You wonder what will happen when markets finally start working. How about, for example, a market that changes prices and wages quickly in response to fluctuations in demand? In a mixed economy with a government that tries to provide fiscal stimulus as needed, will it be of help to move toward such fast-adjusting markets? The two interactive diagrams in this post are based on figures 9a, 9b, 10a, and 10b in a Levy Institute working paper of mine called “Fiscal Policy, Unemployment Insurance, and Financial Crises in a Model of Growth and Distribution,” which was issued just this month and posted on the Institute’s site (math content somewhat crucial).
Each of the two figures shows one pathway followed by an imaginary economy. The pathways are computed by simulating a heterodox model, using a set of parameters as well as a starting point for each of the following variables: capacity utilization, public (government) production, the markup on labor costs used by businesses to calculate their prices, and the size of the labor force. As I explain in the paper, my parameter choices are not based on econometric estimates, but rather on a rough sense of what might be reasonable for a developed economy. In a moment, a new technology will give you a chance to see the impact of varying one of these assumed numbers. In fact, this post represents the first use on this blog of Wolfram’s interactive cdf format. You’ll need a free cdf reader and browser plug-in, which are downloadable at this link, if you don’t already have them.
The pathway shown in the figure just below is followed by public production, capacity utilization, and the markup. As shown, the pathway leads gradually upward in the figure toward an endless orbit called a “limit cycle.” The stabilizing effects of fiscal policy seem to be creating a steady, repeated elliptical pattern.
[WolframCDF source=”http://blogs.bard.edu/multiplier-effect/files/2012/10/blog-cdf-1-revised.cdf” CDFwidth=”435″ CDFheight=”468″ altimage=”http://blogs.bard.edu/multiplier-effect/files/2012/10/blog-cdf-1-alternative-image-rev.png”]
Now, move the lever above the diagram to the right by clicking and dragging with your mouse (or similar move with a touchpad or whatever hardware you have). As you move the lever to the right, you are increasing a parameter that controls the speed at which the markup changes in response to high or low levels of customer demand. continue reading…
A little while back the Wall Street Journalobserved that if there were as many people employed by government today as there were in the last month of George W. Bush’s tenure, the unemployment rate would be around 7.1 percent. Job creation policy, in other words, can sometimes be quite simple. Step One: stop firing so many people.
Reuters’ Edward Hadas picks up Pavlina Tcherneva’s research on the reorientation of fiscal policy and points us in the direction of a Step Two: offer a job to anyone who wants to work but can’t find paid employment. Tcherneva’s research reveals that the standard way of doing fiscal stimulus, trying to boost economic growth with traditional pump-priming and hoping that the jobs follow, has it backwards. Instead of the traditional “trickle-down Keynesian” approach, Tcherneva suggests that targeting the unemployed with direct job creation policies that run throughout the business cycle would be far more efficient. Tcherneva envisions a direct job creation program that would function as a more effective automatic stabilizer, expanding in recessions and contracting in booms.
She argues that this “bottom up” approach is not only closer to what Keynes actually advocated, but that it is also more likely to bring us back to full employment—while being less inflationary and more equitable. Although expanding government payrolls for projects fulfilling various public purposes would be one way of accomplishing this, Tcherneva advocates using social enterpreneurs and the nonprofit sector to offer jobs to all those willing and able to work (with funding provided by government).
From the standpoint of an ongoing debate about counterfactuals and whether the Federal Reserve would have allowed a more aggressive fiscal stimulus to take effect, one intriguing aspect of Tcherneva’s research stems from her finding that direct employment policies tend to be less inflationary, suggesting that reorienting fiscal policy in this direction might be able to get us closer to full employment before triggering a reaction from the Fed.
The article Hadas cites from the Review of Social Economy is behind a paywall but Tcherneva’s previous working papers on this topic can be downloaded here. Her newest working paper is here.
Congressman Ron Paul held a subcommittee hearing on reform of the Federal Reserve system a couple days ago that featured testimony from Senior Scholar James Galbraith, Alice Rivlin, John Taylor, Jeffrey Herbener, and Peter Klein. There were a wide variety of topics addressed, including the size of the Fed’s balance sheet, proposals to make the Fed an arm of the Treasury, and changes to FOMC governance.
Also raised was the question of whether to (formally) drop the employment side of the Fed’s dual mandate (because with unemployment at the dangerously low level of 8 percent and inflation sky high around 2 percent, clearly we’d be better off if the Fed were more like the ECB …). As Galbraith recounts, he himself was part of the team that drafted the Humphrey-Hawkins Act (“at a time of acute theoretical conflict in economics,” he points out), and he offers his defense of the dual mandate here:
As for the decided and observable tilt toward the price stability arm of the dual mandate, Galbraith collaborated on a working paper a few years back that identified the “real reaction function” of the Fed: an aversion to full employment (“after 1983 the Federal Reserve largely ceased reacting to inflation or high unemployment, but continued to react when unemployment fell ‘too low.'”). Although the working paper only covers the period 1984-2003, it raises an interesting contemporary question: even if Congress produced a substantial fiscal stimulus or managed to keep public employment levels anywhere close to where they were in 2008, to what extent would the Fed accommodate the expansionary effects?
Update: Galbraith’s statement before the subcommittee can be read here.
Has the tough labor market of the past five years caused an increase in the severity of the economic problems facing women who are raising children mostly on their own? In this blog entry, we provide updated information on a topic featured in a 2010 post to this blog. The idea of the figure shown above is to illustrate how the labor-market situation affects this group of women (known as “female householders” or by the roughly equivalent category of “women maintaining families”) and their children. The red line indicates that both of the two most recent recessions triggered sharp increases in the relevant unemployment rate. The most recent increase began in 2007—about five years ago. Fortunately, the first few months’ data for 2012 indicate a possible reversal of the post-2007 trend, with the unemployment rate falling to 11.5 percent on average for January, February, and March, compared to 12.9 percent last year.
Will lower unemployment bring lower poverty rates for female householders and their children? The 2010 post referred to above noted that poverty among families with a female householder rose from 2000 through 2008. This improvement followed a decline that lasted through most of the 1990s, the decade of a landmark welfare reform bill at the federal level. Unfortunately, according to Census Bureau data, the upward trend that we noted in our earlier post continued in 2009–2010. The blue line depicts data on children under 18 years old in female-householder families. The most recent publicly available data, which are for 2010, indicate that poverty among these children reached approximately 47 percent that year.
In 2010, the first year of the economic recovery, 93 percent of all income growth in the US was captured by the top 1 percent, according to Emmanuel Saez. There are a whole host of reasons for the stubborn persistence of corrosive levels of inequality, but one of the surprising contributing factors may be found in the way we approach fiscal stimulus policy.
In her newest policy note, Pavlina Tcherneva explains how a conventional “prime the pump” approach to stimulating the economy does little to alleviate tendencies toward unequal growth—and may even exacerbate them. The status quo, at best, offers us two choices in fiscal policy flavors: austerity and stimulus through aggregate demand management. While stimulus is preferable, says Tcherneva, there are still flaws in a fiscal strategy that aims at boosting investment and growth without explicitly targeting unemployment. The problem with pump priming is that it is rarely aggressive enough to adequately reduce unemployment—and when it is sufficiently aggressive, it has inflationary tendencies.
Here Tcherneva is relying on a recent working paper of hers that models the effects of different fiscal policies on prices and income distribution. She compares the effects of government as a provider of income transfers (in the form of unemployment insurance and investment subsidies), as a purchaser of goods and services, and as a direct employer of workers and finds that the first two policies are more inflationary and more inequitable than direct job creation: “pro-investment policies in particular add upward pressure to prices and skew the income distribution toward the capital share of income.”
Jumping off from these results, Tcherneva offers a third way on fiscal policy, beyond austerity and pump priming. continue reading…
The people at Bloomberg appear to have made a curious error on their website yesterday. They have attributed an op-ed to Amity Shlaes that was almost certainly not written by her. You see, Amity Shlaes is a well-known skeptic of Keynes and all things Keynesian, having written the bible for those who like to claim that the New Deal made the Great Depression worse. (For a nice takedown of such claims, as well as Shlaes’ contributions in particular, see this Levy Institute policy brief.)
The Bloomberg op-ed in question contends that the Obama administration’s intention to withdraw militarily from Afghanistan and other places will devastate those countries’ economies. This is because, according to the op-ed, establishing US military bases in foreign countries boosts economic growth there.
The real Amity Shlaes would have carefully instructed us that such public interventions not only cannot increase economic growth (even in the context of a downturn) but will actually decrease it (the New Deal, you see, is what made the regular ol’ Depression “Great”).
Now if this was written by Amity Shlaes, it is a peculiar way of announcing her conversion. But let’s not quibble over ceremony. If it is indeed Shlaes, let’s follow her lead. In order to boost the growth rate in a time of economic malaise here at home, we should invite the US military to occupy the United States; we could even pay them a bonus to do it (Shlaes’ calculations suggest this might still be worth our while).
But if the military is too busy increasing other countries’ growth rates, I have another idea. We could initiate an emergency recruitment drive for the US Army and station the new troops here in the United States, carrying out nation building in particularly distressed economic regions (there are, I believe, a few million people without jobs who would welcome the opportunity). Of course we might need to build some new infrastructure bases to facilitate these operations here in the US, and may have to hire some additional support staff.
And if the threat of being shipped overseas and put in harm’s way is a barrier to recruitment, we could always create a new, strictly domestic branch of the military that recruits civilians to engage in nation building through repairing schools and providing social services. We could call it, I don’t know, the Civilian Conservation Nation Building Corps, or something like that. But none of that Keynesian nonsense please.
From a peak of 4.5 million workers in 2008, Greece has already lost 500,000 jobs. Our first chart shows that the country is already in its worst condition since the beginning of the century in terms of the share of the working age population who have a job (our projections are based on the last monthly data for 2011).
In the next chart we compare government tax revenues to employment, where tax data are from the sectoral accounts of Greece. Although the recent data revision to sectoral accounts are less pessimistic than the former release, we should expect the fall in employment to produce a corresponding fall in government revenues, with adverse effects on government deficits and debt.
What Greece needs are policies to create jobs.
No matter what happens on Sunday, when the Greek parliament is scheduled to vote on the latest bailout package, on Monday Greece will wake up in the grip of an employment crisis (20 percent unemployment, with a near 40 percent youth unemployment rate). In the Huffington Post Dimitri Papadimitriou tells us what we can (and can’t) do about it.
Depending on the Greek private sector alone to produce enough jobs to stave off these socially corrosive levels of unemployment is unrealistic. Drawing from a report on the Greek labor market recently produced by the Levy Institute, Papadimitriou lays out the case for direct public service job creation. As Papadimitriou points out, Greece is currently experimenting with a similar, small-scale version of the idea:
… a better option is being tried on a small scale: A labor department direct public service job creation program with an initial target of 55,000 jobs. Participants are entitled to up to five months of work per year, in projects — implemented by non-governmental organizations — that benefit their communities. A similar, streamlined, Interior department program, this one without NGO participation, will generate up to 120,000 openings.
This approach is the Greek government’s best shot at slowing the nosedive in employment, and at circumventing further catastrophe. The plans have been designed to specifically address and avoid the nepotism, corruption, and favoritism that plague poorly conceived ‘workfare’ schemes. With proper targeting, monitoring, and evaluation as the projects move along, the outcomes should be impressive
Well then. Apparently not everyone agrees that the Federal Reserve is having trouble balancing its dual mandate. Rather, I should say that not everyone agrees about the nature of the imbalance. From the Boston Globe‘s reporting of Ben Bernanke’s appearance in front of the Senate Budget Committee, we find this:
“It seems to me that you care more about unemployment than about inflation,’’ said Senator Charles E. Grassley, Republican of Iowa.
“I want to disabuse any notion that there is a priority for maximum employment,’’ Bernanke responded.
Bernanke deserves credit here for refraining from hitting himself over the head with a frying pan in response. (Is this just a cynical form of “working the ref” or does the Senator really believe it? If the latter, what more could possibly disabuse him of this notion?) I suggested yesterday that you “don’t need to look very hard” to see that the Federal Reserve is doing much better at keeping inflation in check than at controlling unemployment—but you do need to look.
I’ll outsource the rest to the The Economist (where Ryan Avent performs the literary equivalent of hitting himself over the head with a frying pan):
During the second half of 2010, annual inflation stood at its lowest level in over half a century. Unemployment, by contrast, peaked at 10.0%. Only once in the post-war period did the jobless rate rise above that level. Only twice in the postwar period has the country experienced a recession that brought the unemployment rate above its current level, at 8.3% […] I’m left to muse that Mr Grassley must say good-bye when he enters a room and hello when he leaves, and wears his shoes on his head.
ShareThis