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Dull Party to blame for low labor force participation

Jared Bernstein is saying that the unemployment rate is actually higher than 6.7%…

“Based on numbers I’ve written about in greater detail, I think a more representative rate would be about 9 percent.”

His reasoning is based on the fall in labor force participation. But I do not agree with his logic. 6.7% is a realistic unemployment rate. The people who have dropped out of the labor force are gone. The economy is not as good as it used to be. And they have found alternatives. Mr. Bernstein is living in a delusion of the past grandeur of a better economy. Just like his view that unemployment will fall back to 4.0%.

Here is a story of the Dull Party to explain the low labor force participation rate.

You give a fun party every week. You send out invitations to 55 people. So you only provide enough food, beverages and party favors for 55 people. That is your budget. Every week the 55 people show up and enjoy the party. Yet every week, about 7 other people come hoping to get into the party. Every week you have to tell them “sorry, there is no more room.”

However, you would like the extra people to have a chance to enjoy your party. So you drop some people from your invitation list that don’t seem to be enjoying the party and add some names of the people who waited outside. So next week, the faces in the party will change, but there will still be 55 guests at the part. The people dropped from the invitation list now wait outside hoping to get back in.

So week to week there is a balance where 55 people enjoy the party, and 7 people wait outside. (Stable unemployment)

But then the party starts to get dull. The food, beverages and party favors just aren’t as good as before. So, you begin to notice that every week some people get bored and disappointed by the party. So they decide to do something else, maybe go to school and study. Maybe stay home and play video games. You think this is good, because now there is room for some of those who wait outside to come into the party. They seem eager and motivated to enjoy the party. You don’t have to have as many party favors to please the new-comers.

But then you begin to notice that just 4 people wait outside the party each week hoping to get in. There used to be 7 every week. What happened to the other 3 people. Well, I hate to tell you, but your party is dull. Word is getting around that it is just not as fun as before, and the food, beverages and party favors just aren’t as good as before. There are simply less people who are willing to wait outside. And let me tell you something else. Many of the people who come to the party, are not enjoying themselves. More and more of them would love to do somethings else, but they come by obligation to their family or have no good alternative.

So every week, more and more people decide not to come back and wait outside for a space in the party. They are relieved and go do something else. They have found an alternative. Maybe they make an “informal” party amongst themselves. (Informal economy is growing. source 1, source 2, source 3, source 4, source 5, source 6… enough sources?)

The point of this story is that the low labor force participation is due to a dull economy with poor benefits. Just because 7 people used to wait outside, but now only 4 do, you cannot count the missing 3 people as still there somehow. They are gone. They have found other alternatives. The new balance has been established according to the “Fun level” of your party.

Until you realize the party is dull and start offering more food, beverages and party favors, please do not expect that 7 people should be waiting outside. You are living in a delusion of past grandeur, when the party used to be more fun.

Message to anyone who thinks the unemployment rate is much higher than 6.7%… Please wake up and realize that only 4 people are now waiting outside. The others are doing something else. You have to blame the “Dull” party. Even though the economy is making room for a few more people, the party is still not getting any better. People are still not enjoying the party. The unemployment rate of 6.7% is a realistic rate.

UPDATE: Will discouraged workers come back if the economy picks up? Yes, some will, but some won’t. I do know 2 ladies who have a house-cleaning business in the “shadow” informal economy. They both earn over $50,000 per year. And they pay their workers over $12 per hour. There is no way the economy will entice these people back. Regular house-cleaning businesses pay $10 or less to their workers.


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Why is the Recovery so Agonizingly Slow?

Via Economist’s View is Mark Thoma’s new column in Financial Times Why is the Recovery so Agonizingly Slow?

Why is the Recovery so Agonizingly Slow?, by Mark Thoma: Friday’semployment report underscored just how slow the recovery from the Great Recession has been. When the recession officially ended in June of 2009 the unemployment rate stood at 9.5 percent, and it peaked at 10 percent a few months later.  In the four and a half years that have passed since, the unemployment rate has fallen to 6.7 percent. That is still quite a bit above the full employment level, and the fall in unemployment over that time period has been driven in large part by people leaving the labor force rather than the creation of new jobs. When these discouraged workers are taken into account, the labor market is in poor shape even after more than four years of “recovery”.

Why has the recovery been so slow? …

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Memo to Dems and Pundits: The disastrous rollout is very old news.*

Democratic operatives tell me that this basic message is, broadly speaking, how Dems will respond (where appropriate) to attacks over the law. The ad says:

“Ann Kirkpatrick listens and learns. It’s why she blew the whistle on the disastrous health care website, calling it ‘stunning ineptitude,’ and worked to fix it. She fought to hold insurance companies accountable, so they can’t deny coverage for preexisting conditions, or drop coverage when you get sick. Ann Kirkpatrick. Seeing what’s wrong. Doing what’s right.”

This is exactly what Democrats should say about the law. The rollout was disastrous and unforgivable. But note how this ad seamlessly transitions from calling for the rollout problems to be fixed, to standing behind its core goal of protecting people from the sorts of abuses that characterized the old system. These really are components of the same message: we need to continue to fix health care, and going back to the way things were is unthinkable. The ad doesn’t mention “Obamacare,” but it stands up for fundamental principles it embodies that remain popular.

Morning Plum: How Dems are fighting back on Obamacare, Greg Sargent, Washington Post, today

One of my longtime pet peeves about the Dems is the stalenessof their big-name campaign-consultant and ad groups–the consistent failure of these professionals to recognize that it’s no longer the particular political era, year, or month in which they’re stuck, mentally. It’s of course always, always an era, year, or month in which the Republicans were winning an election, an argument, the Quinnipiac Poll.

Sargent praises this ad.  “This,” he says, “is exactly what Democrats should say about the law. The rollout was disastrous and unforgivable. But note how this ad seamlessly transitions from calling for the rollout problems to be fixed, to standing behind its core goal of protecting people from the sorts of abuses that characterized the old system.”

Really?  This is exactly what Democrats should say about the law?  That the website rollout was a disaster?  And that one Dem. congresswoman blew the whistle on that, which is good, because otherwise we wouldn’t have known that the website didn’t work?

The website works now.  And 26-year-olds with MS can now get comprehensive coverage with low co-payments, no maximum lifetime coverage limits, and no possibility that she will be denied coverage down the road, for barely more than she was paying for coverage with high co-payments, a maximum lifetime coverage limit, and the ever-present possibility of cancellation and the inability to find replacement coverage.  In Texas!  And almost certainly also in Arizona.

I don’t understand this claim, repeated again and again, that the law is unpopular and that therefore it doesn’t matter why the law is unpopular.  The law isn’t unpopular because for the first two months of the enrollment period the website didn’t work.  At least that is not the direct reason.  The law is unpopular mainly because there’s been a barrage of misinformation about available plans on the exchanges–something that is in part indirectly a result of the website’s problems in October and November, in part the result of false or incomplete information from the individual-market insurance companies, and in part the result of gullible and incompetent press coverage.  And because of false scapegoating by employers.

So, yes, absolutely, Dem ads should say things like, “She fought to hold insurance companies accountable, so they can’t deny coverage for preexisting conditions, or drop coverage when you get sick.” But the ads need also to say that the website is working now, and here’s what a 26-year-old MS patient has the option to buy now, thanks to the law.

No one thinks Ann Kirkpatrick or any other congressional Democrat was happy about the unusable website. Her telling people that she was unhappy about it makes her look silly.  What people care about is what coverage they have access to within their budget, and that the benefits include the prohibitions of those common insurance-company practices that the ad mentions.  The now-working website is a way to access these insurance policies. So why does this ad focus on the problems with the website in October and November?

*Typo-corrected from “stateness” to “staleness,” 1/17.  Aaaargh.

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Christie’s powerful when he shouldn’t be

Via Think Progress comes Alyssa Rosenberg’s comments on one lesson from the news of Chris Christie’s politics in NJ:

What happened to people who were affected by the traffic closure was ridiculous. But a willingness to inflict ridiculous consequences on innocent people is actually a rather serious thing to do. People who want Chris Christie to suffer the consequences of the tone he appears to have set in New Jersey would do well to remember that. Lampooning him as fat (a subject on which Linda Holmes has a great number of eloquent things to say) or childish both falls into the same sort of tactics Christie himself uses, and misses the point that Christie’s vindictiveness and hectoring style has made him extremely successful. That doesn’t mean we can’t mine humor out of the bridge scandal, and anything else might follow. But that humor needs to be in service of the idea that Christie’s powerful when he shouldn’t be, rather than assuming that everyone shares the idea that he’s laughable.

And she points to Springsteen’s new parody using ‘Born to Run’ under the fold.

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Feeling insecure with low interest rates

As the Euler equation begins its descent into history, where will we go from here? Well, we must understand the social psychology impacting consumption. It is not always true that higher interest rates leads to less consumption and more saving. Just look at the financial repression in China, where higher returns to savings increase consumption.

3 basic effects on consumption…

  1. Higher interest rates by themselves lead to less consumption.
  2. Income uncertainty leads to less consumption.
  3. Uncertainty about the broader economy leads to less consumption.

There are more effects on consumption but just these 3 can work against each other.

Scenario #1…

  1. High interest rates…
  2. High degree of Income certainty…
  3. High degree of certainty about the future of the economy…

1 suggests less consumption, but 2 and 3 suggest more consumption. This scenario roughly explains some of the 1980’s and 1990’s. A high degree of certainty about the future stability of the economy and banking system helped support consumption in a time of higher interest rates. The relative strength of each effect must be weighed to know if consumption will decrease or increase.

Scenario #2…

  1. Low interest rates…
  2. Low degree of income certainty…
  3. Low degree of certainty about the future of the economy…

1 suggests more consumption, but 2 and 3 suggest less consumption. This scenario roughly explains where we are. Uncertainty about income and the future look to be over-powering the effect of low interest rates to spur consumption.

So what can be done to make people feel more secure about their future?

  • Low interest rates are a signal that intensifies uncertainty about the future. The Fed’s forward guidance for low interest rates for many years creates concern. So, raising interest rates with a “forward guidance” message of confidence would create security that the economy is getting back on its feet.
  • Stagnant wages create income uncertainty. So, increases in wages like the proposed increase in the minimum wage would lead to more consumption.
  • The power of banks take away the power of “regular” people, who feel vulnerable. Banks seem to have even more power now, even after they damaged the economy. So, strong regulation of the banks, like was done during the Great Depression, would give back to people a sense of economic power and security.
  • The chaos in the government makes people uneasy. So, the government has to learn to stop their silly games. The government has to get out of bed with “financial despotism“.

The point is that low interest rates should not be expected to simply increase consumption. There is a powerful social psychology of security at work behind consumption too.

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Obamacare horror stories

Maggie Mahar at takes a look at stories easily fact checked in Anatomy of an Obamacare horror story

For months, health reform’s opponents have been feasting on tales of Obamacare’s innocent victims – Americans who lost their insurance because it doesn’t comply with the ACA’s regulations, and now have to shell out more than they can afford – or go without coverage.

Trouble is, many of those stories just aren’t true.

The paper describes them as among Obamacare’s “losers,” but the truth is that they didn’t want to be winners. Two hadn’t even attempted to check prices in the exchanges.

Meanwhile, it appeared that no one at the Star-Telegram even attempted to run a background check on the sources, or fact check their stories. I couldn’t help but wonder: “Why?”

The answer will surprise you.

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Time to end redistribution upwards: minimum wage increases would boost economy and lift all boats.

by Linda Beale

Time to end redistribution upwards: minimum wage increases would boost economy and lift all boats.

No matter how much the business lobby complains about the “business costs” of increasing the minimum wage, legislators should look past that self-serving ideology and look at reality.  Workers have contributed to increased productivity but received a stagnant to declining share of the income that comes from the increased productivity.  IN the meantime, top-echelon managers and shareholders reap larger and larger benefits from the increased productivity provided by the workers.  At the same time, much of the tax expenditure provisions in the Internal Revenue Code–from the charitable contribution deduction (and things like contributing appreciated assets from IRAs) to the mortgage interest deduction to  the life insurance exclusion to the preferential rate on capital gains and the almost non-taxation of corporate dividends are hugely beneficial to the same top echelon in the income distribution, meaning that those provisions are aiding “redistribution”–just not the kind that is condemned by those on the right as a kind of socialism, since this redistribution is upwards and favors the rich.

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Attack on Euler equation implies Financial Repression is alive and well

Noah Smith wrote a GREAT! post about how the data does not support the Euler equation. His post strikes at the heart of why economics and monetary policy is failing. Hopefully, we will see a revolution in thought about interest rates and monetary policy. The one sentence from his post that empowers the rebels is…

The times when interest rates are high are times when people tend to be consuming more, not less.

Awesome! … The major implication I see from his statement is that Financial Repression is a reality.

I recently wrote a 5-part series on Financial Repression which said that it has been sneaking into US policy. Financial repression relies on low interest rates to repress consumption with the goal of raising national savings for investment and increased exports. However, the Fed’s low interest rates are meant in part to raise consumption, not repress it. Noah’s post exposes the fundamental error guiding the Fed’s logic.

I posted a model of the money market split into two sectors, one of capital income and one of labor income. Capital income and labor income experience and react to interest rates differently. The model says that raising interest rates would actually raise consumption. For example, if interest rates rise and labor consumes more, capital investment will actually rise in the face of higher interest rates. So, the real key to “fixing” the Euler equation is to split the money market into a capital income sector and a labor income sector. The correct Euler equation will understand this dynamic.

But in the midst of Financial Repression around us, the solution to low consumption is to raise interest rates. Thank you, Noah.

Related articles…

Lambert, Edward. A Tale of two incomes in the money market. Angry Bear blog. October 23, 2013.

Lambert, Edward. A “Weird” case for a higher interest rate. Angry Bear blog. October 24, 2013.

Lambert, Edward. Inflation expectations, income expectations & financial repression. Angry Bear blog. November 27, 2013


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Imports constrained by effective demand

Labor’s share of national income sets a limit upon the utilization of labor and capital. That is the basic principle of effective demand. Domestic production periodically hits the effective demand limit. But are imports also constrained by the effective demand limit? Yes, they are, at least for the US.

Let’s look at imports to exports. Since the 1950’s in the US, it is common for exports to be 80% the value of imports (Yellow line, right axis).

nx ls 2

It is true as one reads the news that exports are increasing in relation to imports (gray line rising). However, exports are currently at a normal level looking at past data (yellow line). Exports are about 83% the value of imports, which is pretty much the past average. Net exports as a % of GDP went very negative after the late 1990’s (gray line), only because foreign trade increased so much as a % of GDP. Even though imports rose a lot, exports did pretty well in keeping up with them as seen by the yellow line staying fairly steady. Exports are coming back into balance with imports.

Through time, did net exports (gray line above) recognize the effective demand limit? It doesn’t seem like there is any constraint on the line. Well, the limit is hidden, but can be revealed. Below I evaluate net exports as a % of GDP against the effective demand limit. (Data source for graph in video, 1967 to 3rdQ-13)


Activate the video for a second to see graph.

In the video, the graph shows two scatter plots. One is capacity utilization moving with labor share (blue). Capacity utilization hits an upper limit, which is the effective demand limit. The other plot (orange) shows net exports as a % of GDP (same as in first graph) moving with capacity utilization. Now we can see a defined upper limit. Is it the effective demand limit?

The pattern is for capacity utilization to fall as net exports go more negative. One might suppose that increased desire for imports is causing domestic capacity utilization to fall. But there is more to the story. Capacity utilization is actually reacting to the demand limit from labor’s share of income, not so much to an increase in imports. Exports tend to return to balance with imports (yellow line in first graph).

In the video I draw an upper limit on both plots. The one over the plot with labor share (blue) is the normal effective demand limit. The upper limit over the plot with net exports (orange) then simulates the effective demand limit. Do the two plots hit their upper limit at the same time? As it turns out, they do. As labor share slid down over the years, net exports tended to go more negative.

The upper limits followed a somewhat linear downward path. If net exports did not recognize the effective demand limit, you would see the orange line pass through the upper limit. For example, increasing imports would push the orange line to the left through the upper limit. The fact that this does not happen says that the limit upon imports is behaving like the effective demand limit upon domestic production.

Exports can rise, but they will rise in such a way that capacity utilization will not rise above the effective demand limit. You see the orange plot move along the upper limit if exports increase in relation to imports. That insight is important when you are trying to increase capacity utilization with increased exports. If the economy is against the effective demand limit, like it is now, you will only be marginally successful.

To wrap up… In the US, effective demand not only constrains domestic production, but imports too. And capacity utilization rises marginally with increasing exports, when the economy is against the effective demand limit, like it is now.

Note: I am strictly describing data for the US.

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Yes, Speaker Boehner, but WHOSE Fiscal Policies of the Present Are to Blame?

House Speaker John Boehner told a closed meeting of his colleagues that a Republican pollster found that for the first time, most Americans blame President Barack Obama for the economic troubles, not George W. Bush.

“Barack Obama came into office blaming George W. Bush for the state of the economy and the lack of job creation,” Boehner said, according to a source in the room. “For years, that pass-the-buck strategy worked. But at the end of last year, a turning point was reached. For the first time, a majority of Americans now say they believe the troubles in our economy are more the result of the policies of the present than the policies of the past.”

The poll, conducted by longtime Boehner ally David Winston, shows that in November 2013, 41 percent of those polled blame the economic woes on policies of the past while 49 percent blame policies of the present. After the 2012 election, 53 percent blamed past policies and 44 percent blamed today’s policies.

John Boehner: Poll finds Obama to blame, Jake Sherman, Politico, today

Each time I read about some Republican pol blaming referring to the high unemployment rate as “the Obama economy” as a way to obtain approval from the Tea Party to support an extension of unemployment compensation for the long-term unemployed (which I the last few weeks has happened repeatedly), I momentarily, but only momentarily, expect Obama to make a statement detailing the dramatic reductions in public-sector employment, virtually across the board: federal, state and local throughout the country.  In that brief moment of reflex, I expect him to point out that this is unprecedented since the Hoover administration and differs dramatically from what occurred during and immediately after recessions ever since.

I expect him, in other words, to educate the public about basic Keynesian economics.  And to point out that the economy we have is in fact the one chosen by the Republicans, not by the Democrats in Congress and not by him.

Or, to borrow Boehner’s phrasing, I expect him to explain that the troubles in our economy indeed are more the result of the policies of the present than the policies of the past.  And to explain exactly what those policies are, and who has insisted upon them.  The specifics of the sequester, for example, might be a good thing to include in an explain.  Should he provide one.

He won’t, of course. That would require him to deviate from equating family finances and government finances, and back several years ago some political advisor told him that all economics matters must be presented to the public as analogy to family economics, even when the analogy is baldly false and undermines your position.  And, Obama being Obama, he not only believed it but hasn’t since noticed the ill effects of this on fiscal policy and consequently the overall economy.

Obama has the opportunity to upend the Republican claim that this is “the Obama economy, by providing a clear, detailed statement of the actual facts–statistics, competing policy proposals, and actual economics–in his upcoming State of the Union address.  He won’t, though; that would require actual specifics placed into a coherent explanation, rather than a one-off sentence or two.  It might even require charts and graphs!

Charts, graphs, statistics, economics, and other facts are people, my president.  Just like corporations.  In exactly the same way that Romney actually meant that corporations are people, my friend.  But, no matter. He won’t employ them.

But the slack can be picked up, to some extent, at least, by Senate Dems.  Dick Durbin, Sherrod Brown, Elizabeth Warren, Patty Murray, Barbara Mikulski, Chris Coons, Sheldon Whitehouse, Jeff Merkley, Tom Udall.  And, yes, Harry Reid.  Please pick up Boehner’s gauntlet, senators. And soon.

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