it would simply confuse the issue and deflect attention from the important point which is that job growth is very weak no matter how it is measured.

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