Saturday, June 26, 2010

Another blow to the US labor force

The Senate voted down the American Workers, State, and Business Relief Act of 2010, 57 to 41 (see an earlier version of the CBO's estimate here for a breakdown of the Bill). The emergency extensions to weekly unemployment benefits will now expire, leaving many without government support as the labor market improves at snail speed.

Those who support the Bill claim that benefits prop up consumer spending. It is true, that unemployment benefits payments are more likely to be spent rather than saved. However, the latest version of the Bill allocated about $35 billion to benefits, just 0.34% of consumer spending in Q1 2010. Consequently, the direct impact on consumer spending of extending the benefits would have been small. (The provisions of the Bill in full would have quickened the recovery, according to David Resler at Nomura.)

Those who oppose the Bill claim that extending the benefits only increases the duration of unemployment - in May 2010 median duration was 23.2 weeks, its highest level since 1967. This is a weak argument when 7.4 million jobs, near 6% of the current payroll, have been lost since the onset of the recession (this is a cumulative number, which includes the gains since January 2010). The bulk of the unemployed would likely jump at an opportunity to work rather than live on benefits.

One way or another the government will plug the hole that is private spending. And the government will find this out the easy way (expansionary fiscal policy) or the hard way (perpetual deficits that result from weak private-sector tax revenue). Apparently it's going to be the hard way.

At 9.7% unemployment, isn't it obvious that Congress is not "spending" enough?

The chart illustrates the Nairu-implied level of unemployment (NAIRU, or the nonaccelerating inflation rate of unemployment) versus the measured rate of unemployment. The concept of NAIRU is limiting in that it inherently binds fiscal policy and is a theoretical notion at best; but it does present a baseline for comparison. The Nairu-implied level of unemployment is simply the CBO's estimate of NAIRU multiplied by the current labor force. Let's call points when the current level of unemployment is above the NAIRU-implied level as cyclical surplus of workers.

According to this measure of worker surplus, the state of the labor market is obvious: depressed. The NAIRU-implied level of unemployment is half of that currently measured by the BLS with a record wedge between the two. Furthermore, the cyclical surplus of workers in '82-'83 - the last time the unemployment rate peaked above 10% - was relatively mild compared to current conditions.

By failing to pass this Bill, the Senate reiterated its unwillingness to support the US labor market. Of course benefits are not the answer - we need a comprehensive jobs Bill to mitigate the consequences of such a depressed labor market. (There was a good article on the longer term unemployment problem at the Curious Capitalist some months back.)

Rebecca Wilder


  1. Here's something I find puzzling. By anyone's estimation who accepts the NAIRU methodology, we are far above the NAIRU now and expect to remain so for a considerable period of time.  The current inflation rate (e.g. core CPI seasonally adjusted, past 6 months) is near zero.  So why is there so little talk of deflation among serious economists?  (And why, more generally, does everyone seem to discuss the NAIRU as if all that mattered for the inflation rate were the possibility -- or lack thereof -- of falling below the NAIRU, rather than the fact of being above it?)

    If you believe (as it seemed only a few years ago that many did) in a linear Phillips curve with coefficients on past inflation that sum to 1.0, then the situation would appear to be quite alarming.  Even if you think the curve is convex -- unless it's so severely convex as to be almost L-shaped -- it would seem to indicate that we are moving in the direction of deflation.

    I understand that there are other issues to consider -- the dynamics of the business cycle, the persistence of inflation expectations, other measures of slack, etc. -- but nonetheless the prima facie case seems to be pretty strong in favor of deflation.  The inflation rate has actually fallen, and we have observed a dramatic drop in unit labor costs.  Yet everyone seems to talk as if unemployment were only a problem for the unemployed workers.  Does it not threaten to be a problem for anyone who owns real-valued assets?

  2. Hello Andy,

    Paul Krugman, Marshall Auerback, Randall Wray, Bill Mitchell, Ed Harrison, Rob Parenteau have written extensively about the threat of deflation.

    In my view, debt deflation is a pervasive threat. Fiscal policy is not nearly sufficient enough to offset the private sector's surge in desired saving, thus resource utilization drops and mass unemployment results. If left unattended, deflation results.

    Large budget deficits are NOT going to push inflation upward unless the economy is near full employment (whatever that is) - clearly we're not even close. And the only way that the massive reserve base in the banking syste becomes inflationary is if firms and households desire to increase debt burden (i.e., borrow). And bankers must be willing to lend. The Fed is pushing on a string - all they control is the short-term interest rate, not the money supply. Financial regulation, the high unemployment rate, and overall desire to hold larger cash balances by firms all sustain the deflationary pressures.

    And your point: "<span> Does it not threaten to be a problem for anyone who owns real-valued assets?"</span>

    What about debt burden? Given the structure of our mortgage market (nonrecourse loans), rising real burden would result in persistent defaults.

    And don't even get me started on the employment to population ratio....

    By the way, liked your "second dip" article ( Rebecca


  3. Of course, those who get economics -- all matters relevant to man regarding wealth (and no, it's not the "science of scarcity") -- know at once that money is mere medium of exchange. In the end, wealth trades for wealth.

    Politicians and bureaucrats (government) are the great destroyers of wealth and this is why Krugmanism / Keynesianism fails every time.

    Politicians and bureaucrats do not produce wealth. Thus they cannot swap for it. They retard the growth of wealth through taxation. They destroy wealth through direct purchasing and hence consumption. Debt financing to do this kind of wealth destruction proves to be a pernicious evil brought forth by Politicians and Bureaucrats upon the citizenry.

    Those who call for expansionary fiscal policy do not get wealth, its production and consumption and thus do not get the whole of economics.

    Expansion of an economy happens when the Rate of Return from Capital Goods bought with Now Money exceeds the Rate of Interest owed on Future Money. Those who know this economic fact, at once, rush into contracts of production in anticipation of profits.

    By deciding not to pass what could easily have been called the American Workers, State, and Business Punishment and Prolonging of Economic Pain of Act of 2010, for the first time, Senators have shown their willingness to support the US labor markets.

    Courageously, Senators have signaled to investors that price supports are going to get removed.

    Now, Far-seeing investors can become satisfied that prices can go to their bottom, and that an advance of prices is imminent. Thus, such investors, each wishing to gain as large amount of revenue-yielding wealth as possible, can enter into contracts for a large amount of revenue-yielding capital goods.

    If only Senators had the courage to withdraw the meddling support for mortgages, recovery would visit us quickly.

    At 9.7% unemployment, it should be obvious to all that Congressmen have done too much. Keeping so many Americans for so long on subsistence welfare has signaled to all far-seeing investors that Americans have lacked sufficient income for anything beyond the necessities of living. Thus, such far-seeing investors have been reluctant to undertake new production investment.

    On a side note, perpetual deficits arise from the excessive want to borrow money against reaching the upper threshold of taxation, beyond which a politician would lose his or her seat.

    Deficits have NOTHING TO DO WITH "weak private-sector tax revenue".

  4. I guess, what with his Nobel prize and everything, Paul Krugman counts as a serious economist :) .  I should have said "economic forecasters."  What puzzles me is that we hear so little talk of deflation from economists who are actually in the business of making forecasts.  Only a tiny fringe are actually forecasting deflation, and the mainstream of forecasters don't even seem to be taking the threat of deflation seriously.  Do they know something we don't, to make them so confident?

    I'm also puzzled that almost all discourse about the NAIRU now seems to assume implicitly that the Phillips curve is extremely convex.  Do commentators really believe in a highly convex Phillips curve, or have they just not thought this through?  Perhaps people have just gotten in the habit of worrying about inflation and haven't yet adjusted their minds to a world where deflation is a major risk.  Or perhaps the bottom half of the Phillips curve is just an unpleasant topic that people would rather not think about.


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