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December 7, 2011

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Demographic Shift?

Posted: 07 Dec 2011 12:24 AM PST

Tim Duy:

Demographic Shift?, by Tim Duy: Bloomberg appears to attribute the drop in the labor force participation rate to retiring baby-boomers:

The drop in U.S. unemployment so far this year may be an early glimpse of what's to come as the workforce ages...

...At play is a decline in the share of the working-age population, known as the participation rate, meaning that the economy needs to create fewer jobs to bring down unemployment. While some of the decrease has been caused by discouraged workers dropping out of the labor force, another driver is that the baby-boom generation is starting to move into retirement, according to economist Dean Maki.

"Demographic forces are the single biggest factor pushing the participation rate down," said Maki, chief U.S. economist at Barclays Capital Inc. in New York and a former economist at the Federal Reserve. "This is a bit of a slow-moving drama but it's likely to become more important in coming years."

I think it is important to focus on the "slow-moving drama" part, otherwise the problem with this story is the facts. Labor force participation rates of the 65 and older group:

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Note that labor force participation rates begin to rise at the end of the last decade, after the collapse of the internet bubble. It seems that this event, not to mention the subsequent rise and fall of housing markets, played havoc with retirement plans. Many who thought they could retire suddenly realized they couldn't afford retirement, and were stuck working longer than anticipated.

A little more support for Maki's case can be found in near-retirees:

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I looks like labor force participation rates in this group might be topping out, but not enough to be the "single biggest factor" pushing rate down. To get to that story, you need to go lower on the demographic ladder:

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That looks like a pretty dramatic shift to me - 23 percentage points or so. Too be sure, the intermediate group has also declined:

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Given the wide range of ages in this group, it is difficult to apply all of the deterioration to the baby-boomers. Looking across the data, we very much see young people fleeing the labor market. To where? Given the weak labor market this decade, the opportunity cost of education is low, and thus many are continuing their education. Interestingly, Karl Smith looks at the data and concludes:

The United States is becoming more educated faster than the economy would absorb educated workers.

Presumably, this is good in the lon-run, as eventually those more educated workers will be absorbed by the labor market. Here I would caution, however, that defining educated or high-skilled workers as those with college degrees may be too-broad a classification. I sense the college-educated population is much more heterogeneous than commonly believed, and in reality contains a mix of high- and low-skilled workers. In other words, just because we are pushing people through the hoops that lead to a college education does not guarantee that those students have gathered skills marketable in the real world. Which means that we don't really know if we are creating "educated" workers faster than the economy can absorb. We could simply be overestimating the number of "educated" workers.

I think the article would have felt better if it began not with the impression that baby boomers are the driving force behind recent declines in the participation rate, but could be more of an influence in over time. This, I sense, is what Maki really wants to say:

The effect of the baby-boomer exit from the labor force will become more evident in the coming decade, Maki said. The policy implications may be more pressing, as Fed officials keep interest rates near record low levels for longer than may be required given the likely drop in the jobless rate. That may fuel price pressures in the economy, he said.

Then again, maybe not:

"It means there is less slack in the economy than is commonly perceived, and the slack will diminish more quickly than people think," Maki said. As a result, "there are more inflationary risks with the very accommodative monetary policy we have now than one might believe."

I think the near-term reality is a little less dire. And the article eventually gets there:

To be sure, the outlook for jobs may brighten as the economic expansion develops, drawing more people back into the workforce and limiting declines in unemployment. In addition, some economists argue that retiring baby boomers may not be the best explanation for the decrease already in train in the participation rate.

"Demographic trends are pushing down, over time, the normal labor force participation rate," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Nonetheless, he said, "the speed of the decline seen this year is in excess of what one would expect just given the demographic trend."

A much more measured analysis, one I think consistent with the data. Too bad it wasn't the central point of the story. Yes, demographic shifts are likely to put downward pressure on labor force participation rates. But the tendency for those 65 and older to work longer than expected pushes in the other direction. Moreover, an improving economy would also increase labor force participation, especially among younger workers. Simply put, the aging of the baby boomers is just one of many factors currently influencing labor force participation rates and, by extension, the amount of slack in the labor markets.

Links for 2011-12-07

Posted: 07 Dec 2011 12:06 AM PST

"Hoover Institute Recommends Hooverite Policies"

Posted: 06 Dec 2011 03:42 PM PST

When I saw the group of people invited to make presentations at this conference at the Hoover Institution, there was no doubt about the conclusions they'd draw, and which way their advice would lean. It turns out that not everyone spouted the party line exactly, but that's hard to discern from the reports about the conference:

Hoover Institute recommends Hooverite policies, by Noah Smith: Via John Taylor, today's "dog bites man" story:

Why has the recovery been so slow? What can we do about it? Alan Greenspan, George Shultz, Ed Prescott, Steve Davis, Nick Bloom, John Cochrane, Bob Hall, Lee Ohanian, John Cogan and I recently met at the Hoover Institution at Stanford to present papers and discuss the issue with other economists and policy makers including Myron Scholes, Michael Boskin, Ron McKinnon and many others...In sum there was considerable agreement that (1) policy uncertainty was a major problem in the slow recovery, (2) short run stimulus packages were not the answer going forward, and (3) policy reforms that would normally be considered helpful in the long run would actually be very helpful right now in the short run.

Wow, shocking. The recession is Obama's fault for being a crypto-socialist, stimulus doesn't work, and the rich should get tax cuts. Who would have ever guessed that this team of mavericks would reach such a startling conclusion?

But I kid. Actually, the ... Hoover conference ... seems to have been pretty evenly split between people who simply re-asserted the standard conservative line, and people who supported either Keynesian solutions or an end to Republican obstructionism, but whose conclusions were spun in the writeup to fit the conference's (or Taylor's) preferred conservative policy line. So let's look at the specifics of what was said, as reported by Taylor.

First...

Alan Greenspan presented empirical evidence that policy uncertainty caused by government activism was a major problem holding back growth, and that the first priority should be to start reducing the deficit immediately; investment is being crowded out now.

Wow, empirical evidence that policy uncertainty is holding back growth? Show, us, please! Sadly, Greenspan's evidence appears to be proprietary, and only available to people who pay Greenspan Associates for the privilege of hearing that Obama's crypto-socialism is crippling the economy. Whereas the rest of us poor folks are forced to post all our evidence to the contrary online, for free. 

Nick Bloom, by contrast, actually does have some evidence. With Scott Baker and Steven Davis, he constructs a measure of policy uncertainty that matches historical events like 9/11, and then shows that this measure has spiked recently as well. ... Of course, it's not certain which way the causality runs... Note: John Taylor fails to mention that, according to Bloom's measurements, the main sources of uncertainty in the current recession have been A) Republican brinksmanship over the debt ceiling, B) Europe, and C) efforts to sue Obama's health care bill out of existence...

Anyway, onward! Next up we have Ed Prescott:

Ed Prescott had the most dramatic policy proposal which he argued would cause a major boom and restore strong growth. He would simultaneously reform the tax code and entitlement programs by slashing marginal tax rates which would increase employment and productivity.

This line actually made me laugh out loud. A "dramatic policy proposal"...cut tax rates for the rich! Ed Prescott, you innovative, free-thinking genius, you.

But now...(drumroll)...on to Robert Hall, whom a professor in my department once called the "greatest macroeconomist working today":

Bob Hall argued that fiscal policy was not working, and focused on alleviating the zero lower bound constraint on monetary policy. 

This phrasing makes Hall sound like an opponent of fiscal policy. But actually, the exact opposite is true! Hall is one of the most eminent "Keynesians" in the field, a big proponent of government expenditure as a way to get out of recessions. If you don't believe me, read this paper he wrote on fiscal stimulus. ...

Finally, there was Lee Ohanian:

Lee Ohanian showed that unemployment remained high in part because of restrictions on foreclosure proceedings which increased search unemployment by allowing people to stay in their homes for longer periods of time.

That's kind of interesting.

Anyway, let's sum up. What we have here appears to be a conference to which the Hoover Institute invited A) prominent conservatives (Greenspan, Prescott, Cochrane, and Ohanian), and B) people who happened to be sitting nextdoor at Stanford (Bloom, Hall, and Taylor), with an eye to reiterating and affirming standard conservative policy prescriptions: austerity, tax cuts for the rich, etc. What they got wasn't quite that, but it was close enough where the dissenting voices could be spun to sound as if they agreed with the party line. Not sure if it was someone at Hoover or just Taylor himself doing the spinning. But either way, the conference shows that even in relatively conservative circles, substantial deviations from the party line can't help but pop up. Put enough smart people in the room, and at least a couple smart things will probably end up getting said.

"Bankers Should Not Profit from the Fact That They Were Over Leveraged"

Posted: 06 Dec 2011 09:45 AM PST

The Fed fires back:

Fed Shoots Back at Media Portrayal of Crisis Lending, by Luca Di Leo, Real Time Economics: Federal Reserve Chairman Ben Bernanke shot back in unusually strong terms at news reports it blamed for making "egregious errors" about the size and impact on Americans of the Fed's emergency lending during the 2008 financial crisis.
In a letter to the Senate banking committee, Bernanke released a staff memo that rebuts the portrayals in recent Bloomberg and other news articles that the Fed was aiming to help big banks' profits at the expense of taxpayers. (Read the letter)
A Bloomberg Markets Magazine article released Nov. 27 said that big banks reaped an estimated $13 billion of income after the Fed committed $7.7 trillion in funds as of March 2009 to rescuing the financial system. ...
Calling the lending numbers in the media "wildly inaccurate," the Fed said total credit outstanding under its liquidity programs was never more than the $1.5 trillion peak reached in December 2008. ...
The Fed said that nearly all of the emergency assistance has been fully repaid or is on track to be, something it said wasn't stressed in news articles. The central bank claimed that the loans benefited American taxpayers by generating an estimated $20 billion in interest income for the U.S. Treasury. ...

I don't think this addresses Brad DeLong's criticism of how the program was structured:

When you contribute equity capital, and when things turn out well, you deserve an equity return. When you don't take equity--when you accept the risks but give the return to somebody else--you aren't acting as a good agent for your principals, the taxpayers.
Thus I do not understand why officials from the Fed and the Treasury keep telling me that the U.S. couldn't or shouldn't have profited immensely from its TARP and other loans to banks. Somebody owns that equity value right now. It's not the government. But when the chips were down it was the government that bore the risk. That's what a lender of last resort does.
That's why Bagehot's rule is to lend freely but at a penalty rate. The bankers should not profit from the fact that they were over leveraged, and compelled the government to act as a lender of last resort.

Update: I should add that I am not questioning the Fed's role as a lender of last resort, only how the gains from fulfilling that function are divvied up.

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