Archive for August, 2010

For the jobless, a feast of assumptions

Thomas Masterson | August 31, 2010

In a Wall Street Journal Op-Ed (why do I read these!?), Harvard economist Robert Barro claims that “according to [his] calculations” without extended unemployment benefits the unemploymnet rate would now be 6.8%. What are these calculations? Glad you asked!

To get a rough quantitative estimate of the implications for the unemployment rate, suppose that the expansion of unemployment-insurance coverage to 99 weeks had not occurred and—I assume—the share of long-term unemployment had equaled the peak value of 24.5% observed in July 1983. Then, if the number of unemployed 26 weeks or less in June 2010 had still equaled the observed value of 7.9 million, the total number of unemployed would have been 10.4 million rather than 14.6 million. If the labor force still equaled the observed value (153.7 million), the unemployment rate would have been 6.8% rather than 9.5%.

See? If you assume that long-term unemployment is caused by extended unemployment insurance benefits, then removing unemployment insurance extensions solves the problem of long-term unemployment (and you get a pony!). This must be why he makes the big bucks. Magical thinking.

Suppose we make a different assumption. Let’s assume that changes in consumer demand have an effect on the level of employment. If so, then the decision to not extend unemployment benefits would reduce demand for goods and services. Where will the jobs come from? Businesses are not going to expand their capacity or their workforce in the face of falling demand for their products. The only way that extending unemployment benefits could actually increase the unemployment rate above what it would otherwise be (other than just assuming it will, as Barro does) is to assume that the people receiving those benefits, rather than spending them on food and rent, use the checks to set fires to businesses that are currently employing people. This assumption has the advantage of actually leading to the conclusion that Barro reaches, without magic.


What’s new about QE?

Greg Hannsgen | August 30, 2010

After its last meeting, the Federal Open Market Committee, which makes decisions about Federal Reserve monetary policy, decided to keep its holdings of long-term securities constant. The Fed was forced to look again at this issue because borrowers have been paying off the long-term debt securities already in its portfolio. This maturing debt consists mostly of Treasury bonds, mortgage-backed securities, and Fannie Mae and Freddie Mac bonds, most of which were acquired quite recently. The Fed will reinvest the repayments in more long-term Treasury bonds instead of allowing its balance sheet to shrink.

Some have referred to the Fed’s acquisition of certain assets not normally seen on its balance sheet by the special term “quantitative easing,” or QE. This term is perhaps somewhat misleading, because it implies a sharp distinction between the recent policies to which it refers and the Fed’s more typical manipulations of the federal funds and discount rates. But, surprise, the new policy actions also involve interest rates, albeit ones that the Fed had not attempted to directly influence in many years when it began QE in 2008. Let’s hear what Ben Bernanke said at a conference last week:

….changes in the net supply of an asset available to investors affect its yield and those of broadly similar assets. Thus, our purchases of Treasury, agency debt, and agency MBS [mortgage-backed securities] likely both reduced the yields on those securities and also pushed investors into holding other assets with similar characteristics, such as credit risk and duration. For example, some investors who sold MBS to the Fed may have replaced them in their portfolios with longer-term, high-quality corporate bonds, depressing the yields on those assets as well.

In other words, the Fed is buying long-term securities mainly as a means of reducing the interest rates paid by the federal government and other borrowers when they issue long-term debt. These rates are crucial because many large purchases are paid for over a long period of time. These include homes and large-scale corporate investments such as new factories, which are usually expected to yield revenues over a stretch of many years. Of course, the Fed has not set an explicit target for any long-term interest rates. But it certainly did that during and immediately after World War II, which was the last time the federal debt was so large as a percentage of GDP. (Interestingly, during its history, the Fed has not always publicly committed itself to any interest-rate target at all.)

This graph, which shows interest rates on long-term securities issued by the federal government, offers some historical perspective on just how low interest rates are:

The figure depicts two data series maintained by the Federal Reserve, which I have had to splice together because neither series covers the entire time period shown in the graph, January 1925 to July 2010. It shows that throughout World War II and until 1953, the Fed kept long-term interest rates below 3 percent, which helped keep the cost of federal debt low. Of course, to do this, the Fed had to purchase many long-term government bonds. We wonder what will happen next.

(Graph updated with August 2010 data point and resized for readability September 15, 2010.)


How costly is child care?

Kijong Kim | August 26, 2010

You may already know that women’s workforce participation has increased and gender wage gaps have been closing gradually, although we still have a long way to go. Work-life balance can be costly, and raising children is rewarding yet financially challenging.

A new report by the congressional Joint Economic Committee gives an excellent description on the status of women and challenges they have faced in the labor market over the last 25 years (ht to Catherine Rampell at Economix).

As a researcher of the care economy, I couldn’t help noticing the following two graphics. First, Figure 10 in the original report:

The opportunity cost of being a stay-at-home mom is high and grows as time goes by at the rate of 1.34 percent a year! Imagine how much worse off the family will be in 30 years with all the forgone income,  savings, and smaller social security checks to receive after retirement, and so on.

Some of you may claim that it was their deliberate choice to stay at home, so the society should not come to the rescue. Well, if Paris Hilton becomes mom and decide to stay at home to take care of her kids, she probable won’t need any social support other than occasional photo-shoot opportunities to upkeep her celebrity status. For most of us with less financial freedom than Ms. Hilton, however, the choice may have been in part forced by lack of affordable quality care.

Speaking of costs, Figure 15 shows how unequal child care expenses are distributed across families with different income levels:

Looking at the costs as a share of family income, I wonder: how in the world can a mom can keep her job and send her kids to day-care, unless society provides support? Having kids appears to be one of the traps of poverty!

To address the inequalities of care burden, one solution is to expand social care provision and make it universal, if possible (universal care does not mean one is forced to join the system by law). It will not only free many, many women from the costly choice and burden, but offer jobs to many of them in the care economy, as my colleagues and I have proposed.

P.S. One question for readers:  what is a better way to internalize the positive externalities of raising the productive citizens of tomorrow, let alone ensuring the survival of human species? (I think funding NASA projects sort of fits in the question – cutting edge technology development and its spillovers, for instance the Temperpedic mattress, and the search for another habitable planet.)


Social Security remains affordable, even in long run

Greg Hannsgen | August 18, 2010

In Paul Krugman’s blog, a bit of good news from the August 2010 Social Security Trustees’ Report on the finances of the Social Security entitlement programs (retirement, survivors, and disability):

Given the apocalyptic rhetoric we’re hearing, once again, about Social Security finances, it comes as something of a shock—even to me—to look at the actual projections in the latest Trustees’ Report. OASDI [ed.: in plain English, Social Security spending] is projected to rise from 4.8 percent of GDP now to about 6 percent of GDP in 2030, and level off. That’s not trivial—but it’s not huge either.

Hence, the intermediate forecast reported by Krugman seems to indicate that we can maintain current benefit levels, retirement ages, and other rules for the foreseeable future using existing payroll and benefit taxes plus only a modest increase in federal revenues dedicated to Social Security programs. Perhaps more Americans will be able to retire fairly comfortably and at a reasonable age than some have predicted.

Coincidentally, not long after the report was released, a new exhibit marking the 75th anniversary of the signing of the Social Security Act opened here in the Hudson Valley, not far from the Levy Institute, at the Franklin D. Roosevelt Presidential Library and Museum. (The famous Roosevelt home is on the same site.) I hope to see the Social Security exhibit soon and may report back to you on what I find there.


A Levy scholar on the financial crisis

Daniel Akst | August 13, 2010

Over the course of the summer, Levy senior scholar James K. Galbraith gave a series of lectures in Europe laying out his view of the financial crisis that originated on this side of the Atlantic. At the most recent of these, in July, he emphasized the role of fraud:

It’s important to recognize that at the root of the financial crisis there was one of the greatest swindles of all economic history. The mortgages that were originated in the private sector in the United States which were then transformed into securities and sold through the financial markets around the world were in effect counterfeits. They were documents that looked like mortgages but were known by the people making them to be certain to fail.

Links to the rest of Galbraith’s talks are listed below:

continue reading…


High unemployment puts poor families at risk

Greg Hannsgen | August 6, 2010

Scholars at the Levy Institute have supported the creation of an employer-of-last-resort (ELR) program in the United States for many years. Such a program would provide a government job to any American who needed one and met a few basic requirements. (This readable policy note, along with many other Levy publications, explains the case for ELR programs.) So far, the government has created many jobs since the passage of the stimulus package, but the unemployment rate remains at 9.5 percent. Many forecasters are now predicting that the overall unemployment rates for 2010 and 2011 will both exceed 9 percent

Children are among the groups deeply affected by recessions. For example, a government report issued last November found that over one million children sometimes went hungry in 2008, which represented a large increase over the previous year.  Also, in a recent article, Katherine Newman and David Pedulla discuss how this recession has had an uneven impact, hitting groups like young people just entering the labor force especially hard.

Programs that helped the poor in times like these were weakened greatly in 1996, when President Bill Clinton somewhat reluctantly signed a welfare reform bill that was not what he had hoped for, saying that it was the country’s “last best chance” for reform. The Personal Responsibility and Work Opportunity Reconciliation Act set time limits for receiving welfare benefits, and converted the program from one that provided grants to all qualified families to one that came in the form of a grant of a fixed amount to each state. In passing the bill, leaders intended to expand work requirements for welfare benefits, but in practice many were not able to get work, appropriate training, and/or child care. The bill followed many years of reforms at the state and federal levels, some of which had enabled welfare recipients to obtain job training or to raise their incomes substantially by putting in more hours of work.

When the 1996 welfare reform effort took effect, many observers expected an eventual rise in homelessness and poverty, particularly among single-parent families. These effects seemed to have been avoided at first, and indeed poverty rates seemed to be falling as states implemented the new law. Many observers noted, however, that the job market was relatively tight during the late 1990s. The graph below (click on it for a larger view) shows two data series: unemployment for women over 19 years old and poverty rates for families with a female adult, children under age 18, and “no husband.”

The idea is to show how poverty for this group is related to the strength of the job market. Note that as welfare reform went into effect in the late 1990s, the unemployment rate for women was falling, mostly because of a booming economy. This trend helps to explain the fall in the poverty rate shown on the left side of the figure. Then, after the stock-market crash of 2000 and the recession that followed, the unemployment rate shown in the figure rose. It dropped a bit during the subsequent recovery, but then climbed again, reaching 4.9 percent in 2008. This reduction in demand for workers partially explains the steady rise in poverty that occurred during the same period, to more than 37 percent in 2008. Fortunately, improvements in the earned income tax credit (EITC) program probably helped to contain increases in poverty rates during this period. Of course many other factors affect poverty rates, some related to the business cycle and some not.

Unfortunately, as the graph shows, the unemployment rate for women more than 19 years of age rose again in 2009, by 2.6 percentage points—a big increase. The Census Bureau has not released poverty rates for that year, but this analysis shows that there is very good reason to believe that the new data will show that the rise in most poverty rates continued in 2009. Moreover, monthly data for this year show that the unemployment rate for women over 19 continued to rise in 2010 and stood at 7.9 percent as of June. Last month’s employment data will be released later this week. This information suggests that job creation efforts and other initiatives to help the unemployed and underemployed should be on the increase and not on the wane.


Making jobs Job One

Daniel Akst | August 3, 2010

On The Daily Beast, Levy senior scholar James K. Galbraith urges action to get people working again, and smites deficit hawks who might oppose it. In the debate over stimulus versus austerity, he warns of two traps:

The first is the idea that we need another “stimulus package.” How I hate that phrase! The message it conveys—of something fast, temporary, quickly withdrawn—is wrong. We’re not in an ordinary postwar recession. We’ve suffered a major collapse of the financial system. Repairing this, and working off household debt loads and the housing glut, will take years. Yes, the economy can recover without strong private credit, but the recovery will be slow and unemployment will not be cured.

The second trap is the idea that we should undo it all later on. Even worse, many argue that we must make cuts today, effective at a later time, to offset the “stimulus.” Since the major programs which are authorized today for later effect are Social Security and Medicare, this translates to “cutting entitlements” in order to bring “long-term budget deficits under control.”

Hogwash, says Galbraith, who advocates freeing up jobs by making it easier for older workers to retire. You can read the rest here.


Another call for social-sector jobs

Daniel Akst | August 1, 2010

In a New York Times column, Yale’s Robert Shiller calls for a federal effort to battle unemployment by creating precisely the kind of socially beneficial jobs that some Levy Institute scholars have been recommending:

Why not use government policy to directly create jobs — labor-intensive service jobs in fields like education, public health and safety, urban infrastructure maintenance, youth programs, elder care, conservation, arts and letters, and scientific research?

For deficit hawks, Shiller notes that the cost would be modest:

Big new programs to create jobs need not be expensive. Suppose the cost of hiring a single employee were as high as $30,000 a year, several times typical AmeriCorps living allowances. Hiring a million people would cost $30 billion a year. That’s only 4 percent of the entire federal stimulus program, and 0.2 percent of the national debt.

You can read more on this blog about the ideas of Levy scholars along these lines, or you can cut to the chase and read a Levy Policy Brief on this very subject for yourself. Another related Levy publication, this one a Policy Note on job creation and the lessons of the New Deal, is available here.