“Through several recessions and recoveries, inflation-adjusted GDP rose almost in tandem with a line of predicted growth expectations. But in November 2007, something changed. Real GDP dropped down from what was expected by more than 11 percent, and, as this summer’s data has shown, it hasn’t returned to its pre-recession trend. The unusual slump has provoked a stream of commentary that attempts to define the problem, but it hardly matters whether the downturn is identified as the second dip of a ‘double-dip’ recession, a continuation of the ‘Great Recession’, a fast-moving slowdown, a slow nosedive, a long-term stall-out, or a confirmation that the economy has entered a Japanese-style ‘lost decade’. Growth during the 21st century is following a different trend line than it did in the 20th, and employment is also responding in new, different ways from earlier post-World War II recessions.”

Levy Institute President Dimitri Papadimitriou writes in Truthout about the uniquely disastrous employment picture that has emerged from this recession.  It is a reminder that, while there is no convincing argument as to why US government debt or deficits are causing any current economic problems, the employment situation represents a clear and present economic danger.  The proportion of political, legislative, and press attention paid the former, compared to the latter, is wildly unjustified by any compelling economic logic.

Well, I commented last night on President Obama’s speech to Congress on WGXC, my local radio station. I thought it worth putting down my thoughts on silicon, since I’ve already done all the thinking about it.

First of all, I thought that the delivery was one of the better that I’ve heard from President Obama since he took office. It reminded me more of candidate Obama. Maybe that’s because this speech, more than the official announcement that he was running for re-election a while back, was the kick-off to his re-election campaign. He had that whole preacher cadence down, punctuating sections of the speech with the phrase “that’s why you should pass this bill now.” A nice touch, but one that was clearly not directed at the politicians in front of him, many of whom wouldn’t support kibble for kittens if it was an Obama proposal.

Moving on to substance is a bit depressing. The American Jobs Act is equal parts weak tea and bitter pill. The weak tea is that as a job creation proposal it does too little, too ineffectively. Much of the proposal the President outlined in the speech sounds a lot like the American Recovery and Reinvestment Act, the stimulus passed early in 2009. I will talk about that bill’s effectiveness in a bit, because I think a lot of people think very lazily about how to assess that policy’s impact. But the parts are all there: lots of tax cutting; state aid; unemployment insurance; and infrastructure spending. There is also some mortgage finance relief thrown in for good measure.

Tax cuts will be welcome to most people, of course. Who doesn’t want more of their paycheck going directly into their pockets (other than Warren Buffet, of course)? The proposal to cut payroll taxes in half is great in a couple of ways. It will add some stimulus to the demand for goods and services (people will buy more stuff if they get their hands on a bigger chunk of their paychecks). And the payroll tax is one of the more regressive federal taxes, since people pay a flat rate on their first $100K or so of wage and salary income and nothing above that cap, which means that people who make less than $100K (most of us) put a bigger percentage of our salaries into the Social Security system than those who make more.

The employer reduction in the payroll tax isn’t going to be as helpful. Some small business owners will see that as a small bump to their bottom line, but it certainly isn’t going to create a lot of jobs. Nor will the tax credits for hiring the long-term unemployed or veterans, although those are certainly worthy targets for encouraging employment. But businesses aren’t making hiring decisions based on the tax implications of hiring more workers. Certainly, they take taxes they have to pay into account, but these are a small portion of the cost of hiring someone. The point is that businesses aren’t hiring people because there is not enough demand for goods and services in the economy. Until demand for the stuff businesses produce or provide goes up, hiring will remain slow.

State aid is a simpler case to make. continue reading…

Expect one thing from President Obama’s speech on Thursday: a mini ARRA, a smaller version of essentially the same stimulus plan as that of 2009. He will probably call for putting the unemployed construction workers to work on infrastructure projects, he will propose tax incentives to firms to hire the unemployed, he will keep pushing for the weatherization of buildings and more funding to teachers and schools. He will keep advocating a free trade agenda, whatever form that might take. And if informed pundits are correct, he will ask for about a third of the ARRA funds, around $300 billion.

In 2009 ARRA passed a total of $787 billion (which was extended to $840 billion). About a third was allocated to tax cuts, another third went to entitlements and the remaining third (about $275b of which $205b have been disbursed) went to finance various projects through grants, loans and contracts—yes, the same weatherization projects he was advocating at the beginning of his presidency, the same teacher retention programs, school renovations, the same subsidies to firms for (true, mostly green) energy production.

It does not appear that we will see much that is new tomorrow, but the approach will be much more timid, given the deficit phobia that has gripped Washington.  To be clear, the Recovery Act worked, but had a rather small impact on jobs for two reasons: 1) the actual direct job creation component was far too small (for the most part it was contained in that third, which went to grants, contracts and loans); and 2) it was poorly targeted (not all of these funds actually created new jobs for the unemployed—a topic for a different post).

With such a small direct job creation component, it is no surprise that ARRA created only 1.2 million jobs in direct employment. If we consider the secondary, tertiary and subsequent effects from the entire ARRA spending (including tax rebates and entitlements) and account for a multiplier effect, whose high estimate according to the CBO is $2.50, we are looking at 3.3 million jobs created from ARRA in 2 years (2009-q2 to 2011-Q1). So yes, the ARRA did create jobs, but too few and at a time when the economy was experiencing its fastest private sector job loss since the Great Depression.

In January 2009, I argued that what the president should do in his ARRA proposal is offer direct employment to the jobless immediately and without delay. If instead of all the tax cuts, subsidies, and entitlement extensions he had offered full-time employment to the unemployed in transitional public sector jobs at a living wage, we would have prevented the precipitous increase in the unemployment rate that followed. Furthermore, had we targeted the ARRA better (a topic for another discussion) we could have created 10-20 million jobs for the same price tag!

But we did not embrace the bold approach then and we will definitely not embrace it now. continue reading…

Leading up to today’s jobs speech the internal debates in the administration (or so the leaks tell us) have been over whether to propose something minimal that might have a chance of passing, or something bold, knowing that nothing has a chance of getting through Congress anyway.

Randall Wray and Stephanie Kelton demonstrate what it would look like to “go big”:

The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA (the Works Progress Administration, in existence from 1935 to 1943 after being renamed the Work Projects Administration in 1939) and the CCC (Civilian Conservation Corps, 1933-1942). The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements.

The program would operate like a buffer stock, absorbing and releasing workers during the economy’s natural boom-and-bust cycles. In a boom, employers would recruit workers out of the program; in a slump the safety net would allow those who had lost their jobs to continue to work to preserve good habits, making them easier to re-employ when activity picked up. The program would also take those whose education, training or job experience was initially inadequate to obtain work outside the program, enhancing their employability through on-the-job training. Work records would be maintained for all program participants and would be available for potential employers. Unemployment offices could be converted to employment offices, to match workers with jobs in the program, and to help private and public employers recruit workers.

Read the rest here.

In a post on Ezra Klein’s blog entitled “The recession’s gender gap: from ‘man-cession’ to ‘he-covery’,” Suzie Khimm notes that the recovery is happening for men but not so much for women. She quotes an Institute for Women’s Policy Research paper that refers to our research, found in this policy brief. Early childhood education and home health care represent great opportunities for improving quality of life for the care recipients as well as for the people who would become employed under these proposals. I will be listening for some mention of them by President Obama tomorrow night.

“There’s a 60 percent probability that most advanced economies will fall into a recession, while authorities are running out of options to provide emergency support.” — Bloomberg News today, describing the views of Nouriel Roubini

This forecast from a sometimes-prescient and widely quoted economist brings to mind a question that many people now find irrelevant.

Which should we policymakers choose, option A or option B? How about doing whatever is necessary to balance the government’s budget? Increasingly, policymakers believe that is their only option. In some countries, these policymakers may be right. For them, options A through Z are to raise taxes or cut spending. This is what happens when (1) tax revenues are weak, (2) money is needed to make payments on government debt, and (3) the country in question does not or cannot print its own currency and cannot make reserves for its own banks.

Here in the United States, point (3) above does not apply. Hence, the federal government can issue any amount of securities, with the Fed purchasing them if necessary, as long as Congress is willing to keep increasing the debt limit. Unfortunately, however, the stimulus package of 2009 is wearing off, and Congress and the President have not acted quickly enough to increase spending or reduce taxes. As a result, combined government employment at the local, state, and federal levels has been falling. Unemployment remains ultra-high. Hence, we look forward with great concern to President Obama’s upcoming address on jobs creation. Many constructive proposals are likely to be on offer.

On the other hand, all three points in the third paragraph of this post seem to apply to most of the countries in the Eurozone. They are in some kind of a trap, perhaps a debt trap. continue reading…

Thomas Masterson and Pavlina Tcherneva were interviewed by the Huffington Post for an article on job creation policy.  Tcherneva discussed the idea of a modern-day WPA, echoing a call she made at the outset of the Obama administration (in this policy note) for the government to provide an explicit employment guarantee targeting the unemployed.  Masterson highlighted his research with a team at the Levy Institute on the employment and distribution benefits of investing in social care services like early childhood care and home health care for the elderly, and poured cold water on the idea of providing tax incentives for new hiring (“If they can’t sell the stuff that they can make now, then why are they going to hire more people?”).

All to the same place? You might be excused for thinking so after perusing Tyler Cowen’s post Why didn’t the stimulus create more jobs?, but you would be wrong. First let’s look at Cowen’s post for some obvious red flags. About the number of people hired using stimulus funds who were already employed, Cowen says:

You can tell a story about how hiring the already employed opened up other jobs for the unemployed, but it’s just that — a story.  I don’t think it is what happened in most cases, rather firms ended up getting by with fewer workers.

OK, so the substance of this is he doesn’t like one story, he prefers another. I quite understand why, Cowen being who he is. I happen to like the other story, myself. However, one might want actual proof rather than preferences (dear as they are to neo-classical economists).

A second point requires reading the two studies Cowen refers to. Cowen says that “There are lots of relevant details in the paper but here is one punchline: ‘hiring people from unemployment was more the exception than the rule in our interviews.'” Interesting choice. Especially given that the first bullet point in their summary of results is: “ARRA funds led to worker hiring and retention.” And that is the point after all. The question of whether the ARRA funds went to directly hire unemployed workers or not is mostly beside the point.

The question that matters in job terms is: how many more people were employed because of the ARRA spending than would have been without it? It’s a question we can’t know the answer to, because we will never know what would’ve happened without the stimulus. The insinuation in Cowen’s post is that for a variety of reasons the stimulus wasn’t that stimulative. The proof offered is that Cowen doesn’t think workers hired away from other jobs were replaced, or that (from the paper itself, now) wages were mandated to be too high: “38.2 percent [of “organizations required to pay prevailing wages”] thought that they could have hired workers at wages below the Davis-Bacon prevailing wage.” The latter point misses the point of stimulus: its multiplier effect (where have I seen that phrase before?). The number of jobs directly created or saved by the stimulus isn’t the whole story. Those workers, having non-zero rather than zero money in their pockets, will spend more, saving or creating other jobs, and so on.

A final “damning” conclusion from the paper: “[h]iring isn’t the same as net job creation.” Indeed. But net job creation is never actually dealt with in the paper, let alone net job creation/saving relative to no stimulus. For an estimate of job creation under the first three years of the stimulus, you could look at this paper (self-serving, isn’t it?).

I sometimes wonder whether folks who think stimulus spending has little to no effect (or a negative effect!) on employment think the money is just piled up on the White House lawn for President Obama to (gleefully, I’m assuming in this fantasy) toss a lit match onto.

There appears to be a standoff brewing over renewal of the federal gas tax.  The tax traditionally funds highway infrastructure projects and is due to be extended September 30^th.  But a group in Congress, led by Senator Tom Coburn, is maneuvering to block the extension.  A delay of just ten days, Ron Klain writes in Bloomberg, would mean “the permanent loss of $1 billion in highway funding (and layoffs for thousands of workers).”

So not only must we accept the fact that there will be no new infrastructure or public works programs—certainly nothing on a large scale that might begin closing the current employment gap—but there will be an uphill political battle just to maintain existing funding.  In other words, the policy battleground has shifted, such that the choice is not between maintaining the inadequate status quo and investing in a new public works program, but between the status quo and less infrastructure investment.  It is difficult to come up with novel ways of explaining why this is ridiculous.  The fact that the real yield on Treasuries is negative gives us an excuse to rehash the case. continue reading…

mul·li·gan

noun /ˈməligən/
mulligans, plural

• A stew made from odds and ends of food
• (in informal golf) An extra stroke allowed after a poor shot, not counted on the scorecard

Casey Mulligan responds to a Paul Krugman post deliciously entitled “The General Theory of Anti-Mulliganism.” Never mind for the moment that Mulligan’s claim that Krugman admits to there being “exceptions to Keynesian theory” is, to put it most charitably, a self-serving reading of Krugman’s post. The use of the word “exceptions” sounds like Krugman is saying that in such-and-such a case Keynesian theory doesn’t apply. Of course, if you read Krugman’s piece, that isn’t the story he tells. This is merely intellectual dishonesty, though. More atrocious is Mulligan’s insistence that unemployment is caused by unemployment insurance. Why? It’s the incentives, stupid!

unemployment insurance reduces employment, rather than increasing it, because it penalizes beneficiaries for starting a new job.

Fascinating! No wonder those unemployed don’t go out and get new jobs. Because people love being on unemployment so much (they’re the envy of their friends), taking a job would certainly be a step down. See, they’d have to give up all that free time. For more money, maybe, sure, but so what? Of course a new job might also help to alleviate the stress on personal relationships, depression, anxiety, lack of sleep, and general ill-health associated with unemployment.

But Mulligan seems to think the only incentives that matter are the labor-leisure trade off beloved of Chicago school economists: the decision people make is whether more money or more leisure will make them personally better off. This is the type of decision that makes sense to Mulligan and other privileged, highly paid people, perhaps—but not to most people who would end up needing unemployment insurance. And it speaks volumes of the opinion that Mulligan and others who make the same case have of working people: if they’re unemployed, it’s because we’ve made unemployment too easy on them, and they are just taking advantage of our generosity. Or, they’re being too uppity: “employers found that people were more difficult to hire and retain when a generous safety net was available.” The unspoken assumption being made here is that the employers’ difficulties are paramount. Mulligan doesn’t explain how unemployment insurance, available to people who are laid off, not those who quit, makes it more difficult to retain people. continue reading…