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.

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.

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.”

In the Wall Street Journal, Stanford’s Robert Hall tells Jon Hilsenrath that last year’s stimulus just about made up for the cuts in state and local government spending forced by the recession (most states have balanced budget requirements, so when tax revenues dip, as they do in a recession, spending must follow).

So, there was no net stimulus from government spending last year! Still, it could have been worse. What David Leonhardt doesn’t say (in his take on the subject for the New York Times) is that the initial stimulus was too small. Certainly state fiscal support was too small. States have still had to cut their budgets, laying off teachers and police officers. These layoffs have not been helpful to recovery, to say the least.

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Writing for the New York Times Economix blog, Nancy Folbre of the University of Massachusetts cites the work of Levy Institute economists in suggesting that Uncle Sam fund more home-care jobs:

Four economists at the Levy Economics Institute of Bard College – Rania Antonopoulos, Kijong Kim, Thomas Masterson and Ajit Zacharias – have published a policy brief, “Why President Obama Should Care About ‘Care’: An Effective and Equitable Investment Strategy for Job Creation.”

There are many reasons this is a great way to battle unemployment. Check out the policy brief for the full story.

A recent New York Times article highlighted the inadequacy of job training programs in the face of massive unemployment. The programs do not reflect the demand for highly skilled workers, such as those who can handle high-tech equipment and service jet engines. Even highly regarded programs have less than a 60 percent job placement rate. It is hard to predict the economy’s next great job-producing sectors and develop programs that train for them.

We’ve reached the point, moreover, where the experience that come with age has become a roadblock to successful job hunting, and almost 39 percent of the long-term unemployed are men in their mid-40s or older. Unemployment checks barely covers their living expenses. Sometimes families break up or people move in with their elderly parents. It’s a sad story.

When passive labor policies are not working and the end of recession seems too far away, it’s time to consider more active steps, including public employment programs. Once upon a time in America, the Civilian Conservation Corps reached out to jobless young people. Perhaps we need another large-scale jobs program, only this time for older workers. Just as the Fed is our lender of last resort, government could take on the role of employer of last resort. It’s paying the jobless anyway, in the form of unemployment insurance (about to be extended again). Why not just go ahead and give jobs along with jobless benefits?

Are you worried that such a plan will intolerably increase the public debt? A study by Carmen M. Reinhart, a co-author with Kenneth Rogoff of This Time is Different: Eight Centuries of Financial Follies, says of the Great Depression: “Countries that were more consistent in keeping spending high tended to recover more quickly.” (Free but older version of the paper is here). Perhaps there is a lesson for us in this.

The Bureau of Labor Statistics released its May employment situation report today and the news was mostly grim. Sure, unemployment dropped to 9.7 percent from 9.9 percent. But don’t get too excited, because almost all the new jobs created in May were for census-takers, and these folks will be unemployed again soon.

In more bad news masquerading as good, the so-called mancession appears to be easing. Most developed countries are beset by one of these male recessions, with men suffering the brunt of job losses due to their much greater representation in construction and manufacturing—both of which are hard-hit almost everywhere. In this country, at least, the mancession looks like it’s easing—until you look a little closer and realize that this is only the case because men leaving the labor force increased by 4.7 percent over last year, an increase twice that of women. In other words, men aren’t gaining jobs. They’re giving up.

What shall we do with the horrendous number of idle men? Their skills may not be valued in industries that have done better than traditional men-industries. Training for new kinds of work is one possibility, but demand for new workers may not be there yet; relocation to other states may be out of the question if your mortgage is underwater; and the Euro crisis is a pinch of salt on the slow-healing wound of recession.

For a great many men, this Father’s Day is unlikely to be a happy one.

From today’s NY Times:

The cost of public pensions has been systemically underestimated nationwide for more than two decades, say some analysts. By these estimates, state and local officials have promised $5 trillion worth of benefits while thinking they were committing taxpayers to roughly half that amount.

As Dimitri Papadimitriou said on this blog recently, we are facing a multidimensional pension crisis in this country. A coherent national retirement system–truly comprehensive Social Security obviating private pensions–might have avoided these runaway state and local pension obligations, which may yet end up on the federal balance sheet.

An earlier Levy post outlined America’s multi-dimensional pension crisis. Now comes this paper from economist Joshua Rauh, who says that at least seven states may be unable to pay their public-pension obligations during the next decade–and by 2030 that number could reach 31 states.

Barring reforms, Rauh says, a federal bailout could be needed, possibly exceeding $1 trillion. In the paper, he gives a sense of the magnitude of the problem: “The gap between assets and already-promised liabilities in state pension funds alone was over $3 trillion at the end of 2008.”

What is to be done? Part of the answer, Rauh writes, is that states might give public employees defined contribution plans–and bring into the Social Security system the quarter of state and local workers now outside of it.

Getting medical insurance out of the workplace would have been a grand idea. But bowing to practicality, the Obama administration pushed through a good-enough plan that leaves it there.

Let’s not make the same mistake twice when it comes to pensions. America and its retirees are facing a multi-dimensional pension crisis—one that, even more than health-care, requires severing the connection between the workplace and the social safety net.

Like health insurance, employer-provided pensions are regarded as the natural course of things in this country, but it wasn’t always so. It all started during World War II, when the government clamped down on wages. Benefits were a way of getting around the restrictions to increase compensation, but they persisted for good reasons. Paying workers with benefits rather than cash had tax advantages, and promising something 30 years into the future is always more appealing to employers than paying higher wages today.

But the system has bred serious problems, all of them getting larger by the day. First, individuals and their employers are terrible retirement planners. Companies have every incentive to make rosy assumptions that let them under-fund their plans, while employees, increasingly left to their own devices with 401(k)s and other such self-funded plans, probably don’t save enough.

Then there’s the problem of investing. Neither employers nor employees are very good at managing the money they do save. As Yeva Nersisyan and Levy Senior Scholar L. Randall Wray have shown, from 2007 to 2008, private pensions and IRAs lost roughly $2.9 trillion that people were counting on for their old age.

Defined-benefit plans—the nice, old-fashioned kind funded by employers—may have made sense when workers stayed put for years. Nowadays, though, people change jobs a lot more often and through no fault of their own. Employees fall victim to technology or downsizing every day. Yet vesting requirements persist, which means that these days more and more of your work-life won’t get you much pension credit. continue reading…