Should We Tolerate A Jobless Recovery?

Although the recession may have technically ended, millions are still without jobs and thousands are still losing their jobs. Should the federal government do more to fight the jobless recovery or should we tolerate a slower recovery without jobs? Economist Mark Thoma from Economist's View discusses this topic in the following post.

There is news on weekly jobless claims. Despite all the attempts to paint this as good news, the fall of 12,000 from the previous week is being highlighted in many places, 545,000 new claims is still very high and indicates that the recession is not yet over for workers:

Jobless Claims Decline, WSJ: Initial claims for jobless benefits fell 12,000 to 545,000 in the week ended Sept. 12...

The four-week average of new claims, which aims to smooth volatility in the data, fell by 8,750 to 563,000 from the previous week's revised figure of 571,750.

With claims still at a fairly high level, the data seems to reinforce the idea expressed earlier this week by U.S. Federal Reserve Chairman Ben Bernanke that the recession is most likely over from a technical standpoint but it will take time for the labor and credit markets to recover...

The ... number of continuing claims -- those drawn by workers for more than one week in the week ended Sept. 5 -- rose by 129,000 to 6,230,000 from the preceding week's revised level of 6,101,000.

Amid all the optimism that seems to be pervading the coverage of the economy, a mood that is being intentionally stoked by policymakers eager to rebuild confidence, we'll have to keep reminding everyone that workers still need help (I'm seeing more and more stories, for example, about unemployment benefits running out for some workers even as long-term unemployment continues to rise). As this picture from the SF Fed shows, the employment series does not yet display the "fishhook" shape shown in other series that are the source of the declarations that the worst is behind us. And as the experience of the last recession in the graph below shows, the trough in employment can be far behind the trough in output:

One more note on this. I was pleased to see McClatchy News at least asking the question in "Will Obama, Fed tolerate another jobless recovery?," so it's not completely off the radar and perhaps this will help to get the message to policymakers in congress. As for the Fed, as the futures market for the federal funds rate shows, markets believe rate hikes aren't far away indicating a belief among market participants that as output begins recovering, inflation worries will trump concerns about employment:

Does The US Need A Second Stimulus To Prevent A Jobless Recovery

One of the road blocks to economic recovery is the huge unemployment numbers that could make a recovery slow and painful. So why not use a second stimulus to create jobs immediately. That is what economist Mark Thoma suggests at his blog Economist's View.

Following up on some of the issues raised in the post above this one, here's a quote from today's NY Times that summarizes my view on whether we should intervene with policy:

Mark A. Thoma, an economist at the University of Oregon, says the financial crisis would have been worse if the government hadn’t rapidly intervened.

“I completely disagree with the idea that letting the markets heal themselves is the best idea,” he says. “We tried that in the ’30s, and it didn’t work out so well."

The second part of the quote doesn't express what I was trying to say very well. Brad DeLong expresses it a bit better:

[W]henever governments largely ... let financial markets work their way out of a panic out by themselves – 1873 and 1929 in the United States come to mind – things turned out badly. But whenever government stepped in or deputized a private investment bank to support the market, things appear to have gone far less badly.

And, since I'm quoting myself, here's one more from yesterday at CNN Money on whether the fiscal stimulus in place already has worked:

The true test of the stimulus package will come in the fall, when the government reports economic activity for the third quarter. The administration is working to get the money out the door quicker, as complaints mount that stimulus is not having its promised effect.

"The third quarter will be a critical time period for assessing the stimulus package," said Mark Thoma, an economics professor at the University of Oregon.

As to whether we need more fiscal stimulus, if we wait until we know for sure it will be too late. I've been worried that employment would lag behind output once the economy recovered, and that the fiscal stimulus package we put in place was not sufficiently devoted to the employment recovery problem for quite awhile now, and I haven't changed my mind. From last June at MarketPlace:

Fiscal policymakers should have recognized that employment has tended to recover sluggishly in recent recessions and implemented policies that are known to create jobs. But they didn’t...

We need policies that put people back to work immediately. Unfortunately, when the first fiscal stimulus package was being formulated, stimulus programs that hire people to do things that don't enhance long-run growth was a difficult sale politically, so we were left trying to stimulate employment largely with infrastructure projects that were difficult to bring online quickly (which will be even more true if there is another round). I would have preferred that more of the original stimulus package be devoted to projects that created immediate employment, and if we do another stimulus package, as we should given the shape that labor markets are in, I hope we pay more attention to the employment problem.

Update: Along these lines, recently, Brad DeLong wrote:

The Changing Nature of the American Business Cycle, by Brad DeLong: ...It used to be the case that businesses hoarded labor in recessions because they did not want their skilled workers to wander off and to have to train new ones....

Now it is really beginning to look as though businesses take recessions as opportunities to greatly slim down their workforces without making the workers they retain too angry and depressed. We saw this in 2002-2003. We saw it before in 1992-1993. The fact that productivity is no longer strongly procyclical in recessions is good news in the long run--it means that our average long-run rate of productivity growth is higher than we used to think. But it also means that there is more headroom for expansionary policy, and more need.

Thus statements like this one from the very sharp Allan Sinai:

Phil Izzo reports:: "The mother of all jobless recoveries is coming down the pike," said Allen Sinai of Decision Economics. But he doesn't favor more stimulus now, saying "lags in monetary and fiscal policy actions" should be allowed to "work through the system..."

make me pound my head against the wall. If as the policies we have now in train to support the economy work their way through the system we find that we still have "the mother of all jobless recoveries," then we should be acting now to provide additional government support. A jobless recovery is not a good thing. And we should avoid it if we can figure out how in time.

For more, see:

Productivity in the Recession and Going Forward, by Paul Bauer and Michael Shenk, FRB Cleveland In contrast to previous postwar recessions that tended to see sharply lower labor productivity growth, if not outright declines, the 2001 and the current recessions have had relatively strong labor productivity growth. In 2001, year-over-year productivity never dropped below 2.0 percent. In the current recession, productivity has remained over 1.9 percent. The sustainability of this productivity growth has implications for monetary policy, the affordability of the Federal deficit, and ultimately our living standards in the long run.

Gains in labor productivity (output per hour) come from three sources: increasing the amount of capital per worker (capital intensity); increasing workers’ average level of skill, education, and training (labor composition); and a residual (multifactor productivity) that picks up economy-wide gains in knowledge and organizational methods not captured by the previous two effects. Only annual estimates are available for the breakdown in labor productivity. The post-1995 resurgence in labor productivity has been spurred largely by capital intensity and multifactor productivity. However, the growth for 2007 to 2008 was fueled more by capital intensity and a bit less multifactor productivity. ... [full article]

This post has been republished from Mark Thoma's blog, Economist View.

Why A 'Jobless Recovery' Is Likely

Yesterday the World Bank warned of a long and painful recovery in most developed economies, echoing Bernanke's hints of a "Jobless Recovery". Martin Hutchinson from Money Morning gives 4 reasons that suggest a painfully slow economic recovery. See his argument below.

When the Labor Department recently reported that U.S. payrolls fell by 345,000 jobs in May - the lowest total in eight months - commentators were suddenly spotting “green shoots” of economic recovery virtually everywhere they looked.

Given that more than $800 billion of federal money has been earmarked for U.S. “stimulus” projects, one would actually expect that the frightening job losses of the past six months would quickly reverse, and that the U.S. economy would soon start creating the 3 million jobs that U.S. President Barack Obama has promised.

Unfortunately, that has not been the case.

That’s not to say that the outlook is for a Great Depression, an economic reversal in which a country’s output plummets by 25% or more from its peak level. While the current U.S. recession may well be the “worst since the Great Depression,” it’s becoming clear that the peak-to-trough output decline will be something like 5% - worse than the recessions of 1973-75 and 1980-82, both of which saw output declines of about 3.5%, but not all that much worse.

After all, the money supply has not been allowed to collapse as it did during the 1930s and there has been no repetition of the infamous Smoot-Hawley Tariff Act, though the “Buy America” provisions in the original stimulus outline and the corresponding “Buy China” provisions in China’s corresponding package indicate that “Smoot-Hawleyism” still lurks just beneath the surface.

However, the following four factors make it almost certain that the U.S. economy will be slow:

• Record-low interest rates make it impossible for the U.S. central bank to use rate cuts to jump-start growth.

• The huge U.S. budget deficit will force the federal government to continue its heavy borrowing - potentially “crowding out” private-sector players seeking loans to finance their own growth.

• The growing size and influence of the U.S. public sector.

• And an over-growth of government regulation.

Let’s consider each one.

First and foremost, the U.S. Federal Reserve has loosened money supply inordinately over the last year, with short-term interest rates at 0.00% and money supply growth at 15% per annum. Thus, there is no Fed loosening available to spur employment.

Interest-rate-sensitive sectors - especially housing and construction - are likely to remain depressed for years. These sectors are major employers of low-skilled and semi-skilled labor, which will not be picking up their normal slack.

A second adverse factor is the exceptionally large federal budget deficit - expected to reach $1.85 trillion, or 13% of the U.S. economy, in this year alone, according to the nonpartisan Congressional Budget Office (CBO). That deficit will stretch several years into the future, thanks to the stimulus package and various bailouts initiatives.

In the short term, these rescue-oriented provisions have helped U.S. employment, not the least by allowing federal and state governments to do some hiring. But in the longer term, the federal borrowing they have caused will restrict the private sector’s access to the capital markets. That will hinder small businesses in particular. Indeed, the private sector will find it difficult to fund capital expansion, and again the result is likely to be a dearth of hiring.

A third adverse factor is the expansion of the public sector itself. To some extent, it does not matter how budget deficits are financed; the important consideration is the transfer of resources from the private sector - allocated by the automatic optimization of the so-called “price mechanism” - into the public sector, where no such considerations apply.

It’s not just a question of government itself; it’s now clear, for example, that Chrysler LLC and General Motors Corp. (OTC: GMGMQ) are to be controlled by the government - with subsidies - at our expense.

When General Motors announces, as the company did Wednesday, that it will build automobiles on the basis of an assumed oil price of $100-$120 per barrel, one sees at once a politically motivated strategy; GM will cease making the large cars that in the past have been its principal source of profit. If oil prices average $50 or less, as is perfectly possible in a long period of sluggish global growth, General Motors will be a mess - and will need to be bailed out by us again.

The late William F. Buckley Jr. once claimed that 500 names chosen at random from the Boston telephone book could do a better job of running the country than Congress; I wouldn’t mind betting that such a random selection would also make a better job of running General Motors than the government.

Related to the growth in government is the growth in regulation. For example, President Obama’s “cap-and-trade” plan to address global warming will impose a new tranche of costs on the U.S. economy, without any great offsetting spurs to employment. In areas such as energy production and heavy industry, employment will be depressed by the additional cost burdens those areas bring, as well as by the simple difficulty of complying with the new regulations.

To see where a larger state sector and more regulation can lead, one need only look at the European Union (EU). Whereas U.S. unemployment was below 5% for much of the last decade, the lowest rate reached since 2000 was 8.8% in the EU. What’s more is that certain areas of the EU have much worse records than this.

In Spain, for example, unemployment was close to 20% for much of the 1980s and 1990s, and has now soared once again to no less than 18.2%. The EU is not ensconced in a Great Depression and Spain remains a relatively wealthy country; nevertheless, the rigidities in the European system are such that unemployment remains persistently high, with adverse social effect, such as the rioting in the Paris banlieus.

The European Commission (EC) recognized this problem as early as the 1980s, and has been gradually pushing Europe towards the more open U.S. labor market, with only moderate success.

Because of over-loose money, excessive budget deficits, growing government and impending regulation, it is thus unlikely that the U.S. economy and its job market will bounce back as quickly as it has in the past.

The investment “takeaway” from this is obvious, I fear: A substantial part of one’s money should be invested in the free-market economies of East Asia, where regulation and taxation are lower, so even though a recession has also hit, recovery is likely to be much more robust.

This article can also be viewed at Money Morning's investment news site.