Thoma: The Slow Recovery of Unemployment
Mark Thoma is a truly stand-up guy. We need more like him screaming for the unemployed and underemployed. I’ll comment just a bit more after Mark’s commentary.
Mark Thoma on The Slow Recovery of Unemployment:
I don’t like to make economic forecasts. Though I do it on occasion, I generally leave that to Tim Duy — he’s much more of a data grubber than I am so he’s better at it anyway. I do try to comment on what data says when it’s released, mostly at MoneyWatch, but I don’t generally consider those to be formal forecasts of where the economy is headed.
There’s a good reason why I try to avoid forecasts. In the past, whenever I’ve tried to predict the path the economy would take, I’ve found myself reading subsequent data releases in a way that supports the forecast. I think that once you make a forecast, it affects your objectivity, and I think that applies generally, not just to me.
Perhaps that’s why I’m feeling more and more alone in talking about the current state of the economy. Though the worries began long before this, in June of 2008 I did a MarketPlace segment where I predicted that the recovery of unemployment would lag output, and I said that policy should begin addressing the problem immediately due to the long lags between the time when policy begins is first considered and the time it actually has an impact on the economy. Ever since, I’ve found myself watching to see if that forecast was correct (which is another reason why I don’t like to make forecasts — you hope you are correct, but being correct in this case means people will struggle to find jobs, so it brings on an internal contradiction — how can you hope people will struggle?).
As I said above, I don’t think I’m alone in reading data in a way that supports previous forecasts, and others are much more bullish about the latest data releases than I have been. Part of my point has been that the data can be read another way. When people say, for example, that there’s nothing in the latest employment report to change the relatively optimistic forecasts they’ve made recently, I try to say that there’s nothing in the data to reject the alternative forecast either, i.e. that we are still headed for a very slow recovery of employment. Whatever your null hypothesis or prior beliefs were, the latest data did little to change that outlook.
My reason for noting that the data can be read another way goes beyond trying to show that I was right and others were wrong about how long it would take for employment to recover. I am very worried that we are, for all intents and purposes, about to abandon the millions who are still unemployed. Once we conclude that a robust recovery is underway, we will turn our attention to other things. All of the social services that we need to provide for the unemployed, simple and important things like making it possible for their kids to get dental care to name just one example, will be ignored. We devote little if any effort to job creation. We will simply turn our backs and move on.
I fully understand the desire to have a perfect landing, to get policy just right. But just right when the costs of unemployment are so much higher than the costs of inflation means that we should bias policy toward the unemployment problem. If we are going to make a mistake, it should be too much unemployment, and the inflation that comes with it, rather than too little. However, with the inflation hawks writing almost daily in the WSJ and elsewhere that we need to raise interest rates immediately to avoid inflation, and with all of the pressure to address the budget deficit, if anything the bias in policy seems to be in the other direction. Thus, while I acknowledge the fact that I am probably reading the data in a way that is favorable to previous statements, there was a good reason to worry back in 2008 that this would be a problem, and I believe there’s still good reason for worrying about it today. If I have read the data more pessimistically than others, the reason for it is simple — to push against the chance that we will forget about all the households that continue to struggle. If Ben Bernanke’s right, even with current policy we are looking at years until employment gets back to normal and we must do all that we can to help people find jobs or, failing that, provide the social services they need to get by until the employment picture improves.
Until I am sure that the economy is on firmer footing than it’s on now, and that employment prospects have improved substantially, I will continue to be the one who pushes back against optimistic reading of the data. And I will make no apologies for it beyond what I’ve said here.
(More comments after the jump)
RW: Just today I was reading an Economist article from last week’s publication, Et in Arcadia ego (even in Arcadia I exist), about the homeless population that is building in the hardest hit parts of the economy (generally related to the manufacturing and housing decline). Tent cities, surging homeless rate, and poverty are becoming more of the ‘norm’; it’s really rather heart wrenching if you think about it.
And then I see a chart like this (h/t Ken Houghton at AB) on inflation expectations and asset prices. Yes, propping up asset prices – that’s what the Fed’s done here is inflate asset prices – will have the intended effect of dropping the saving rate and increasing current consumption; but to what end? Wall Street’s doing just fine, in fact. I’m a macroeconomic analyst and portfolio manager in the global fixed income space and have seen a nice shuffling around in the labor force. I wouldn’t say that jobs are plentiful, but popping up, nevertheless.
On forecasting, I find it very interesting that when Wall Street economists model their outlook for the unemployment rate – according to Bloomberg, the consensus expects the unemployment rate to drop to 8.5% in 2012 – they assume that the 2.8 million workers that are marginally attached to the labor force (of which discouraged workers is a subset) will not re-enter. Mathematically, that drops the unemployment rate: compared to a year ago, January 2010, the number of marginally attached workers has increased from 1.07% of the working-aged noninstitutional population to 1.17%, while the U3 unemployment rate dropped 9.7% to 9.0%. (the alternative measures of unemployment are listed in Table A-15 here.)
I think that run75441 says it well (in the comment section of this post):
If NILF [not in the labor force] keeps going up, it does not matter what U3 does which is a joke. Parity for U3 is reached when Participation Rate equals the Participation Rate of 2001. The numeric is to nervous and today’s measurement of U3 has no meaning.
Mark, thank you for your voice. It takes a lot of courage to push back against those that see just the tip of the economic iceberg, i.e. the parts of the economy that are trucking along just fine right now.
Until there is a change in what we value in terms of GDP growth whether it is Labor Intensive industry or Wall Street Asset Appreciation, then the deficit hawks; the Petersons, the Biggs, the Keatings, etc. will rein supreme. With a growing population of people not in the Civilian Labor Force, we will have issues with enough revenues to support the programs necessary for the population. Changing the paradigm and placing the emphasis on Labor (job creation) rather than Wall Street/Banking and taxing capital appreciation in areas such as CDS, naked CDS, securization, etc. would go a long way to changing the issues we have today.
Thanks for the plug . . . I enjoy your posts.
not much to argue with here, unless you are a Believer in unenlightened self interest.
which, by the way, seems to be the way the world works. so if you are looking for a Nobel Prize in Economics, you might give some thought to showing why the world is going to hell in a handbasket.
I did for Rebecca
I did recommend an emphasis to Rebecca
The marginal value of the unemployed is essentially zero.
High unemployment reduces over-all wage rates via simple supply and demand.
As wage rates fall below the subsistence level, individual debt becomes unserviceable. (I owe my soul to the company sto’e.)
At that point we become indentured servants –> serfs –> slaves.
The wealthy elite will reduce the population to slavery whenever it is allowed to by the prevailing economics of labor, social norms, legal structure and the inability of people to break the chains. This is why labor unions have been under attack since (at least) the Reagan administration, and are always outlawed by dictators.
Ancient Egypt, Medieval Europe, So. American banana republic, Southern plantations (or share-croppers) . . . and, yes, West Virginia coal miners — these are our future.
Hayak had it exactly backwards. International Corporatism is the road to serfdom.
Another side to it. With a growing number of people not in the labor force, the average skill level of the population will very likely decline. That will then hit the top line (GDP). If this level of mass unemployment is allowed to persist, it will turn structural and the aggregate will be worse off for it.
I do believe that we will start seeing reasonable jobs gains in the first half of this year, especially in the service sector, but 2012 is anybody’s guess. At that point the deficit hawks will like have a forceful voice and want to ‘fix’ the government’s over-spending. The only problem is, that that government cannot run surpluses or even near-surpluses without the private sector running big deficits, or else the economy will go back into recession and the deficits rise again.
This could be a very short business cycle. And if it is, the next time the economy starts contracting again unemployment rate will be much higher than when we’ve gone into previous recessions (another post). Not good.
I really believe that the reason for the lack of focus on the laborer, the individual or labor household, is that we have allowed macro economics formulate policy and figuring that all the micro will fall in place. It is why we have watched people vote for those who’s policies undo the social safty net.
Please, this is not meant a criticism of any one marco person, but as a stand back observation. I believe this use of macro theory/ideology at the expense of the micro is in part due to the financial sector’s push to become not only a bigger player in an economy, but THE player in the economy. It is also that part of economics that is required to sell “globalization” as currently practiced. Not interested in the chicken/egg issue of which came first, financial desire or Milton. They are both culpable.
Focusing on the macro of an economy at the expense of the micro is to focus on the pattern of tree growth in a forest and not see the death in the undergrowth. Henry Ford failed in the rubber industry because of to broad a focus and not understanding the micro of the environment he wanted to grown rubber plants.
When some policy people start presenting micro economist, or the media starts, then the public will start seeing how and why they’re lifes are no longer connected to the Dow’s movement and the Fed’s actions. The people will beable to see how what works for them on the individual level is not necessarily what works for them on a social level, community level, town/city level, state level or even nationally.
When micro becomes as influencial as macro, we will reverse the idea that what is good for business is also good for people and society. I am certain that such is not true very often. I am also certain that the opposite is predominately true.
You touch close to my own thoughts and we still might disagree.
I would make the criticism (which you choose to bypass) though because we are still discussing what has been obvious for more than a decade now, Labor does not count and capital appreciation does. It is here the battle is being fought and it is here the Petersons of the world are spending their $billions to influence with the support of the Biggs and Keatings of the world. It is here the world of economists have turned a blind eye to over the last decade and only now have awaken to the reality of what is taking place.
Krugman recently wrote a blog post citing Domar’s model for the shift from free labor to labor bound in some way to the landowner – either serfdom or slavery. Domar’s view was that it was a response to high wages. As long as workers have little choice because they are plentiful and jobs are scarce, landowners don’t need to go to the trouble to police them or provide for them. They can starve just as well on their own. When workers are able to find jobs that pay more than landowners in a jurisdiction can easily pay, then they appeal to government to bind workers to the land.
The Presidents Roosevelt and the post-WWII social contract gave workers their largest share of US production ever. When the economic troubles of the 1970s came along, it was an opportunity for “Morning in America” and an effort to take back workers gains.
The Angry Bear argument over Social Security’s relationship with the Federal Budget has interestingly ignored the following CBO presentation on the subject. It has been available to CBO readers since 2002.
Social Security and the Federal Budget: The Necessity of Maintaining a Comprehensive Long-Range Perspective
LONG-RANGE FISCAL POLICY BRIEF
Published by CBO
August 1, 2002
By law, the Social Security program is treated as an “off-budget” entity, and its financial figures are displayed separately from the rest of the budget. The separate display, along with the use of trust funds as an accounting device, is a means of distinguishing the program’s finances from those of other government activities. However, the distinction can be confusing when it leads people to think of Social Security as an independent financial entity. Social Security is a federal program, and as such, all of its taxes are received by and its outlays dispensed from the U.S. Treasury.
Focusing on an accumulating balance in the Social Security trust funds can also be misleading. The only economically significant way that the government has a surplus is if there is a unified budget surplus–when total receipts are greater than total outlays. Although separate taxes are collected for Social Security, the money left over after benefits are paid is used to fund other government programs or to pay down the debt held by the public. Moreover, in the future, those separate tax receipts will become insufficient to maintain the program once the post-World War II baby-boom generation begins drawing federal entitlement benefits. Social Security and other entitlement programs will then be dependent on the federal government to cover their costs–at the same time that the government must pay for its many other functions.
Regardless of how any federal program is financed and accounted for–and whether it is presented as on- or off-budget–a full understanding of the government’s looming fiscal strains and the potential economic impact of its fiscal condition requires that all government functions be considered together. It is the federal government’s total claims on the nation’s resources that affect the economy—not the individual components that make up those claims.
The Utility of a Comprehensive Budget Display
The government’s fiscal condition has a significant impact on the economy, and that impact is most effectively summarized by the aggregate flows of money to and from the U.S. Treasury. It is the difference between the government’s total receipts and total spending, including Social Security’s, that determines how much the government needs to borrow from the financial markets or how much it can repay. Social Security benefits alone account for one-fifth of federal spending, and payroll taxes for the program account for one-fourth of federal revenues. Therefore, most economists, credit market participants, and policymakers, when they seek to gauge the government’s role in the economy and its effect on the credit markets, look at the total budget figures, including the figures for Social Security.
Treating some federal programs as off-budget can obscure the government’s total financial picture and its impact on the economy. And fragmentation of the budget can restrict the range of budget choices for policymakers and can complicate the public’s understanding of the government’s long-range fiscal condition.
Social Security as a Separate Display and as Part of the Totals
In summary tables of the budget prepared by the Congressional Budget […]