The Crisis of Long-Term Unemployment

Economic Policy Institute:

(L)ong-term unemployment is elevated for workers at every education level… while there is considerable variation in long-term unemployment rates across groups—which is always true, in good times and bad—the long-term unemployment rate is substantially higher now than it was before the recession started for all groups. The long-term unemployment rate is between 2.9 and 4.3 times as high now as it was six years ago for all age, education, occupation, industry, gender, and racial and ethnic groups. Today’s long-term unemployment crisis is not at all confined to unlucky or inflexible workers who happen to be looking for work in specific occupations or industries where jobs aren’t available. Long-term unemployment is elevated in every group, in every occupation, in every industry, at all levels of education.

"The Austerians Have a Lot To Answer For"

 Professor Krugman @ NYTs:

Right now the official unemployment rate is 7.3 percent. That’s bad, and many people — myself included — think it understates the true badness of the situation. On the other hand, there are some reasonable people (like Bob Gordon) arguing that at this point, possibly thanks to long-run damage from the Great Recession, “full employment” is now a number north of 6 percent. So there’s considerable uncertainty about just how depressed we are relative to potential.

But we’re clearly still well below potential. And we’ve also had exactly the wrong fiscal policy given that reality plus the zero lower bound on interest rates, with unprecedented austerity. So, how much of our depressed economy can be explained by the bad fiscal policy?

To a first approximation, all of it. By that I mean that to have something that would arguably look like full employment, at this point we wouldn’t need a continuation of actual stimulus; all we’d need is for government spending to have grown normally, instead of shrinking.

Here’s a comparison of two series. One is actual government purchases of goods and services since the Great Recession began (this is at all levels; most of the fall has been state and local, but the Federal government could have prevented that with revenue sharing). The other is what would have happened if those purchases had grown as fast as they did starting in the first quarter of 2001, i.e., in the Bush years.

The Unemployed Need Bold, Creative Moves from the Fed

Mark Thoma @ Fiscal Times:

The Federal Reserve has increased the size of its balance sheet nearly four-fold

since the onset of the financial crisis, from around $870 billion in 2007 to $3.35 trillion today. This has caused people like Peter Schiff to predict that we are headed for a severe outbreak of inflation. An inflation problem is just round the corner we’ve been told again and again since 2008, yet inflation remains below the Fed’s 2% target, long-run inflation expectations are well-anchored, and there is little evidence in recent data that inflation is or will be a problem. 

Why is inflation so low?

More on the persistence of low inflation

Catherine Rampell @ New York Times Economix:

The personal consumption expenditures, or P.C.E., price index, which the Fed has said it prefers to other measures of inflation, fell from March to April by 0.25 percent. On a year-over-year basis, it was up by just 0.74 percent. Those figures are quite low by historical standards, and helped push consumer spending up. (Measured in nominal terms, consumer spending fell slightly in April. After adjusting for inflation, it rose.)

When looking at price changes, a lot of economists like to strip out food and energy, since costs in those spending categories can be volatile. Instead they focus on so-called “core inflation.” On a monthly basis, core inflation was flat. But year over year, this core index grew just 1.05 percent, which is the lowest pace since the government started keeping track more than five decades ago.

                             Source: Bureau of Economic Analysis, via Haver Analytics. The core P.C.E. price index refers to the price index change for personal consumption expenditures, excluding food and energy.

Low inflation may be one reason that consumers have proven so resilient in recent months (in addition to the lift they’re getting from rising home prices). A measure of consumer sentiment released Friday by the University of Michigan surged in May, and is at its highest level since July 2007.

What's wrong with the economy?

Here's the biggest problem with the US economy:

This is a chart of percentage of national income going to wages:

Since the end of the 1960s, the percentage of national income going to wages has decreased by ten percentage points. That's not a "10% decrease."  That's nearly a 20% decrease - from just below 54% to just below 44%.  This is a national scandal and a shift of wealth from labor to the very wealthy and to corporations - whose earnings are other than "wages" - that is as extreme and structural as any of our myriad economic problems.

In terms of overall economic growth, this suppression of consumer demand and rising inequality is as bad for real businesses that make things and sell things as it is for workers. 

"Austerity for Dummies"

A "layman's guide" to anti-austerity from Stephanie Kelton @ New Economic Perspectives that does a pretty good job of tackling the central arguments in non-econospeak terms:

1. When we allow our economy to operate below full employment (as now), we are sacrificing trillions of dollars in lost output and income each year. We can never go back and recover it.  It is gone forever.  You’ve seen the debt clock?  Here’s the lost output clock.

2. Capitalism runs on sales. In survey after survey, we find that the Number One reason businesses are slow to hire and invest in new plant & equipment is a lack of demand for the things they produce.  Businesses hire and invest when they’re swamped with customers.  See this story in The Wall Street Journal.

3. The two decades after WWII certainly aren’t the only time that robust growth reduced the DEBT/GDP ratio.  During the late 1990s and early 2000s, the economy grew at an above average clip.  Unemployment fell to 3.7%.  Inflation remained modest.  There was a job vacancy for every job seeker in America — genuine full employment.  Because people were working, there was less spending to support the unemployed (food stamps, unemployment compensation, etc.) and more people paying income taxes. The deficit disappeared, and the national debt fell to around 40% of GDP.  So you do not need post-WWII conditions to support the argument that economic growth is the way to reduce the debt.

4. The debt/GDP ratio falls when the denominator grows faster than the numerator.  Right now, just about everyone is fixated on using austerity (raising taxes and slashing spending) to reduce the numerator (DEBT).  The problem, as Europe has kindly shown us for years, is that austerity “works” by crushing incomes, which in turn crush sales (or what we call GDP).  So instead of bringing the ratio down, austerity hampers growth, which causes deficits and debt loads to rise.

The Sequester's Impact on Recession and Recovery

The New Republic asked a range of economists whether the sequester will throw us back into recession. Here are some answers:

With $85 billion in budget cuts set to take effect Friday, when the sequester kicks in, there's been plenty of debate about whether the economy will spiral back into a recession. In search of some clarity, The New Republic asked economists from across the political spectrum a simple question, "Will the sequester start another recession?"...

It could. And either way, it's dumb policy.
"My reaction is possibly, but improbably. That said, it's pushing policy in exactly the wrong direction. At a time when the economy still needs a stimulus to promote recovery rather than restrictive policies to prevent overheating. I think job one economically today is to restore full employment, that is today's problem. Tomorrow's problem will be to deal with long term budget imbalances, but trying to curb long term budget imbalances now carries the high probability of delaying economic recovery and the possibility of turning recovery into decline and, were that to happen, it would be a major misfortune for the nation." — Henry Aaron, senior fellow of economic studies at the Brookings Institution

Probably not. But we'll notice a difference.
"In my view it will have a noticeable hit on the growth rate of between 0.5 and 0.9 percentage points. That won't put us in a recession but it will definitely slow improvements to unemployment and the job market." — Austan Goolsbee, professor of economics at the University of Chicago and former chairman of the Council of Economic Advisers

It's certainly not good for the economy.
"It's not helpful. However, trading the sequester for long-term Social Security and Medicaid/Medicare benefit cuts would be worse. Short-term cuts are fairly easy to reverse if it's done quickly." — James Galbraith, economist, University of Texas at Austin

Bernanke: Conservative Voice of Reason to Crazy Fellow Republicans

John Cassidy at The New Yorker:

With about eighty-five billion dollars of across the board spending cuts due to take affect in a few days, Fed chairman and former Princeton prof Ben Bernanke was up on Capitol Hill this morning giving his fellow Republicans a much-needed lesson in austerity economics. Departing from his statutory duty of reporting to the Senate Banking Committee on the Fed’s monetary policy, Bernanke devoted much of his testimony to fiscal policy, warning his congressional class that letting the sequester go ahead would endanger the economic recovery and do little or nothing to reduce the country’s debt burden.

“Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant,” Bernanke told his students, who included a number of right-wing Republican diehards, such as Senator Bob Corker, of Tennessee, and Patrick Toomey, of Pennsylvania. “Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run.”

Translated from Fed-speak, that meant that congressional Republicans have got things upside down. Bernanke has warned before about the dangers of excessive short-term spending cuts. But this was his most blunt assertion yet that Mitch McConnell, John Boehner, et al. should change course. “To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run,” Bernanke said. “Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget.”

The Walmart World

George Packer @ The New Yorker  takes a look at the fragility of the Walmart consumer economy after decades of increasing income inequality and years of Great Recession:

If you were to write a social history of America through the story of business, what would be the most significant companies in the years since the Second World War? I’d divide the period into two: from 1945 to the mid-seventies, I might name General Motors and Woolworth’s. They set the standard for corporate success and behavior during a period that could be called the Roosevelt Republic, when a social contract underwrote American life. It included an expanding middle class, a strong safety net, high marginal tax rates, a white male establishment that grudgingly made way for other groups, a bipartisan approach to legislation in Washington, and a business culture that was cautious, loyal, hierarchical, and unimaginative.

In the decades since the mid-seventies—you could call it the Reagan Republic, but I prefer the “Unwinding”—the social contract has frayed to the point of disintegration. The middle class has shrunk; tax rates (especially on upper brackets) have plunged; inequality has exploded; the safety net (especially for the poor) has weakened; the old power structure has given way to a more diverse and broad-based upper class based on education; bipartisanship—well, you know; and business culture has become entrepreneurial, fast, risk-taking, and harsh. The trade-off: more freedom, less security.

Two companies have defined the years of the Unwinding: one is Apple, the other, Walmart. Steve Jobs’s genius for design and marketing helped create the consumer taste of that educated upper class—the spare, sleek, Bauhaus-inspired devices; the turtlenecks and jeans; the self-congratulatory language of revolution and inspiration; the Einstein fetish—with the Apple Store a kind of secular temple for devotees in prosperous cities and suburbs, mostly along the two coasts.

Jobs’s stylistic and philosophical opposite was Sam Walton. He came out of the heartland, where he saw the potential for a strategy of low cost and high volume in overlooked backwaters like Siloam Springs, Arkansas, and Coffeyville, Kansas. Walmart’s period of explosive growth coincided with decades of wage stagnation and deindustrialization. By applying relentless downward pressure on prices and wages, the company came to dominte both consumer spending and employment in small towns and rural areas across the middle of the country. The hollowing out of the heartland was good for Walmart’s bottom line: its slogan might have been an amoral maxim attributed to Lenin—“The worse, the better.”

Do tax cuts for the rich turn them into "job creators"?

Economists Laura D'Andrea Tyson & Owen Zidar, @ New York Times, have done the research:

The centerpiece of Mitt Romney’s tax plan is an across-the-board 20 percent cut in marginal tax rates. This cut, along with a few other tax changes Mr. Romney has endorsed – such as repeal of the estate tax and the alternative minimum tax – would reduce federal tax revenue from personal income and payroll taxes by an estimated $3.6 trillion to $3.8 trillion over 10 years.

The total is closer to $5 trillion when Mr. Romney’s proposed cut in the corporate income tax rate to 25 percent is included. About two-thirds of this amount would go to taxpayers making $200,000 a year or more – about 5 percent of all taxpayers.

Extending the Bush tax cuts for high-income earners, as Mr. Romney proposes, adds another trillion in lost revenue and increases the share of the benefits going to the top 5 percent. Even if the cost of the Romney tax cuts for the top 5 percent is covered by base-broadening measures, as Mr. Romney promises – but as President Obama and many others assert is mathematically impossible – does it make sense to devote trillions of dollars to lowering income taxes for the top 5 percent? Is this an effective way to create jobs?

Mr. Romney appears to think so. His plan rests on the assertion that lower taxes for high-income taxpayers will increase economic activity and employment – that lower taxes for job creators create jobs and will do so quickly. This assertion, while superficially convincing and ideologically compelling, is not supported by the evidence.

Lack of demand and the need for more stimulus

"Even" a Bush-era economic advisor, via The Wall Street Journal, confirms that current unemployment rates are rooted in lack of consumer demand and that renewed stimulus can help move the numbers:

Is the job market weak because of structural changes, or is a lack of demand the true factor keeping unemployment rates high?

Answer that, and you resolve a grand mystery that’s bedeviled those who are trying to make sense of the persistently high levels of unemployment that have been afflicting the U.S. economy for several years now.

The answer isn’t just academic: If a lack of demand is behind high unemployment, the Federal Reserve can help fix the situation via monetary policy stimulus. Structural problems, however, are beyond the reach of those remedies.

A paper presented Saturday at the Kansas City Fed’s annual Jackson Hole, Wyo., research conference argues that what currently ails the economy is indeed a demand problem. That suggests the Fed has room to act if it chooses to do so. The paper was written by Edward Lazear of Stanford Graduate School of Business and James Spletzer of the U.S. Census Bureau. Mr. Lazear was also a chairman of President George W. Bush’s Council of Economic Advisers.

“An analysis of labor market data suggests that there are no structural changes that can explain movements in unemployment rates over recent years,” the authors write. “Neither industrial nor demographic shifts nor a mismatch of skills with job vacancies is behind the increased rates of unemployment.” ...

The "Austerity Cliff" and the GOP's Military Keynesians

 Brian Beutler at TPM:

A giant austerity bomb is timed to go off at the beginning of next year, and the threat of significantly higher taxes and lower spending has Republicans running around the Capitol sounding more like John Maynard Keynes than John Boehner.

Automatic, across-the-board reductions to domestic and defense spending, combined with the looming expiration of the Bush tax cuts, will dramatically consolidate the budget in the next calendar year, if Congress does nothing. And despite bemoaning deficits throughout the Obama years, the GOP’s suddenly come around to the view that cutting government spending is a job killer.

Just listen to Sen. John Cornyn (R-TX).

“Just when you thought the economic news could not get much worse with slow economic growth, with reduced wages because of higher costs, and with many people simply giving up looking for work with the lowest labor participation rate we’ve had in some time,” Cornyn warned reporters in the Capitol Tuesday, “we have an entirely predictable and preventable jobs crisis approaching in January, where because of the sequestration [automatic spending cuts], my state alone will lose 91,000 private sector jobs — and there are about a million private sector jobs at risk if the sequestration goes into effect on January 2.

This marks the return of the Defense Keynesians — Republicans who admit that government spending supports job growth in a weak economy, if and only if that spending is directed toward the military.

As luck would have it, a new Congressional Budget Office concludes Republicans are right about the economic consequences of defense cuts — but that their other fiscal priorities are just as perilous for economic growth.

If all the fiscal tightening scheduled for the beginning of the year is allowed to take effect, it will take a huge bite out of the projected deficit for the coming fiscal year.

Unfortunately, it’ll take a similarly large bite out of GDP — enough to threaten a new recession. And the resulting job losses would reduce tax revenues and increase spending on jobless benefits enough to undo billions of dollars in direct deficit reduction.

A prosperous middle class is central to economic productivity and income inequality is a threat to our economic and political health

 Heather Boushey and Adam Hersh at Center for American Progress:

To say that the middle class is important to our economy may seem noncontroversial to most Americans. After all, most of us self-identify as middle class, and members of the middle class observe every day how their work contributes to the economy, hear weekly how their spending is a leading indicator for economic prognosticators, and see every month how jobs numbers, which primarily reflect middle-class jobs, are taken as the key measure of how the economy is faring. And as growing income inequality has risen in the nation’s consciousness, the plight of the middle class has become a common topic in the press and policy circles.

For most economists, however, the concepts of “middle class” or even inequality have not had a prominent place in our thinking about how an economy grows. This, however, is beginning to change. One reason for the change is that the levels of inequality and the financial stress on the middle class have risen dramatically and have reached levels that motivate a closer investigation. The interaction and concurrence of rising inequality with the financial collapse and the Great Recession have, in particular, raised new issues about whether a weakened middle class and rising inequality should be part of our thinking about the drivers of economic growth.

"Taxing the rich to make investments...is the single shrewdest thing we can do for the middle-class, for the poor...and for the rich"

Millionaire tech investor Nick Hanauer gave a talk at Technology Entertainment and Design - which regularly posts the equivalent of video essays on it's popular site - but it was apparently kept off of the site because the presumed audience of wealthy entrepreneurs wouldn't want to hear Hanauer's message of "taxing the rich" as "the single shrewdest thing we can do." There's a lot of applause for Hanauer in the room. One wonders why TED found Hannauer's timely and insightful talk troublesome:

HT: Rob Grocholski

European Austerity - Wrong Diagnosis & Wrong Medicine

Former Treasury Secretary & Harvard-based charmer Larry Summers explains why austerity schemes give him a headache - read his entire piece at the Financial Times HERE:

Unfortunately, Europe has misdiagnosed its problems and set the wrong strategic course. Outside Greece, which represents only 2 per cent of the eurozone, profligacy is not the root cause of problems. Spain and Ireland stood out for their low ratios of debt to gross domestic product five years ago with ratios well below Germany. Italy had a high debt ratio but a very favourable deficit position. Europe’s problem countries are in trouble because the financial crisis under way since 2008 has damaged their financial systems and led to a collapse in growth. High deficits are much more a symptom than a cause of their problems.

Treating symptoms rather than causes is usually a good way to make a patient worse. So it is in Europe. Its financial problems stem from lack of growth...

Can stimulus pay for itself and help shrink deficits?

Larry Summers and Brad DeLong argue, yes.  When the economic picture is really, really bad. Here's the (wonky) argument that we're in such a deep long-term unemployment trough that stimulus is key to keeping folks in the labor force and generating future tax revenues :

WHEN he was at the Treasury nearly 20 years ago Larry Summers would counsel President Bill Clinton on the merits of “stimulative austerity”: cut deficits, and interest rates will fall by enough to produce stronger economic growth. Now Mr Summers is making the opposite case: stimulate growth through a bigger deficit, and the long-term debt may shrink.

In a new paper* written with Brad DeLong of the University of California, Berkeley, Mr Summers, now at Harvard after a stint as Barack Obama’s chief economic adviser, says that in the odd circumstances America faces today temporary stimulus “may actually be self-financing”.

This sort of argument is not new. Advisers to John Kennedy and Lyndon Johnson thought their 1964 tax cut might stimulate so much new spending it would pay for itself. In the early 1980s, supply-side economists argued something similar about Ronald Reagan’s tax cuts. Neither claim stood the test of time.

The mortgage crisis is holding back economic recovery

Robert Reich at Financial Times:

(T)he biggest continuing problem for most Americans is their homes. Purchases of new homes are down 77 per cent from their 2005 peak. They dropped another 0.9 per cent in January. Home sales overall are still dropping and prices are still falling – despite already being down by a third from their 2006 peak. January’s average sale price was $154,700, down from $162,210 in December. 

Houses are the major assets of the middle class. Most Americans are therefore far poorer than they were six years ago. Almost one out of three homeowners with a mortgage is now “underwater”, owing more to the banks than their homes are worth on the market...the negative wealth effect of home values, combined with declining wages, makes it highly unlikely the US will enjoy a robust recovery any time soon.

 Read the entire piece HERE.

Stubborn facts about the GOP's spending cuts "austerity agenda"

Paul Krugman at NYTs:

Pain Caucus peddling failed ideas from Europe

(I)n early 2010 austerity economics — the insistence that governments should slash spending even in the face of high unemployment — became all the rage in European capitals. The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in “confidence,” that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates...

Now the results are in — and they’re exactly what three generations’ worth of economic analysis and all the lessons of history should have told you would happen. The confidence fairy has failed to show up: none of the countries slashing spending have seen the predicted private-sector surge. Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending.

A Reagan Conservative debunks the current GOP's economic proposals

Picture credit: mariopiperni.com

Given the iconic status of Ronald Reagan and "Reaganomics" that is serially invoked among the current crop of GOP candidates - particularly at the level of presidential aspirants - it's useful to listen to one guy who actually did help formulate Reagan's economic strategy three decades ago and who isn't impressed with the rubber-stamped "Reagan(!)" pretenders.

Bruce Bartlett - one of the few sane voices left in contemporary conservatism (or, perhaps more accurately, left in the wake of extremist right-wing radicalism that pays lip service to conservatism) - was a domestic policy advisor in the Reagan administration and adheres to conservative fiscal policy, which he doesn't interpret as simply "more tax cuts all of the time."

Here's Bartlett's explanation of why the current GOP agenda - tied to simplistic invocations of Ronald Reagan - doesn't make sense in 2012:

In their debates, ads and speeches, the candidates for the Republican presidential nomination are vying for the label of most Reagan-esque.

On taxes, “I take the Reagan approach,” former senator Rick Santorum said at a recent Florida debate.

On the economy, “under Ronald Reagan, we had . . . the right laws, the right regulators, the right leadership,” former House speaker Newt Gingrich said in a debate before his South Carolina primary victory.

Judging from the candidates’ tax proposals, they seem to believe that the most Reagan-like candidate is the one with the biggest tax cut. But as the person who drafted the 1981 Reagan tax cut, I think Republicans misunderstand the premises upon which Reagan’s economic policies were based and why those policies can’t — and shouldn’t — be replicated today...

It's the demand, stupid...

Former Treasury Secretary Larry Summers at Financial Times:

Government has no higher responsibility than insuring economies have an adequate level of demand. Without growing demand, there is no prospect of sustained growth, let alone a significant fall in joblessness. And without either of these there is no chance of reducing debt-to-income ratios...

The best chance for economic recovery involves governments working directly to increase demand and to augment business confidence.