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Cyclical vs Structural Unemployment part N

Robert Waldmann

Kevin Drum stresses the very sound point that even if part of current unemployment is structural, we should stimulate to get rid of the part which is cyclical. I don’t have a serious disagreement and choose to debate his guess as to the level of structural unemployment for the sake of debating.

“The “normal” unemployment level is about five points less than it is today. I wouldn’t be surprised if perhaps three of those points are cyclical and two are structural.”

He agrees with Annie Lowrey who presents the following analysis

The unemployment is cyclical and structural. Most sectors have suffered from the turndown, but job losses are concentrated in some industries: In residential construction, they are down 38 percent since 2006. (Between Aug. 2007 and Dec. 2009, unemployment in construction quintupled from about 5 percent to about 25 percent.) In health care and education, however, jobs are up.

This analysis is accidental theory. Between the first sentence and the second, there is a theoretical argument that the cycle has the same effect on log employment in each sector. This argument makes no sense. More after the jump.

I know it is not wise to argue with an “I wouldn’t be surprised” but their approach to measuring cyclical unemployment is completely incorrect. Lowrey identifies the cyclical component by assuming that around the cycle percent changes are equal. Therefore a much much larger percent change in construction than in health is not cyclical.

In fact, the amplitude of the cycle in log employment is not the same in each sector. Some sectors are very cyclical (always go down a lot in recessions) others are almost acyclical. A correct estimate of how much unemployment can be eliminated with fiscal and monetary policy requires an estimate of the effect of fiscal and monetary policy on log-employment by sector. The assumption that this is necessarily equal is an accidental theory — a very strong and plainly false assumption which is made by people who think they can just look at the data without theory.

This is the topic of one of my very rare contributions to the actual economics literature

The practical relevance of the decomposition is due to the fact that it is argued, that, if unemployment is due to miss-match, then a general stimulus will lead to labor shortages in some sectors. This would lead to inflation. As Drum notes this is not a problem at the moment. However, let’s imagine a stimulus powerful enough to drive unemployment down to 7%. Does anyone really think this would create (much more of) a shortage of workers in health care ?

Why would demand for health care increase much (as a percent of current demand for health care). 85% of people are insured. Much of the effect of the recession is people moving from private insurance to Medicaid. There isn’t a big cycle in the number of uninsured and there is little reason for demand for care by the insured to shift with aggregate demand. Even the uninsured demand health care in ERs, then go bankrupt. Recall the HCR debate.

Now how about residential construction. Does anyone really think that no construction workers can shift from residential to commercial construction ? Is there any reason to think that an increase in employment which were to drive the unemployment rate down to 6% would cause labor shortages anywhere ?

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Together, credo and trinity … our purpose

by reader Ilsm

American Empire and “exert upon the world the full impact of our influence for such purposes as we see fit and by such means as we see fit” (Henry R. Luce); why the generals push back on Gates’ minimal 3% increase in their war machine, disguised as cuts. Generals push back on GAT

Andrew Bacevich on the New American Century: Empire
“Global Leadership: Empire:

“Henry R. Luce made the case for this specious conception of global leadership. Writing in Life magazine in early 1941, the influential publisher exhorted his fellow citizens to “accept wholeheartedly our duty to exert upon the world the full impact of our influence for such purposes as we see fit and by such means as we see fit.” Luce thereby captured what remains even today the credo’s essence.”

“Along with respectful allusions to God and “the troops,” adherence to Luce’s credo has become a de facto prerequisite for high office.”

“Note, however, that the duty Luce ascribed to Americans has two components. It is not only up to Americans, he wrote, to choose the purposes for which they would bring their influence to bear, but to choose the means as well.”


Militarism to provide the means for empire:

“With regard to means, that tradition has emphasized activism over example, hard power over soft, and coercion (often styled “negotiating from a position of strength”) over suasion. Above all, the exercise of global leadership as prescribed by the credo obliges the United States to maintain military capabilities staggeringly in excess of those required for self-defense.”

The philosophy that sustains the Military Industrial Complex, top cover for war profits:

“By the midpoint of the twentieth century, “the Pentagon” had ceased to be merely a gigantic five-sided building. Like “Wall Street” at the end of the nineteenth century, it had become Leviathan, its actions veiled in secrecy, its reach extending around the world. Yet while the concentration of power in Wall Street had once evoked deep fear and suspicion, Americans by and large saw the concentration of power in the Pentagon as benign. Most found it reassuring.”

Numbed population forgets its roots:

“A people who had long seen standing armies as a threat to liberty now came to believe that the preservation of liberty required them to lavish resources on the armed forces.”

Noble Lie: Perpetual Mobilization and Militarism, Why have forces to deploy and sustain in remote areas of the world with no threats to the “common defense”:

“Yet an examination of the past 60 years of U.S. military policy and practice does reveal important elements of continuity. Call them the sacred trinity: an abiding conviction that the minimum essentials of international peace and order require the United States to maintain a global military presence, to configure its forces for global power projection, and to counter existing or anticipated threats by relying on a policy of global interventionism.”

“Together, credo and trinity — the one defining purpose, the other practice — constitute the essence of the way that Washington has attempted to govern and police the American Century.”

Full read here

The US has a sacred duty to squander its treasure and institutions on the Military Industrial Complex for American Empire. What steps make re-directing this energy and treasure to productive economy possible?

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Angry Bear blog at Jackson Hole symposium

by Dan Crawford (Rdan)
(H/t Ken Houghton)

Eric Leeper’s paper Monetary Science, Fiscal Alchemy∗, also found ungated in the Financial Times: Jackson Hole papers finally available, mentioned Angry Bear in a footnote page 12 in the section on reactions to the lastest CBO report.

Here is the fiscal alchemy of Bruce’s post on the CBO report. I read it several times and the comments but for the life of me can’t find any part that suggests fiscal restraint is less severe in the science of monetary, nor ignored the limits of CBO reporting, or suggested the upper and lower bounds were accurate, but did address the public, political statements of impending doom of an election year when insolvency was months away according to the bond vigilantes and several politicos.

Mainly, as Ken suggests in a tweet, “He believes monetary policy is science, but makes fun of AB?”

On the other hand it helps to advertise.

Update: Try here for the science part, and some of Robert’s posts on Kocherlakota (Mr. Leeper refers to Kocherlakota in his paper)

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Simpson to disabled vets

Daily Kos: Simpson to disabled vets: You cost too much Joan McCarter: Fresh off of being forgiven by the White House, Simpson has a new target.

:RALEIGH, N.C.—The system that automatically awards disability benefits to some veterans because of concerns about Agent Orange seems contrary to efforts to control federal spending, the Republican co-chairman of President Barack Obama’s deficit commission said Tuesday.

Former Wyoming Sen. Alan Simpson’s comments came a day after The Associated Press reported that diabetes has become the most frequently compensated ailment among Vietnam veterans, even though decades of research has failed to find more than a possible link between the defoliant Agent Orange and diabetes.

“The irony (is) that the veterans who saved this country are now, in a way, not helping us to save the country in this fiscal mess,” said Simpson, an Army veteran who was once chairman of the Senate Veterans’ Affairs Committee….

“It’s the kind of thing that’s just driving us to this $1 trillion, $400 billion deficit this year,” Simpson said. “It’s not that I’m an uncaring person, but common sense is the most uncommon thing in Washington.”

Dan (Rdan) here: We could do the numbers for the whole VA cost, but putting the deficit on the shoulders of diabetic veterans is simply out of it…when someone becomes old, their real thinking is blurted out without the normal screening public figures often take…what a tool.

Dan here: Lifted from comments, this wry thought comes to mind regarding Mr. Simpson’s inner world of lesser people:

How would you feel if after forty years of faithful service at five hundred a month and alternate Tuesdays off, your butler or cleaning lady said, “I’ve saved up enough to retire, so screw you.” ?

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