The latest chapter in the “why was the original stimulus so small?” story is a memo from December 2008 that reveals Larry Summers’ assessment as to why the stimulus (ARRA) had to be limited to around $800 billion—about half of what was necessary, in Summers’ estimation.  There are various conclusions you can draw from this memo, but the aspect I’d like to focus on is this:  Larry Summers’ suggestion that $225 billion of “actual spending on priority investments” is all that the government could get out the door over a two year time span (and so the rest had to be made up of tax cuts, aid to states, etc.).

Let’s grant for the sake of argument that Summers is correct about this “shovel ready” figure.  The question is:  what can we do about it?  If you’re looking for short-term results, the answer is probably “not much.”  Even things like speeding up environmental impact assessments for infrastructure projects wouldn’t have much effect (at the link, Brad Plumer tells us that only 4 percent of highway infrastructure projects even require such environmental reviews).

But looking ahead, there is more we could and should be doing.  Back in 2009 Martin Shubik sketched out a plan in a Levy Institute policy note for creating a “Federal Employment Reserve Authority“—a kind of Fed for employment (yes, I know:  the Federal Reserve is the “Fed for employment.”  But you don’t need to look very hard to see that the sides of the dual mandate aren’t equally weighted).  Among other things, the FERA would maintain state branches that are charged with keeping updated and prioritized lists of potential public works projects (with a preference for self-liquidating projects) and providing constant monitoring and evaluation so that financing can be put in place as soon as unemployment reaches a particular trigger level in that region.  Regional public investment would respond to objective employment conditions. continue reading…

Dimitri Papadimitriou and Randall Wray deliver a second installment of their joint assessment of the risks that a renewed global financial crisis might be triggered by events in Europe or the United States.  In their latest one-pager they move past disputes over etiology and lay out their solutions for both sides of the pond:  addressing the basic flaws in the setup of the European Monetary Union (“the EMU is like a United States without a Treasury or a fully functioning Federal Reserve”) and outlining how to place the US financial system and “real” economy on more solid foundations.

Read the newest one-pager here.

Their first one-pager focused on the reasons it is unhelpful to label the turbulence in Europe a “sovereign debt crisis.”  This way of framing the situation obscures more than it enlightens.  To recap:  prior to the crisis only a couple of countries had debt ratios that significantly exceeded Maastricht limits.  For most, the economic crisis was the cause of rising public debt ratios, rather than the other way round.  What we really need to look at, Papadimitriou and Wray suggest, are private debt ratios and current account imbalances within the eurozone.  And as for current public insolvency concerns, this has far more to do with the flaws in the institutional setup of the European Monetary Union than the particular size of a country’s debt ratio:  countries that control their own currencies aren’t experiencing comparable difficulties.

(For a more detailed investigation, Papadimitriou and Wray will be releasing a new public policy brief:  “Fiddling in Euroland as the Global Meltdown Nears.”)

The Bureau of Labor Statistics (BLS) noted on its website yesterday that in 2011, “annual totals for [layoff] events and initial claims were at their lowest levels since 2007.” Nonetheless, today’s report that the Fed open-market committee plans to keep short-term interest rates low until late 2014 reminds us of the obvious but unfortunate fact that the current slump in employment growth is continuing.

Appearing at the top of this post is a chart showing monthly Bureau of Labor Statistics (BLS) figures on new hiring, which remains very slow. Last week, in citing similar data, Ed Lazaer argued that “If jobs are scarce and wages are flat or falling, decent increases in the gross domestic product or the stock market are almost irrelevant” (WSJ link here). One should not forget that the last official recession began in December 2007—well over four years ago. (National Bureau of Economic Research recession dates are indicated with grey shading in the figure above.)  Such dates are somewhat arbitrary. To take another example, the BLS’s broadest labor underutilization rate still stood at 15.2 percent as of last month, down only modestly from 16.6 percent the previous December.

First The Economist, now CNBC.  CNBC’s Senior Editor John Carney has put together a series of posts on Modern Monetary Theory at his blog.  One of Carney’s objections to MMT is this:

…my biggest point of departure with the MMTers is they display a political and economic naivete when it comes to the effects of government spending. When they talk about spending it is almost always in terms of abstract aggregates, which is weird for a school of economics so focused on the specifics of monetary operations. What this means is that they miss the distortions of crony capitalism the accompanies so much government spending.

I’m not sure this is a problem for MMT in particular, but you might put the point a little differently.  Fully MMT-inspired public policy would require a particular set of political and policy-making institutions.  If inflation is going to be fought through raising taxes, for example, we will need a policy-making process that is able to pull this off, and with the right timing.

But having said that, after observing the process since the outbreak of the Great Recession it’s pretty clear that we don’t even have the right policy apparatus for carrying out conventional aggregate demand management.  Having a robust set of automatic stabilizers in place during the crisis would have been far more preferable to forming fiscal policy according to the whims of Susan Collins and Olympia Snowe (or catering to Congress’ anxiety about a thirteenth digit).

Carney’s latest entries:

Monetary Theory, Crony Capitalism and the Tea Party

Modern Monetary Theory and Austrian Economics

Can the Government Guarantee Everyone a Job?

MMT Monetary Theory vs. Austrian Monetary Theory

The Trouble with a Job Guarantee

The Wall Street Firm That Uses Modern Monetary Theory

Courtesy of INET, here is Pavlina Tcherneva explaining her “bottom up” approach to fiscal policy.

Notice the way she uses the term “trickle down” to apply also to conventional pump-priming fiscal policy (targeting growth and hoping for the right employment side-effects).  We need to move beyond the conventional options on fiscal policy, says Tcherneva; beyond a fiscal policy space marked out by aggregate demand management on one end and austerity on the other.  There’s a third approach that’s more in tune with the “original Keynesian spirit,” as she puts it:  directly employing the unemployed.  We should be targeting employment and the unemployed directly rather than trying to achieve this through the kind of bank-shot maneuver represented by conventional pump priming.

You can read some of Tcherneva’s work on this issue here and here.  One-pager here.

In an op-ed in today’s LA Times Dimitri Papadimitriou makes the case for a direct job creation program:

It’s unreasonable to expect private enterprises to solve these problems. Full employment isn’t an objective of businesses. … There simply isn’t any known automatic mechanism, in the markets or elsewhere, that creates jobs in numbers that match the pool of people willing and able to work. …

At the theoretical heart of job-creation programs is this fact: Only government, because it is not seeking profitability when it is hiring, can create a demand for labor that is elastic enough to keep a nation near full employment. During a downturn, when a government offers a demand for unemployed workers, it takes on a role analogous to the one that the Federal Reserve plays when it provides liquidity to banks. As in banking, setting an appropriate rate — in this case, a wage — is one key component for success, with the goal of employing those willing and able to work at or marginally below prevailing informal wages.

Papadimitriou goes on to describe successful examples of direct public service job creation programs around the world, and finishes with a discussion of the need for decent monitoring and evaluation systems for these programs (a set of topics highlighted in the recent Levy Institute report on the framework of a direct job creation program for Greece).

We’ve now seen a long string of employment reports in the US in which modest private sector job gains have been paired with continuing job losses in the public sector.  Sometimes (sometimes) the most straightforward-sounding policy solutions really are the best.  When a government faces an unemployment crisis like the one we’re in now it should, after ensuring that lower levels of government (states and municipalities) have the means to stop firing so many people, go ahead and start paying more people to do useful things.

This country is filled with sick, neglected, disabled, and vulnerable children and adults who need care, and plenty of roads, bridges, and school buildings in various states of disrepair or obsolescence.  Now would be a good time to pay some people to do something about it.

Read Papadimitriou’s op-ed here.

The Levy Institute research he references indicating the dramatic employment creation effects of investing in care services versus physical infrastructure (double the jobs created per dollar invested) can be read here, here, and here.  If you only have time for the one page version, see here.

In 2009, the Institute released some careful research on the micro-level effects of the recovery act (one example is at this link). That work helps to answer questions about how the benefits of specific stimulus packages will be spread out among different individuals, and households, and demographic groups in the United States.

Increasingly, these and other distributional issues loom large in U.S. debates about economic policy. For example, some influential economists contend that a distribution of income that is increasingly slanted toward “the 1 percent” has been a contributing factor to the dangerous upward trend in U.S. household debt that began decades before the recent financial crisis.  The regressive tax policies called for by many candidates ahead of tomorrow’s big Iowa Republican presidential caucuses also bring to mind these serious problems (see this New York Times link for a description of the Republican candidates’ somewhat varied positions on fiscal issues).

An important school of thought that emphasized distributional issues in macroeconomics was the so-called “Cambridge school,” whose name connotes its association with Cambridge University in England and Cambridge progenitors such as John Maynard Keynes. This year, Piero Garegnani, who was closely linked in many ways with this school of thought, passed away (an interesting professional obituary is here). It was interesting to see this eminent Italian economist speak in a small, uncrowded room, at the big annual economists’ conference in Chicago, about five years ago. Decades earlier, Garegnani was a protagonist in the “capital controversy” between the Cambridge school and a number of well-known orthodox economists, most of them based in Cambridge, Massachusetts, here in the United States.

Geoffrey Harcourt was another important figure in this debate. During the Institute’s holiday break last week, I eagerly read The Structure of Post-Keynesian Economics: The Core Contributions of the Pioneers, Harcourt’s sympathetic 2006 account of the work of the Cambridge school and some of its closest post-Keynesian intellectual relatives. The book moves quickly in its 157+ pages through many of the main ideas developed by these post-Keynesian schools. The points are made with words, simple algebra, and diagrams. The book contains some interesting tidbits and observations that only an insider such as Harcourt could muster.

Among the themes of the book continue reading…

The Levy Institute, with underwriting from the Labour Institute of the Greek General Confederation of Workers, has helped design and implement a program of direct job creation throughout Greece. Two-year projects, financed using European Structural Funds, have already begun.

This report by Senior Scholar Rania Antonopoulos, President Dimitri B. Papadimitriou, and Research Analyst Taun Toay traces the economic trends preceding and surrounding the economic crisis in Greece, with particular emphasis on recent labor market trends and emerging gaps in social safety net coverage. Overall, the report aims to aid policymakers and planners in channeling program resources to the most deserving regions, households, and persons; and in devising data collection methodologies that will facilitate accurate and useful monitoring and evaluation systems for a targeted employment creation program.

On its own, the report provides an excellent in-depth portrayal of the evolution of the Greek economy since joining the euro and traces some of the harrowing challenges ahead—particularly in youth employment (the youth labor force participation rate is 20 percent below the OECD average—what’s happening in Greece will truly mark an entire generation).

For those interested in the policy side, the report also provides a solid introduction to the conceptual justification behind a direct job creation program along the lines of Hyman Minsky’s “employer of last resort” idea (beginning on p.33 of the report), while also detailing some of the nuts-and-bolts monitoring and evaluation aspects of making this kind of policy work.

It’s difficult to know where to begin with this post from Casey Mulligan (the comments are definitely worth reading). He starts off by implying that those who might want to characterize the recession as involving “a lack of hiring” are simply misled by the nature of aggregate data on hiring and separations. He goes on to say this is due to the fact that turnover rates (and therefore hiring and separations) for younger people are higher throughout the business cycle than for older workers. He links to this 2010 Brookings paper by Michael Elsby, Bart Hobijn and Aysegul Sahin. Unfortunately for Mulligan’s point, the authors have this to say:

Measures of unemployment flows for different labor force groups yield an important message on the sources of the disparate trends in unemployment across those groups: higher levels and greater cyclical sensitivity of joblessness among young, low-skilled, and minority workers, both in this and in previous downturns, are driven predominantly by differences in rates of entry into unemployment between these groups and others. In sharp contrast, a striking feature of unemployment exit rates is a remarkable uniformity in their cyclical behavior across labor force groups—the declines in outflow rates during this and prior recessions are truly an aggregate phenomenon.[p.3]

While Mulligan states, correctly, that “[e]stimated job separations among employees ages 25-54 were 33 percent greater in 2009 than they were in 2007,” he stumbles into trouble by asserting that “the low employment rates for young people since 2007 are almost entirely explained by low hiring rates.” While the latter statement is true, it is also true, and conspicuously absent from Mulligan’s piece, that hiring rates fell as much for older workers as for younger workers. Figure 8 of the Elsby, Hobijn and Sahin paper clearly shows this dynamic: hiring has dropped precipitously for all age groups since 2007, while separations increased by much more for older workers and remains higher than the 2007 level.

Given the plunge in hiring detailed in the paper Mulligan refers to, what is one to make of this argument:

Before the recession began, quits were by far the most common type of separation; now the number of quits about equals the number of layoffs.

Perhaps the decline in quits is a signal of what’s ailing the economy, although I view it largely as a consequence of the unemployment insurance system. A person who quits his or her job is not eligible for unemployment insurance. As a result, calling a job separation a “quit” rather than a “layoff” results in the loss of unemployment benefits.

For some strange reason, Mulligan chooses to focus on separations, rather than unemployment inflows, and then blames unemployment insurance for this trend (Casey-watchers will have seen this coming a mile away). Of course, separations includes people who leave one job to go to another job. Separation trends from quits and layoffs are reported in Figure 11 in the Elsby, Hobijn and Sahin paper (see below), which I guess is where Mulligan got that trend. Interestingly, that same figure also shows inflows into unemployment from layoffs and quits, which paint a somewhat different picture than the one Mulligan wants us to see: continue reading…

In our latest Strategic Analysis we estimate that a cut in the general government deficit in the United States would have strong adverse effects on unemployment and a relatively smaller impact on the U.S. public debt-to-GDP ratio, since GDP would slow down with a cut in government expenditures and transfers.

A similar strategy of deficit reduction seems to be on the agenda for many eurozone countries; notably Italy, where a new government was recently put in charge to implement unpopular tax increases that the Berlusconi government was not willing to adopt.

A comparison of our simulation for the U.S. with the European Commission’s for the eurozone may therefore be interesting.

First of all, the United States is now (third quarter of 2011) back to the pre-recession level of output, as measured by real GDP. Using this figure we could say that the recession is behind us, and we can plan for the future (although this is far from true if we look at the unemployment rate!). And in our projections we show that an acceleration in aggregate demand is needed if the unemployment rate is going to be reduced (the green line), while policies to cut the government deficit will lead to stagnation (the red line) and an increase in unemployment.

Let’s look at a similar chart for Europe, taken from a simple synthesis of the new roles for economic governance in the area:

Real GDP in the area is still below its pre-recession level, and stagnating. We would think that European governments would be meeting frequently to discuss how to recover the lost ground in output and employment, but instead they meet with quite a different problem in mind: how to enforce balanced budget rules on national governments. The Italian government, still one of the largest economies in the area, is now passing a bill that will increase taxes substantially, further depressing domestic demand.

What the EU is planning is the wrong policy at the wrong time. And if the multiplier in the EU is similar to what we estimate for the United States, the consequences for the unemployment rate will be substantial.