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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The Avengers Movie, and Time vs. Space in DC and Marvel Comics

May 4, 2012Mike Konczal

Avengers is a fantastic movie.  You should see it.  The Thor and Captain America characters are far better than they were in their own movies, and Mark Ruffalo as Banner is the best we'll likely see (the Hulk steals every scene he is in).  Here's Alyssa Rosenberg's epic review, ‘The Avengers’ Brings Superhero Movies to Another Level.  In honor of the Avengers, let's do a comic book related post.

Avengers is a fantastic movie.  You should see it.  The Thor and Captain America characters are far better than they were in their own movies, and Mark Ruffalo as Banner is the best we'll likely see (the Hulk steals every scene he is in).  Here's Alyssa Rosenberg's epic review, ‘The Avengers’ Brings Superhero Movies to Another Level.  In honor of the Avengers, let's do a comic book related post.  No movie spoilers, except in the last paragraph, which will have a warning.

Specifically I want to examine the use of space and time in Marvel versus DC comics.  Recently DC rebooted their comic line.  All their titles stopped, and most were relaunched with an issue #1.  Continuity was thrown for a loop, with some issues starting at the beginning of their hero's career and others happening much later.  I stopped reading DC right before that, but my overall sense is that it is a mixed bag.

I was surprised by this move, as I always thought the deep time dimension to DC comics was what animated it and gave it a much different tone than Marvel comics, and this more or less threw that away.  To me, the dominant horizon for Marvel comics is space, as in location, and DC comics is time, as in history.  Marvel's comics were best read as unfolding across their Earth, in multiple locations, with the challenge as following how the different spaces overlapped and conflicted.  For DC, it was about mining the deep history and overlapping continuity, constantly in flux, to make sense of where the characters had come from and how they were engaging each other.

The two major, era-defining runs on Marvel were the Chris Claremont run on X-Men, and now Bendis' run on Avengers.  They both set the tone for how Marvel operated.  The thing I remember most about Claremont's X-Men, especially once the original characters spun off into X-Factor, is how the characters were always split up in different locations.  There was a team off in Australia. There was a group off in New Orleans doing other things. There were people at the mansion and in outer space and on the Moon.  Getting people in the same space - would they all make it to Muir Island to fight the Shadow King? - was always a source of dramatic tension.  But as a fan, keeping track of the continuity of who was where was always a task, and the geek fun was trying to keep a mental map to make sense of it as it unfolding each week.

Bendis' Avengers, especially after the Civil War storyline, works the same way.  You had to know which characters are underground, who is staying with what team, and who is chasing and fighting with whom.  Like the X-Men at their height, you really need to follow several titles to keep track of who is doing what where.  Their big events are all about this as well.  Most of Siege takes place across an afternoon of battle, and it is just a matter of getting all the characters in place for the action to take place.  Fear Itself requires Tony Stark to go to one place, and Thor to bump into the Hulk and the Thing, and then everyone to get to Asgard, and so on.

DC Comics never had that issue - instead they exist across time.  To really make sense of the stories, especially after Geoff Johns took over the world, you had to engage continuity across time.

I think it's safe to say that the Ron Marz run on Green Lantern, which turned Hal Jordan into the villian Parallax, introduced Kyle Raynor, then immediately put his girlfriend in a refridgerator and made it so Kyle's ring could impact the color yellow, is a low point in DC Comics history.  Johns not only rebooted Green Lantern, but turned it into a major comics achievement by fitting all those items into continuity.  While lesser writers would have ditched the old story, or other comic universes would ignore huge parts of it just to make it fit however they wanted (who is Xorn again?), part of the joy of the Green Lantern reboot was watching Johns make it all work together.  When you geek out with DC comics, the continuity to fixate on is going to be how the story exists throughout time.

The revamping of the comic universe that happened in DC around this time amplified this - creating the JSA (Justice Society of America) as a dual-generation comic alongside the Justice League.  Grant Morrison's run on Batman gloried in pulling up every arcane reference to old Batman stories. James Robinson's fantastic Starman run was all about nostalgia and the relationship between Golden Age and current day comics.  DC's big events follow this as well.  The Crisis events usually are about the various reworkings of the history - what universes are in, and what universes and stories are out.

(There are plenty of pieces of evidence against this division - Bendis' excellent Illuminati comics series, which is all about revisiting major events in the Marvel timeline, for instance.  And practically, DC's longer timeframe and its purchasing of numerous comic titles that had to be worked into continuity add to this, as well as the fact that the headline characters move at such speeds it is assumed they can get anywhere quickly.)

Why does this matter?  As the comic book audience ages, and as the fandom is done online (with the ability to discuss every esoteric detail of every comic and being available to all), there's a big advantage in going complicated for the comic book titles.  By having to read several titles, or having had to have read a deep backlog, it boosts sales. But it also creates a more complete universe, which is an excellent thing for the fans. I'm surprised DC tossed their advantage in this realm on a gimmick.

AVENGERS SPOILER:  Speaking of deep history, I can't believe they put Thanos in as the major baddie at the end.  After the midnight showing, several teenagers were trying to figure out who that was.  I can tell I'm old because I really wanted to go: "sit down, son. When I was your age, actually when I was younger than you, there was this comic called Infinite Gaunlet.  After the first issue came out, everyone scrambled to find the entire backstory, from Thanos Quest to all the Silver Surfer issues where he chases Thanos around (and the latter ones, including that one with the spiffy reflective cover). It was the greatest comic ever." In other words, the one bone they threw to fans in the closing credits was perfectly pitched to obsessive comics readers in their early 30s.  Well played.

 

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Job Numbers Friday: Looking to the Secondary Measures

May 4, 2012Mike Konczal

April's job numbers were disappointing, but they'd look even worse if we accounted for those who have dropped out of the job market.

Today featured a lackluster set of job numbers. Payroll employment was up 115,000 jobs in April, and the unemployment rate went down to 8.1 percent from 8.2 percent. Government jobs were down 15,000, including 5,200 state and local education workers.

April's job numbers were disappointing, but they'd look even worse if we accounted for those who have dropped out of the job market.

Today featured a lackluster set of job numbers. Payroll employment was up 115,000 jobs in April, and the unemployment rate went down to 8.1 percent from 8.2 percent. Government jobs were down 15,000, including 5,200 state and local education workers.

There are three ways of parsing the jobs numbers. One way is to focus on the jobs created -- where are they, what industries they're in, and how much wage growth and hourly gains there are. The second is to focus on unemployment -- who is unemployed, how long have they been unemployed, and what characteristics do they have? And the third is to look at secondary unemployment characteristics, the numbers that try to interrogate the boundaries between the unemployed and those "not in the labor force."  We'll spend some time in the next week talking about how to think of this third category.

For instance, is this even an interesting question? Matt Yglesias makes a case that it is overblown, arguing that it is really catching longer-term patterns and needs to be put in the context of the global economy. I agree in the sense that I think 8.1 percent unemployment is sufficient for serious reaction. But I think digging into this is important for both economic and political reasons. We'll start a reply with this post.

It is the case that the size of the labor force hasn't grown (as raw number of people, not a percentage) since the recession started. Though we don't know what the "true" size of the labor force should be at full employment, it should be a bigger number than it was in 2007. That's a problem, because conventional unemployment can't capture that.

And it is still true that the unemployed are more likely to drop out of the labor force than find a job. This is a brand-new phenomenon in the post-Great Depression economy.

Though the drop-out rate is within a longer historical range as a percentage of the unemployed (which is in the chart above), the number of unemployed people doubled during this recession. This channel is undertheorized in normal economics -- why would someone looking for a job decide to stop looking, given that they were willing to look at one point? For those concerned about the long-term costs to our economy of hysteresis, this is a problem. We aren't seeing an uptick in those moving from "not in the labor force" to unemployed, and thus no increase in unemployment, which we had wondered if we were going to see as the economy picked up.

Many of those who are "not in the labor force" want a job but are declining to actively search for them. This number went up in the recession and is hovering at a high rate:

This is the categorization of "want a job now," but "U-5" unemployment also captures some of these changes. That additional 1.5 to 2 million unemployed workers would give us a higher unemployment rate. It isn't increasing in the past year, but it isn't decreasing either.

An aging population should create decline in the employment-to-population (the percentage of people working) and labor force participation (the percentage of people working or looking for work) rates. How does this look when we just look at 25-54 year olds? Here is their labor force participation rate:

And their employment-to-population ratio:

There's a question as to what extent the recession is speeding up already occuring trends (retirements in an aging population, increased schooling, fewer men working) or has caused these trends to happen (or at least overshoot) as a result of being away from full employment. But retirement and schooling is less of an issue in the 25-54 year old range, and yet we see dramatic results here. Will these go back to their previous levels? Probably not. But I believe they'd go back at least a little at full employment. And that needs to be accounted for.

Mike Konczal is a Fellow at the Roosevelt Institute.

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More on the Case for the Public University as a Public Option

May 3, 2012Mike Konczal

Josh Barro has an editorial at the Daily, Making U. Pay, about the college affordability cost crisis.  Barro:

Josh Barro has an editorial at the Daily, Making U. Pay, about the college affordability cost crisis.  Barro:

What the University of Florida (along with every other American college and university) really needs is cost discipline...Colleges still need to employ a lot of highly skilled workers, and college costs are tied to their wages, which rise faster than inflation...colleges and universities have failed to mitigate this phenomenon. For example, over the last few decades, the typical public four-year college has seen a sharp expansion of its support and managerial staff — from 5.5 per 100 students in 1987 to 7.5 per 100 in 2007...

Unfortunately, consumers do not have the necessary incentives to impose cost discipline in the market. The perceived necessity of a college degree to find a middle-class job gives students few options but to pay up...State legislatures, too, should put pressure on public colleges and universities not to increase staffing relative to student populations, and to respond to budgetary strains with cost control instead of tuition hikes or reductions in enrollment...Colleges and universities should take greater advantage of technological advances that could finally improve productivity in the education sector, such as distance learning and video instruction...

These reforms, different though they are, have one aim in common: creating incentives for all actors in the market to make higher education not just cheaper, but more efficient. That may sound unromantic, but it’s necessary to maintain educational opportunity for all.

I agree with most of the piece.  Barro doesn't take his argument in this direction, but, with the risk of dragging Josh into a social democratic quicksand pit, it's useful to reframe this discussion as one of reclaiming a "public option" in higher education.  Much of the discussion on the technical efficiency of the public provisioning of merit goods focuses on scale and compulsion, which is relevant for higher education, but there's also advantages in cost control and baseline quality.  By holding down tuition, the public university can act as a check on runaway price inflation in the private university market.  Considerations about dynamic efficiency - improvements in quality - seem not as relevant here in the formal education market: private sector tuition is exploding as fast as public tuition.  If we are concerned that boosting demand through price subsidies is captured by incumbent suppliers, then boosting access through reducing tuition on public universities should negate those rents.

Dynamic efficency is very important when it comes to the online and future sectors of higher education.  However public options help here as well: having a strong baseline of quality is important for vetting the actual efficiency improvements of these new institutions.  Public options solve a certain type of informational problem.  If prices are lowered, it can be difficult for the government and citizens to tell if it is because market innovations have allowed for lower cost production or because they are providing services of a cheaper quality.  The private market is more incentivized to provide new benefit options and offer greater flexibility when they have to compete against a baseline product.  This creates the incentives mentioned above, but these incentives work more towards actual quality improvements instead of rent-seeking when they are competing against a public baseline.  We know for-profit schools are a bad deal because they statistically underperform public community colleges while having larger debt burdens.  Online education at California looks to have equally high drop-out rates. This was part of the important intellectual firepower over the debate on "vanilla products" that erupted during the early parts of Dodd-Frank, brought over to the education sector.

Tim Noah wondered to Matt Yglesias if we should impose cost controls on colleges; I think we should instead do what we know has worked - make sure a public option is available to all, and have a private market develop alongside it, filling in the efficiency gaps wherever they are.  I forgot to link to this, but Aaron Bady had a powerful defense of the California Master Plan, the mid-century public higher education model, when we did a bloggingheads a few weeks ago:

 

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A Majority of Those Who Claim EITC Are on it for Less Than Two Years

May 2, 2012Mike Konczal

Here's a datapoint I was surprised to learn. From a footnote by Bob Greenstein of CBPP, there's a paper titled 

Here's a datapoint I was surprised to learn. From a footnote by Bob Greenstein of CBPP, there's a paper titled Income Mobility and the Earned Income Tax Credit: Short-Term Safety Net or Long-Term Income Support, by Tim Dowd and John B. Horowitz.

Is the safety net a hammock?  And is the system fundamentally broken if some 40 percent of American don't pay an income tax? This is the brunt of the conservative attack on the welfare state.  As Paul Ryan notes, his plan will make sure the government doesn't "turn the safety net into a hammock that lulls able-bodied people to lives of dependency and complacency, that drains them of their will and their incentive to make the most of their lives." Ryan's plan is focused on cutting spending through the tax code.  Most tax code spending benefits the top 20 percent of Americans, with one exception - the set of refundable credits including the Earned Income Tax Credit (EITC).  Those mostly go to those in the bottom 40 percent of Americans.  If you have the concerns mentioned above, the EITC is the place you'd cut.

But does the EITC represent a "hammock," a permanent class of the poor living lives of "depenency and complacency"?  For one, EITC is connected to those who work, so one would think that it would be excluded from the assault on the welfare state.  But beyond that, it appears that those claiming EITC are people going in and out of working poverty with a surprising turnover frequency.  From the Dowd/Horowitz paper (my bold):

Sixty-one percent have spells of one or 2 years. However, at the same time, we find that 20 percent of EITC recipients starting a spell, conditional on observing the taxpayer in 1989, claim the credit 5 or more years. Therefore, for some taxpayers, the EITC acts as a temporary safety net during periods of either anticipated or unanticipated income or family structure shocks. But the EITC also acts as a long-term mechanism of providing assistance to taxpayers with children who are entrenched in the lowest- income brackets.

Indivar Dutta-Gupta at CBPP has more on the study, also noting that (my bold):

The EITC goes to working people — the overwhelming majority of them families with children — with incomes up to roughly $49,000.  Earlier unpublished research from Dowd and Horowitz found that EITC users pay much more in federal income taxes over time than they receive in EITC benefits.  Taxpayers who claimed the EITC at least once during the 18-year period from 1989 through 2006 paid several hundred billion dollars in net federal income tax over this period, after subtracting the EITC and any other refunds.

Dowd and Horowitz’s new study also found that EITC use is highest when children are youngest — which is also when parents’ wages are lowest.  (Working parents’ wages rise, on average, as their children grow up.)  This finding is particularly important given the importance of income for young children’s learning and the evidence that poverty in early childhood may reduce children’s earnings as adults.

Rather than a permanent class of non-taxpayers, EITC users do, in fact, pay more in federal taxes over time than they get in EITC benefits, which represents how many of them move in and out of working poverty over the course of several years.  The study finds that mobility is lower on the whole for this group, which makes a safety net even more of a necessary thing.  But perhaps we can cut with the hammock language, and focus on the metaphor of a trampoline, providing people much needed support when there's a sudden shock to the economy or their lives that drops their ability to provide for themselves, and also a mechanism that promotes the kind of risk-taking we want in our society.  The question is how to make that stronger.

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Will Ryan's Budget Take a Page From the 18th Century and End Progressive Taxation?

May 1, 2012Mike Konczal

Jonathan Chait has a great article on Paul Ryan in New York Magazine, which includes an important quote from anti-tax adovcate Grover Norquist: "We don’t need a president to tell us in what direction to go. We know what direction to go. We want the Ryan budget...

Jonathan Chait has a great article on Paul Ryan in New York Magazine, which includes an important quote from anti-tax adovcate Grover Norquist: "We don’t need a president to tell us in what direction to go. We know what direction to go. We want the Ryan budget... Pick a Republican with enough working digits to handle a pen to become president of the United States.” Earlier in the year Thomas Mann and Norman Ornstein walked readers of the Washington Monthly through what it would look like to have a Republican House, Senate, and president -- and the likelihood that they would pass the Ryan budget through reconciliation.

Degressive Taxation

One of the centerpieces of the Ryan budget's Path to Prosperity is tax reform. The tax overhaul will cut tax expenditures (without naming any) while also reducing the current set of six tax brackets to just two. One bracket will have a tax rate of 10 percent and the other will be 25 percent. Here's a question: should we think of these two rates as a special form of a flat tax? Would this budget be the end of progressive taxation in the United States?

There's an excellent 1908 book called Progressive Taxation in Theory and Practice (you can download a copy at that google books link). Written by Edwin Robert Anderson Seligman for the American Economic Association, it set out to catalogue every argument in history for and against progressive taxation as well as proportionate taxation (or what we'd now call a flat tax). While walking through all the arguments, he has to classify a set of arguments that aren't strictly either -- something he calls "degressive taxation."

Degressive taxation is where you have two tax rates: Below a certain income it is one rate, and above that income it is a second, higher rate. Typically it is a zero rate of taxation for income below the poverty line, and a flat, proportionate rate for income above that.

Arguments for degressive taxation were very common in 18th century Europe. The French political economist François Véron Duverger de Forbonnais argued in 1758 that "the object of taxation is the preservation of property; and property is nil if it does not afford subsistence. Hence, the physical subsistence of every family is a privileged part of all income. Only the surplus above this minimum can be assigned to the public for the support of government."  Zero taxes for incomes up until poverty, flat tax above poverty.

Dean Woodward put the argument even more strongly in 1768. "Before we begin to tax any income for the poor, we must deduct from it as much as is requisite to purchase for the possessor and his family the absolute necessaries of life.  No man can be bound to give to another what is essential to his own subsistence.  To this every man has the exclusive right on which the very claim of the poor is founded."

Even though it isn't a flat tax across the entirety of income, as there are two distinct tax brackets, none of these people viewed their project as one of progressive taxation. Lord Auckland, debating England's first income tax in 1799, exempted 60 pounds for taxation as the minimum of subsistence but rejected progressive taxation "because of the implied inference, that because a man possesses much, therefore more shall be taken from him than is proportionably taken from others." As Seligman noted, surveying the arguments, "in degression the ideal is proportional taxation, although a concession is made, through lower rates or exemptions or abatements, to the poorest classes who ought theoretically to pay the same rate but who are deemed to be unable to do so."

How Does The Ryan Plan Stack Up Against the 18th Century?

I think it is fair to characterize the Ryan plan as, in its ideal, a degressive taxation plan. A low rate for those with little and a flat tax for everyone else. There are a few things that complicate this picture. It isn't clear where the 10 percent bracket ends and the 25 percent bracket starts (the 25 percent bracket now runs from $35,351 - $85,650 for singles, so in theory the 10 percent could run from $0 to $35,350). As James Kwak and many others point out, the numbers don't work -- this would be a major tax cut for the rich and a major tax hike for the working and middle classes.

However, would people making poverty wages pay ten percent under the Ryan Plan, or zero percent? People working for poverty wages now don't often pay income taxes because of the Earned Income Tax Credit (EITC). But would Ryan look to cut the EITC tax break? As this fantastic New York Times chart shows, some sets of tax expenditures tilts to the 1% and some tilt to the bottom 40 percent:

Refundable tax credits, like the EITC, benefit the bottom 40 percent of Americans. The preferential treatment of capital gains and dividend income benefits the top 20 percent, especially the top 1%. Ryan is clear that he wants to give capital gains and dividends even better treatment. But will he look to cut the EITC, making those in poverty pay more? It's not clear from anything I can find. As Tim Noah writes, Eric Cantor looks pretty set on getting those who pay nothing in income tax to pay something, and cutting the EITC is the way to do that.

Looking further afield, Yuval Levin's big article "Beyond the Welfare State," the intellectual firepower (Committee on Social Thought-trained) justifying something like the Ryan Plan, mentions only three exemptions "worth keeping" after the conservative new dawn: "retirement savings (which are far preferable to universal cash benefits to retirees), a unified child tax credit (to encourage parenthood and to offset the mistreatment of parents in the tax code), and the charitable-giving deduction (since a reduction in government's role in social welfare must be met with an increase in the role of civil society, which should be encouraged)." Nothing specifically targeted for supplementing the incomes of those making poverty-level wages.

Which also means that at the turn of the 21st century, after centuries of economic growth, the conservatives in the United States are looking at tax policy potentially far more regressive at a conceptual level toward the poor than classical liberals in the mid 18th century. Forget so-called moderate Republicans of the Eisenhower-era; can we just get a handful of 18th century tax scholars in the Republican party?

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