Brad DeLong

Video: Brad DeLong and Oscar Landerretche, "The Politics of Inequality": Berkeley Center for Latin American Studies

http://www.youtube.com/watch?v=80zPkYzDFfU

Earlier

The Scary Thing Is That in Three Hours I Could Write a 1000-Word Study with Tables and Charts Projecting That the Romney Plan Will Generate Twelve Million Jobs Before 2017...

It's trivially easy to do:

• Project labor force growth over 2000-2008 forward--thus you have already baked the retirement of the baby boomers into your projections.
• Estimate the full-employment level of the unemployment rate at its 5% average 1993-2007 value.
• Commit President Romney's administration to fiscal, monetary, and financial policies to support a return to full employment within four years.

And you get a projection of 15 million new jobs over the next four years.

Then you be prudent, and say that you are not confident the economy can recover from more than 80% of the burden of the downturn, and you are at 12 million.

Now I would not make such a projection--I don't think we are going to get even 80% of the way back to a 2000-2008 labor force trend growth definition of "full employment" over the next four years. I don't see the policies that would produce such an outcome being implemented.

But at some point the Romney campaign sat down and said "we are going to commit the candidate to policies that ail produce a strong recovery. How strong a recovery can we reasonably claim these policies would produce?" And then they should have gone and asked somebody to write up a study that did some projections so that they would know.

But they never asked anybody to write the study…

Can't any Republicans play this game?

Thomas Gabe and Julie Whittaker: Antipoverty Effects of Unemployment Insurance

http://www.fas.org/sgp/crs/misc/R41777.pdf

Laura Tyson: Closing America’s Jobs Deficit

http://www.project-syndicate.org/commentary/schools--skills--and-jobs-in-the-united-states-by-laura-tyson

Increased Government Purchases Right Now Are Self-Funding...

…and reduce the effective debt-to-GDP burden of a country:

• For a multiplier μ of 1.5 and a marginal tax revenue share of GDP τ of 1/3…
• When a credit-worthy government can borrow at a real interest rate r of zero…
• If the hysteresis parameter η--the share of this year's demand-side production shortfall that turns into a persistent supply-side potential output shortfall next year--is larger than the decay parameter ρ--the speed with which persistent but not permanent hysteresis effects go away.

This is a very, very easy hurdle to jump. For any credit-worthy sovereign--or for anybody who can borrow on the credit of any credit-worthy sovereign--it is fiscal expansion now that reduces the effective debt, and fiscal austerity that increases it.

This is really not rocket science, people. Arguments that austerity makes sense are arguments that the multiplier μ is not 1.5 but 0.5, and that the relevant interest rate r is not the interest rate currently on offer or any future interest rate forecastable off of the term structure but rather something much much higher that will appear with the imminent arrival of the bond market vigilantes.

We in the North Atlantic have now been waiting for the bond market vigilantes for five years. Here in Japan they have been waiting for the bond market vigilantes for 25 years.

Paul Ryan, Mitt Romney, George W. Bush, and Social Security Privatization Done Wrong

Josh Marshall:

Etch-A-Sketch Urgently Needed: Biden got Ryan to admit that he and Romney supports at least the principle of eliminating Social Security and replacing it with private accounts. In other words, the 2005 Bush plan.

The things wrong with the 2005 Bush Social Security-privatization plan were:

1. that it started with a bunch of unfunded benefit increases.
2. that it was a carve-out of existing Social Security, not an add-on.
3. that there was no backstop proposed to deal with people who gambled with their Social Security money and lost it all.
4. that the program was structured so that the government was basically lending you your Social Security benefit money at an interest rate of 3% plus inflation--and requiring that you pay it back.

At an interest rate of 1%, the money you have to pay back in 35 years is 40% larger than the principal your borrow. At an interest rate of 2%, the money you have to pay back is twice. At an interest rate of 3%, the money you have to pay back is three times as large as the principal you borrow.

The numbers of the Bush plan were such that it meant that an awful lot of people older than 70 would be destitute under such a system--but for a Randite like Paul Ryan, destitution of the unthrifty (and unlucky) old is a virtue.

I am fine with having the government invest the Social Security trust fund in equities--it can bear the risk. I am fine with private accounts as an add-on. I am not fine with financially-unsophisticated individuals being charged 3% plus inflation per year as they gamble their Social Security retirement tranche on the stock market.

IMF: World Economic Outlook: October 2012

http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf

This Month's Household Report

Justin Wolfers: The scorecard: Private sector job growth under Bush: -646k. Under Obama: +967k

The scorecard: Private sector job growth under Bush: -646k. Under Obama: +967k. blogs.wsj.com/economics/2012… (via @reddy)

— Justin Wolfers (@justinwolfers) October 5, 2012

Heidi Shierholtz: Job gain steady, unemployment drops to 7.8%

http://www.epi.org/publication/job-gain-steady-unemployment-drops/

Romney: 'This Is Not What A Real Recovery Looks Like': A RomneyCovery Sees Falling Wages and Rapidly Rising Private Equity Values!

http://livewire.talkingpointsmemo.com/entry/romney-this-is-not-what-real-recovery-looks

Flash: Unemployment Rate Now Lower than When Obama Took Office

W00T!! W00T!! W00T!!: This is the household survey that we have been waiting for!

BLS Employment Release: Talking Points: October 5, 2012:

• W00T!! W00T!! W00T!!: This is the household survey that we have been waiting for. This is the household survey we seek: +863,000 jump in the number of employed on the household survey.

• Unfortunately, the establishment survey is no great shakes: only +114,000

• Over all, the labor-market pattern remains the pattern of the past two years.

• The U.S. economy continues to grow--but not at a pace fast enough to rapidly reduce the number of people without jobs.

• Employment grows, but the number without jobs does not diminish or diminishes only slowly.

• The number of unemployed is continuing to fall--but that is mostly because people are dropping out of the labor force.

• The U.S. economy is thus doing much better than our partner industrialized nations across the North Atlantic--where the number of workers without jobs is increasing again, and where there economies are again in recession.

• Job growth is inadequate because spending is too low: aggregate demand is less than aggregate supply, less than the economy's productive potential.

• Business's willingness to spend is boosted by the Federal Reserve's extraordinarily low interest rates and retarded by fear that recession will come again. These offset each other. Business confidence and spending is not a source of strong recovery, but it is not a drag on the economy right now.

• Housing construction is a big drag on the economy. Few people are willing to build houses because they fear when they try to sell them they will be competing with a new wave of forced foreclosure sales. The failure to rework and refinance underwater loans is the biggest source of slow recovery.

• For this, blame Rick Santelli and the Tea Party--the fear that somebody might be getting something they don't deserve has kept the government from doing its proper job to deal with the aftermath of the financial crisis, and paralyzed housing finance and housing construction for four years.

• Government is a big drag on the economy. Governments are still firing a lot of people.

• This is the second major policy error. In the Bible, Joseph tells Pharaoh that the government should run very large surpluses during boom years and then spend and run very large deficits during bust years. But right now we have a government that knows not Joseph.

• Clinton ran big surpluses (and Gore was planning to run big surpluses) during boom years. George W. Bush deliberately threw that policy away. Now we are in the position where we ought to run even bigger deficits until the economy recovers, but we are not sure if we can afford to.

• Four years ago I would have said that the odds were 50-50 that we could afford to run bigger deficits until the economy recovers. Now I think the odds are 90-10. That's a risk worth taking to boost spending and put people back to work.

• Now it is time for the government to remember Genesis 41:36, and the story of Joseph and Pharoah's dream.

Private nonfarm payroll employment increased by 162 thousand from August to September on a seasonally adjusted basis, according to the ADP National Employment Report

Yes, Jim Medoff Moved the Needle

Andy Harless writes:

Employment, Interest, and Money: James Medoff, Stagflation, the Phillips Curve, and the Greenspan Boom: James Medoff, my thesis advisor in graduate school and later my collaborator and business associate, died on Saturday, September 15 after a long struggle with multiple sclerosis.  In the field, he was probably best known for his work on labor market institutions, and particularly for his work with Richard Freeman on the impact of unionization. But… I was a student of macroeconomics… I was intrigued by a paper he had written with Katharine Abraham entitled “Unemployment, Unsatisfied Demand for Labor, and Compensation Growth, 1956-1980.”… [T]he Medoff-Abraham paper… said was that there was not nearly as much “stag” in the stagflation as we thought.  The labor market, it suggested, had been booming during much of the 1970’s despite the appearance of high unemployment.  The implication was that the unemployment of the 1970’s was largely “structural”… once you realized that, the accompanying inflation shouldn’t surprise you.

The Republican Noise Machine and Mitt Romney: The Con Artist Conned

Let's go back to May, to Boca Raton Florida, to the mansion of Sun Capital private equity magnate Marc Leder:

Mitt Romney is trying to raise money. He is speaking to those who have paid $50,000 a plate. He is telling them that he will do his part and speak to America. And he is telling them that he needs them to give a lot more money so that he can run enough ads to win:

MITT ROMNEY: Frankly, what do I need you to do? Just to raise millions of dollars, because the president's going to have about $800 to $900 million. That is by far the most important thing you can do.

FEMALE VOICE: Is find (UNINTEL).

MITT ROMNEY: You don't have the capacity to speak to hundreds of thousands of people. I will be in those debates. There will be 150 million Americans watching me. If I do well, it will help. If I don't, it won't help.

MALE VOICE: Your debates are incredible. (APPLAUSE)

MITT ROMNEY: Thank you. Advertising makes a difference. The president will engage in a personal character assassination campaign, and so we will have to fire back: one, on defense; and two, on offense. That will take money. You will see the ads here in Florida. It will be one of those states that is a key state. All the money will get spent in ten states. And this is one of them.

Then Romney talks about how they will get a good return on their investment in his campaign. He is, he says, (i) not yet well-known and still (ii) nearly tied with the President in the polls--and that is good news for his odds of winning in November:

Things I Said and Things I Did Not Say at the BPEA

(1) Thoughts on Case, Shiller, and Thompson: I would argue for use of the time machine to go back to 2000 and add more questions to the past decade's surveys. What we want to see are not the expectations of the average home buyer, but of the marginal buyer and the marginal non-buyer. In interpreting the surveys, I find myself trying to mark down the trimmed-mean of the survey to the expectations of the marginal buyer, and wondering how that markdown changes over time.One thing this paper has made me think is that I should place greater weight on credit standards in understanding the bubble. There will always be people who are overoptimistic.

 

And even if you are not overoptimistic, radical uncertainty about the long-run has powerful implications for how people should invest in long-duration assets like housing. In a non-recourse state like California, the optimal housing strategy is obvious: (i) build good relationships with your children so that you trust them with your assets, (ii) buy the largest house possible, (iii) mortgage it to the gills, (iv) pass all your assets--including claims to future earning power--down to your children, and (v) sit back and wait, and either be rich or live off your children. (In recourse states things are more complicated.)

 

This means that credit standards--especially when combined with the fact that the professionals in the housing business are all neither agents of the buyer nor agents of the seller but rather agents of the deal--seem to be even more important than I thought they were before I looked at this paper.

Jonathan Chait: Why Washington Accepts Mass Unemployment

Jonathan Chait: Why Washington Accepts Mass Unemployment:

In the years since the collapse of 2008, the existence of mass unemployment has stopped being something the economic powers that be even pretend to regard as a crisis. To those directly impacted, the economic crisis is an emergency, a life-altering disaster the damage from which will endure for years. But most of those in a position to address it simply have not seen it in such terms. History will record that the economic elite has viewed the economic crisis from a perspective of detached complacency....

The Obama administration has tried to prevail upon Edward DeMarco, the acting director of the Federal Housing Finance Agency, to offer lower mortgage rates to underwater home owners through Fannie Mae and Freddie Mac, which he controls. What interests me is not the proposal itself, nor even DeMarco’s obstinate refusal, but an editorial in the Washington Post applauding DeMarco for refusing to implement the program. The Post is the voice of the Washington centrist establishment, and the logic of the editorial is a telling signpost. The Obama administration had argued to DeMarco that the mortgage relief was a pure win-win. Not only would the lower mortgage rates provide relief to Americans desperate to keep their homes, and secondarily to give them more purchasing power for other things that would provide a small economic stimulus, it would save the government money: with lower mortgage rates, fewer would default on their government-owned mortgages. DeMarco replied that he believed the taxpayers would end up spending money on the deal: not much, but some. The Post’s thumbs-up editorial of DeMarco endorsed the reasoning that only a relief program that could be assured to cost the taxpayers nothing was worthwhile. It concluded, “with signs multiplying that the housing market may be finally bottoming out without this additional stimulus, perpetuating this particular battle does not strike us as the best use of the secretary’s time.”...

It’s important to respond to arguments on intellectual terms and not merely to analyze their motives. Yet it is impossible to understand these positions without putting them in socioeconomic context. Here are a few salient facts: The political scientist Larry Bartels has found (and measured) that members of Congress respond much more strongly to the preferences of their affluent constituents than their poor ones. And for affluent people, there is essentially no recession.... I live in a Washington neighborhood almost entirely filled with college-educated professionals, and it occurred to me not long ago that, when my children grow up, they’ll have no personal memory of having lived through the greatest economic crisis in eighty years. It is more akin to a famine in Africa. For millions and millions of Americans, the economic crisis is the worst event of their lives. They have lost jobs, homes, health insurance, opportunities for their children, seen their skills deteriorate, and lost their sense of self-worth. But from the perspective of those in a position to alleviate their suffering, the crisis is merely a sad and distant tragedy.

At Least the Labor Market Isn't Collapsing Further...

Why I Am Not Happy This Morning

RT @justinwolfers: Most depressing fact of the two conventions: The political invisibility of the unemployed.

— felix salmon (@felixsalmon) September 7, 2012

A Payroll Report 513,000 Better than It Was Four Years Ago!: Yes, We Are Better Off Now Than We Were Then Before

And the Bureau of Labor Statistics Reports:

Employment Situation Summary: Total nonfarm payroll employment rose by 96,000 in August, and the unemployment rate edged down to 8.1 percent…. The number of unemployed persons, at 12.5 million, was little changed…. [T]he number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 5.0 million. These individuals accounted for 40.0 percent of the unemployed…. Both the civilian labor force (154.6 million) and the labor force participation rate (63.5 percent) declined in August. The employment-population ratio, at 58.3 percent, was little changed….

Total nonfarm payroll employment rose by 96,000 in August. Since the beginning of this year, employment growth has averaged 139,000 per month, compared with an average monthly gain of 153,000 in 2011…

Private Payrolls: Bush and Obama

Are you better off than you were four years ago? Just saying…

Obama:

Bush first term:

---

Obama 2012:

Bush 2008:

WOOT!!: ADP Employment Report: +201,000 SA: UPDATE: Alas, Once Again ADP > BLS

In my email from Macro Advisors:

Private nonfarm payroll employment increased by 201 thousand from July to August on a seasonally adjusted basis, according to the ADP National Employment Report. This is above consensus expectations of a 125 thousand increase.

This Friday's Payroll Employment Number Will Be a 500,000 Win for Obama

Pdacosta:

pdacosta: I'm not sure the #AreYouBetterOff hashtag is a great bet for Republicans. Four years ago, Sept. payrolls came in at -432,000.

 

 

A Very Different World than 2000...

Immigration, the Size of Government, the Modern American Republican Party, and Poor Deluded Adam Ozimek's Self-Deception

You know, modern American Republicans' self-image is of a rugged individualist, upwardly-mobile, eager to take risks and strike out for new frontiers, a pioneer willing to move thousands of miles and become a stranger in a strange land in search of opportunity--and somebody who does not care about and is not obedient to picky bureaucratic rules and regulations.

In short, their self-image is that he is an illegal immigrant from Oaxaca.

But modern American Republicans really do not like illegal immigrants from Oaxaca. Especially Paul Ryan does not like them:

Sara Inés Calderón: Paul Ryan Compares Latinos To Animals, Decries "Anchor Babies": Yesterday, Wisconsin Congressman Paul Ryan held several town halls, one of which stirred up the topic of immigration and so-called “anchor babies.”… Ryan… noted that “anchor babies cost money,” which is like saying U.S. citizen children cost money — how is it worse when they’re Latino kids?…

Ryan began to talk about border security, saying that “catch and release” doesn’t work. “Are you talking about people or fish?” a woman in bold framed glasses blurted out…

This has implications for the smart but sadly deluded Adam Ozimek, who continues to carry water for a Republican Party that simply does not exist in modern America:

Larry Summers is Wrong About Unshrinkable Government: I don’t regard government being a growing share of the economy as inevitable, or as only avoidable with drastic and painful cuts in spending. He ignores the obvious but often ignored example of more immigration, and in particular, more high skilled immigration. You might argue that this is too unpopular to be discussed, but part of the unpopularity is that economists too often decide that this solution isn’t worth mentioning. If we instead reminded people of this fix as consitently as it merited, it would be a lot harder to ignore….

[M]ost of the decline in the ratio of workers to retirees happens when by 2030, when the ratio falls from 4.84 to 2.96. The working age population over this period increases around 10%, from 195 million to 214 million. The number of retirees, in contrast, increases by 80%. Workers increase by 19 million while retirees increase by 32 million. So for a start we could increase the expected number of immigrants by 23 million, or 1.15 million more per year, and increase the number of workers by the same amount as the number of retirees.

If we wanted to maintain the ratio of 4.8 workers to retirees, we would need… an extra 3.5% of workers starting in 2010, or 6.7 million a year on average. To put that in context we currently have around a million new citizens a year…. [W]e could drastically reduce the number needed if we focused on allowing high-skilled immigrants in…. [C]onservatives more than anyone should support more high-skilled immigrants, since this is our best chance at preventing Larry Summers’ predicted unshrinkable government from coming true.

If Adam wants his dream of an America open to high-skilled immigrants to have a chance of coming true--and that would be a very good thing for the world, as it turns out to be much easier to move people to where there are good institutions than to move good institutions to where there are people--then he needs to join us on this side of the aisle working to end the modern Republican Party as we know it and return to an America that welcomes immigrants as our brothers and sisters rather than, as the modern Republican Party does, both fears them and--since it is no longer politically viable to expressly call for discrimination against African-Americans (save for closing the polling stations in their neighborhoods early)--seeks to discriminate against them.

Then we could focus on what kind of safety net is needed to make higher rates of immigration win-win for current Americans and the world as a whole.

Come across the aisle, Adam! Join those of us ex-professional bipartisans who have given up on the modern Republican Party!

The Depressing Situation in Europe: Fred Bergsten and What Does "Resolve Each Successive Stage of the Crisis" Mean?

Fred Bergsten is perhaps the last optimist about the euro: He writes, in Foreign Affairs:

The eurozone countries have demonstrated that they can and will resolve each successive stage of the crisis by cooperating and sharing decision-making powers.

When I came to his piece I was terrified about the economic future of Europe: I had moderated a panel composed of Barry Eichengreen and Wolfgang Munchau last month in Rio de Janiero that had made me want to hide under the table and not want to come out.

I hoped Bergsten's piece would restore my equilibrium.

But Bergsten's attempt to convince me to worry less and be happier failed: "if this is the strongest argument for optimism he can come up with..." I found myself thinking. The key problem is that Bergsten has an unusual definition of "resolve". So now I am hiding under the table, and so blogging from my iPad.

Depressing Graph of the Day: The Quasi-Beveridge Curve

The Beveridge Curve plots the unemployment rate against the vacancy rate--the ratio of vacancies to the labor force. This quasi-Beveridge Curve plots the employment-to-adult population ratio against the vacancies-to-adult-population ratio:

If you think that "full employment" in the United States today is a vacancies-to-adult-population ratio of no more than two percent, and if you think that each percentage-point rise in the vacancy rate going forward will be associated with a no more than 5 percentage-point rise in the employment-to-population ratio, then…

The headroom for demand expansion without inflation is now down to 2.25% of the adult population on the employment-to-population ratio: "full employment" is now an employment-to-population ratio of 60.8%.

2.25% of the adult population is still 5.5 million workers: we could still put 5.5 million more people to work with appropriate demand-management policies.

But restoring the employment-to-population ratio to 63%? Boosting American employment by 10.7 million to get us back to the--completely sustainable--employment-to-population ratio of the pre-crisis era?

I look at this graph and I do not see how it can be done, absent truly massive and successful public active labor market policies to better match workers to jobs…

A Good Payroll Employment Number!

The Bureau of Labor Statistics reports:

Employment Situation Summary: Total nonfarm payroll employment rose by 163,000 in July, and the unemployment rate was essentially unchanged at 8.3 percent…. In July, the number of long-term unemployed (those jobless for 27 weeks and over) was little changed at 5.2 million. These individuals accounted for 40.7 percent of the unemployed.

Both the civilian labor force participation rate, at 63.7 percent, and the employment-population ratio, at 58.4 percent, changed little in July.

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged at 8.2 million in July. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

In July, 2.5 million persons were marginally attached to the labor force, down from 2.8 million a year earlier. (These data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

That we regard this as a good employment report is just one sign of how far we have been beaten down…

"Hopeless Unemployment" by J. Bradford DeLong | Project Syndicate

"Hopeless Unemployment" by J. Bradford DeLong | Project Syndicate: BERKELEY – However bad you think the global economy is today in terms of the business cycle, that is only one lens through which to view the world. In terms of global life expectancy, total world wealth, the overall level of technology, growth prospects in emerging economies, and global income distribution, things look rather good, while on still other dimensions – say, global warming or domestic income inequality and its effects on countries’ social solidarity – they look bad.

Even on the business-cycle dimension, conditions have been far worse in the past than they are today. Consider the Great Depression and the implications of market economies’ inability back then to recover on their own, owing to the burden of long-term unemployment.

But, while we are not at that point today, the Great Depression is no less relevant for us, because it is increasingly likely that long-term unemployment will become a similar impediment to recovery within the next two years.

At its nadir in the winter of 1933, the Great Depression was a form of collective insanity. Workers were idle because firms would not hire them; firms would not hire them because they saw no market for their output; and there was no market for output because workers had no incomes to spend.

By that point, a great deal of unemployment had become long-term unemployment, which had two consequences. First, the burden of economic dislocation was borne unequally. Because consumer prices fell faster than wages, the welfare of those who remained employed rose in the Great Depression. Overwhelmingly, those who became and remained unemployed suffered the most.

Second, reintegrating the unemployed even into a smoothly functioning market economy would prove to be very difficult. After all, how many employers would not prefer a fresh entrant into the labor force to someone who has been out of work for years? The simple fact that an economy had recently undergone a period of mass unemployment made it difficult to recover levels of growth and employment that are often attained as a matter of course.

Devalued exchange rates, moderate government budget deficits, and the passage of time all appeared to be equally ineffective remedies. Highly centralized and unionized labor markets, like Australia’s, did as poorly as decentralized and laissez-faire labor markets, like that of the United States, in dealing with long-term unemployment. Fascist solutions were equally unsuccessful, as in Italy, unless accompanied by rapid rearmament, as in Germany.

In the end, in the US, it was the approach of World War II and the associated demand for military goods that led private-sector employers to hire the long-term unemployed at wages they would accept. But, even today, economists can provide no clear explanation of why the private sector could not find ways to employ the long-term unemployed in the near-decade from the winter of 1933 to full war mobilization. The extent of persistent unemployment, despite different labor-market structures and national institutions, suggests that theories that pinpoint one key failure should be taken with a grain of salt.

At first, the long-term unemployed in the Great Depression searched eagerly and diligently for alternative sources of work. But, after six months or so passed without successful reemployment, they tended to become discouraged and distraught. After 12 months of continuous unemployment, the typical unemployed worker still searched for a job, but in a desultory fashion, without much hope. And, after two years of unemployment, the worker, accurately expecting to be at the end of every hiring queue, had lost hope and, for all practical purposes, left the labor market.

This was the pattern of the long-term unemployed in the Great Depression. It was also the pattern of the long-term unemployed in Western Europe at the end of the 1980s. And, in a year or two, it will be the pattern again for the long-term unemployed in the North Atlantic region.

I have been arguing for four years that our business-cycle problems call for more aggressively expansionary monetary and fiscal policies, and that our biggest problems would quickly melt away were such policies to be adopted. That is still true. But, over the next two years, barring a sudden and unexpected interruption of current trends, it will become less true.

The current balance of probabilities is that two years from now, the North Atlantic’s principal labor-market failures will not be demand-side market failures that could be easily remedied by more aggressive policies to boost economic activity and employment. Rather, they will be structural market failures of participation that are not amenable to any straightforward and easily implemented cure.

Sliding Into The Great Depression

Sliding Into The Great Depression: At its nadir, the Depression was collective insanity. Workers were idle because firms would not hire them to work their machines; firms would not hire workers to work machines because they saw no market for goods; and there was no market for goods because workers had no incomes to spend.

Long-term unemployment means that the burden of economic dislocation is unequally borne. Since the prices workers must pay often fall faster than wages, the welfare of those who remain employed frequently rises in a depression. Those who become and stay unemployed bear far more than their share of the burden of a depression. Moreover the reintegration of the unemployed into even a smoothly-functioning market economy may prove difficult, for what employer would not prefer a fresh entrant into the labor force to someone out of work for years? The simple fact that an economy has recently undergone a period of mass unemployment may make it difficult to attain levels of employment and boom that a luckier economy attains as a matter of course.Once an economy had fallen deeply into the Great Depression, devalued exchange rates, prudent and moderate government budget deficits (as opposed to the deficits involved in fighting major wars), and the passage of time all appeared equally ineffective ways of dealing with long-term unemployment. Highly centralized and unionized labor markets like Australia's and decentralized and laissez-faire labor markets like that of the United States did equally poorly in dealing with long-term unemployment. Fascist "solutions" were equally unsuccessful, as the case of Italy shows, unless accompanied by rapid rearmament as in Germany.

Even today, economists have no clean answers to the question of why the private sector could not find ways to employ its long-term unemployed. The very extent of persistent unemployment in spite of different labor market structures and national institutions suggests that theories that find one key failure responsible should be taken with a grain of salt.

But should we be surprised that the long-term unemployed do not register their labor supply proportionately strongly? They might accurately suspect that they will be at the end of every selection queue. In the end it was the coming of World War II and its associated demand for military goods that made private sector employers wish to hire the long-term unemployed at wages they would accept.

At first the unemployed searched eagerly and diligently for alternative sources of work. But if four months or so passed without successful reemployment, the unemployed tended to become discouraged and distraught. After eight months of continuous unemployment, the typical unemployed worker still searches for a job, but in a desultory fashion and without much hope. And within a year of becoming unemployed the worker is out of the labor market for all practical purposes: a job must arrive at his or her door, grab him or her by the scruff of the neck, and through him or her back into the nine-to-five routine if he or she is to be employed again.

This is the pattern of the long-term unemployed in the Great Depression; this is the pattern of the long-term unemployed in Western Europe in the 1990s. It appears to take an extraordinarily high-pressure labor market, like that of World War II, to successfully reemploy the long-term unemployed.

The Big Problem with Choosing a Bain CEO as President of the United States Isn't Outsourcing...

Bob Reich gets it exactly right:

Robert Reich: The Problem Isn't Outsourcing. It's that the Prosperity of Big Business Has Become Disconnected from the Well-Being of Most Americans: Forget the debate over outsourcing. The real question is how to make Americans so competitive that all global companies — whether or not headquartered in the United States — will create good jobs in America. Apple employs 43,000 people in the United States but contracts with over 700,000 workers overseas. It assembles iPhones in China both because wages are low there and because Apple’s Chinese contractors can quickly mobilize workers from company dorms at almost any hour of the day or night. But low wages aren’t the major force driving Apple or any other American-based corporate network abroad. The components Apple’s Chinese contractors assemble come from many places around the world with wages as high if not higher than in the United States.

More than a third of what you pay for an iPhone ends up in Japan, because that’s where some of its most advanced components are made. Seventeen percent goes to Germany, whose precision manufacturers pay wages higher than those paid to American manufacturing workers, on average, because German workers are more highly skilled. Thirteen percent comes from South Korea, whose median wage isn’t far from our own....

Put simply, America isn’t educating enough of our people well enough to get American-based companies to do more of their high-value added work here. Our K-12 school system isn’t nearly up to what it should be. American students continue to do poorly in math and science relative to students in other advanced countries. Japan, Germany, South Korea, Canada, Australia, Ireland, Sweden, and France all top us. American universities continue to rank high but many are being starved of government funds and are having trouble keeping up.... China, by contrast, is investing like mad in world-class universities and research centers. Transportation and communication systems abroad are also becoming better and more reliable. In case you hadn’t noticed, American roads are congested, our bridges are in disrepair, and our ports are becoming outmoded.

So forget the debate over outsourcing. The way we get good jobs back is with a national strategy to make Americans more competitive.... But big American-based companies aren’t pushing this agenda.... They want lower corporate taxes, lower taxes for their executives, fewer regulations, and less public spending....

Mitt Romney’s Bain Capital is no different from any other global corporation — which is exactly why Romney’s so-called “business experience” is irrelevant to the real problems facing most Americans...

I would not say "irrelevant". I would say actively harmful.

Noah Smith: Fake Microfoundations Are Worse than None at All

Noah Smith:

Noahpinion: Microfoundations would be nice if we had them: [T]he big problem with "microfounded" macro, as I see it, is that the "microfoundations" are bad: not credible, and generally not consistent with anything microeconomists have actually found. Bad microfoundations are worse than none at all.

Indeed. Equities are not claims to the fruit of a fixed number of trees with fruit amounts that drop according to a random walk with drift. The underlying technologically-limited potential productivity of workers does not drop in a recession. People are not trapped on islands, knowing their nominal wages but uncertain of the prices of the goods and services they will buy with those wages.

The Macroeconomic Situation, and My Calendar This Morning

My calendar this morning:

• 0800: Curl up into a ball on the floor
• 0830: Whimper
• 0900: Lapse into catatonia
• 0930: Revert to whimpering
• 1000: Sobbing
• 10:30: Return to catatonia

Ryan Avent, by contrast, is still able to use his words:

BEN BERNANKE is on Capitol Hill today, providing his semi-annual commentary on the state of monetary policy. The backdrop for this testimony is as dark as it's been in some time. We would expect the American economy to manage trend growth in nominal output of about 5%… 3% real annual GDP growth and 2% annual inflation, give or take. In the 11 quarters since the end of the recession, NGDP growth has come in at more than a 5% annual rate only twice…. [W]e would expect consistent above-trend growth during the recovery to make up some of the lost ground.

In the first quarter of 2012, NGDP grew at a 3.9%…. Tracking estimates… for the April-June period… an NGDP growth rate of no more than 1.5%…. Mr Bernanke's testimony says as much:

The pace of economic recovery appears to have slowed during the first half of this year, with real gross domestic product (GDP) likely having risen at only a modest pace. In the labor market, the rate of job gains has diminished recently, and, following a period of improvement, the unemployment rate has been little changed at an elevated level since January…. With the unemployment rate expected to remain elevated over the projection period and ination generally expected to be at or under the Committee’s 2 percent objective, most participants expected that...the federal funds rate would remain extraordinarily low for some time...In addition to projecting only slow progress in bringing down unemployment, most participants saw the risks to the outlook as weighted mainly toward slower growth and higher unemployment.

Mr Bernanke ought to be brimming with apologies for such miserable performance. Instead, he simply notes:

The Committee again stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability...

One might expect the chairman's Congressional audience to respond by saying, "Wait, the committee believes that it could take additional action and that such action would promote a stronger recovery and sustained improvement in labour market conditions? What in heaven's name are you waiting for?… [W]e can blame our abysmal performance on partisan polarisation and the filibuster! What's your excuse?"

Yes, the Rise in Headline UK Inflation in 2010-2011 Was Just a Transitory Blip

Adam Posen takes a victory lap. Yet another victory for looking at the core inflation rate rather than the headline inflation rate to understand what is really going on:

Elsby and Shapiro: Why Does Trend Growth Affect Equilibrium Employment?

Why Does Trend Growth Affect Equilibrium Employment?:

That the employment rate appears to respond to changes in trend growth is an enduring macroeconomic puzzle. This paper shows that, in the presence of a return to experience, a slowdown in productivity growth raises reservation wages, thereby lowering aggregate employment. The paper develops new evidence that shows this mechanism is important for explaining the growth-employment puzzle. The combined effects of changes in aggregate wage growth and returns to experience account for all the increase from 1968 to 2006 in nonemployment among low- skilled men and for approximately half the increase in nonemployment among all men.

Inequality Between the 20%-ile and the 80%-ile: It's Not Just Personal Choices: It's Regional-Societal-Cultural-Structural

Jason de Parle's article would have been considerably stronger for an engagement with Naomi Cahn and June Carbone, Red Families v. Blue Families: Legal Polarization and the Creation of Culture...

Adam Ozimek Gives Three Cheers for "Outsourcing"; I Give Minus Three Cheers for Bain Capital-Style LBOs

Adam Ozimek:

DeLong On Outsourcing: The political battle between Obama and Romney camps on outsourcing has prompted a lot of commentary… litigating whether Mitt Romney was responsible for outsourcing done by Bain Capital. Most people engaging in this issue, including many who absolutely know better, seem content to let outsourcing be used as mud….

DeLong Smackdown Watch: Matthew Yglesias Has Doubts About Seasonal Adjustment Department

The (well-behaved) employment-to-population ratio series comes from the household survey. The (not so well-behaved) jobs series comes from the payroll survey.

No. I can't think of why SA might be working well in one case and not so well in another…

And Matt hasn't even gotten to my "Sleet" post of this morning yet…

I Think BLS Seasonal Adjustment Has Been Doing a Good Job...

The big news is that nothing has been happening to the civilian adult employment-to-population ratio since September 2009.

It seems to me that the blue line that is the seasonally-adjusted series has been conveying that message rather well...

The Changing Structure of the Economy

Twitter / JustinWolfers:

Meta-observation: Economists too often claim that the BLS is getting seasonal adjustments wrong, and too rarely note the economy is changing

Indeed: the seasonal adjustment factor in the employment-to-population ratio.

Eric Platt: U.S. June Payrolls Expand by 80K

From Business Insider…

A catastrophe in the sense only that the situation is a catastrophe: does not make matters worse in any respect…

---

All generalizations about the character of recessions and recoveries in the post-WWII period are now inoperative.

Thank you.

If It Was Uncertainty About Health Care Financing That Was Holding Back the Economy…

…the stock market should have jumped last Thursday when ObamaCare was ruled constitutional. If it was fear of ObamaCare, then the stock market should have fallen.

It did neither. Austan Goolsbee:

Austan Goolsbee: The Markets Did Not React When ObamaCare Was Declared Constitutional: Of all the public reactions to last Thursday's surprise ruling from the Supreme Court on the Affordable Care Act, one of the most interesting came from the markets: Nothing happened. That probably disappointed those who spent the past two years saying that the costs from increased regulation and fear of the health plan explain why U.S. companies have not hired faster and have accumulated huge amounts of cash on their balance sheets. If that were so, the court ruling should have had a big impact on expected future profits. Stocks should have tumbled. They didn't, and the markets' collective yawn was the latest piece of evidence refuting the notion that the health plan and other regulations are the main problems facing the economy….

What about the companies that have hoarded so much cash? It turns out that the hoarding began years before the Obama administration even took office…. Cash hoarding also pervades the rest of the developed world—in countries that have not undergone regulatory changes or passed new health plans. As a share of the economy, the cash holdings of companies in the healthiest European countries are actually 15% to 30% higher than they are here. Clearly, U.S. policy has not driven that.

Perhaps we shouldn't really be surprised that regulatory trends can't explain macroeconomic performance. They haven't for decades. Surveys showed that business people were even more dissatisfied with President Clinton's perceived regulatory overreach than they are with President Obama's today. Yet our economy grew rapidly during the 1990s. President George W. Bush aggressively deregulated throughout the economy, yet growth in the 2000s was modest (and followed by financial crisis). Now, under Mr. Obama's policies, the private sector has added close to a million more jobs than during Mr. Bush's first term….

[D]ata do show fear and uncertainty and companies unwilling to make long-term investments. But that fear is not predominantly about U.S. regulation. It is rooted in the dangers of further financial crisis and of not having enough customers. It is a fear that hangs over most of the developed world….

[L]et's agree with the market's judgment: Health-care reform and regulations are not the reason for the economy's slow recovery.

Another Economist Who Got It Largely Right in Real Time: Mark Thoma

Mark Thoma: Why Employment Might Not Fully Recover Until 2013:

Employment lags changes in output because firms usually wait to see if a recovery is permanent rather than a temporary uptick before committing to the costly task of hiring new people. But the reason for the change in the relationship between output and unemployment after 1990 is not fully understood, making it harder to know how to battle the problem using government policies designed to stimulate employment…. It's not just the lag between the turning points in output and employment that leads to a pessimistic outlook for labor numbers. Once unemployment does peak, output still needs to return to its normal growth level before we see a return to full employment. The San Francisco Fed doesn't expect a return to normal growth until the middle of 2012, and this means that unemployment likely won't fully recover until somewhere in 2013.

The reason for the slow recovery is partly due to the depth of the recession -- the deeper the hole, the longer it takes to crawl out of it -- but it's also because of the large amount of structural change that the economy must go through before it can recover….

[T]here's still a long road ahead, particularly for labor, and for that reason I am very much in favor of additional government policy targeted directly at the employment problem. In addition, given the record levels of long-term unemployment we are experiencing (those unemployed 27 weeks or more now constitute 35.6 percent of the unemployed; see here for a graphical representation of the situation), the recent vote to extend unemployment benefits was overdue and very welcome.

Alito, Kennedy, Roberts, Scalia, Thomas Have Just Said that George W. Bush's 2005 Social Security Privatization Plan Was Unconstitutional

Brian Beutler:

At the risk of jumping the gun, I THINK this ruling means Congress could not require you to own a private retirement account...

I concur. Alito, Kennedy, Roberts, Scalia, Thomas have just said that George W. Bush's 2005 Social Security Privatization plan was unconstitutional.

The chances any of them would have so ruled had these issues come before them in the guise of the Social Security Privatization Act rather than the Affordable Care Act?

Zero.

Partisan hacks, all...

Answers to Five Easy Euroquestions...

(1) Q: Who Should Eat the Losses from the Existing Greek Debt?

A: The German banks that made the loans to Greek politicians who did not have authority to impose taxes high enough to repay the debt--and the German government that backs the banks--should eat the losses from the existing Greek debt.

(2) Q: How Should Greece Balance Its Taxes and Its Government Spending Going Forward?

A: That's nobody's business but the Greeks'. It would, however, be nice if they would stop spending money like water in an attempt to maintain "strategic parity" vis-a-vis Turkey in the Aegean.

(3) Q: How Should Greece Balance Its Spending on Imports and Its Exports Going Forward?

A: Borrowing to cover the gap between imports and exports that exists at current exchange rates and price and wage levels is not going to happen, so Greece has a choice between (a) deep prolonged depression to make Greeks too poor to afford imports, (b) Grexit, devaluation, and a subsequent export boom, and (c ) Germans opening up the monetary spigots to produce higher inflation in northern Europe and meanwhile giving Greece an additional fortune to keep the pain in Greece low enough for adjustment to take place within the Eurozone framework.

(4) What Will Happen If Greece Exits the Euro?

A: Germany will then have a choice between (d) a Great Depression in Europe, and (e) a much bigger inflation in Europe and a much larger fortune given away to cushion adjustment than would be needed to make (c ) work.

(5) We Will Then See (c ), Right? Germans Opening Up the Monetary Spigots to Produce Higher Inflation in Northern Europe and Meanwhile Giving Greece an Additional Fortune to Keep the Pain Low?

A: Ha!!

Does This Look Like the Output of a Low-Order ARIMA System to You?

The Changing Mean Reversion of Unemployment in the United States

Back in 1948-1980, you could expect 47% of a rise in the unemployment rate to be recaptured within a year: if unemployment went up by 1% point, you could expect the economy to suffer 2.12% point-years of cumulative unemployment as a result. Between 1980 and 1996 that coefficient dropped from 47% to 30%: in that period if unemployment went up by 1% point, you could expect the economy to suffer 3.33% point-years of cumulative unemployment as a result. Since 1996 the unemployment-rate mean-reversion coefficient has been only 12%: now if unemployment goes up by 1% point, you expect the economy to suffer 8.33% point-years of cumulative unemployment as a result.

This is an astonishing and stunning difference--albeit one that is just at the edge of statistical significance. And I have not seen an explanation of it nailed down...

Felix Salmon: Why Bernanke’s Not Doing More

Why Bernanke’s not doing more | Felix Salmon:

Bernanke feels as though he has at least some extra ammunition in the back of his armory in case things get worse still. Which raises the obvious question: why isn’t he using that ammunition now? Binyamin Appelbaum asked that question of Bernanke in April; here’s how Bernanke responded.

The view of the committee is that that would be very reckless. We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four or five years to support the economy without leading to an unanchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.

From today’s presser, my feeling is that Bernanke maybe doesn’t feel as strongly any more that he would be reckless to act more aggressively. But he does still feel that the upside from doing so is “doubtful”. If he’s forced by crisis to pull out the ammo, he’ll do so. But Bernanke clearly doesn’t consider the unemployment crisis to be a crisis in that sense. If something happens suddenly, then policymakers can act strongly and decisively. Years of high unemployment are in many ways more damaging than the sudden drop in government spending that risks arriving with the fiscal cliff. But because the damage is slow-acting and invidious, it seems that unemployment, on its own, is incapable of persuading Bernanke to do more.

Matthew Yglesias: Labor Unions and Public Opinion

Matthew Yglesias:

Labor Unions and Public Opinion: In the wake of the failed recall of Scott Walker, Doug Henwood of the Left Business Observer wrote a stirring from-the-left critique of American labor unions (more or less along the lines of Bob Fitch) that's prompted a number of interesting responses, relatively few of which grapple with what I think is Henwood's strongest point:

And as much as it hurts to admit this, labor unions just aren’t very popular. In Gallup’s annual poll on confidence in institutions, unions score close to the bottom of the list, barely above big business and HMOs but behind banks. More Americans—42%—would like to see unions have less influence, and just 25% would like to see them have more. Despite a massive financial crisis and a dismal job market, approval of unions is close to an all-time low in the 75 years Gallup has been asking the question. A major reason for this is that twice as many people (68%) think that unions help mostly their members as think they help the broader population (34%). Amazingly, in Wisconsin, while only about 30% of union members voted for Walker, nearly half of those living in union households but not themselves union members voted for him (Union voters ≠ union households). In other words, apparently union members aren’t even able to convince their spouses that the things are worth all that much.

Gordon Laffer's response to this in the Nation is typical… unions can't be unpopular because many non-union workers say they'd like to be in one….

This misses the force of Henwood's point. I wish billionaires had less influence over American politics. The fact that I would, personally, like to be a billionaire does not contradict that point. On the contrary, the untoward level of political influence enjoyed by billionaires is one of the main things that's appealing about my hypothetical billionaire lifestyle. If someone is inclined to view labor unions as primarily dedicated to advancing the interests of a privileged (remember that wage premium) minority of American workers, that's in no way inconsistent with a large share of the non-unionized minority wishing that they enjoyed those privileges.

If the upshot of those mixed feelings was a rapid rise in the rate of union membership, the contradiction would work itself out quickly. But since Taft-Hartley that hasn't been the case, and the union share of the private sector's been steadily declining...