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September 8, 2012

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Posted: 08 Sep 2012 12:06 AM PDT

'What Krugman & Stiglitz Can Tell Us'

Posted: 07 Sep 2012 10:37 AM PDT

Hacker and Pierson on Krugman and Stiglitz:

What Krugman & Stiglitz Can Tell Us, by Jacob Hacker and Paul Pierson, NYRB: Five years after the onset of the financial crisis that badly damaged the US economy, the nation remains mired in chronic joblessness. The unemployment rate, stubbornly above 8 percent, actually makes the situation look better than it is. Many millions have given up looking for work and no longer figure in the statistics. Long-term unemployment remains at levels unseen since the Great Depression. Young Americans are entering the worst job market in at least a half-century. For both the long-term unemployed and new job seekers, this sustained absence from the workforce will have permanent effects on both their earnings and their well-being. And not just theirs. We have all lost, and continue to lose, from the prolonged mass idleness of potentially productive workers.

Yet Washington is stuck in neutral. Worse than neutral; it is in reverse. ...

Against this backdrop, no book could be more timely than Paul Krugman's End This Depression Now! Since the crisis began, Krugman has argued with consistency and increasing frustration that the United States has become caught not in a normal recession, but in a "liquidity trap." Since interest rates are already at rock bottom, normal measures, such as easy credit, won't work, and expanded government expenditures must play a central part in boosting anemic demand. Otherwise, the efforts of private citizens to pay down debts laid bare by the financial crisis will continue to hold the economy back.

To Krugman, this is all the more regrettable because it is almost wholly preventable. We know what to do, he argues: increase public spending and make it clear that monetary expansion will continue until the economy fully recovers. Krugman advocates greater federal aid to state and local governments, as well as an aggressive effort to relieve private mortgage debts. He also argues that the Fed has been too timid in setting higher inflation targets to restore expectations of growth. ...

In this indictment, Krugman is joined by another Nobel laureate economist, Joseph Stiglitz, whose claims are much more sweeping than his. In an argument that dovetails with those of Occupy Wall Street protesters, Stiglitz insists that the huge and growing divide between the richest 1 percent and "the 99 percent" is not just one concern among many, but the defining characteristic of a thoroughly sick economy. ...

The reason, according to Stiglitz, is that the vaunted American market is broken. And the reason for that, he argues, is that our economy is being overwhelmed by politically engineered market advantages—special deals that Stiglitz labels with a term familiar to economists: "rent-seeking." ...

Much, much more here.

Fed Watch: Another Jobs Disappointment

Posted: 07 Sep 2012 10:07 AM PDT

Tim Duy:

Another Jobs Disappointment, by Tim Duy: The August employment report certainly reminded me that forecasting monthly changes in nonfarm payrolls is a dangerous game. A game I will certainly play again, but dangerous nonetheless. I think there is little doubt that this report is not in the "substantial and sustainable" category, which thus points to additional Fed action next month.
Nonfarm payrolls posted a 96k gain for the month, well below consensus expectations and the low-end of my 110k-290k range (198k midpoint). The numbers for the previous two months were revised downwards. And while the 12-month trend remained virtually unchanged, the 6-month trend is weaker than last summer:


And while I am sure it will not dissuade fears that inflation is just around the corner, hourly wages actually slipped a penny for both all employees and production/non-supervisory workers. The latter category, for which we have a longer time series, continues to plumb the depths of wage growth:


Also note that the index of aggregate weekly hours has largely leveled off this year, in contrast with steady growth in 2011:


Roughly half the net job growth was attributable to health care and social services, manufacturing and government both dragged down the headline, while professional services gained 28k despite a disconcerting loss of 4.9k temp workers. In short, more of the same general lackluster numbers that on average have typified the labor market "recovery."
The population survey was also hardly inspiring. The unemployment rate managed to edge down on the back of an exodus of 348k workers from the labor force. Consequently, the participation rate ticked back down:


The ranks of both the employed and unemployed fell. Employed part-time for economic reasons fell only marginally, basically steady since the beginning of this year:


Long-term unemployment, an issue specifically noted by Federal Reserve Chairman Ben Bernanke, fell as a proportion of total unemployment, yet still remains very, very high:


Improvements in the long-term unemployment situation have been hard to come by, to say the least.
Bottom Line: Where does this leave us for next week's FOMC meeting? Given Bernanke's description of the labor market situation as "grave" and the complete lack of improvement in the most recent report, given Bernanke's meager defense of the potential costs of balance sheet operations (see Joe Gagnon), given the ongoing European saga (Europe still headed for a deeper recession as more austerity will likely occur in both Spain and Italy despite the ECB) and its impacts on US manufacturing (see Intel today), given the uncertain situation in China, given the increasingly vocal support of Fed doves and marginalization of Fed hawks, given that time is running out for Bernanke with the nontrivial possibility of a Romney win, and given that recent positive data is largely limited to consumer spending, it is hard to come to any conclusion other than to expect additional easing next week. Quantitative easing and/or enhanced verbal guidance, although at this point I imagine they need to go hand-in-hand. In fact, if they don't ease this time, I think we will need to conduct a fundamental reassessment about what exactly is happening on Constitution Ave.

The Jobs Report

Posted: 07 Sep 2012 09:14 AM PDT

My comments on the job report are here. I mostly talked about how this will change the likelihood of the Fed doing more to boost the economy, and I briefly talked about fiscal policy (and why it won't happen). I didn't say much about the plans from Obama and Romney to lower the unemployment rate, and disappointingly not much was said at either convention about, arguably, the most important problem we face, but Robert Reich has that covered:

...Unfortunately for the President — and the rest of us — jobs gains have averaged only 94,000 over the last three months. That's down from an average of 95,000 in the second quarter. And well below the average gain of 225,000 in the first quarter of the year And compared to last year, the trend is still in the wrong direction: a monthly average gain of 139,000 this year compared to last year's average monthly gain of 153,000. 
Look, I desperately want Obama to win. But the one thing his speech last night lacked was the one thing that was the most important for him to offer — a plan for how to get the economy out of the doldrums.
Last week Mitt Romney offered only the standard Republican bromides: cut taxes on the rich, cut spending on programs everyone else depends on, and deregulate. They didn't work for George W. Bush and there's no reason to expect they'll work again.
But the President could have offered more than the rejoinder he did — suggesting, even in broad strokes, what he'll do in his second term to get the economy moving again. At least he might have identified the scourge of inequality as a culprit, for example, pointing out, as he did last December, that the economy can't advance when so much income and wealth are concentrated at the top that the vast middle class doesn't have the purchasing power to get it back on track. 
Undeniably, we have more jobs today than we did at the trough of the Great Recession in 2009. But the recovery has been anemic — and it appears to be slowing. We're better off than we were then, but we're not as well off as we need to be by a long shot. 

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