Archive for the ‘Employment’ Category

A Fiscal Fallacy?

Greg Hannsgen | June 17, 2013

We have been advocates of the theory that fiscal tightening is threatening economic recovery (last week, for example).

John Taylor objects to the view that fiscal tightness has been the key to the slowness of growth in the recovery.

In his blog, he states, “As a matter of national income and product accounting, it is true that cuts in state and local government purchases subtract from GDP, but these cuts are mainly an endogenous consequence not an exogenous cause of the weak recovery.

Taylor’s reasoning is that state and local government spending has been constrained by weak tax revenues. This is certainly true.

However, Taylor’s argument seems to imply and rely upon another false dichotomy—variables are either exogenous causes or endogenous outcomes. Is it not more reasonable to say that these reductions in spending at the state and local level are “mainly an endogenous consequence and endogenous cause of the weak recovery”?

(Note for further reading: This scheme of cumulative causation or positive feedback is part of the fiscal trap thesis advanced in a brief I wrote with Dimitri Papadimitriou last summer and fall: especially in a non-sovereign-currency system, spending cuts and slow growth can be part of a vicious cycle or downward spiral. This 2010 Levy Institute brief, among other publications, assessed the extent to which fiscal stimulus of various types can help to break the cycle.)


UK Debate and the Facts Moving in Opposite Directions

Michael Stephens | June 7, 2013

Today in the Guardian, Philip Pilkington notices the British Labour party potentially inching away from their scaled-down proposal for a “job guarantee,” an idea fleshed out by Hyman Minsky:

Minsky’s theories of financial instability suggested that capitalist economies were prone to serious downturns in which huge amounts of the labour force would find themselves unemployed. What’s more, this would lead to large shortfalls in demand for goods and services which would further exacerbate such downturns. The result was a vicious circle that would become worse and worse as the financial system evolved into an increasingly fragile entity and households and businesses became increasingly mired in debt. …

While progressive taxation and unemployment benefits went some way toward both protecting workers and propping up demand during downturns, it did not, according to Minsky and his followers, go nearly far enough. They believed that governments should offer a job to anyone willing and able to work and then pay for these jobs by engaging in increased deficit spending …

Read the whole thing.  Pilkington notes that the original Labour proposal differed from Minsky’s “employer of last resort” in both its scope (limited to the long-term unemployed) and its compulsory nature (the ELR is meant to be voluntary, in Minsky’s original formulation), but the proposal did at least represent a departure from the Conservative government’s fixation with the budget deficit and an attempt to do something about the long-term unemployment crisis.

Pilkington now sees Labour leaders positioning themselves closer to the ruling Conservatives’ pro-austerity stance.  That may or may not be a shrewd political move, but in terms of policy, what recent economic events have made austerity look more attractive?  The UK just posted a blistering GDP growth number of 0.3 percent (thus barely avoiding its third slide into recession in the last five years), and as Michael Linden illustrates (pdf) with the figure below, since Cameron’s austerity measures were imposed in 2010, the UK’s projected debt-to-GDP ratios have gone up instead of down.  Assuming the goal was to reduce the debt ratio, and not simply reduce government spending for its own sake, austerity seems to be failing:

UK Debt to GDP Fail_Linden


Hyman Minsky and the Employer of Last Resort

L. Randall Wray | May 17, 2013

A couple of weeks ago, I mentioned Hyman Minsky’s new book, Ending Poverty: Jobs, Not Welfare (there is also a Kindle version).  Take a look at the cover – Minsky looking like a bit of a rougue!

I thought you might enjoy my powerpoint presentation, given at the Levy-Ford annual Minsky conference in NYC in mid-April. It summarizes some of the main arguments of the book. However, you really need the book – it is brilliant, and a good antidote to all the silly arguments made by economists that we “need” to keep tens of millions of Americans unemployed.

As Keynes put it:

“The Conservative belief that there is some law of nature which prevents men from being employed, that it is ‘rash’ to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years….” (J. M. Keynes)

Here’s the powerpoint.


A Budget Surplus by 2015?

Michael Stephens | May 15, 2013

That’s the implication of a James Pethokoukis post linked to here by Reihan Salam.  Let’s assume for the sake argument that a federal budget surplus does emerge in 2015 (yesterday’s CBO report projected the 2015 deficit would be a mere 2.1% of GDP).  Salam expresses concern that such a scenario would leave Republicans, who have been banging the austerity drum since inauguration day 2009, in a political and policy bind.  It would allow Democrats to declare “mission accomplished,” as Salam puts it, leaving Republicans with no agenda.

One problem with this analysis is that it assumes the voting public would even recognize/concede the existence of a budget surplus.  If you’ve been paying any attention to US public affairs, you’ll have observed that the realm of empirical fact is a fiercely contested battlefield (see warming, global).  And on budget matters, as Dimitri Papadimitriou has pointed out, the battlefield is tilted in one direction:  “The deficit has arguably gained the distinction of being the single most widely misunderstood public policy issue in America. Just 6% (6!) of respondents in a recent poll correctly stated that it had been shrinking, which has in fact been the case for several years, while 10 times more, 62%, wrongly believed that it’s been getting bigger.”

Now, it ought to be mentioned that no one should get any credit for a budget surplus in 2015 (or for a deficit as low as 2.1% of GDP, as the CBO predicts).  Under current economic conditions, this would represent the continuation of an inexcusable fiscal policy error — and the reason it would be an error points to another problem with Salam and Pethokoukis’s political concerns. continue reading…


This Growth Rate Would Be Insufficient Even If the Economy Weren’t Broken

Michael Stephens | April 26, 2013

Today’s GDP report estimated that the US economy grew at an annual rate of 2.5 percent in the first quarter of 2013.  If the economy were translating GDP growth into jobs at rates similar to those seen in the past, this 2.5 percent pace would not get us to full employment until, say, the end of Hillary Clinton or Jeb Bush’s second term.  But evidence suggests that, in fact, the link between output and jobs has been weakening for the past thirty years or so.  In other words, we need higher growth rates today than we did thirty years ago to produce the same employment increases.  In that context, 2.5 percent growth is nowhere near good enough.

In a new policy note, Michalis Nikiforos looks closely at US employment recovery (or lack thereof) after the “Great Recession.”  In part, the dismal job creation record — which, says Nikiforos, is more accurately reflected by looking at the total number of employed workers rather than just the unemployment rate — is due to slow growth rates.  Such slow growth is to be expected for an economy recovering from a financial crisis, he explains:  “following the burst of a bubble and a financial crisis, the private sector seeks to minimize the debt it accumulated before the crisis.  This leads to a large private sector financial surplus, which in turn weakens demand and thus output growth.”

But in addition to these slow growth rates, Nikiforos details the increasingly weak link between output growth and job creation:  “[D]uring the recovery in the second half of the 1970s, a 1 percent increase in output led to an increase in employment of 0.714 percent. This number has been decreasing since the late 1970s and stands at 0.288 in the current recovery (i.e. 2009Q2–2012Q4).”  In the policy note he runs through some possible reasons for this degraded link between output and jobs (including some research from a forthcoming paper by Deepankar Basu and Duncan Foley that points the finger at the growing share of the financial sector in GDP, which, they argue, leads to an overestimation of real economic activity).  To give a sense of the challenge we’re facing, Nikiforos observes that just bringing the unemployment rate down to 5.5 percent by the end of 2014 would require the economy to grow at an annualized rate of 3.4 percent this year and 6.3 percent next year.

Read the policy note here.

(Note: this is a follow-up to the Levy Institute’s most recent Strategic Analysis.)


Weakened Link between Output and Jobs Makes Higher Deficits a Necessity

Michael Stephens | April 10, 2013

In the LA Times, Dimitri Papadimitriou explains that the link between growth and employment has been steadily weakening over the last several decades, and that this makes getting help from fiscal policy — increasing the deficit in the short run — more urgent than ever.  If we want to get back to pre-crisis unemployment rates (below 4.6%) anytime soon, the private sector isn’t going to be able to do it on its own, and certainly not with payroll tax increases and indiscriminate budget cuts weighing down already-insufficient growth rates:

While we are seeing some economic growth, the unemployment rate is not responding as strongly to the gains as it did in the past.

This slow job growth — today’s “jobless recovery” — isn’t an outlier. It’s a phenomenon that has been increasing over the last three decades, with jobs coming back more and more slowly after a downturn, even when GDP is increasing. The weak employment response has been an almost straight-line trend for more than 30 years.

Our institute’s newest econometric models show that each 1% boost in the GDP today will create, roughly, only a third as much improvement to the unemployment rate as the same 1% rise did in the late 1970s.

Read the op-ed here.

For more on this broken link between output and jobs, the background research can be found here.


A New Collection of Minsky’s Work

Michael Stephens | April 8, 2013

Hyman Minsky is probably best known for his work on financial instability and financial reform, but he also wrote extensively about how to address the persistent problem of all those left behind by our increasingly financialized economy; about how to design policies that would put an end to income poverty in the midst of plenty. Despite the fact that far more attention has been paid to his writing on financial fragility, these were intimately related issues in Minsky’s research, connecting the financial and “real” economies.

As with his work on finance, Minsky’s approach to poverty did not fit comfortably within the confines of the status quo. With “trickle-down” on one side, pure tax-and-transfer approaches on the other, and vague calls for retraining floating somewhere in the middle, Minsky found the conventional menu of policy options incomplete and inadequate (a menu that has changed very little over the last several decades). Calling for “upgrading” workers without ensuring there are enough jobs to go around is, as Minsky put it, “analogous to the great error-producing sin of infielders — throwing the ball before you have it.” What’s missing, he thought, is a commitment to ensuring that paying jobs are available to all who are ready and able to work; a commitment to “tight full employment.” The question is how to get there without sparking runaway inflation or inducing financial crises. Private markets, left to their own devices, aren’t going to get us there. For part of the answer, Minsky turned to a forgotten side of the New Deal:  direct job creation.

In the interests of providing a more complete picture of Minsky’s intellectual legacy, the Levy Institute has published a collection of his central writings on poverty and full employment: Ending Poverty: Jobs, Not Welfare. The chapters span roughly three decades of Minsky’s writing and feature four never-before-published pieces. The earliest were written in the context of the “War on Poverty” of the Kennedy and Johnson years, but readers will find more than mere historical interest here. Minsky’s critiques of both the “neoclassical synthesis” and the welfare state hold up rather well. If anything, the material is even more relevant today, given our widening income inequality and chronic rates of long-term unemployment — and the fact that the battle against poverty, while not won, has largely been forgotten.

The paperback is now available on Amazon; the Kindle version will be appearing shortly.

Ending Poverty_cover


The Allure of Dysfunctional Finance and the Power of Agenda Setting

Michael Stephens | April 5, 2013

Here are today’s big pieces of economic policy news:  (1) net job creation in the month of March (+88,000) was too low to keep up with population growth; (2) the president’s budget proposal will reportedly include cuts to Medicare and Social Security (or as the latter will be described in most newspapers, “adjustments to the way inflation is calculated for the purposes of determining Social Security benefits”).

These two items may seem unrelated, but in reality they form the basis of an unhappy remarriage.  continue reading…


How Much Fiscal Stimulus Do We Need?

Michael Stephens | March 28, 2013

How much fiscal stimulus would the government need to inject into the economy over the next two years in order to get the unemployment rate into the 5.5–5.9 percent range?  In their newest strategic analysis, Dimitri Papadimitriou, Greg Hannsgen, and Michalis Nikiforos provide us with some harrowing answers.

The authors lay out a scenario (“scenario 3″ in the analysis) featuring some favorable macroeconomic tailwinds in the form of higher private sector borrowing and increased exports.  As they explain, such developments are not entirely unlikely (and policy changes could help contribute to such an export boost).  Nevertheless, even in these relatively rosy circumstances the government would need to pitch in a spending increase of 6.8 percent* (after inflation) in each of 2013 and 2014 to bring the unemployment rate below 6 percent by the end of 2014.  That would amount to a stimulus program worth around $600 billion over the next two years.  Without these tailwinds from private sector borrowing and exports (“scenario 2″), spending would need to increase by 11 percent per year — or roughly over a trillion dollars of stimulus over two years — in order to bring unemployment down to around 5.5 percent.

As the authors note, Washington is not in the mood for a trillion-plus-dollar stimulus program, or a program half that size.  Congress has consistently rejected a mere $50 billion for infrastructure repair.  If anything, the policy challenge of the moment is to temper the zeal for cutting spending.  Moreover, 5.5 percent unemployment is arguably still shy of what we ought to consider “good enough.” This level is around a full percentage point above where we were before the recession hit in 2007.  In other words, even if this Congress were to approve a stimulus package larger than the 2009 Recovery Act (ARRA) — which is unimaginable at this point — we would still not be back to pre-recession unemployment levels after two years (or even four years, as the strategic analysis demonstrates).

While we’ve been focused on phantom budget menaces derived from assumptions about the state of medical technology in 2080, the jobs crisis has continued to ruin real lives.  Without a dramatic turnaround in our fiscal priorities, it will continue to do so for years to come.  It’s become pretty clear that the actual needs of this economy far outstrip what the political system is willing to deliver.  (The authors actually favor direct job creation, in the form of an employer-of-last-resort policy, but they suggest that this is currently even further outside the realm of the politically possible as compared to traditional fiscal stimulus.)

Assuming no further stimulus is possible, the “best case” scenario over the next four years might be to merely hold off any new attempts at grand bargains or further budget cuts; to maintain the miserable status quo on the budget.  In that case, as the figure below illustrates (the authors’ “Baseline” forecast represented by the black line), unemployment would still be above 7 percent in two years, and above 6.5 percent by the end of President Obama’s term in office (which, as the authors point out, is still in excess of the threshold at which the Fed would consider tightening monetary policy).

SA March 2013_Unemployment Rate

The full analysis can be downloaded here.

* Specifically, the increase applies to “real government purchases of final goods and government transfers to the private sector.”


Putting Full Employment Back on the Agenda

Michael Stephens | December 5, 2012

James Galbraith and Randall Wray spoke about returning full employment to the policy agenda at an event in Helsinki on Monday organized by the Foundation for European Progressive Studies and supported by the Kalevi Sorsa Foundation and the Finnish Confederation on Trade Unions (SAK).

Wray focused on Minsky’s under-discussed work on poverty and full employment (the Levy Institute is currently putting together a new book containing a collection of Minsky’s published and unpublished writings on the topic):  “Minsky wrote almost as much on poverty, unemployment, and employment policy as he had on financial instability.”  Video of the presentations is below:

Video of the panel discussion can be seen here.