Barack Hoover Obama and the Curse of the Long Term Unemployment Rate
Posted: January 26, 2010 Filed under: Global Financial Crisis, Populism, president teleprompter jesus, The Bonus Class, The Great Recession | Tags: economics, the insanity of spending freezes during recessions, Unemployment Rate Comments Off on Barack Hoover Obama and the Curse of the Long Term Unemployment RateWhen I wrote the morning thread at The Confluence last night, I couldn’t imagine any justification for an economic policy proscription of spending freezes coming from any one except maybe the American Enterprise Institute. Basic macroeconomic theory states that during a recession with high unemployment, the government’s fiscal policy should either consist of tax cuts or spending increases. Theory also shows that during these horrible times, budget deficits grow naturally through automatic stabilizers. Tax receipts go down because folks lose their jobs and businesses lose customers. Government spending goes up because unemployed people rely heavily on social safety net programs like unemployment insurance.
There really are no philosophical differences between conservative or liberal economists on these theories. What you usually see are arguments from both sides on which policy prescription to apply. Republicans favor tax cuts. Democrats usually go for increased spending that targets job creation. That’s been the way it’s been for a long time until THIS President who appears to believe he can rewrite economic theory the way a fundamentalist preacher rewrites geology, anthropology, cosmology, biology, and reality.
I woke up to a chorus of Barack Hoover Obama this morning coming from Economic Blogs all over the web. It is here from Paul Krugman.
A spending freeze? That’s the brilliant response of the Obama team to their first serious political setback?
It’s appalling on every level.
It’s bad economics, depressing demand when the economy is still suffering from mass unemployment. Jonathan Zasloff writes that Obama seems to have decided to fire Tim Geithner and replace him with “the rotting corpse of Andrew Mellon” (Mellon was Herbert Hoover’s Treasury Secretary, who according to Hoover told him to “liquidate the workers, liquidate the farmers, purge the rottenness”.)
It’s bad long-run fiscal policy, shifting attention away from the essential need to reform health care and focusing on small change instead.
It is here from Brad Delong who mentions that even deficit hawk economics find this a laughable policy.
There are two ways to look at this. The first is that this is simply another game of Dingbat Kabuki. Non-security discretionary spending is some $500 billion a year. It ought to be growing at 5% per year in nominal terms (more because we are in a deep recession and should be pulling discretionary spending forward from the future as fast as we can)–that’s only $25 billion a year in a $3 trillion budget and a $15 trillion economy.
But in a country as big as this one even this is large stakes. What we are talking about is $25 billion of fiscal drag in 2011, $50 billion in 2012, and $75 billion in 2013. By 2013 things will hopefully be better enough that the Federal Reserve will be raising interest rates and will be able to offset the damage to employment and output. But in 2011 GDP will be lower by $35 billion–employment lower by 350,000 or so–and in 2012 GDP will be lower by $70 billion–employment lower by 700,000 or so–than it would have been had non-defense discretionary grown at its normal rate. (And if you think, as I do, that the federal government really ought to be filling state budget deficit gaps over the next two years to the tune of $200 billion per year…)
And what do we get for these larger output gaps and higher unemployment rates in 2011 and 2012? Obama “signal[s] his seriousness about cutting the budget deficit,” Jackie Calmes reports.
As one deficit-hawk journalist of my acquaintance says this evening, this is a perfect example of fundamental unseriousness: rather than make proposals that will actually tackle the long-term deficit–either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits–come up with a proposal that does short-term harm to the economy without tackling the deficit in any serious and significant way.
Here’s more from Mark Thoma and one from Naked Capitalism. That’s just some of the more high profile economist blogs. I didn’t even go for the dozens of links from business bloggers or the political sites. I want to put this all in perspective and I’ll use a Jan. 16 article from The Economist to do so. It’s one of the latest articles I intend to use in my classes and it’s called The Trap.
When teaching about unemployment statistics, economics professors like Krugman, Thoma, DeLong, and little ol’ me all emphasize that it’s not the big rate so much as the underlying trends and details within the rate that drive a policy. Cyclical unemployment–the type of unemployment that comes from a recession–eventually clears up on its own when the economy improves. Usually, the folks impacted by cyclical employment will not have problems finding jobs in a good economy.
There are some pervasive types of unemployment that are much more deeply rooted and take more targeted, specific job policies to eliminate. Structural unemployment is one of those phenomena that take job retraining programs or helping the labor force move where the jobs are being created (either location or industry change). You can usually spot this type of unemployment in the Long Term Unemployment Rate. These folks have been in industries or jobs that are no longer valid in the modern economy and without some refitting, they stay unemployed. If you look at the graph I posted above from The Economist, you’ll see exactly how disturbed the labor market really is right now. This unemployment is not going away and it requires some serious policy to deal with it. Until then, we will see lower tax receipts and higher need for safety net programs. Obama’s policy totally ignores the reality on the ground and goes for a quick political message. We’re not seeing solutions for the real problem at all.
The Economist article calls this the ‘curse’ of long term unemployment. This is the real problem left to this administration from the Bush years. Other than shove the young unemployed into the military, there has been no program aimed at the lackluster job creation coming from the U.S. economy since Bill Clinton left office.
THE 2000s—the Noughts, some call them—turned out to be jobless. Only about 400,000 more Americans were employed in December 2009 than in December 1999, while the population grew by nearly 30m. This dismal rate of job creation raises the distinct possibility that America’s recovery from the latest recession may also be jobless. The economy almost certainly expanded during the second half of 2009, but 800,000 additional jobs were lost all the same.
It took four solid years for employment to regain its peak after the 2001 recession. With jobs so scarce, wages stagnated even as the cost of living rose, forcing households to borrow to maintain their standard of living. According to Raghuram Rajan, an economist at the University of Chicago, this set the stage for the most recent crisis and recession—a crisis, ultimately, caused by household indebtedness. If the current recovery is indeed jobless, wages will continue to lag. Since they are now virtually unable to borrow, households will have to make do with less, and reduced spending is likely to make the economic recovery more uncertain still.
So which is it to be: jobless or job-full? Of paramount concern is the growth in long-term unemployment. Around four in every ten of the unemployed—some 6m Americans—have been out of work for 27 weeks or more. That is the highest rate since this particular record began, in 1948. These workers may forget their skills; and many began with few skills anyway. Just as troubling is a drop of 1.5m in the civilian labour force (which excludes unemployed workers who have stopped looking for work). That is unprecedented in the post-war period. If those who have stopped looking were counted, the unemployment rate would be much higher.
The only sectors that have been growing recently are the health care industry (like demand for nurses) and the education sector. I can tell you as a participant in the education sector, state-level balanced budget requirements are about to change those statistics. Both the Health and Education sectors require government funding, if that dries up, the jobs dry up even though the demand remains high.
The Obama administration has been verbal about green sector jobs, but frankly, jobs are not going to come from ethanol subsidies, that’s only going to create food shortages. The basic question, then, is where do the jobs come from, and what policies do we use to encourage job creation? It is obvious that our infrastructure needs a huge amount of rework to me and like FDR, this is one area where we could start programs to rebuild interstates, networks, and buildings. Just refitting buildings to meet earthquake or hurricane standards could be one potential area. We also don’t have enough refineries and power plants. It is possible we could subsidize the private sector in major infrastructure projects if there’s no will for a public work project. All of the highways, dams, and electrical grids are aging and in need of repair. We’ve seen realization of these problems but no policy prescriptions.
Where are the jobs of the future and how can government create an environment for their creation if we defund job training and education and fail to fully fund repairs to the infrastructure that supports job creation in the future? Do we really need a spending freeze in this jobless century? Where are the real economists in this administration?
On the other hand … or is it Hoof?
Posted: October 29, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, The Bonus Class, U.S. Economy | Tags: Great recession, Real economic Growth, REAL GDP, stimulus Comments Off on On the other hand … or is it Hoof?In what is undoubtedly good news, the US Bureau of Economic Analysis (Dept. of Commerce) has announced that REAL GDP grew by
approximately 3.5% in the third quarter of 2009. That is up from the second quarter growth of .7%. It appears that the economy may be rebounding from the so-called “Great Recession”. However, as with everything, the devil is in the details and the details show that this occurred because of government support. This will be good news for those folks that supported the Stimulus Plan. Details underlying the growth still show that the private sector, however, has yet to pick up slack. This means the growth has not worked its way through the economy in a way that makes it firmly sustainable. The increase in Consumer spending seem rooted firmly in the cash-for-clunkers program as well as the tax credits to first time home buyers. These programs have ended so now we have to look for sustainable consumer spending in areas not financially supported by government programs.
Policy makers will now focus on whether the recovery, supported by federal assistance to the housing and auto industries, can be sustained into 2010 and generate jobs. The record $1.4 trillion budget deficit limits President Barack Obama’s options for more aid, while Federal Reserve officials try to convince investors that the central bank will exit emergency programs in time to prevent a pickup in inflation.
“A lot of this is thanks to government support,” Kathleen Stephansen, chief economist at Aladdin Capital Holdings LLC in Stamford, Connecticut, said in an interview on Bloomberg Television. “The consumer, in fact private demand in general, is not ready yet to pick up the growth baton from the government.”
There has yet to be any signs that improvements will be permanent. The Labor Market, traditionally sticky, has yet to turn around in a fundamentally good way.
A report from the Labor Department showed 530,000 workers filed claims for jobless benefits last week, more than anticipated and signaling the job market is slow to heal even as growth picks up.
There is an extremely good piece over at Naked Capitalism that explains the situation right now called “The choice is between increasing or decreasing aggregate demand” written by Edward Harrison of Credit Writedowns.
(It’s a bit wonky so be forwarned.)
As I see it, the issue we are debating has to do with how the government responds when large debts in the private sector constrain demand for credit in the face of a severe economic shock and fall in aggregate demand. In short, if private sector debt levels are so high that a recession precipitates private sector credit revulsion, how should government respond?
This is a good question as it gets to the heart of what to do next if you’re the government and it reflects reality on the ground which are the constraints facing the economy due to continuing credit market problems. The one thing that the discussion fails to address is the fact that quantitative easing by the Fed is not feeding into the credit markets as much as it appears to be feeding a bubble on Wall Street eagerly supported by the Great Vampire Squid and other enemies spawning in the unfathomable deep. The article focuses on the paradox of thrift and the question “Do we really want the private sector to save at the moment?”
The deal is, we’ve plenty of money circulating through the financial markets at the moment because of actions by the FOMC and of course, the Treasury. The problem is where it’s going. Easy money is financing merger activities and arbitrage rather than underlying investment that promotes long run economic growth. This is the same bubble-producing activity that brings us to no good ends. We really don’t need savings as much to fund business as much as we need business to feel like it can make commitments to job-producing, goods and servicing producing capital investments funded by the financial sector that should be forced to stop its casino banking activities. If anything, we need savers to step up and buy government debt, sort’ve an any bonds today movement to stop our reliance on foreign sources and free ourselves of obligations to human rights violators like the Chinese and Saudis.
Death by Bubble
Posted: October 10, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, The Bonus Class, The Great Recession, U.S. Economy | Tags: bubble economies, Consumer Financial Protection Agency, shadow banking system 2 Comments
Economist Andy Xie says Lehman Brothers died in vain and that it’s just a matter of time before we get hit by another deadly bubble. His guest post at Caijing Magazine is just so dead on that you must go read it.
There has been plenty to learn from last year’s miserable economy and near collapse of key financial markets but U.S. policy makers appear to rebuilding the same system with the same ghastly mistakes in place. We cannot afford to be complacent about this because if it’s done, another huge mishap can’t be far behind. Xie explains that the entire financial system is one big Lehman now and has become much more costly to bail out.
So Lehman died in vain. Today, governments and central banks are celebrating their victorious stabilizing of the global financial system. To achieve the same, they could have saved Lehman with US$ 50 billion. Instead, they have spent trillions of dollars — probably more than US$ 10 trillion when we get the final tally — to reach the same objective. Meanwhile, a broader goal to reform the financial system has seen absolutely no progress.
‘Absolutely no progress’ may actually be an optimistic estimate of the current situation. No progress would mean, to me, we’re not rebuilding the same time bomb. Xie’s article is remarkable in that it deconstructs the arguments one-by-one that we’re hearing that things are really changing, What we actually have is the proverbial shuffling of the chairs on the financial Titantic.
Top executives on Wall Street talk about having cut leverage by half. That is actually due to an expanding equity capital base rather than shrinking assets. According to the Federal Reserve, total debt for the financial sector was US$ 16.5 trillion in the second quarter 2009 — about the same as the US$ 16.6 trillion reported one year earlier. After the Lehman collapse, financial sector leverage increased due to Fed support. It has come down as the Fed pulled back some support, creating the perception of deleveraging. The basic conclusion is that financial sector debt is the same as it was a year ago, and the reduction in leverage is due to equity base expansion, partly due to government funding.
This, of course, leads to the most fundamental question of all. What happens when the government funding disappears? I admit that I see no end to that infusion unless the Fed or some other central bank becomes spooked by the possibility of inflation. These institutions would have to be rebalancing their portfolios in lieu of all the M&A activity they’ve undertaken this year to be able to live with out cheap government funds. Some of them may be repaying the TARP funds, but the real deal happens when Quantitative Easing and ZIRP ends. We’ve had no indication from the FOMC or Bernanke that that’s in the works any time soon but I can tell you, one little glimpse of inflation and the game ends there.
Now, here’s my favorite point. It’s this bull market where the shadow banking system profits from churning and running up your own portfolio by selling it back and forth between the parent and subsidiaries to create a false sense of momentum.
…financial institutions are operating as before. Institutions led in reporting profit gains in the first half 2009 during a period of global economic contraction. When corporate earnings expand in a shrinking economy, redistribution plays a role. Most of these strong earnings came from trading income, which is really all about getting in and out of financial markets at the right time. With assets backed up by US$ 16.5 trillion in debt, a 1 percent asset appreciation would lead to US$ 16.5 billion in profits. Considering how much financial markets rose in the first half, strong profits were easy to imagine.
Trading gains are a form of income redistribution. In the best scenario, smart traders buy assets ahead of others because they see a stronger economy ahead. Such redistribution comes from giving a bigger share of the future growth to those who are willing to take risk ahead of others. Past experience, however, demonstrates that most trading profits involve redistributions from many to a few in zero-sum bubbles. The trick is to get the credulous masses to join the bubble game at high prices. When the bubble bursts, even though asset prices may be the same as they were at the beginning, most people lose money to the few. What’s occurring now is another bubble that is again redistributing income from the masses to the few.
Yup, there it is. The idea that many of the bigger players are just trying to run up the market enough to entice the suckers back near the top. Catch the one about redistribution? We’re basically using cheap money to finance the reverse Robin Hood scenario one more time.
Who Holds Wall Street Accountable?
Posted: October 5, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, Surreality, Team Obama, The Bonus Class, The Great Recession, The Media SUCKS, U.S. Economy | Tags: Andrew Ross Sorkin, Bear Stearns, Goldman Sachs, Hank Paulson, Investment banks, Matt Taibbi, Morgan Stanley, Simmons Bedding Company, Wall Street Comments Off on Who Holds Wall Street Accountable?
If your answer included any of number regulators or congress with its oversight duties or the traditional media with its watchdog of the public duties sorta answer, that would be a wrong answer. There were so many articles today about past and present Wall Street tomfoolery that I almost forgot to check the Wall Street Journal or The Hill. Instead, I”m relying on my subscriptions to things I’m supposed to be reading in the bath tub with Chopin playing in the background and a glass of Pinot Grigio nearby. Today, the best read came from Vanity Fare and was written by Andrew Ross Sorkin. (My Vanity Fare showed up today along with my latest copy of The Economist with the cover shouting “After the Storm: How to make the best of the Recovery.” ) My bottom line is still that Wall Street caused this and they are not only NOT cleaning it up, they are not being cleaned up.
I’m also checking out Matt Taibbi and TaibBlog now that his infamous vampire squid article in July’s Rolling Stone defined the shadowy world of Goldman Sachs better than just about any thing I’ve recently read. Matt’s blog today takes on naked selling or ‘naked swindling’ in the succinct framing of the Wall Street Deal that I now consider better jargon than that of the derivatives blah blah blah that I was taught in any of my PhD level corporate finance or investment classes. I may be able to do the proof for the Black Scholes formula but I will never be able to prove its social usefulness.
Actually, this takes me back to the Grey Lady and my first read of the day about the now bankrupt Simmons Bedding company that was the cash cow purposely inflicted with mad cow disease. Now days, it’s still more about the arbitrage deal and the leveraged deal that produces dividends than it is about what a company produces and the lives of the workers and long time managers who produce valuable stuff. It’s no longer build it and they will come. It’s leverage it to the hilt, take your dividends now, and find the next sucker with the next model that can hyperactivate the milking machine. It’s another real life example of Gordan Gekko and the greed is good speech. Spend some time with the Simmons story before you hit Taibblog and definitely the Sorkin article in Vanity Fare. It’ll put you in the right frame of mind.
Some times being Right doesn’t always make you Feel Good
Posted: October 3, 2009 Filed under: Global Financial Crisis, Team Obama, The Bonus Class, The Great Recession, The Media SUCKS, U.S. Economy, Voter Ignorance | Tags: balanced budget amendment, DeLong, Krugman, Obamanomics, Reaganomics, Stiglitz, stimulus plan, unemployment Comments Off on Some times being Right doesn’t always make you Feel Good
You may remember back in January that I was not happy and very outspoken about the size of the Obama Stimulus plan. I was not impressed by the content or with the mix between tax cuts and direct government spending. You may recall that the Blue Dogs interminable resistance to do anything that might wake their sleeping Republican voters and the desire on the part of POTUS to appease the unappeasable remnants of the Republican party led to a very watered down plan. At the time, all that I could hope was that it might be enough to get the ball rolling. However, I felt that the historical multiplier –especially for taxes– was not going to kick in the way it had in the past.
The release of the miserable unemployment data yesterday (not all that unexpected as you’ll recall) as well as an estimate of our output gap now clearly squares with my earlier view as well as the earlier views of Brad deLong, Paul Krugman, Mark Thoma and Joseph Stiglitz among others. The stimulus was clearly not the blue pill the economy needed. (That last link is from me saying this same thing in July.)
The Washington Monthly says the decision to appease centrists and Republicans looks even worse in retrospect. Now, the media gets it. Color me completely unsurprised because I told you so back then that it wasn’t going to be enough. I even mentioned it recently when it appeared the stimulus plans of German, France, and Japan had already lifted those economies from the worst of it last spring. These countries emphasized direct government spending. We mostly shuffled a few funds as stop gaps and the created a bunch of tax cuts that no one really needs right now.
In February, when the debate over the economic stimulus package was at its height, a handful of “centrist” Senate Republicans said they’d block a vote on recovery efforts unless the majority agreed to slash over $100 billion from the bill.
The group, which didn’t have any specific policy goals in mind and simply liked the idea of a small bill, specifically targeted $40 billion in proposed aid to states. Helping rescue states, Sen. Collins & Co. said, does not stimulate the economy, and as such doesn’t belong in the legislation. Democratic leaders reluctantly went along — they weren’t given a choice since Republicans refused to give the bill an up-or-down vote — and the $40 billion in state aid was eliminated.
At the time, it seemed like a very bad idea. That’s because it was a very bad idea.
In the past, government hiring had managed to somewhat offset losses in the private sector, but government jobs declined by 53,000, with the biggest number of cuts on the local and state levels. Even the Postal Service, which is included in the public-sector job statistics, dropped 5,300 jobs.
“The major surprise came from the public sector, where every level of government cut back,” Naroff said. “The budget crises at the state and local levels have caused an awful lot of belt-tightening.”





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