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September 15, 2011

Latest Posts from Economist's View

Latest Posts from Economist's View

"The Late American Jobs Machine"

Posted: 15 Sep 2011 03:42 AM PDT

Lane Kenworthy on our "twin maladies":

The late American jobs machine, by Lane Kenworthy: : The U.S. labor market is bad shape. The great recession and its aftermath are the chief culprits, of course, but the sputtering began earlier. In the 1970s, 1980s, and 1990s employment increased so rapidly that our economy was sometimes referred to as the "great American jobs machine." In the early and mid 2000s that ended.
Richard Freeman and William Rodgers were among the first to draw attention to the shift. In 2005, well into the recovery following the 2001 recession, they noted the anemic job growth relative to prior recoveries and wondered if the labor market had changed fundamentally.
Here are some revealing indicators.
During the growth phase of the business cycle, from 2002 to 2007, the number of people employed increased less rapidly than in previous upturns.

The employment-to-population ratio gained no ground over the 2002-07 upturn. It was 63% when the economy emerged from recession at the beginning of 2002 and 63% just before it plunged back into recession at the end of 2007.

Rising employment is particularly important for those at the low end of the labor market. Here too the 2000s upturn was a disappointment. In working-age households in the bottom quartile of the income distribution, average employment hours failed to rise at all.

What caused this collapse of the American jobs machine? I think the most convincing explanation is a shift in management's incentives and in its leverage relative to employees. According to Robert Gordon, this has its origins in the 1980s and 1990s but emerged in full force in the early 2000s:

Business firms began to increase their emphasis on maximizing shareholder value, in part because of a shift in executive compensation toward stock options. The overall shift in structural responses in the labor market after 1986 were caused by … the role of the stock market in boosting compensation at the top, … the declining minimum wage, the decline of unionization, the increase of imported goods, and the increased immigration of unskilled labor. Taken together these factors have boosted incomes at the top and have increased managerial power, while undermining the power of the increasingly disposable workers in the bottom 90 percent of the income distribution.

Executives' compensation is heavily influenced by their firm's stock price. Financial advisers believe "lean and mean" delivers better long-term corporate gains. Employees have limited capacity to resist employment cutbacks during hard times and to press for more jobs during good times.

During the 2000s upturn this made for sluggish employment growth despite conditions that were, in historical and comparative terms, quite favorable for hiring: buoyant consumer demand, low interest rates, limited labor market regulations, modest wages and payroll taxes.

Is there direct evidence that employers were reluctant to hire? The pattern in the following chart, from Scott Winship, is telling. In the 2001 recession, posted job openings as a share of the labor force (the blue line in the graph) fell to their lowest level in more than half a century. Then, as the economy picked up steam, posted openings didn't budge. The lack of increase was a sharp departure from previous upturns.

Many hope that when the economy finally gets moving again, we'll return to the glory days of rapid employment growth. But developments in the 2000s, prior to the crisis, paint a discouraging picture.
The importance of this slowdown in employment growth is hard to overstate. In recent decades the American labor market has suffered from twin maladies: it's been producing fewer middle-paying jobs and wages in the bottom half of the earnings distribution have been stagnant. For much of this period its chief virtue was that it created a large number of jobs. That looks to have gone by the wayside.

"Infrastructure Has Another meaning, Too"

Posted: 15 Sep 2011 03:24 AM PDT

Via Ecological Headstand:

"Infrastructure has another meaning, too," Sandwichman: Arlene Goldbard points out the not-so-obvious to those who misplaced concreteness makes them see only roads and bridges where public support of culture -- books, plays, paintings, sculpture, dance performance, concerts and cultural workshops -- would employ far more people, more creatively with less capital intensity.

Cultural infrastructure, social infrastructure: these describe the institutions, customs, ways of communicating, expressions of caring, celebrations, ceremonies, and public spaces that enable people to feel seen and to know they are welcome in their own communities. Cultural infrastructure is the aggregate of innumerable public and private actions, of many threads weaving the social fabric we share. When it becomes badly frayed—when foreclosures, homelessness, long-term joblessness are epidemic, when countless families are forced to relocate to find work, when bleeding-edge gentrification become commonplace, when scapegoating rises and ordinary Americans are unable or unwilling to cross lines of color or class—when the social fabric is as shredded as it has become after decades of me-first corporate-driven politics, mending it is clearly a public sector responsibility. Who else's should it be?

Three-quarters of a century ago, President Franklin Delano Roosevelt's New Deal drove public-sector interventions that helped to pull us out of the Great Depression. Roads and bridges, parks and ampitheatres were built, to be sure. But the largest single New Deal intervention was Federal One, comprising five massive cultural programs that put jobless Americans to work. They made plays that helped us face the issues we had to resolve and images that reminded people of a history of struggle and cooperation that built their communities. They created enterprises that brought exciting innovative design into the public sphere; taught children to make music so that access to beauty and meaning did not become an attribute of privilege, but was recognized as a human right; and preserved living history as a reservoir of resilience we could draw on to face the future.

FDR understood that shoring up physical infrastructure wouldn't save us without comparable investment in cultural infrastructure. People wouldn't have faith in the future, they wouldn't be willing to spend their hard-earned dollars, they wouldn't be aligned with national goals for recovery, unless they had meaningful, personal connections to our collective story. Unless they felt connected and saw their own actions as helping. Demonstrably, he was right.

links for 2011-09-14

Posted: 14 Sep 2011 10:01 PM PDT

Rodrik: The Crisis of Fiscal Imagination

Posted: 14 Sep 2011 03:06 PM PDT

Dani Rodrik:

The Crisis of Fiscal Imagination, by Dani Rodrik, Commentary, Project Syndicate: ...Democracies are notoriously bad at producing credible bargains that require political commitments over the medium term. In both the United States and Europe, the costs of of this constraint on policy has amplified the crisis – and obscured the way out. ... As sensible as [a] two-pronged approach – spend now, cut later – may be, it is made virtually impossible by the absence of any mechanism whereby President Barack Obama can credibly commit himself or future administrations to fiscal tightening. ...
Democracies often deal with the problem of extracting commitments from future politicians by delegating decision-making to quasi-independent bodies managed by officials who are insulated from day-to-day politics. Independent central banks are the archetypal example..., politicians effectively tie their own hands (and get lower inflation as a result). ...
Compared to monetary policy, fiscal policy is infinitely more complex, involving many more trade-offs among competing interests. So an independent fiscal authority modeled along the lines of an independent central bank is neither feasible nor desirable. But certain fiscal decisions, and most critically the level of the fiscal deficit, can be delegated to an independent board.
Such a board would fix the maximum difference between public spending and revenue in light of the economic cycle and debt levels, while leaving the overall size of the public sector, its composition, and tax rates to be resolved through political debate. Establishing such a board in the US would do much to restore sanity to the country's fiscal-policymaking. ...

The we'll need something like this:

Supervising the supervisors, by Pedro da Costa: A new Brookings Institution report from the self-appointed Committee on International Economic Policy and Reform suggests that, given a spotty recent record, supervisors and policymakers at the world's top central banks need to be watched themselves. The group of 16 high-profile economists and financial experts, which includes former Brazilian central bank chief Arminio Fraga, Berkeley professor Barry Eichengreen, Harvard's Kenneth Rogoff and Mohamed El-Erian from Pimco, proposes a new international watchdog that might ensure actions taken by individual countries are coordinated and smoothed out...

The Brookings report suggested the Fed's go-it-alone approach can be self-defeating... The panel urges explicit international coordination — however politically unfeasible. ...

Best of luck, ladies and gentlemen.


Posted: 14 Sep 2011 01:48 PM PDT

I'm traveling here today. I'll post as (and if) I can. (I have ten posts scheduled for the next several days just in case, mostly of the here's x saying y variety.)

"How to Do More"

Posted: 14 Sep 2011 10:17 AM PDT

Adam Posen urges central banks to take aggressive action:

How to do more, by Adam Posen, External Member of the Monetary Policy Committee, Bank of England: We do want more, and when it becomes more, we shall still want more. And we shall never cease to demand more until we have received the results of our labor. - Samuel Gompers, May 2, 1890

Something's better than nothing, yes! But nothing's better than more.
- Stephen Sondheim, Sung by Madonna in the movie, Dick Tracy, 1990

Both the UK and the global economy are facing a familiar foe at present: policy defeatism. Throughout modern economic history, whether in Western Europe in the 1920s, in the US and elsewhere in the 1930s, or in Japan in the 1990s, every major financial crisis-driven downturn has been followed by premature abandonment—if not reversal—of the macroeconomic stimulus policies that are necessary to sustained recovery. Every time, this was due to unduly influential voices claiming some combination of the destructiveness of further policy stimulus, the ineffectiveness of further policy stimulus, or the political corruption from further policy stimulus. Every time those voices were wrong on each and every count. Those voices are being heard again today, much too loudly. It is the duty of economic policymakers including central bankers to rebut these false claims head on. It is even more important that we do the right thing for the economy rather than be slowed, confused, or intimidated by such false claims.

Make no mistake, the right thing to do right now is for the Bank of England and the other G7 central banks to engage in further monetary stimulus. If anything, it is past time for us to do so. The economic outlook has turned out to be as grim as forecasts based on historical evidence predicted it would be, given the nature of the recession, the fiscal consolidations underway, and the simultaneity of similar problems across the Western world. Sustained high inflation is not a threat in such an environment, and in fact the inflation that we have suffered due to temporary factors in the UK is about to peak.1 If we do not undertake the stimulative policy that the outlook calls for, then our economies and our people will suffer avoidable and potentially lasting damage. I will recap the argument for doing more in a moment.

My main purpose in speaking to you today is to explain how the Bank of England, and by extension other central banks, should do more to ease monetary policy at this juncture. I hope to convince you that doing more would be not only desirable, but constructive for the economy as a whole, effective as stimulus, and feasible without political compromise. A large part of this argument rests on asking you as sensible listeners to see through the distortions and falsehoods that have cropped up again in the aftermath of this crisis as in the past. Some common sense can be just as useful in appraising monetary policy as in evaluating the overall worth and likely success of other services for which the public contracts with technical experts. After such appraisal, I hope that you will agree with my arguments that:

  • More monetary ease will lead to greater restructuring of the economy in the right and necessary direction;
  • More of the same Quantitative Easing [QE] program that the Bank already undertook would be where to start, especially if done on sufficient scale;
  • More cooperation between the Bank and HM Government to promote investment and credit to small and medium business should be the beneficial next step.

Monetary policymakers must also free themselves from unfounded concerns and take these necessary actions. There are too many excuses for passivity being offered, none of which stand up to scrutiny or to the data. In essence, central banks can improve matters by doing more, even if we have to act alone. In so doing, we would make constructive actions by other policymakers in the fiscal and financial arenas outside of our remit more – not less – likely, and those actions more likely to succeed when undertaken.

Almost certainly, even if we were to do everything right on monetary policy (and we certainly will not get everything right, despite the best of intentions), there will still be suffering and ongoing problems from economic adjustment. And the benefits of our right policies may not turn out to be self-evident. But it is our responsibility and our duty to make things better if we can. Central bank officials have wasted too much time over the last year worrying about how their institutions would appear to markets, to politicians, and to the public, were we to undertake more stimulus. Sometimes you have to do the right thing even if it may be misperceived. I believe that by explaining how doing more would work, as I am trying to do today, the chances may increase that we will do the right thing on monetary policy now, and that it will be recognized as right later if not immediately.

1 Unless there is a sufficiently persistent supply shock to energy prices to more than offset the influence of declining rates of global growth on those prices for the next couple of years – something oil futures markets do not price in at present (in fact, they price in the opposite). ...[continue reading]...

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