Relevant and even prescient commentary on news, politics and the economy.

The Unemployment Rate Puzzle

This morning’s release of December’s unemployment data by the BLS contains the same puzzle that’s been dogging this economy for months. Why has the unemployment rate continued to fall over the past 6 months, even though jobs have not been created?

The answer is that people are dropping out of the labor force. The BLS conducts a survey every month and asks about 60,000 households whether they are working, and if not, whether they are actively looking for work. The number of people who have responded that they are not working but are actually looking for work (and thus are technically unemployed) has fallen from about 9.2 million in June to 8.4 million in December. That’s good. Unfortunately, they apparently haven’t stopped working because they’ve found jobs, since the number of jobs in the US economy is still below where it was a year ago. (See the graph in this post to see what I’m talking about.) They’ve stopped working for some other reason.

This makes me curious. Who is it that’s dropping out of the labor force and giving up on the search for work? And why are they no longer looking for work? The following graphs give some interesting information about this, though they don’t provide the answer.

The first one shows the “labor force participation rate” (LFPR), which counts the percentage of the total population that is either employed or actively looking for work. As you can see from the brown line, it has fallen quite a bit over the past couple of years, and shows no sign of picking up yet. The blue line shows the LFPR for women only. It rose a lot during the 1990s, and interestingly, hasn’t fallen. That gives us one piece of information about who’s leaving the labor force: they’re men, not women.

The second graph breaks the labor force into education categories. The brown line shows the LFPR for all people who are over 25 years old but never completed high school. The blue line shows people over 25 who have a college degree. The results really surprise me, but there they are: more poorly educated people are working, while more college educated people are dropping out of the labor force.

What’s the explanation? I honestly don’t know. Maybe this reflects a boom in low-skill jobs and a dearth of high-skill jobs in the US economy? Or maybe it’s a reflection of the growing income inequality in the US — well-educated (and thus wealthier) families have gotten so rich that can afford to have one member of the family stay home, while families who earn relatively little are being forced to work more to maintain their income. Or maybe it reflects a shift in preferences — perhaps some well-educated people are deciding that their families are more important than finding a new job?

If anyone has another good theory to explain these facts, I’d love to hear it.


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A Surprising Unemployment Report

The BLS reported this morning that the US economy created a net grand total of 1,000 jobs in December, according to the Department of Labor’s survey of businesses. That’s pretty bad. Surprisingly bad, in fact. According to the less reliable household survey, the US economy lost 54,000 jobs in December.

The good news is that the unemployment rate went down to 5.7%. That’s less bad. But since jobs aren’t being created, the only reason the unemployment rate is falling must be people dropping out of the labor force. Which is probably also bad.


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Giant, Happy-Fun, Credit Card Party

Mark Kleiman points to and excerpts a piece, Sustained Budget Deficits: Longer-Run U.S. Economic Performance and the Risk of Financial and Fiscal Disarray, by Peter Orzag (Brookings), Robert Rubin (Citigroup), and Allen Sinai (Decision Economics). (Synopsis here; full paper here.) I could blather on about the importance of inflation expectations, as well as consumer and investor confidence, to the smooth functioning of financial markets and the economy in general. But instead I’ll try an analogy.

If I were willing to max out my credit cards, I could have a really wild two or three week bender in Las Vegas. Not Dollar Bill Bennett style by any stretch, but a great time nonetheless. Until the supply of credit dwindles and the bills come due, at which point the good times cease.

If only there was some way I could pass the bills off to someone else, say my children and yours, and I didn’t particularly care about the well-being of those children, then everything would be fine and I could have my Las Vegas bender. This plan, in a nutshell, is precisely the economic policy of Bush and the Congressional Republicans.


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Compassionate Conservatism?

What Army bureaucrat thinks that this is reasonable behavior for a civilized society?

Amanda Bolduc on Wednesday was holding on tightly to her 3-month-old son, taking advantage of every last minute, memorizing his every feature — she won’t see him again for a very long time.

The young mother, a 2nd Lieutenant in the Army National Guard, has been deployed to Iraq. She will have to leave Brayden behind for the next 18 months while she serves with the 133rd Engineering Battalion.

Chalk it up as another cost of this war.


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Kash’s Call #1: China and the Yuan

I’ve gone back and forth on this one a bit, but this is my first prediction: China will maintain the yuan’s peg to the dollar throughout 2004.

Why? The key is China’s banking sector. I know, “the banking sector” sounds like an incredibly boring answer, but for better or worse it’s often the lynchpin of the whole economy. So let me explain. No, there is too much. Let me sum up.

Think of it this way. If China revalues (changes the exchange rate so the yuan is stronger), that will depress exports, reduce inflation, and cause holders of dollar assets in China to take a significant capital loss. On the other hand, if China holds the exchange rate constant, exports continue to boom and inflation rises.

But a bit of inflation is exactly what China wants right now. China has been flirting with deflation for a couple of years, and as fester reminded us yesterday, China now has a potential banking crisis to contend with. China’s banks are groaning under the weight of loans that borrowers can’t repay.

This sounds eerily like the situation in Japan in about 1990 or 1991. To cap off the analogy, note that China is also experiencing a housing market bubble, just like Japan at that time. Japan’s nemesis throughout the 1990s became deflation, which makes banking problems much worse. (It’s easier for borrowers to repay fixed loan amounts when prices – and hence their revenues – are rising rather than falling.)

China’s policymakers are aware of this. That’s why they will welcome some inflation – both to keep out of the deflationary spiral that ensnared Japan, and also to help improve the solvency of their banks. China is under significant pressure to turn its banks around fast, by the way, because according to WTO rules China must open its banking sector up to foreign competition by 2006. A bit of inflation would make the job that much easier. By contrast, a revaluation that causes banks to lose money on their dollar assets would make it that much harder.

One last note: As I already predicted back in August (remember, I get to remind you of those predictions I’ve made that were right), what China does with the yuan has become increasingly important, both politically and economically. That’s why my first 2004 prediction has to do with the value of the yuan. Economic events in China will have a bigger impact on the US than events in any other country. As a result, almost all of my other predictions depend on this one. So I’m going to start off the year guessing that China will hold the yuan where it is.


p.s.: I’m sure lots of you will disagree with me on this one, as well as my other calls; I’m looking forward to finding out why!

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The IMF Criticizes Bush’s Economic Policy

Yesterday the IMF released a paper called “U.S. Fiscal Policies and Priorities for Long-Run Sustainability.” In it, the IMF delivers a surprisingly sharp criticism of the Bush administration’s fiscal policy. It’s the first time that I’m aware of that the IMF has criticized US policy in such strong terms. You can find the paper here, but I’ll give you a few highlights:

  • The stimulus effect of current fiscal policy will taper off and be replaced by higher interest rates, crowding out of investment, and therefore lower productivity growth in the US: “In one simulation, for example, the tax cuts would eventually lower U.S. productivity—in terms of labor output per hour—by ½ percent in the long run.”
  • This harmful increase in interest rates will affect the rest of the world, too: “Simulations reported in Section II suggest that a 15 percentage point increase in the U.S. public debt ratio projected over the next decade would eventually raise real interest rates in industrial countries by an average of ½–1 percentage point.”
  • The US is racking up a dangerous amount of foreign debt: “The United States is on course to increase its net external liabilities to around 40 percent of GDP within the next few years—an unprecedented level of external debt for a large industrial country (IMF, 2003b).
  • Social security is at serious risk: “The fiscal imbalance [over the next 75 years, including future entitlement liabilities] is as high as $47 trillion, nearly 500 percent of current GDP… Closing this fiscal gap would require an immediate and permanent 60 percent hike in the federal income tax yield, or a 50 percent cut in Social Security and Medicare benefits.”

The IMF’s conclusion is that it is not quite too late to avoid a fiscal disaster in the US… but that time is quickly running out, and the negative consequences of failure will be severe, both for the US and for the rest of the world.

This is all old hat to readers of Angry Bear, I’m sure. So what may be most significant about this report is simply that the IMF was willing to be so critical of the Bush administration’s fiscal policy management. The IMF is traditionally directed to a fair degree by the US Treasury Department, and rarely (never?) criticizes the US, as a result. I guess that tradition didn’t hold true this time.


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Ready for 2004

I’m finally back at my desk, after a couple of weeks of some play and some more work. After clearing off enough mail so that I can now actually SEE it (my desk, that is), I’m now ready to write again. One of the first things I’ll be doing is giving you some predictions for the year 2004. You just have to promise me that by December of 2004 you will have forgotten all of them. That way I can just remind you of those predictions that turned out to be right on the mark. Otherwise it doesn’t work. Deal?

By the way, thanks to fester for his help over the last couple of weeks. (The timing of this post worked out curiously well as a virtual handoff, don’t you think?) I’m looking forward to catching up on his writing.


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Fester’s Last Guest Post

I would like to thank Angry Bear and Kash for allowing me to guest blog for the past two weeks here at Angry Bear. I have had a wonderful time learning from your comments and reactions to my writing. I greatly appreciate the opportunity to write before such a large and diverse audience of serious policy wonks, economists, casual bloggers and innately curious people. This has been a fun challenge and I would like to be able to do this again sometime in the future, but right now I am out of anything that I recognize as a good idea worthy of a post here on Angry Bear, so I’m pulling back to writing over at my blog, Fester’s Place.

Thank you and adieu.

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