We expect the unexpected at the Levy Institute. As followers of Keynes, most economists here, including this author, believe that one cannot assign exact probabilities to most important economic outcomes even, say, six months into the future.

On the other hand, thinking about the economic debate on job creation, and the recent release of new jobs data, I have not been very surprised at the gradual pace of progress in reducing the unemployment rate. In fact, we on the macro team have consistently called for more fiscal stimulus rather than less. The reason is that unemployment is a relatively slow-moving variable. As the chart at the top of this post shows, the unemployment rate (shown as a blue line) fell only rather gradually after each of the previous three recessions (shown as shaded areas in the figure). (Here, we count the double-dip recessions of 1980 and 1981–82 as one.) Hence, once the recovery began, we knew that with the unemployment rate at very high levels, it needed to fall unusually fast to be at reasonable levels by this point in the Obama administration.  Hence, since 2007, the team has advocated an easing of fiscal policy. Instead, especially after the 2009 ARRA, little action was taken by the government to stimulate the economy. Partly as a result of inaction on fiscal stimulus, government employment as a percentage of the civilian workforce (red line in the figure above) peters out after 2010.

At this point, we hope for legislation to moderate January’s expected “fiscal cliff”—which will lead to perhaps a $500 billion in reductions in the federal deficit in 2013 unless laws are changed, by CBO estimates.  (In its current form, the cliff would probably have a serious impact on all economic and demographic groups. Lately, I’ve been working on a model that incorporates the larger effects of an additional dollar of income on spending at lower income levels—not a simple task.)

In the figure, both lines are shown in the same units, namely percentages of the civilian labor force age 16 and above, though the two lines use different scales, one on each side of the figure.  For example, a one-unit change in the blue line represents the same number of workers as a move of one unit in the red line. A hypothetical jobs program or another spending measure that gradually increased government employment (red line) by, say, 1 percent of the total US workforce might easily have led to an unemployment rate (blue line) for last month of 1 to 3 percent less than the actual reported amount. But government does not seem to be expanding; in fact, the red line shows that government employment shrank at a time when more hiring from that sector would have been of great help to the economy. (The figures include employees of local and state governments, as well as those of the federal government. The smaller governmental units have seen the biggest cuts in payrolls.) continue reading…

We’re seeing a lot of “is the euro crisis over?” stories pop up in the press lately (or rather, again).  The sensible responses are “no” and “which euro crisis?”

Presumably, this burst of enthusiasm derives in part from Mario Draghi’s announcement to (sort of) commit to (sort of) unlimited bond purchases.  But even if you think, optimistic reader that you are, that this will (sort of) rein in the periphery’s galloping borrowing costs and forestall an immediate breakup of the eurozone (at least until next month), that would just leave us with a slightly smaller pile of crises—including a crippling growth crisis.

For Greece in particular, to declare its crisis “over” requires a serious dose of lowered expectations:

The unemployment rate currently stands at 23.5 percent, wages and salaries have shrunk by as much as 30 percent, a series of pension cuts has been implemented (the latest proposal is to cut up to 600 euros per month from individual pension checks!), hospital operating expenses have been reduced by half, and the education budget has been hit so hard that many schools throughout the country operated without heating oil last winter.

If you want to know what it looks like when a national crisis isn’t over, read more here.

We end the week with news of only modest economic growth, but also with a set of revised data that does not seriously worsen the economic outlook. Today the Bureau of Economic Analysis announced the release of an advanced estimate of 2^nd quarter GDP, as well as revised data for 2009Q1 through 2012Q1. Their press release notes that:

“Real gross domestic product—the output of goods and services produced by labor and property located in the United States—increased at an annual rate of 1.5 percent in the second quarter of 2012, (that is, from the first quarter to the second quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent.”

An article from the FT  points out that consumption grew by 1.5 percent, while government spending at all levels of government fell by 1.4 percent. Leaving the drop in government spending out of the calculation would raise the overall growth rate to 1.8 percent per year, or .3 percent higher than the actual figure released today.

Here is a graphical comparison of the old and new data series:

As the figure shows, the new data series implies that the fall in real GDP during the 2007–09 recession was not as deep as previously believed, though this difference is rather small. (Note: This earlier FT article mentions some of the reasons the GDP series needs to be revised, and well as some of the anticipated policy implications of today’s data release.)

Also, the revisions make only a slight difference in an estimated trend line for all the data, as seen in the figure below, where the blue line is hidden behind the red one. However, these trend lines are much different from a similar estimate constructed using prerecession data (1947Q1–2007Q3) only, which is also seen below.

The continuing weakness of the actual GDP data compared to the prerecession trend line provides further support to the notion that the economy has a lot of extra room to grow. In other words, such a sharp drop in economic activity relative to an existing trend is an indication that private-sector output can recover to a great extent without straining supplies of labor and most other resources. Hence, economic stimulus designed to increase aggregate demand is in order, as we have argued for some time. The reported decline in government spending is of some concern indeed.

These numbers of course do not constitute a good measure of national well-being, but at their recent levels, they are symptomatic of an economy experiencing a prolonged period of high unemployment rates, which can contribute to many other social and economic problems.

Postscript, July 27: Interesting, same-day posts by New York Times bloggers  point out that the revised data reveal a shrinking government sector and analyze the effects of the revisions.

(click to enlarge)

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…

C. J. Polychroniou surveys the distressing results, in terms of unemployment (and particularly youth unemployment), of the “neo-Hooverism” and obsession with price stability that permeate European Union policymaking and explains that a fundamental change in approach is needed:

Europe is in dire need of an economic and political revolution. It needs an immediate return to Keynesian measures and a new institutional architecture for the eurozone. It needs to move toward a United States of Europe. If such steps are not taken, Europe’s economies and societies could very well end up in a situation similar to that of the United States in the 1930s.

Read Polychroniou’s one-pager here.

C. J. Polychroniou has a new one-pager that starts off by noting the asymmetries in the approaches taken by governments in the US and Europe to the 2007-08 crash and its aftermath:  featuring bold public interventions to save the banking and financial systems but relatively limited measures for the millions of unemployed.  He then turns his sights to the latest 130 billion euro Greek “rescue” package and, in the context of a series of such packages and their accompanying austerity demands, Polychroniou suggests that Greece is being pushed too far:

It is high time for Greece to put an end to the EU farce that has now turned into a real tragedy. The nation should refuse to accept another lethal injection and threaten immediate default. At this juncture, there is no other way out.

Read it here.

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

Read the whole thing here at HuffPo.

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.