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 Future of the Economy Will Be Decided on Election Day

May 4, 2012Jeff Madrick

The future of the recovery is still in doubt, and it all depends on which economic doctrine comes out on top on November 6th.

The future of the recovery is still in doubt, and it all depends on which economic doctrine comes out on top on November 6th.

Today’s jobs data from the Labor Department were disappointing but not a disaster — at least not yet. The creation of 115,000 jobs is not adequate to bring the unemployment rate down consistently. The drop in that rate to 8.1 percent had to do with people leaving the workforce, not the creation of an adequate number of jobs. Contrary to what is widely written, however, the numbers do not necessarily mean the economy is slowing down. There is probably now a problem with the seasonal adjustments. Something has changed, and the most likely culprit is the warmer-than-usual weather.

The seasonal adjustments probably inflated the data on growth earlier in the year and are probably deflating it some now. We are likely growing at a pretty even pace, not slowing down significantly. Let’s not forget that recoveries do have a momentum of their own, and manufacturing is making something of a comeback. There is also some notable rundown in consumer leverage.

This is good news, but not good enough. The pace is still too slow. By now we all know about the headwind of consumer debt and lack of adequate mortgage relief. That leverage is not being diminished fast enough, and it is likely as the Obama stimulus fully peters out that there will be ongoing government contraction — especially as state and local governments continue to cut back.

It would be nice to see Washington pay some attention to this potentially serious weakness — along with two other factors. The first is continued recession in Europe, which in turn will weaken its finances further. Austerity has been the disaster we long warned about. The U.S. sells to Europe and it owes us money, not least our money market funds.

Second, a bunch of significant contractionary policy matters come to a head at the end of the year. The Bush tax cuts end, as do emergency unemployment benefits, the payroll tax cut expires, and Congress is supposed to implement $1.2 trillion in spending cuts because the Super Committee failed to agree on its own cuts.

Many have written about this “cliff” and understand nothing will be done until after the election, which leaves less than two months to do anything. Most think there will be some kind of postponement of the issues by Congress because there won’t be enough time to do anything substantive. But then what? Much will depend on the election outcome.

So much attention has been given to deficit reduction in the U.S., and by the Obama administration until only last fall, that we are now in a dangerous rut. We need fiscal stimulus and we are not going to get it. The economy is hardly strong and can be easily toppled into a new recession. Then deficit projections get still worse. It's hard to be optimistic in this environment. I believe the Obama administration took its eye off the ball since the start. The focus should have been jobs, and I don’t think the attention paid to health care legislation was a sufficient excuse. They would have missed the ball anyway.

But given the nation’s current straits, this November’s election is one of the most important elections of our lifetime. If it goes well, jobs and growth have to be at the top of the agenda, not deficit issues. An Obama loss means austerity and recession again. Budget cuts will be demanded at the expense of the elderly, the poor, and the new health care bill. If Obama wins but Democrats lose the Senate, it will be significantly better but not a panacea. Muddling through, which is what we’d get, may also mean recession.

A Democratic victory in the House and a filibuster-proof Senate would be too grand to bank on, but not impossible. Even then, it would all depend on aggressive leadership by Obama that favors growth. Fiscal responsibility can come later.

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

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The EEOC Stands Up for Transgendered Workers While Congress Stalls

Apr 30, 2012Tyler S. Bugg

genderless-icon-144The EEOC's decision to extend protections against discrimination to transgender workers is an important step toward social justice and a stronger economy.

genderless-icon-144The EEOC's decision to extend protections against discrimination to transgender workers is an important step toward social justice and a stronger economy.

Two months ago, I wrote that our country should pass the Employment Non-Discrimination Act (ENDA) and expedite the process of ending discrimination based on sexual orientation and gender identity in the workplace. This month, we’re one step closer. A groundbreaking ruling handed down from the Equal Employment Opportunity Commission (EEOC) on April 20 dictates that protections against gender identity discrimination are covered by Title VII of the 1964 Civil Rights Act and can be called upon in gender and sex discrimination complaints to the bureau and in subsequent lawsuits. This is a major leap forward for transgender Americans and for their job security.

The landmark change came as a response to the case of Mia Macy, a transgender woman and former Phoenix police officer who applied for and was tentatively accepted for a ballistics job -- until the employer conducted a background check. After obtaining information about Macy’s transition from a man to a woman, the employer allegedly (and untruthfully) informed Macy the offer was eliminated due to budget cuts and then promptly filled the position with another (not transgender) applicant. EEOC policy has been vague on exactly the types of cases are covered under its statutes, and are therefore under its legal jurisdiction, and detrimentally so. But under the new ruling, Macy’s filing of a complaint of gender discrimination with the EEOC can move forward to the next investigative steps.

The new ruling, however, has ramifications much larger than Macy’s case alone. It clarifies existing national policy and makes stronger what’s often been a too slowly evolving area of employment law. It sets into motion protections for potential employees from workplace discrimination regardless of their gender identification, expression, or status. The policy holds obvious significance for cutting away unnecessary pressures within the workplace environment, pressures that are both bad social policy and bad business policy.

Human Rights Watch’s “Corporate Equality Index” has striking evidence in support of the last point. Not only are employees who usually face discrimination finding more inclusive employment laws beneficial, so are employers. While employees experience higher confidence in their job searches and eventual careers, employers can access improved applicant pools. Benefits like more inclusive health plans and policies, gender-minority support and focus groups, and diversity councils are all additional assets that strengthen the commitment to productive and respectful employer-employee relations, guided by principles of fairness and equity. The economic outlook, in the long run, is the real winner.

The EEOC ruling will also have profound effects in curbing some disturbing trends. Data from the National Center for Transgender Equality (NCTE) shows that mistreatment at work is widespread. A disturbingly high 90 percent of transgender individuals reported feeling harassed or mistreated at work, and 47 percent reported being fired, not hired, or denied a promotion or salary increase as a result of their non-conforming gender status.

On top of this, the lack of protection against discrimination in the workplace has long had alarmingly adverse effects on gender-minority individuals elsewhere. The NCTE further reports that as transgender employees face workplace discrimination, their personal lives suffer as well. As a result of negative workplace environments, transgender individuals are four times more likely to be homeless, 70 percent more likely to abuse drugs and/or alcohol, and 85 percent more likely to be incarcerated.

The EEOC ruling is a vital first step with the potential to be a game changer in the job market. Its potential for setting a precedent for the passage of laws like the ENDA, one of the most stagnant pieces of legislation of the past two decades, is also promising. But it’s not the whole solution. While it's certainly a strong deterrent for employers with histories or ongoing incidents of gender discrimination, it’s only a mechanism as strong as we make it. It shouldn’t only be a reactive method that penalizes discrimination by threatening lawsuits, legal fees, and unwanted government intervention. Rather, it should foster a culture of prevention aimed at normalizing acceptance of all workers.

Tyler S. Bugg is a member of the Roosevelt Institute | Campus Network and an Organizing Fellow with Obama for America studying international affairs and human geography at the University of Georgia.

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Andrew McAfee on the Quickly Encroaching (Economic) Dominance of Our Robot Overlords

Apr 26, 2012

Last week, Roosevelt Institute Senior Fellow Bo Cutter’s latest installment of the Next American Economy breakfast series featured Andrew McAfee, principal research scientist at MIT’s Center for Digital Business, discussing his book The Race Against the Machine.

Last week, Roosevelt Institute Senior Fellow Bo Cutter’s latest installment of the Next American Economy breakfast series featured Andrew McAfee, principal research scientist at MIT’s Center for Digital Business, discussing his book The Race Against the Machine. A self-proclaimed technology optimist, McAfee lays out in stark and sobering terms the workforce displacement that has already taken place and will continue as the speed of technological innovation only increases. Watch here as McAfee relates how chess, rice, and, an Indian emperor help explain why computers keep getting twice as fast every year:

While computers are able to take on increasingly complicated tasks (like becoming a Jeopardy champion), McAfee notes that there are still a few places where humans can hold their own against their soon-to-be cyber overlords, namely complex communication, advanced pattern recognition, and entrepreneurship. However, examples of “science fiction becoming reality,” like the Google Car and nearly pitch-perfect language translation software, make clear that computers “are eating away at those advantages very quickly.” Bottom line: As a result of this “unprecedented digital encroachment,” the bundle of skills that the typical American worker has to offer potential employers is dwindling.

On the upside, McAfee makes clear that technological progress will continue to make us a more productive and rich society. But with the way things are wired right now, not everyone will get to enjoy the party. McAfee points out that while GDP and even mean income is generally increasing, median income has actually declined.

So what can we do about all this? McAfee offers up three places to start. First, invest in America’s infrastructure. Second, use appropriate policy tools (read: taxes) to deal with what we know will be increasing distance between haves and have-nots. Finally, increase innovation in our education system at all levels. McAfee believes our fate is in our own hands and that “the choices that we make as a society and an economy over the next generation are really going to strongly determine whether it’s a utopian or dystopian future that we head into.” 

For more, watch the full roundtable discussion below:

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Our Brave New Service Economy

Apr 23, 2012Bryce Covert

More low-wage, dead-end jobs might sound good to business owners, but is that what we want for our country?

More low-wage, dead-end jobs might sound good to business owners, but is that what we want for our country?

One of Romney’s big selling points is that he knows the “real economy” (much like some conservatives know “real America,” I guess) because he has experience as a businessman. Conservatives have started substituting business acumen for political acumen, making the mistake of comparing what’s required to run a country to what’s required to run a company. At first blush it almost makes sense: both oversee groups of people, both deal with budgets, both make decisions. But not only does that experience not necessarily translate to the White House, it also belies a deeper problem about the kind of economy we’re trying to recreate in the aftermath of the Great Recession. Viewing the country, and its economy, as a private business isn’t likely to create solid middle-class jobs.

“This American Life” had a recent episode called “What Kind of Country” that explored what kind of country Americans want this to be, but parts of it had more to do with what kind of economy we want. Take the example they give in act three: Colorado Springs. With a stretched city budget, local businessman Steve Bartolin, CEO of the Broadmoor Hotel, decided to look and compare it to running his hotel. After all, he tells the reporter on the story, “We have the same number of employees as the city… I look at us as a service delivery organization,” just like the city, apparently. They are both concerned with “how do you deliver the highest quality of service in the most efficient, cost effective manner.”

His main focus became how much both entities spend on their employees. “They’re running a 70 percent labor cost and we’ll run a 35 percent labor cost,” he says. “Any business person can look at that and say, ‘Jesus, we’re going to be out of business by 2014 at this pace.’” He writes a manifesto to the city council that ends up being circulated all over town: the city should lower starting wages for its employees, require them to pay more for their health insurance, and start contracting out anything it can to private businesses.

A city councilwoman explains that payrolls for the city government are higher than the hotel’s because it doesn’t control its own pension costs, which are mandated by the state. But she also makes a very important point: it has to hire people with more training and experience. City engineers and police officers can’t be hired on the cheap like the service industry workers at the Broadmoor.

And herein lies a big problem. What Bartolin proposed, basically, is to make government employees more like service employees. This is highly problematic, particularly for the black Americans and women who have long relied on public employment because it paid decently, offered good benefits and stability, and enabled them to move up the economic ladder. Public employment has been credited with helping to create the black middle class. If we make these jobs as unstable and low-benefit as service jobs, we’ll be taking away a huge boon from groups who have historically benefitted from it.

But we’re not just dragging public employees down to the level of service workers. In fact, the jobs our economy is best at producing these days are service jobs. As Harper’s recently tweeted, the chances that an employed American works in the service industry are six in seven. Those jobs have been growing very quickly: from 2010 to 2011, occupations like salespersons, cashiers, and food preparation workers grew by 3.2 percent. As Nona Willis Aronowitz recently reported, one in 10 employed Americans works in food service, making up 9.6 million people. And young people are taking a lot of those jobs: a quarter of people ages 16 to 29 who have a job work in hospitality, meaning travel, leisure, and food service. “A study of 4 million Facebook profiles found that, after the military, the top four employers listed by twentysomethings were Walmart, Starbucks, Target, and Best Buy,” she writes.

These are low-wage, low-benefit jobs that rarely pay much more than minimum wage (if even that) and offer schedules that can change on a whim. A report from the Retail Action Project in New York found that over half of retail workers made under $10 an hour – and 12 percent earn the minimum wage. Less than a third get health benefits through their employer. The Restaurant Opportunity Centers United reported that the average yearly income for restaurant workers in 2009 was $15,092, and less than a third make a livable wage. And what about those hotel workers who might be under the employ of Batolin? Non-managers make less than $12 an hour on average.

And unlike government work, these jobs offer little training and room for advancement. The sector relies on employee churn to keep labor costs lower. (Just ask Barbara Ehrenreich.) Service careers aren’t designed to advance much farther than flipping burgers.

Is this what we want our economy to look like? Do we want most jobs to offer wages that don’t cover basic expenses and to deny workers the benefits they need to stay healthy? Businesspeople would call this cost effective. I call this unsustainable.

Bryce Covert is Editor of Next New Deal.

 

http://www.shutterstock.com/Image courtesy of Shutterstock.com.

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Even Six-Figure Salaries Don’t Attract Men to Care Work

Apr 18, 2012Suzanne Kahn

Until these jobs are given the respect they deserve, they will continue to turn men off and be paid less than they're worth.

Adam Davidson’s recent New York Times Magazine article “The Best Nanny Money Can Buy” introduced readers to the “bizarre microeconomy” of New York’s highly paid nannies. The first nanny Davidson introduces earns $180,000 a year, plus a Christmas bonus and an apartment on Central Park West.

Until these jobs are given the respect they deserve, they will continue to turn men off and be paid less than they're worth.

Adam Davidson’s recent New York Times Magazine article “The Best Nanny Money Can Buy” introduced readers to the “bizarre microeconomy” of New York’s highly paid nannies. The first nanny Davidson introduces earns $180,000 a year, plus a Christmas bonus and an apartment on Central Park West.

Davidson’s economy is indeed bizarre. As Bryce Covert pointed out in Forbes recently, the average New York nanny makes $37,076 a year. Childcare providers, home health care aids, and others are paid far too little for the incredibly important work they do. In the U.S., median pay for a childcare worker in 2010 was about $9 an hour.

Care work jobs have historically been paid poorly. Jobs associated with the work women traditionally did as wives and mothers have not been conceptualized as real work and have generally paid far less than traditionally male work. This was partially a result of the way laws were written. Until the 1970s, domestic workers were not included in the Fair Labor Standards Act that mandated a federal minimum wage, among other things.

When jobs pay well, however, they tend to attract men. Yet this does not seem to be the case among New York’s elite nannies. Interestingly, even in the microeconomy of highly paid nannies, they are all women. Davidson himself points this out, and a glance at the job listings on the website of the Pavilion Agency, the firm that connected Davidson with the high-end nanny he spoke to, confirms this. Why aren’t men attracted to these high-end jobs?

The answer seems to lie with the respect we give care workers. Most nannies not only earn very low pay for very long hours but also gain little social capital from their jobs. This lack of respect seems to extend even to highly paid nannies. It is unmistakable in the language used in the Pavillion Agency job listings. “This is the nanny who will be a ‘wife’ to a fortunate family,” reads one posting. Others describe the candidates as a “lovely lady” or “cuddly.” This sounds like the way the ad execs on Mad Men talk about their secretaries and not the way we talk about candidates for professional careers in the 21st century.

These are also notably gendered advertisements. Employers are clearly looking for women to fill these jobs because they imagine them to be a woman’s or a “wife’s” work. This sort of language very likely not only keeps men out of these jobs, but it also keeps pay very low for most care workers. As long the job of nanny is not respected, it will be paid less than jobs that are. 

Davidson may have described a strange niche economy, but his rare, highly paid nannies actually tell us quite a bit about the problems most care workers face. If even six-figure salaries fail to attract men to the market, there’s a problem with care work that goes far beyond poor pay. It’s a job that society tells men, and many women, that it isn’t respectable to do. Until these jobs earn social capital as well as cash, care work will probably remain a sex-segregated, and therefore underappreciated, sector of the economy. Outside the upper echelons of Manhattan society, that means care work is likely to remain poorly paid.

Suzanne Kahn is a Roosevelt Institute | Pipeline Fellow and a Ph.D. student in history at Columbia University.

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How States Can Get Serious About Offshore Wind Development

Apr 10, 2012Stewart Boss

earth-150As part of the 10 Ideas: Generating a Green Future series, a call for policies that level the playing field for wind power, which would in turn create jobs and revenues for the states.

earth-150As part of the 10 Ideas: Generating a Green Future series, a call for policies that level the playing field for wind power, which would in turn create jobs and revenues for the states.

North Carolina has 140 gigawatts (GW) of potential offshore wind energy capacity -- the largest resource of any state on the East Coast -- in part because its shallow-water coastline is ideally suited for offshore wind development. But while North Carolina may be number one in potential offshore wind energy, it's hardly alone. The National Renewable Energy Laboratory (NREL) estimates that the U.S. has 4,150 GW of total potential wind turbine nameplate capacity from resources around the country. (For some perspective, the nation's total electric generating capacity from all energy sources was 1,010 GW in 2008). The U.S. Department of Energy reports that North Carolina alone could conceivably install 10 GW of offshore wind capacity by 2030.

Offshore wind farms have existed in Europe for more than 20 years. States like Massachusetts and Rhode Island are advancing offshore wind energy projects, and Maryland's state legislature is currently considering a bill that would create wind industry incentives. But despite all the benefits, there are still no installed offshore wind projects in the U.S. And there are none currently even planned here in North Carolina.

Yet the economic and environmental benefits of turning to this cleaner energy source are substantial. Building just one GW of offshore wind energy in North Carolina would create an economic ripple effect over the next two decades that could pump an estimated $1.1 billion into the state's economy. The more than 8,000 component parts of offshore wind turbines are often too large to transport long distances, so development in North Carolina would mean new manufacturing facilities and thousands of manufacturing jobs in the state. That same DOE study showed that installing one GW of offshore wind power would create 1,628 new jobs and bring $188.5 million into local economies in the construction phase alone. This is not surprising; investing in clean energy projects typically creates three times more jobs than the same level of spending on fossil fuels.

Developing that one GW of wind power in North Carolina would also deliver tangible environmental gains: 2.9 million tons in annual carbon dioxide reductions and 1,558 million gallons in annual water savings. The environmental, climate, and public health benefits of shifting from coal to cleaner forms of energy like wind are well documented. A recent Harvard study found that "the life cycle effects of coal... are costing the U.S. public a third to over one-half of a trillion dollars annually." These externalized costs add roughly 17 cents per kWh of electricity generated from coal. And as one of the most coal-dependent states in the country, North Carolina is spending almost $2.2 billion every year to import coal from other states. That's money that could be invested in developing energy and creating jobs in North Carolina.

Join the conversation about the Roosevelt Institute’s new initiative, Rediscovering Government, led by Senior Fellow Jeff Madrick.

In an event co-sponsored by the Roosevelt Institute | Campus Network at the University of North Carolina, Chapel Hill this past fall discussing the opportunities and obstacles for offshore wind development in North Carolina, we brought together state leaders from government, industry, coastal law, and scientific research. The consensus among the speakers was clear: what's missing in North Carolina is a policy framework for getting turbines installed. Investors and utilities need regulatory certainty to commit to trying something new. As Congress squabbles over what to do about extending the critically important federal production tax credit for wind energy, there's also no state legislation pertaining to offshore wind on the books in North Carolina.

So what can we do? A bill in North Carolina might have an answer. North Carolina's Senate Bill 747, the Offshore Wind Jobs and Economic Development Act, proposed a state-managed competitive request for proposals (RFP) process to develop 2.5 GW of offshore wind energy starting in 2017. If the state determines that a bid has a positive net economic impact, then investor-owned utilities would be required to sign 20-year contracts to purchase power. Incremental costs or savings for ratepayers would appear on customers' utility bills, with limits on the impact of rate increases to large consumers. If the state fails to determine that 2.5 GW of offshore wind energy would result in a net economic benefit, then there would be no obligation to grant a contract.

In an effort to enhance industry support, SB 747 also gives utility companies the option to co-invest or purchase an ownership interest of up to 50 percent in the projects. While the bill does not require any direct government spending, it also extends an existing manufacturing tax credit for wind through 2020 to help attract manufacturing jobs. State agencies (in this case, the Department of Commerce) would review RFPs under a wide variety of criteria, including, but not limited to, the impacts on ratepayers, jobs and economic activity, tax revenue, system reliability, climate change, public health, export opportunities, system reliability, and existing industries.

This policy could create a practical path forward for offshore wind energy. The emphasis on ensuring that any offshore wind project would have a net positive economic impact on the state should make the policy more politically attractive to state legislators concerned about consumer groups opposed to rate hikes, electric utilities eager to avoid anything resembling regulation, and coastal industries that may conflict with proposed turbine locations. This kind of bill also levels the playing field for clean energy in a way that prioritizes economic considerations. Adopting this policy will effectively eliminate cost disadvantages for offshore wind by requiring the government agencies reviewing industry proposals to fully account for the massive and externalized environmental and public health costs associated with continuing to rely on coal and other artificially cheap fossil fuels for electricity.

On a national level, the public strongly supports developing clean energy technologies like wind. A recent nationwide survey conducted by the Civil Society Institute showed that roughly 71 percent of Americans support shifting federal "support for energy away from nuclear and towards clean renewable energy such as wind and solar." The sooner we start implementing policies that lead to more wind development, the better.

Stewart Boss is the co-director of the Roosevelt Institute| Campus Network's center on energy and environmental policy at the University of North Carolina, Chapel Hill.

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