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August 7, 2012

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Posted: 07 Jul 2012 02:34 AM PDT
I was asked to guest edit The Browser which involved choosing six things for people to read, along with a brief (<40 words) intro to each. The selections were supposed to have appeared in the last few weeks, and I tried to cover topics of importance such as inequality, worker rights, monetary and fiscal policy, health care costs, and so on. Here are my selections:
Six Selections from Mark Thoma
(Also, for now at least, on the front page).
Posted: 07 Jul 2012 01:08 AM PDT
As I've emphasized many times in the past, austerity at the state and local level forced by balanced budget requirements, falling tax revenues, and increasing demand for public services due to the recession had a large, negative effect on the economy. The failure of the federal government to backfill state and local budgets and stop this from happening was a big policy mistake:
Three years into recovery, just how much has state and local austerity hurt job growth?, by Jos Bivens and Heidi Shierholz: ...the public sector has seen massive job loss in the current recovery—largely due to budget cuts at the state and local level — which represents a serious drag that was not weighing on earlier recoveries. ...
How many more jobs would we have if the public sector hadn't been shedding jobs for the last three years?  The simplest answer is that the public sector has shed 627,000 jobs since June 2009.  However, this raw job-loss figure understates the drag of public-sector employment relative to how the economy functions normally.
Over this same period the overall population grew by 6.9 million. In June 2009 there were 7.3 public-sector workers for every 100 people in the US; to keep that ratio constant given population growth, the public sector should have added roughly 505,000 jobs in the last three years.  This means that, relative to a much more economically relevant trend, the public sector is now down more than 1.1 million jobs. And even against this more-realistic trend, these public-sector losses are dominated by austerity at the state and local level, with federal employment contributing only around 6% of this entire gap.
It should be noted that this counter-factual of 1.1 million additional public sector jobs is a perfectly reasonable benchmark.  Before the Great Recession, the number of public-sector workers per 100 people had averaged right around 7.3 since the late 1980s.  In other words, having 1.1 million more public-sector workers, which would put us back at 7.3 public-sector workers per 100 people, would simply restore our economy to a normal level of government employment.  ...
However, even that 1.1 million public-sector jobs gap leaves out an important component:  public-sector job cuts also cause job loss in the private sector, for a couple of reasons. First, public-sector workers need to use inputs into their work that are sourced by the private sector. Firefighters need trucks and hoses, police officers need cars and radios, and teachers need books and desks. When public-sector jobs are lost, it stands to reason that the inputs into these jobs will fall as well, and indeed research shows that for every public-sector job lost, roughly 0.43 supplier jobs are lost.[3]
Second, the economic "multiplier" of state and local spending (not including transfer payments) is large – around 1.24.[4] This means that for every dollar cut in salary and supplies of public-sector workers, another $0.24 is lost in purchasing power throughout the rest of the economy. Teachers and firefighters stop going to restaurants and buying cars if they're laid off, which reduces demand for waitstaff and autoworkers and so on. Add these two influences together (supplier jobs and jobs supported by this multiplier impact) and roughly 0.67 private sector jobs are lost for every public sector job cut. This means that the public sector being down 1.1 million jobs has likely cost the private sector 1.1 million*0.67 = 751,000 jobs.
Further, it should be noted that this 0.67 figure only accounts for private-sector job loss that is due to direct public-sector job loss. But state and local austerity has components besides cutting direct jobs; when these governments cut back, they often don't just cut jobs, they also cut transfer payments (generally safety-net programs like Medicaid and unemployment insurance...).
A rough estimate of this additional impact of jobs lost due to cutbacks in transfer spending can be constructed using the fact that that transfer payments constitute roughly a quarter of state and local spending, and tend to have slightly higher economic "multipliers" than the direct state and local spending. If we assume that the labor intensity of jobs supported by these transfer payments are the same as that spending undertaken directly by states, this implies that the 1.1 million in state and local job losses is likely matched by 275,000 jobs lost due to reduced transfers as well. Applying a standard multiplier to this number (the 1.52 multiplier for unemployment insurance benefits, for example), yields another 412,500 jobs likely lost as states cut back on transfer payments as well as direct jobs.
This estimate of reduced transfers actually is conservative...
Putting our four components together – the jobs lost in the public sector, the jobs the public sector should have gained just to keep up with population growth, the jobs lost in the private sector due to direct public-sector job declines, and the jobs likely lost when state spending cutbacks on transfer programs were made– we find that if it weren't for state and local austerity, the labor market would have 2.3 million more jobs today – and half of these jobs would be in the private sector.
This is more than a fifth of our 9.8 million "jobs gap", the number of jobs needed to bring the economy back to full employment. If all of these 2.3 million jobs had been filled, it is likely that the unemployment rate would now be between 6.7% and 7.5% instead of 8.2%, and the labor force participation rate ... would be up to three-tenths of a percentage point higher than it is.
The public sector continues to shed jobs, causing job loss throughout the economy and creating an enormous drag on the recovery.  To reduce these job losses and the suffering for American families they cause, Congress should provide aid to state and local governments to keep austerity in that sector from continuing to weigh down the recovery.
Here's evidence that help from the federal government mattered. If only there had been more help, the numbers above wouldn't be so large (conversely, without any help at all from the ARRA, the numbers would have been even larger):
The Role of Fiscal Stimulus in the Ongoing Recovery, by Michael Greenstone and Adam Looney, Brookings: ... This conclusion comes from a pair of new academic studies on the American Recovery and Reinvestment Act (ARRA) or the 2009 stimulus plan; both studies find robust evidence that government policy helped reduce the extent of the downturn and improve job growth. ...
Conclusion
The Great Recession resulted in significant increases in unemployment, but it did not impact all states equally. In fact, one contributor to the disparities appears to have been the differences in state government spending. Those states that increased per-capita expenditures the most experienced the smallest rises in unemployment rates, while those that increased expenditures the least experienced the largest rises in unemployment. Although state governments certainly played a role in shaping their economic situations, much of the increased state spending was financed by the American Recovery and Reinvestment Act (the federal stimulus plan), which put significant amounts of money directly into depleted state coffers.
Given the serious challenge of the long-run budget outlook, it will be necessary to take difficult steps to address the imbalance between what the federal government spends and how much it raises in revenues. But it is also important to recognize that, despite the boost from the temporary stimulus, millions of Americans remain out of work and more than 40 percent of the unemployed have not worked for six months or longer. As policymakers grapple with these dual fiscal and economic challenges, it is important to recognize that they need not be at odds. The best prescription for improving the budget deficit over the next few years is to return the economy to health. To that end, it is instructive to consider the latest evidence that active budget policies enacted today can help boost employment and speed recovery
Even now, it's not too late to do more.
Posted: 07 Jul 2012 12:06 AM PDT
Posted: 06 Jul 2012 03:06 PM PDT
An interview with Joe Stiglitz:
Why does growing inequality matter? ...
We care about inequality partly because we pay a high price in terms of our economic performance. We care about it also because of the impact that it has in every other aspect of our society -- our democracy, our rule of law, our sense of identity or a land of opportunity -- because we aren't anymore.
The people at the top are not the people who made the most contributions to our society. Some of them are. But a very large proportion (is) simply people I describe as rent-seekers -- people who have been successful in getting a larger share of the pie rather than increasing the size of the pie.  ...[W]e don't understand the extent to which our economy has really become a rent-seeking economy.
How has the financial sector contributed to the growing inequality?
Much of what goes on in the financial sector is this kind of rent-seeking.
The most dramatic example was the predatory lending and the abusive credit card practices, which took money from people on the bottom and the middle often in a very deceptive way, sometimes in a fraudulent way, and moved it to the top....
There is another example where the financial sector has been particularly bad. They pushed for laws like our bankruptcy laws that gave priority to derivatives. In bankruptcy, derivatives got protected and workers and everybody else has to swallow their losses. That encourages more risk-taking.
At the same time, they pushed for laws that made it more difficult for ordinary Americans to discharge their debt and (were) particularly bad for students who can't discharge their debt no matter what happens, no matter how they have been deceived by the schools, even in the event of bankruptcy. ...
How else can the government act to reverse this trend in inequality?
Inequality in the United States has many dimensions; too much money at the top, many people in poverty, the hollowing out of the middle class. And each of these requires its own solution.
We have to have a more progressive tax structure. And what is interesting to realize is that our tax structure not only is unfair, but actually distorts our economy. It lowers growth and increases inequality. If you tax speculation at less than half the rate you tax people who work for a living, what you do is you encourage speculation. You weaken the economy. Speculative activities are activities associated with high levels of inequality. And that way you increase inequality. We tax in a sense a lot of the rent-seeking activities at a lower rate because they get under the rubric of the capital gains tax. ...
Posted: 06 Jul 2012 07:20 AM PDT
This is from Arin Dube:
Private In-Equity: How Outsourcing affected Wage Standards
Arindrajit Dube
Assistant Professor
Dept. of Economics
University of Massachusetts Amherst
There is renewed interest in the issue of onshore outsourcing or subcontracting as we evaluate the societal implications of the private equity model exemplified by Bain Capital. Yes, that would be the Bain Capital that is the main source of earned income for candidate Romney.  Writing on this topic, Paul Krugman recently reported some relevant findings from my research in his blog as well as his column. I thought it would be useful to share some more details from that research that was jointly conducted with Ethan Kaplan.
Over the past 3 decades, a rising share of work that used to be done "in-house" has been outsourced to outside contractors. Sometimes, the exact same work is being done at the same physical location—but by someone with a different employer of record. So what is the point of re-labeling people as outsourced workers as opposed to in-house employees? After all, a janitor cleaning the floor of your building after work hours is doing the same job whether they wear a uniform with a contractor logo or that of your company.  Yet, we have seen companies spin off work that is outside of their "core competencies" to such outside contractors.  While the idea of "core competency" makes us think of knowledge and efficiency, it is also plausible that the primary motivation for companies is to spin off low-wage work to contractors who could—and would—pay lower wages and benefits.   
In our research, we specifically considered two occupations where the contracting status was easy to identify using the data: security guards and janitors. These two occupations also saw extensive contracting out during the 1980s and 1990s.  We found that subcontracted employees earned lower compensation than their in-house counterparts (between 7 and 12 percent for janitors and 13 and 26 percent for security guards depending on the specification).  The evidence for wage reduction held even as we considered individuals within the same occupation switching jobs between in-house and outsourced varieties.
Interestingly, we found that the main impact of outsourcing was to reduce "good jobs" within these occupations: janitors and security guards in the upper half of their respective wage distributions saw substantial reduction in wages due to outsourcing.  The pictures below shows the actual occupational wage distributions in 1983 and 2000, as well as "counterfactual" ones had the level of outsourcing remained constant. The story that these pictures tell is one where good in-house janitorial and security jobs were replaced with worse subcontracted jobs: the top quartile of these service jobs saw the greatest reduction in wages (typically above 15%) due to the growth in outsourcing.  
Finally, we found that industries and areas that were outsourcing tended to be those who historically paid better wages and benefits. This is exactly the pattern you would expect if companies outsourced primarily to cut pay for these workers—for instance to break previous implicit contracts without upsetting their "core" workforce or changing company wages and benefit norms.
There were many factors behind the fall in the wages of low-credentialed workers during the 1980s and 1990s. Our research suggests that one of those factors was change in institutional arrangements—such as outsourcing—which further reduced the bargaining position of workers in low-wage occupations. To the extent that companies were rescued—and profits restored—by breaking implicit contracts on wages and benefits, we should rightfully be wary of the societal value of such practices.
Posted: 06 Jul 2012 06:30 AM PDT
Here's my reaction to the employment report (let me add what is implicit below, my disappointment with policymakers at the Fed and in Congress -- it doesn't have to be like this. So I hope I've erred in my assessment that the Fed will remain in wait and see mode until the next report.):
Employment Report Shows Little Change from Last Month: (MoneyWatch) The employment report released earlier today was not as strong as many analysts had predicted. Nonfarm payroll employment increased by 80,000, just under what is needed to keep up with population growth, and the unemployment rate was unchanged from the previous month at 8.2 percent.
The report highlights the fact that the economy is treading water rather than making progress on the unemployment problem. The number of long-term unemployed, which accounts for 41.9 percent of the unemployed, was essentially unchanged as was the civilian labor force participation rate (63.8 percent), the employment- population ratio (58.6 percent), and the number of part-time workers (8.2 million). Jill Schlesinger has more details, and a discussion of why the economy is stagnating.
The report is not a disaster in the sense that it shows that things are getting worse. But it is very worrisome that things are not getting better, particularly the long-term unemployment problem. Long-term unemployment is, of course, disastrous for the individuals who cannot find jobs, from health effects to reduced lifetime earnings potential, but it is also a problem for the economy as a whole. Evidence from previous recessions shows that long-term unemployment can turn into permanent unemployment, and this reduces our long run growth potential. That has implications for future taxes, which will be lower, future spending on social programs, which will be higher, and for our ability to provide decent jobs in the future.
Does this mean that policymakers will take action? If the report had been stronger, policymakers at the Fed would have likely started thinking about whether and when to break the commitment to keep interest rates low through the end of 2013. It would take several months of strong employment growth before they would seriously entertain doing this, but it would certainly be on their minds. Had the report been weaker, the members of the Fed who want more aggressive action would have had a stronger hand, and there is a good chance that some type of easing would come in the near future, even before the next FOMC meeting. As it stands, with the employment situation essentially unchanged from last month, the Fed is likely to remain in "wait and see" mode, particularly since the data are only preliminary and subject to large revisions down the road (Fed officials will hope for large upward revisions to this month's report). But if the incoming data continues to be weak prior to the next FOMC meeting, which comes just before the next jobs report, the Fed is likely to ease policy further.
As for fiscal policy, more aggressive action could help, for example a large scale infrastructure spending program could provide needed employment opportunities, but that would be a tough sell in this Congress at any time, and is even tougher in an election year. So it's not very likely at all that fiscal policy -- tax cuts or more spending -- will come to the rescue.
All in all, this is not the report we've been waiting for. There are millions of people who want to work but cannot find jobs, and this report does not give much hope that will change anytime soon.

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