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October 2, 2011

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Posted: 02 Oct 2011 12:06 AM PDT

Why Isn’t the Unemployment Crisis a National Emergency?

Posted: 01 Oct 2011 11:43 AM PDT

[Note: An edited version of this column appeared here on 9/13. Even though the president has pivoted "from deficit reduction to job creation," and even though job creation was the theme of the weekly address Obama gave today, I can't say I'm any more encouraged about the prospects for a significant job creation package than I was when I wrote this.]

Labor markets are in terrible shape. Fourteen million people are unemployed, long-term unemployment remains near record highs, the ratio of job seekers to job openings is 4.3 to 1, and the employment to population ratio has dropped precipitously. Even if the economy grows at a robust average of 3.5% beginning in 2013, labor markets won't fully recover until 2017. And if average growth is only 3.0% – well within the range of possibility – it will take until 2020. In short, labor markets are in crisis and the longer the crisis persists, the more permanent and growth-inhibiting the damage becomes.

So it was welcome news to see President Obama pivot from deficit reduction to job creation in his widely anticipated speech last week. The president proposed a combination of spending and tax reduction policies, and he surprised many people with the boldness of his proposals and his passion and commitment to the issue. Unfortunately, it's unlikely to do much to help with the unemployment problem.

There plenty of time to provide help, the dismal prospects for recovery detailed above make that clear. So the time it takes to implement job creation policies – the objection that there are not enough shovel ready projects – is not the issue. And while concerns over the deficit are valid for the long-run, they shouldn't prevent us from doing more to help the jobless. The long-run debt problem is predominantly a health care cost problem, and whether or not we help the jobless doesn't much change the magnitude of the long-run problem we face.

The problem is the political atmosphere. Republicans may go along with doing just enough to look cooperative rather than obstructionist, but no more than that and the policies that emerge are unlikely to be enough to make a substantial difference in the unemployment problem. It won't be anywhere near the $445 billion program the president has called for, which itself is short of what is needed to really make a difference.

I don't expect we'll get much more help from the Fed either. There is quite a bit of disagreement among monetary policymakers over whether further easing would do more harm than good, and inflation hawks are standing in the way of those who want to aggressively attack the unemployment problem. As with Congress, the Fed is likely to adopt a compromise position and do the minimum it can while still looking as though it is trying to meet its obligation to promote full employment.

Thus, despite the President's newfound interest in job creation, and the call from some at the Fed to treat the unemployment problem the same way they would treat elevated inflation – as though "their hair was on fire" – the actual policies that come out of Congress and the Fed are unlikely to be sufficient to make much of a dent in the problem.

It's time for this to change. The loss of 8.75 million payroll jobs since the recession began should be a national emergency. But it's not, and the question is why. Why has deficit reduction taken precedence over job creation? Why is our political system broken to the extent that a whole segment of the population is not being adequately represented in Congress?

That brings me to an important difference between the response to this recession and the policies that followed the Great Depression. Many of the policies that were enacted during and after the Great Depression not only addressed economic problems, they also directly or indirectly reduced the ability of special interests to capture the political process. Polices that imposed regulations on the financial sector, broke up monopolies, reduced inequality through highly progressive taxes, accorded new powers to unions, and so on shifted the balance of power toward the typical household.

But since the 1970s many of these changes have been reversed. Inequality has reverted to levels unseen since the Gilded Age, monopoly power has increased, financial regulation has waned, union power has been lost, and much of the disgust with the political process revolves around the feeling that politicians have lost touch with the interests of the working class. And it would be hard to disagree with that sentiment.

We need a serious discussion of this issue, followed by changes that shift political power toward the working class, but who will start the conversation? Congress has no interest in doing so, things are quite lucrative as they are. Unions used to have a voice, but they have been all but eliminated as a political force. The press could serve as the gatekeeper, but too many outlets are controlled by the very interests that the press needs to take on and this gives them the ability to cloud most any issue. Presidential leadership could make a difference, and Obama's election brought hope for change, but this president does not seem inclined to take a strong stand on behalf of the working class despite the surprising boldness of his job creation speech.

Another option is that the working class itself will say enough is enough and demand change. There was a time when I would have scoffed at the idea of a mass revolt against entrenched political interests and the incivility that comes with it. We aren't there yet – there's still time for change – but the signs of unrest are growing and if we continue along a two-tiered path that ignores the needs of such a large proportion of society, it can no longer be ruled out.

Fed Watch: Too Late for the Unemployed?

Posted: 01 Oct 2011 09:27 AM PDT

Tim Duy says that while Ben Bernanke suggested that the main unemployment problem was cyclical, not structural in his speech at Jackson Hole, Federal Reserve policymakers are increasingly adopting the structural view. Unfortunately, the belief that unemployment is mostly structural is a self-fulfilling proposition:

Too Late For The Unemployed?, by Tim Duy: The debate about whether unemployment is cyclical or structural unemployment arose last year. At this point, it looks like Federal Reserve policymakers increasingly favor the structural side of the debate.

Federal Reserve Chairman Ben Bernanke, speaking at Jackson Hole, suggested that cyclical unemployment remains the primary economic challenge:

Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view--the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow.

Note that he does not conclude the long-term unemployed are by definition structurally unemployed. Still, he continues to suggest that cyclical unemployment can turn structural:

In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.

But, as is well known, he throws the ball to the fiscal authorities:

Notwithstanding this observation, which adds urgency to the need to achieve a cyclical recovery in employment, most of the economic policies that support robust economic growth in the long run are outside the province of the central bank. We have heard a great deal lately about federal fiscal policy in the United States, so I will close with some thoughts on that topic, focusing on the role of fiscal policy in promoting stability and growth.

But is it already too late? Has the cyclical unemployment turned structural? This week, serial-dissenter Philadelphia Federal Reserve President Charles Plosser embraced the structural view:

These numbers are troubling, especially when more than 40 percent of the unemployed, or some 6 million people, have been out of work for 27 weeks or longer. This underscores that we should not expect any easy solution. Millions of unemployed workers may take longer to find jobs because their skills have depreciated or they may need to seek employment in other sectors. These structural issues will take time to resolve. Jobs and workers will need to be reallocated across the economy, which is a long and slow process.

Plosser takes the rise in long-term unemployment as an indication of structural unemployment. He then extends the point to fight the last war:

We have provided a great deal of monetary accommodation to the economy, and given the stubbornness of the unemployment rate in responding to these efforts, we should be cautious and vigilant that our previous accommodative policies do not translate into a steady rise in inflation over the medium term even while the unemployment rate remains elevated. Creating an environment of stagflation, reminiscent of the 1970s, will not help businesses, the unemployed, or the consumer. It is an outcome we must carefully guard against.

Likewise, the centrist Atlanta Federal Reserve President Dennis Lockhart also speaks of structural factors with respect to the long-term unemployed, even invoking a comparison with Europe:

I was concerned by not only the persistence of high unemployment but also the complicated internal dynamics of the current labor market. To me, it is not clear to what degree structural factors are impeding the filling of job vacancies. And with some 43 percent of the unemployed out of work for more than six months, it is not clear to what extent the long-term unemployed are becoming a class of permanently unemployed, creating a problem resembling the so-called structural unemployment of some European countries. Further, it is not clear why participation in the labor force continues to fall. Finally, it is not clear what level of unemployment should be considered the natural or equilibrium rate under current circumstances.

Not to be outdone, the difficult-to-categorize St. Louis Federal Reserve Chairman James Bullard also looks to Europe for guidance. From his presentation this week:

  • Unfortunately, unemployment rates have a checkered history in advanced economies over the last several decades.
  • In particular, "hysteresis" has been a common problem, in which unemployment rises and simply stays high.
  • This occurred in Europe during the last 30 years.
  • If such an outcome happened in the U.S., and monetary policy was explicitly tied to unemployment outcomes, monetary policy could be pulled off course for a generation.

Now, it seems to me premature to be looking to Europe as an example. It seems reasonably obvious the unemployment problem is the result of a severe negative shock to spending. You might say no, it is structural in that we can no longer rely on housing to support incomes. But that just boils down to a spending problem - unemployment was at the natural rate as long as households and firms had the ability and willingness to spend. Moreover, I am a bit hard pressed to see how America was transformed into Europe in just three years. That said, I am not the policymaker. It appears Federal Reserve members increasingly embrace the structural unemployment story, and that suggests they will hesitate to bring out substantial additional stimulus until the see greater evidence of deflation. Of course, the longer we drag our heels on the unemployment crisis, the more easily it will be for policymakers to wash their hands of the issue, as the cyclical unemployment eventually will become structural.

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