Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • Vitters and Shelby Blocking of Federal Reserve Nominees and Previous Conservative Candidates

    May 10, 2012Mike Konczal

    Chris Hayes, guest-hosting for Rachel Maddow, had a great segment on the hold Senator David Vitters placed on President Obama's Federal Reserve nominees where he talks with economist Betsey Stevenson.

    Chris Hayes, guest-hosting for Rachel Maddow, had a great segment on the hold Senator David Vitters placed on President Obama's Federal Reserve nominees where he talks with economist Betsey Stevenson.  The nominees, Jay Powell and Jeremy Stein, were nominated as a bi-partisan move after Peter Diamond was blocked by the Senate (records have Powell donating to the Romney and Hunstman campaigns in 2011).






    Vitters' reasoning? "I refuse to provide Chairman Bernanke with two more rubber stamps who approve of the Fed's activist policies."  This is consistent with Richard Shelby, who blocked Nobel Prize award winning economist Peter Diamond for the Federal Reserve because of “Dr. Diamond’s policy preferences…He supports QE2…He supported bailing out big banks during the financial crisis.”  Republican Senators are giving themselves a de facto seat on the FOMC, and they are casting multiple votes against further monetary easing, without being held accountable for their logic or the subsequent results.

    Here's an important point on how far to the right conservatives have moved on monetary policy.  The natural way reporters cover this is to note that the back-and-forth blocking of Federal Reserve nominees have been escalating for several years, especially since Democrats blocked Republican-nominee Randy Kroszner.  Indeed Shelby notes in his letter that "For those who say that policy preference should not be considered, I will only point out that the re-nomination of Dr. Randy Kroszner to the Fed was blocked by the majority party because he was viewed as being too free market."  Democrats blocked conservative, free-market Randy Kroszner's nomination to the Federal Reserve, and so the Republicans are going to block those who support QE2.

    But here's the funny part (and I'm cannablizing one of my posts, which lays out the case in more detail): Randy Kroszner supported QE2.  He urges people to seriously consider QE3.  To give you a sense of how off-center the Republican Party has gone in terms of the economy, if Kroszner was to show up as a nominee from President Obama for the Federal Reserve tomorrow the conservatives in the Senate would block him because of his policy preferences.

    Here's Kroszner, in January 2011, saying: ”I think [QE2] was the right policy when they put it forward. I think the right policy now, and I think the data has been very much supportive of what the Fed’s been doing...It depends on where we are four or five months from now. If the unemployment rate has not ticked down at all, if we haven’t seen a little bit more job creation, then of course the Fed will have to see if it needs to do more support [with QE3].”  That now appears to be sufficient to get blocked by the conservatives in the Senate.

    Even better, Kroszner spent March 2011 arguing not only that inflation wasn't spinning out of control but the real threat was Japanese-style deflation.  Bloomberg TV, March 2011: “It’s hard to see a lot of inflation pressures right now. If you look at the recent numbers that came out on inflation just earlier this week, the core rate, stripping out food and energy, is less than 1%. That’s dangerously close to Japan-style deflation problems. An even the headline rate, which includes food and energy is less than 2%. So we aren’t seeing enormous inflation pressures right now…inflation is well-anchored."  The real threat is not inflation but Japan-style deflation...it's like you are reading a Krugman column.

    (For fun, here's Kroszner saying that even glancing at the evidence shows that the Community Reinvestment Act didn't cause subprime lending: "the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.”  Given how important that the "CRA -> Crisis" argument is to think-tank based conservative intellectuals, Kroszner is practically a socialist in the political landscape.)

    There is no neutral in monetary policy.  If Republicans in the Senate think that the Federal Reserve is doing too much, then they think the Federal Reserve can't accomplish anything, or that unemployment is too low or they think that unemployment should not come down because it would get in the way of other political projects - from passing the Ryan plan to taking the Senate as a result of a weak economy.  Some people on the right are explicit about the third - “The more we offer accommodative monetary policy, the less incentive they have to pull their socks up and do what’s right for the American people,” was the argument Richard Fisher used for dissenting.  I wish more would just come out and say that.

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  • A Visual Guide to the Conflicting Theories About How to Fix the Economy

    May 10, 2012Mike Konczal

    A map of the contrasts between 2012's different theories of what's ailing our economy and how we can fix it.

    A map of the contrasts between 2012's different theories of what's ailing our economy and how we can fix it.

    Since there's so much renewed focus on debates between those with a demand-side approach and those with a supply-side approach to what is wrong with the economy, I think it's a useful time to redraw my mapping of all the explanations of our crisis. I did this exercise in 2011, with a focus on different explanations of what is wrong with the economy and ways certain policies overlapped between them. I'm going to redraw this to emphasize the policy as it exists on a spectrum of options and give some new links.

    Demand

    The first approach is to say that we have a lack of demand in the economy. Those who believe this usually have three sets of policies for dealing with the weak economy: fiscal policy, monetary policy, or (mortgage) debt policy. Here are the three circles with a policy response spectrum for each of the issues. In general, the response on the right side of the arrow is more aggressive.

    For those who want an explanation of how the three link together, some explanations include "Debt, Deleveraging, and the Liquidity Trap" and "Sam, Janet and Fiscal Policy," both by Paul Krugman, as well as "Consumers and the Economy, Part II: Household Debt and the Weak U.S. Recovery," by Atif Mian and Amir Sufi.

    Some people put more of an emphasis on one circle versus another. Some think one will be the major factor, and some think another has no traction in the economy. In my humble opinion, it is useful to think of this as a three-legged stool. They all hang together, and contraction on any specific part of the three policies will require more expansion on another part to offset it. They are also all different battlefields policy-wise, requiring different agents and different arguments.

    Fiscal Policy

    For those who would like to see the government run a larger deficit to increase spending, the big question is whether to just give people money (particularly in the form of tax cuts, but also through other means like food stamps and unemployment insurance) or to use the money to invest, hiring people to work on infrastructure and other public works. The multipler is believed to be larger when it comes to hiring people, plus it results in public works and other investments in our economy -- things like roads, bridges, schools, etc. That takes time, though. This debate goes back to the composition of the ARRA stimulus and continues today.

    Chrstina Romer has an overview about what we know on fiscal stimulus. Dylan Matthews reviewed nine studies about the effects of the ARRA stimulus bill that was passed in 2009. On the other hand, as Karl Smith would say,  "Why is the US government still collecting taxes when borrowing is cheaper than free?"

    Monetary Policy

    For monetary policy, the big debate is whether the Federal Reserve should engage in unconventional monetary policy through monetary instruments or by setting more aggressive targets. Paul Krugman gave a nice overview of the debate between these two approaches here.

    Joe Gagnon wrote "The World Needs Further Monetary Ease, Not an Early Exit," justifying further action using monetary instruments. The larger case is that Bernanke can do more by guiding short-term interest rates than he could with the blowback he'd get from doing more aggressive targeting.

    For the NGDP target group, Scott Sumner has been the best writer on this: see "Re-Targeting The Fed" and "The Case for NGDP Targeting: Lessons from the Great Recession." (A nice background on this movement is Lars Christensen's "Market Monetarism: The Second Monetarist Counter-revolution.") Brad Delong argues that a 2 percent inflation target is too low. Charles Evans's conditional higher inflation target is first alluded to in this speech of his; Yglesias covers his Brookings paper on his approach versus the instruments/guidance approach here.

    Mortgage Debt Policy

    For debt relief policy, the godfather of the "balance-sheet recession" view is Richard Koo -- see his "U.S. Economy in Balance Sheet Recession: What the U.S. Can Learn from Japan’s Experience in 1990–2005." To understand how mortgage debt and a balance-sheet recession is different than the wealth effect of people just feeling poorer from losing their housing value, see this interview with Amir Sufi. Adam Levitin has testimony about how to adjust bankruptcy to prevent housing foreclosures and better assign losses. Atif Mian, Amir Sufi, and Francesco Trebbi make the case that foreclosures are having a major real, negative economic impact in "Foreclosures, house prices, and the real economy." R. Glenn Hubbard and Chris Mayer argue for economic stimulus through refinancing here.

    Supply

    Meanwhile, on the supply side, there tends to be another three sets of policy arguments. One is that government policy is the issue, another is that governement budgets are the issue, and the third is that the labor force is the issue. Again, the issue on the right side of the spectrum should be considered the more aggressive approach in understanding the topic.

    Government Budget/Debt

    The first major cluster of supply-side arguments focus on the government budget and the deficits the government is running. These usually argue that private capital and job creators are sitting on the sidelines due to worries about government spending, future tax burdens, and/or a potential debt/solvency crisis. "Growth in a Time of Debt" by Carmen Reinhart and Kenneth Rogoff, as well as "Spend and Save" by Noam Scheiber, are places to start. These often go hand-in-hand with philosophical defenses of a program like the Ryan Plan and assaults on the social safety net (e.g. Yuval Levin's "Beyond the Welfare State").

    At their most aggressive, these arguments say that short-term consolidation would expand the economy instead of shrink the economy. This "expansionary austerity" is less popular than it was in 2010-2011 (see David Brooks, "Prune and Grow") due to what is happening in Europe, though it still shows up. "A Guide for Deficit Reduction in the United States Based on Historical Consolidations That Worked" by AEI and "Large changes in fiscal policy: taxes versus spending" by Alesina and Ardagna are places to start.

    Another aggressive argument is that any increased government spending would have to come at the expense of private capital, crowding out investment by definition. This "Treasury View" was a very common Chicago School argument against expansion in 2009, though is mentioned less now -- see Brad Delong's "The Modern Revival of the 'Treasury View.'"

    Goverment Policy

    Government policy arguments usually rely on the idea that economic performace is weak because of regulatory decisions made under the Obama administration, especially the passage of health care and financial reforms as well as regulatory decisions by the EPA. Suzy Khimm gives an overview of this argument and its political impact. Alan Greenspan is the most prominent advocate of this argument (see his paper "Activism"). Robert Lucas argues that Obama may have turned America into a social democratic country, which could explain the weak economy, in "The classical view of the global recession."

    At the more aggressive end of this argument is the idea that the unemployment rate is high because the government is encouraging the unemployed to go on vacation (i.e. it's not a Great Recession but a Great Vacation). Instead of adding to background uncertainty, the government's policies are actively creating the unemployment they are trying to fix. See "Compassionate, But Inefficient" by Casey Mulligan and "The Dirty Secret of Unemployment" by Reihan Salam.

    The other argument at the aggressive end is the idea that the level of GDP in 2007 was in a bubble, unsustainably high as a result of debt and/or bad sectoral allocations to finance and housing (caused solely by government policy, of course). A related argument is that the collapse of the housing bubble has permanently reduced U.S. potential output. See the arguments of James Bullard in the links here or here; it is also part of the main thesis of Raghuram Rajan's Foreign Affairs article.

    Labor Productivity

    The last cluster of arguments are centered around labor productivity. Some argue that we have an issue of labor mismatch. Our workers lack the skills necessary for high-tech 21st century jobs, or the recession has tossed the lowest productivity workers out of the labor force, or there are geographic and related issues that weaken our ability to match unemployed workers to job openings. See David Brooks here and Narayana Kocherlakota here for job openings, and Tyler Cowen's "10 Percent Unemployment Forever?" for the productivity argument.

    The more aggressive version of this argument is that our problems are related to a lack of producitivty gains from so-called "protected" sectors of the economy, and without labor market reforms our economy cannot grow. Usually this is code for public sector workers; sometimes it means various growth-related government policy decisions (immigration, copyright/patents). This should properly be thought of as a long-term growth issue, though it is being folded into our current short-term economy by those who would make these arguments. David Brooks makes the case here; Raghuram Rajan makes a similar case in Foreign Affairs.

    In general, the supply arguments have not held up well (remember when U.S. debt rallied on a ratings downgrade? good times), but here they are. Did I miss anything?

    Mike Konczal is a Fellow at the Roosevelt Institute.

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  • Live at the Financial Times: Monetary Policy Response Op-Ed

    May 9, 2012Mike Konczal

    I have an editorial at the Financial Times online here on monetary policy. It responds to Raghuram Rajan's editorial against "progressive economists" calling for the Federal Reserve to do more (same link, unguarded here.)  The essay is reprinted here, but go check it out at the FT's webpage.  Enjoy!

    I have an editorial at the Financial Times online here on monetary policy. It responds to Raghuram Rajan's editorial against "progressive economists" calling for the Federal Reserve to do more (same link, unguarded here.)  The essay is reprinted here, but go check it out at the FT's webpage.  Enjoy!

    In 1926, John Maynard Keynes attacked socialist ideas for being “little better than a dusty survival of a plan to meet the problems of fifty years ago, based on a misunderstanding of what someone [Karl Marx] said a hundred years ago.” Right now the monetary policy debate in the US is centered on answering the problems of 30 years ago – when inflation and unemployment were both at high levels – based on a misunderstanding of what someone said 50 years ago: Milton Friedman.

    The problem at the core of the US economy is that interest rates have been too high since the recession started. However, the Fed is not in a straightjacket. It has the tools to get the economy going again and must put them to use. The absence of pressure on the Fed, which has received only one dissenting vote demanding more stimulus but several to tighten earlier, to do more to reduce unemployment speaks to an intellectual paralysis as challenging as the orthodoxy of the gold standard and balanced budgets in the Great Depression.

    The Fed uses monetary policy to balance unemployment and inflation. It has typically done this with an inflation “target”. But the target metaphor is inaccurate; it functions far more like a “ceiling.” People aim for targets but can go over them. Yet what we’ve seen over the last five years is that rather than a balance between its two goals, the Federal Reserve supports the economy up until the point where it is near the inflation target, and thereafter backs down from monetary stimulus. The market understands this and output remains equivalently depressed.

    The Fed is fighting the last war: against 1970s stagflation. It is of course essential that the Fed maintains its hard-won credibility against runaway inflation. But the best way to do so isn’t to keep the economy in a perpetual state of high unemployment. It is to be explicit in what it wants to see accomplished and what it is willing to tolerate in order to get it. As Charles Evans, President of the Chicago Federal Reserve, recently pointed out, the Fed could “make a simple conditional statement of policy accommodation relative to our dual mandate responsibilities.” An “Evans Rule” would mean the Fed would agree to keep interest rates at zero and tolerate 3 per cent average inflation until unemployment went down to 7 per cent, setting market expectations in such a way that would allow aggregate demand to surge.

    If conventional monetary policy was available – if interest rates were at 1 per cent instead of zero per cent – Mr Rajan’s argument suggests he wouldn’t lower interest rates further. Even though inflation has been lower than the target for several years, and unemployment is significantly higher than it should be, his editorial suggests he believes interest rates are already too low. Lower rates will not help the unemployed, since unemployment is localised. As he puts it, people are out of work in Las Vegas, but lower interest rates will increase demand in New York. So we won’t see increased employment, just savers “coerced” into buying risky bonds.

    Contrary to Mr Rajan’s argument, the crisis is a national one. The median state’s unemployment rate is 1.65 times higher than it was before the recession began. New York has an unemployment rate of 8.5 per cent, up from its pre-recession rate of 4.7 per cent. Meanwhile, as Edward Luce wrote in the Financial Times yesterday, “risk capital is far harder to come by”. If lower rates would, as Mr Rajan says, increase demand for riskier assets, that’s exactly what the economy needs.

    This would help with our current dilemma, but the Fed must also change its future approach to monetary policy. It has failed to balance inflation and growth, especially in periods of low inflation. Our low inflation target doesn’t work precisely at the moment when we most need it. Changing the target to inflation and growth added together, or what economists call NGDP (nominal gross domestic product), would better balance these goals. Alternatively, moving to a higher inflation target, say 4 per cent a year, would give the Fed much more room to fight recessions. Four per cent was the average annual rate during much of the past 30 years. The costs of a higher target would be minimal. Given that the cost of the current recession is in the trillions of dollars, this demands serious reconsideration.

    It seems like a radical statement to some to note that the Fed has the ability to bring us closer to full employment with little risk and is simply choosing not to do it. They believe the Fed is full of disinterested technocrats doing the best they can. No doubt those at the Fed believe they are trying hard, but if the situation was reversed, with unemployment at ultra-low rates and inflation well above what anybody could possibly want, they would be working overtime to try and fix the problem. Chairman Bernanke, when he was a scholar of Japan, understood that a central bank could end up in a situation of “self-induced paralysis,” like where our current Federal Reserve is. And Milton Friedman himself, who people arguing against looser monetary policy would like to invoke, also understood that the Bank of Japan had “no limit” on closing output gaps if “it wishes to do so.”

    Commentators would like to argue that monetary policy rewards some people over others, forgetting that mass unemployment is the most regressive policy imaginable. But beyond that, monetary policy is not a morality play, and it’s not about rewarding the good people and punishing the bad ones. It’s about stabilising growth, prices and maximum employment without overheating the system or letting it choke to death from a lack of oxygen. Now, more than ever, a commitment to both goals is necessary for the good of our economy.

     

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  • Assessing Yet Another Round of the Structural Unemployment Arguments

    May 8, 2012Mike Konczal

    No matter how much elites insist that our unemployment problem is structural, they don't have the data on their side.

    David Brooks has the 2012 version of the structural unemployment argument in his editorial today, "The Structural Revolution." Here's rooting for this one, as the previous arguments haven't held up all that well.

    No matter how much elites insist that our unemployment problem is structural, they don't have the data on their side.

    David Brooks has the 2012 version of the structural unemployment argument in his editorial today, "The Structural Revolution." Here's rooting for this one, as the previous arguments haven't held up all that well.

    The 2010 version of the argument had to do with an increase in JOLTS "job opening" data, data that turned out to be incorrectly estimated by the BLS (as we learned in 2011). The 2011 version focused either on the idea that the unemployed had bifuricated into a normal unemployment market and a long-term, zero-marginal productivity market (it hadn't) or that the "regulatory uncertainty" of the Obama administration was holding back the economy (which, as Larry Mishel found, wasn't backed by the data).

    There's been a ton of situations where these structural unemployment arguments came charging down the runway only to hit a cement wall of data. One "oops" moment was Raghuram Rajan citing Erik Hurst in claiming that unemployment would be three points lower if it wasn't for "structural" reasons, and Hurst having to publicly point out his preliminary research said nothing of the sort. Another was Rajan arguing, in June of 2011, against monetary policy. Why? Because "one view is that corporate investment is held back by labor-market rigidities (wages are stubbornly too high)....There is, however, scant evidence that the real problem holding back investment is excessively high wages (many corporations reduced overtime and benefit contributions, and even cut wages during the recession)." Empirically that means that there shouldn't be any bunching of wage changes at the zero mark. Here's what the San Francisco Fed found early this year:

    Whoops.

    Apparently none of that changed anything for anyone. So what do we have now? I want to address three specific points in Brooks's essay which I think are wrong in a very useful way. First, Brooks argues that "Running up huge deficits without fixing the underlying structure will not restore growth." The argument here is that a larger deficit will not help with short-term growth. I'll outsource this to Josh Bivens, addressing a similar argument from Adam Davidson:

    This is the reverse of the truth – there is wide agreement that debt-financed fiscal support in a depressed economy will lower unemployment. Now, it’s true that there are holdouts from this position. And others who think the benefits of lower unemployment are swamped by the downsides of higher public debt (they’re wrong, by the way). But, the agreement is much more widespread – ask literally any economic forecaster, in the public or private sector, that a casual reader of the Financial Times has heard of if, say, the Recovery Act boosted economic growth. They will all tell you “yes.”

    You won’t find anywhere near such a consensus on long-run tax or education or health care policy. In fact, public finance economists can’t get unanimous agreement on if, in the long run, income accruing to holders of wealth should be taxed at all (it should, by the way). In short, anybody waiting for the current unpleasantness to pass and for economists to unite in harmony in future policy debates shouldn’t hold their breath...

    Lastly, Davidson notes that there is a rump of economists (he calls them, reasonably enough, the Chicago School) that argue that debt-financed fiscal support cannot help economies recover from recessions. But, it’s important to note that there is pretty simple evidence that can be brought to bear on this Keynesian versus Chicago debate. Nobody denies, for example, that the government could borrow money and just hire lots of people – hence creating jobs. What the Chicago school argues is that this borrowing will raise interest rates (new demand for loans will increase their “price,” or interest rates) and this increase in interest rates will dampen private-sector demand. But interest rates have not risen at all since the Recovery Act was passed and private investment has risen, a lot.

    Second, Brooks argues that "there are the structural issues surrounding the decline in human capital. The United States, once the world’s educational leader, is falling back in the pack." If this is the case -- that our problems are a lack of education and investment in human capital -- then recent college graduates would have significantly lower unemployment rates than most, or they would be the same, or if they were higher then they'd come down even faster. Also from EPI, Heidi Shierholz, Natalie Sabadish, and Hilary Wething, "The Class of 2012":

    Young people with recent college degrees have high unemployment rates. That's not good, either for Brooks's argument or for the huge number of young people being devastated by the weak economy and the weak response of elites.

    Third, we have Brooks arguing that there are issues "surrounding globalization and technological change. Hyperefficient globalized companies need fewer workers. As a result, unemployment rises, superstar salaries surge while lower-skilled wages stagnate, the middle gets hollowed out and inequality grows." Some occupations require high skills and have sufficient demand, but some occupations require mid-skills and are disappearing. (Low-skill jobs should be fine on unemployment, but low on wage growth, in most versions of this "job polarization" theory.)

    Let's take BLS CPS unemployment data by occupation, March 2007 and March 2012, and see if you can tell me which occupations require these high-end skills from their low 2012 unemployment rates:

    I'm having trouble seeing them in the data.

    So here's the important thing about the demand-side recessions: If I wanted to come up with a "supply" theory for Brooks, I'd say, looking, at the data above, that we have too many college graduates and too many business and professional workers. I'd also say we have too many non-college graduates and too many service workers. I'd also say we have too many of all ages, all educations, and all occupations. Something is weak at a fundamental level in the economy, which is impacting everything, even before we get to the pressing issues related to job polarization or education. That weakness is demand, and that is where the policy response should be. Don't tackle it, and the longer-term problems are even harder to manage.

    As David Beckworth noted, "[t]his evidence in conjunction with that of downward wage rigidity excess money demand, and the Fed handling the housing recession just fine for two years should remove any doubt about there an aggregate demand problem. The real debate is how best to respond to this problem." The evidence he referred to was the SF data noted above along with the tracking he found between sales being reported as the "single most important problem" by small businesses and the unemployment rate:

    Mike Konczal is a Fellow at the Roosevelt Institute.

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  • Getting Our Arms Around Labor Force Participation With Two Fed Studies

    May 7, 2012Mike Konczal

    The short answer is: half, U-5 probably tells you everything you need to know, and women are going to play the most interesting role as it evolves.  Now for the question and longer answer....

    The short answer is: half, U-5 probably tells you everything you need to know, and women are going to play the most interesting role as it evolves.  Now for the question and longer answer....

    The average labor force participation rate went from an average of 66% in 2007 to a 2011 average of 64.1%.  Last month it was 63.6%.  As a reminder, the labor force is the employed and the unemployed (those without a job who are actively looking for one) added together.  When this number decreases it means that there are less people working, though it doesn't increase the unemployment rate (because, by definition, those leaving the labor force are no longer looking for a job).  Let's try to get our arms around the latest econoblogosphere debate: how much is the decrease in labor force participation a type of shadow unemployment?

    To recap, there's a handful of longer-term trends to watch in the economy. When Ben Bernanke was asked about labor force participation at his most recent press conference, he responded that labor force participation was dropping because the economy was (my bold) "no longer getting increased participation from women... society ages and also, for other reasons, male participation has been declining over time."  However a lot of it "represent cyclical factors, much of it is young people, for example, who presumably are not out of the labor force indefinitely, but given the, uh, weak job market, they are going to school or doing something else, rather than, than working."

    But how to get a good estimate of what is cyclical - related to the economic downturn - and what is structural and the result of longer-term trends - what would have happened without the Great Recession?  First off, what's the largest number possible?  Evan Soltas (a new blogging superstar you should be reading) takes the labor force participation rate of 2007 and projects it to now, and finds 5.8 million people missing.  This would give us an unemployment rate of around 11.4 percent, but would also exclude the longer-term trends.  Greg Ip, looking at CBO numbers, finds 5 million people missing.

    At the other end of the spectrum are those who would think that the unemployment rate is capturing all we need to know.  If someone really wants a job, they would look for one, and there's nothing interesting policy-wise in this information.  At 8.1% unemployment there's still plenty of slack in the labor market. (There's an unemployment crisis at 8.1% unemployment!)  The answer of the "true" unemployment rate should be somewhere in the middle.

    Chicago, Kansas City

    Daniel Aaronson, Jonathan Davis, and Luojia Hu of the Federal Reserve Bank of Chicago just put out a paper - Explaining the decline in the U.S. labor force participation rate - that shows:
    the current LFPR [Labor Force Participation Rate] is roughly 1 percentage point lower than our estimated trend rate (the LFPR consistent with the contemporaneous composition of the work force and an economy growing at its potential)....As of late 2011, the actual LFPR for 16–79 year olds is 1.1 percentage points below trend LFPR...Indeed, over the 2008–11 period, we find that only one-quarter of the 1.8 percentage point decline in actual LFPR for 16–79 year olds can be attributed to demographic factors.
    Labor force participation is 1.1% below the trend of where it is supposed to be.  They concluded this after creating a model of 44 combinations of gender, education and age to estimate projected changes, which is then compared to actual 2011 labor force participation rates.  Two-thirds of the long-term decline in LFPR is from demographics, and the remaining third is due to other effects, especially gender and education.
     
    Meanwhile, Willem Van Zandweghe has a paper from the Federal Reserve Bank of Kansas City, published in the first quarter of 2012, titled Interpreting the Recent Decline in Labor Force Participation.  They, strikingly, come to the same conclusion as the Chicago researchers.
     
    Zandweghe breaks out a decomposition technique to seperate out the cylical from the long-term elements of labor force participation movement.  He finds that that "[t]he Beveridge-Nelson decomposition attributes 1.1 percentage points of this decline (58 percent) to the cyclical downturn. Long-term trend factors, such as demographics, account for the remaining 0.8 percentage point of the decline (42 percent)."  1.1% percent is cyclical. That 1.9 percentage point overall drop reflects the drop from the 66% average in 2007 to the 64.1% average in 2011.
     
    Gender plays a role in this analysis as well.  A slight majority of men's decline in labor force participation is due to long-term trends; virtually all of women's decline is the result of the cyclical downturn in the recession.  "The average annual LFPR of men fell 2.8 percentage points from 2007 to 2011, of which 60 percent was due to a decline in trend participation...Women’s average annual LFPR fell 1.2 percentage points from 2007 to 2011. The decomposition attributes essentially all of this decline to the cyclical downturn in the labor market."
     
    1.1% Means...
     
    To lose 1.1% of the labor force means that we are missing roughly 2.7 million people.  Since around half of the total loss is cylical, the 2.7 million matches half of the total 5 - 5.8 million that Soltas and Ip found above, which is a good sanity check.  If we add 2.7 million people to the unemployed, that gives us a current unemployment rate of 9.7%.
     
    The number of people the BLS lists as "not in the labor force" but also lists as "persons who currently want a job" has increased by 1.7 million.  Indeed U-5 unemployment, which takes normal unemployment and adds in "discouraged workers, plus all other persons marginally attached to the labor force," sits at 9.5%.  Discouraged and marginally attached workers, and the U-5 unemployment rate that incorporates them, are designed to give us a measure of those not in the labor force who want to come back into the workforce but have given up looking.  Perhaps this will be our best measure going forward of this phenomenon?
     
    Here's a chart from the Kansas City paper of how the unemployment rate looks forecasted:

    Since so much of the cylical elements of the labor force participation is driven by female labor choices, those will be key in understanding how this evolves.  Catherine Rampell wrote last December about how young women dropping out of the labor force "are not dropping out forever; instead, these young women seem to be postponing their working lives to get more education."  We could see a wave of much more highly educated women enter the labor force further down the road.  And the New York Fed's blog argued that "a key factor for future aggregate labor force participation is the behavior of married women," and whether or not they look to re-enter the labor force. In general, and likely for men, as both the Kansas City paper and Ryan Avent note, many of these workers are going into disability.

    Overall I agree with what Ryan Avent argues here.  If we were hitting constraints, we'd see job openings and prices, especially labor costs, shooting upwards, which we do not see.  I'm not sure what policy lessons people are drawing from these missing workers, but they amplify the case that expansionary policies, from fiscal to monetary to debt workouts, are necessary and urgent.

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