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August 25, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

Would More Accountability Help the Fed?

Posted: 25 Aug 2010 02:02 AM PDT

We are, as they say, live at MoneyWatch:

Would More Accountability Help the Fed?

This was derived, in part, from a conversation with Brad DeLong and Tim Duy.

Identifying Cyclical vs. Structural Unemployment

Posted: 25 Aug 2010 12:43 AM PDT

I am one of the "cycs" in the article below. I have given my view on this, and Brad DeLong adds more evidence on the side of those arguing that the problems in our our economy are due primarily to a collapse in demand, not a structural shift:

Identifying Cyclical vs. Structural Unemployment: A Guide for Slate Writers, by Brad DeLong: Over at Slate, James Ledbetter says that he cannot referee between the two gangs of economists warring over the causes of high unemployment.

But he is wrong.

He can.

Here is how:

Suppose that you have not cyclical unemployment generated by a collapse in aggregate demand but structural unemployment generated by mismatch, suppose you have a situation in which the structure of demand by consumers is different from the jobs that workers are capable of filling. Suppose--this is Berkeley, after all--that we were in a nice equilibrium in which some workers were baristas making lattes and other workers were yoga instructors teaching classes and that all of a sudden we have had a big shift in demand: that consumers decide that they want few moments of wired, frenetic caffeination and more moments of inner peace.

What would we expect to find happening?

We would expect, first, coffee bars to stand empty as people hoarded their quarters for the next yoga lesson. We would expect coffee bars to fire baristas, and to close down. But we would also expect yoga studios to be crowded, and yoga instructors to be teaching extra classes, and working long hours, and raising their prices, and training ex-baristas to chant properly, do the downward-facing dog and the lizard, and teach others how to achieve inner peace.

The size and duration of the excess unemployment of ex-baristas might be substantial and long-lasting. It takes quite a while to retrain a barista as a yoga instructor. Those seeking training might have a difficult time getting the attention of and apprenticing themselves to the yoga instructors doing land-office business--given how mercenary and grasping and eager to catch the wave of the market we all know yoga instructors to be.

But depression in the coffee-bar sector and unemployment among ex-baristas would be balanced by exuberance in the yoga-studio sector, rising prices for yoga lessons, and long hours and high wages for yoga instructors.

That is what "mismatch" structural unemployment looks like--one sector depressed with a lot of idle excess labor, a second sector booming with rising wages and prices.

What do we have in America today?

Well, over the past three years...

  • employment in logging and mining has risen by 11 thousand
  • employment in construction has fallen by 2.1 million
  • employment in manufacturing has shrunk by 2.4 million
  • employment in wholesale trade has fallen by 437 thousand
  • employment in retail trade has fallen by 912 thousand
  • employment in transportation and warehousing is down by 333 thousand
  • employment in publishing, except internet is down by 147 thousand
  • employment in motion picture and sound recording is down by 34 thousand
  • employment in broadcasting, except internet is down by 41 thousand
  • employment in telecommunications is down by 54 thousand
  • employment in financial activities is down by 921 thousand
  • employment in professional and business services is down by 1.3 million
  • employment in educational services is up by 197 thousand
  • employment in health care is up by 789 thousand
  • employment in leisure and hospitality is down by 467 thousand
  • employment in other services is down by 32 thousand
  • employment by the federal government is down by 330 thousand
  • employment by state and local governments is down by 127 thousand.

All this in the decline from 137.83 million people employed in July 2007 to 129.95 million people employed in July 2010--a 7.88 million decline in employment during a period in which the adult population has grown by 6 million.

I see employment growth in (a) internet, (b) health care, and (c) logging and mining. I see employment declines everywhere else.

That does not look like a story of "mismatch" unemployment--in which demand shifts in a direction that the existing labor force cannot cope with, and the result is structural unemployment in declining sectors and occupations and boom times and rising wages and prices in those sectors and occupations to which demand has shifted. That does not look like that at all.

links for 2010-08-24

Posted: 24 Aug 2010 11:02 PM PDT

"A Letter to My Students"

Posted: 24 Aug 2010 02:13 PM PDT

Michael O'Hare:

A letter to my students, by Michael O'Hare: Welcome to Berkeley, probably still the best public university in the world. Meet your classmates, the best group of partners you can find anywhere. The percentages for grades on exams, papers, etc. in my courses always add up to 110% because that's what I've learned to expect from you, over twenty years in the best job in the world.
That's the good news. The bad news is that you have been the victims of a terrible swindle, denied an inheritance you deserve by contract and by your merits. And you aren't the only ones; victims of this ripoff include the students who were on your left and on your right in high school but didn't get into Cal, a whole generation stiffed by mine. This letter is an apology, and more usefully, perhaps a signal to start demanding what's been taken from you so you can pass it on with interest.
Swindle–what happened? Well, before you were born, Californians now dead or in nursing homes made a remarkable deal with the future. (Not from California? Keep reading, lots of this applies to you, with variations.) They agreed to invest money they could have spent on bigger houses, vacations, clothes, and cars into the world's greatest educational system, and into building and operating water systems, roads, parks, and other public facilities, an infrastructure that was the envy of the world. They didn't get everything right: too much highway and not enough public transportation. But they did a pretty good job.
Young people who enjoyed these 'loans' grew up smarter, healthier, and richer than they otherwise would have, and understood that they were supposed to "pay it forward" to future generations, for example by keeping the educational system staffed with lots of dedicated, well-trained teachers, in good buildings and in small classes, with college counselors and up-to-date books. California schools had physical education, art for everyone, music and theater, buildings that looked as though people cared about them, modern languages and ancient languages, advanced science courses with labs where the equipment worked, and more. They were the envy of the world, and they paid off better than Microsoft stock. Same with our parks, coastal zone protection, and social services.
This deal held until about thirty years ago, when for a variety of reasons, California voters realized that while they had done very well from the existing contract, they could do even better by walking away from their obligations and spending what they had inherited on themselves. "My kids are finished with school; why should I pay taxes for someone else's? Posterity never did anything for me!" An army of fake 'leaders' sprang up to pull the moral and fiscal wool over their eyes, and again and again, your parents and their parents lashed out at government (as though there were something else that could replace it) with tax limits, term limits, safe districts, throw-away-the-key imprisonment no matter the cost, smoke-and-mirrors budgeting, and a rule never to use the words taxes and services in the same paragraph.
Now, your infrastructure is falling to pieces under your feet, and as citizens you are responsible for crudities like closing parks, and inhumanities like closing battered women's shelters. It's outrageous, inexcusable, that you can't get into the courses you need, but much worse that Oakland police have stopped taking 911 calls for burglaries and runaway children. If you read what your elected officials say about the state today, you'll see things like "California can't afford" this or that basic government function, and that "we need to make hard choices" to shut down one or another public service, or starve it even more (like your university). Can't afford? The budget deficit that's paralyzing Sacramento is about $500 per person; add another $500 to get back to a public sector we don't have to be ashamed of, and our average income is almost forty times that. Of course we can afford a government that actually works: the fact is that your parents have simply chosen not to have it.
I'm writing this to you because you are the victims of this enormous cheat (though your children will be even worse off if you don't take charge of this ship and steer it). Your education was trashed as California fell to the bottom of US states in school spending, and the art classes, AP courses, physical education, working toilets, and teaching generally went by the board. Every year I come upon more and more of you who have obviously never had the chance to learn to write plain, clear, English. Every year, fewer and fewer of you read newspapers, speak a foreign language, understand the basics of how government and business actually work, or have the energy to push back intellectually against me or against each other. Or know enough about history, literature, and science to do it effectively! You spent your school years with teachers paid less and less, trained worse and worse, loaded up with more and more mindless administrative duties, and given less and less real support from administrators and staff.
Many of your parents took a hike as well, somehow getting the idea that the schools had taken over their duties to keep you learning, or so beat-up working two jobs each and commuting two hours a day to put food on the table that they couldn't be there for you. A quarter of your classmates didn't finish high school, discouraged and defeated; but they didn't leave the planet, even if you don't run into them in the gated community you will be tempted to hide out in. They have to eat just like you, and they aren't equipped to do their share of the work, so you will have to support them.
You need to have a very tough talk with your parents, who are still voting; you can't save your children by yourselves. Equally important, you need to start talking to each other. It's not fair, and you have every reason (except a good one) to keep what you can for yourselves with another couple of decades of mean-spirited tax-cutting and public sector decline. You're my heroes just for surviving what we put you through and making it into my classroom, but I'm asking for more: you can be better than my generation. Take back your state for your kids and start the contract again. There are lots of places you can start, for example, building a transportation system that won't enslave you for two decades as their chauffeur, instead of raising fares and cutting routes in a deadly helix of mediocrity. Lots. Get to work. See you in class!

CBO: Estimated Impact of the Stimulus Package

Posted: 24 Aug 2010 11:40 AM PDT

Here is the CBO's latest estimate of the impact of the ARRA:

Estimated Impact of the Stimulus Package on Employment and Economic Output, CBO: ...A CBO report released this afternoon ... provides CBO's estimates of ARRA's overall impact on employment and economic output in the second quarter of calendar year 2010. ...

When ARRA was being considered, CBO and the staff of the Joint Committee on Taxation estimated that it would increase budget deficits by $787 billion between fiscal years 2009 and 2019. CBO now estimates that the total impact over the 2009–2019 period will amount to $814 billion. Close to half of that impact is estimated to occur in fiscal year 2010, and about 70 percent of ARRA's budgetary impact will have been realized by the close of that fiscal year.

CBO's Estimates of ARRA's Impact on Employment and Economic Output

Looking at recorded spending to date as well as estimates of the other effects of ARRA on spending and revenues, CBO has estimated the law's impact on employment and economic output using evidence about the effects of previous similar policies on the economy and using various mathematical models that represent the workings of the economy. On that basis, CBO estimates that in the second quarter of calendar year 2010, ARRA's policies:

  • Raised the level of real (inflation-adjusted) gross domestic product (GDP) by between 1.7 percent and 4.5 percent,
  • Lowered the unemployment rate by between 0.7 percentage points and 1.8 percentage points,
  • Increased the number of people employed by between 1.4 million and 3.3 million, and
  • Increased the number of full-time-equivalent (FTE) jobs by 2.0 million to 4.8 million compared with what those amounts would have been otherwise. (Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers.)

The effects of ARRA on output and employment are expected to gradually diminish during the second half of 2010 and beyond. The effects of ARRA on employment and unemployment are expected to lag slightly behind the effects on output; they are expected to wane gradually in 2011 and beyond.

Although CBO has examined data on output and employment during the period since ARRA's enactment, those data are not as helpful in determining ARRA's economic effects as might be supposed because isolating the effects would require knowing what path the economy would have taken in the absence of the law. Because that path cannot be observed, the new data add only limited information about ARRA's impact. ...

"The effects of ARRA on output and employment are expected to gradually diminish during the second half of 2010 and beyond," and it doesn't look like the private sector is ready yet to take up the slack.

There is a real risk of extended stagnation or even further decline, but monetary and fiscal policymakers don't seem to fully recognize the threat we face and the urgency to do something about it. For once, it would be nice to see policymakers get out in front of a threat and head it off before it does damage instead of waiting until the threat becomes a reality and then trying to play catch up. That hasn't worked to date, and it won't work now.

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